Financial Health Goes Global

Financial health – or wellbeing – is emerging as a core concept for financial sector policymakers and providers who are concerned with how financial services affect consumers.  In high-income countries, the concept has been thoroughly explored and applied over the past decade by government agencies (e.g., UK Money and Pensions Service), private companies (e.g., Commonwealth Bank of Australia), and non-profits (e.g., Financial Health Network).

More recently, the concept of financial health is being adapted to middle and lower income countries. An expert working group, convened by H.M. Queen Máxima of the Netherlands, the United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development (UNSGSA), assessed the state of the global financial health “movement” and advised on an agenda for the future.

This five-part blog series will explore the working group’s findings. After this introductory post, the series will feature findings from each of the group’s three new publications: first, on the relevance of financial health for policymakers, second, on challenges in measuring financial health, third, on the role of the private sector, and fourth, a special look at financial health and consumer protection.

What is financial health?

Recognizing a need for clarity and a common understanding about what is meant by financial health, an important first task for the group was to establish a consensus definition that could be widely used. The following definition was adopted:

Financial health or wellbeing is the extent to which a person or family can smoothly manage their current financial obligations and have confidence in their financial future.

The definition further notes that four elements comprise financial health: smooth day-to-day finances, resilience, ability to pursue long term goals, and confidence (feeling secure and in control of one’s finances).

How financially healthy are people around the world?

Unfortunately, what we know about the current state of financial health is not encouraging: there are serious deficits across the world. The World Bank’s Global Findex, for example, found that half of respondents in low and middle income countries did not think they could raise a modest sum (1/20th of per capita gross national income) to meet an emergency. A 10-country Gallup study in 2018 found that, in the low- and middle-income countries surveyed, resources to maintain basic needs would run out for most people after less than a month of interrupted income. Millions of families across the world faced such a scenario during the COVID-19 pandemic. And the Organisation for Economic Co-operation and Development (OECD), with a survey in 26 countries, found that most people are left with no money at the end of the month. These and other findings indicate that financial stress and worry is a global concern.

What can we do to improve financial health?

Policymakers around the world are starting to respond to these insights, which direct the attention of financial sector policymakers where it rightly belongs – on the welfare of the users of financial services. Understanding how the use of financial services can help or hinder financial wellbeing is a next step beyond access and usage in the financial inclusion journey.  As such, financial health can be seen as a desired outcome of financial inclusion. It is a companion concept to customer-centricity, with centricity focused on the experience and specific results of using a financial service, and financial health as a broader outcome stemming from financial service use and a range of broader factors, such as employment and risk exposure.

Insights from financial health measurement spark probing questions, such as:

• Is the success of financial inclusion best measured by the financial health of the newly included?
• What factors drive financial health and how do they relate to policy?
• What features of financial products best support financial health?
• What implications do the results of financial health surveys have for consumer protection?
• Does the pathway to financial inclusion and financial health look different for low-income people?
• How do policies in areas such as employment, social protection and health care affect financial wellbeing?

These questions touch on values and objectives, as well as empirical facts, and their answers have the potential to significantly affect resource allocation and policy decisions – which will be the subject of our next post.