How are customers keeping up with essential bills during the cost-of-living squeeze?

The recent dear CEO letter continues to re-enforce the regulator’s focus on supporting customers struggling with bills. The letter cites results from the FCAs financial lives research survey; ‘11% of UK adults have missed payments on any domestic bill”. This research is based on survey responses. By contrast, Experian insights into actual missed payments over a similar period shows that around 5% of adults have fallen into arrears (by 2 months or more) on their obligations in the last 6 months (including utilities, telecommunications, credit cards, loans mortgages etc.), which remains below the pre-pandemic levels. The level of impact of the cost-of-living crisis on consumers is a hotly debated topic and these stats provide context and may differ due to definitions or perhaps raise a question about consumers’ perception versus reality.

This blog aims to explore the impact of the cost-of-living challenge against 3 core essential bills metrics. Before delving into this, a recap on terminology. The phrase ‘essential bill payments’ is misleading and would typically include council tax, for example. Therefore, to make this article as succinct as possible, and avoid using the phrase ‘energy, water, mobile phones, fixed line and broadband bills’, I’m using the term, ‘essential utilities bills’.

Experian Insights – Is the cost-of-living crisis resulting in more customers struggling to pay their essential utilities bills?

The 3 key metrics that need exploring to answer this question are:

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1. Are most consumers up to date on their essential utilities bill payments and are more falling into arrears recently?

Experian’s latest insights continue to show that the vast majority of customers are ‘up to date’ on their essential utilities bills; with over 90% of accounts up to date in any month. The percentage of customers who are starting to fall behind on their essential bill payments has risen over the last year (after significant falls during the pandemic) and is now at or slightly above the pre-pandemic level. Taking energy, for example, prior to the pandemic the percentage of accounts that fell 1 or 2 months behind on their payments had been stable for around 3 years. The latest early arrears rates are practically identical to this pre-pandemic ‘norm’ with a more pronounced increase in the latest month. Although the overall level of early arrears for water payments is slightly higher than for energy, the trend is similar (without the latest spike). Within telecommunications, current arrears levels have just nudged above pre-pandemic levels.

2. Is the Average Balance of Essential Utilities Bills Increasing due to compounding debts?

Energy and water suppliers often wrap ‘debt’ into a future monthly instalment combined with consumption payments. This makes it difficult to track as ‘debt’ as it is no longer in arrears. Is the average balance recorded at Experian increasing and showing the impact of the cost-of-living challenge masking a rising debt problem? Taking a deeper look into the data on this for energy and water shows a marked increase over the last year. Largely this fell below the level of inflation and increase in energy costs, though over the most recent quarter it increased by 30% in comparison to the same period last year. Ofgem’s data portal^[2] also shows similar trends for customers in debt with and without debt repayment plans. Ofgem cite that, for customers in debt without payment plans, “The last year has seen substantial increases in average arrears, reaching £1,214 for electricity and £965 for gas in Q1 2023 (up by 40% for electricity, and 34% for gas compared to Q1 2022). The increase in average arrears in the last four quarters has presumably been driven by higher retail prices and increasingly difficult financial circumstances faced by some households”.

3. Forbearance and extended payment arrangements.

Customers that accumulate a debt on their bills, agree a repayment plan and are unable to repay within a reasonable period (typically 12m for energy and water bills), have arrangements recorded at a credit reference agency. Customers who take a prepayment meter to repay debt for energy are typically recorded as arrangements. Experian continues to see increases in the volume of customers on arrangements (i.e. in a state of forbearance) for energy and water. However, the proportion of customers on such schemes is still extremely low (<1% of essential bills accounts, highest penetration in water and the lowest in telecommunications).

Do insights indicate increased financial stress levels on essential bills?

In short, yes, albeit marginally. Average balances, arrears and levels of forbearance on essential utilities bills are increasing slowly but steadily and are now at or slightly above pre-pandemic ‘norms’. We know that consumers typically increased their savings levels during the pandemic and paid down outstanding balances on credit cards and loans. UK Finance’s update in June ’23 reports that ‘In Q1, the level of overall household savings fell by one per cent compared with the same point in 2022, as the number of households now running down those savings as monthly costs escalated outnumbered those still able to put away monthly’. Has this ‘buffer’ run out and will the tide start to turn, and we begin to see a more pronounced increase in arrears on essential bills?

In light of this, are customers starting to prioritise their committed payments differently?

Experian run exclusive webinars on this topic for members. In summary, consumers continue to prioritise their mortgage and car loans at the top of their list. Essential bill payments follow (where the priority varies by age with younger customers prioritising mobile phones higher than older customers). Credit cards, loans and retail credit are last. This prioritisation is showing signs of change over the last 3 months and needs further investigation or more time for the trend to mature.

What support/intervention have the Regulators made and can we see any effect?

There have been several reminders from the regulators to their members of the importance of supporting customers in financial difficulty, offering tailored plans, understanding affordability and ability to pay and the need for early intervention. The Dear CEO letter is the most recent example of this. It is likely that these reminders have, along with the cost-of-living crisis itself, led to an increase in forbearance described above as suppliers and firms have offered support. Over the last year another significant intervention has been made for energy customers. Early in 2023 Ofgem tightened rules on the involuntary installation or remote switch to prepayment meters. From industry discussions it is clear that this has resulted in an effective cessation of the use of this practise up to this point as suppliers have undergone checks to their processes. In the intervening period there are concerns that consumer debts for those affected may have increased.

“Bad debt within the energy industry is increasing to unsustainable levels. As Ofgem acknowledges, the new process will lead to fewer installations by warrant and so it’s likely customer debt will increase even further as a result – as well as from the current pause – which will need to be addressed.”

Dhara Vyas, Energy UK’s deputy chief executive

The full impact of this will become clearer over the next few months. However, Experian trends described above do show considerable increases in the last few months for which this could be a contributory factor. (At the time of writing this, Ofgem statistics have not been updated for Q2 23).

What can suppliers do to help identify and support customers in difficulty?

I have been heavily engaged in energy, water and telecommunications over the last few years and I keep using the word ‘step change’ to describe the fundamental shift in the use of new sources of data to help identify those customers most in need. Affordability data (income less commitments and essential expenditure) is a data ‘type’ that has been used in financial services for many years. It’s coverage in Energy, Water and Telecommunications, up until a couple of years ago, was limited to information gathered through direct contact with customers. It was, therefore, available on a tiny proportion of the customer base. Open Banking has been adopted to help with this challenge. Although it’s useful and certainly has its role to play, coverage is still very low in the above sectors and appears to be falling over the last year. However, the step change that has occurred is the huge increase in coverage for this data achieved through use of a bureau-based service to attribute flags to indicate what is or isn’t affordable. Income (derived from current account turnover) less credit commitments and estimates for essential expenditure based on ONS data, is combined and made available on the majority of UK consumers. It’s this data that has been adopted and ingested quickly by the sectors involved in essential utilities services recently.

Where should the focus be now?

The pressures on consumers’ finances will not abate quickly. Therefore my guidance for energy, water and telecommunications providers remains as follows:

1. Accurately track your portfolio arrears trends, against those in your sector to identify any signification deterioration in performance, ensure that provision levels and forecasts remain up to date and robust and that you are achieving performance in line or better than your peers.

2. For suppliers that have already embraced the latest affordability data, ensure that you continue to exploit this data and leverage it (where appropriate). The affordability data that has been discussed in this blog will automatically reflect customers’ changing affordability where their mortgage payments increase. Therefore, suppliers who are using this data will benefit immediately for those customers struggling with increasing mortgage payments. Fully embedding the affordability data in processes across provisioning, prepayment, assessing direct debits and discretionary support will be most important for Energy suppliers going forward.

I also recommend ensuring that you fully leverage your traditional credit risk data alongside affordability data to further tailor your support. How can you set up a debt plan for a water customer if you don’t know they’re in arrears on their mortgage?

All energy suppliers have signed up to the new Involuntary Prepayment code. Energy suppliers may currently be struggling to manage increasing debts for customers in certain segments as a result. Experian are working with suppliers to show how data can shed huge insight on this challenge and help you differentiate can’t and won’t pay to tailor your next steps. Please don’t hesitate to reach out.

3. For suppliers that have yet to understand which of their customers can’t afford their services or debt repayment, the challenge is to familiarise yourself quickly on what is possible and the benefits this can reap. I think more can be done within the telecommunication and water sector, in particular, to mirror the approach in Energy and ensure vital support is given to those most in need.