Sustainable Views: Looking after your financial health

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Do you know what financial health is? Intuitively, you probably do. Having enough money to get you to the end of the month, managing to repay your mortgage or other debts you may have, knowing that if things go wrong, there is a cushion. It's a pretty important consideration, isn't it? Though not one that companies or even regulators seem to have taken on as a responsibility. Perhaps also because there isn't really an official definition of financial health. Well, a pretty high-profile name is keen to set this right. That's Queen Máxima of the Netherlands. In this episode, you will hear from Queen Máxima and from the head of her office at the UN. Queen Máxima is the UN Secretary-General's Special Advocate for Inclusive Finance. So in this episode, we talk finance with a royal. This is Sustainable Views, and I'm Silvia Pavoni, your host. The first time I interviewed Queen Máxima was at the end of 2019 at the Royal Palace at The Hague, which, as far as interview settings go, dear listener, was pretty special. I then spoke to her during the UN General Assembly last year, and that's when we talked about financial health.

In my capacity, United Nations Secretary-General Special Advocate for, among others, financial inclusion and financial health, we decided to bring expertise together to first of all come up with a set of definitions. What is financial health? Because probably financial health is not the same thing in Great Britain that it is, for example, in Argentina or in the Netherlands or in South Africa. So I think that's very important to actually come up with a common agreement on what is financial health and how do we measure financial health, and therefore what are the best practices and what are the best policy advices for both private sector and public sector. So, if we would like to sort of define it, what is financial health, we define it as, first of all, that you can actually be able to come up, make, you know, a front to all the day-to-day needs that you actually have, but also be able to have long-term planning and at the same time without having any financial stress. So it is 4 things in synthesis: being able to have your day-to-day completion of your needs, sort of, you know, your bus rides, your home, your food, your health, in most cases; to be able to have long-term programming, you know, do you want— what do you want to send your kids to education, to university, do you want to buy a house in the future; to be able to be resilient, and what is resilient? To be able to protect yourself until an unforeseen risk, if somebody gets sick, are you covered? If there's a drought, are you covered? If there if there's a big, you know, a flood somewhere and your house is gone, are you covered? And fourthly, and it's a subjective one but still a very important one, is are you having any financial stress because of your finances? I mean, you would actually have different people have more or less level of financial stress, but also financial stress has a very big impact on people's productivity, in people's quality of life, and as well mental health. So it is an issue that we need to give increased attention over time. And it is a job for both the financial education, but also policies on the public side, and also how in the private sector, you know, how do your employees do? You know, did we ever help, sort of thought about, you know, your human resources department? Are my employees actually having financial stress or not? Do we talk to them about it? And of course, financial sector providers should be actually bearing this in mind to be trying to nudge people to actually build up buffers, plan run better for the future, be able to decrease some costs that are necessary. There are some issues that are extremely necessary to start talking with the industry and with the public sector in general.

In the same conversation, I also asked Queen Máxima about progress with including more people around the world in the financial services system. Hard to feel financially healthy without access to a bank account or a payment network. And at that time, at the end of 2021, figures still showed that 1.7 billion people were locked outside of the financial system?

First of all, since I started this work, we actually included more than 1.2 billion, and it's been accelerated the last year. So, and these are figures of 2017. So this 1.7 billion, I'm very sure the numbers that are going to come out, you know, end of this year, there's going to be much less than 1.7 billion. And why, you know, am I so positive? Twofold. First of all, because digitization has helped us tremendously in the last years to actually achieve that. That makes it, um, you know, through your mobile phone, through fintech, people have actually had more access and more usage to financial services that before were actually unthinkable of. We've actually talked about the African situation where somebody can actually get the money that the mother of the son sends the mother money on the mobile phone and she can cash it at a local store. I mean, those issues have been revolutionizing most of the financial service provision in emerging markets. And also, in our developed countries. I mean, the amount of fintech companies that actually emerged has actually given a completely other value proposition. So, in that sense, digitization has played a very good role. What is actually very important and what has actually happened in the last 18 months because of COVID even though we've been telling countries— I visit more than 40 countries and we've been working more than— there's 50 countries that have actually had national financial inclusion strategies, You know, it was going a little bit good, I mean, with very good tempo, but sometimes in some countries slow. The moment that COVID started, the phones began to ring. How can I actually get this in place so I could send subsidies to these women that cannot go to the markets anymore, and I can help them keep their livelihoods? It was incredible. And actually, the countries have actually done some kind of what we call global public goods, like having an ID, have connectivity, having the regulations to be able to do mobile money, did extremely well. They were able to really react to this emergency and actually roll out subsidies by which people in the end of the day were less hungry, really less hungry. So in Chile, for example, they already had started a whole national ID that they were just finishing it, but they were just in time when COVID hit. They were able to really multiply their whole subsidy system because of COVID very, very quickly. They would not have been able to do that. The same thing in Togo, they had a similar program. They really rolled out extremely quickly and they really helped people to stand through the whole COVID pandemic. So the flight that COVID really made us take in many, many countries has been incredible. So I'm actually very curious to see really the last surveys to see really where we're standing. But I'm actually very positive.

Well, Queen Maxima was right. The latest figures do show an improvement. That 1.7 billion has gone down to 1.4 billion. So to understand the new numbers and what has happened, I also had a chat with Pia Roman-Tayag, who leads the team that supports Queen Máxima's work at the UN. Pia is a financial sector veteran. Before taking on this role in September 2020, she had spent nearly two decades at the Central Bank of the Philippines.

It's great to start with the good news, Sylvia. So I think from the, from the last time you had a chat with Her Majesty, we had 1.7 billion people still remain unserved by the financial system. And based on the World Bank Findex, this has dropped significantly to now just 1.4 billion adults. So we have really included about 76% of adults worldwide, and that is a significant increase from just 50% back in 2011. So in the decade we've seen such progress, but of course that's still 1.4 billion that we need to reach.

That's encouraging progress. But 1.4 billion is still a pretty big number. A year ago, Queen Máxima said that the COVID emergency helped attract attention to digital services. The emergency served as a sort of catalyst. Countries needed financial systems that could reach more people via digital channels. Rather than through physical transactions. Is this new interest continuing?

Indeed, I think this increase was driven largely by digital. So digitization has really contributed to this, as well as COVID, that some have referred to be the silver lining because more and more people got access to accounts. For example, when we look at digitization, 39% of adults opened accounts for the first time because they knew they could receive either government or private sector wages through them. And with COVID for example, about, you know, 40% of adults started making digital payments. You know, those who are still very much married to cash payments actually shifted for the first time since COVID So these were, you know, behaviors that were driven, I guess, by increased access to digital tools, but also accelerated by COVID. And I think the government really saw the potential here. For example, governments who had invested in digital public infrastructure like identities and, you know, databases and data sharing frameworks, for example, were able to reach their population so much more quickly during COVID than those who didn't. For example, like those countries out of 85 countries who were investing in these digital infrastructure, they reached 51% of their population relatively quickly compared to those without those investments who reached only 16%. And so it's become so clear for governments that these investments need to be made. And I think also with the pandemic and with all the other crises we are facing, just financial inclusion has really become central in making sure we build resilience and in making sure that people are able to recover and bounce back really much stronger. So, yeah, I think, I think these conditions have set us up for the work ahead. To reach the 1.4 billion left, but at the same time to make sure that we go beyond just access. It's one to say, yes, they have now access to an account, they can make payments, but what does that really mean? Are they able to put aside some money for savings? Are they able to get credit if there's a business opportunity that comes about? Or is there insurance in case their business fails or they're unemployed? So these are questions that we really need to ask ourselves moving forward.

Financial inclusion is important. It is something that helps to understand how to improve people's lives, which is the ultimate goal. That's why PI is working with Queen Maxima on the broader concept of financial health.

You know, I mean, financial inclusion has really been just a means to an end. It's important, but it's not the end goal. It is to have access to these financial services so that that you could have positive outcomes in your life, to have better lives. And financial health, and you've heard Her Majesty define it, it really is so important because it touches upon our everyday lives, putting food on our table, paying rent, planning for the future, putting our kids through school. And why it's so important is that there's so much to be done in this space, both in developed and developing countries. So the World Bank Index, for example, showed that only 55% of adults in the developing world actually said they could come up with funds when an emergency comes. So could you imagine the rest who could not come up with these emergency funds? But if you look at that data even more, it's that, you know, they said they can come up with it, but then when you ask them further, how hard would it be, they said it would be very hard. So it might actually be an even lower figure. And this is not a problem just in the developing world. Like, for example, an OECD survey, which includes, of course, high-income countries, almost half of the respondents in the survey agreed with the statement, "I don't have enough money at the end of the month." And so it's just an important issue because it's, you know, it's part of our everyday lives, but also it touches upon other things like productivity. You know, like there are surveys where they show 1 in 3 employees are distracted at work. Because of financial health concerns, you know, financial concerns and stress. And so that— imagine the productivity cost in that. It also has linkages with physical health. You know, there are studies that have shown that if you are financially stressed, you're more likely to have heart disease, fatigue, migraines, and all of that. And so it's compelling too for policymakers because it really links to other objectives such as financial stability, for example, consumer protection. So, you know, an unhealthy— financially unhealthy buildup of portfolios, I think, will have an effect on the financial institution and possibly in other— in the financial system. So also as a regulator, and, you know, in my previous role as regulator, this concerns me Because are we making the financial system more inclusive? But, you know, our next question is, apart from just including everyone, does it benefit everyone? And I guess those are new questions that we really need to be very deliberate in trying to address.

By the way, FinDex, which Pia has mentioned a couple of times, is a World Bank database. It has information on global access to financial services like payments, savings, and borrowing. So half of respondents to that survey of OECD countries said that they don't have enough money at the end of the month. Financial health concerns are interfering with how we are coping at work, how focused and productive we are. And stress, including obviously when caused by financial worries, has an impact on our physical health too. This is something for policymakers to consider, as Pia says. Are they?

Yeah, so Her Majesty has been, as you know, you've had many opportunities to speak with her passionately about financial inclusion since she's had this role since 2009. But she has been one to always say that it's not the end in itself. And now she's really increasing her conversations on building resilience, on really establishing policies that build financial health. I think her first message is to measure because we'll never know where we have to go and we don't know what policies need to be in place if we don't know the situation. And I think Her Majesty, apart from speaking to policymakers, is also making this very clear to the private sector that there is such a big role for the private sector to play. First of all, in financial health, there is a business case. I mean, you know, we have seen that companies that put an importance in financial health really have— they're better customers. You can cross-sell other products, they're less costly to serve, and you really differentiate among your peers. So there is a business case. There's also a business case if you look at financial health for your employees because of the productivity aspects that I've discussed with you, as well as just loyalty to the firm and engagement with with your company. Her Majesty has really focused on emphasizing the importance of measuring, but not measuring as an end, but measuring to really see what action needs to be taken, what policies need to be in place, but also for the private sector, maybe what products need to be developed. We might be rolling out products that are actually not helping. Let's give an example of digital credit, which is great because then it's really expanded access to credit to markets that that did not have them before. And many are using this to grow their small businesses, for example. But if left unchecked, it could also lead to overindebtedness. There are examples in countries that have increased financial inclusion largely by digital accounts and digital credit, but financial health declined. And maybe because these are— credit is just so accessible and maybe the suitability and the capacity is not appropriate. So even in product development, keeping in mind the financial health lens, I think, is very key. Because at the end of the day, we want the products to be beneficial and to lead to positive outcomes, for sure.

I also wanted to ask Pia about what companies can do to help reduce financial stress. Looking after employees' wellbeing has been a particularly popular subject during the pandemic. Companies have been offering all sorts of advice, apps, even to manage stress. But I reckon I'm not the only one thinking that the most effective way of reducing stress at work could well be just a lighter workload. And as for financial stress, shouldn't companies just pay people on low salaries more?

That's why this is such a compelling issue, both for developed and developing economies, because, you know, there are some who have— who are thinking that, you know, for developing economies, we can't talk about financial health yet because we have income levels that we still need to increase. We have to generate jobs so that that becomes relevant. But actually, quite the contrary, because then you have to think about financial health at the onset. And see whether the policies that you put in place at the end of the day can benefit financial health. It's not sequential, but it could actually be a complementary lens, at least on the policymaker side. On the company side, I think it's the same. It's not just about income. I mean, we have examples of companies who have looked at financial health, who have seen that, you know, they're actually paying above market, but yet financial health of their employees was still low. And the interventions that they put in place is not increasing salaries, but really financial education, giving them some stake in the company, and really trying to understand, you know, measuring the levels of financial health to know where the company can support beyond just an increase in salary. So I think it's really a mindset shift, and then maybe it will uncover— measuring will uncover where the levers we can move are.

Okay, Pierre was probably being a little bit diplomatic there, but essentially, yes, companies could look at compensation too. So this is what Queen Máxima's office has been working on during the pandemic. What about now that we've resumed travelling? What's next on what I know used to be a pretty packed travelling schedule? Country visits, physical country visits, are probably where a royal can exert the greatest influence.

You know, even during COVID Her Majesty had virtual country visits. So there is no stopping her in really trying to cover, you know, where financial inclusion is most needed. But indeed, in the last year, thankfully, we have done, you know, country visits in Senegal and Côte d'Ivoire and Tanzania. And I think what is really compelling, you know, beyond the important conversations that Her Majesty has with leaders, both public and private, is really when she meets clients. And sees where the impact of access to financial services leads. Like, for example, in Tanzania, she saw how digital financial services help expectant mothers that have really affected not only the ease of them doing their regular checkups, but at the end of the day, the health of their babies. And so you see how financial services leads to other development outcomes like good health and nutrition. In Senegal, for example, she met with farmers who have really shown how access to insurance has helped them invest better in their business and have become more resilient. And of course, smallholder farmers are really key in agricultural value chains globally. And so if we are able to provide services that, you know, that support them and help them make better investments and make them more resilient, I think the impact would be transformational. And so I think the country visits It's been quite busy, but I think all worth it because we've really seen the impact. And it's really a reminder of what we need to work towards beyond access to finance, insurance products for farmers, digital services to enable healthcare, to enable education. What is the infrastructure that needs to be in place to make this happen? So I think that's, that's really maybe the work ahead. And, you know, the office is happy to support Her Majesty in this role. We really have to see where these efforts are most needed and where conversations need to be had. Her Majesty has had a strong focus in the African region, but of course, you know, other regions as well. So we really have to be demand-driven in a way and see where these conversations could make the most impact.

So lots more to do around financial health. But for now, it is good to know that at least in terms of financial inclusion, things are improving. Thank you to Pia Roman-Tajek, Director at the Office of the UN Secretary-General's Special Advocate for Inclusive Finance for Development. And thank you, of course, to Queen Máxima of the Netherlands for the earlier interviews. That's it for today's show. I hope you enjoyed it. If you'd like to get involved in this area on a personal level, I'll add the details of the Financial Times Financial Literacy and Inclusion campaign, FT Flick, in the show notes. As for us, you'll find me and my producer, John Rogers, on December 16th for the next episode of Sustainable Views, the podcast. Until then.

This podcast is supported by Federated Hermes Limited, a global leader in active responsible investment. We follow 3 pathways: active ESG, sustainability, and impact. 3 routes to 1 destination: sustainable wealth creation. Capital at risk, professional investors only.