Financial vulnerability represents a precarious state where individuals face substantial risks of financial hardship due to restricted access to resources, income volatility, and negative economic shocks. It changes over time and across individuals and groups, thus making it challenging to predict and identify. When prevalent on a societal level, it can hamper economic growth and hinder national productivity. Traditional tools for detecting financial vulnerability are often inadequate as they do not consider the variability of individual circumstances.
This project addresses this challenge by using a data-first approach. It aims to capture financial vulnerability by focusing on shelter and energy costs – two of the largest cost categories impacting UK households. It exploits the effects of exogenous shocks on these costs to map how financial vulnerability evolves under the moderating influence of diverse demographic characteristics. These insights could then be used to refine the offerings of financial services providers and adjust policy responses to prevent financial instability and increase resilience.
Our empirical strategy involves merging the highly detailed proprietary financial transactions data from Smart Data Research UK’s Financial Data Service (FINDS), managed by the Smart Data Foundry (SDF) at the University of Edinburgh, with other non-proprietary datasets to characterise the moderating impact of unique demographic traits on financial vulnerability. The FINDS database provides pre-arranged access to anonymous, large-scale transaction datasets, covering up to 5.3 million individuals over extensive timelines. The analysis draws on advanced empirical modelling techniques, which includes natural experiments to isolate the effects of a range of large scale and exogenous shocks, and machine learning to predict future values of defined metrics. This interdisciplinary approach intends to provide a comprehensive view of financial vulnerability and contribute meaningfully to better managing socioeconomic disparities and improving financial security and prosperity across the UK.
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