How to prevent financial exclusion

My parents had deep working class roots in the Glasgow and Liverpool of the Great Depression. Their childhood memories were of big families, grinding poverty and precarious employment prospects. But the collective experience of World War II made my parents aspirational. They were keen to buy their own house. So what did my mother do? She got a cleaning job and set about saving the cash to buy her much-desired bungalow. I don’t mean saving the deposit. I mean saving the whole £3,000 it eventually cost her in 1969 to move out of council housing in Glasgow’s Drumchapel.

You see my mother’s childhood had made her petrified of ever getting into debt. Her bogey was the predatory tallyman of the 1930s, offering poor families tiny loans at usurious interest rates to tide them over till payday—a debt trap one rarely escaped. I always hid from my mother the fact that I—born into a debt-fuelled consumer era—had multiple credit cards.

You could not repeat my mother’s approach to credit. Modern lifestyles are predicated on debt. If you are in a job, have a bank account with access to a range of modern financial products, you can manage your debts efficiently. Indeed, that is what the entire financial system is for. But debt becomes a lifetime’s trap if you lack easy access to those financial products—if you are one of the financially excluded.

The poorest fifth of Scotland’s population are disproportionately likely to be without a basic bank account. Surely it’s easy to open an account and manage everyday payments through direct debits? Not if you are on benefits and a tight cash flow. Having a direct debit can trigger steep (often hidden) bank charges if there isn’t cash in the account on payment day. The 2008 Credit Crunch has made matters worse. Many who previously had access to standard financial service products suddenly found themselves without, as a result of tightening family belts. Financial exclusion has spread even to the impoverished middle class.

A report by Save the Children just before the 2007 banking crisis estimated that the costs borne by unbanked families amounted to a “poverty premium” of £1000 a year. The extra expense came from lack of digital take-up (most of the best deals are available only online) and use of pre-payment mobile phones. Post-2010 the poverty premium from being unbanked has rocketed to £1280 per year.

Adding to this burden is the advent of Universal Credit. The Poverty Alliance warns: “While lack of access to basic banking and financial services has been seriously affecting the wellbeing of Scotland’s poorest households for generations, the changes involved in the switch over to Universal Credit mean that this problem should be viewed as a crisis by Scottish policy makers.”

There are many potential action points in promoting financial inclusion and strengthening financial resilience. But let’s not beat about the proverbial bush. In the UK our banking system is highly monopolised and self-serving. The lack of suitable financial products for poorer families is because our monopoly banks won’t provide them.  As a recent Consumer Focus report on financial exclusion concluded:

“Despite recognising that many low-income consumers were good money managers that wanted to avoid debt, mainstream providers still identified other providers, such as credit unions and the Post Office, as more appropriate to serve low-income consumers… Even in terms of playing a supporting role to social lending, the banks’ efforts have been found wanting.”

It is time for the regulatory bodies to direct the banking system to offer the appropriate products to those currently outside the system. Financial exclusion is a form of market failure here and it needs to be sorted through appropriate regulation. Banks are a public utility and as such should have a universal service obligation.

In the longer run, we need public intervention to create a more broadly-based banking system with a layer of customer-friendly savings institutions. A blueprint for doing this in Scotland was published earlier this year, as a collaboration between Common Weal, Friends of the Earth, the New Economics Foundation and Move Your Money. The report, entitled “Banking for the Common Good,” advocates overcoming exclusion through an overhaul of the current financial services market, using the existing powers of the Scottish Government.

However, there are innovative steps that can be taken in the interim to open up new market solutions to exclusion. For instance, new “jam-jar” accounts are needed to address the behavioural reasons why people remain without a bank account. Why not promote a commercial partnership between high street banks and social landlords? Vetting applicants’ identification documents poses a costly administrative burden that commercial banks are reluctant to shoulder for basic accounts. But these documents are the same ones used for accessing benefits or other housing-related administration. Housing associations could vet the same documents simultaneously for both purposes. This would go part of the way to tackling the problems thrown up by the introduction of Universal Credit.

 

With the support of Legal & General, Prospect hosted a private lunchtime roundtable discussion on financial resilience at the SNP 2016 party conference. The discussion was chaired by Andy Davis, Prospect’s Finance Editor. Speakers include: George Kerevan MP, member of the Treasury Select Committee; Dr Paul Monaghan MP, Vice Chair of the APPG on Debt and Personal Finance; Ted Hart, Head of Public Affairs and Policy, Legal and General; Sharon Bell, Head of StepChange Debt Charity Scotland;and Yvonne MacDermid OBE, Chief Executive of MoneyAdvice Scotland.

For speaker and partnership opportunities, please contact david.tl@prospect-magazine.co.uk.