Has increased competition in banking benefited all consumers?
Although the numbers vary from one source to another, there is broad consensus that a large group of poor and vulnerable consumers are effectively excluded from basic financial services. According to the House of Lords Select Committee on Financial Exclusion, some 1.7m people in the UK do not have a bank account and 40% of the working age population have less than £100 in savings.
In a pair of round-table discussions at the recent Labour and Conservative conferences, Prospect brought together groups of experts and policymakers to analyse the issues linked to financial exclusion and suggest possible solutions. Speaking on behalf of Bacs, the payments infrastructure provider that sponsored both events, Anne Pieckielon, Director of Product and Strategy, stressed that a wide group of players would have to collaboration to address financial exclusion: “We are only at the beginning of this process but there is a much more active conversation taking place now and Bacs wants to be fully involved in the debate as it moves forward,” she said.
One of the most striking features of the discussions in both Brighton and Manchester was the degree of consensus among MPs that banking, like other basic services, depends on public support for its legitimacy. “Most of my colleagues in our party are recognising that the public have to give their consent for companies to operate, and I don’t think there’s very much trust at all in banks,” said Rachel Maclean, Conservative MP for Redditch.
However, even though the government now contains two ministers with financial inclusion among their responsibilities – Guy Opperman at the DWP and Stephen Barclay at the Treasury – there was fierce criticism of its implementation of Universal Credit among Labour MPs in Brighton, particularly the six-week waiting period that claimants face before receiving their first payment. The “political values and assumptions” that have driven its implementation “have pushed people further into poverty and distress”, said Seema Malhotra, Labour MP for Feltham and Heston.
Willingness to shift the balance between government intervention and market forces in addressing financial exclusion may be shifting on both sides of the political divide – if the evidence of Prospect’s roundtables is any guide. Bim Afolami, Conservative MP for Hitchin and Harpenden and a former executive at HSBC, pointed out that banks make no profit on a large percentage of their customers – “the barely banked” – and see no value in offering them more than a “bare-bones service”.
“How much do we regard banks as social organisations that should do things even though they don’t make money?” he asked. “Are we saying we want banks to perform a properly social function or are we saying that we need to find a separate vehicle, other than the current banks, to serve vulnerable people?”
One of the striking features of the post-crisis banking market, speakers acknowledged, was that the UK has seen a profusion of new banks enter the market over the past five years yet there was little evidence that financial exclusion was decreasing.
Not surprisingly, the entrants tended to target the most desirable customers. In a system where most people expect basic banking services to be free, this often meant that the most vulnerable customers in the market were subsidising everyone else, for example through overdraft charges. Lamenting that “we are saddled with the free-in-credit banking model”, Chris Pond, Vice-Chair of the Financial Inclusion Commission, pointed out that “of the 1.7m without bank accounts, half have had one in the past and don’t wish to repeat the experience”.
It therefore appeared to some that banking competition as currently constituted would not lead to less financial exclusion. “There’s a really good opportunity in a range of markets such as banking and energy for the government to redefine what we mean by a well-functioning market,” said Matthew Upton, Head of Consumer and Public Services Policy at the Citizens Advice Bureau.
Aside from changes in government policy towards banking – including a proposed duty of care towards customers and possibly going as far as setting out the industry’s social obligations as a basic utility – the many potential responses to the problem of financial exclusion involve regulators, technological innovation, competition between incumbents and the addition of new providers such as the Post Office. Here, an agreement signed recently with the major banks had brought a range of basic banking services into 12,500 post offices, doubling the size of the branch network, said Rebecca Park, Head of External Affairs and Communications at UK Finance, the financial services trade body.
Mick McAteer, Founder and Co-Director of the Financial Inclusion Centre, argued that regulators could play a bigger role in ensuring the government’s goals on improving financial inclusion were met, perhaps by making it an objective of regulation rather than an issue to which the Financial Conduct Authority must “have regard”.
There was also a clear role for innovation and technology to play. Technology could make the cost of banking services more transparent, enable innovations such as “request to pay” that lets people to pay direct debits in instalments as they’re able, allow customers to compare the cost of competing services, and improve the flow of information they receive on their financial situation.
The Open Banking reforms set to go live in January could deliver many of these benefits. But several speakers worried that they might just as easily widen the divide between engaged customers willing and able to use digital tools to secure a better deal, and a large group of disengaged customers who risked being left behind.
However, no real solution to financial exclusion would emerge unless we do more to understand those it affected, argued Carl Packman, Research and Good Practice Manager at Toynbee Hall. Researchers currently had to deduce how many people do not have mainstream financial products from surveys that measure those who do, he explained. “We measure financial exclusion and unbanked households in a very imperfect way.”
With the support of Bacs, Prospect hosted a series of round table discussion at the 2017 Labour and Conservative Party Conferences on how banking services could best be provided to the financially excluded.
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