A person of no account?
Time to bring bank customers back in from the cold
Britain is fast becoming a cashless society. Last year debit card payments overtook cash purchases for the first time, with cash payments dropping 14 per cent in a single year from 2016-17.
The government supports the shift as it makes it easier to tackle issues such as money laundering and tax evasion, but what about the 1.5m adults in the UK without bank accounts?
The unbanked are not a uniform group. Those who struggle to access financial services include people on low or unstable incomes, those with disabilities or mental health problems, the long-term unemployed, the elderly and migrants. Being without a bank account can make it harder to access employment, benefits, housing and credit.
An even larger segment of people have basic accounts that provide a poor level of service, such as a card that only permits withdrawal of benefits from a Post Office. Basic accounts for those on low incomes are not well publicised, so applicants often apply for the wrong type of account and are refused due to a low credit rating. Where an account is opened, one in four people pay more in penalty charges than they gain on savings.
What are the barriers to inclusive banking?
According to Mark Carney, pictured right, governor of the Bank of England “In order to have competition, you need all of the banks to be healthy.” Since the crash, banks have focused on profitability. We expect world-class banking services for free, but the truth is it costs a traditional bank around £80 to service a basic account.
Perhaps unsurprisingly, banks have concentrated on customers who make them a profit, either through large deposits or regular payment of overdraft fees. There is little incentive to reach out to people on low incomes, who struggle to use technology or understand financial information. As a result, the marketplace is sluggish and uncompetitive.
It’s time to stop ignoring the problem
We can’t go on like this. To achieve the government’s vision of a cashless society, banks and financial technology firms must reach out to those who are excluded from financial services. Social justice demands it, and with emerging economies rapidly bringing more citizens into the formal banking system, there’s no excuse for developed economies such as the UK to ignore the problem.
“The products on offer must suit people’s experiences rather than offer the minimum required by regulators”
Traditional banks face a heavy burden of regulation that makes innovation difficult compared to digital-only players such as Monzo, Revolut and Starling Bank which benefit from lower operating costs. Servicing an account costs around £8 per year rather than £80.
Some digital disruptors have made great fanfare of their commitment to bringing more people into the banking system, but it remains to be seen whether these efforts are more than PR bluff.
Pairing up big banks and financial technology to find solutions
The solutions that achieve progress in helping excluded people access financial services are likely to arise through partnerships between traditional banks and the new breed of financial technology companies.
Combining the strategic expertise of large banks with the innovation and flexibility of market entrants could be fruitful, so long as the partnerships are based on an understanding of the real-life barriers that prevent the unbanked and underserved from accessing financial services.
We need a shared system of accreditation that sets out the definition of a financially inclusive product. The financial inclusion committee that I chair at The Emerging Payments Association (EPA), is working with the Post Office to develop this sort of scheme.
Financial services that are already making a difference
Successful financial inclusion initiatives have a common theme: not trying to reach everyone, but focusing on having a real impact on people’s lives. There are several examples of this, such as Pockit, Osper, Arro Money, U Account and OnePay all of which offer new kinds of financial services to people currently under-served including the young and seasonal migrants.
The real lesson of the last ten years is that rhetoric about financial inclusion is not enough. We need a more competitive marketplace for low-income and excluded people. The products on offer must suit their experiences rather than simply offer the bare minimum required by regulators.
Financially excluded people are currently unloved by banks: they don’t try to win them over, think about their needs, or treat them with respect. In future, the relationship needs to become more like a marriage, based on a lasting commitment with real impact on customer welfare. It’s time to bring unbanked people in from the cold.
Banking on Change is a publication which examines how we can develop a comprehensive policy approach towards financial inclusion. The report features contributions from the likes of John Glen MP, Peter Dowd MP, Anne Pieckielon, Chris Pond and Guy Opperman MP.
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