Banking on Change: how can we better address the banking needs of the financially excluded?
The banking and financial services that we rely on to run our lives are more than ever dominated by digital technology and data. At the beginning of 2018, Open Banking was officially launched, enabling us to share our private banking data securely with approved third parties who can then analyse it and recommend products and services that are cheaper or more suitable for our needs. Millions of younger customers, meanwhile, are flocking to app-based start-up banks such as Monzo, Revolut, Tandem and Starling that provide highly tailored services along with smart tools aimed to help them manage their finances better.
For many people, the experience of being a bank customer is getting steadily better as digital technology develops. But what about those on the margins, who are short of money, lack the confidence to make often complex financial decisions and want to be able to speak to someone rather than do everything online? How big an opportunity does digital technology and data offer to improve financial inclusion? Or do they, instead, risk making exclusion worse?
At the recent Labour and Conservative party conferences, Prospect and the Current Account Switch Service (CASS) hosted roundtable discussions to debate the issues around financial inclusion and examine the part that technology might play in addressing it.
Since it was launched in 2013, CASS has provided a simple and stress-free means of switching bank accounts. Over 5 million people have now switched, and CASS has become a recognised thought leader on issues such as financial inclusion and competition in retail banking. Introducing the round tables, Simon Hanson for CASS encouraged a lively debate, explaining that as consumer expectations change and new digital services become available, there needs to be a consensus across the switch ecosystem on how to ensure inclusion.
At the events we heard that efforts to harness financial technology innovation to tackle problems of financial inclusion are already well under way. For example, Chris Pond, Vice-Chairman of the Financial Inclusion Commission, highlighted the 2017 Fintech for All competition run by the former Tech City UK (Now Tech Nation), an organisation that supports the UK tech entrepreneurs, which aimed to identify companies developing technology that would help make the financial system more accessible to everyone.
Similarly, a growing number of small businesses are using technology-based alternative lenders such as Funding Circle, a website lender that connects investors with companies looking for unsecured loans. Many of these borrowers are very small businesses that do not own physical assets that could serve as security for a conventional bank loan. Natasha Jones, Head of UK Communications at Funding Circle, said customers liked the fact that it used digital data to help it make very quick lending decisions and that each borrower dealt with the same account manager at Funding Circle throughout the application process. Notably, the combination of technology and a human point of contact has led to high levels of customer satisfaction.
However, Labour MP Seema Malhotra warned against putting too much weight on digital technology as the answer to problems of financial exclusion, a view echoed by Martin Coppack, Deputy Chief Executive of the Lending Standards Board: “The danger is that by waiting for technology to solve this we ignore the boring areas where the damage is done – the cost of doorstep lending, overdraft charges and the growth of aggressive debt collection.” Rosie Winterton, Labour MP for Doncaster, pointed out that digital services could produce problems from unexpected quarters. She had dealt with numerous cases in her constituency where vulnerable and elderly constituents had been persuaded to transfer funds to fraudsters online. The ability to do so instantly was the problem, she said. If the technology could be slowed down, or a cooling off period built in, more victims would realise they were being duped. This view was echoed by Angela Kitching, Head of External Affairs at the charity Age UK, who added: “Banks are not helping people who want to slow down the system. Seventy-five per cent of people realise within 24 hours that they’ve made a terrible mistake.”
The question of using alternatives to the mainstream banks to improve access to finance featured frequently in the debates. Where communities are losing access to banks due to branch closures, the Post Office is often talked about as a way to deliver branch-based financial services. But speakers warned that it was being seen too often as a “catch-all answer for everything” and argued it would struggle to fill the gaps that banks are leaving behind, due to its own funding constraints and the need for counter staff with specialist training and financial knowledge.
Rushanara Ali, a Labour member of the Treasury Select Committee, asked whether regulation could be used to force banks to provide more support to alternative lenders such as credit unions. These might be particularly relevant for people that were, for example, trapped in expensive financial products because their irregular earnings meant they were unable to switch to a different mainstream lender. “The formulas that banks are using to establish creditworthiness can’t cope with this pattern or earnings,” she said.
Could technology be used to help people with irregular earnings or patterns of employment by aggregating more data about them to build a more comprehensive picture of their finances, Ali asked. This could help people who currently struggle to gain access to the best deals to make the case that they are creditworthy. One example of the systemic discrimination that can occur is that homeowners have a big advantage over those that rent, because their credit history will capture their record of mortgage payments, while data is only now beginning to be used to show that tenants pay their rent on time.
Emma Thomas, Head of Public Affairs at the credit reference agency Experian, lent backing to this view that collecting more data on people can improve their ability to show they are creditworthy. “Alongside traditional credit data there’s new, non-traditional data filtering in, such as Open Banking data,” she said, “an especially from the perspective of financial inclusion this has an important and valuable role.” In 83% of so-called “thin” credit files, adding more data had a positive effect on the person’s creditworthiness, she said.
While collecting more data would be positive for some people, Joanna Elson, Chief Executive of the Money Advice Trust, pointed out it would not necessarily help those who were digitally excluded because they don’t use online services from which data is gathered. Efforts to gather more data would do little to help people who use cash to help manage their household budget.
Mick McAteer, Co-Director of the Financial Inclusion Centre, also warned of the pitfalls of pinning one’s hopes on big data to produce solutions to financial exclusion. “Big data and fintech will lead to more financial exclusion, not less,” he said, arguing that the more information providers collected about each of us individually, the easier it became for them to differentiate between customers they could profitably serve and those that would never make them money. “There are few iron laws in financial services, but one is that the more segmentation you have, the more exclusion you have.”
Instead, he argued that the priority should be “stamping out the bad” – such as the “financial discrimination” that led to people in deprived areas being 70% more likely to use unauthorised overdrafts and paying double the fees and charges of those in better off communities.
Although others were more optimistic about the potential of technology to improve financial inclusion, there was widespread agreement among participants at the two events that any solution would have to involve regulators, government, civil society groups and the financial services industry working closely together. Next year CASS plans to continue to lead this discussion to ensure the service realises the potential benefits of technological change and find solutions for the problems such change will inevitably bring.
With the support of CASS, Prospect hosted a series of round table discussion at the 2018 Labour and Conservative Party Conferences on how banking services could best be provided to the financially excluded.
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