Financial Exclusion

Payday has finally arrived. You can make a dent in that overdraft and pay a few pounds off your credit card. Later, you might go shopping using your debit card or take some cash out at an ATM. Soon various direct debits and standing orders will start to come out of your account to cover your home insurance, car loan, mobile phone, council tax and utilities, and some money might even make its way into an ISA or savings account...

The luxury of such streamlined access to banking services is something that most of us take for granted every day. But imagine if you had to live with limited or, worse yet, no access to these services. That's the reality for two million people in Britain today who don't have even the most basic of bank accounts. And that's just the tip of the financial exclusion iceberg.

Financial exclusion is a direct cause of social exclusion and affects a significant proportion of the country, usually in its most impoverished areas. To find out more check out the sections below:

Who are the financially excluded?

Effects of financial exclusion

Problem Areas

Financial alternatives

The sub prime crisis and importance of responsible lending

What can you do?

Organisations that can help

Who are the financially excluded?

There are numerous social groups affected by financial exclusion, the most prominent of these include:

  • Low-income families
  • The unemployed
  • The elderly
  • Those living in rural or remote areas
  • Immigrants and those with little English
  • Those with disabilities
  • Those who distrust banks and other financial institutions or feel that they are outside the system

Effects of financial exclusion

Lack of affordable credit

In the absence of affordable credit from mainstream outlets, the financially excluded may turn to 'doorstep' lending companies or even loan sharks for credit. The high cost of servicing debt generated in this way can have a devastating effect on borrowers' lives and the lives of their families.

Some debt consolidation companies target the heavily indebted and unemployed with the promise debt relief. But this 'relief' often extends the length of time that customers remain in financial distress, forcing them to take on further debt while being charged high fees for the privilege1.

Irresponsible lending by credit card companies - offering cards with high APRs to those with already poor credit ratings - is a further problem area.

Higher household bills

Poor families across the country without bank or building society accounts can end up paying well over the odds for council tax, gas, electricity and other basic utilities.

Without an account these families don't have the option of paying bills by direct debit or standing order and therefore cannot take advantage of the many related incentives offered by companies and councils looking to increase the 'efficiency' of their billing systems.

A 2007 study by Save the Children and The Family Welfare Association found that financially excluded low income families can pay as much as an extra £1000 per year on utility bills2.

Devalued cheques

Without bank accounts in which to deposit cheques or to cash them, many people are forced to cash cheques in pawnbroker-style shops, paying a high proportion of the cheque's worth (anything from 10% upward) to the cashier.

Local branch closure

The elderly and people living in remote areas are commonly excluded by the closure of local banks and post offices with no alternative provided via local agencies.

For those without the luxury of even a local ATM, let alone access to the internet, there are sometimes no means available to manage their finances. Such people may have to travel at expense to their closest bank or post office.

Poor access for disabled customers

Lack of access is also a major factor for people with disabilities. Banks are legally obliged to make some access provisions for disabled customers but ideally should provide tools including accessible websites; Typetalk for people who cannot speak or hear; documents in large print, Braille and on audio tape for the visually impaired; wheelchair accessibility at branches and ATMs; hearing induction loops at branches to reduce background noise for hearing aid users; and mobile units capable of visiting the homes of disabled customers where necessary.

Language barriers

Another large group affected by financial exclusion are immigrants and those with little English. For this group, the issue of understanding the paperwork involved in setting up a bank account, getting a national insurance number and declaring tax, is compounded by the complex language and reams of forms to be completed with little or no assistance.

The result is that many people are excluded from the financial system due to insufficient language provision or poor marketing of such a provision when it is available.

To find out what your bank does to combat the effects of financial exclusion, search for it here (link to banking section) and follow the links to its profile page. The relevant information can be found in the 'Financial Exclusion' and 'Responsibility toward Customers' sections.

Problem areas: banking, saving and insurance

Financially excluded groups have difficulty accessing everyday financial services. This section looks at the key areas and asks what banks and other financial institutions could and should be doing to improve the uptake of services by low-income and other excluded groups. It also looks at some of the products currently available, as well as their limitations. These include basic bank accounts, Post Office Card Accounts (POCAs) and Child Trust Fund accounts.

Banking

While new credit unions continue to open in Britain, the country's bank branch and post office networks are shrinking at a significantly faster rate.

Britain has far fewer branches of banks and building societies per head of capita than other major European countries. With just 250 branches per million customers, Britain trails far behind France (435) and Germany (540)3. So while high street banks are beginning to offer more basic banking products, the problem of access at branch level is of growing concern.

Because basic bank accounts do not make any money for financial institutions they tend to be poorly promoted and therefore new customers have been relatively slow on the uptake. Meanwhile new customers have flocked to the well-publicised Post Office Card Account (POCA) which offers a much more limited service (see below).

A 2006 report by the Citizens' Advice Bureau found a number of additional difficulties and off-putting factors experienced by their clients in opening basic bank accounts. These include being refused an account because of a lack of acceptable evidence of identity and address; long delays in opening basic bank accounts at some banks; the practice of taking money out of accounts to pay other debts to the bank without checking the customer's circumstances first; and the charges levied by banks for items such as failed direct debits4.

Furthermore, recent research has found that though the number of 'unbanked' individuals has decreased, many of those with basic accounts are on the margins of banking and barely use their accounts. Figures suggest that as many as half of basic bank account holders prefer to withdraw all their money each week and manage it as cash, especially those with relatively inflexible basic accounts.

What is a basic bank account?

A basic bank account is meant to be open to all customers regardless of credit history and operates with reduced functionality, e.g. does not offer any credit facilities.

The range of services available through basic bank accounts varies from provider to provider. Some do not offer counter service and free ATMs, others do not offer bill-paying facilities, while some offer all these things. Ideally, a basic bank account should offer the following components as a minimum:

  • The ability to make both deposits and withdrawals
  • A debit card and pin number
  • The ability to take money out at free ATMs
  • The ability to make direct debit and standing order payments
  • Counter service

It should not offer an overdraft or other credit facility (borrowing, a credit card or chequebook) unless it is responsibly administered and will not lead to the account holder into financial difficulty.

Banks offering basic accounts

The below high street banks offer basic bank accounts, however, the terms and components of each may vary widely in terms of meeting, not meeting or exceeding the criteria above. Click on banks for further details:

POCAs

Post Office Card Accounts (POCAs) were introduced by the government to reduce the administrative costs of issuing benefits.

Payments from the Department of Works and Pensions can be made to POCAs via the Direct Payment system. Other benefits such as housing benefit cannot be paid into a POCA, however the system is currently under review and functionality may be increased.

A POCA is the most basic of basic accounts. Holders can only use the account to access benefit payments, they cannot deposit or borrow money, nor can they withdraw it from anywhere other than the post office. It does, however, give people somewhere to store their benefit payments in the absence of a bank account.

Unlike basic bank accounts, POCAs have been better marketed and so have drawn significant membership despite relatively limited functionality. However, the continuing closure of post offices means that the POCA service in inaccessible to many customers.

Saving

Saving even a small amount can offer a degree of security to low-income individuals and families especially in times of financial uncertainty and as a way of preventing debt.

However, this is often not possible for the financially excluded, due to a combination of lack of 'financial capability' in terms of planning for the future, especially amongst the under 40s, and a simple lack of money to save.

Also, the types of financial products available, as well as recent low interest rates, can discourage saving. There is a distinct lack of savings options available for low income groups who want to save small amounts. Often savings products are designed to attract and be convenient for a middle income market.

Low income groups are therefore often attracted to informal savings schemes such as saving clubs, despite their vulnerability, as demonstrated by the collapse of the Farepak hamper firm in 2006. These schemes allow money to be saved in return for vouchers to be spent on particular goods or occasions (e.g. Christmas) and a number of supermarkets offer similar schemes though savings cards.

Credit unions

Credit unions provide accessible savings accounts which are open to all regardless of credit history or whether the amounts saved are relatively small. For more details see the credit union section, here.

Child Trust Funds

The government child trust fund initiative encourages families from all backgrounds to put money aside for their children's futures and aims to foster financial capability amongst young people.

Children living in the UK, for whom Child Benefit is received and who were born on or after 1 September 2002, are entitled to a child trust fund account. The government gives the parent of each eligible child a voucher for £250 to be invested in a suitable savings account or fund. Additionally, parents or other family members and friends can invest up to £1200-per-year in the account on a child's behalf.

The government will make a second payment of £250 when an eligible child reaches the age of seven. A third payment for teenagers is under consideration. See our Child Trust Funds section for more details.

Insurance

Home contents insurance (HCI) is the most basic form of insurance, offering protection against theft or damage to residential property. A significant number of households living on a low or very low income have no home contents insurance.

The absence of home contents insurance is linked to other forms of social exclusion and disadvantage. People without home contents insurance often live in deprived areas where crime and risk levels are higher, for example.

Possible reasons why low income households do not have home contents insurance include:

  • Affordability
  • Insurance companies no longer use doorstep collections, and people living on a low income often do not have a bank account with direct debit facilities
  • Monthly payments do not fit with weekly budgeting cycles
  • Products available are not suited to the needs of low income households: the minimum sum insured can be too high, as can the excess on a standard policy
  • An increasing number of HCI polices are purchased over the telephone and internet sites and require a bank account, as well as a certain level of literacy, numeracy and IT skills
  • Low income customers are not targeted in product marketing

Financial alternatives

Credit Unions

Credit Unions are mutual organisations, owned and sometimes run by community members. They can provide a financial lifeline for people who would be otherwise excluded from mainstream banking services and provide low-interest credit to their savers. Though their services are relatively limited, credit unions around the country are increasingly looking to provide more bank-like facilities.

Below are some of the potential benefits to banking with a credit union:

  • Credit unions are easy to join for low income members or those with a poor credit history
  • Credit unions use a pool of members' savings to offer low-interest loans
  • Many credit unions now offer a bill payment facility which allows people without bank accounts to take advantage of discounts or incentives offered by their utility providers
  • They can provide free life insurance and loan protection insurance to their members
  • They offer financial advice to members
  • They are a means to ensuring that money is kept within the community
  • They promote the value of making regular savings
  • They are a locally-run, trusted institution with an appeal to those who have had bad experience with or distrust banks or money lenders
  • They may operate in areas where banks do not have branches

Find your local credit union: www.abcul.org (Association of British Credit Unions Limited)

Some banks provide financial support and training to credit unions. Currently the Co-operative Bank is working with the Association of British Credit Unions Limited (ABCUL) in developing banking capabilities within a small number of UK credit unions. These credit unions can now offer a range of new services including debit cards, ATM withdrawals, direct debits and standing orders to their members.

By working with credit unions in this way, banks could help provide important bill-paying services to customers without bank accounts, for example, and help counter the effects of branch closures on geographically excluded groups such as the elderly and those living in rural areas.

However, only a small number of banks are currently working with credit unions to improve services and increase accessibility. To find out whether your bank or building society supports or works in partnership with credit unions search here and follow the links to its profile. See its 'Financial Exclusion' section for relevant information.

Community Development Finance Institutions

Community Development Finance Institutions lend to small businesses, organisations and individuals within communities in an effort to help community development and sustainability. Loans provided include:

  • Working capital
  • Bridging loans
  • Property and equipment purchase
  • Start up capital
  • Business purchase
  • Marketing campaigns
  • Personal loans
  • Home improvements
  • Back to work loans

For more info visit the Community Development Finance Association site.

Sub prime crisis and the importance of responsible lending

The roots of the recent global economic downturn is often attributed to the 'sub prime crisis'.

Sub prime lending means granting loans to people who are considered to be in higher risk categories - those more likely to default or with a poor credit history, for example. This type of lending is not problematic in itself - credit unions and community development finance institutions regularly lend to sub prime candidates.

Instead, irresponsible lending to customers in the sub prime category is the problem. In the build up to the 'crunch' some financial institutions were lending 100% mortgages (and in some cases more) to people who would not be able to make their repayments in the longer term. Ultimately many banks lent too much and, in turn, repackaged and sold these loans to other banks, who then needed to be rescued.

To many who had previously been excluded from the housing market, the promise of 100% mortgages was seen as an extraordinary opportunity. It led to a frenzy of mortgage-lending and house-buying that in turn inflated property prices, which then fell substantially when the market collapsed.

What on paper looked like a form of financial inclusion has served only to exclude many people further, as their property is devalued, mortgage repayments become an ever-increasing burden and homes are repossessed.

The implementation of responsible lending policies, developing appropriate products at appropriate rates and properly assessing an individual's ability to make repayments are all of vital importance to ensure that history does not repeat itself.

Lending responsibly shouldn't be limited to just mortgages - it applies to all loans, big and small, and to the provision of credit cards too.

What can you do?

Improve your financial capability

If you feel you need advice on planning ahead, making ends meet, keeping track of your finances and finding suitable financial products the below organizations can help:

  • ABCUL (Association of British Credit Union Ltd): this governing body provides support for existing and joining credit union members in the area of financial literacy.
  • Dough UK: this online resource is aimed at young people between the ages of 14 and 24 and provides step-by-step information on all aspects of personal finance including banking, budgeting, borrowing, saving, bills, insurance, benefits and tax.
  • FSA Money Made Clear: provided by the Financial Services Authority, this website offers jargon-free advice on basic financial services
  • Toynbee Hall: this organisation provides 'financial capability' training and money guidance to people across London through SAFE and Capitalise, London's debt advice partnership.

Lobby for change

Below are steps you can take to address your current financial provider(s) stance on financial exclusion:

1. Search our database for profiles of your bank, building society or insurance provider, and get answers to the following questions:

  • Does it offer any basic products that are open to all?
  • Does it offer or support any financial education programmes?
  • Does it offer a debt advice service?
  • Does it support the work credit unions and if so how?
  • Does it make access provisions for disabled customers?
  • Does it invest in or lend at lower rates to financially excluded communities?

You should also check out our Banking and Insurance sections for information on other relevant issues including responsible lending.

2. If you feel that your provider is making a valuable contribution to reducing financial exclusion you should support them by writing a letter of acknowledgement and encouraging other customers to do the same. Click here for the relevant addresses of all major UK financial institutions.

3. If you are unsure about the extent of your bank, building society or insurance provider's contribution or commitment to reducing financial exclusion, dig a little deeper by writing to them personally with a set of questions you want answered.

4. If you find that your provider is doing little or nothing to reduce financial exclusion and feel that they should be doing more, write a letter to both your branch and headquarters highlighting these inadequacies and demanding change.

While your voice counts, it is likely to get more attention if joined by the voices of others. You should consider encouraging other customers to follow your example by starting an email campaign or utilising free online petition services to get as many signatories as possible.

5. If you are not satisfied with your financial provider's performance on this issue and have not received a satisfactory response to your questions or a sufficient demonstration of future commitment to reducing financial exclusion, consider changing to a more ethical provider.

Switching is easy and banks are obliged to help you transfer all data, debits and standing orders to your new provider.

If you do decide to switch bank or building society account you should write to your current provider(s) detailing what you're doing and why, as well as how you think they should improve their services. You might also consider encouraging other customers you know to switch too.

A comprehensive list of contact details for the UK's top financial institutions is available here.

Organisations that can help

Debt Management

Some banks offer basic in-house debt advice services, the scope of which can vary greatly. But often banks will just refer customers to free advice services rather than offering help themselves.

For details of your bank's debt advice services search here and follow the links to their profile page. Information on this subject can be found under 'Responsible Lending'. Alternatively contact your bank directly for further information.

According to the Friends Provident Foundation, one and a half million people in Britain are behind on their bills while nearly three million report a constant struggle to keep up financial commitments. Below are some organisations offering help to those with debt problems:

Education and Training Services

A contributing factor in financial exclusion is poor 'financial literacy' or 'financial capability', phenomena whose chief victims are from deprived areas and those with a poor educational background. The organisations below offer resources for providers of education and training.

  • Community Development Finance Association (CDFA): The trade association of CDFIs (Community Development Finance Institutions).
  • Debt on our Doorstep: this organisation lobbies for responsible lending practices across the financial services industry.
  • FSA Financial Capability: provides resources to organisations providing financial capability training and advice.
  • Personal Finance Education Group (PFEG): helps schools to plan and teach financial capability across England.
  • Transact: a national forum concerned with financial inclusion and is composed of over 1000 organisations and individuals dedicated to practising and promoting financial inclusion.

References