Tackling financial exclusion

Paul A Jones PhDResearch Unit for Financial Inclusion

Money Talks: How can we tackle financial exclusion?Quaker House, Liverpool

Tuesday 22 September, 2015

Financial exclusion• Financial exclusion refers to a process whereby

people encounter difficulties accessing and/or using financial services and products in the mainstream market that are appropriate to their needs and enable them to lead a normal social life in the society in which they belong. EU 2008

Measuring financial inclusion

• Measured by three dimensions

1. Access to financial services

2. Usage of financial services

3. The quality of the products and the service delivery

The Global Partnership for Financial Inclusion

– the platform for all G20 countries

Supply side factors• Delivery of financial products • Increasingly complex products• Information technology and the move to digitalisation• Profitability – the flight to quality• Risk assessment • Market segmentation• Providers unwilling to serve lower income/ higher risk

consumers• Impact of legislation and regulation

– Money laundering legislation

Demand side factors• Self-exclusion • Historic cultural self-exclusion• Lack of financial awareness• Low levels of financial capability• Lack of trust and confidence in banks and mainstream

providers• Non engagement - prefer to stay in a cash economy• Been included and got burnt!

– Factors related to over-indebtedness

The impact of financial exclusion

• Inability to participate as an economic citizen • Financial exclusion an aspect of social exclusion • European citizens cannot fully participate in

society without a basic bank account • EU Directive on payment account fees, payment

account switching and access to a basic payment account

Realising banking inclusion 2010

• Efforts on banking inclusion have moved 1.1 million into banking but the benefits appear to be unevenly distributed and barriers to banking remain

• the majority of both the newly banked and those remaining unbanked are not new to the banking system.

Realising banking inclusion 2010• Penalty charges have been a harsh reality of the

banking experience for many.• A little over a quarter (27%) of the newly banked

have been net gainers from the move into banking. For a little over a third the position is broadly neutral while 26% have been net losers. The balance have fallen out of banking.

Banking on a fresh start 2009 • High impact in people’s lives

– “It seems superficial doesn’t it just to say the most important reason for me is that I can be like anybody else”

• Psychological and social outcomes – "This might sound daft, but I feel better as a person, and I

would like other prisoners to know that."• Some evidence of reduction of reoffending• Enabling some to obtain employment

Changing Lives (the Cyrenians)

• Banking on a better future (2014)• Inability of service users to obtain a bank account• Service users spoke of feeling judged, rejected

and isolated from the system. • Research into solutions

– Glasgow Central Savings, credit unions, local branches

• Agreement by Barclays that Changing Lives could be a charity introducer

What people look for in a bank account

• Credit union current account research 2009 – Ability to have wages or benefits paid directly into the account,

95%– Cash machine access, 72%– Certainty about charges, 63%– Low penalty charges for failed direct debits and standing orders,

56%

• Control, personal service, clarity, transparency and familiarity

• The continuing importance of cash

New basic fee-free bank accounts

• New basic fee-free bank accounts to help millions manage their money

• Government secures deal with the big banks on basic bank accounts - ending fees for failed payments.

• Link to agreement

Demand for credit (2011) • Credit use is widespread• For many only way to manage • 69 per cent of low-income households and 10.55 million

low-income individuals are credit users.• Driven by a lack of savings safety nets, and competing

pressures on tight budgets• 64% of low income households have no cash savings,

rising to 74% of those on the lowest 20% of income

Access to credit on a low income 2005

Factors influencing choice

• Affordability rather than cost• Accessibility -“It’s who will

say not say no to a loan that matters”

• Ease and flexibility of repayment

• Immediacy• Tradition and culture• Knowledge of the product

• Simple and straightforward terms and conditions

• Convenience• Ease of application• The human touch• No stigmatisation• No credit checks

Overdrafts and credit cards, have become the key sources of credit for those on low incomes

Credit repertoires for those on low incomes (all sources of credit used)Source: Policis

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Payday loan

Credit Union

Pawnbroker

RTO (Brighthouse type)

Sale and buy back (Cash Converter type)

Cash advance on credit card

HC shopping voucher

Car loan through dealer

Personal loan from CF company

Home credit

HP finance

Social Fund

Storecard

Catalogue credit

Personal loan from bank

Friends and family

Credit card to buy goods and services

Overdraft

Base: Bottom 50% household incomes

Access to affordable credit

• Some key issues – The cost of credit – Default charges– Affordability assessment– Financial difficulty– Multiple and repeat borrowing – Loan renewal

– Bristol University (2013)

Saving in low-income households • 64% of low income households have no cash savings,

rising to 74% of those in the lowest income quintile Source : Policis / FPF 2011

• Research demonstrates the positive effects of saving (Michael Sherraden 1991).– ‘Income only maintains consumption, but assets

change the way people interact with the world. With assets, people begin to think for the long-term and pursue long-term goals. In other words, while income feeds peoples’ stomachs, assets change their minds.’

Access to savings accounts• Assets have significance beyond their value as stored income.

– Positive psychological impacts.– Greater confidence about the future– A feeling of empowerment and control over their lives.– Links between assets and later life outcomes such as greater family

stability, improved health and better labour market performance.– For the positive latter life outcomes to occur, the asset did not need to

be very large (Bynner and Paxton, 2001).

Saving in credit unions • Saving when repaying a loan (encouraged always, obligated traditionally)• Saving by payroll deduction with employers• Saving through low value deposits - payable in cash in credit unions or in

post office • Satellite points in community locations • Locked in savings accounts - e.g. Christmas savings• Dedicated savings accounts - holiday savings accounts• Estate loans - given to people with no savings that go directly into savings -

people cannot withdraw savings until they pay down the loan - people effectively pay to save

• Additional withdrawable savings accounts - if main account locked with a loan greater than savings

• Childrens’ savings in schools (which encourages parents)• Matched or pump-primed savings accounts

Credit unions in the UK

• Engagement in financial inclusion– The Financial Inclusion Growth Fund 405,134 loans to

a total value of £175,351,444. (May 2011)– Growth in membership and improved working

practices

• Historic major commitment to low income communities– Research study into NI credit unions 2013

Facing CU financial and organisational challenges

• Financial challenges – Low income to average assets – High operating expenses – Loan to asset ratio – around 50 per cent

• Organisational challenges– Leadership, governance and management– Consistency in products and services– Serving wider target market– Developing information technology– Developing effective partnerships

Tackling financial exclusion• Financial education

– Financial capability – an essential life skill – The impact of financial skills training for social housing tenants (Quids In 2012)– Financial capability, income and psychological wellbeing. (Taylor, Jenkins and

Sacker 2011

• Access to affordable financial services – Credit unions, CDFIs and other social finance

• Money and debt advice • Income maximisation• Consumer protection