Promoting financial inclusion

Over a million adults in Britain still live their lives without the most basic of financial products. Some 6-9 per cent of all households do not have any kind of bank or building society account and 14-23 per cent live without the flexibility of a current account. [Footnote 1] There is a large minority of people for whom the financial services revolution has effectively passed them by; they are financially excluded. Against this backdrop, Faith Reynolds assesses some current initiatives that are attempting to promote greater financial inclusion.

The reality of financial exclusion
The implications of being financially excluded
Toynbee Hall and SAFE: Services Against Financial Exclusion
Asset-building and the Saving Gateway
Financial education
Basic bank accounts
Conclusion

The reality of financial exclusion
Underpinning financial exclusion are problems of poverty, ignorance and environment:

• Poverty: being on a low income, especially out of work and on benefits.
  
  
• Ignorance: low levels of awareness and understanding of products caused by lack of appropriate marketing or low levels of financial literacy.
  
  
• Environment: lack of access to financial services caused by several factors, including:
  
  – geographic access to bank branches or remote banking facilities;
  – affordability of products such as insurance, where premiums often price out those living in the most deprived and risky areas;
  – suitability of products like current accounts, which offer an overdraft and an easy route to debt;
  – regulatory barriers, such as the money laundering guidelines requiring proof of identification which many people find difficult to provide;
  – cultural and psychological barriers, such as language, perceived/actual racism and suspicion or fear of financial institutions.

The implications of being financially excluded
Living without financial products is a significant disadvantage in an age where cash is slowly being replaced by debit cards and automated transactions, and living on credit is the norm. Having no insurance exacerbates the effects of theft. Outside of mainstream financial products, saving options are informal and unreliable. Discounts on utility bills for paying by direct debit are inaccessible. Affordable short-term credit is replaced by sub-prime lenders offering credit on APRs that often exceed 100 per cent, pawn brokers and loan sharks. Being financially excluded can cost and it is the most deprived who pay the price.

Toynbee Hall and SAFE: Services Against Financial Exclusion
Toynbee Hall is a voluntary organisation that was established in 1884 to alleviate poverty in the East End of London, an area with a history of deprivation. Toynbee Hall has a tradition of developing innovative services. Indeed, Child Poverty Action Group started at Toynbee Hall in 1965.[Footnote 2] A more recent addition is SAFE: Services Against Financial Exclusion. SAFE was launched in March 2002 and currently offers financial information and education, promotes access to basic bank accounts and to the Saving Gateway, a government pilot savings scheme. SAFE also works in partnership with Toynbee’s free legal advice service, The Environment Trust and Quaker Social Action to promote free debt advice and access to free training opportunities and micro-finance (through the Community Finance and Learning Initiative).

The problems underpinning financial exclusion are interlinked and need to be addressed jointly as well as individually. Financial inclusion is a key part of the Government’s social inclusion policy and it has applied pressure on its departments to review, reform and regulate where necessary. Others have taken up the baton, including various policy makers, the Financial Services Authority (whose job it is to promote public awareness of UK financial systems) and the voluntary sector. Some financial institutions have also made costly, if, in some cases, half-hearted steps towards promoting financial inclusion. ‘Joined-up doing’ (as well as thinking) is needed to ensure financial inclusion becomes reality.

There are many initiatives being established across the country with the aim of tackling financial exclusion. The following discussion highlights three common themes of these initiatives and some of their policy implications.

Asset-building and the Saving Gateway
The anti-poverty lobby and living wage campaign are well established. A more recent innovation is asset-based welfare policy. It is suggested that increasing an individual’s or community’s asset holding can increase social mobility and offer a positive route out of financial exclusion and poverty.[Footnote 3]

Raising income is part of the Government’s welfare policy and financial assets have a complementary role to play. [Footnote 4] Having money put aside smoothes peaks and troughs (and acts as an alternative to a short-term loan); it also allows people to take advantage of opportunities which might otherwise be denied (eg, paying for further education); in the longer term it can offer a more comfortable retirement. The act of saving reinforces longer-term thinking and a sense of responsibility for one’s future. Holding a savings product also reduces financial exclusion.

Research shows that people on lower incomes are least likely to save or hold assets.[Footnote 5] They are also unlikely to be affected by tax breaks, which might be attractive to people on higher incomes. The Saving Gateway is one policy the Government is piloting to encourage low-income households into saving. The scheme offers to match an individual’s savings, a pound for a pound up to a specified limit and is run through trusted community-based organisations, which act as intermediaries between the client and the delegated bank (the Halifax). Given the expense of the project and the target group, the Saving Gateway has caused much controversy.

One valid question raised by the Institute for Fiscal Studies [Footnote 6] is whether people on low incomes should be encouraged to save in the first place and incentivised with such high returns. Its work suggests that only one in eight of the poorest fifth of the population will benefit from the Saving Gateway in the way that the Government [Footnote 7] expects and that those left may indeed borrow to save into the scheme. Others argue that people on such low incomes do not have a disposable income in any case. If their low levels of income necessitate a hand-to-mouth existence, should longer-term thinking and financial planning be encouraged? Increasing income should be the priority.

Research from a similar scheme in America shows that people on low incomes can, and perhaps more importantly want to, save small amounts on a regular basis. For many people the Saving Gateway replaces an existing informal form of saving (the jam jar for instance). The saving scheme offers a decent return on very small savings that people on higher incomes would benefit from through tiered interest rates and tax breaks. Why should poor people not reap as comparable rewards for saving as people on higher incomes?

A balanced view needs to be taken on asset-based welfare policy: it is not a case of either income or assets, but of both income and assets. For those people who want it, there should be the opportunity of saving and reaping clear benefits. If the aim is to increase financial inclusion, the answer is not to keep people in ignorance, excluded from products that policy makers judge unsuitable. People on low incomes have every right to make the decision for themselves. Policy, therefore, needs to be equally concerned with what informs individuals’ decisions and how education can best be delivered to ensure that all people (whatever their income) are enabled to make the right decision given their circumstances.

Financial education
The five Saving Gateway pilots do not stand alone but, in all but one case, are run alongside a Community Finance and Learning Initiative (CFLI). One of the objectives of the CFLI is to promote financial literacy through the provision of financial education. The National Foundation of Educational Research describes financial literacy as the ‘ability to make informed judgements and to take effective decisions regarding the use and management of money’.

The delivery of financial education can be said to comprise three key themes: building skills, increasing knowledge and developing understanding and within each of these a client’s confidence should also be developed.

Building skills
Literacy and numeracy are fundamental skills in managing money and understanding the plethora of financial products available by which to do so. Research commissioned by the Basic Skills Agency (BSA) [Footnote 8] shows that there is a link between people who have low levels of literacy and numeracy and financial difficulties. Almost one in four people (23 per cent of population) do not have the basic skills expected of an 11-year-old. Moreover, research shows that whilst people with poor basic skills do hold financial products, they are less likely to do so.[Footnote 9] Consequently, the BSA has developed useful resources for delivering financial education to people with basic skills needs [Footnote 10] and worked with four financial institutions to train front-line workers in helping customers with basic skills needs.

Increasing knowledge
Raising awareness and increasing knowledge of financial products is key in helping people make informed decisions. Financial institutions tend not to market very deprived areas, where residents are more likely to already be financially excluded.[Footnote 11] As such, residents of these areas are even less likely to become aware of suitable products as they come onto the market. In terms of promoting financial inclusion, much of the work is simply in providing easily understood information in a safe and engaging environment. To this end the Financial Services Authority has produced a detailed consumer website, various free leaflets and a financial planning CD-Rom [Footnote 12] and these are publicly available through CABs, libraries, post offices and the like. Financial providers and other trusted local community organisations also make excellent vessels for disseminating such information.

Developing understanding
Whilst increasing knowledge is mostly about the provision of information, developing understanding is about giving an individual a strategy for dealing with this information, which might include skills for budgeting, planning, understanding the types of products available and shopping around to find the best deal. There is no definitive way for delivering this type of training but it is generally agreed that, for the client, there has to be ‘something in it for me’. Debt advice, basic skills courses and initiatives like the Saving Gateway can be useful ‘carrots’ for engaging people in financial education and resources like the Adult Financial Capability Framework [Footnote 13] give a sound structure from which to plan the training.

Building confidence
All aspects of training should build an individual’s confidence. The skills and confidence necessary for filling out forms, asking questions, getting further clarification and making complaints in an effective manner are all too often taken for granted. In all aspects of training there needs to be constant affirmation of the individual, the individual’s rights and significance as a citizen in our society (and of their consequent responsibilities towards others). An individual has a right to ask questions and receive answers that make sense to them from a person who is able to see beyond their own needs and react in a positive way.

Basic bank accounts
There is, however, no single solution for financial exclusion and a financially capable adult has little chance of becoming financially included if the environment is set against them. The Government has made significant moves to promote a more accessible environment [Footnote 14] but one initiative is of particular relevance at the time of writing: access to mainstream financial services through the provision of appropriate financial products.

Apart from wishing to promote a socially cohesive society more generally, the Government has a vested interest in advancing financial inclusion and access to mainstream financial services. In 1999 the decision was taken to move all benefits payments from giro to automated credit payments (ACT) by 2003, thus saving the Government (and the tax payer) approximately £650m a year in administration costs and fraud. [Footnote 15] However, this relies upon recipients having some kind of account to which benefits can be credited.

A universal bank was initially proposed. This was to be a no frills banking service available through post offices. Not only would the universal bank promote financial inclusion, but it would also advance benefits reform and modernise post offices. The cost of doing so, however, was considered too great and neither the Government nor the banking industry would pay the bill. Instead the paper-based giro has been replaced by the post office card account (POCA). This allows benefits (not salaries) to be paid by ACT and withdrawn in cash at a post office as before, but otherwise offers very little flexibility. Alongside POCA some 18 financial institutions have so far developed (or committed to develop) a basic bank account. These accounts vary by bank, but are similar to a standard current account without an overdraft facility or cheque book. With no overdraft users do not need to be credit scored nor fear losing control of their money. Customers can set up standing orders and direct debits, use their Solo or Electron card for debit transactions, as well as withdraw cash from cashpoints and their benefits from a post office.

There have, however, been some complaints about the lack of marketing for basic bank accounts and some banks’ hesitancy in embracing the basic bank account target group. The problem is that basic bank accounts are considered unprofitable.

It should not be forgotten that banks and building societies are profit-making institutions with shareholders and that the local branch is similar to any other shop – it is there to sell a product. It is estimated that if all 13 million benefits recipients decided to use standard or basic bank accounts (which is unlikely in the early years, but surely the ultimate aim for the future) then the total costs to the industry could be as high as £1 billion. Incremental costs could be £400-£650 million if each account costs £30-£50 per annum. [Footnote16] Whilst the Government will make considerable savings by transferring benefits payments to ACT, the banking industry, without any financial incentive or government subsidy, will pay considerable costs to support the initiative.

On the other hand, however, it would be somewhat short-sighted to believe there is no business case for the basic bank account. The Government spends several millions of pounds in benefits and tax credits. This could be money flowing straight to financial institutions, which may not always flow straight out. The number of benefit recipients hits millions and it is plausible that a financial institution could expand its client base (and profits) significantly by actively marketing its basic bank account (especially in deprived areas) and later cross-selling products (eg, savings accounts). It is also likely that for some customers a standard account with an overdraft facility will be appropriate and profitable. For many, overdrafts offer a cheap and reliable form of short-term credit which in the longer term some basic bank account clients may graduate towards. Further development to structure the repayments of overdrafts could also increase confidence and a sense of being in control among potential users whilst keeping defaults low. The labour market and income levels are also variants which should be taken into account: today’s single mother with a baby on income support may well be next year’s new business entrepreneur.

A new approach to basic bank accounts and people on benefits needs to be adopted. By non-marketing the basic bank account and by giving staff no financial incentive to sell it [Footnote 17] a negative view of the target group is reinforced both to staff and society more generally. The cultural barrier between the financial institution and the financially excluded simply widens further.

Many banks already embrace corporate social responsibility, make generous donations and send volunteers to local community organisations. The next step is for corporate social responsibility to have an impact on the way banks do business. This is already happening to some degree through community banking programmes (for instance, the Bank of Scotland’s work with the Big Issue to provide basic bank accounts and an appropriate saving scheme [Footnote 18), initiatives like the Saving Gateway and training packages produced by the Basic Skills Agency, but it needs to happen on a much larger scale.

The voluntary sector has a key role to play in promoting initiatives like the Saving Gateway and other community banking programmes, as well as in informing, supporting and being positive about financial institutions’ steps towards financial inclusion. Similarly, some parts of the financial sector need to open their doors more widely, become aware of the neighbourhoods in which they work and promote a more outward-looking, customer-centric model to work alongside their target-based, profit-driven model.

Conclusion
In conclusion, there are many issues (some which are not mentioned above) which need to be taken into account when considering the best course towards financial inclusion. A recent report on poverty [Footnote 19] suggests that there has been little change over the last five years in the number of financially excluded people. There is still a long way to go, but the need for change becomes ever more acute. One of the main characteristics of the work should be that it is collaborative and ‘joined-up’, harnessing the strengths and expertise of all those involved, whether in policy, government, regulation, education, industry or the voluntary sector.

Faith Reynolds is the co-ordinator of SAFE (Services Against Financial Exclusion) at Toynbee Hall in the London Borough of Tower Hamlets

Thanks go to Ian McGimpsey and Luke Geoghegan of Toynbee Hall, and volunteers Sean Williams, Will Paxton and Gill Hind for their help with this article.

Footnotes
1. Financial Services Authority, In or Out, 2000 [back to text]
2. 'Driving Spirit for Action Against Child Poverty', Obituary of Harriet Wilson, The Guardian, 26 July 2002 [back to text]
3. M Chapman, 'Promoting Financial Inclusion', Centre for Research into Socially Inclusive Services, in ESRC How People on Low Incomes Manage Their Finances, 2002 [back to text]
4. Savings and Assets for All, The Stationery Office, 2002 [back to text]
5. J Banks, S Tanner, Household Wealth in the UK, Institute for Fiscal Studies, 1999 and Department of Social Security, Family Resources Survey, 2000. [back to text]
6. C Emmerson and M Wakefield, Institute for Fiscal Studies, 'Getting the Saving Habit' in ESRC, How People on Low Incomes Manage Their Finances, 2002 [back to text]
7.Data excludes those how already hold financial assets, homeworkers, students, pensioners and those not in paid work. [back to text]
8. 1995 sweep on the National Child Development Study, completed for the Basic Skills Agency by the Centre for Longitudinal Studies, London University [back to text]
9. A research study conducted by MORI for the Basic Skills Agency, 2002 [back to text]
10. Including 'Making the Most of It' pack and 'Money-go-Round': more information at www.basic-skills.co.uk [back to text]
11.E. Kempson and C Whyley, Kept out or Opted Out?, The Policy Press, 1999 [back to text]
12. See www.fsa.gove.uk/consumer/ for more information [back to text]
13. See www.fsa.gove.uk/consumer/teaching/adults/framework/ for a copy [back to text]
14.Recent reforms by the Government include making products more accessible and transparent and the introduction of the CAT standards as voluntary benchmarks for charges, access and terms. [back to text]
15. S Williams, summary of the Report of the Banking Review, Centre for Polciy Studies, 2001 [back to text]
16. See note 15 [back to text]
17. Some banks offer bonuses to staff on the sale of a product, but in many cses there is no such bonus offered for selling a basic bank account [back to text]
18. See www.bitc.org.uk/resources/case_studies/bank_of_scotland.html [this page is no longer available on the Business in the Community website] [back to text]
19. Monitoring Poverty and Social Exclusion 2002, New Policy Institute and the Joseph Rowntree Foundation, 2002 [back to text]

Poverty 114, Winter 2003