Thursday 27 January 2011

• How far have the range of financial inclusion approaches and strategies been perceived as relevant by those with low, and often volatile, incomes?

• What needs to change for policy design and delivery in financial inclusion to most fully utilise lessons about how policy interacts with the real life experience of low income citizens?

The guiding principle of the series has been to learn lessons from existing financial inclusion policy and to identify priorities and recommendations for future initiatives. This seminar held under the Chatham House rule discussed how approaches to financial inclusion can and should be shaped around the needs and life patterns of those on low and volatile incomes.  Panelists leading the discussion were Danielle Walker Palmour, Director of the Friends Provident Foundation and a member of the Financial Inclusion Taskforce, Omah Khan, Researcher and Policy analyst at the Runnymead Foundation and Paul Jones from the Research Unit for Financial Inclusion at John Moore’s University. Research Director of the Fabian Society, Tim Horton chaired the session and the following report covers the main themes and issues discussed.

Since 2005, under the jurisdiction of the Taskforce, over 1.1 million people have moved into the banking system via the Basic Bank Accounts. These were created to improve access to financial institutions and services for low income groups and the Taskforce have successfully reduced the number of ‘unbanked’ by half; a key priority from its inception. However, as recognised in the first seminar of the series, the experience of those people in banking has been very mixed.  In some cases this has been a positive contribution, for example with ex-offenders. Yet, at the same time 12% of those newly banked fall out of the system shortly after.  Penalty charges can wipe out any savings gained, with approximately £35 million per annum borne primarily by those on the lowest income, and indeed often those in the lowest quintile experience a net loss from the move into banking.

There is the case therefore for a more expansive view of financial inclusion beyond the banking system, and it was broadly agreed the issue is more about enabling people to manage their money on a day to day business, by the best means possible.  

Credit Unions and community development financial institutions were praised. With 137 million pounds of loans filtering through them, these organisations have made a substantial impact on the credit market and high cost lenders. It is estimated that savings of between £337 and £425 are made over the lifetime of a loan compared to non-growth fund borrowers elsewhere. The non-financial benefits from engaging with credit unions and community development finance were also noted: people felt more in control and more connected to a range of services.  But while this sector has flourished at a time when trust in the banks has deteriorated, the costs of provision are high and dependant on subsidies; an issue that needs to be grappled with in both in public discourse and with the Treasury in order to sustain the future provision of these services.

Take up has been patchy around insurance and saving schemes.  More often than not people with fluctuating and variable incomes find it difficult to make regular payments and it was argued that often those that paid into insurance schemes found themselves with less financial security in the long term.  As soon as one payment is missed, coverage is automatically withdrawn leaving customers more vulnerable. ABI research suggests that people do value protection but they actually feel it is too expensive to buy. It was acknowledged that it was not an area the Taskforce has focussed on with considerable success.

Research does indicate that people do save, but with slightly different patterns of behaviours; the terminology is different and does not tend to be for ‘rainy days’ – of which the Government is advocating. Savings have been hit rather hard by the loss of the Savings Gateway, which was an incentivised matching scheme. It was observed the Government’s main intervention seems to be with tax incentives, however some argued most people don’t understand tax incentives at all and this can lead to a movement of savings rather than net increase. Many felt there was scope in future policy making to develop a long term savings vehicle for this particular market.

Another important role for the Taskforce has been to provide support for those experiencing financial pressure; assessing the role of credit, savings and insurance, and how people cope with a variety of things that put pressure on household expenditure. The significance of good quality and accessible advice is essential and dealing with people on the phone and face to face is a trained skill to make people think differently about things. Improved money advice, both on debt and crisis intervention, has been introduced to help relieve such financial distress; with more accessible advice on illegal lending teams, which addressed loan sharks in communities.

Low income people tend to have very positive experiences with face to face advice which has proved extremely popular.  However money advice is in a very difficult stage of development. The Financial Inclusion Fund paid for 500 advisors around the UK in a range of advice centres both independent as well as the Citizens Advice Bureau. At present, the Government has not indicated what is to happen, so, in reality, they all under threat of redundancy with a huge pending front line service delivery loss. And this does not begin to take into account the added economic costs associated with the loss of trained and skilled staff across the country. 

As the discussion turned to what needs to change for policy design and delivery in financial inclusion, many felt a better understanding of how people spend and borrow should be developed; one that goes with the grain of how people want to use services.

Arguably financial inclusion policies have been modelled on middle class assumptions, rather than responding to a realistic understanding of the pressures experienced by low income households.  For example, signing up to Direct Debit payments may reduce the cost of electricity in the long term, but does not provide the kind of control that a meter does in helping people monitor their consumption. 

Quite often people on low incomes like cash because they can see how much they have in ‘their pocket’. Yet certainly cheques and cash are two very clear things are things banks are trying to discourage people from using. The shift to an electronic financial system does raise new challenges for the financial inclusion agenda and the pressing challenge will be how to meet the banking transaction need which doesn’t actually involve a bank, and likewise how we can replicate bank accounts that have the characteristics of a cash service.

The role of transparency and predictability in improving access to finance was also discussed. People want to know how much something’s going to cost them and transparency is a key component this: if you don’t have much money, you want to know what your outgoings are or what they will be in the immediate future.  Unfortunately the existing system is based on penalising borrowers unexpectedly and essentially for those with very limited funds this is impractical. There is some indication that people would prefer to pay a fee for certainty which was proposed as an area to be explored further. 

How people learn to manage and make choices about their finances is most effective when delivered informally and through their communities. Informal conversations can lead people to look at the world and budgets differently, so it was agreed the dynamics of financial inclusion should involve lots of engagement and intermediaries rather than a top down approach.

This is most clearly demonstrated amongst the different patterns of behaviour of certain groups that the broader financial inclusion agenda could learn from. BME groups, as well as older people and migrant communities have different needs based on different histories which require different responses. For example savings clubs that have existed for older black Caribbean clubs are now being introduced in these communities for the young too. There is no scope for profit making which superficially seems irrational. Instead people sign up to the system because of the relationships and non-financial value to the community, which as a system instils a greater level of trust and discipline between its members. The system works at this level so the challenge is how to scale this model of saving up.

Addressing the underlying causes of broader social exclusion remains the biggest challenge to the financial inclusion agenda. It was suggested that the welfare system has failed to promote citizen income in society, and there were fears the changes to the Universal Credit system would offer no firewalls between different payment claims resulting in a larger financial loss for the recipient.

A holistic approach was advocated and a greater willingness to pool risk between different income groups. Currently banks wont design products for the poor because their business model is based on high income and high yield.  While the existing model of risk accepts that those at the lowest end of the income pool will incur the highest cost. Issues around intergenerational and income fairness were raised through wider concerns about institutional lending. The question remains that if banking is a commodity, how does society subsidise the cost of people not managing so well?

In retrospect, in many ways policies have been trying to connect the ‘financially excluded’ up with the market, based on an underlying assumption that ‘these people are outside the market; we’ll connect them to the market and the market will serve them’.  Experience has found that to some degree the market isn’t working for this group and it is instead a very rational decision to leave. The nature of their income means the existing financial model perversely costs them money. There is large scope therefore to develop a better understanding about how people want to live and how they do live to inform future financial inclusion policy.

Worryingly, however the discussion was underpinned by a substantial fear that Government is moving out of this area.  For example the civil service team in the Treasury which has been driving policy will be dissolved in March.  It was suggested this is a considered political move away from an understanding that everyone has a right to access to banking. Given such a shift in Government strategy the challenge remains therefore to produce a new set of objectives within the current political context which will put people on low incomes at the centre of policy making but in such a way that allows new ways of doing things which are not presuming a driving force from the centre.