House of Commons - Treasury

Select Committee on Treasury Twelfth Report

2 The challenges of financial inclusion

11. Financial inclusion can be defined as the ability of individuals to access appropriate financial products and services. This definition clearly raises as many questions as it answers. It hinges on an understanding of "appropriate" products and services. As will be seen, financial inclusion has fairly different meanings in the context of banking and in the context of a more diverse market such as the credit market. In seeking to understand the challenge of financial inclusion and the measures needed to promote it, we have sought to concentrate not on finding a final definition of the term, but on understanding what is involved in being financially excluded, what can be done to tackle such exclusion, what forms financial inclusion can take and what benefits flow from financial inclusion.

The nature of financial exclusion

12. The United Kingdom has one of the most innovative and diverse financial services sectors in the world. Despite this, many individuals struggle to gain access to basic financial products such as bank accounts, credit, insurance and financial advice. Financial exclusion or lack of access to appropriate financial products and services can arise for a variety of often inter-linked reasons. Witnesses suggested a variety of causes including:

Exclusion due to inappropriate or excessively high charges: interest rates for doorstep lenders and other alternative credit products may be high and lead to a long-term cycle of over-indebtedness.[17]
Exclusion due to religious beliefs or other cultural barriers: financial services may not comply with Islamic law, which forbids the charging of interest, for example.[18]
Exclusion due to disability: disabled people might find it difficult to access premises, or find it difficult to read marketing material.[19]
Exclusion due to being on lower incomes or being long-term recipients of benefits, which impacts most on the disabled, ethnic minority groups, the elderly and those excluded from the labour market.[20]
Locational exclusion: lack of access in the person's locality to appropriate financial services.[21]
Regulatory requirements: regulations imposed by the Government or the FSA play a valuable role in enhancing consumer protection, but, where regulations are excessive or are implemented in a way which does not take account of particular circumstances faced by individuals, they might accentuate financial exclusion.[22]
Self-exclusion: where an individual feels that there is little point in applying for financial products because he/she expects to be refused, or is unwilling to engage with the financial services industry as a result of previous experiences.
Information problems: an individual may have difficulty obtaining the information he or she needs, either due to the requirements of the providers (who may be unwilling to lend to people without a credit history)[23], or to the challenge to the individual as consumer, who may not be able to access marketing information or may have particular difficulty choosing between complex products.

13. Some witnesses believed that financial exclusion would become a bigger challenge in the future. One reason why such a development seemed likely was the increasing responsibility placed on individuals to plan for their retirement.[24] Another factor cited was that delivery of the Government's welfare strategy will increasingly involve the direct payment of benefits and care allowances into bank accounts, with increasing moves to "individualised budgets"—leaving people to manage larger amounts of money and make payments for the provision of public and private services. This trend could serve as an opportunity to introduce people to financial services, increasing the importance of claimants being able to access and operate appropriate accounts. However, where people have difficulty in managing accounts, benefits and tax credits could go unclaimed.[25] Technological change may lead to greater market segmentation by financial institutions, allowing them to exclude groups of customers whom they perceive to be less likely to be a source of profit.[26] On the other hand, technological progress can work to promote inclusion if it can allow financial service providers to better identify and reduce the risks of lending to low-income consumers or to use automated processes to reduce costs.[27]

The varieties and scope of financial exclusion

14. Financial exclusion is not a unified phenomenon. Some people may have access to some financial services and products, but have great difficulty obtaining access to others. Financial exclusion may seem absolute in some cases—for example, where a person feels they are simply unable to open a bank account—but more relative in other cases—for example, where an individual feels that he or she is paying an unduly high cost for financial products and services such as credit or insurance. At least to a degree, the scope of financial exclusion in banking can be delineated by reference to the number of individuals or households without a bank account—"the unbanked". In the context of credit, the picture is more complex. The credit market is more diverse than that for bank accounts, with a large number of additional providers alongside the mainstream banks. The vast majority of households will be able to access some form of credit, but such credit may come at a high cost, or even from an illegal source. Credit may be accompanied by onerous terms or conditions, excessive penalties and even threats if repayment is not made. Too much access to credit and irresponsible lending and borrowing can lead to a spiral of over-indebtedness and wider problems.

15. In the main, financial exclusion, particularly in the context of banking services and affordable credit, is associated with those on the lowest incomes, and long-term recipients of benefits.[28] However, we received evidence that problems with exclusion include both a wider set of financial products and a wider group of people. Which? believed that

exclusion has generally been associated with consumers in the lowest income/socio-economic cohorts. And it is quite true that the most vulnerable consumers in society are the most affected by financial exclusion and its associated disadvantages. However, we take the view that exclusion affects a much wider population of consumers on lower-median incomes.[29]

Which? noted particular problems for this group of people in gaining access to value for money pensions and long-term savings products and objective financial advice. For example, the Pensions Commission found that the long-term savings industry has a poor track record of serving customers with incomes of above £9,500 but below the median of £22,000.[30] The Resolution Foundation also identified a lack of access to generic financial advice affecting this group.[31]

The costs of financial exclusion

16. Many witnesses noted that financial exclusion can impose significant costs on individuals, families and society as a whole. These include:

Denial of access to services or a requirement to pay higher charges for services: the Fuel Poverty Advisory Group indicated that not paying by direct debit increases the cost of energy bills by around £70 per year.[32] Other services such as mobile phone contracts may not be available to the financially excluded.[33]
Barriers to employment and enterprise: Many employers require wages to be paid into a bank account. This can leave people at risk of exploitation in the informal economy if they do not have a bank account. Lack of access to financial services can make it difficult for people to start their own business. Excessive debt can act as a disincentive to work.
Opportunities to save can be insecure or difficult to access, and lack of security in storing money can leave individuals vulnerable to loss or theft.[34]
Opportunities to borrow can be limited (or illegal).[35]
Difficulty in building assets: Owning or obtaining assets can be difficult without access to finance. People may be reluctant to save because of lack of access to advice and low-cost products.[36]
Difficulty in smoothing income to cope with shocks: If households cannot access credit they may find it difficult to deal with large one-off items of expenditure. Help the Aged noted that many of the poorest pensioners can struggle to make ends meet when facing one-off costs or unexpected bills.[37] Lack of insurance can result in high costs if a person is a victim of crime.
Contribution to child poverty: The Government's review of child poverty in 2004 highlighted the links between financial exclusion and child poverty.[38] Paying more for certain financial services and the impact of debt can exacerbate the harm caused by child poverty. There are at least 800,000 children in households without bank accounts.
Entrenching social exclusion: Financial exclusion contributes to social exclusion; individuals and neighbourhoods which are financially excluded can become disengaged from mainstream society.

Benefits of financial inclusion

17. While financial inclusion alone cannot prevent poverty, it can help ameliorate some of its worst effects and help provide routes into work and enterprise. Ms Claire Whyley, Director of Policy at the National Consumer Council (NCC), noted that "at a basic level, financial inclusion can reduce the costs of poverty for people on low-incomes".[39] The NCC believed that

unless being financially included makes a positive difference to the lives of those who are excluded, it will not be inclusion in any meaningful sense … Meaningful financial inclusion can only be achieved if financial products and services are designed and delivered to meet the particular needs of people on the lowest incomes, ensuring that they are not only accessible, but also attractive, appropriate and available.[40]

18. Financial inclusion can help towards the achievement of the Government's objective to increase the rates of asset-ownership amongst lower-income households.[41] Promoting financial inclusion can also help in the regeneration of local areas if money saved by increased access to financial services can be re-invested in the community.[42]

19. Poor people end up paying proportionally more for their money. Promoting financial inclusion is crucial to the fight against poverty. An effective Government strategy to combat financial exclusion has a crucial role to play in enabling those on low incomes and others who are financially excluded to take their own steps away from poverty.

17 Ev 244, 282, 300, 398 Back

18 A Atkinson, "Migrants and Financial Services: A review of the situation in the United Kingdom", University of Bristol, March 2006, pp 16-17 Back

19 Ev 456, 364 Back

20 Q 719; Ev 455; HM Treasury, Promoting financial inclusion, chapter 2 Back

21 Ev 220 Back

22 Ev 353, 215, 202 Back

23 Ev 295 Back

24 Q 5 Back

25 "Banking benefits: CAB evidence on payment of benefits into bank accounts", Citizens Advice, January 2006, pp 22-23 Back

26 D Knights, "Virtual financial services: who wants them?", Keele University, 2000 Back

27 S Collard and E Kempson (2005), Affordable Credit: The way forward, Bristol: The Policy Press Back

28 HM Treasury, Promoting Financial Inclusion, chapter 2 Back