Memorandum submitted by Fair Money Ltd
CITIZENS FINANCIAL
RIGHTS
The inclusion agenda addresses the right of
all citizens to participate in the economic life of the country.
Increasingly, people can only make a living by participating in
the money economy, although barter and exchange remain in the
margins.
Government policy and much third sector practical
work on inclusion has closely identified the workings of the money
economy with the operation of the banks, to the extent that a
central measure of financial inclusion is whether people have
a bank account. We think this is a mistake.
All citizens have access to the cash economy.
Some non-citizens such as asylum seekers have been partially excluded
from the cash economy by giving them vouchers, and some social
security payments are made in the form of vouchers, However, citizens
do not currently have a right of access to electronic payment
systems, which are the dominant money mechanism in our society.
Historically, financial service providers, including
the banks, have turned their back on people with low incomes as
being commercially uninteresting. Doorstep lenders, pawn shops
and cheque cashers have to an extent filled this vacuum, with
no shortage of profit. This picture is changing rapidly with mainstream
providers, often through special vehicles, finding ways to extract
significant profit from people on low incomes. We see this as
not in the interest of such people or in the national interest.
Inclusion can be a negative factor.
Evidence from the NCC seems to show that people
fare worse at managing their money when they move from cash to
using a bank account. We have evidence that people with bank accounts
take their pay by cheque to a cheque cashing service to avoid
the implication of pay going into their account. We think that:
— the services that people really need
to manage their money do not exist; and
— it is not in the interest of mainstream
providers that people on low incomes manage their money better.
The existing policy position seems to be that
people must be financial included to avoid the very real costs
of staying exclusively in the cash economy. However, an unacceptably
high proportion of the financially excluded appear to be vulnerable
to extortionate business practices, and inclusion seems to increase
this vulnerability and the extent to which they are targeted.
We think it is necessary to approach financial inclusion from
a different starting point, one of citizens' rights.
There is evidence that benefits and the minimum
wage are insufficient to support people's basic needs, certainly
in some areas of the country. We approach the notion of financial
inclusion from the perspective that there may not be enough money
to go round, that financial prudence and budgeting may not be
a sufficient solution for everyone, and may not be a sufficient
solution for anyone all of the time.
Cash is free to use at the point of use. The
Bank of England does not charge consumers for the use of banknotes
and coins. "Free" services such as free banking provided
by high street banks is not free in this sense. In fact banking
is only free to some customers on the basis that other customers
pay high fees, typically for there being insufficient funds in
their account to meet immediate demands. The consequences of this
commercial structure is that low income customers subsidise high
income customers, and that banking services are in practice very
expensive to use for low income customers.
Given the central place of electronic money
in our society, low income people need to be able to make electronic
payments and need to be able to do so at a realistic price. Ideally
this should be free as a national economic service as with cash.
The mechanism used by the banks, NEWBACS, is such a service: it
is cheap and transfers money essentially instantaneously. There
is every reason to believe that enabling people to move money
easily and cheaply will improve the circulation of money in the
economy, and especially in underserved areas of the economy. Not
to grant access as a right to these systems of electronic money
is to deny citizenship to people at a most basic level.
Once people have a citizen's right of access
to electronic money systems, a different set of questions come
into view. There are no financial services designed for low income
households, with the exception of products which are extortionate
in nature, rather than being genuine service offerings. We are
now accustomed to stories from around the world about how with
different business models, such genuine services are a motor for
economic development and emancipation. Our mission is to develop
a set of sustainable services that meet the real needs to low
income individuals, families and households. Since these services
must be either publicly funded or low cost, they must emphasise
what people can do for themselves given the appropriate organisation
and tools. It is only when people have a sensible level of support
that we can possibly see the real shape of the financial inclusion
problem.
We want to emphasise that money spent by the
state on benefits, grants and loans to low income people has less
and less impact on the living conditions of these people because
it is more and more efficiently extracted from them, largely by
financial services providers. Until we address people's ability
to manage their money, this trend will continue. We think that
existing models of financial literacy education are too weak to
materially affect the trend.
The most basic piece of money management is
the ability to say no. When there is not enough money to go round,
and people are working in cash, then some creditors do not get
paid. Charges and fees for services that customers do not value
are hard for providers to collect. So the most basic money management
service is to be able to make electronic payments under the customers'
complete control. It must be just as in the cash situation but
more secure, more traceable, cheaper and quicker overall.
The second fundamental of money management is
to earmark earnings against important items of expenditure, perhaps
the electricity bill and the grocery bill. With electronic payments
and the smarter use of debit card technology these money management
techniques can be made completely visual, transparent and trivial
to use. These are the sort of services that people need in order
to gain control in very messy and complex situations.
The third fundamental of money management when
funds are short is to be able to predict the effect of choices.
Is it worth borrowing a small amount to avoid impending penalty
charges on non-payment of my utility bill? Will the repayments
wreck the budget I have worked out? What is the best date in the
month to make the repayments? A mistake in these calculations
can easily cost a hundred or even two hundred pounds in knock-on
charges, and yet the calculations are horribly complex and subject
to all sorts of external uncertainties. Citizens have a right
to ways of making day-to-day money management challenges accessible
and comprehensible.
People on low and possibly insufficient incomes
need access to affordable credit. Credit allows some of the ups
and downs of both income and expenses to be smoothed out. This
is a different notion of credit to the credit which has fuelled
the economy is recent years, which is simply not affordable to
people on low incomes.
Mainstream financial service providers charge
low income people more for credit than high income people, and
justify their charges on levels of risk of default. However, low
income people on micro-lending schemes typically show lower rates
of delinquency and default than conventional borrowing. Risk perceptions
have more to do with context than the ability to repay. With low
cost mechanisms for moving money, and high trust social structures,
there is no economic reason why affordable credit should not be
available to all to the benefit of the whole economy.
Citizens have a right to borrow money at rates
that reflect real risks of default, not default manipulated by
the provider to increase their profit margins. Citizens who are
in difficult circumstances need appropriate support to keep the
cost and risk low enough for credit to be affordable.
January 2006
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