Memorandum submitted by the Building Societies
This memorandum highlights the importance of
financial inclusion to the retail savings operations of building
Saving provides security and opens opportunities,
enabling people to develop from using financial products merely
for transactions into more advanced products and saving for longer
term needs. Building societies help to promote financial inclusion
by offering simple savings accounts, many allowing deposits of
only £1. They show a greater propensity to keep branches
open than banks and the Post Office, and are major contributors
to the success of cash ISA and CTF cash accounts.
The BSA supports the principle of the Saving
Gateway initiative. Building societies are well placed to provide
the Saving Gateway as trusted savings providers with strong links
to their local communities. The scheme needs to be carefully designed
in order to achieve the goals of increased financial inclusion
and capability while still being viable for financial service
providers to supply.
Financial capability is a crucial determinant
of saving behaviour. The less financially capable an individual
is, the more important psychological and behavioural influences
are on their decision, rather than the rate of return. Financial
education should be made compulsory in schools to develop financial
skills and instil better understanding of future financial requirements
1. The Building Societies Association is
the trade body representing all the UK's 60 building societies.
These societies have total assets of over £310 billion, around
15 million adult investors and over 2.8 million borrowing members.
Building societies account for 19% of UK retail deposits and 18%
of residential mortgage loans outstanding. They operate through
around 2,100 branches and, including their subsidiaries, employ
nearly 50,000 staff.
2. The Building Societies Association welcomes
the opportunity to contribute to the Treasury Select Committee's
inquiry into financial inclusion. Promoting financial inclusion
is inherent in much of societies' core business. This can be seen
in the simple saving products offered by societies, and by the
much greater propensity of building societies than banks or the
Post Office to keep their branches.
3. The Building Societies Association strongly
believes that saving plays a number of important roles in financial
inclusion. These mainly relate to the security and the opening
of opportunities that a base of savings provides.
4. Research by the Financial Inclusion Taskforce
shows, not surprisingly, that those without a savings account
tend to be on low incomes.
These people are more likely to suffer shocks to their income
due to illness, unemployment, divorce and so on. They are also
less likely to be insured, should anything go wrong. A stock of
savings enables people to respond to sudden expenditure needs
or drops in income, and prevents these events developing into
deeper financial problems that can keep people excluded. Saving
can also help alleviate the pressures on household finances caused
by the lumpy nature of expenditure through the year. As such,
saving allows individuals to plan with more certainty. Having
an accumulated asset also enables opportunities, such as higher
education, house purchase, and so on, to be realised without financial
constraints becoming prohibitive.
5. Simple savings accounts assist in financial
inclusion because they can be one of the first ways that individuals
deal with financial institutions. This develops financial capability,
and allows the individual to accumulate an asset that they can
then invest, or use to achieve other aims. This applies particularly
to children, and constituted part of the rationale for the Child
Trust Fund. Short-term saving therefore provides the basis on
which people can develop from using financial services merely
for transactions to access more advanced products and markets.
Short-term saving can provide foundations in terms of financial
capability and financial security. In this way, short-term saving
can be a bridge towards longer-term saving. BSA research has found
some evidence that a hierarchy exists in saving behaviour.
By overcoming the barriers to saving in the short-term, it can
become apparent to the saver that the act of saving itself is
not overly arduous.
6. Reducing the barriers to financial inclusion
is inherent in the savings operations of building societies. Most
societies offer simple savings accounts which can be opened with
a minimum deposit of £1, many of which offer instant access
to the deposited money. Many of these can be accessed with a passbook,
allowing savers to immediately see the balance on their account.
7. In 2004 the BSA commissioned Dr. Karl
Dayson of the University of Salford to conduct independent research
into building societies' contribution to the promotion of financial
The research found that most building societies had products suitable
for new savers, with 57% allowing deposits of less than £1
and 94% allowing withdrawals of a £1 or less. 50% of societies
allowed "savings holidays" on their accounts, and 94%
had accounts capable of receiving state benefits. The research
also found evidence of societies being as flexible as possible
with the identification and verification requirements in the Joint
Money Laundering Steering Group guidance.
8. Building societies are major providers
of ISAs and in respect of cash ISAs, societies are market leaders,
accounting for over 37% of cash ISA balances (£46 billion
out of £124 billion in February 2007). This is more than
double building societies' share of the market for cash-based
savings as a whole and demonstrates both building societies' commitment
to the cash ISA market and their success in attracting funds to
this important product.
9. ISAs are sometimes criticised as being
the preserve of the wealthy middle classes. The figures do not
bear this out. In fact, the cash ISA has been particularly popular
among those on lower incomes. For example, in 2003-04, the latest
year for which HMRC figures are publicly available, 72% of cash
ISAs were subscribed by people on annual incomes of less than
£20,000 and only 12% were subscribed by those with incomes
of £30,000 or more. Nor is the ISA confined to older savers.
24% of those subscribing to an ISA in 2003-04 were aged 34 or
10. Building societies also are the main
providers of Child Trust Fund cash accounts. Of the 19 providers
offering the cash option, 13 are building societies. Where people
use institutions that offer both cash and stakeholder CTFs, 70%
have opted for cash accounts, and a quarter of all CTFs that parents
have opened have been cash accounts. Those on the margins of mainstream
financial services are more likely to prefer to deal with cash
products rather than starting with an equity based product.
11. The Building Societies Association was
pleased to observe that Brian Pomeroy's recent review of Christmas
saving schemes acknowledged the contribution made by societies
in providing festive saving accounts. Scarborough, Skipton, Furness
and Dudley building societies all responded to the collapse of
Farepak by introducing new products. These accounts have features
that appeal to those who use Christmas saving schemes, such as
allowing small regular deposits and locking away the money until
it can be spent on Christmas items.
12. All the new festive savings accounts
offered by societies had opened by 1 February 2007, and one was
available as early as December 2006. This is an example of societies
responding to the needs of the less financially capable by trying
to increase awareness of the savings options available.
13. The majority of societies also take
steps explicitly to tackle financial exclusion, whether this be
sending staff into local nursing homes to enable elderly members
to manage their savings or improving access and services for those
14. Branches are important to financial
inclusion as lower income customers tend to be heavier users of
branches. An independent report by the University of Nottingham
showed that building societies had a much better record than banks
in maintaining a branch presence, particularly in areas of social
deprivation. The chart below shows the difference in branch closures
between building societies, banks and the Post Office across the
UK as a whole.
15. The Nottingham University report found
that building societies gave greater consideration than banks
to the impact on customers in the communities they serve when
assessing branch performance. Instead, the report found that because
banks are owned by shareholders, pressure to reduce costs outweighs
all other factors in their decision. Those societies with ATMs
also extend these wider considerations to the siting of their
16. Building societies await with interest
the publication of the final results of the second trial of the
Saving Gateway. The BSA supports the principle of the Saving Gateway.
Several building societies have already volunteered to meet with
Treasury officials to discuss the implications of the results
on the design of the scheme, and to consider the practicability
of running the scheme across the UK.
17. At this preliminary stage, building
societies appear well suited to the provision of the Saving Gateway
scheme. Participants in the second trial viewed building societies
as more trustworthy, more ethical and better at looking after
their customers than banks.
In order to make it a viable option for societies to provide the
product, the final scheme design needs to be simple and flexible,
as well as allowing a long-term relationship to develop between
the institution and the customer.
18. The Saving Gateway is explicitly aimed
at reaching the financially excluded. The eligibility criteria
will need to be carefully defined to ensure that those who currently
do not save are reached by the scheme. Some have advocated the
use of community groups or voluntary organisations to increase
participation of hard-to-reach groups.
However, similar matching schemes in America have shown that while
the involvement of community organisations helps to access the
financially excluded, it is very resource intensive and this has
limited the scale of the project.
The American schemes started on very small scales with slight
differences in operating models, and then tried to expand these
established programmes. Designing and implementing a larger scale
scheme from scratch, carefully defining the roles and responsibilities
of each group involved in the provision of the scheme, may enable
the administrative burden to be reduced.
19. The provision of financial education
could be formally integrated into the scheme design from the outset,
and with clear objectives in mind. This would aim to capitalise
on the individual's saving experience during participation in
20. While the pound for pound match in the
first trial was a significant (and simple) incentive for the financially
excluded to investigate the product, there were a number of people
who were still not persuaded to save. Increasing the monetary
return is a blunt tool, and the psychological barriers to saving
also need to be addressed in the scheme design.
21. Research recently published by the Building
investigated why people in seemingly similar circumstances saved
vastly different amounts. Almost one in five respondents said
that of a range of factors identified in the research, none could
persuade them to save. One of the main conclusions of this report
was that while simple products were necessary, simplicity alone
was not enough. A change in the way that people think about saving
needs to be engendered as well. People need to be encouraged to
think about the benefits to themselves in a few years time of
putting money away now.
22. The BSA's research into the saving decision
found that financial capability was a considerable determinant
of saving behaviour. The less financially capable a person was,
the less sensitive they were to the rate of return. They also
tended to place a lower value on their future needs, so failed
to make sufficient provision. Instead, behavioural and psychological
factors were relatively more important. As such, how offers were
presented could sway decisions, and the level of trust in institutions,
or a friend's recommendation or advice were more influential.
Choosing products by word-of-mouth and heuristic behaviour, where
people learn by trial and error, were found to be more accurate
descriptions of saving behaviour in the less financially capable.
23. For the Saving Gateway, this means that
the match has less of an impact on its target audience than it
would have on a more financially capable group. Other more psychological
aspects of the scheme design are therefore very important.
24. The BSA report called for financial
education in schools to be compulsory for all children. As well
as teaching the skills needed to operate accounts, education should
try to teach why it is important to look over longer time horizons
to engender a more realistic present valuation of future needs.
Better understanding of personal saving requirements should also
help people to ask informed questions of financial providers.
The report also suggested using stark imagery in a public awareness
campaign to try to stimulate non-savers to reappraise their current
25. Financial inclusion is integral to much
of building societies' activities. Offering simple savings accounts,
the rapid reaction by several societies to the problems with Christmas
saving schemes, and the propensity to maintain the branch network
are testament to this. The ISA has been a success story to which
building societies have been major contributors. The cash CTF,
provided mainly by building societies, offers parents an important
alternative to equity based products. Building societies also
seem well placed to provide the Saving Gateway, provided the design
makes this a viable option. Financial capability is a crucial
part of reducing exclusion, but paradoxically, using financial
products such as short-term savings accounts to build up financial
experience is the best way to improve capability.
6 "Access to financial services for those on
the margins of banking" Financial Inclusion Taskforce, 2006 Back
"The Individual's Saving Decision", The Building Societies
Association, 2007. Attached as an appendix to this submission,
or available at www.bsa.org.uk/publications/industrypublications/savings_report.htm Back
"Improving Financial Inclusion", Dayson, K, 2004, http://www.bsa.org.uk/publications/industrypublications/100641.htm Back
"Societies in Society", BSA, 2006, http://www.bsa.org.uk/publications/industrypublications/societiesinsociety.htm Back
The Changing Geography of British Bank and Building Society Branch
Networks, 1995-2003. Leyshon, A, Signoretta, P, French, S,
"Interim Evaluation of Saving Gateway 2" IFS and Ipsos
MORI, 2006 Back
See, for example, "The Saving Gateway: From principles to
practice" ippr, 2006 Back
See, for example, "Achieving Scale in Asset Building: Operational
challenges and opportunities from IDA Programs", The Aspen
Institute, 2006 Back
"The Individual's Saving Decision", ibid Back