Written evidence submitted by Toynbee
Toynbee Hall welcomes the opportunity to respond
to the Treasury Select Committee's enquiry into Competition and
Choice in the Banking Sector.
financial crisis has hit the most vulnerable the worst. It is
these groups who see the strongly the negative impacts of financial
and competition in the banking sector is about promoting a fairer
market. A tightening of affordable lending will have an ongoing
negative effect on creating a banking system that is fair for
the conditions for new entrants into the banking sector will have
a positive effect on the market by introducing new suppliers;
however the committee needs also to consider demand side policies.
bank charges are a problem for those who are already at the margins
of the banking sector.
away from free banking will hit those already in poverty worst,
and will provide a disincentive for people opening bank accounts
even when it is in their best interest.
1.1 Toynbee Hall is a charity based in Tower
Hamlets that produces practical innovative programmes to meet
the needs of local people, improve conditions and enable communities
to fulfill their potential. Toynbee Hall works with over 6,000
members of the community each year to support them to meet the
challenges that they face and to encourage them to take control
of their lives.
1.2 Toynbee Hall has been a pioneer of financial
inclusion work in the UK third sector for some years, and continues
to develop services and projects to help improve the lives of
people facing financial exclusion. Current projects include:
(Services Against Financial Exclusion)
provides preventative financial capability training for organisations
and their service users and problem-solving financial inclusion
support for individuals.
and Measurement develops methodologies
and tools for measuring and evaluating levels of financial capability
and inclusion and the impact of interventions designed to improve
Illegal Money Lending Team provides supports to victims
of loan sharks across London, through helping them to identify
their financial/well-being priorities and supporting them to achieve
London Strategic Financial Inclusion Champion is based
at Toynbee Hall. The Financial Inclusion Champions are a national
team of network-builders who support organisations to make links,
share best practice and close gaps in provision around Financial
the national forum for financial inclusion, a network of over
1,000 organisations committed to practicing and promoting financial
1.3 Our comments in response to the consultation
are therefore focused on the impact of the proposals on financial
inclusion, and have chosen to respond to those questions that
we believe have a financial inclusion element.
1.4 The recent financial crisis will have an
adverse effect on the everyday lives of the most vulnerable in
Those most vulnerable in society often do not have access to mainstream
financial services and therefore suffer further from a poverty
premium, when poorer households pay more for goods and services.
Without a bank account, for example, a household will not be able
to take advantage of the lower costs of their utility bills by
paying through a direct debit.
If Britain is to be able to exit the recession in an effective
way that will not cause further detriment to the vulnerable people
in society, then it is important that there is a banking sector
which caters for all in society in a fair and equal way. This
will have a further positive effect on financial stability, by
increasing consumer confidence in the banking sector lowering
the chances of another run on a British bank.
1.5 Toynbee Hall welcomes the committee's interest
in competition and choice in the retail banking sector. Effective
competition in the banking sector permits consumers to actively
engage in the market by switching to better offers. This drives
firms to deliver lower prices and higher quality due to the risk
of losing customers. Whilst on one hand effective competition
is driven by the business model of banks, we would ask the committee
to consider the other side of things: the relative weakness of
consumers. This is especially the case when thinking about those
who are understood as being "financially excluded",
that is those who currently do not participate in mainstream financial
services. We would ask the committee to consider what effects
choice and competition have on these more vulnerable groups to
ensure that fair retail banking markets are created for all. This
includes a consideration of the effects of changes in free banking
for these groups.
2. THE FINANCIAL
2.1 The financial crisis has had a detrimental
effect on consumer participation in the retail banking sector.
This translates into having a negative effect on choice within
the market. As a result of the financial crisis, banks have tightened
the purse strings and lending to individuals has decreased.
This increases the chances of an individual of becoming financially
excluded, because the high street will no longer lend to them.
These individuals are forced to turn to door-stop lenders or loan
sharks. Loan sharks target the most vulnerable and have been found
to charge up to 825% APR on loans.
2.2 The threat on financial stability caused
by the financial crisis also rests on the ability that markets
have for working fairly for all consumers. Toynbee Hall would
therefore welcome the committee giving attention to current campaigns
that are seeing to address bank lending to individuals.
3. DEMAND SIDE
3.1 New entrants into the retail banking sector
will be beneficial to mainstream consumers in that it will have
a positive effect on choice and competition.
Toynbee Hall would like to the committee to consider consumers
who are for whatever reason excluded from mainstream financial
3.2 The availability of choice in the retail
banking market can be offset by the strong presence of consumer
inertia. Evidence shows that consumers tend not to shop around
for competitive deals on their bank accounts. In addition, consumers
have concerns that the switch might be problematic. In 2008, the
number of consumers found to have switched bank accounts in the
previous 12 months was 6%; the lowest in Europe.
3.3 The other barriers to switching are not simply
that the consumer does not want to switch, the problem is more
that they are not able to switch. Evidence shows that a majority
of low income consumers feel they do not have the knowledge to
be able to switch bank accounts.
Or at least switching is sufficiently difficult enough for it
to act as a disincentive.
3.4 Toynbee Hall considers inertia and the lack
of financial capability to be significant barriers to creating
a successful competitive market. Any policies around the development
of fairer markets for banking therefore should consider demand
side policies as well as supply side policies.
4. FREE BANKING
4.1 Toynbee Hall welcomes the need for more transparency
from banks when it comes to charges. There is a need to deal more
effectively with unfair bank charges. Incurring bank charges acts
as a disincentive to opening an account for many people on low
4.2 Consumers who are financially excluded are
more like to feel the adverse effects of hidden bank charges.
Through a combination of lower financial capability as well as
not having the savings to recover from being overdrawn, these
consumers are more likely to incur them.
4.3 Furthermore, these charges often outweigh
the benefits for many people in holding a bank account.
4.4 Toynbee Hall are concerned, however, that
if customers are charged for holding a current account, this will
provide a disincentive for the financially excluded to enter into
mainstream financial services; therefore making those who are
not included into mainstream financial services, more vulnerable
to the pitfalls of financial exclusion
banking sector needs to be set up in which they create the condition
for a fair service to all consumers. For those who cannot access
mainstream affordable credit, there should be viable options for
these people to turn to. We would therefore recommend the continuing
support of CDFIs in order to ensure the existence of viable alternatives.
recommend the consideration of how demand side policies can have
a positive effect on creating a fairer banking sector. Improved
financial education, targeted at those who need it the most, should
be provided to increase the knowledge and skills needed for all
recommend that further research be conducted to look into the
effect of banking charges on low-income groups.
47 http://www.esrc.ac.uk/ESRCInfoCentre/about/CI/CP/Our_Society_Today/economists/RecessionBritainPublication.aspx Back
http://betterbanking.org.uk/ and http://www.londoncitizens.org.uk/pages/pdfs/Press%20Release.docx Back
Ibid, p85 Back
Ibid, p106 Back