Chapter 2: The extent and nature of financial exclusion
11.The causes and effects of financial exclusion are many and varied. In recent years, governments have undertaken a number of measures to seek to address exclusion and promote inclusion. Within this chapter, we provide some initial figures, analysis and context for financial exclusion; subsequent chapters of the report develop and build upon these themes.
Defining financial exclusion and financial inclusion
12.In public policy, the term ‘financial exclusion’ began to be used in the early 1990s, reflecting concern among geographers regarding bank closures.5 Subsequently, financial exclusion has come to describe the inability, difficulty or reluctance to access mainstream financial services,6 which, without intervention, can stimulate social exclusion, poverty and inequality.
13.The term ‘financial inclusion’, first used in UK public policy in 1997, has in many respects replaced ‘financial exclusion’ in much of the policy and literature on this topic. It has been suggested that an individual might experience financial inclusion if they have the ability to:
- Manage day-to-day financial transactions;
- Meet expenses (both predictable and unpredictable);
- Manage a loss of earned income;7 and
- Avoid or reduce problem debt.8
The relationship between financial exclusion and financial inclusion
14.It is widely agreed that a relationship exists between these two terms, although there are differing views on the precise nature of the relationship. Leeds City Council told us that financial exclusion should be seen as “the problem” and financial inclusion as the solution.9 Birmingham Financial Inclusion Partnership argued that financial products needed to be designed with the needs of marginalised groups in mind.10 We were told that:
“Financial inclusion and exclusion can have multiple meanings and it is possible to develop hybrid versions of financial inclusion. Examining the different possibilities is important for addressing the definitions and causes of financial exclusion.”11
15.We did not, at the outset of our work, seek to limit our considerations by setting out a precise definition of financial exclusion, or financial inclusion. We have sought to consider the multiple causes and effects of financial exclusion and to give account to policy initiatives and proposals that were intended both to promote financial inclusion and address exclusion.
Financial inclusion in public policy
16.The increased prominence of financial inclusion in public policy debates was reflected by the publication of a financial inclusion strategy by the then Government in 2004. This strategy, entitled Promoting Financial Inclusion, outlined several key policies, including a dedicated Financial Inclusion Fund of £120 million for the period from 2005–08. The follow-up report, Financial Inclusion—the way forward, announced the extension of this fund with a further £130 million to cover the period 2008–11. The funding was targeted across a range of Government departments, with a degree of central co-ordination from HM Treasury.
17.Promoting Financial Inclusion also initiated the creation of the Financial Inclusion Taskforce in 2005. The Taskforce, comprised of industry, third sector, consumer groups, local government and academia, was set up to advise Government departments, with a mission to:
- Increase access to banking;
- Improve access to affordable credit, savings and insurance; and
- Improve access to appropriate money advice.12
18.The Taskforce also undertook comprehensive monitoring of financial inclusion initiatives, and provided regular research and reports on such matters. It was based within, but independent from, HM Treasury. The presence of the Taskforce gave a clear, identifiable degree of Government priority to work to promote financial inclusion, and provided a central resource for leadership and co-ordination of such work.
19.The work of the Taskforce was wound up, as originally planned, in March 2011. While a number of subsequent policy initiatives have sought to promote inclusion, the loss of the Taskforce was consistently identified as an issue in the evidence that we heard. We reflect further upon this in the next chapter, which considers the need for central leadership and co-ordination of initiatives to address financial exclusion.
Who is affected by financial exclusion?
20.Financial exclusion affects a wide range of people at various stages in life. Age, education, digital capability and income are just some of the factors that can influence the level of financial exclusion experienced by an individual. Figure One illustrates some of the ways in which different groups of people might be affected by financial exclusion.
21.Young people can be at risk of exclusion; figures from 2011–12 highlighted that around 8% of 18–19 year olds did not have a bank account compared with 0.7% of the overall population.13 Other age groups, however, can be affected in different ways. Banking services are moving increasingly towards digital platforms, yet only 38.7% of adults aged 75 and over have used the internet in the past three months.14 Seeking to apply a single categorisation or measure for those who are financially excluded is difficult, although some correlations can be found between different groups.
Figure 1: Who is at risk of financial exclusion?15
Figure 2: Financial exclusion in the UK16
22.Those on low incomes are particularly vulnerable. A range of individuals can fall into this low income category including: the long-term unemployed; people with a long-term illness; those unable to work due to disability; individuals with learning difficulties; young people; and single parent families. Across these groups, there is regular and ongoing research which points to negative financial impacts from major life events, or relates financial exclusion to groups that are exposed to lower incomes or poverty.17
23.Christians Against Poverty (CAP) noted that those experiencing deprivation are not set up to engage well with financial services as they are lacking monetary resources, support, confidence and, importantly, financial choices.18 This was part of a wider trend; we consistently heard that financial exclusion was connected to poverty, that deprivation and poverty could exacerbate financial exclusion, and that financial exclusion could often arise from poverty.
The relationship with poverty
24.The Committee was told that the problem of exclusion was, sometimes, simply a result of a sheer lack of money. The National Housing Federation expressed this forcefully:
“The fundamental problem is often poverty. We wrap that up in all kinds of other things: unemployment, underemployment or digital exclusion, all of which are absolutely challenges, but the fundamental underlying issue is one of poverty—the fact that people do not have enough money to get from one end of the week to the other . . . We have to be a bit more honest about some of the underlying challenges.”19
25.Lone parents’ advice charity Gingerbread concurred, saying that “financial exclusion among single parents is in the main simply about not having enough money.”20 The Child Poverty Action Group (CPAG) reported that “it is often assumed that [those on very low incomes are] a group that does not manage money very well”, but that anecdotally it appears that “most low-income families are better at budgeting than most of the rest of us. They do it by having cash economies, by keeping money in jars and knowing exactly what every penny is spent on, otherwise they would run out before the end of the week.”21
The poverty premium
26.One of the main relationships between poverty and financial exclusion comes in the form of the poverty premium, which is the additional cost incurred by people carrying out their various transactions when compared to people who have full access to financial services. Pay-as-you-go mobile phone contracts, utility payments, high cost credit and insurance are some of the main areas of life where additional costs can be incurred.22
27.Disability Rights UK explained the poverty premium as follows:
“If you are poor, you are paying more for things, because you lack the consumer leverage. For example, if you can make a quick cash outlay you can buy things in bulk; if you are poor you cannot afford to buy things in bulk.”23
In a similar vein, the Money and Mental Health Policy Institute told us that individuals with variable levels of income may choose to pay for their energy bills via a pre-pay meter, which comes with an additional cost24 that will contribute to the poverty premium.25 It was also noted that people can suffer the poverty premium when they lack the ability to buy products online—where the best deals are often to be found—or are unable to subscribe to direct debit payments.26
28.The costs associated with the poverty premium are significant, running into thousands of pounds.27 A number of evidence submissions estimated that the premium could amount to approximately £1,300 a year per person, a figure first cited in a 2010 report by Save the Children.28
Aspects of financial exclusion
How many are without a bank account?
29.The number of people without access to a bank account provides some insight into levels of financial exclusion. Bank accounts act as a prerequisite for other financial services and, arguably, have become a necessity. Although the ‘unbanked’ account for a relatively low percentage of the population they are a key driver of the financially excluded cohort.
30.Figure Three, which draws upon research from the Friends Provident Foundation and the University of Birmingham29, illustrates that in 2006–07 there were 1.01 million people without access to any bank account in their household, falling to 660,000 in 2012–13. However, this declining trend reversed in 2013–14 with numbers rising to 730,000. If those who did not state whether or not they had access to an account are also included, numbers rise to 1.02 million for the period 2013–14 which, again, represents a decline from 2006–07 figures (2.09 million) but an increase on the 2012–13 figures (1 million).
31.The same research30 suggests the total number of individuals who are unbanked was 1.71 million for the 2013–14 period which, once again, represents a decline from 2006–07 (3 million) but an increase on 2012–13 figures (1.5 million). It is, of course, worth noting that this might include adults who have access to the account of a partner or family member.
Figure 3: Households and adults without access to a current or basic account, or savings account31
Identity verification issues
32.Not meeting identity requirements is one reason why an individual might find themselves unbanked or excluded from other financial services. Individuals without a driving licence, passport or permanent address, for example, sometimes fail to meet stringent identity criteria to access financial services; those already experiencing financial exclusion might find that they do not have the resources to acquire these documents, leaving them in a challenging position.
33.We were told that, in 2012, 9.5 million people were without a passport in the UK and, in 2015, 1 in 4 UK residents did not have a driving licence.32 Individuals that are particularly at risk of not meeting identity requirements include:
- Ex-offenders and prisoners;
- The homeless;
- Those fleeing domestic abuse;
- Young people;
- Migrants, refugees; and
- Low income groups.
34.A 2010 study found that 85% of people interviewed in prison without a bank account said they had tried to get one without success.33 Difficulties experienced by migrants and refugees were also consistently highlighted in the evidence that we heard.34
Digital exclusion
35.The growth of internet banking has meant an increasing number of financial services are moving online. While this has made banking more convenient and accessible to some, others face the negative effects of increasing bank closures and isolation from digital platforms. 53% of UK bank branches closed between 1989 and 2016.35
36.Digital exclusion can affect those who are excluded from digital services due to high cost, capability issues or limited geographical access; 12 million people live in rural or remote areas of the UK where poor internet access can make managing money online a difficult task.36
37.The ageing population is also at risk. Just 53% of single pensioners had internet access in 201637 and 93% of those aged 80 and over do not use internet banking.38 Non-internet users are likely to miss out on competitive online deals and instant, easy access to their accounts and services.
Recent trends in savings
38.Research from the Money Advice Service (MAS) has suggested that 16.8 million people—40% of the working-age population—have less than £100 in savings available to them at any time.39 This alarming figure leaves millions at risk of financial exclusion as savings can provide a buffer to unexpected expenses and reduced income through job loss, illness, or upon retirement. Moreover, 13 million people report that, should they experience a 25% cut in income, they do not have access to enough savings to support themselves for one month.40
Figure 4: Households’ Saving Ratio41
39.One key measure of savings, the households’ saving ratio, highlights how saving levels in the UK have been declining steadily since 2010.42 As Figure Four displays, the households’ saving ratio peaked at 13.2% at the beginning of 1997 but fell to a low of 4.6% in 2008 during the economic downturn. Despite recovering to 11.5% in the third quarter of 2010, savings have since been declining and, as recent figures demonstrate, savings for quarter one of 2015 were at 4.9%, marginally higher than 2008 levels.
40.These figures suggest a worsening scenario whereby those on the lowest incomes are likely to have the lowest savings and become susceptible to financial exclusion, simply by virtue of having insufficient money available to them to overcome the financial shocks or negative impacts that can be experienced as part of everyday life.
Access to credit
41.Many in this situation are also unable to access affordable credit and are forced to turn to high cost lenders; the Financial Inclusion Commission (FIC) estimated that two million people took out high cost credit in 2012 as they were unable to secure any other form of credit.43 Younger age groups are particularly affected by this, with one survey suggesting that 40% of people between the ages of 25 and 35 were turned down for access to bank credit in the past year.44
42.Those left without a choice face paying extra for turning to high cost credit. Disturbingly, these additional costs are often used for basic necessities rather than luxury goods and services. In 2013 CAP found that of those who had taken out a ‘payday loan’45, 77% had used it to pay for food, 52% for gas or electricity and 36% for rent or mortgage payments.46 The extra costs associated with products such as payday loans constitute part of the ‘poverty premium’ discussed earlier.
Financial education and capability
43.A lack of financial education and capability has been cited as a further cause of financial exclusion. Around one third of the UK population (17 million) struggle to routinely manage a budget and 1 in 6 people struggle to identify the balance on their bank statement.47 Within this context, the need for financial education is more apparent than ever with younger people becoming increasingly exposed to financial choices; 68% of 13–17 year olds reported having seen a payday loan advert on television in the last week48 and the average debt-to-income ratio for 15–24 year olds stood at nearly 70% for non-students in 2010–12.49 While 94% of secondary school teachers50 agreed that financial education gives students an essential life skill, evidence suggests that much work remains to be done in delivering financial education. We consider this in more detail in Chapter Four.
Self-exclusion
44.Finally, a proportion of individuals are ‘self-excluded’ either through their own choice or a lack of awareness of the services available to them. The Post Office, for example, offers an extensive range of accessible services, yet they themselves suggest public awareness of these services “has historically been relatively low”.51
45.Beyond a lack of awareness of the services on offer, there are a number of other reasons for self-exclusion. These can include:
- A lack of financial capability and confidence;
- Lack of trust in providers;
- Psychological barriers; and
- An inability to access products via the preferred channel.52
The design and implementation of financial products can also contribute to this; we heard that inflexible payment schedules (such as those associated with direct debits) and penalties for missed payments could lead to some people ‘opting out’ of financial services.53
Concluding remarks
46.Financial exclusion has multiple causes, and can affect many different groups in society. Different groups, of all ages, can encounter the repercussions of poor financial capability yet those on the lowest incomes appear to be most at risk. Some people simply have an income level that is insufficient to enable them to avoid financial exclusion. For many, a low level of income, or a variable income, can lead to diminished access to financial services and other goods and services. This reduced access contributes to the poverty premium, whereby the poor pay more for goods and services. The premium then serves to further exacerbate the effects of poverty and financial exclusion.
47.The policy focus on financial inclusion increased from the late 1990s onwards, with a succession of initiatives culminating in the work of the Financial Inclusion Taskforce. While the Taskforce was closed in 2011, there have subsequently been a number of initiatives of relevance to the inclusion agenda but without the same degree of central focus on inclusion per se. What is not immediately clear is the extent to which these initiatives have delivered appropriate support to those, often at the margins of society, who are experiencing the effects of exclusion. We consider this in later chapters, with particular focus on delivering support to those who are most at risk of exclusion.
48.What is clear is that, in an era of increasing bank closures, an ageing population, and declining savings rates, much work is needed. The United Kingdom stands at the forefront of the global financial services and, as such, should lead by example, setting a high standard in seeking to address financial exclusion. We believe that the country must strive to mirror its global standing by committing to the development of a truly financially inclusive society.
5 European Commission, Financial Services Provision and Prevention of Financial Exclusion (March 2008) p 9: http://www.bristol.ac.uk/media-library/sites/geography/migrated/documents/pfrc0807.pdf [accessed 14 March 2017]
6 Joseph Rowntree Foundation, Financial Inclusion in the UK: Review of policy and practice (16 July 2008): https://www.jrf.org.uk/report/financial-inclusion-uk-review-policy-and-practice [accessed on 14 March 2017]
7 For example, a loss of income from job loss, reduced working hours or ill health may be eased by savings.
8 Friends Provident Foundation, University of Birmingham, Financial Inclusion Annual Monitoring Report 2016 (2016) p 4: http://www.birmingham.ac.uk/Documents/college-social-sciences/social-policy/CHASM/annual-reports/financial-inclusion-monitoring-report-2016.pdf [accessed 14 March 2017]
12 Friends Provident Foundation, University of Birmingham, Financial Inclusion Annual Monitoring Report 2016 (2016) p 8: http://www.birmingham.ac.uk/Documents/college-social-sciences/social-policy/CHASM/annual-reports/financial-inclusion-monitoring-report-2016.pdf [accessed 14 March 2017]
13 Friends Provident Foundation, University of Birmingham, Financial Inclusion Annual Monitoring Report 2014 (2014) p 6: http://www.birmingham.ac.uk/Documents/college-social-sciences/social-policy/CHASM/annual-reports/chasm-annual-monitoring-report-2014.pdf [accessed 14 March 2017]
15 Sources: Joseph Rowntree Foundation, ‘Monitoring Poverty and Social Exclusion 2016’ (7 December 2016): https://www.jrf.org.uk/report/monitoring-poverty-and-social-exclusion-2016 [accessed 14 March 2017]; Joseph Rowntree Foundation, ‘Destitution in the UK’ (27 April 2016): https://www.jrf.org.uk/report/destitution-uk [accessed 14 March 2017]; written evidence from Demos (FEX0063); written evidence from MAS (FEX0062); written evidence from Age UK (FEX0094); written evidence from the Finance Foundation (FEX0079); Federation of Small Businesses, ‘Bank Branch Closures’: http://www.fsb.org.uk/standing-up-for-you/policy-issues/finance-and-the-economy/bank-branch-closures [accessed 14 March]; written evidence from EHRC (FEX0089); Office for National Statistics, Statistical bulletin, Internet access - households and individuals: 2016 (4 August 2016): https://www.ons.gov.uk/peoplepopulationandcommunity/householdcharacteristics/homeinternetandsocialmediausage/bulletins/internetaccesshouseholdsandindividuals/2016 [accessed 14 March 2017] and written evidence from the British Insurance Brokers’ Association (FEX0075)
16 Sources: Friends Provident Foundation, University Birmingham, Financial Inclusion Annual Monitoring Report 2016 (2016) p 18: http://www.birmingham.ac.uk/Documents/college-social-sciences/social-policy/CHASM/annual-reports/financial-inclusion-monitoring-report-2016.pdf; Money Advice Service, Press release: Low savings levels put millions at financial risk on 29 September 2016: https://www.moneyadviceservice.org.uk/en/corporate/press-release-low-savings-levels-put-millions-at-financial-risk; supplementary written evidence from Age UK (FEX0097); written evidence from CAP (FEX0014); written evidence from Shelter (FEX0056); BBC, UK household debt now a record £13,000, says TUC (January 2017): http://www.bbc.co.uk/news/business-38534238; Money Advice Service, Financial Capability in the UK 2015, (November 2015) p 50: https://prismic-io.s3.amazonaws.com/fincap-two%2Fd08746d1-e667-4c9e-84ad-8539ce5c62e0_mas_fincap_uk_survey_2015_aw.pdf
17 See, for example, written evidence from The Advice Shop (FEX0039), Macmillan Cancer Support (FEX0057), Merton Centre for Independent Living (FEX0003), Demos (FEX0063), Financial Inclusion Commission (FEX0044) and Money Advice Service (FEX0062).
24 In February 2017 the energy regulator, Ofgem, announced that a temporary price cap for energy pre-payment meter charges will be introduced. The price cap will be updated every six months, and will remain in place until 2020. See: http://www.bbc.co.uk/news/business-38891010 [accessed on 14 March 2017].
28 Written evidence from Mastercard (FEX0068), Shelter (FEX0056), Lloyd’s Banking Group (FEX0077), Demos (FEX0063), Birmingham Financial Inclusion Partnership (FEX0049) and Financial Inclusion Commission (FEX0044)
29 Friends Provident Foundation, University of Birmingham, Financial Inclusion Annual Monitoring Report 2016 (2016) p 18: http://www.birmingham.ac.uk/Documents/college-social-sciences/social-policy/CHASM/annual-reports/financial-inclusion-monitoring-report-2016.pdf [accessed 14 March 2017]
30 Friends Provident Foundation, University of Birmingham, Financial Inclusion Annual Monitoring Report 2016 (2016) p 18: http://www.birmingham.ac.uk/Documents/college-social-sciences/social-policy/CHASM/annual-reports/financial-inclusion-monitoring-report-2016.pdf [accessed 14 March 2017]
31 Source: Friends Provident Foundation, University Birmingham, Financial Inclusion Annual Monitoring Report 2016 (2016): http://www.birmingham.ac.uk/Documents/college-social-sciences/social-policy/CHASM/annual-reports/financial-inclusion-monitoring-report-2016.pdf [accessed 14 March 2017]
35 Federation of Small Businesses, ‘Bank Branch Closures’ http://www.fsb.org.uk/standing-up-for-you/policy-issues/finance-and-the-economy/bank-branch-closures [accessed 14 March]
37 Office for National Statistics, ‘Statistical bulletin, Internet access- households and individuals: 2016’: https://www.ons.gov.uk/peoplepopulationandcommunity/householdcharacteristics/homeinternetandsocialmediausage/bulletins/internetaccesshouseholdsandindividuals/2016 [accessed 14 March 2017]
39 Money Advice Service, Press release: Low savings levels put millions at financial risk on 29 September 2016: https://www.moneyadviceservice.org.uk/en/corporate/press-release-low-savings-levels-put-millions-at-financial-risk [accessed 14 March 2017]
40 Financial Inclusion Commission, Improving the Financial Health of the Nation (March 2015) p 3: http://www.financialinclusioncommission.org.uk/pdfs/fic_report_2015.pdf [accessed 14 March 2017]
41 Source: Office for National Statistics
42 This ratio captures the saving behaviour of households by subtracting household expenditure from household income; a higher saving ratio would indicate increased household income, decreased expenditure or a combination of the two. Figure Four also includes NPISH (Non-profit institutions serving households).
43 Financial Inclusion Commission, Improving the Financial Health of the Nation (March 2015) p 3: http://www.financialinclusioncommission.org.uk/pdfs/fic_report_2015.pdf [accessed 14 March 2017]
45 A relatively small sum of money lent at a high rate of interest on the agreement that the borrower will repay the sum when they receive their next wages.
48 All Party Parliamentary Group on Financial Education for Young People report, Financial Education in Schools: Two Years On — Job Done? (May 2016) p 14: http://www.pfeg.org/sites/default/files/APPG%20on%20Financial%20Education%20for%20Young%20People%20-Final%20Report%20-%20May%202016.pdf [accessed 14 March 2017]
49 Citizens Advice, Unsecured and insecure? Exploring the UK’s mountain of unsecured personal debt—and how it affects people’s lives (September 2015) p 27: https://www.citizensadvice.org.uk/Global/CitizensAdvice/Debt%20and%20Money%20Publications/UnsecuredorinsecureFinal.pdf [accessed 14 March 2017]
50 All Party Parliamentary Group on Financial Education for Young People report, Financial Education in Schools: Two Years On — Job Done? (May 2016) p 17: https://www.pfeg.org/sites/default/files/APPG%20on%20Financial%20Education%20for%20Young%20People%20-Final%20Report%20-%20May%202016.pdf [accessed 14 March 2017]