The UK has one of the world’s most sophisticated banking markets, but when it comes to serving vulnerable and low-income people, it has yet to find the right formula. Silvia Pavoni looks at what it means to be financially excluded in the country, and whether banks are close to finding the solution.

Financial exclusion artwork

Bianca sells The Big Issue, a magazine aimed at helping to assist homeless and people living in poverty, outside the train station in Blackheath, south-east London. She is 22 and with her husband buys 100 copies a week from the publisher at half the £2.50 cover price to resell. What they make helps to cover expenses and buy food for their large family, comprising their two children, Bianca’s parents and her younger siblings.

There is rarely much money left so Bianca does not use the bank account she opened some time ago. “It’s a bank in Woolwich, I can’t remember the name. I had to go with my father [the first time], it was too scary,” she says, shaking her hands, finding the question of whether she had found it an easy process almost humorous.

Out of sight, out of mind?

Banks are still intimidating places for many people, including those in the UK – one of the most sophisticated economies in the world and home to one of its leading financial centres, London.

Financial exclusion is an issue that both the UK government and banks have vowed to tackle but improvements seem to have plateaued. Out of a population of more than 64 million, up to 2 million adults do not hold a bank account and 9 million do not have access to mainstream credit, according to the Financial Inclusion Commission, an independent campaigning body. It also reports that an estimated 2 million people were forced to take out a high-cost loan in 2012 because of their inability to access any other form of credit.

Furthermore, according to the charity Financial Health Exchange, the annual cost of being poor in the UK rose from £1000 ($1265) in 2007 to £1280 in 2010. The figure has not decreased since then. This 'poverty premium' relates to the limited choices available to unstable and low-paid workers regarding how and when they pay for essentials. For example, they cannot enjoy the discounts offered by utility providers for paying by direct debit and cannot get jobs that require wages to be paid into an employee’s bank account.

Rather than simply grinding to a halt, things could still deteriorate further. A recent report by think tank Demos, ‘Banking for All’, found that the combination of political uncertainty after the Brexit vote in June 2016, historically low interest rates and changes in benefit schemes “are creating a timebomb that could see even more Britons become financially vulnerable”.

How to solve the problem?

Even optimistic observers are becoming impatient. Sherard Cowper-Coles, group head of government affairs at HSBC and chair of the Financial Inclusion Commission, says: “The Theresa May government’s commitment to a country that works for everyone applies also to the financial system. What I think is missing is the government packaging [new initiatives] together in a sort of policy for financial health, which the Financial Inclusion Commission called for in our report in 2015. The trends are definitely positive, but there are still 1 million to 2 million adults in the UK that don’t have bank accounts.”

The report also proposed a duty for the UK's banking regulator, the Financial Conduct Authority (FCA), to promote financial inclusion “but there are mixed views on that”, says Mr Cowper-Coles. “To be fair, the FCA has been positive about it, it has supported a financial inclusion paper [of its own]; but my commission would like to see something perhaps more forward leaning.”

Others asked whether greater pressure should be put on the banking sector. In December, at a House of Lords select committee hearing on financial exclusion, Lord Northbrook asked FCA chairman Andrew Bailey whether such statutory duty should be placed on his organisation. “We recognise that, frankly, for the market to work there do need to be some underpinnings that impose duties and obligations. A case in point – this is an interesting one in the sense that the Treasury has created the obligation but we will essentially enforce it – is the duty on banks to provide basic bank accounts,” he answered.

The FCA statutory duty may not materialise, but enforcement of other measures would still help.

Targeting the poor

These issues revolve around providing the right products and services for the poor and vulnerable, reaching those people, and allowing innovation into the field. Banks, charities and financial technology firms can work together to create solutions.

The obligation to offer basic bank accounts to any customer came into effect at the beginning of 2016 as part of an agreement between the UK Treasury and the banking sector. The duty was reinforced by the implementation of the EU Payment Accounts Directive later in 2016. (Such a requirement did not exist beforehand as banks could choose not to offer such products.)

A basic bank account provides features such as the ability to deposit, withdraw and receive money and pay bills free of charge. There would be no risk of running into accidental overdraft costs – something that had generated yearly fees of £1.25bn in the UK according to industry data. This was equal to £55 a month for individuals who became overdrawn, including those who went into the red by mistake or because of the poorly organised management of their finances. A good credit history is not required as the basic bank account does not allow an overdraft, but a proof of identity and address are compulsory, which can be an obstacle for low-income people.

Sarah Porretta, Lloyds Banking Group’s head of financial inclusion and education, says: “While there are savings products that are available from just £1, if you can’t pass a bank’s know your customer obligations to prevent crime by producing standard forms of identification, you will not be able to open an account.”

Too many hurdles

While Big Issue vendor Bianca had a passport to bring with her to the bank, the £70-plus application fee to obtain such documentation may be unaffordable to others, or seen as a non-essential cost. In England and Wales, 9.5 million consumers do not have a passport, according to 2012 data from the Office for National Statistics, while in England in 2014, 12 million residents (27% of the total) did not have a driving licence, according to the Department for Transport. The data regards total population, not just adults who can apply for a bank account, but figures are still indicative of the problem, as passports and driving licences are typical standard documents used by banks to verify identity.

At the bottom of the pyramid, the Big Issue Foundation (the charity linked to the magazine) works with vendors to help them secure identification, and to encourage social and financial inclusion. There are other issues it tackles too, often in partnership with local financial institutions. People living in extreme poverty have a very short time horizon, according to the foundation’s chief executive, Stephen Robertson. “From hour to hour: where am I going to get food? How am I going to take cover from the rain? Buying the magazine stretches their horizon, as they need to plan how many copies to buy,” he says. There is no returns policy on unsold copies.

The partnership with banks and credit unions has helped stretch that time horizon further as the foundation brings vendors and local bank staff together in events held at its offices, where it can motivate vendors towards managing their money better and saving to achieve their aspirations. For example, if they wanted to be a writer, they would need to start saving to buy a laptop, says Mr Robertson – former vendor James Bowen is now a published author of books including A Street Cat Named Bob.

“Financial stability is the building block for us. You might have a host of social issues that are plaguing you at the time, but the first thing that we do is trying to increase your financial activity,” says Mr Robertson. “People on the margin don’t have easy access to the things that we take for granted. It might be a mainstream bank account; a [family doctor] rather than using A&E [hospitals’ accident and emergency departments] as your form of healthcare; it could be around accommodation.

“The way we provide services is by brokering between providers and our vendors, who are typically characterised as chaotic and hard to reach.” Of The Big Issue's 1400 active vendors, after selling the magazine for 12 to 18 months, about 70% do join the financial system, he adds.

Supporting the vulnerable

Similarly, working with charities such as Macmillan Cancer Centre has helped Nationwide Building Society to better serve vulnerable clients, according to Nationwide head of social investment Stephen Uden. It is not only poverty that transforms banks and financial institutions into overwhelmingly intimidating organisations, health issues, bereavement and other shocks can have the same effect.

Also giving evidence to a House of Lords select committee in December, Mr Uden reported some work the building society is doing to support vulnerable customers. “I took our executive committee along to the Macmillan Cancer Centre at University College Hospital [in London], and they met with the Macmillan team. It was quite shocking to realise that people were very afraid to go to their financial services provider – [only] 2% of people [did] – and yet Macmillan gets more calls around finances than it does around the health implications of cancer,” he said.

As a result, Nationwide created a specialist support centre, initially focusing on people with cancer issues, which is now used as a vehicle to provide dedicated financial support around other areas such as motor neurone disease, Parkinson’s and other specialist conditions.

A tech saviour?

Help is also coming in the shape of financial technology. Banks’ engagement with financial inclusion is key, but some believe that their legacy structures and systems are insurmountable obstacles to reaching low-income people.

Going back to the issue of identity, simplifying the process to meet requirements is one of the features of U, a recently launched online bank that offers current accounts. Founder Alex Letts says the firm’s technology and systems allow for nearly instant identity and address checks, as the information provided by prospective customers is automatically checked against a number of databases. This means that at the most basic level, applicants do not need to present documents but simply put their personal information on the online form.

The company was built on Mr Letts’s original venture, Ffrees, which offered pre-paid cards. “We integrated the full pre-paid banking card capability into a current account with Vocalink banking network, so it has access to faster payments and direct debits, which it didn’t have before,” he says. Similar to a basic bank account, the company aims to complement the product with money management tools too, and offers a simpler process.

“So if you’re financially excluded, you can have exactly the same capabilities, exactly the same service that you would have got from a bank but you don’t have to go to a bank. You don’t have to be credit checked, you don’t have to make appointments to see people. Our commitment to the sector has grown; now I have something I can really beat the banks in their own backyard with,” adds Mr Letts. His chosen job title is 'chief unbanking officer'.

There is a strong case in support of digital banking. The Lloyds Bank Consumer Digital Index shows that digitally capable consumers can save on average £744 per year through shopping around online, and those on a lower income can save as much as £516 per year, which equates to a greater proportion of their income. Furthermore, the index shows that highly digitally capable consumers make savings deposits 50% more often and for, on average, four times as much as low digitally capable consumers, allowing them to better absorb financial shocks in the future.

Finally, FCA research has shown that through signing up to text alerts and mobile banking, customers were able to have greater day-to-day control over their money and had reduced the amount of unarranged overdraft fees on their accounts by 24%.

However, dealing with a computer or smartphone screen may remove some anxieties but raises other issues. While according to 2014 data by Ofcom, the UK communications industries regulator, 93% of adults have a mobile phone and 77% have access to broadband, Ms Porretta points to other statistics. “The Lloyds Bank Consumer Digital Index shows that there are 3.2 million people in the UK with low financial and low digital capability so utilising the digital channel alone could increase the gap between those who cannot get online access, do not have the capability or do not trust that their money is secure online,” she says.   

Mr Cowper-Coles adds: “Most people do have smartphones, that’s what the Financial Inclusion Commission found out, but it’s a question of encouraging them, equipping them, giving them the confidence to use them for financial services. That brings a fresh set of challenges around digital exclusion – making sure that vulnerable groups such as older people aren’t left behind.”

Digital vs physical

Digital solutions are welcome, but it is likely that vulnerable and digitally excluded people will still need a physical, non-intimidating place to deal with their finances. The ongoing closure of bank branches is not helping.

This is where other agents can play a role. Beyond building societies and credit union networks, which by their nature have a closer relationship with local communities, the Post Office is claiming a larger stake in the provision of financial services through its extensive branches and stores. The FCA’s Mr Bailey has recently talked about the organisation’s potential in this respect. In addition to its own financial products, particularly for small savings accounts, the Post Office has been working with the UK’s mainstream banks to serve its customers through its 11,600 offices across the country.

“Our agency business is where we work with banks and enable their customers to come into our stores; it has been available for some banks for some customers for some time,” says Nick Kennett, chief executive, financial services, at the Post Office. “Over the past year, we’ve been working with banks to ensure that all customers of all banks can access basic services [such as cash withdrawals and deposits] in our branches.”

Besides personal services, available in all locations, businesses will also be able to use the Post Office network, but in fewer stores. Mr Kennett says that discussions with lenders should be completed soon and hopes that an official announcement will be made in early 2017.

Getting closer

Physical proximity to customers can help small businesses that would otherwise not have access to finance, notes James Mack, chief financial officer of Aldermore, a specialist lender launched in 2009. Working with brokers around the country, Aldermore focuses on clients who may not fit the standard credit approval model of traditional banks. Financial exclusion experienced by small businesses can be as oppressive as that felt by individuals, as these companies are a crucial part of local communities’ economic fabric. Often, they are also the ones attempting to combat financial exclusions, says Rod Schwartz, chief executive of ClearlySo, a company that helps social entrepreneurs to raise funds.

ClearlySo was an early investor in Mr Letts’s initial venture Ffrees, for example. “There is no doubt that banks and the market generally don’t serve many people who need, and indeed deserve, finance – especially companies that create a positive social and environmental impact, on top of creating jobs,” says Mr Schwartz.

Other useful developments could come from changes in regulation. Mr Letts notes how the financial services compensation scheme may hinder his new online bank’s future growth as all customers’ funds are held in an account with a mainstream lender. “If your bank goes bust you’re insured up to £75,000. But if you use a provider like us, who keeps everything in the same bank account, [the individual customer] does not get financial services compensation,” he says.

While UK banks, charities, financial technology firms, regulators and the government attempt to tackle financial exclusion, what may finally improve those flat statistics is time, so the next generation of entrepreneurs can enter the workforce and bring greater impetus to solving the issue.

Mr Schwartz is hopeful. In addition to his role at ClearlySo, he is a visiting lecturer at Oxford University’s Said Business School. “Entrepreneurship as a general field is exploding on business school campuses,” he says. “The hot jobs are with entrepreneurial companies – some people have their own start-up ideas or want to join early-stage businesses.

“I guess they even think they can make more money [than in other careers] but, in addition, they feel they would have a much more interesting and meaningful life than binding pitchbooks for three years at a big bank. The demand for [lectures] on social entrepreneurship within that is also rising dramatically.”

The determination to solve society’s problems, including financial exclusion, is growing. Hopefully Bianca and her family, along with millions of underserved people in the UK, will be able to benefit from this.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter