Who's financially excluded?
There are many people in the UK who find it difficult to access basic banking services or face severe restrictions on the financial products they can use - many of which most of us take for granted.
This guide will explain exactly what financial exclusion is, what causes this problem and what solutions have been offered.
Carry on reading or click on the links in the menu opposite to jump ahead.
Most people living in the UK are financially included, which means that they participate in an up-to-date, mainstream financial world - accessing credit and banking online and having lots of choice between different products and services.
For those who are financially excluded, the following will apply:
- Those affected are usually individuals on a low income and those with a poor credit history.
- Other key groups affected include the elderly, migrants, single parents, and the disabled or those on long-term sick.
- Financial exclusion can both be caused by social exclusion and also lead to a deepening of social exclusion.
- Paying essential bills is more difficult and saving to ensure security for the future or for emergencies becomes near impossible.
- This term can also apply to supposedly 'good' banking customers. That's because they don't tend to make financial companies any money in fees or interest, and are therefore sometimes denied further products and services.
The Financial Inclusion Commission, which researches financial exclusion and aims to find solutions to the problem, states that 1.5 million adults in the UK today do not have access to a bank account.
Additionally, only 41% of UK households are actively putting away savings.
Furthermore, according to the World Bank, the UK ranks in ninth place for financial inclusion (for banking) in the world.
This isn't great considering the fact that the UK is one of the most technologically and financially developed nations in the world, and is home to one of the world's leading financial centres.
In March of this year the Select Committee on Financial Exclusion, a parliamentary group, published a report which called on the Financial Conduct Authority (FCA) and the banks to do more to help the financially excluded.
They highlighted the following problems:
- Too many people cannot get a bank account or fairly priced financial services.
- There is a 'poverty premium' for these people because they are forced to pay more to access credit and pay bills (because they have fewer options).
- The most vulnerable in society suffer the most.
- Banks have not adapted to meet the needs of their disabled customers.
Causes of exclusion
Now that the problem is clear, let's take a look at some of the causes of financial exclusion.
Current or past debt
Those who have been made bankrupt or are in a Debt Management Plan (DMP) of one form or another are particularly likely to face financial exclusion.
These accounts offer very basic banking services. They have no credit or overdraft facilities and simply offer a debit card and an account to pay money into and out of, including direct debits.
Due to the lack of credit facilities, from the banks' point of view these accounts don't make them any money.
Also, since January 2016 all basic bank accounts have to be offered without any fees attached.
As such, they're not widely advertised to potential customers.
But for those with poor credit histories, basic and managed bank accounts are a good option to get back into mainstream banking - particularly because they don't usually reject applicants based on past credit problems like payment defaults.
However, proof of address and identification are required to open these accounts, and this can sometimes be a problem for very vulnerable or low-income people.
That's because these individuals sometimes have no fixed address, and the cost of a driving licence or passport for identification is prohibitive.
Another problem is that basic bank account holders have not always been treated well by the banks.
For example, in 2011 RBS decided to restrict these account holders to using only RBS ATMs, meaning that they had access to only 20% of available ATMs.
However, Lord McFall of Alcuith, the former chairman of the Commons Treasury Select Committee disagreed that the move was fair.
"It all falls apart very fast when they [the banks] start excluding groups of people. It is extremely worrying and a big step back."
RBS stopped this practice in 2014, but the example serves as a reminder that even when the financially excluded open the door to financial inclusion, they can still be excluded in different ways.
Occasionally, some applicants for financial products can be rejected because they have proven themselves to be too responsible of a banking customer.
For example, someone who never misses a payment and never pays interest on their accounts may seem like a perfectly sensible banking customer, but from the banks' perspective they can make very little money from them.
David Seaman, of US site Credit Outlaw, is typical of commentators both in the UK and the US when he says: "They [credit card providers] don't lend for charity's sake. They lend to make money.
"And if they have concrete proof that you have never added a cent to the bottom line of any card company, you aren't terribly attractive to them".
This is a similar problem to the unprofitability of basic bank account holders, but tends to occur with more stable and less vulnerable banking customers.
Lenders themselves deny that they screen applicants for their likely profitability. Rather, they claim only to judge applicants on how likely they are to pay back debts.
Incomplete credit history
Sometimes financial exclusion can occur when people apply for credit.
Financial providers usually perform a credit check to assess the creditworthiness of an applicant. But sometimes an applicant's credit report can have missing or incorrect information, and this can lead to finance being denied.
Indeed, missing or incorrect records are often the root cause of rejection despite the large amount banks do share.
Some examples of the problems that can occur include:
- Address inaccuracy: If a current or previous address has been inputted incorrectly then this can cause problems - it's important to use the same variation for each address.
- Missing addresses: There should be at least six years' of previous address history on a credit file.
- Name changes: Previous names should all be added to the report to link information recorded under different names.
- Financial links: Being linked to somebody with a poor credit history - such as sharing a joint mortgage - can be problematic.
- Incorrect information: Sometimes information about payments can be recorded incorrectly on a credit file - such as a missed payment that was actually paid.
There's also the fact that not all financial providers share all the information they have about an applicant with a credit reference agency - such as all the accounts they hold.
A Which? spokesperson said: "A missing account could have a significant impact on a lending decision. We do not think anybody should be forced to agree to share data but if you are applying for credit it makes sense that lenders see what other accounts you have open".
Even if customers have agreed to let their information be shared, not all banks and building societies will release it.
Smaller outfits such as regional building societies or private banks often don't like to share information.
Indeed, research from Which? found that of those surveyed (all of whom were rejected for a credit card application) eight out of ten struggled with a lack of information about why the decision had been made and half received a generic message which told them to 'check their credit file'.
This indicates that making sure our credit records are up to date and correct is really important to avoid being financially excluded from the products and services we apply for.
There's lots more information on how to repair a credit rating in this guide.
It's also possible to improve a credit rating with a credit card - if one can be accessed - and this guide covers all of the options.
Digital and social exclusion
A 2016 report from the Demos think tank found that thousands of people in the UK suffer from financial exclusion and are 'boxed out of mainstream consumer services'.
This report specifically highlighted the problem of digital exclusion, with 'IT-illiteracy' a massive problem that prevents many people from accessing financial products and services online, where the best deals are usually found.
The Financial Inclusion Commission states that 23% of adults in the UK do not have access to broadband, either fixed or on their mobile phones, which highlights the scope of the problem.
According to the UK Consumer Digital Index, which is compiled by Lloyds, offline consumers could save an average of £744 each year just by moving all of their accounts and payments online.
That's because banks and utility suppliers tend to offer the best deals to customers who not only find deals online but who manage their accounts online and pay digitally, because it saves on admin and paperwork costs.
Go ON UK is a charity aimed at including everybody in the digital world. They state that 50% of the digitally excluded belong to the over-65 age group - preferring to manage their accounts and pay their bills using more traditional methods.
For example, research from Moneysupermarket.com has found that those aged over 55 are the most likely to auto-renew their car insurance without searching online for a better deal.
That's despite the fact that many insurers - many of whom like Saga are specifically targeted at the over-50 age group - take advantage of auto-renewals to increase premiums and offer much lower insurance rates for those who come to them online.
For example, the research found one man in this age group who had been quoted double his previous years' car insurance by Saga at renewal. When he went online to find a better deal he found one at half the price - and this quote also came from Saga.
The practice of companies offering much cheaper and more flexible deals online is widespread, and as such, it tends to impact the digitally excluded the most.
At this point it's important to note that clearly digital exclusion is tied to social exclusion.
Social exclusion tends to cover any group that is isolated from 'normal' society for one reason or another - such as having a very low income, having no or very few formal qualifications, having a disability or being elderly.
These groups tend to be blocked from the social and financial routes that most people find essential - in this case digital services and the financial benefits they can bring.
Government, regulatory authorities and consumer groups generally agree that some form of intervention is necessary to stop financial exclusion.
Consensus is particularly likely when social and financial exclusion meet.
The Financial Exclusion Select Committee report included a number of recommendations to help tackle the problem:
- That the Government appoint a fully resourced Minister for Financial Inclusion to promote inclusion across every level of society.
- That regulations should be introduced to limit the impact of unarranged overdraft charges.
- That the Government work proactively with the Post Office and banks to launch a public information campaign to ensure that as many people as possible are aware of the banking services offered by the Post Office.
This last point is particularly important for the financially excluded. That's because the Post Office is a well-known and local service that the vast majority of people can access.
The Post Office provides its own banking services and works with the other banks to provide financial services through 11,600 offices. Without doubt this can help reduce financial alienation for certain groups in society.
Interestingly, a Post Office bank was a Labour election promise and a 2010 budget promise, but the inclusion taskforce was dropped by the Tories in 2011.
A recent report from the Financial Inclusion Commission has also highlighted the importance of better access to and sharing of data to help prevent financial exclusion.
Better data sharing would more accurately represent an individual's creditworthiness for certain financial products.
For example, the report states that 76% of tenants have an improved credit score when their rental information is shared.
It also states that better information sharing about household incomes would help lenders to have a more complete picture of an applicant's financial status and open up new lines of credit for many people.
These measures would help the poor and vulnerable who are excluded from mainstream banking to avoid using payday lenders and home credit companies, discussed here, which charge high interest rates and can create further financial problems.
Finally, the Demos report referred to earlier in the article also has a number of recommendations, which are summarised below:
- That charities reach out to people in local areas, such as food bank users and ex-offenders, to give them basic advice about accessing financial services.
- That schools should educate children about money-management and how to use financial products and services carefully as they grow into adulthood.
- Similarly, that banks should offer lessons in finance and money awareness to customers who face financial troubles.
There's a wide range of ideas, innovations and recommendations available, but what's certain is that collaboration between Government, financial providers and charities is essential to tackling financial exclusion.