UK banks are taking aim at the problem of financial exclusion with a myriad of innovative programmes, since figures have revealed that 12% of the UK’s population manage without a bank account.
As with computers, telephones and TVs, the more common something is the harder it can be to get by without it.
Yet an astonishing 12% of the UK’s population manage their day-to-day financial affairs without a bank account, fuelling concern over the damaging effects financial exclusion can bring.
Being excluded from mainstream financial services has many damaging consequences. Without a bank account, it is harder to get a job, security is compromised through having to store cash at home and there is no way of paying direct debits. Poor communities face difficulties as a whole, as the lack of facilities makes it less attractive for companies to locate there, while local small businesses are starved of funds to grow and create new jobs.
In a worst-case scenario this contributes to a spiral of urban decline of the kind seen by inner cities in the US. Concerns that US banks were not taking a share of responsibility towards low income areas prompted legislators to force them to, imposing tough obligations through the 1977 Community Reinvestment Act.
The UK too has seen worrying branch closures in poor areas, prompting claims that banks are more concerned with ‘cherry-picking’ rich customers than serving small businesses or the poor. But since a landmark 1999 report by the Treasury, banks and building societies have taken concrete steps to establish a new consensus on social responsibility in the sector.
Banking on the poor
Research by the UK Treasury found that of the most financially excluded families, 68% live in the most deprived 10% of postcode areas. It also identified a key reason why many people steer clear of bank accounts: a fear that using a bank rather than dealing with hard cash might mean losing control over their finances.
Part of the solution is the Basic Bank Account, now offered by more than 15 banks, all of which follow a standard formula agreed with the government. Benefits and salaries can be paid in to the account electronically, cash can be withdrawn and direct debits set up. However, this straightforward account does not let the holder go overdrawn. Advocates claim that this simplicity has brought numerous people into the system – increasingly important since the government phased out cash payments of benefits in favour of electronic transfer in 2003.
Certain companies have gone a step further through partnerships with community organisations. HSBC in East London set up links with community organisation Services Against Financial Exclusion (SAFE), which helps local people present the appropriate documentation to open an account and then accompanies them to branches. Barclays works with homeless organisation The Passage in West London to provide appropriate ID without wasting staff time. Both cases reduce the cost of serving low-income individuals, while giving staff the satisfaction of helping people who most need their services.
Credit where it’s due
Another lesson from the USA is that where banks cannot meet local needs while making a profit, alternative sources of credit can be built up. Credit unions – organisations that pool the savings of their members in order to provide them with loans – are one solution. A range of other community development finance institutions (CDFIs – essentially social enterprise banks) meet a similar need for small business and entrepreneurs.
When a bank on the Lower East Side of New York announced the closure of its last branch, a local campaign persuaded it to provide cheap premises, a £100,000 investment and funding for staff costs to set up a new credit union. The new organisation took off rapidly, reaching 4,000 members and 69m in deposits. The example has been followed by British banks such as Lloyds TSB which have given targeted support and technical help to credit unions in order to catalyse their growth.
Credit union membership is still only 1% in the UK, and many are too small to support full-time paid staff. But Lloyds TSB’s support for South Coast Money Line is an example of how funding and a staff secondment can help one such organisation reach the critical mass needed to sustain itself in the long-run. Meanwhile, Barclays support for the Association of British Credit Unions Limited (ABCUL) aims to give a boost to the whole sector by upgrading IT facilities and risk management techniques.
Education, Education, Education
A final piece of the financial inclusion jigsaw is to improve the confidence and capability of ordinary people who use financial services. A leading initiative is the Personal Finance Education Group (PFEG), set up by the industry to push for personal finance to be included on the national curriculum – a goal that was achieved in 2000. PFEG, brought together professionals from banking, investment and insurance, became a registered charity in 2000 and now receives part of its funding from the industry regulator the Financial Services Authority.
PFEG’s flagship initiative Excellence and Access helps teachers develop a ‘school plan’ to embed financial literacy into different stages of the curriculum. Rather than straightforward lessons on mortgages and pensions, guaranteed to make any class yawn, PFEG promotes ways to make finance relevant by getting children to compare mobile phone tariffs or talk about pocket money.
Financing the future
Better informed customers carry out transactions quicker, complain less and do not restrict themselves to the simpler products. As such, UK banks face a win-win situation. Furthermore, the need for financial know-how is only set to increase, as the next generation gets to grips with mushrooming student loans and do-it-yourself pensions.
The Treasury recently outlined a new set of priorities, focusing on Advice (more free help for people in debt), Banking (halving the number of the un-banked, with considerable progress by 2006) and Credit (a step-change in the availability of loans in the most excluded areas. While achieving such ambitious targets will certainly not be as easy as ABC, the creativity banks have shown over the past five years gives at least some cause for optimism.
Corporate Citizenship Briefing, issue no: 81 – April, 2005
Nick Jones is a researcher at the Corporate Citizenship Company and a volunteer debt adviser in East London
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