Today, the Financial Inclusion Commission released its report, Financial Inclusion: Improving the financial health of the nation. The report argues that financial inclusion must be a priority for an incoming government. It brings together evidence the Commission has gathered from a wide range of stakeholders from around the country, provides a vision of what a financially inclusive society should look like, and makes recommendations on how this can be achieved. Policy in Practice is proud to have supported the Commission in its work.
Financial exclusion: the reality in 2015
The United Kingdom leads the world in financial services, but not in financial inclusion. Globally, the UK ranks just ninth in banking access according to the World Bank. Nearly two million people are ‘unbanked’. Many more are ‘underbanked’, meaning that they are not making full use of the services on offer, that banking services simply aren’t meeting their needs, or a combination of both.
Financial exclusion doesn’t just affect money management. It has an impact on all areas of life. Finding employment requires a bank account so that wages can be paid. Payment mechanisms that work well for people are essential for paying household bills and maintaining secure housing. Falling into problem debt can have a huge impact on physical and mental well-being.
At the same time, technology and innovation is making great strides to make financial transactions – and our lives – easier. 58 million contactless cards have now been issued in the UK and new smartphones can also be used to make payments. But while these developments make banking more convenient for those already connected to the system, they may not be enough to draw in those who are excluded, or who are excluding themselves.
After speaking with a wide range of stakeholders – financially excluded people, banks, credit unions, local authorities, academics, charities – the Financial Inclusion Commission identified a number of key challenges to overcome:
- Leadership: There is not enough momentum and coordination across all sectors, notably government.
- Banking and Payments: Banking services (particularly Direct Debits) are still not meeting the needs of low income consumers. Technology is changing the face of financial services.
- Credit: People on low incomes are not served by the mainstream market, creating a credit gap. This will be widened by the FCA’s cap on payday loans.
- Debt: Debt solutions have not evolved to reflect the changes in people’s needs and debt advice is fragmented.
- Savings: Savings products are not suitable or rewarding enough for those wanting to save small sums. Many people lack financial resilience.
- Pensions: Proposed pension reforms, even though desirable in principle, could have serious unintended consequences in the longer term.
- Insurance: Insurance is seen as irrelevant or unaffordable for many and some groups may be paying disproportionately high premiums.
- Financial Capability: The UK needs to be ‘skilled up’. Universal Credit will change the way people on low incomes have to manage their money.
The way forward
The Commission wants the United Kingdom to be a global leader in financial inclusion. The report calls for a financially inclusive society:
We want financial services that are accessible, easy to use and meet people’s needs over their lifetime. We want people to have the skills and motivation to use financial services, and to benefit meaningfully from them.
To promote financial inclusion, the Commission has made 22 recommendations. You can see the full list here. They call for government to lead the way, for the regulator to have a statutory duty to promote financial inclusion, for financial services to address the needs of consumers on low incomes or in vulnerable situations, and for a much greater emphasis on financial skills not only in school but throughout life.
A financial system that excludes large numbers of people cannot foster growth or spread prosperity for the country. Greater financial inclusion will benefit everyone in society and will help to build a more robust economy.
To make financial inclusion happen, the Commission argues that a collective effort is needed, but that government needs to take a clear lead. In the run up to the General Election, politicians are understandably focused on the state of public finances. But it would be a mistake for them to ignore the importance of personal finances and fail to tackle the lack of financial resilience in too many households across the UK.