A new approach to improving access to low cost credit

Deven Ghelani reveals a new financial inclusion project investigating how public sector data can be used to build people’s credit scores and promote access to financial services.

How many of us are still financially excluded today?

The numbers are stark. Research for the Financial Inclusion Commission found that nearly two million adults in the UK do not have a bank account and nine million do not have access to mainstream credit.

People with a ‘thin’ credit file, or no credit history at all, often find it difficult to access credit or are restricted to the most expensive products, many paying a poverty premium of £1,300 each year.

An estimated two million people took out a high-cost loan in 2012 as they were unable to access any other form of credit. The inability to access affordable credit is a form of financial exclusion and a driver of indebtedness.

Financial skills in a Universal Credit world

Policy in Practice is working on a new project to identify how other sources of data, primarily public sector data, could be used practically to build people’s credit scores and promote access to mainstream credit. This would enable more people to access affordable credit.

Founded by Deven Ghelani, one of the architects of Universal Credit, Policy in Practice has seen the thin but visible policy divide between the welfare system and financial inclusion. Our work with frontline advisors tells a different story, financial exclusion typically affects the same low-income households that depend upon and struggle with a complicated benefit system.

The Financial Inclusion Commission found that credit scoring, collection practices, and the creditors’ threshold limiting access to mainstream credit is cloudy and often poorly understood. At the same time, public sector and other non-traditional data sources offer the opportunity to develop a more complete credit profile.

“There is a credit gap for people on low incomes who are not served by the mainstream market. Debt solutions have not evolved to reflect the changes in people’s needs and debt advice is fragmented.

“The people of the United Kingdom need better financial skills. Universal Credit will change the way many people on low incomes manage their money.” FIC report

Our work with local authority housing benefit and council tax data, making the welfare system simple for people and organisations to understand, gives us an insight into the strength of public sector data, as well as the challenges that need to be overcome in order to realise its potential.

Using public sector data for good

Policy in Practice will look at credit scoring and identify practical ways that it can be improved, primarily through public sector data, so that a more rounded and informed view of a person can be formed.

Local authority revenue and benefits teams act as both a creditor to and a support provider for low-income households. They hold information on income, earnings and arrears, and will play an active role in supporting households at risk under Universal Credit.

They also want to promote financial inclusion and access to lower cost credit because there is a clear link between indebtedness and the need for financial support, and a demand for better information on financial and digital inclusion. Housing associations hold a large amount of rent, payment and transactional data on the behaviour of consumers.

“We believe that forward thinking local authorities and housing associations would support the use of their data to promote financial inclusion amongst their customers and, we hope, will want to work with us to develop a proof of concept.

“Ultimately, the opportunity lies in influencing how Universal Credit, and Universal Support is used not only to simplify the benefit system, but also increase access to financial services.” Deven Ghelani

Overcoming the barriers to broader use of public sector data

There are always challenges in how public sector data is used; however, we believe the time is ripe for three main reasons.

The political environment points toward greater sharing of information where this delivers more cost-effective public services (see Cabinet Office consultation on the Better Use of Data in Government, Feb 2016). We have found that concerns of the use of data can sometimes be overcome; our work for the Children’s Society (The Right Start, April 2015) found, for example, that a consent box overcame many of the difficulties with sharing live birth data.

The public now expect the technical barriers to sharing data to be routinely overcome in the commercial sector, and expect a similar level of service from the public sector. Information is beginning to be shared and matched internally within public sector organisations.

The DWP matched data across housing benefit, DWP benefits and HMRC to identify who would be impacted by the lower Benefit Cap. This is something we have been doing for councils across the UK, helping them to match this to the award of discretionary support, and understanding the impact on arrears. In today’s technical environment, we know that the technical barriers can be overcome securely, the barrier is more likely to be will, rather than ability.

The project will need to ensure that public sector information is used responsibly, to widen (rather than limit) access to mainstream credit. Credit scores exist to distinguish between those that are a low credit risk and those that are a higher credit risk. Ultimately, the success of any initiative depends upon the willingness of credit providers to use the data as intended. The project will engage with bill originators, credit reference agencies and credit providers, and investigate what safeguards can be built in to ensure that the information is used to build credit scores, rather than lower them.

Action plan shaped by local organisations, for central government

The project will research and recommend how to improve financial inclusion without significant increase in cost or risk to the sector, or to individuals. Stakeholder input is being sought and is critical to developing an action plan which will be communicated to industry and government, that has indicated they could consider legislating in this area.

The first phase of the research will build on the Commission’s last round of evidence gathering, focusing on initiatives including the Rental Exchange, gov.uk/verify, the recent data sharing consultation by the Cabinet Office and Open Banking as directed by the CMA, as well as engaging with the three main credit referencing agencies (and new technology alternatives), creditors, bill originators and debt collection teams.

We would like to hear from housing associations and local authorities who want to share their experiences of these initiatives and any others that we should include in this review.

Please get involved

The project will run from November 2016 until March 2017, culminating in the delivery of an action plan for government. Policy in Practice is now recruiting housing associations and local authorities who are interested in developing debt solutions that better reflect people’s needs today and who are keen to be involved in developing a proof of concept with us.

Email deven@policyinpractice.co.uk or call 07863 560677 for more details and to express your interest in being a stakeholder.