We need a real alternative to predatory high street lenders
When it comes to understanding poverty, we rely too often on the numbers and not the dynamics, detached from people’s experiences. Many of us have the same two-dimensional view of low-income households and their experience with financial services.
We know, for example, that 8.8m people struggle with indebtedness in the UK. According to figures from the Money Advice Service, £8.3bn is the cost to society for not properly tackling problem debt, and £3.4bn is the cost to the economy for low levels of financial capability.
But what is this actually telling us? On paper, we simply know there is a problem that needs to be targeted. When we compare this with previous years we get a sense that the problem is getting worse, but we still have a long way to go before we truly understand what debt does to the lives of those who struggle with it.
For researchers on debt and finance like myself, this not only makes it difficult to gain access to information crucial to finding solutions to overindebtedness, it also impacts greatly on key services for people who don’t interact well with what mainstream finance or debt advice has to offer today.
Recently Joseph Henson and the Centre for Social Justice (CSJ) published a fantastic report looking at the future of tailor-made financial services for those who currently sit outside the mainstream. They have constructed a blueprint for improving financial capability from the supply-side.
During their evidence sessions, they found that those with the least financial means want a few key things from the financial services they use, which they don’t currently enjoy to an adequate standard: price transparency, certainty, and control.
Compounded by the suspicion that free in-credit banking is cross-subsidised by those who are penalised by overdraft fees – a transference of funding to the wealthier end from the poorer end – there is a widespread desire to bring about a transparency revolution in banking, to bring an end the myth of free banking.
Furthermore, having more control over rescheduling debt repayments is something that came up in the evidence sessions on the grounds that low-income household’s situations change frequently, and more flexibility over payments means fewer situations where fees and penalties drain accounts.
Some may ask: don’t these types of services already exist? For those interested already in financial inclusion, there is always the temptation to say: credit unions offer price transparency and are also more attuned to the needs of consumers to have flexible payment schedules.
The problem is the uptake of credit unions has come from a low base in the UK already, and they aren’t growing nearly fast enough to compete with the predatory lenders on the high street.
As Dr Daniel Tischer will point out in a report to be published with the Political Economy Research Centre next week, the ability of credit unions to generate income for loans has worsened since 2005 – and this is at a time when there is more pressure than ever for them to be competitive.
The rub then is the following: credit unions have been given various rounds of government subsidy over the years and many would quietly admit that they haven’t made the leaps and bounds some were hoping for. In short, it is evident they are going to have to change.
For the CSJ, this is possibly because they have designed products from the ‘top down’, based on what people ‘should do’ or ‘should want’.
To be clear, products designed via government subsidy are just as likely to be ‘top down’, in this sense, as products by banks; there is a level of paternalism inherent to both that mustn’t be ignored.
The solution, so say the CSJ, is to make better use of FinTech (portmanteau of ‘Finance’ and ‘Technology’). Many start-ups in the UK are already designing platforms that disrupt the clunky systems of old-build platforms and better enable low-income families to engage positively with financial services.
While I err on the side of caution when it comes to newfangled tech companies who claim to have a solution’, I do hold some optimism that government can help develop these companies, through investment or other incentives, and start to tap into their knowledge about how to unblock the financial services system.
Clearly, blindsighted belief in credit unions as the only alternative to predatory finance or ill-suited mainstream financial products for low-income consumers hasn’t worked to date.
To be sure, there is still need for more research into those who are unserved or under-served by mainstream finance. Questions still need answering, for example: what contemporary evidence do we have in the UK for why some low-income households choose to be unbanked?
But in all, this new research by Henson and the CSJ provides some well needed discussions and answers to the ever-present question: what do people want from the financial services industry?
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