Financial exclusion is a barrier to sustainable growth

Britain has a two-track financial system, with world-beating services for some and a poverty premium for others, says Charles Randell

With a week to go until the Budget, what measures does the Financial Inclusion Commission – a cross-party group of financial experts from business, politics and the charity sector – advise the Chancellor to take up? 

The answer is none, for two reasons. First, the Budget is largely set by now and anyone offering last minute advice is wasting their breath. Second, the key commitment was made in January, when Labour announced there would be a government-led National Financial Inclusion Strategy. 

But having said that, the Chancellor could use her speech to look forward to harnessing the government’s National Financial Inclusion Strategy to contribute to her growth mission. In fact, we would argue that we can’t have sustainable and inclusive growth without it.

In her Mais lecture earlier this year, Rachel Reeves identified reform as a critical pillar for growth, alongside stability and investment. Her reform agenda, she said, would be “guided by the understanding that growth and competitiveness rest on contribution: mobilising all our resources – the human potential found in every town and city – to break free from a vicious cycle in which inequality widens while growth stutters, towards a virtuous circle in which working people play their part in building prosperity and feel its benefits.”

During my time as Chair of the FCA, I too came to realise that we cannot go on with a two-track system: with a globally successful financial services sector on the one hand, but millions of people at home who cannot access basic financial services on the other. We need government-led reform to ensure that everyone knows how to access a basic bank account; is helped to build a rainy-day savings pot; can find affordable credit and essential insurance products; and can thereby become a contributor to economic growth rather than a cost.

To reinforce the message, the Financial Inclusion Commission is publishing new research by the Centre on Household Assets and Savings Management (CHASM) at Birmingham University, which will give the Treasury a fully up-to-date picture of the extent and nature of financial exclusion across the UK. 

CHASM’s findings reveal a worrying picture of wasted human and economic potential which is holding Britain back. In the past 12-24 months, one in five UK adults has increased their borrowing to cover higher living costs; five per cent of adults still have no bank account, rising to eight per cent in Northern Ireland. Over 8m UK adults need debt advice. One in six families has no savings.

One in six families has no savings

The truth is we have a market that works well for many, but often does not work well for those with the least in financial and material terms. Commercial businesses tend to charge them more – ‘the poverty premium’ – or choose not to serve them at all. 

Crucially, our report draws on feedback from people with direct, lived experience of financial exclusion in communities right across the UK. The stories people told us are humbling. 

We cite the example of Maya, a 34-year-old single mother working part-time in retail in Birmingham, who relies on buy-now pay-later to cover unexpected expenses, and whose variable income barely covers essentials and leaves nothing for savings. 

Also, Kenneth, a 70-year-old pensioner from Northern Ireland, without the digital skills to use online banking who, following branch closures, has to travel long distances for basic banking services.

Maya and Kenneth are personas created to preserve the privacy of the real people the researchers spoke to. Their stories typify the experiences of millions. People shut out of the market for basic financial services. People reliant on cash and face-to-face banking who can no longer access them.

Going cashless is reckless

Our research also lays bare the impacts of the rapid transition to digital payments. We grossly underestimate the effect going cashless is having on our fellow citizens. Over 5m UK adults rely on cash every day and 14 per cent of all payments are still made in cash.

The FCA has a plan to protect access to cash. But with retailers going ‘digital only’, people may be able to access cash but increasingly they face difficulties using it to buy things. Unsurprisingly, the switch to online banking hits older people hardest. Currently, 50 per cent of adults aged 75+ conduct their banking activities face-to-face in a branch. 

The research provides a baseline for the National Strategy; and the Financial Inclusion Commission can bring forward a series of recommendations to tackle the problems it identifies in markets for banking, credit, savings, insurance and advice.

There is lots of good work to build on. Labour has committed to increasing the number of banking hubs, which offer face-to-face banking and access to cash, but we need them to offer a broader range of services; and they could also be developed to connect people with money support and debt advice. Fair4All Finance is doing excellent work to increase access to affordable credit, but we need stronger partnerships between community and commercial lenders to ensure credit is available in sufficient volumes.

Equally, innovative schemes have been piloted to raise take-up levels of workplace savings. And government – through its recently announced taskforce – aims to curb the spiralling cost of motor insurance, which is keeping people economically inactive, especially young people in rural communities.

Greater financial inclusion will pay dividends. Resolve the poverty premium and there is more money in peoples’ pockets, less reliance on expensive credit and less cost to the NHS. 

We look forward to the National Strategy unlocking collaboration across the four nations and between industry, policy makers, charities and the public sector. And above all, unlocking the potential of people across the UK to contribute to, and benefit from, economic growth. 

Charles Randell is ex-chair of the FCA and a member of the Financial Inclusion Commission