Who’s financially excluded in the UK?
The traditional definitions of financial exclusion might neglect a significant issue in British society.
This article has been written jointly by Urmila Janardan and myself.
The national governance issue we will describe and analyze below is that of financial exclusion in the United Kingdom . We will analyze the state of financial exclusion situation in Britain through data and analyze the potential for and shortcomings of solutions to drive better inclusion outcomes.
What’s financial exclusion?
For the sake of this article, we define financial exclusion in broad terms: when individuals and businesses are unable to or kept from accessing financial services and products that are both appropriate (offered under conditions that reflect a fair level of risk) and relevant (products that satisfy the need of the customer). In this context, we define 6 dimensions of financial exclusion: bank account ownership, credit, savings, payments, insurance and technological access.
Looking at these dimensions and the factors that drive financial exclusion, which are both supply-driven (influenced by the offering of services and products in the market) and demand-driven (originating from the customer decision-making), we believe that financial exclusion deserves to be treated as a significant governance issue at the national and global level, and treated as one that differs significantly from poverty (and thus requires a different approach).
The benefits of including citizens in the financial system are still being explored today, but early work in countries like Kenya show that inclusion can drive greater payment flows, spending and resilience when faced with difficult economic circumstances (Jack & Suri, 2014) (Matheson, 2016). These outcomes may not necessarily be recreated in all regions and environments, so further work in the context of the UK is needed. Thus, financial inclusion should be understood as a means to an end, as it can act as a mechanism to weather economic difficulties for businesses and households.
Some solutions to financial inclusion might come from technology, but here still there are concerns about equity and inclusivity in whatever technological systems are made.
Who’s financially excluded in the UK
The most basic level of financial exclusion is an individual’s lack of a bank account. In the UK, 4% of the total adult population (2.1M of 54.1M, as of 2018) lack a bank account. According to the World Bank Global Findex report (2017), this number has fallen in the last years from 1% of the population in 2014, and is particularly acute among the unemployed, where the unbanked reach 6%. These are worrying numbers for a population that has not grown significantly in the last five years.
In a society that has barely grown in total population since 2011, we must look at the different demographic groups to explain the decrease in bank account ownership in British society.
Among older adults (ages 25+), we can see that account ownership remains extremely high, but it is in youth groups that we see a steep decline. This group has entered adulthood in the last few years, which could explain the 7% decline in bank account ownership. On average, adult women tend to be as “unbanked” as men, even when their numbers were higher than males’ in 2011.
Thirdly, we can see that the sectors of society that are less educated are significantly more “unbanked” than those with more education. In this case, 10% of those with a primary education level do not have a bank account, which is significantly higher than those with a secondary education (the latter being much larger in size).
While bank account ownership in Britain seems to be skewed towards the more educated and older members of society, the 4% gap in bank account ownership only partially conveys the weight of the issue of financial exclusion in Britain: the real effect of financial exclusion is felt by British society when accessing other services beyond opening a bank account.
A proof of this is that rural population and low-income bank account ownership are not significantly lower than their higher income, urban counterparts, when in reality the differences in experiences are dramatic.
These differences are experienced through the other dimensions of financial exclusion, and constitute the real governance issue for the British government. These members of society are usually named the “underbanked”, as they are financially included yet underserved by existing saving, credit and financial products.
Saving
Many individuals in the UK are not properly saving for their futures. This can derive from lack of financial education, or lack of positive role models when it comes to saving (Cadywould, 2016).
As evidenced in the above graphs, more and more individuals are saving at financial institutions, but the youth and uneducated fall behind. In 2014, 52% of the total adult population of the UK was saving in financial institutions. However, for individuals who had only a primary education or less, this number was a striking 27%. In the past 3 years, individuals with primary education or less have increased dramatically in the number that are saving at financial institutions. Still this number lags behind the national average by more than 10 percentage points. We can see similar gaps when looking at rural populations or women
Savings are incredibly important to buffer from financial shocks. Those that are financially excluded — un- or underbanked — are often the ones hit with unexpected and increasing costs. These issues often have compounding effects on health as well (Cadywould, 2016). That these issues disproportionately affect certain segments of the population (rural and female populations), signal a need for government intervention to address these issues.
There is very little being done to improve financial education, and for those that are a decade from their last educational institution, there are very few programs that offer support. There are little market pressures that would incentivize the type of programming it would take to increase financial knowledge across the UK.
Credit
When it comes to credit, the percentage of the adult population that borrowed any capital at all was 75%, which is significantly higher than the average for high income countries (64%) (World Bank Group, 2018). From the graph below, we can see that those that increased its level of debt the most from 2014 to 2017 were females (adults of all ages), young adults (under 25) and those of poor incomes (the bottom 40% percentile for income).
While taking on debt is not necessarily bad, as it can open up business opportunities and weather economic difficulties, the terms of that debt are what keep thousands underserved nationally. 6% of all adults use high-cost credit (over 100% interest rate), which along with informal lending schemes in underprivileged communities, can create debt traps for the financial underserved (Dormant accounts financial inclusion programme, 2018).
High-cost credit and rent to own. 6% of all UK adults used high-cost credit (where the APR is equal to or above 100%) in the previous 12 months. This includes payday loans, home collected loans, hire purchase and other similar products. The use of these loans is highest among 25–44 year olds, which represent 9% of the population, and younger single parents. This is consistent with the data on outstanding housing loans, where young adults, low-income adults and those with low education levels have seen increases between 3% and 6% since 2014.
All in all, the profile of the financially excluded in the UK differs substantially from other countries’, as the financially underserved bear the economic burden of exclusion as much as the unbanked. From the data, the underserved are predominantly young adults, with lower educational outcomes and from the bottom 40% income bracket, and the UK government and institutions must proactively address this growing governance issue. To address some of the issues posed by financial exclusion, past policies and new technologies may be the answer.
What are the solutions?
In 2015s, the UK implemented a policy capping the interest rates on payday loans. Payday loans are when smalls amount of money are lent at extraordinarily high interest rates — in the UK, some rates were set at over 100% (Jones, 2015). This predatory lending practice often targets low-income individuals, who generally use this money to buy food and other necessities. Although the existence and proliferation of these loans point to a broader social issue, recent policy measures capped the amount of interest payday loans could charge. This unilateral policy is incredibly effective is at least reducing the burden on individuals who receive such loans.
This type of policy has been effective, which signals that the UK has the ability to legislate and enforce regulations on the lending and banking industry. This type of policy could be applied to other areas such as the enforcement of employer saving schemes, the promotion and development of low-interest credit unions and the development of responsible finance.
Programming that addresses the lack of financial knowledge is also essential to financial inclusion. Few individuals leave primary or secondary education with a clear understanding of how to plan and save financially for their future, let alone how to interact with banking and finance industries. Educational outreach to all ages is necessary, which would take funding, political will, and government resources (Cadywould, 2016). While the UK has the capacity to implement such a program, political will is tentative and might be difficult to sustain.
New technologies aimed at automating aspects of lending are also expected to improve financial inclusion (Ubabukoh, 2018). While there are some reasons for optimism, there are also reasons for caution. Automated lending is expected to cut out human bias, reducing negative stereotyping and marginalization of minority groups. However, it has been shown that these automated proceedings might systematically reproduce human bias, and offer no options for recourse (Crosman, 2016). For these reasons and more, technological solutions are promising but must be closely monitored
Works cited
Cadywould, C. (2016). Banking For All. Retrieved February 21, 2019, from https://www.demos.co.uk/wp-content/uploads/2016/09/476_1604_BankingForAll_web.pdf
Crosman, P. (2017, September 07). Is AI a threat to fair lending? Retrieved February 21, 2019, Retrieved from https://www.americanbanker.com/news/is-artificial-intelligence-a-threat-to-fair-lending
Dormant accounts financial inclusion programme — Statement of intent. (2018). Retrieved from https://www.tnlcommunityfund.org.uk/funding/funding-guidance/dormant-accounts-financial-inclusion-statement-of-intent
Final Inclusion Overview. (2018, October). Retrieved from http://www.worldbank.org/en/topic/financialinclusion/overview
Jack, W., & Suri, T. (2014). Risk Sharing and Transactions Costs: Evidence from Kenyas Mobile Money Revolution. American Economic Review, 104(1), 183–223. doi:10.1257/aer.104.1.183
Jones, R. (2015). Payday loan caps come into force. Retrieved from https://www.theguardian.com/money/2015/jan/02/payday-loans-caps-fca
Matheson, R. (2016, December 08). Study: Mobile-money services lift Kenyans out of poverty. Retrieved from http://news.mit.edu/2016/mobile-money-kenyans-out-poverty-1208
The World Bank (2017). Global Findex. Retrieved February 22, 2019 from https://datacatalog.worldbank.org/dataset/global-financial-inclusion-global-findex-database=
Ubabukoh, O. (2018, October 22). Driving financial inclusion using Artificial Intelligence.Retrieved February 24, 2019, from https://punchng.com/driving-financial-inclusion-using-artificial-intelligence/
World Bank Group. (2018). The Little Data Book on Financial Inclusion. Washington (D.C.).Retrieved from: https://openknowledge.worldbank.org/bitstream/handle/10986/29654/LDB-FinInclusion2018.pdf?sequence=1&isAllowed=y
