By Donal McKillop and John Wilson
This article was first published in Public Management and Policy and is reproduced by permission of the Association. http://www.cipfa.org.uk/pmpa/index.cfm
Banks accounts have become a ‘must have’ in the 21st century, but a large number of people do not hold a current account. These people suffer disadvantage in receiving benefit payments, in employment and in the charges they pay for credit. The authors outline what is being done by the government and the banking industry to limit the effect of financial exclusion. They also look to the future and suggest how a range of measures, including greater transparency on what is being achieved, can promote financial inclusion.
The latest official figures suggest that 1.9 million households in Great Britain do not have access to any kind of bank account and a further 1.1 million households only have a savings account (HM Treasury: Promoting Financial Inclusion, December 2004). This means that 3 million households, or one in eight of the population, do not have access to day-to-day banking facilities. This matters because social benefits are increasingly being paid into bank accounts; employers prefer to pay people through bank accounts; and because those without banking facilities are forced to use alternative and more expensive credit sources, such as money lenders.
In a recent lecture to the PMPA, we argued that one of the most significant government policy response to this problem has been the development of and support for credit unions. However, the financial stability of these organizations needs careful monitoring, not least because of increasing FSA regulatory demands. Other important responses, which tend to be led by the third sector, include community development finance initiatives and home contents Insurance schemes, but take up of these schemes has been limited. The government has also taken a role in promoting financial education, for example through the Child Trust Fund, and the launch of a ‘financial capability’ action plan by the end of 2007.
The banking industry has also played a part in tackling financial exclusion. Some have supported community development schemes and some have promoted basic bank accounts. Early analysis suggests that six out of 10 people who had opened a basic bank account had not had another account beforehand but there are still barriers to access—for example those previously without a bank account find it difficult to supply information for credit checks.
What more should be done?
There is a lot more that financial institutions could do to help tackle financial exclusion. For example, they could do more to improve ATM accounts and provide flexible products, building on the basic bank account model. They should also provide more data on the socio-economic background of their customers in order to assess the extent to which they are reaching the most vulnerable. In the USA, banks are required to publish such data in their corporate social responsibility reports. The government, too, should be doing more. They need to:
•Encourage credit union development.
•Take action to ensure disclosure of information about the socio-economic status of their customer base by banks. In the absence of such information, it will always be difficult to assess whether current or future policy responses are genuinely tackling financial exclusion.
•Take a more joined-up approach to financial education.
A cost-effective approach?
The extent to which government policy is effective was the main theme of the discussion that followed our lecture. It was suggested that the increasing provision of free services such as free transport and free school meals undermined financial education programmes as children and young people did not learn about the costs of services. It was also suggested that the substantial volume of subsidy provided by government through support for credit unions, social funds and financial education might be less cost-effective than measures to increase the income of the least well-off. Finally, it was noted that, in the absence of data about who was currently being reached by financial inclusion measures, any new measures were likely to be poorly targeted. The financially excluded were not a homogeneous group so a one-size-fits-all approach would always be difficult.
Donal McKillop is professor of Financial Services at Queen’s University Belfast and John Wilson is Professor of Banking and Finance at University of St Andrews.