When Natalie Ceeney, who led the independent Access to Cash Review, said that we are “in serious danger of sleepwalking into a cashless society and leaving millions behind”, she was going to the very heart of financial inclusion.
As technology changes the face of banking ever more rapidly, what happens to those eight million adults, according to the Ceeney report, who are left behind by digital progress?
What of those who have never engaged with financial services – often referred to as the “unbanked” – and what is their relationship with those classed as ‘vulnerable customers’? What are the barriers in the modern financial world that hold back financial inclusion and perpetuate financial exclusion?
The Financial Conduct Authority (FCA) 2018 report, The Financial Lives of Consumers across the UK, found that 3 per cent of UK adults are unbanked, with 77 per cent of them showing characteristics of potential vulnerability. One million UK adults are both unbanked and potentially vulnerable.
The survey also found:
- At least 4.5 million UK adults said they had been declined a financial product in the last two years.
- 3.1 million UK adults had one or more high-cost loans now or in the previous 12 months, including, for example, payday loans and home-collected loans.
- 4.1 million people were “in difficulty”, because they had already failed to pay domestic bills or meet credit commitments in three or more of the last six months.
- 12.9 million adults – or 25 per cent of all UK adults – had been overdrawn in the previous 12 months; 3.1 million adults had used an unauthorised overdraft facility, either by exceeding their limit or never arranging one, in the same period.
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So what can banks do to help deal with this wide range of vulnerabilities?
Natasha Brownlee, managing associate in the financial services team at Womble Bond Dickinson, says: “According to the Financial Lives survey of 2018, half of UK adults display one or more characteristics of being potentially vulnerable.”
More specifically, FCA research shows that 48 per cent of people with mental health problems cannot weigh up the advantages and disadvantages of a loan product and, according to the Money Advice Service, one in five British adults cannot read and understand a bank statement.
“Banks have room for improvement in the area of customer vulnerability,” says Brownlee, inset below. “Some institutions are not being as proactive as they could be.”
The FCA defines a vulnerable consumer as “someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care.”
Brownlee thinks it is a fair definition: “Also, I think the industry thinks it’s fair – but it’s also very wide. There could be actual vulnerability, where a customer has the inability to do certain things day-to-day or it could be transient, like someone losing their job or being unable to work due to illness, for example. A lot of banks place their focus on debt management rather than making things simpler and accessible for customers.
“The FCA is consulting on guidance for firms on the fair treatment of vulnerable customers at the moment. This will hopefully help align the industry and focus firms on the importance of dealing with customers with vulnerabilities. I think the key is that financial institutions need to embed vulnerable customer policies from top to bottom, not just in their frontline services.”
Yvonne MacDermid, chief executive of Money Advice Scotland, says: “We want the banks to be able to spot vulnerability and potential vulnerabilities early, put them in touch with debt advice agencies and give them breathing space.”
Natalie Ledward, vulnerable customer specialist with Monzo Bank, says there are “lots of grey areas around vulnerability – and a lack of understanding”. She continues: “One of the big challenges is normalising conversations with banks about mental health, or any external issues affecting your finances.”
Monzo has a team specifically dedicated to financial vulnerability, accessibility and inclusion and has an ongoing campaign called No Barriers to Banking.
Ledward explains: “We are exploring all the barriers people face, including no fixed address or having no form of identification. No fixed address emerged as a major barrier and people signing up for our accounts have not needed one; we think we are the only bank to do that.
“People can give a local church, or a homeless shelter, or a community group as an address.
“Everyone deserves access to financial services. But even today, too many people are excluded by invisible barriers in the banking system. We think all banks can do better. If we have people in society who are ‘unbanked’, then we are not making banking work for everyone.”
Monzo has identified five categories which are barriers to banking, which are included in a simple, click-through menu on the bank’s website, which goes to a list of organisations that can offer relevant support .
The five barriers identified by Monzo are:
- I have a mental health condition.
- I live in an area with no physical branches.
- I struggle with managing my money using technology.
- I find it hard to communicate with written English.
- I don’t have a fixed address.
“We selected these problems because we could see these were the main problems people were facing in accessing banking services,” says Ledward. “But we know there are plenty more barriers and we are building that into the heart of our business growth. We want to make banking work for everyone.
“We are now trying to understand the bigger problem around requirements for a bank account and how to access a bank account. Although you don’t need a fixed address, you do need some kind of ID to start a Monzo account like a driving licence or passport. We know not everyone can provide that and it’s an issue we’ve not solved just yet; it’s a much bigger issue than Monzo.”
Caroline Stevenson, of Womble Bond Dickinson, agrees that identity is a big issue: “A quarter of people in the UK do not have a driving licence and about 17 per cent don’t have a passport. I’m very passionate about identity, especially with regard to the homeless community. If people do not have an identity, they are likely to be unbanked and therefore cannot access the benefits to help get them out of that cycle.”
Stevenson adds that young fintech businesses are doing a lot of good in this area, such as Edinburgh-based Amiqus ID and its involvement with the ProxyAddress project for people who are homeless or on the verge of being homeless, to help them to access a basic bank account (see story, top right). She continues: “I think we will see more of that; a big part of the fintech community is fintech for good – it’s a real movement.”
Natasha Brownlee expands: “Credit worthiness is another huge issue. Your credit rating is a very blunt instrument and we need to find more subtle ways of judging it. For example, you might never have used a credit card, or missed a rent or council tax payment, but a decision might be made based only on the information a credit reference agency can find.
“I know examples of retired people who have paid off their mortgage and have never had a credit card – never mind any credit card debt – and couldn’t get a phone contract as a result. At the moment, the system requires you to use credit sensibly to build up a good credit record, but this could encourage people to get into debt.”
Stevenson adds: “Some people argue the creditworthiness checks generally performed in the UK are not fit for purpose. These can be skewed for many reasons, for example, a person who regularly pays off their work expenses using their personal credit card could have a perfect credit score. But that score is false – it’s not based on their personal means or ability to repay their debt.
“Likewise, a young individual who relies on the bank of mum and dad to repay their debts could be perceived to be a low credit risk but that’s not an indication of their personal ability to repay debt.
“Creditworthiness is coming more to the fore. The use of open banking and big data could really shake up the credit market, permitting lenders to get a real understanding of potential customers’ financial situations. There’s arguments for and against this change and anything implemented would have to be done in a way that ensures that there are no unintended consequences.
She continues: “It’s this nervousness which seems to be stopping the FCA getting behind the Big Issue-pushed Creditworthiness Assessment Bill, which is slowly making its way through Westminster.
“The Bill seeks to make it mandatory to take council tax and rental payments into account as part of credit checks. The FCA noted in its response to the Treasury Committee report on consumers’ access to financial services that it was broadly in support of the Bill’s aims – particularly where thin credit files are concerned – but believes the Bill as drafted could potentially cause harm to those it’s intended to help.”
Stevenson concludes: “Whatever happens, anything that can help open up affordable credit to more customers has to be a good thing.”
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