Study finds 1.5 million homes without access to financial services

The report warns that as the range of banking, savings, pension and insurance products goes on growing for the majority of the population, so the problems faced by ‘financially excluded’ households will intensify. And it calls for action by financial service providers and by government to bring down the barriers faced by potential users.

Matching data from two national surveys with evidence gathered from in-depth interviews with individuals who make little or no use of financial services, the researchers find that:

• Who you are is the strongest risk factor for financial exclusion. ‘High risk’ groups include people with low incomes, benefit claimants, tenants, single non-pensioners, Pakistani or Bangladeshi households and older people who left school before the age of 16.
• Where you live is also important. Households in Scotland, Wales, Greater London or one of the 50 most deprived local authorities in England and Wales are twice as likely to be financially excluded as those living elsewhere.
• There is no single explanation for households being without financial products. Although three out of four have never used financial services, one in four have been users in the past.
• The largest group of people who make no use of financial services is householders who have never had a secure job. Other significant groups are elderly people over 70 who are part of a ‘cash-only’ generation, young householders who may yet make use of financial products and women who became lone mothers at an early age.
• Some minority ethnic groups – especially Pakistani and Bangladeshi families – make limited use of financial products, as a result of language barriers, religious beliefs and lack of information.

The researchers at the University of Bristol’s Personal Finance Research Centre find no evidence that large numbers of households are being deliberately denied access to financial products. But they identify important barriers that inhibit their use of services. These include:

Condition exclusion – where the terms and conditions attached to products make them inappropriate;

Marketing exclusion – where financial institutions target more affluent customers and are not keen to attract low-income groups;

Price exclusion – where products are too expensive for low-income households to afford.

In addition it suggests that some government policies may encourage or reinforce financial exclusion. For example, payment of means-tested social security benefits by giro or order book encourages cash budgeting by recipients. The way that financial services are regulated can also cause or reinforce financial exclusion.

Interviews and focus groups with people who had no access to financial products suggested that the two main areas of unmet need were for services to help with day-to-day money management and for help in accumulating long-term financial security. Insurance against loss of income or possessions was rated less important. However, even less need was expressed for savings or consumer credit products.

The researchers conclude that the needs of financially excluded people are far from impossible to meet and should include:

• A simple banking account that would allow them to retain tight control of their money. It would offer basic facilities for money transfer and spreading the cost of bills. Ideally, it would not provide access to an overdraft and would not depend on credit scoring. It would, however, have a ‘buffer zone’ allowing the account to go into the red for small amounts over a short period without incurring charges.
• Simple and transparent schemes offering long-term term financial security based on regular and automatic saving. Products would be flexible enough to adjust to times of hardship and capable of being used as collateral for small loans.
• Affordable home contents insurance (such as second-hand replacement indemnity rather than 'new for old') with options for spreading payments across the year.
• Affordable short-term credit in the form of small, fixed-term loans with fixed, automatic repayments.
• Financial products that are compatible with the Islamic faith.

The report adds that people on the margins of financial services would often feel more comfortable dealing with intermediaries, such as the Post Office, which they perceive as trustworthy and user-friendly.

Elaine Kempson, co-author of the report said: “Knowledge about financial products is remarkably low among households that are without them. This is compounded by marketing policies which reinforce the belief that financial services are 'not for the poor'. Measures to encourage future take-up must tackle the widespread mistrust which such households feel for many financial providers."

She added: “In the two years since this research began, there have been significant developments that demonstrate the willingness of private and public sector organisations to tackle the problem of financial exclusion. Even so, low income households continue to be constrained in their access to financial products, thereby reinforcing their risks of long-term social exclusion.”