The UK likes to boast about having the best financial services bus this has never translated into having the best track record on financial inclusion.
Depending on which research you look at and what metrics you use, we are in the top quartile in terms of performance in the EU. But many countries do much better, such as Belgium, Denmark, Germany.
Everyone knows how complex the issues are surrounding financial exclusion and there is no silver bullet to solve this. But there are three issues worth considering when we are considering potential solutions. Understanding the markets through access to data; understanding people to support personalisation; and not underestimating the costs of disruption required to create change at scale.
Access to data
The Community Investment Coalition (CIC) has campaigned since 2012 for banks to release data on lending to support effective interventions to tackle communities that struggle to access mainstream finance.
In the USA, the Community Reinvestment Act (CRA) (1977) and the Home Mortgage Disclosure Act (1975) require US banks to disclose data on a wide variety of metrics at a local (census tract) level. This data disclosure has enabled civil society advocates to identify key problems and lobby for solutions, has enabled community investment organisations to identify and target areas of financial exclusion, has enabled government to develop appropriate policy measures, and has enabled evaluation of the impact of community investment solutions.
Granular, place-based data disclosure, broken down by demographic indicators and types of financial services provided, has enabled US stakeholders to identify the nature and location of problems of financial exclusion.
US data disclosure requirements, however, are incomplete. The CRA and HMDA were designed to operate in a different financial system and have not kept up with recent financial innovations. HMDA data does not include data on terms and cost of loans, which is particularly relevant when assessing predatory lending. And CRA reporting requirements do not apply to bank subsidiaries, leaving large parts of the market un-measured.
It also hasn’t meant an end to financial exclusion in the USA. 28% of the population, around 88 million, people remain unbanked or underbanked.
But there are three key lessons in this area for the UK. Data disclosure is a vital to understanding the problem of financial exclusion effectively and to designing appropriate solutions. Data needs to include granularity at the local and demographic level, as well as data on terms of loans provided as well as loans made and refused. It should apply to all financial institutions rather than just a sub-set.
And coordinated identification of financial inclusion and community development goals is necessary to specify both what data is important to collect and how it will be used.
So far, CIC has achieved the voluntary disclosure of bank lending data at a postcode sector level, which is a welcome and significant step forward. But the disclosure framework only includes the main retail banks. The quality of the data needs to improve to really give us the intel we need to understand the issue at a community level. As many of the solutions to exclusion are community driven, there is a lack of synergy between what we know and what we can do. And even given the limitations of the data, not much use is being made of it. This is partly due to the erosion of public policy capacity but also due a lack of ease of access.
Damon Gibbons excellent work in Leicestershire, mapping the data, shows how you could use it but also what the limitations are. CIC has also recently created a working group with leading experts to work with the BBA to look at data improvements. But we also need more pressure for data use as part of building an evidence base about financial exclusion. People should ask local authorities, LEPs, MPs and other elected representatives how they are using the data to support financial inclusion and economic development work.
Personalisation
In a whole range of areas, personalisation and customer experience is seen as the next big thing in innovation, from retail to election strategies to developing financial services for consumers.
But when we think about products and services for people on low incomes there is a high level of tolerance for the idea that one product or organisational delivery model should suit all. At least part of the reason for this is the cost of providing and scaling products and services. But is there too much focus on what products people need rather than looking at the customer journey?
Responsible Finance members include organisations like Scotcash and Sheffield Money, which provide a triage service undertaking an analysis of need before sending the customer on a tailored journey.
Innovation in tacking financial inclusion should focus more on data analysis to understand gaps in the market, behavioural economics to understand the way in which people interact with products and services or fail to do so and personalisation to address individual need.
For example, a huge amount of work has taken place in the UK and elsewhere to get people to take out basic insurance products but often with little success, no matter how cheap or convenient they are, for example deducted with rent payments. This may partly be due to reliance on informal insurance networks, friends and family and a lack of trust in insurance companies paying out. But repeatedly trying to convince people to buy something we know they are, at best, suspicious of isn’t effective.
The work the Centre for Responsible Credit is doing on rent flexibility is a good example of personalised innovation and open banking should support this type of innovation. But it has to start with looking at people as individuals, rather than creating an app to be peddled around for investment before consideration of customer need and how to reach those customers.
If we have learnt anything since the banking crisis and subsequent attempts to improve competition, it is that people are incredibly reluctant to change financial service providers or try out new products and services. We need to think more carefully about what innovation looks like and how it can really provide targeted solutions to financial inclusion.
Investment and disruption
Even if we had the right data to fully analyse market gaps and their characteristics, the innovation to fully personalise products and services and provide the people focused support often required, would that create the change we need to see?
There is a view that the alternative finance sector has benefited from significant levels of investment over the last ten years but without this investment really having impact. But this view under-estimates the impact we have and the investment required to change the game.
In 2016 responsible finance members lent £242 million to nearly 50,000 customers, helped to start up 8,200 new businesses and created 11,000 jobs and helped customers to deposit £3 million into savings accounts. This is without the level of investment that the sector in the USA receives, which is around $200 million a year.
Metro Bank is always a good example of how hard it is to create real disruption. It is conservatively estimated that took £20 million to set up and more than 10 years on, it still hasn’t yet moved into profit. And it only targets affluent consumers in the south-east.
We can make a really good case for the need for state investment in the sector and the impact that has per pound invested on economic growth. But we do need to consider, in the current absence of state investment at the level we would like it, how else we can change the game.
The UK doesn’t lack innovation but we need smarter thinking about how products and services can reach scale, while simultaneously evolving to meet changing consumer needs.
There is a lot to be positive about in terms of ‘building a financially healthy society’ and some great work going on across the UK. Access to data, personalisation, investment and innovation can al play a role in making the UK a world leader in financial inclusion.
Jennifer Tankard
This blog is based on the content of a speech given to CfRC’s annual conference in February 2017.