PART ONE OF A THREE-PART SERIES
It is almost impossible to avoid the daily barrage of texts, high street signs, bus or TV adverts offering quick and easy access to finance.
Getting credit is certainly easy these days – a ‘no pay till pay day’ loan can be for up to £1000 and arranged in minutes – but at a cost: interest rates can be as high as 4,500%. These lenders are not men with baseball bats and Rottweilers; they are often large companies like Wonga or The Money Shop with respectable investors (including charitable foundations) that are providing a service that many choose for convenience and access because they have no other choice. Expensive credit is just the tip of the financial exclusion iceberg.
The last five years have seen the tightening of lending by banks that has resulted in the boom in alternative lenders. The Office of Fair Trading estimates the market to be worth billions of pounds. The most financially excluded are the 2 million people who do not have a bank account but many more are being drawn to borrow from payday lenders because they cannot get credit from their own bank. In many ways people are mostly underbanked rather than simply unbanked. As a result, the potential alternative lending market in the UK is 7 million people.
The social cost of financial exclusion is staggering for people living in poverty. A lack of a bank account means living in a cash economy with no discounted utility bills, which compounds low-income families’ poverty. Short term borrowing for an emergency at sky-high interest rates stretches household budgets further and is often the only solution since, without savings or insurance, people have no protection or buffer from a crisis. Debt is the consequence, leading to mental health problems, family breakdown and homelessness. The reality of financial exclusion for people in the UK is a life more unstable, expensive and stressful.
Dealing with the challenge of financial exclusion is complex and not as straightforward as the myths would have it. The first myth is that debt is simply the product of ignorant profligacy. The people my organisation helps with debt problems are not buying Nike trainers and luxuries; more likely they need finance for a cooker, a school uniform, or a funeral. People go to high-cost lenders because they have no choice: they are meeting an essential need and no one else will lend them the money. The second myth is that the problem can be solved by simply banning high cost lending or capping lending rates. Shutting down the alternative lending market will simply drive people into the hands of the men with Rottweilers.
By understanding the complexity of financial exclusion, philanthropists can use their money, networks and experience to have a massive impact on a growing social problem. There are solutions to this problem but most need serious investment, support in innovation and assistance in scaling.
Any intervention needs to look at the following areas:
- Supporting financial literacy, to help young people understand the complexity of the financial world they are entering and the impact of their actions if they fail to engage properly: missing a mobile phone payment may damage your credit file for six years and leave you locked out of borrowing from a mainstream bank. This kind of early life intervention can potentially have massive positive impact in the future but is being funded in a piecemeal and unsustainable way.
- By helping people who have got into difficulty. No amount of education will change their immediate situation. Often a situation of stress, anxiety or panic takes over. It is no surprise that many people who are over-indebted have mental health issues, and that many with mental health issues have debt problems. Helping people rehabilitate back into mainstream banking will need more than advice; it will need personal counselling that will take time and energy. With cuts in legal aid and advice funding, the challenge is to think of innovative and better ways to offer the personalised service needed to make change.
- Developing alternative forms of financial services, not just in credit but also in savings and insurance. A growing movement of social business, microfinance organisations and community finance bodies have started to offer opportunities for social investment and smarter giving in this space. Social investors have helped my organisation, Fair Finance, take over 10,000 people out of the hands of moneylenders and loan sharks and given them a path previously denied to them back to the financial mainstream. Yet hundreds of thousands of people remain in difficulty and millions are at risk because of financial exclusion. This market is still young and underdeveloped, lacking investment in innovation and in scaling. The potential for philanthropists to use their money to become the lynchpin to unlock greater social investment from a growing body of intermediaries and mainstream providers is huge.