The muddied waters of 'financial inclusion'

'Basic' accounts and credit unions have a long way to go when it comes to bringing banking to people on low incomes, finds Esther Shaw

Can you imagine managing your money without any sort of bank account - no debit card payments, ATM access, cheques or overdraft?

Nearly three million adults in the UK do; they include the unemployed, the retired, those in low-income jobs and part-time workers paid in cash. The National Consumer Council (NCC) says half of these people have been on benefits for over five years.

Since state financial support is channelled through the Post Office, many may not want or need a bank account. After all, handling cash is often better because you can't spend what you don't have.

But "financial inclusion" - the Government's buzz-phrase for bringing low earners into the mainstream - is high on the political agenda. During the Treasury's Spending Review last year, it was announced that ministers intended to tackle areas such as banking and affordable credit. So the rise and rise of "basic" bank accounts, first launched in 2000, should form a key part of their plans.

These accounts offer a stripped-down version of an ordinary current account. You can make cash deposits and withdrawals, and pay bills by direct debit or standing order.

But there is no chequebook or overdraft facility, so you can only take out or spend money if there is enough in your account.

You do get a basic Solo or Electron debit card, but these are not accepted at all shops or restaurants and won't work unless your balance is in credit.

On the surface, the initiative has been a success: between launch and December 2004, some 5.7 million basic accounts were opened. However, critics say the banks could do a lot better.

"Mystery shopper" surveys by the consumer arm of the Financial Services Authority (FSA), the City regulator, have exposed either a lack of staff knowledge or unsuitable attempts to open current accounts, and credit facilities, instead.

The NCC is now calling for a new basic-banking model that includes a small penalty-free overdraft (to act as a buffer zone) and weekly direct debits to aid budgeting.

Alongside basic accounts, there is growing demand for credit for those on low incomes.

The £150 average loan sought by these people is not catered for by mainstream lenders, and many also have a poor credit score, which rules them out of contention. That can leave the worst off (and often those most desperate for cash) with little choice but to turn to doorstep lenders and, worse, loan sharks.

A report in January by Paul Jones of Liverpool John Moores University showed that low-income consumers can pay an annual percentage rate (APR) of more than 1,000 to gain access to credit.

In less extreme but still expensive cases, a credit card with an APR of 60 is available through Vanquis, a subsidiary of Provident Financial, one of the biggest doorstep lenders.

The Joseph Rowntree Foundation, the social policy charity, wants to see a big expansion of the government-sponsored Social Fund. Administered by the Benefits Agency, this provides interest-free loans repaid through deductions from social security payments. But the current system isn't flexible enough, the foundation warns: monthly repayments for loans are still too high.

An alternative banking service for those in deprived areas is provided by credit unions. These are financial co-operatives, regulated by the FSA, which can take deposits, grant loans, receive benefits and provide bill-payment budgeting schemes.

By law, they can charge customers no more than 1 per cent a month for any product - equivalent to an APR of 12.7.

New figures from the Association of British Credit Unions Ltd (Abcul) suggest that as many as half a million people are benefiting from their services.

But despite government support, there are concerns that the unions still have some way to go in providing a credit service to the financially excluded.

A separate report from Liverpool John Moores University in February recommended they adopt a more "businesslike approach", with links to ATMs and direct debit facilities. Controversially, it suggested that APRs had to rise to bring in greater flexibility.

However, Mark Lyonette, Abcul's chief executive, stresses that its version of the basic bank account - which should be available next year - will prove a major boost.

Concern remains, though, as to whether credit unions can achieve the scale required to offer a solution to credit exclusion. The need for commercial involvement, says an NCC spokeswoman, must not be overlooked.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

News
peoplePair enliven the Emirates bore-draw
Arts and Entertainment
tvPoldark episode 8, review
News
Britain's opposition Labour Party leader Ed Miliband (R) and Boris Johnson, mayor of London, talk on the Andrew Marr show in London April 26
General electionAndrew Marr forced to intervene as Boris and Miliband clash on TV
Arts and Entertainment
Ramsay Bolton in Game of Thrones
tvSeries 5, Episode 3 review
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

    £24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Ashdown Group: Business Analyst - Financial Services - City, London

    £50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

    SThree: Trainee Recruitment Consultant

    £18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

    Day In a Page

    Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

    Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

    How a costume drama became a Sunday night staple
    Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

    Miliband promises no stamp duty for first-time buyers

    Labour leader pushes Tories on housing
    Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

    Aviation history is littered with grand failures

    But what went wrong with the SuperJumbo?
    Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

    Fortress Europe?

    Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
    Never mind what you're wearing, it's what you're reclining on

    Never mind what you're wearing

    It's what you're reclining on that matters
    General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

    Chuka Umunna: A virus of racism runs through Ukip

    The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
    Yemen crisis: This exotic war will soon become Europe's problem

    Yemen's exotic war will soon affect Europe

    Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
    Marginal Streets project aims to document voters in the run-up to the General Election

    Marginal Streets project documents voters

    Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
    Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

    The real-life kingdom of Westeros

    Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
    How to survive a social-media mauling, by the tough women of Twitter

    How to survive a Twitter mauling

    Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
    Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

    At dawn, the young remember the young

    A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

    Follow the money as never before

    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
    Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

    Samuel West interview

    The actor and director on austerity, unionisation, and not mentioning his famous parents
    General Election 2015: Imagine if the leading political parties were fashion labels

    Imagine if the leading political parties were fashion labels

    Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence