Banks and insurers want to please shareholders by chasing the affluent, and the poor are being sidelined. Some three million adults do not even have a bank account.
Now the Office of Fair Trading has stepped in. It wants an overhaul of banking and insurance regulation to reverse the growing exclusion of vulnerable customers. John Bridgeman, the OFT's director-general, dismissed the finance industry's arguments that ethnic minorities, the disabled and those on low and volatile incomes choose not to use basic financial services. Current accounts, household insurance and short-term credit from high street banks are beyond their reach, he said.
New technology and telephone banking mean fewer bank branches, with a higher proportion closing in deprived areas. In 1989 there were 13,788 branches of the top 10 high street banks; by 1997, that had gone down to 11,776. Meanwhile, technology-driven risk assessment has enabled insurers to target areas of high crime and push up the premiums, so again the poor suffer.
Reports have suggested the Government could force banks to reopen or retain their branches in rural and inner-city areas and make them offer accounts to the poor. Another option would be to force banks to co-operate with credit unions and community groups.
Mike Young, director of the British Bankers' Association, claims compulsion is unnecessary. The BBA has just set up a six-month study with the Campaign for Community Banking Services into how to help those who cannot do their banking by telephone or computer.
Mr Young suggests banks need to provide basic accounts that stop the holder slipping into overdraft and also allow payment of utilities bills by direct debit to obtain discounts. These accounts should also give access to low-cost emergency credit.
He says Abbey National, Alliance & Leicester, Bank of Scotland and Halifax already have accounts for the socially excluded, and more will follow.
Malcolm Tarling, spokesman for the Association of British Insurers, admits his industry must also act. But there are obstacles: "If you are high risk you will pay a high premium."
One concern is the practice some companies have of "red lining" - refusing insurance to all residents in areas with high claims. Mr Tarling claims other insurers will fill the gap. But as there is no co-ordinated strategy, many people don't realise they may be able to get help. Some local authorities have had to step in to offer affordable contents cover for council tenants.
Marion Poole, general secretary of the Association of Friendly Societies, doubts banks and insurers will do much to target the excluded unless they are forced to do so. "Friendly societies and credit unions are the only organisations determined to be in that market," she says.
Friendly societies are mutual organisations that offer regular savings plans, pension schemes, life and health cover, and more recently general insurance. The plans target the less well-off.
Ms Poole welcomes government attempts to help the excluded but warns that similar plans have stalled in the past. The original intention of the new individual savings accounts (ISAs) was to encourage the less well- off to save, she says, but they were hijacked by the middle-class PEP and Tessa lobby.
However, there will be instant access ISA savings accounts, with interest paid tax-free. Only half the adults in the UK have any savings at all and the new ISAs are designed to be as easy as possible to use, and open for deposits of pounds 10 or more.
Friendly societies are now looking at introducing banking services, which will help many to get used to running a bank account. This will include taking out small loans. "Many people are forced into using legal loan sharks, which can charge up to 400 per cent interest, or illegal loan sharks, which can charge up to 1,000 per cent. The alternative is to borrow from drug dealers," says Ms Poole.
The other option is credit unions. There are 600 in the UK with more than 200,000 members, and they are in effect do-it-yourself savings and loan schemes set up by people with a common bond, such as a workplace or church. Members pay in regular sums for a set period and these are pooled. After three months a member can apply to the union for chea-per borrowing, at rates not available from the local shark. The unions do not do credit checks and rely on peer pressure to ensure loans are repaid.
Economic secretary Patricia Hewitt has already pointed to credit unions as an important method of encouraging financial planning among lower-income groups. Forthcoming legislation should enable credit unions to expand their role.
Supported by President Bill Clinton, credit unions and a community banking movement have proved successful in the US. The system combines community lending by large banks and smaller, co-operatively owned credit unions.
Lobbyists at Ludgate Communications have prepared a report on social exclusion. Stephen Lock, managing director of public affairs at Ludgate, believes the Government should follow the example of the US by compelling banks and other financial institutions to meet the credit needs of the communities they serve.
He says US banks have seen commercial benefits in working with credit unions. "There has been some crossover from unions to private sector organisations. Banks are making money out of community lending."
The Government needs to act. With phone and internet banking gathering pace, the financial services gap is widening.
n For information on friendly societies and credit unions, ring the Financial Services Authority on 0171-676 1000.