The financially excluded – it’s not just who you think

When we talk about financial inclusion, you might previously have thought of the world’s poorest nations locked predominantly in cash economies. Now, we recognise that this issue is far broader than that.

In fact, in the UK, up to 8.8 million people are over-indebted and nearly two million adults in the UK do not have a bank account. Indeed, the current COVID-19 crisis in the UK has shown just how fragile our household finances can be. This feels at odds with the fact that, as a nation, we are a leader in the world in financial services. Just recently we heard how the UK has smashed its fintech investment record, notching up $4.9 billion of capital raised, surpassing the $3.6 billion the previous year and catapulting the country to second in the global rankings for VC investment.

Defining what it means to be financially included can be a challenge in itself. According to the World Bank’s 2017 Global Findex, an individual (or business) is financially included if they have “access to useful and affordable financial products and services that meet their needs, transactions, payments, savings, credit and insurance”. So why do so many people in the UK struggle to access financial services?

One major problem has been accessing fair and affordable credit as lenders are relying on traditional credit bureau data to assess whether someone will be able to repay. As credit bureau information can be inaccurate and up to 60 days out of date, lenders are wrongly declining people who could actually afford the loan, leaving millions turning to high cost, short term lenders.

For decades, measures of creditworthiness have depended on the traditional credit report – a blunt instrument that’s often out of date and relies on historic borrowing data that doesn’t paint an accurate picture of someone’s ability to repay. However we’re not only talking about the poorer sections of society who are routinely rejected for financial products and services – we’re also talking about those serving in the military who are often deemed a greater credit risk because of their lack of address history while on deployment, or a person returning from working overseas that lacks historical financial information in the UK. It even, remarkably, includes someone who has never taken out credit before who therefore has a thin credit file.

The inability of traditional lenders to lend to these groups, because of a lack of quality data, has contributed to the growth of high-cost loan providers. To illustrate the size of the problem, in 2012, an estimated two million people took out a high cost loan as they were unable to access any other form of credit. This means people could be paying more for a loan than they need to, simply because some mainstream lenders are using data which doesn’t go deep enough, or isn’t up to date.

This isn’t just an issue for the individuals affected. This is a wider issue for society and for the nation’s economy. As the Financial Inclusion Commission states: “As more people are better able to manage their money and to access products and services that meet their needs, they create a future of greater possibility for themselves, their families and their communities.”

Yet, with multiple sources showing that millions in the UK have less than £100 in savings, it is highly likely people are always going to have to rely on credit to weather a financial hiccup or unplanned event  – as we know many are doing during the COVID-19 crisis at present.

In the UK, we want both the private sector and the authorities to commit to developing, supporting and promoting fair financial products and services that serve the financially excluded. To do this requires innovation, the latest in technology and data, and a purpose-led drive by finance companies to solve the problems that the financially excluded face.

Thankfully, open banking and the Second Payments Directive (PSD2) have kick-started a revolution in the financial sector, and those at the forefront of applying open banking data for good are rapidly transforming sectors. For example, in the mortgage sector, Mojo Mortgages is using credit and open banking data to provide a mortgage score to prospective buyers – offering them guidance on how to improve their score if they are not quite mortgage ready yet. Similarly, we’re disrupting the credit market by harnessing open banking data to give lenders a more accurate and up to date understanding of a borrower’s true creditworthiness – helping more people be accepted for mainstream credit.

With a thriving fintech sector developing some of the most innovative financial products and services enabled by open banking, the UK is well-placed to reduce the numbers of the financially excluded to virtually zero. But in order to continue what open banking has started, we also need the government, regulators and the private sector to continue to work together to close the gap. With continued action, everyone will be able to access affordable, fair credit when they need it and we can make the ‘poverty premium’ a thing of the past.