Financial exclusion has become a big problem in the UK. Around this time last year the Select Committee on Financial Exclusion called on the UK’s banks, as well as the Financial Conduct Authority, to make tackling financial exclusion a priority. Currently, there are around 1.7 million people in the UK who don’t have a bank account. And roughly 40% of those of working age in the UK have tiny savings pots of less than £100. So, if you feel financially excluded then you are part of a large number of people who fall into the same category. But if you are financial excluded then what can you do about it?
What is financial exclusion?
Essentially, it means being outside of mainstream financial services. Someone who is financially excluded will have difficulty accessing – or be completely unable to access – those financial services, whether that’s credit cards or a bank account. However, those are not the only elements involved. If you’re financially included then you not only have the ability to access a range of financial products and services that are appropriate to your life and income but you also have the financial literacy and savvy to know how to manage them. The financially excluded may struggling with basic financial concepts and may not have the financial capacity to get to grips with the range of financial products that are available today.
What is the impact of being financially excluded?
The number of people who find themselves financially excluded can cause problems, not just for individuals but also for the country and its infrastructure.
Employment issues. Many employers today will only pay wages into a bank account so those who don’t have one may struggle to get paid (or even to get work).
Retirement poverty. Those without savings will struggle to get by in old age.
Higher utility rates. Utility providers tend to drop their prices for those paying by direct debit, which is only an option for someone with a bank account.
High fees. If you don’t have a bank account you may have to use high street cheque cashing stores, which charge high fees for transactions, on top of 7-9% of the value of the cheque.
High interest credit. The financially included have access to attractive loans at affordable rates. Those who are financially excluded may have no option but to borrow high interest credit, which is more costly to repay.
Insurance protection. Insurance is another financial product that those who are financially excluded don’t have, leaving them completely unprotected in the event of fire, theft or flooding.
Social exclusion. There is plenty of evidence that financial exclusion reinforces social exclusion – but also that financial inclusion can reverse social exclusion if it is correctly tackled.
What can you do about financial exclusion?
The Post Office Card Account (POCA) – if you don’t have a bank account then the POCA enables you to receive pensions, benefits and tax credit and withdraw cash without expensive fees.
Basic bank accounts – as part of an initiative towards universal banking in the UK, 17 mainstream financial services providers now offer basic bank accounts. These don’t provide overdrafts or credit but basic account services without credit checks.
Financial skills for life – this is a partnership between Citizens Advice and Prudential plc, designed to improve financial literacy and understanding for anyone who feels financially excluded. It includes resources such as financial training and digital money coaches.
The Social Fund – the Social Fund provided a range of grants and interest free loans to people on low incomes. Unfortunately, it was abolished by the Coalition Government’s Welfare Reform Act in 2013. It has been replaced by funding made available to local authorities who can still provide assistance in their local areas to those in need.
Pensions auto-enrolment – around 80% of people believe that the state pension will be sufficient to cover the cost of retirement. However, this is barely the case now and certainly won’t be in the decades to come. Pensions auto-enrolment means anyone over the age of 22 earning £10,000 or more a year is automatically enrolled into a workplace pension to which an employer also contributes. If you don’t have any savings for retirement then don’t opt out of auto-enrolment.
Getting out of debt – over indebtedness is one of the main reasons that people remain financially excluded. However, there are a number of free services and organisations designed to help people get out of debt, including the National Debtline, Citizens Advice, and charities such as Step Change.
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read more about Alex Hartley