External threats to financial inclusion

There are a number of major socio-economic, commercial, financial market and technological forces and trends which threaten to exacerbate the chronic problems we face in the UK with financial exclusion and underprovision. These are:

  • The impact of the new economic and financial reality on households and financial markets
  • Risks associated with financial firms transitioning from legacy business models
  • The potential abuse of ‘Big data’ and personal information

The impact of the new economic and financial reality

One of our key concerns is that the financial services industry, policymakers and civil society organisations have not fully grasped the potential impact of the new economic and financial reality facing millions of households and the implications for financial exclusion.

Changes in the labour market are having a significant impact on households. Taking into account the self-employed, workers on zero-hours contracts, non-guaranteed hours jobs, temporary and part-time jobs, we estimate that there are 13.2 million people in non-permanent/non-full-time jobs – over 40% of the workforce. There are also concerns that the UK is also developing an ‘hour glass’ labour market with an increase in higher skill and lower skill jobs but a fall in middle skill jobs[1].

While some on more ‘flexible’ work will benefit from greater freedom and flexibility, many of these households face uncertain futures and economic insecurity. The development of the hour glass labour market suggests that we could see a widening disparity in incomes and capacity for building assets. These trends could have implications for the ability of households to build financial resilience and long term financial security.

But the new economic reality also has implications for the financial services industry which faces a prolonged period of lower economic growth and lower financial returns.

The already worryingly levels of financial exclusion and underprovision amongst financially vulnerable households may be partly explained by demand side problems such as low awareness and affordability. But there are clearly supply side issues too.

Generally, financial services business models have tended to be based on assumptions that households can look forward to employment security, steady earnings growth, paying down debts and building assets over time. This is clearly not the case for the millions of households who face uncertainty and insecurity.

But we do not see much evidence that the business models of the financial services industry have not responded to the structural changes in the economy affecting households nor responded to the new lower financial return environment.

The obvious fear is that the mainstream financial services industry will focus its efforts even more on better-off households. When combined with the increased use of data and technology to segment households in more granular detail, this will result in even greater financial exclusion.

Consumer groups and other important stakeholders such as social housing providers need to develop more flexible, innovative, efficient business models and products to meet the changing needs of households facing more uncertain, unpredictable futures.

Transition risks and legacy business models

The new economic and financial reality could expose major structural weaknesses in the business models of many financial institutions including incumbent banks, life insurance companies, and investment/ asset managers. Many financial institutions were structured to operate in a very different economic climate with high returns on equity, high economic growth, easy credit, and increasing household incomes.

In certain sectors, oversupply of providers and proliferation of products[2] is as much a problem as the overconcentration of providers seen in the banking sector. So, the dislocation effects on financial institutions (and therefore on financial users, shareholders and employees) could be significant.

One of the effects of this transition to the new economic reality could be greater financial exclusion. However, consumer groups should also be alert to major conduct risks. In inefficient markets with high degrees of oversupply there is a risk that financial institutions will seek to maintain revenues and profit margins through exploitative practices and behaviours such as price gouging and hidden costs.

‘Big data’ and abuse of information

Information plays a central role in all sectors of a modern economy. But it is particularly important in the financial services industry – at its core it is an information business. Information, if used properly, can lead to more efficient, well-functioning, flexible and responsive markets that meet consumers’ needs and preferences.

But, information is power and power can be abused. If financial and personal information is not used within a proper social justice, regulatory and corporate governance framework, it can result in dysfunctional markets, market abuse, and serious consumer detriment including financial exclusion, price and service discrimination (red-lining) and abuse of fundamental rights.

There has been much hype about so called ‘big data’. But the value to financial institutions remains to be seen and we have yet to establish how much it will actually be used by financial services for retail financial services. Nevertheless, there have been rapid developments in information science, technological innovation and an increase in the sheer volume of data and information being accumulated in the hands of powerful financial institutions and associated services providers such as credit reference agencies.

This provides mainstream financial services institutions – who are seeing business models squeezed in a low return environment – with the imperative to undertake more granular segmentation to target better-off households and opportunity to ‘discriminate’ against financially vulnerable or lower income households.

Therefore, civil society groups need to develop policies on the ownership and use of information. The key issues are: the impact on access to financial services; opportunities for further price discrimination; the risks of red-lining; ownership and rights of access to personal data; and making sure that personal and financial information is stored safely and responsibly.

[1] High-skilled jobs hard to find as graduate pool grows, Financial Times, p3, 20th January 2015

[2] Policymakers should recognise that oversupply (too many providers and products) can be as detrimental to the interests of financial users as too few providers or overconcentration in a market (the classical competition model)