The Causes of Financial Exclusion

Understanding the causes of financial exclusion and underprovision

There is already a considerable body of research available into the extent of financial exclusion and underprovision in the UK. The nature of the subject means we will never have a perfect picture of the scale of exclusion and who is most affected but we know enough to understand we face a major problem in the UK.

However, while we know there is a serious problem, there is a major gap in our understanding of the root causes of financial exclusion and underprovision, and what interventions actually work to overcome the underlying causes. Moreover, there are major gaps in our understanding of how exclusion affects specific groups of consumers or regions in the UK.

This is where the Centre focuses its research activities. If policymakers and stakeholders are going to promote greater financial inclusion and provision, and help consumers achieve financial security, then we need to:

  • gain a better understanding of the root causes of financial exclusion and why consumers don’ t engage with financial services; and
  • identify solutions that work, and promote best practice.

We want to develop innovative policy solutions that work. All of our planned projects are designed around this practical policy framework.

For example, we are planning a major project investigating which financial capability interventions are actually effective at changing consumer behaviour.  Another example, is the project we undertook looking at the impact of the credit crunch on overindebted consumers which included market led solutions for protecting vulnerable consumers. We are also working on a project to develop a more effective regulatory system which strikes the right balance between protecting consumers and making markets work (see Current and future projects).

We are also taking this a step further by working in partnership with the financial services industry and third sector to create alternative business models that change the economics of access, and make products more affordable.

The causes of financial exclusion and under provision

Consumers are not homogenous and the causes of exclusion are complex and varied. Moreover, the number of consumers affected very much depends on the product sector. But the Centre will focus its efforts on two broad target groups.

Financially excluded: a combination of low disposable incomes and the economics of access in retail financial services means that this group are not commercially viable for mainstream retail financial providers. Alternatively, consumers may face actual exclusion because of a disability. In this case, there may be limits to what the market can provide and innovative solutions and alternative business models may be needed to change the economics of access or remove the barriers to access and develop affordable, accessible products and services.

Underprovided: these are consumers who could afford to provide for their core financial needs but aren’t doing so due to demand and supply side factors and barriers to access (see below).

It is important not to oversimplify why financial exclusion and underprovision happens. There are numerous and complex factors that interact with each other and affect individual consumers and groups of consumers differently.

However, to aid its research and innovation programme FIC categorises the underlying factors into several broad groups (click for further information):