At some stage in our lives, most of us will have felt like we’ve been excluded from something in one way or another, and that includes when we’re managing our finances. Let’s take a look at what financial inclusion is, who it applies to and what efforts need to be made for a financially inclusive future.
What’s financial inclusion?
You’ve probably heard terms such as ‘levelling up’ being used by a lot of politicians during the cost of living crisis. In early 2022, the government published its White Paper on ‘Levelling Up the United Kingdom’, setting out plans which it says will promote economic, academic and cultural success in parts of the country that have been lagging behind due to geographic inequality. The government intends to do this by boosting productivity, spreading opportunities, and restoring pride and empowerment in local communities.
At its core, financial inclusion’s about giving people equal access to financial services, no matter who they are. But with 1.2 million adults in Britain currently not even having a bank account, we can see that we’re a way off financial equality as things stand. The reason why you’ve been financially excluded won’t always be as simple as where you happen to live. It can play a factor along with other circumstances, characteristics and values that you hold.
Who’s likely to be financially excluded?
The list of those who may find themselves excluded from a financial product or service is non-exhaustive. Many of us will have had periods in our lives when our finances aren’t in the place we’d like them to be, and may have been declined for products such as credit cards or mortgages. For some of us, this will improve with time and perseverance, but that can be harder if the financial system just isn’t designed for someone in your situation. You may have a particular financial vulnerability depending on a range of factors.
Whether you’ve a disability or neurodiversity
There are four million people with disabilities in the UK living in poverty. This suggests that if you’ve a disability, financial exclusion might start long before you get to the point of trying to access a financial product. It may be that you face a higher cost of living due to any special equipment or adaptations required in your home. With 50% of working age disabled people unemployed, it can be harder to find an employer that’ll adapt to your needs, and shockingly, you’re more likely to be paid less than non-disabled people doing the same jobs.
If you’ve moved to the UK from another country
CEO of Bloom Money; Nina Mohanty says: “What we often find in immigrant communities in the UK is that people prefer to use cash. . . there’s this certain reluctance to trust financial institutions.”
It can be difficult to get to grips with a financial culture that may be completely different to the one you were brought up with. Before you even start looking at the numbers, you could find yourself financially excluded simply because English isn’t your first language. Then, of course, there’s also the language of currency. If you’re not used to pounds and pence, it could take some time to understand how its value compares to the currency that you’ve previously dealt with. It may also be harder for you to gain access to financial services if you’ve previously had no economic ties to the UK and therefore don’t have a credit history.
Dealing with financial products can be challenging if they work in a way that doesn’t align with the values of your religion. For example, if you’re Muslim, you may find it difficult to find an investment product that’s Shariah compliant as there are fewer available that adhere to these rules.
It’s been well publicised that there’s a gender pay gap in the UK. As of April 2022, women were, on average, paid 14.9% less than men. This can have a domino effect on other aspects of women’s finances. For example, PensionBee research shows that the average size of a woman’s pension pot is 39% smaller than men’s. As well as the lack of pay equality, this can be down to the fact that women are often the main childcare providers, so are more likely to take extended periods off work, and therefore have less cash spare to contribute to their long-term savings.
For many young people these days, before you’ve even begun to start saving for the future, you’ve already been saddled with the debt of a student loan, putting you at an immediate disadvantage. This might be the first time you’re introduced to things such as credit and interest rates. It can be a debt that stays with you for a long time, especially if you’ve not received much education on the subject.
Our lives are becoming increasingly reliant on technology, and our finances are no exception. As you grow older, it can be difficult to adapt when you’re used to a certain way of dealing with money. You might prefer to do your banking in person, which is becoming increasingly difficult, with banks and building societies closing at a rate of about 54 each month.
A common theme amongst those who’re susceptible to financial exclusion is the reliance on credit ratings across some products. From mortgages and tenancy agreements, to credit cards and mobile phone contracts, all of these and more will usually require a check on your credit history before lenders will accept your application. If your credit score isn’t high enough, you could find yourself unable to access many of these services. This can become a vicious cycle because without access to financial products, you’ll find it more difficult to improve your credit score.
For many groups, the problem can be beginning to build a credit history in the first place. If you’re new to the UK financial system, then you won’t have a credit score - you’re essentially ‘credit invisible’. You may find yourself having to rely on someone that can vouch for you, such as a family member, for financial matters. For example, sometimes a tenancy agreement will ask you to provide a guarantor; someone who will pay your rent for you if you’re unable to. This simply might not be an option to some people - there might be nobody available to help, or perhaps the situation would bring about feelings of shame.
If you do have a credit score, there are many things that can affect it, including:
The amount of money you owe
Missing or making late payments
The length of your credit history
Making too many credit applications
If you have any County Court Judgements (CCJs) against you.
How can we achieve financial inclusion?
Unfortunately there isn’t a magic wand to make it so we’re all financially included. But there are a few things that, with the help of the government and financial institutions, it could be realistic to change.
If we’ve the correct knowledge of finance, and the associated services from a young age, this may better help us to be financially resilient in the future. There’s currently an inconsistency across the UK nations as to when we’re taught about finance, though it’s been proposed that financial education should be made compulsory at primary school age in England to bring it in line with Scotland, Wales and Northern Ireland.
Improve accessibility to credit agencies
There are ways in which you can access and check your credit score, but often this comes at a cost which can be difficult to afford if you’re on a low income. If there were more options at an affordable rate, it may be easier for everyone to monitor and improve their progress.
Eliminate the jargon
There’s often a lot of paperwork and difficult language involved with some financial policies, which can be especially difficult to deal with if you’ve certain types of disabilities, or if you’re not a native English speaker. Simplified language and the use of modern technology may be one way to improve this.
Diversity within the industry
Head of Communications at the FSCS; Emma Barrow says: “I remember at the first financial services company I worked for, the very first thing I was asked was, ‘how did you get this job? You’ve not worked in finance before’. And it really opened my eyes to that revolving door of people who have always worked in the industry.”
Only 23% of senior roles at financial firms are held by women, only 1% of fund managers in London identify as black and only 18.5% Asian. If communities that are more likely to be financially excluded were better represented, then there may be better understanding of the issues faced by those communities within financial institutions.
There’s clearly still some work to do before we reach that ultimate goal of ‘levelling up’ society. The discussion continues over on Episode 15 of The Pension Confident Podcast where we ask how we can achieve financial inclusion once and for all, and dig into the issues preventing this from happening. You’ll hear from CEO of Bloom Money; Nina Mohanty, Head of Communications at the Financial Services Compensation Scheme (FSCS); Emma Barrow and CDO of PensionBee; Matt Loft. You can listen to the episode, watch it on YouTube or read the transcript right now!
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.