The fallout of the banking crash and the related bailout conveniently pushes an issue in to the background that has been the focus of some considerable, albeit woefully inadequate, initiatives by the Government and banks: that of the unbanked.
In the past 5 years, the Government has convinced banks to introduce a Basic Bank Account (BBA), a current account without cheque and credit facilities. This would enable clients with a bad or no credit history to open up a bank account. More importantly, the BBA is also accessible through Post Offices – but stopping short of allowing the Post Office to run a bank itself. This is despite the fact that the Post Office enjoys the trust of people on low incomes, and a Post Office Bank would be ideally suited to promote financial inclusion as we argue in a recent report.
Initially, 800,000 BBAs were opened, but more recently, the number of people without a BBA or current account has risen again to 3m. This points to a fundamental flaw in the system – banks’ lack of incentive and willigness to cater for the low income market. The current crisis offers an opportunity to rectify this, but we need to break a taboo: paying monthly fees for our bank accounts. Although it sounds counter-intuitive, for the unbanked, paying an adequate fee for a transparent cost structure is a bargain.
Not having a bank account is expensive. The unbanked pay a poverty premium of around £1000 per year. They pay their bills in cash, and use pre-pay meters for gas and electricity. Many companies charge higher prices for bills that are not paid by direct debit, and pre-pay tariffs for gas and electricity are also higher than the standard ones.
So why do they not open an account?
The issue is complex, but one important aspect is that current accounts, including the BBA, are not flexible enough to suit the needs of people on low incomes. For example, direct debits are taken off the account on a fixed date of the month and cannot be moved. If account holders receive their pay or benefits late, then the payment bounces, or the account goes overdrawn – both of this incurs heavy penalty charges, currently the subject of an OFT inquiry.
Banks argue that they have to make these charges to cover costs, and to be able to offer current accounts for free. They even committed not to charge fees for current accounts in the UK Banking Code. This is in essence fair, as it prevents unequal treatment of clients depending on incomes. But is it really the best way to reduce the number of the unbanked?
There might be an alternative. Some Credit Unions, popular with people on low incomes, have introduced a Credit Union Current Account (CUCA) that provides all the functions of a standard current account. The difference is that customers pay between £1 and £5 per month. In return for this fee, direct debits are processed even if the balance does not cover the amount, and charges for going overdrawn without authorisation are vastly lower than those charged by the high street banks. Some credit unions do not levy this charge at all. The monthly fee allows credit unions to cover their costs.
It seems counter-intuitive to charge people on low income for something other people get for free. On the other hand, we are all willing to pay for something that enables us to save elsewhere. The popularity of the CUCA shows that the unbanked make the same choice: if having a CUCA costs them £120 a year, but allows them to switch to cheaper tariffs for their utilities and similar, this reduces their poverty premium by £880.
Is it time to break a taboo and introduce monthly fees in exchange for transparency and clarity? Looking at the CUCA’s success, the choice of the financially excluded is clear.
The issue is of course complex and requires careful consideration of equitable access, cost structures and levels – they should not be an excuse for profiteering. But having a bank account will become more, not less important in the future. We need to find ways to ensure maximum access.
In the current banking crisis, many rules of the past are rewritten. Maybe it is time to rewrite the banking code and allow people to make their own choices.