UK households up and down the country are struggling to live within their means, often resorting to extortionate payday loans to get by. Creating better, fairer access to credit for those who need it most starts on a local level, argues a new report.
This month marks the 10-year anniversary of Lehman Brothers’ crash into bankruptcy – commonly viewed as one of the main triggers of the global financial crisis that followed thereafter.
Sunnier economic times may be upon us, relatively speaking, but there are still many people in the UK who continue to feel the squeeze on living standards.
With real wages still struggling to keep pace with inflation, many households up and down the country have resorted to borrowing beyond their means. According to the recent figures by the Office for National Statistics (ONS), the saving ratio among households out of their disposable income slumped to 4.9% in 2017, marking the lowest level since records began back in 1963.
The repercussions of such wholesale fiscal insecurity are concerning. Increasing numbers of individuals and households are resorting to unsecured consumer credit as a means of keeping the wolves from the door. An unforeseen charge bill or invoice – say, a boiler breaking down or the car fails its MOT – can mean sleepless nights for many as they agonise over where the money will come from.
Indeed, according to a survey by the FCA last year, millions of Britons admitted they would find it difficult to pay an unexpected bill of just £50. The strain can be so heavy, that 19% of respondents in a recent survey by the Chartered Institute of Personnel and Development (CIPD) claimed to have suffered from lower energy levels and fatigue during working hours. Even those earning well above the average UK salary of aren’t immune.
Tackling financial exclusion
If the ability to save for a rainy day is looked upon as a barometer of financial resilience, we can safely say the UK is facing something of a savings crisis. By the same token, we are spending well beyond our means. According to recent research by the ONS, British households spent roughly £900 more on average than they received in income last year.
Such statistics form the basis of a new report by Salary Finance – presented to the House of Commons on September 5 – which posits new means of ‘credit emancipation’ in the UK in a bid to tackle financial exclusion.
According to other statistics cited in the report, assembled by ResPublica, there remains a sizeable chunk of the country’s adult population without access to even the most basic financial services, such as a bank account, and who are unable to navigate simple, day-to-day financial transactions. There are believed to be 1.7 million ‘unbanked’ adults presently excluded from the mainstream credit market.
The report identifies a correlation between this cross-section of society with some of the UK’s most deprived places, where unemployment, low income and in-work poverty are commonplace. As a result, it’s often the case that these communities face “a poverty premium of higher costs for goods and services, including insurance, energy bills, and credit,” claims the report.
The report makes the case for a ‘place-based’ approach in order to allow individuals living in such communities to build up credit and get themselves back on their feet. The strategy centres on the improvement of aggregate credit scores at a local authority level as a means of addressing the likes of unaffordable credit and debt.
Both public and private sector employers also have a role to play, says the report, in helping to improve the fortunes of those who have fallen on hard times. This plays into the idea of salary-deducted lending – schemes in which employees are able to apply for loans delivered through their employer’s payroll mechanism.
Given that the current alternatives comprise unaffordable credit cards and payday loans – or in more desperate cases, loan sharks – the offer of salary-linked lending for employees with poor credit histories makes a lot of sense, as corroborated by recent report by Harvard’s Mossavar-Rahmani Center for Business and Government, which advocated “employer-sponsored fintech benefits”.
Improving local authority credit ratings
Salary Finance works with employers to offer access to a range of salary-linked products designed to help employees save money and borrow sensibly. Since launching in 2016, the group has seen mounting demand for its products, which include saving schemes and emergency loans.
By working closely with employers, Salary Finance helps create significant cost savings though lower customer acquisition costs and reduced credit risk – these savings are then passed onto customers, who are able to charge lower interest-rates on loan products. For example, on an average £3100 loan, employees can expect to save £600 in interest payments.
The potential for salary-deducted lending across the UK, as a new source of consumer finance, is significant, claims the report. A shift of £1 billion of lending from other forms of consumer credit into such lending would lead to a reduction in debt service costs of approximately £200 million.
The creation of such a lending culture could reap positive results in areas such as the London Borough of Newham, cited in the report, where an estimated 22.7% of adults are overburdened by debt – the highest rate in the UK. The borough’s median income comes to £15,704 – £6500 lower than the national average.
However, Newham council is seeking to redress this imbalance. In 2016, it launched Moneyworks, a ‘one-stop shop’ providing access to affordable loans, financial products and advice in opposition to payday lenders. The council has also issued a crack-down on the advertising of high-cost loans, with lenders with APR interests in excess of 400% banned from displaying offers on council-owned property.
However, data is yet to be published on how successful the programme has been in diverting residents from the temptation of high-cost loans.
The report also trains an eye on the potential of improving the socioeconomic standing of an area through upgrading aggregate credit scores.
According to its calculations, an improvement in a local authority’s aggregate credit rating, from the bottom 10% to the middle of the credit score distribution, would equate to an improvement in median weekly earnings by £36 – or just over 9%. This would also create an improved employment rate of roughly three percentage points, and an increase in home ownership of six percentage points.
“Building financial resilience by increasing credit scores at the neighbourhood or local authority level can form part of a place-based strategy that can help to turn around disadvantaged communities,” says the report.
“By connecting residents to comprehensive credit building resources, products and financial education services places can seek to uplift the average credit rating of a given area. This would allow less money to be paid on servicing debt and more to circulate within households and local economies, ensuring that ‘income inequality’ does not become an unsustainable cycle of debt and sustained ‘expense inequality’.”
A localised approach
In order to achieve these outcomes, a truly ‘localised approach’ needs to be adopted – whether it’s commissioning debt advice or other financial capability services – through which community organisations are all pulling in the same direction. Unfortunately, at present, intervention programmes such as Moneyworks in Newham are still an exception rather than the rule.
In addition to salary-deduction schemes and the onus on local authorities to take more of a place-based approach to credit building, the report also calls on central government to explore the benefits of an area-based credit building pilot.
“This could be undertaken in collaboration with a Metro-Mayor and a leading Fintech partner like Salary Finance,” it suggests. “This would seek to devolve an element of debt management funding from the Money Advice Service to develop policy solutions and determine where and how resources should be committed. HM Treasury should evaluate the economic impact of this public policy approach to credit emancipation.”
Elsewhere, the government is also urged to provider greater capital for trusted lenders, including Credit Unions and community development financial institutions, while coming up with a clearer policy on financial inclusion.
As the report rightly concludes, “building good credit will not solve all financial difficulties or eradicate the root cause of inequalities which contribute to financial exclusion and indebtedness”.
What is needed, rather, is the creation of greater access to fairer and more affordable financial products, such as low-cost loans, with as much advice and education on offer to households as possible. Financial exclusion might be a national issue, but work to remedy this needs to begin locally.