In recent years financial institutions and consumer advocacy groups alike have turned their focus upon “financial inclusion” or lack thereof. Those who are “financially excluded” include many people with low or unstable incomes, or those who have experienced a major upheaval in their lives. Single parents, widowed or single pensioners, migrants, and people suffering from long-term illnesses or disabilities may find themselves excluded, either by choice or otherwise, from banking benefits, credit, loans and insurance.
Financial institutions clearly have a monetary stake in greater inclusion, but consumers can benefit too as banks and other institutions scramble over each other to find new ways to serve the under-served.
Banks are hurting
Of particular concern to finance watchers and consumer groups is the growing number of “unbanked” Britons; according to the Financial Inclusion Commission page linked to above, the World Bank ranks the UK ninth in the world in terms of banking inclusion. An estimated 1.5 million adults remain unbanked, and those who have banks often aren’t faring too well. For instance 26% of the newly banked are “net losers” due to high penalty charges and other fees cancelling out their savings. For the four largest providers, customer satisfaction levels are below 60%.
Accordingly banks are trying to find ways to appeal to new customers and keep existing ones. One notable method to reach these potential customers is offering them a new type of account, commonly referred to as Basic Banking. The basic, no-fees accounts implemented at the beginning of 2016 will be available to customers who do not currently have bank accounts, whose financial situation has left them unable to use their existing account, or who are otherwise unable to qualify for a standard account.
One particularly important feature of the new accounts is that they will not impose overdraft fees or usurious penalties that force the account holder into overdraft. In addition, the accounts will not impose penalties in the event that there are insufficient funds in the account to cover a standing order or direct debit.
Other services offered to regular account holders, such as access to ATMs and onsite services at bank branches and the Post Office, will also be available to basic bank account holders.
Clearly, though, banks still have a ways to go. Recent recommendations by the Competition and Markets Authority (CMA) – such as capping overdraft fees and increasing price transparency on financial products – have been criticised by consumer groups as insufficient to boost competition. And the founder of challenger lender OakNorth Bank, Rishi Khosla, said that smaller firms suffer more from a lack of specialist available loans than from poor price transparency.
Being unbanked doesn’t mean being without options
In any case people are turning away from banks, particularly for loans. Sometimes this isn’t completely by choice, as people who have bad or spotty credit may not be able to get a traditional loan product through a bank or dedicated lender. In fact, credit challenges often discourage people from availing themselves of a tool that could truly help them. What such people fail to realise is that there are still credit options available to them, even if their credit history is bad.
Granted, such credit will likely be more expensive than more traditional loans, which is understandable since the lender is accepting greater risk by lending money to individuals who have had problems repaying their debts in the past. But with the government’s latest round of regulations covering such lenders, customers are protected from having to pay the usurious interest rates, fees, and penalties that some lenders had charged in the past. And when you consider how quickly these loans are processed in comparison to the sometimes glacial pace of approval, processing, and payment for traditional loans, even some people with excellent credit are taking out these short-term, bad credit type loans, just to get their hands on needed funds as quickly as possible.
In this segment of the credit industry, just as in all others, it is important for the borrower to determine what a given loan is going to cost them, and to compare the offerings of different lenders. Some lenders who are aggressively trying to expand their share of the market are offering discounted interest rates and fees, and are providing a level of customer service comparable to that which is offered by banks and other more traditional financial organizations.
Keeping it all in perspective
As we’ve said before on this blog, it would be folly to rely completely upon protective regulations to keep you out of financial trouble. Nor is it wise to put your faith completely in the good will of the financial institutions that purport to serve you. They serve themselves first, and they’re in business to make money from all of us. That’s a given.
Awareness of these basic realities will ensure that you enter into any transaction, whether opening a current account or taking out a loan, with eyes wide open. And willingness to always shop around for the best deals can ensure that you are financially “included” in ways that support rather than compromise your well being.