Series 6 Episode 5: Delivering inclusive growth - the financial inclusion challenge

Transcript

Tessa Norman: Hi everyone, and welcome to the latest episode of Risk and Regulation Rundown, the podcast where we share our views and insights on financial services, risk and regulatory hot topics. Today we're discussing financial inclusion, an important and particularly timely topic, given the growing focus on this issue that we're seeing from both the government, and from the FCA. That includes government plans to launch a national financial inclusion strategy, plus a range of regulatory initiatives, combined with the FCA's consumer duty and vulnerable customers guidance, which have raised the bar on the support that firms are required to deliver for their customers. To explore this topic, I'm delighted to be joined by Sarah Porretta, who is Deputy CEO of Fair4All Finance, a not-for-profit organisation which works to improve the availability of fair and accessible financial products and services. I'm also joined by Howard Taylor, who is a Director in PwC's Risk and Compliance Transformation Consulting Practice, and who is a commissioner on the UK Financial Inclusion Commission. Welcome to the podcast.

Sarah Porretta: Thanks for having me.

Howard Taylor: Great to be here.

Tessa: Sarah, do you want to kick us off by telling us about the work that Fair4All Finance focuses on and why financial inclusion is so important?

Sarah: Sure. Through the work that we've done, we know that just over 20 million people are vulnerable to exclusion. One of our key messages is, that this is not a niche issue. Lots of people are affected by exclusion in different ways. And it's obviously important because if we want to build an inclusive economy focused on growth, if people are excluded from the safety nets that people rely on and also the products and services people need to take up opportunities like credit, savings, insurance, I don't think we can get there without really improving inclusion in the UK. And this is about helping people fulfil their full potential and take up opportunities. To give an example of that, I think we've all heard about or experienced the cost of car insurance. If you're on a low income, the cost of car insurance could be the barrier to taking up a job in the next town. Really fixing those issues is hugely important. And in the context we've got now around this real focus on inclusive growth, I think financial inclusion is becoming increasingly important. And we work with the community finance sector, but we also have really tried to work with mainstream financial services as well on this issue.

Tessa: Thanks Sarah, a helpful introduction and certainly some of those points around inclusive growth are points we'll come back to later on in the conversation. But before we do that, it would be helpful to explore just a bit more, some of the challenges in this space and why this is such a challenging issue to resolve. What are some of the barriers that you see to financial inclusion, and what are some of the customer needs that perhaps aren't being met as well as they could be?

Sarah: There's a piece of research which looks at the poverty premium, and that looks at basically how much extra it costs you if you're on a low income. Being poor costs you more as you sometimes hear that spoken. And I mentioned car insurance, and prohibitively high costs of car insurance. There are also things like, people who are maybe on fluctuating incomes that can't pay by direct debit, or people that maybe want access to smaller sum credit. They don't want to borrow, or they can't borrow £2,000, but they want to have access to maybe £500 to fix a broken fridge or get the kids some new school clothes, or things like that. And we even hear of people talking about being unable to afford a funeral. All sorts of practical ways that people might need credit on short notice. And the reality is there are lots of barriers that exist where people are excluded from society in general, and then they also impact within financial services. But it's a mix of, whose responsibility is it to cater for design products for and serve those customers. We had a live experience panel at our conference earlier this year, and there was a lady there who had got herself into financial difficulty because of some job changes. And over a number of years, she had gone and got herself some further education, and got herself a better job, and was on a higher income. And had tried to pay down her debts, and sort of many years in, was still facing loads of barriers because of that historical issue around debt. And she kept using these words, 'Why aren't I good enough?' And when we've got a system like that, that isn’t helping people who are trying to do the right thing and be economically active because the products, the services, the way that we use data about those customers works against them, then we have an issue.

Tessa: Absolutely. And Howard, it would be great to bring you in for your perspective here. I know you work with a lot of our clients on these issues. What is the industry perspective on this? You know, where are firm at in their financial inclusion journey and what is their perspective on some of those challenges and barriers that Sarah's touched on?

Howard: Because I would say, at the beginning, you said that regulator and government are interested in this topic. But I think also our clients are interested in this topic. And that's really coming from, I think, a few different places. One is, they've certainly seen a change in the regulatory, but also the social expectation around inclusion. The second thing is there's a genuine willingness, I think, to look at how to do things better for the future and the third is, I think there's a lot of good intent within our clients to do better. And I think that that means that we've seen good progress over the last decade since the start of the chatter on this topic. And now with Labour being in a position of making clear that they want to see change, our clients are thinking through, 'How do we work with the government to make sure that change happens?' But also from a commercial point of view, how do we demonstrate the commercial case for inclusion? That's driven as well by the reality that to find growth and to find inclusive growth, you need to find new markets. And as the population in the UK ages and becomes more diverse, the number of people who are excluded has increased. And therefore, to find growth you need to actually look at how you bring those people more into the mainstream system or work with them to understand how to overcome those barriers.

Tessa: You've talked about that kind of stronger intent from industry to do more. But what are some of the barriers the industry faces, perhaps to reach out to new customer groups or to do more in the space? And what are some of the ways that they can overcome those barriers?

Howard: I think there are a couple of different forms of barriers. One, there's definitely a perception from a risk appetite point of view that some of the regulation doesn't always work in tandem together, and that then sometimes creates conflicts that mean it's hard to overcome. I think there's a piece around actually getting to the nub of what the customers need, in order to access service properly, and how do you implement those changes into the operating model in a sustainable way. We have seen a few, certainly progress in different spaces. If you think about the digital journeys that are now emerging, there's more and more talk about how do we use nudges, how do we use gambling blocks, are there ways we can use AI to better identify customers earlier so we can talk to them about their needs and meet that requirement of consumer duty. There's also discussion about what's the future face of human contact in the context of banking or insurance? And so we've seen progress. But what probably needs to happen is that, certainty over exactly what the expectation is going to be, and actually to work through how that commercial model works in reality.

Tessa: And Sarah, is there anything you'd add to that in terms of the kind of regulatory landscape, and for instance, how we've seen the impact of the consumer duty changing things now that's been in place for over a year?

Sarah: Yes, just to build on Howard's point, I think we're coming now within the context of a Labour government of exclusion is not helpful. We want to try and include more people, in giving them access to products and services that meet their needs. To enable them to become economically active. I think the commercial point is key because, we saw during COVID for example, where when the whole nation was looking at ways to help people at short notice, interest-free overdrafts were extended to lots of customers overnight. There's a model in the US called Small Dollar Loans where banks are able to lend smaller amounts with different affordability criteria. It's looking at the boundaries of regulation and saying, like, we've got this customer segment, what are their needs? What kind of products could work for them? And then working with the regulator to work out how that could happen. But the commercial argument is tricky. Because obviously, that example of Small Dollar Loans, we haven't tried that in the UK. Can it wash its face? But it's back to that piece, as well, around, if it can't, is there still an argument that actually we still collaboration across mainstream financial services to serve that market? And basic bank accounts are a good example. I worked in mainstream financial services as Head of Financial Inclusion in a big retail bank during the time when we were really looking at rolling out basic bank accounts. Well, they're not commercially viable, but they are seen as part of the license to operate of mainstream retail banks paying a proportionate share of serving that market. I think we should be looking at the same things around insurance and credit as well. Because ultimately, if the national goal is growth and inclusive growth, we cannot afford to have people who are excluded from the system.

Tessa: Absolutely. And have you seen much yet in terms of the government's intent in this space? You mentioned that they've signalled they want to do more on inclusion. But is there more you can share with us in terms of what you're expecting to see on that kind of policy agenda?

Sarah: Yes, in spring 2024, before Labour came into power, they published their report on their intention around financial services. And there was a chapter in there on financial inclusion. It doesn't go into a lot of detail, but we've had subsequent conversations with Labour before getting into power, and obviously since then. The public commitments that have been made are to have a Treasury ministerial-backed committee, to develop a financial inclusion strategy. And we've seen some broad policy areas that that will look at. Car insurance and prohibitive cost of car insurance, being one. Rolling out side-cost savings model, which Nest Insights have done lots of work on. Also looking at banking hubs and whether they can be broadened out to provide other more inclusive services. There are some key policy areas. We would also like to really see some solutions focused on credit as well. The timings are a little unclear at the moment. We don't have any clear sense of timings on that. But there's a huge amount of anticipation and goodwill. One of the things that, as an industry, we need to be careful about is building on the evidence base that we already have. So this should be going right back to the beginning and asking what could we do in financial inclusion. Fair4All Finance has had five years and a reasonable amount of funding to really establish and evidence base working with community finance, working with all the main retail banks. I think there's a lot that could be done relatively quickly and that's what we, and lots of other stakeholders in the industry would like to see.

Tessa: Absolutely, and you mentioned the banking hub there. And I know the government's made a specific commitment around 350 additional banking hubs, looking at quite a big expansion there. And there's been a lot of focus on that and the new access to cash rules that have come in. But what's your view on what we need to see to make sure that those hubs really work for consumers?

Sarah: Yes, I think there's a risk here that we're putting a lot of expectation on what banking hubs can deliver, when really we're quite early in the rollout. I've definitely heard conversations around, could there be debt advice? Or could community finance organisations be housed within banking hubs? And of course, there's potential to explore all of that. But that's not the system that's designed at the moment. And we're relatively early in the rollout. We just need to be a little bit cautious about expecting banking hubs will fix all of the things that I was talking about, because I don't think they can do all of that. However, I would really welcome a conversation about, maybe how they could take on more. But there needs to be the buy-in from the organisations that are funding banking hubs? Who are funding them for a specific purpose?

Tessa: Yes, of course. And Howard, I know you have been having conversations with our banking clients around this and around how they're rethinking their channel strategy and making sure it's fit for the future? I mean, how are banks thinking through this? How do they meet that really quite tricky balance between meeting their customers' varied needs and doing so in a way that balances their commercial considerations as well?

Howard: I think Nikhil actually touched on this in his speech a week or so ago. That as the world evolves, the regulatory architecture, but also the commercial considerations, they also need to evolve. I think realistically, what we're seeing in society as a whole from those who are able to, is a move to digital and to new technologies. And that technological progress, it's going to be difficult to hold it back. And so, things like when you talk to our clients, it's not like they're saying, 'We don't want to do face-to-face, we only want to do digital.' That's not the case at all. What they're saying is, 'We need to do digital because that's where the world is going.' How do we get the balance right to make sure that those who need face-to-face also have access to those services. Whether that's realistically through a hub or a branch, or through some other model, I think that's still a little bit up for grabs in terms of really trying to work out how you get that balance right. And I think there's a piece about the broader social problems that mean that those who are currently walking into branches or into banking hubs are often people in society who have a greater deal of needs. And at the end of all of these different services, whether it be GPs, broader social care, banking or other, are the same families or the same individuals. And so how do you start to make sure that you don't forget that at the end of all these topics, there is a real person who is probably just like you and I, but gone through a period of being in difficulty, and therefore you have to see financial inclusion in the context of broader social inclusion, and to drive inclusive growth you need to think about where the boundaries are, and also the role - not just commercially, but also socially - that the financial services organisations are going to play. But there has to be collaboration with the telecoms companies and other players in the economy.

Tessa: Yes. I think that's something that's really come out through this conversation that financial services are just one piece of that puzzle. And of course, can't solve all these issues in isolation. Sarah, is there anything additional that you'd really like to see in terms of how government can work together with industry to help drive forward this, and solve some of those issues that perhaps fall outside of financial services alone?

Sarah: Yes, digital inclusion is a good example. Because that report I mentioned before does mention digital inclusion, but in the context of financial services. And actually, financial services cannot fix digital inclusion on its own. And there isn't really a nationally coordinated effort for, say, the NHS and telecoms companies, as Howard mentioned, and the BBC, and loads of other organisations for whom it's a challenge for them in terms of viability of keeping face-to-face or other services going. But back to that inclusive growth point, there's huge value in having as many people in society digitally included as possible. But it's not something for financial services to fix. I do think there needs to be some more national collaboration amongst all those organisations that have skin in the game to work together. And it happens in pockets, but it's not happening at the strategic level that we need it to. And at the scale that we need it to.

Tessa: Yes, absolutely. Howard, you referenced that recent speech from Nikhil Rathi, and he did very much make that link between financial inclusion and economic growth. I think with the regulator's recent objective for competitiveness and growth as well, and of course, the huge focus from the government on growth as well, I think it makes sense that we're going to see more and more of a focus on that. We're coming towards the end of our conversation, but I think it would be great to finish with some really kind of practical and positive examples of some of the initiatives that you've both seen, to really demonstrate what industry can achieve. Howard, what are some particular examples you can draw out that have worked particularly well?

Howard: I think we're seeing quite a few. We've definitely seen improvement in banking apps and simplifying them, and simplified communications. And that probably needs to carry on. And I think there's a real question about, as communication formats change, and the social norms change, how do you as financial services start to reach out beyond, paper-based terms and conditions to videos and other formats. And we've seen some explorations from our clients and what that means. And particularly how you simplify the explanation, the understanding of the products and the kind of onboarding space. And we've also seen really good examples from a disability inclusion perspective of actually building software or capability into your platforms that allows people who are deaf, for example, to access things more easily. I think there's good evidence that when groups of people who are normally deemed excluded, feel that mainstream organisation is catering for their needs, all of a sudden what we've seen is examples where the uptick in customers wanting to use that service and trusting that service, really works well. And that goes to the broader point that you need trust in order for people that are excluded to feel like they can access mainstream systems.

Tessa: Sarah, is there anything you would add to that in terms of what you've seen?

Sarah: Yes, some of the community finance organisations are kind of pushing the boundaries and looking for ways to better serve customers. And I think, back to that lady that I talked about, 'Why aren't I good enough?' The reason she's not good enough is actually the data about who she is, is working against her. And I think we're working with Salad Money, for example, that use open banking data rather than credit-referencing data to really understand, can this customer pay? Could we lend to them? And there's some ongoing work to really build that evidence base around those different data points that can actually give a better indication. And that would help someone like her be included back into the system. Because she can afford to pay. And she's shown that over a number of years. But at the moment, the credit referencing data doesn't say that. It's back to as Howard said, really thinking about who are these customers that are on the other end of the system? And what do they need? We talk a lot about innovation and creativity and using technology for good in this country, and I think we can do more. You know, we've got great minds that can really think about some of these problems and come up with clever ways to fix them. And at the moment, that maybe isn't happening, well it's happening in pockets. It goes back to that question around, do we really want to serve this market? And if we really want to serve this market, and everyone buys into that, then we can use that innovation and creativity, we can use regulation for good and get everyone behind it.

And it's back to that point I made right at the beginning around proportionate share. If we're talking about 20 million people who are potentially excluded, they cannot all be served by community finance organisations or credit unions. That has to be a responsibility also of mainstream financial services. I think we've got an opportunity here to be the most inclusive nation and use our financial services sector, which is so strong globally, for really good ends.

Tessa: You raised a really interesting point there, Sarah, around some of the challenges around data. Howard, what were your thoughts on that in terms of how firms are approaching those challenges around data?

Howard: I think firms are really cognisant of the problems of data and the need to solve them. Within the context of financial services, you've got a number of legacy systems and legacy integrations that mean that data is currently still in place has fragmented, and I think what we're also seeing is a post-COVID change to the way that data needs to be understood. Before COVID the sort of regular, normal rhythm of why somebody ended up in an excluded position was very much linked to particular occupations, life events, and other things. And COVID mashed all of that up and actually changed some of the social norms that we saw. And therefore, what many organisations are now doing, is saying, what's the new metrics that we need in order to provide effective oversight of better customer outcomes, and to better understand customer needs? Because the question is no longer,what is wrong with someone? Or what makes somebody a vulnerable customer? The question is, what does a customer need in order to be fully integrated into the system or to get the best out of a product, or what data do we need to make sure that that product is designed effectively to the points that Sarah was making earlier in this conversation? And so we're seeing this transition from a data perspective around, how do we capture accurate data that makes those metrics useful, and demonstrates effective board oversight of the challenges. Now, for newer organisations who have new systems, and less legacy systems, having cleaner data, as we can see from some of the newer banks, is much easier. For legacy organisations, they're going through that journey.

But then there's also this piece around the regulatory rules when it comes to affordable credit. And this is a discussion that I've been having with the FCA and others, Salad is a good example. There are a couple of others that we've been talking to, where we're like, 'Can we rethink how those rules around people's credit history are used? Do we always have to look backwards? Can we, to Sarah's point, look forward and forgive people of past mistakes? Because people make mistakes and life happens. What we need to happen, I think, is this dialogue between the industry and the regulator around the sort of permissibility of the risk that can be taken in order to make effective lending decisions that may require a bit more consideration of the future rather than what's happened to somebody in the past. Organisations will tell you that post-financial crisis, that the rules were tightened. And so maybe we need to have a dialogue about what the effective rules of the future are, which again builds on that point Nikhil made a week or so ago.

Tessa: Absolutely. And as you say, it's definitely something that the FCA have hinted at that they're looking at. But building on that, and giving some further clarity to industry would be really helpful to enable firms to take that forward. As we look further ahead, Howard, what are your closing thoughts on the future agenda in this space, and how the industry can work together with government and other sectors to drive progress?

Howard: It's really that we need to look at the system holistically, and as Sarah said, what we need, is when and if the national financial inclusion strategy comes, that strategy to provide the framework for organisations to then say, 'This is how we operate in that framework.' Because at the moment, in the absence of a national vision for financial inclusion what we've got is pockets of good activity, many of our clients, many of the industry are doing many good things. But if we could help bring all that together with one vision, I think that would actually progress the agenda because it would allow that conversation that Sarah mentioned to happen, to say, 'This is, therefore, our role in this, and this is, therefore, both commercially and socially how we, within the context of a market economy, create growth, because we changed the parameters of what the accepted norm is.' And if we look at other forms of exclusion historically, where now some of those barriers have been broken down, it really came about because of some stated government policy or vision that allowed that dialogue to be had, to start to change the way in which society thinks about those groups of people. And financial services is just one part of a very big puzzle. And I worry that without that vision, great pockets of effort will get lost because they have nothing to bring it together.

Tessa: Yes, absolutely. And I think this is certainly a topic that makes sense for us to return to over the next coming months, when we hopefully get more of that clarity from government on that vision and financial services role within that. Thank you both so much for joining the podcast and for sharing your insights and experience. To our listeners, I hope you've enjoyed this conversation. As always, please subscribe to future episodes and please rate and review this series, as it helps other listeners to find us. If you'd like to hear more from us on risk and regulation, please look out for our regular publications on our website, which we'll link to in the show notes. And I look forward to speaking to you again next month.