What is financial inclusion and why does it matter?

In the UK one in four families is now classed as low-income. What does that mean? In 2017 the definition of low-income ranged from earning less than £144 a week for a single person with no children to £401 a week for a family of two adults and two children.

The truth is there is no hard and fast definition of low-income: it is defined in terms as both relative and absolute, based on figures that change from year to year and those on a set baseline from 2011-12; it can refer to household income either before or after essential bills; it might or might not take into account savings. The phrase low-income is a deceptively tricky and complex beast.

But, if we broadly accept that a range of £144 to £401 a week is one level beneath which we might class people as having a low income, then how can people trapped in them be helped?

This is where financial inclusion comes in. People with high household incomes, who own expensive property and luxury goods, have no problem accessing good credit – they have access to lenders who offer them cheaper credit, because they have more to give back should they default.

People with a low income or little or no savings – one in four families now have less than £100 in the bank, which means an unexpected expense like a washing machine breakdown can be disastrous – and fewer high-value possessions are viewed by lenders as higher risk. So they will have less credit offered to them, higher interest rates, or might, if their credit rating is poor, be unable to access credit at all.

People on the lowest incomes already pay up to 40 per cent more for electricity when given no option but to pre-pay for their power, which adds to what’s called the poverty premium – meaning people on the lowest incomes pay anywhere between £490 and £1,200 per year more for the same utilities, bills and credit than people on higher incomes.

Stack of multicolored credit cards close-up view with selective focus.

And as this week’s cover star, Exeter Big Issue vendor Ann explains, the rollout of the government’s flagship benefit system Universal Credit is adding exponentially to the problem. According to Islington Council, 75 per cent of recipients have fallen into rent arrears since the rollout began in June. Again, these are people most likely to be excluded from accessing affordable credit to help them out.

With increasing numbers of people in the UK who are financially excluded, it has never been easier to become trapped in spiralling debt.

That is what financial inclusion means, and why it is crucial that it is increased.

So how do we improve financial inclusion?

At present, 13 million [PDF] of the lowest-income individuals in the UK – around 20 per cent of the population – are financially excluded by mainstream banks and lenders, who use traditional credit scores to assess creditworthiness, an approach typically unsuitable for these individuals. Financial inclusion means ensuring access to bank accounts to everyone who needs one – including people with no permanent address. The move towards a cashless society is accelerating apace, but those without access to mainstream banking risk being left further behind. And financial inclusion also means not paying extra to access the same financial services as wealthier people.

The move towards financial inclusion means working to create a level playing field, to extend access to vital everyday financial tools to low and middle-income individuals and households. However, access to finance and access to good finance are two very different things.

As Big Issue founder John Bird has observed, “it is very expensive to be poor”. He knows what he’s talking about: raised in London’s slums in abject poverty, as regular readers know, he has fought his way up, which is why he set up this magazine – to give others who are in most need the chance to get on their feet financially. To bring them back from the margins.

Now, as a crossbench peer in the House of Lords, Lord Bird is fighting to push the Creditworthiness Assessment Bill through Parliament, which would ensure that fair credit is available for those who need it most. The Bill is awaiting its Second Reading in the House of Commons, having made its way through the House of Lords.

For too long, regular payments – sometimes over years or decades – made by renters to landlords or housing associations have not been taken into consideration by credit companies. This has left an estimated 5.8 million people invisible to the financial system, limiting their ability to access fair credit. If the Creditworthiness Assessment Bill becomes law, those rent payments will have to be taken into account by anyone offering credit.

What is Big Issue Invest doing to encourage financial inclusion?

No one is doing more to encourage financial inclusion, and the companies working to open up access to affordable, fair credit, than Big Issue Invest, the social investment arm of The Big Issue.

In the march towards financial inclusion, equality of opportunity to access the financial services we all need to manage our money, absorb unexpected costs and smooth out big expenses over time is vital. 

People with irregular income, closely linked to a lack of job security, need responsible lenders who make a personal connection with their customers and can talk through their income and expenditure to develop an understanding of their future ability to repay loans, rather than pushing unaffordable and inflexible credit.

We help those who need it most, when they need it – Over half of our customers have a household income of less than 15k pic.twitter.com/ghzXj9JVwU

— Moneyline (@moneyline_uk) January 8, 2019

Big Issue Invest has invested in responsible personal lenders Moneyline, Street UK, Fair For You and Five Lamps. Each sets a good example of how to serve people previously excluded from affordable finance. However, there are still not enough responsible finance alternatives in what is a growing market.

The End High Cost Credit Alliance, founded by actor and activist Michael Sheen, is raising the profile and promoting the work of the responsible lending sector, and the government recently earmarked £55m from dormant bank and building society accounts to increase access to affordable and appropriate credit.

These initiatives in conjunction with Big Issue Invest’s commitment will help to create a more financially inclusive future in the UK.

Financial inclusion, contactless payments and Big Issue vendors

This winter, The Big Issue has been trialling a contactless payment system with around 20 vendors in London, Bristol and Birmingham using devices provided by iZettle. Not only will this help the thoroughly modern, cashless reader buy their favourite magazine, but it will plug vendors directly into the financial system that has previously excluded so many of them.

Money from contactless sales goes directly into the vendors’ bank account. While this sounds simple, it is anything but. Many vendors have historically been unable to open bank accounts as they do not have a permanent address or valid photo ID. The Big Issue Foundation continues to help vendors out with these issues. But a 4G phone with sufficient data may also be required to operate a contactless payment system. And many vendors will not have access to this technology.

Dean-Telfer-Bristol-iZettle

Dean Telfer was one of the first vendors to receive the device in Bristol

Still, it is the first step on an important road as The Big Issue and our vendors look to the future in an increasingly cashless society. Debit card payments overtook cash for the first time last year, according to UK Finance, while the Access to Cash Review warned that up to eight million people could be left behind if society goes totally cashless.

Chris Falchi-Stead, director of sales and operations at The Big Issue, explains: “We are really pushing the contactless revolution at The Big Issue. Our goal is ultimately to equip every vendor in the country with a contactless machine.

“Things have changed dramatically in the space of a few years. What we are hearing from vendors more and more is that people say: ‘I’d love to buy one but I don’t have any cash.’ It’s the new: ‘I’ve got it already!’

“So our vendors are very positive towards going contactless.”

And vendor Mike, who sells the magazine at Bristol Temple Meads, added: “It’s been working brilliantly, it’s doubled my sales. There are lots of people that walk past me and now see that I have a card machine and stop and buy one.

“People are really happy that we are moving with the times and that they can actually buy one with contactless.”

Change is coming, and it is vital that we future-proof our magazine and our vendors. But the path to all Big Issue vendors joining the contactless revolution is both long and complex.

And new for 2019 we bring you The Big Exchange

In 2019 Big Issue Invest is launching The Big Exchange – a mobile-first platform that offers an ethical and inclusive new approach to banking, saving and investing. Developed in conjunction with Aberdeen Standard Investments (ASI), Columbia Threadneedle Investments, AllianceBernstein and Alquity, the revolutionary app will let users track how their funds support the United Nations’ Sustainable Development Goals and allow them to switch their preferred area with just a tap of the screen.

We're shaking up finance with The Big Exchange – a blockchain-based mobile-first platform that offers a new approach to banking, saving and investing.https://t.co/2RT8Jt48bf

— Big Issue Invest (@BigIssueInvest) November 21, 2018

Every investor and saver – which could be any of us – will build up a digital ‘social passport’ which will track, encourage and reward their positive impact. The impact platform, dubbed The Big Funds, is just phase one of The Big Issue’s ambitious project to dismantle poverty through impact investing and ethical financial services for all. The Big Exchange has received indications of support from major institutions for at least £1m in funding. The project is currently in the user testing stage, with a beta version to be launched early this year.

Read the full article in this week's Big Issue.

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