Coffee House

Britain’s banks fail the poor

28 July 2014

Britain’s banks aren’t working for the poor. We, the better off, might moan when our internet banking crashes or in-branch mortgage advisers can’t meet us on Saturday mornings; but these are frustrations the poor can only dream of. The individuals and families most in need of ethical finance, clear rules, reliable advice and appropriate products, have almost nowhere to turn on our high streets today.

As a result some people never bother: 1.4 million people in the UK have no transactional bank account. For others, the banking industry’s hidden charges, penalties and standard fees mean they crash out of mainstream finance in even worse shape.

Exasperated and bruised, many turn to the kind of people you wouldn’t want looking after your grandmother. Ruthless legal and illegal lenders, free from ethical competitors, swarm around the vulnerable and the worried. Almost one million people say they use payday lenders because they can’t get credit elsewhere. And the broader high-cost credit market, including pawnbrokers and home-collected credit, has grown by billions of pounds in recent years.

Exclusion from banking is only one concern for those considering personal indebtedness in Britain. We have a problem. Household debt has almost doubled in a decade to £1.44 trillion. Seven million people now use high-cost credit. More than 300,000 people borrow from dangerous loan sharks and more are too poor to go bankrupt.

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Behind these numbers are broken lives; mental illness, a tragic sense of shame, physical strain, relationship breakdown and poverty flourish thanks to problem debt. Some people are driven to suicide and many more consider it: one in three getting advice have either attempted or contemplated suicide as a result of their debt.

Today, the Centre for Social Justice recommends ways to prevent problem debt, support people hit by it, create market competition to improve lending products, and nurture a much stronger savings culture to build resilience.

To create ethical lending we propose a new network of community banks. These banks, free from onerous regulation and a profit motive, will offer a better choice for those unwelcome on the high street. The government’s cost of credit cap is narrow, simplistic and will not work. We need more competition in the high cost lending market not less.

Other reforms include: auto-enrolment products for employees, a range of basic financial products people can understand, expansion of charity-based debt advice and work in schools to increase financial literacy. All published in good time for manifestos.

Work to reduce problem debt should be high on the list of social justice priorities for our plotting political parties.

Christian Guy is Director of the Centre for Social Justice

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Show comments
  • Anna5577

    I know that in our country there are many poor families who are trying to survive and to ask for support from lenders! I was upset that some loans driving the poor people into a debt. I’m shocked that the material situation brings some people even to the suicide! I think there should be more financial products intended for low income people. And loan sharks should stop charging their sky high interest rates! Anna for Vita Loans.

  • Iain Hill

    Have you never heard of credit unions?

  • Leonidas

    Take a leaf from the third world. Micro finance for the most part works there so why not try it in the UK?

  • Terence Hale

    “Britain’s banks fail the poor”. Oh ! What a coincidence they also fail the law.

  • Alexsandr

    lending to the uncreditworthy in the US caused the credit crash.
    wonga et al charge high interest rates because they roll their fees up into the rate charged.not very transparent but keeps it simple. And setting up a loan costs money. and if the loan is a small amount and for a short time then you get a high interest rate. The banks will probably lend to the poorer members but will change an up front fee to cover their costs, and high interest rate because of the risk.
    If you lend money you have to calculate the likelihood of the borrower not paying the loan back and thats how an interest rate is calculated.

    If the banks are forced to lend to people without the means to pay back, then they will be forced to increase rates for credit for those who can so cross subsidise the unprofitable.
    So Christians idea will increase costs for mortage payers, credit card holders and business lenders. That will help.

    • The Masked Marvel

      No doubt the author assumes that in this fantasy world he’s concocted they’ve also banned banks from using derivatives, trading debt, and credit default swaps, or doing much of anything else with their money other than redistributing it as described above.

  • London Calling

    Since when was a Bank for the poor? ban bedroom tax and lower council tax if you really want to help the poor and wage increases would be helpful…..far too many peoaple are in debt because of it and I dont see any change now or hear voices of support from those in power to represent the majority, you cannot just say we represent the hard working people, when the hard working people are being crushed
    to a pulp by the system………….:(

    • Alexsandr

      what has banking got to do with spare room subsidy? I reckon the most likely cause of problems for the unemployed are those with unsecured lending they took out when they had a job that they cant afford to service now/

  • The Masked Marvel

    NB the new Coffee House editor: The link to this article on the main page is wrong. It seems to have taken me to an editorial in some student SWP newspaper.

  • Rhoda Klapp8

    What I mean is, don’t pussyfoot around, it isn’t problem debt, it’s problem people, who will borrow all the community bank will lend them and then go to payday loan companies.

  • Rhoda Klapp8

    There is a number of people, how large I don’t know, who do things without due consideration of the consequences. In any and all areas. Smoking, over-eating, bad spending, binge drinking, whatever. They have the same status and rights as the rest of us (all of whom do something stupid some of the time). This post suggests givng them another crutch, at the expense of.. whom? And if it is, as I suspect, us who will pay, why? Why do people who look after themselves get to pay for those who don’t.

    To all those who think this is opposed to the views I expressed on the fatty thread, all I can say is ‘Look over there, a spider!’

  • David J Timson

    Credit unions?

  • HookesLaw

    Giving loans to bad risks was the start of the crash

  • Smithersjones2013

    Britain’s banks aren’t working for the poor.

    Who is this moron? Banks are not a social service! No businesses are!

    • pointlesswasteoftime

      No, not a social service but they are a social burden when they need to be bailed out and hence, should be accessible to everybody (even the poor pay tax – VAT etc).

      And then you wonder why capitalism gets a bad name?

      • Alexsandr

        the banks have their segment of the market, and the payday loans have their segment. If you force the banks to lend to the uncreditworthy, do you think they will be cheaper than wonga et al? Course not.

        • pointlesswasteoftime

          Yes. Have you seen Wonga’s rates? It’s such companies that make people “uncreditworthy”.

          But as David Timson says above – credit unions.

          • Alexsandr

            how do credit unions factor in defaulters?
            do they have fees rather than rolling their costs into interest rates?
            or do they credit check the borrowers so well that their default is low -so that wont help your target market then will it?
            i do peer to peer lending so understand well the effect of default on my return.

            or do you expect banks to suddenly lend to the uncreditworthy and let the rest of us pay the costs?

            • pointlesswasteoftime

              For a free bank account, banks normally expect a throughput of £1,000 per month. Credit unions don’t.

              The one I know best charges about 26% for a Payday Loan (annual rate)… compare that with Wonga.

              They credit check borrowers – but many will balance that with the record that a member has with the union prior to the loan application. It’s about being community based (to be a member, you have to show a “common bond” such as living, working or studying within a certain area).

              Any profits are shared out between members as dividends based upon how much they have kept in their accounts for how long.

              Profits at banks are shared out amongst shareholders – and it’s not the poor who are the biggest risk, actually. They usually want about £1,000 to £2,000 for things like baby clothes, a second hand car, to pay off Wonga loans…

              I speak as a volunteer at a credit union – not a manager or a paid employee, so my knowledge may be inferior to their’s. But I don’t see how YOU would end up paying for banks having small defaulting loans. Or, indeed, just providing bank accounts that simply don’t allow people to go overdrawn and who don’t get £1,000 a month.

              • Rhoda Klapp8

                Of course there is a place for credit unions. But not to resolve problem debt. The people who go to the payday loan people are varied. Most take the loan and repay it in the time, avoiding the really massive interest involved with late payment. This is entirely OK, tides them over, no harm done. Another group of people default. They don’t pay back at all, the payday loaners take the knock after an effort to get them to pay back, and sell the debt on. A good deal of the high headline rates are to cover default.Some of those people lie on their application and keep multiple bank accounts and even names and addresses so as to get multiple loans from different lenders. Tough, you might say, serve the lenders right. But they lend to that segment of the market and nobody else will.

                • pointlesswasteoftime

                  If they lie, have multiple bank accounts and aliases and addresses, they are not poor – they are fraudsters. So no sympathy there. I’m talking about genuinely poor/disadvantaged people on low level income/benefits who make one poor decision and end up paying for it indefinitely. Unfortunately, not everyone is financially literate and the unexpected comes up – the cost of a funeral, the need to cover costs while benefits are sorted after illness or injury or redundancy… those sort of things.

                • Alexsandr

                  i think the DWP should have a loan fund to help cover unexpected costs. they can get their money back by deducting it from benefits or if necessary deducted from wages.
                  Expecting a commercial organisation to do this is unrealistic.
                  I think there is a DWP scheme but sounds like it needs beefing up.
                  not costed this -just an idea.

      • The Masked Marvel

        Because people are ignorant. Free-market capitalism has lifted infinitely more people out of poverty in human history than all other systems combined. The bank bailout was handled badly indeed, but let’s stay in reality, shall we? Do you think Socialism might be getting a bad name after what’s happened in Venezuela or Greece or Spain?

        • pointlesswasteoftime

          Government bank bailouts are not by definition an example of free market capitalism. And the economy of Spain tanked as much due to market (especially housing) speculation as anything else.

          You are right about capitalism having lifted more people out of poverty than previous systems – but we are moving into an age where corporate interests are prioritised over those of individuals. Something has to change.

          • The Masked Marvel

            Agreed that the bank bailouts were handled very badly. Corporate interests have been prioritised over those of individuals since the beginning of time. It’s just that these days they’re too big and too intertwined with government.

  • HFC

    To understand the numbers – and too many people find confusing anything involving numbers – the quality of teaching must be improved.

    Multiplication tables, fractions & percentages are utterly alien to too many school leavers; these matters should be dinned into the dimmest brains before the time they’re ready to handle money.

    If not, they will never be able to use any bank – even a ‘banking for dummies’ community bank.

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