I am ashamed to admit that after many years working in personal finance its only in the few months that I’ve been working at thinkbanking that I’ve given any proper thought to the money matters of those on low incomes. In fact I’ve realised that the world of personal finance (product providers, journalists and marketing/PR) pretty much ignores the plight of people on below median earnings. For the sake or argument – and I accept that this is a bit rough and ready – this means those with weekly gross pay of less than £500. And this is the median take home pay which means, by definition, that half the population is earning less than this.
Take First Direct for example. First Direct’s excellent current account is free so long as you credit more than £1,500 per month. For those that can’t there is a charge of £10 a month. So the 50% of the population that has the least money starts by being charged £120 a year more than the better off half of the population if they want to bank with First Direct. Santander’s Preferred Current Account is another case in point: it often makes it into the best but tables, but pay in less than £1,000 a month and you’ll earn no interest. Pay in more and you’ll earn 5%.
Of course it is unsurprising that the personal finance industry doesn’t focus on people on lower incomes – it’s harder to make money out of them. Few will ever buy an investment product or pension, many will have little or no savings. They are lower users of financial services generally. In fact there’s an argument that providers actively want to discourage this type of customer, because they are less profitable. It isn’t just the reduced chance of lucrative cross-sales, but these customers can often have a higher cost to serve. For example people in lower income groups are often bigger users of branch networks – “clogging them up” (as the provider would see it) with low value transactions.
It’s not just the product providers that don’t focus on this market, it’s the media too. You’d think that the tabloids in particular would be focused on their audience and understand its needs. But few articles ever really focus on the needs to people on low incomes. For example a tabloid personal finance section I was reading recently included a guide to the best equity ISA funds (presumably to try and attract end of tax year ISA advertising). Even when the subject matter is relevant the advice can often be fairly trite – of the “look out for special offers in the supermarket” variety.
People on lower incomes often face different financial challenges and not just for the obvious reason. For example, most of us who work in personal finance probably get paid monthly, which makes paying monthly bills relatively straightforward. But on average thinkbanking customers have five main credits a month to their accounts. Many are still paid weekly or fortnightly, and many also get benefits and tax credits, which are often paid two weekly or four weekly (which means that the payments arrive on different dates each month). Try budgeting for a £200 monthly mortgage payment when you have £150 a week coming in. Monthly direct debits and bills may be convenient but are not always the easy way to pay. Of course the un-banked and the almost one million people with a Post Office Card Account don’t even have access to direct debits. These people suffer from the so-called “poverty premium” paying more for utilities, mobile phones, Sky and other services because they are unable to pay by direct debit.
Even basic bank accounts, which are designed specifically for those on the lowest incomes, often serve this market badly. Get your budgeting wrong so that a direct debit is bounced and the Coop will charge you £17.50 and Santander £25. On top of this the direct debit issuer often makes a charge as well. Unsurprisingly the OFT found, in its market study on current accounts, that consumers on low incomes are the most likely to pay bank charges. The average paid in a year was £205 but 1.4m people paid over £500 a year in charges (shockingly over half had done so the previous year too).
It was good to see, therefore, the publication last week of a report, written by Social Finance, for the Treasury’s Financial Inclusion Taskforce. This report highlights how the current account market fails to meet the needs of those on low incomes. It looks at some of the alternatives available (including thinkbanking) and proposed a pilot study. Social Finance suggests that “jamjar” banking could improve the finances of people on low income and reduce the impact of the poverty premium.
The challenge for providers, including Think Money and thinkbanking is to address the needs of this market. There’s no reason why these customers shouldn’t have access to good quality customer service and fairly priced products that are tailored to their needs, as well as producing a sustainable profit for the provider. The US is leading the way with providers such as Mango which have sprung up to serve this market (as featured in this article in the Economist). Whilst we are some way behind, we are working hard to understand the market and meet its needs, even as high street banks withdraw further from it.