Cass Finance Blog

Unbanking our poorest?

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“Who will bank the unbanked?” is the header for a recent article in The Banker magazine discussing opportunities and challenges in banking the world’s poorest countries (a topic my colleague Thorsten Beck likes to talk about), but it is perhaps becoming a bigger issue in the UK and some other Western nations where changes in banking may lead to society’s poorest being forced out of the banking system.   In the US, those with the least resources appear to be leaving the bank,s due to increasing basic fees, for what amounts to pre-paid debit cards with lower fees than current accounts.  While meeting current internet and other payment needs for users at perhaps lower fees than banks, consumers will eventually find such activity won’t provide the necessary credit history to access the least cost car and mortgage loans from banks.  Will they be trapped with no access or only loan-shark debt?  It is also hard to imagine how some of these card-bank users might handle an unexpected receipt of a multi-thousand pound cash payment.  Card or mattress?

The BBC’s Kamal Ahmed (“Has Tesco signalled the end of the free current account”, 10 June) noted that Tesco’s new current account effectively excludes the UK’s millions on state pensions from getting Tesco’s best deal.  In a country where the premiere advertising slogan is ‘we match Tesco….’  this merits more than passing interest.  Attending a conference in 2012 I witnessed a manager from the Co-op Bank challenge a manager from the UK’s new and chief ‘challenger’ bank, MetroBank, on offering free current accounts to those financially poorly off; he was quickly re-buffed.  Indeed, a few other attendees asked why the Co-op did provide these, as well as asking about other high street banks.

High interest rates often provided enough ‘fat’ in the retail banking system for banks to not worry about the costs of chasing even the smallest of current accounts.  With those days ended and better attention to ‘mis-selling’, banks are more focused on customer profitability.  Foreign bank visitors always find it odd that in the UK, the poorest who remain ‘in-credit’ have a deal subsidised by their wealthier neighbours who must either pay more indirect fees through more payment transactions, or receive less on their savings or paid more for mortgages.  Probably one of the few Robin Hood stories of banking, though it could be argued that mis-selling PPI was really the subsidiser (it was big, but not that big).

Banks would surely like to charge more for their products as would any other retailer and attaching identifiable fees for unique services suggests the greater transparency politicians endorse and these are building wave of support to increase basic banking fees.  The challenge is to the least economically capable of society (particularly those who live on the monthly pay or benefits).  The perhaps £10 per month they will need to pay to maintain a current bank account has to come from some cut in other spending or they will simply join the unbanked and be one large step further from the mainstream economy.

Author: Peter Hahn

Following 20+ years in banking, Pete Hahn entered the PhD programme at Cass Business School in 2004. He was awarded a fellowship in 2007, a PhD in 2008, and joined the Faculty of Finance on a full-time basis in 2009. Pete teaches Bank Strategy, Bank Management, Corporate Finance, and Principles of Finance to Undergraduates, MBAs, and Executives. He is also a consultant to regulators and banks and regularly appears for questioning before Parliamentary bodies. Dr Hahn has been interviewed by the BBC more than 300 times.

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