Financial exclusion – a Big Local problem with national significance

The need to reduce financial exclusion has been identified as a priority by people in Big Local areas.

Local Trust delivers the Big Local programme with an investment of over £200m from the Big Lottery Fund. Big Local is happening in 150 communities across England over the next 15 years. It provides residents in each community with at least £1m and a range of other support and funding to develop ways of making their areas even better places to live.

Lack of access to banking facilities and affordable credit, extortionate interest rates, spiralling personal debt and resources flowing out of local areas are all growing problems in Big Local areas. We believe that every adult, household and business should have access to affordable finance and people in Big Local areas have been clear that this is often not the case.

We have found that banks and other financial service providers have retreated from some of the areas that we are working with. This has left a vacuum. People are coming up with a range of solutions to fill this gap, but they need support.

As our case study shows, Big Local areas (supported by Local Trust with Small Change and a group of social investment representatives) have shown an appetite and a desire to provide services where mainstream financial institutions have retreated.

Credit unions and community development finance institutions (CDFIs) have shown they can be effective working at a local level with Big Local areas. They offer much more affordable interest rates for people taking loans than national payday lenders. But working without the same commercial presence as banks or even payday lenders, many credit unions and CDFIs cannot currently offer every service that a bank can.

It is clear that the demand for these services is there. If you just take CDFIs as an example, in 2013 CDFIs received more than 96,000 enquiries from potential customers. They were seeking £811m of finance. CDFIs went on to receive 64,000 applications, and 50,700 (87%) of these resulted in a loan being made. Research conducted for the CDFA suggests that there is a possible demand of £5.45-£6.75bn for community finance in the UK.

Credit unions and CDFIs need to be able to serve the demand that is there. Part of this is through developing their portfolio of customers to include both a mix of those who currently need them most and more middle-income customers who do not currently see the offer as relevant to them. However, to create a step change, what they really need is capital investment.

In Leysdown (part of the Isle of Sheppey Big Local area) we have seen that where banks have retreated people do not feel able to take part in everyday financial life as they cannot access a branch. There are several cash machines in the area, but not one is free for residents and businesses to withdraw cash from. People have to travel for over an hour, on two buses to their nearest bank branch.

While the cost of bricks and mortar of having a bank on a high street can be costly, technological innovations mean it is possible to have a local presence in other ways. One of many opportunities is multi-use ATMs. While ATMs were originally developed as just cash dispensers, they have evolved to offer many other bank functions including:

• Paying routine bills
• Paying the credit balance on a card.
• Transferring money between linked accounts
• Videoconferencing with bank employees.

This technology is available but commercial banks have not yet made it available to under-served communities, like Leysdown, as our video highlights:

https://www.youtube.com/watch?v=KGuf4Lkqvr8&list=PLC4hR96P6B1oF5925gM6hkInVcWuXIAd9

Change is needed

We are pleased to support the Community Banking Charter. People in Big Local areas are already beginning to find local solutions to help address financial exclusion, but these local solutions need encouragement and support nationally from banks, policy makers and regulators.
The solution lies in a mix of locally identified solutions, better financial education and crucially transformative structural change bought about by policy makers and regulators. Banks have shown that they will not make the necessary changes of their own accord. That is why we are calling on policy makers and regulators to implement the proposals set out in the Community Banking Charter.