Comment: How banks fail the poorest in society

By Carl Packman

A new report by the School of Geography in the University of Nottingham has found that some 7,500 bank and building society branches have been lost in the period covering 1989 – 2012.

Furthermore, and perhaps least surprisingly, "the areas with above average rates of closure between 1995 and 2012 were Britain's least affluent inner city areas, multicultural, metropolitan areas and traditional manufacturing areas".

It's noted that a significant reduction in the numbers of bank and building society branches has occurred, relative to the population in built-up areas, prospering metropolitan and in student communities. Inevitably this accounts for unmet need of mainstream financial services in many communities and that seems to fall hardest on the most vulnerable.

Compare that with more affluent areas and the results are even more telling. Rates of closures in areas that the researchers defined as 'middle England' have fared relatively better. "Traditional manufacturing and inner city areas", say Dr Shaun French, professor Andrew Leyshon, and Sam Meek in their research, "have lost branches at a rate 3.5 times higher than suburbs and small towns."

Ultimately this confirms an economic truism that has become far more hard-hitting since the dawn of the UK's financial crash: credit by mainstream providers, previously used to supplement low or stagnant wages, is no longer an option for a lot of people today.

In the credit boom years during New Labour's tenure the incomes of most working people were not rising, but the availability of credit had been far easier. Today, wages are not growing and the cost of living is increasing; the only difference is mainstream credit sources are no longer easily obtainable.

Last year the PwC wrote a report suggesting that the credit card had gone through a "mid-life crisis", that is to say its usage overall was dropping in number and fewer people were getting access to such mainstream financial products. One of the winners, that report suggested, was the payday lending industry.

A relatively new industry, payday lending was worth a mere £100 million in 2004. During the recession years in 2009 the industry shot up to be worth a bloated £900 million. But most shockingly of all, today in 2013, the industry's worth is somewhere between £2 to 4 billion (and the fact that we don't have a completely accurate figure on that by the Office of Fair Trading is even more disturbing).

At a time when interest rates remain historically low – with the primary intention of people borrowing more and subsequently spending more to prop up the high street and restore economic growth – it is becoming increasingly more difficult for many families in poorer communities to enjoy the fruits of healthy financial products.

This in itself promotes bad economics. A recent CityWire report showed that 52% of credit products on the high street are from non-banks and 'other' financial institutions, including payday lenders and pawnbrokers. Rather than pumping more money into the real economy, these institutions – enjoying very healthy growth rates themselves in these hardened times – suck money from the economy, charging the most financially hard-up customers stupendous amounts, which inevitably makes it more likely that a person will live from paycheck to paycheck, not adding to the wishy-washy consumer-led growth plans of this government and certainly not saving to avoid oncoming financial shocks.

What this and the Nottingham University report shows is something we have always instinctively known, but have been unsure about how to go about changing: that banks serve themselves first and foremost and fail many people in particular communities.

Chief secretary to the Treasury Danny Alexander has already committed to mandating banks to reveal their lending data in 10,000 postcode areas by January 2014. This is a start, but not an end in itself. What this move towards transparency and disclosure will reveal is details of unmet need in lesser-off communities. It is not a solution to this problem.

Instead the radical solution would be to oblige those mainstream banking institutions that have failed to meet financial need to pay up a levy, so that where they do continue to lack presence in some areas they can sponsor other ethical alternative financial institutions who will meet that need.

However we must not assume this absolves banks of their responsibility to lend money to families of diverse income streams. For starters more credit facilities need to be opened up as an option for more people.

In 2011 nearly nine million people in the UK went without mainstream credit facilities in the UK – which is far more than in Germany and France where a similar consumer credit industry exists. Today that figure only grows higher.

Banks ought to be a lot less risk averse with lending people smaller sums of money. In the course of trying to undercut predatory lenders in the form of payday loans in Rhode Island, USA, nearly nine out of ten state chartered banks offered 'small-dollar loans' with streamlined underwriting in order to make loan decisions in a responsible 24-hour period.

Unlike with irresponsible payday lenders, loans could be repayable over 90 days and were offered at 36% APR, a comparatively low rate of interest.

If this is something state chartered banks in the US could offer with success then there is no reason why banks who feel some obligation to the good of society's economic health could not do the same.

Banks are essential to our economy and are best when they are not inward looking, caring more about shareholders than the communities that they exist within. That is why the growth of credit unions and community banks, which are mutual institutions whose members have an active stake in their operations, is a necessary one.

But in the meantime mainstream banks need to step up their debt to society, too. Furthermore there is a public-purse incentive for government to pursue this. Britons are already some of the most indebted people in the world (on average owing £8,000 per head in unsecured debt) and this was built up when mainstream credit facilities were accessible to more people.

Government expects us to borrow and spend more to help the economy. But if our only options are to fall into the open arms of legal loan sharks, then it'll only be so long before a bulging personal debt bubble is allowed to burst.

Carl Packman is a writer, researcher, and blogger. He wrote his first book called Loan Sharks: The Rise and Rise of Payday Lending in 2012, published by Searching Finance, and has written for many publications including the Guardian, New Statesman, Jewish Chronicle and Credit Today Magazine. Follow him on Twitter.

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