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Financial Exclusion Wears a Suit

David Jordan

Financial exclusion is a western problem too with one in four people denied adequate financial services and women are the hardest hit. It has a huge economic impact on top of the social issues. It is something we can fix. We can improve outcomes for so many people if we just rethought regulation and risk.

 

It is time for a frank discussion on a cause of poverty, not a result of poverty. To throw away assumptions and to get to the crux of the problem. To resolve a hidden productivity issue that impacts economic growth. Something that is critical for the COVID economic recovery.

 

It is simple maths. A billionaire does not make an economy. They only need one bed, one house, one car. When we enable a hundred million people to buy a car, a house, a bed then we are talking an economy. Yet 25% of the population in the western world are denied the financial capacity do this and many of them are women. This is an even bigger problem for developing nations.

 

 

 

 

 

"Financial exclusion wears a suit" highlights the misnomer that this is about uneducated, unskilled, and lazy people. The fact is that most are hard working and often well educated. Young people with degrees who cannot afford to buy a home and pay higher credit costs than a older home owner. This makes it harder for them to save for a deposit to buy a home and they are stuck in a cycle. A young women with a teachers degree who can only get casual roles will be rejected by banks. To break the cycle we have to rethink our risk models, our regulations.

Small Banks and Credit Unions need help

Smaller banks and credit unions have an important role, but need more support from Government and regulators to reshape risk and compliance. COVID is driving an urgency to find smarter solutions and challenge the misconceptions so we can drive economic recovery.

 

…credit unions would have to grow 8-10 times to meet the gap in affordable credit in the UK

 

Chris Pond, vice chair of the Financial Inclusion Commission

 

In the UK the Financial Inclusion Commission states that Credit Unions need to grow from 400 to 4,000. However in Australia, the regulators have shrunk 800 credit unions down to 30. The bigger the institution, the less time they have for the lower end of the economy.

Corporates driving change

Woolworths, a large Australian retailer, recognised the productivity cost of financial exclusion to their business. Their corporate wellbeing program now focuses on 3 issues:  

  1. Physical Health
  2. Mental Health
  3. And "financial health"

 

Woolworths provides struggling staff an interest free card for small items such as $2,000 to repair a car. They have a 90% repayment success and the rest are usually forgiven due to hardship circumstances. Woolworths had to step in because 20% interest credit cards for this sector of the community was having an impact on the productivity of lower income workers.

The solution is risk modelling and regulation not financial literacy

Government, banks, businesses, and media think financial exclusion is self inflicted and the answer is financial literacy. Let me say charging a vulnerable person 19.5% more than the cash rate for a credit card is not an education problem it is a pricing problem, it is a product problem.

 

The Basel Accord punishes the banks telling banks to have 3 times more capital for a personal loan to a disadvantaged person than to a rich person with a home. Whilst there is a logic to this regulation, it enforces financial exclusion.

 

We need to understand the risk problem by understanding who is impacted.

So who are the victims of financial exclusion?

The perception is uneducated and unskilled people. People that suffer from addictions like alcohol, drugs and gambling. Yet most don't fit this perception.

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