Thousands of British people suffer from a vicious cycle of financial exclusion, making them more vulnerable to accruing debt and boxed out of mainstream consumer services, a report from think tank Demos has found.
A lack of coordination between sectors involved in financial services provision and advice is stymieing attempts to address the problem of financial exclusion, according to Demos.
The report revealed 1.5m British adults are without a bank account, and thousands more building up problematic debt and falling prey to payday loans each year, saying many ordinary Britons simply lack the financial and digital know-how to manage their money effectively.
It added financial exclusion can be a vicious cycle, as the under-banked miss out on deals only available online or through direct debit payments, such as energy bills, mobile phone contracts and internet plans, and often struggle to access the credit needed to make investments, such as buying property, or the financial products to help them plan and save for the future.
As such, those wrestling with problematic debt are also at risk of being unable to take out a mortgage or purchase a car in the future, and there are both short and long term implications for well-being and mental health, relationships and employment.
Charlie Cadywould, a researcher at Demos, said:“Everyone should have the opportunity to keep their money safe, to set it aside for a rainy day and to borrow carefully and affordably to invest in their future. Expanding access to financial services can be a huge help those struggling to get by.
“A huge part of the answer is helping people to manage their money effectively, to understand all the different options for saving and borrowing, to access impartial advice, and make informed decisions. Preparation for this can start at an early age and help should continue to be available throughout adulthood.
“To make this happen, we need a co-ordinated effort: banks, credit unions, charities, schools and government all need to work together to ensure everyone is equipped with the tools to manage their income and spending, to get the best deals and borrow and save most effectively.”
Demos noted the move to Universal Credit, which will be distributed through bank accounts, could also prove problematic for those currently without them.
The report said local charities, credit unions, bank branches and local authorities should work together to raise awareness of and refer to each other’s services.
The government should allow Lifetime Isa customers to borrow without incurring a charge if the borrowed funds are fully repaid, it said, and encourage employers to offer to provide employee contributions to the Lifetime Isa through payroll.
It also recommended that banks offer services – including nudges and ring-fencing - that help customers to separate out their savings without incurring a loss of earnings on interest.
Demos said banks should also offer finance tutorials to customers as a way of achieving better lending rates, and design and pilot money awareness courses to those who go into unarranged overdrafts or fall behind on loan repayments.
Meanwhile campaigns to build financial capability and to get more people online complement each other, Demos said.
Andrea Rozario, chief corporate officer at Bower Retirement said: "Increased competition and innovation in the equity release market is helping drive growth to a 10-year high and the responsibility now is for the industry to ensure more customers become aware of the option of using property wealth to support retirement planning.
"It is striking that around half of new plans being sold enable customers to make voluntary repayments highlighting how the market is shifting to more retirement lending.
"The market has been evolving, improving and becoming more cost-effective than ever before underlining the need for expert independent advice for consumers and the benefits for advisers in working in the sector."