Basic bank accounts are no help to the poor, says study

LONDON: Basic bank accounts, introduced five years ago to help the poor in the U.K., have failed to accomplish the aim — of closing the gap between rich and poor, says a research report prepared by the National Consumer Council (NCC) and Policis, a research consultancy. The poorest consumers still face financial exclusion and their only resort is high-cost borrowing, says the report.

The study revealed that half of low-income consumers wanted to manage their money in cash as the accounts did not fulfill most of their needs. Those having the accounts have been found to have fallen behind with household bills payments than those without the accounts.

The monthly cycle followed by banks and the hurdles in even opening an account mean that the poor still have problems in accessing affordable financial products, the study said.

NCC’s deputy head of policy Claire Whyley said there is a mismatch between the needs of the poorest to keep close track of their income and spending and to avoid debt, and the existing basic bank account design, which does not help them achieve this.

NCC said the lack of flexibility in automated payments could lead to problems for those with unpredictable circumstances. Penalty charges levied by banks and building societies, when there are no funds in accounts, to meet a direct debit often lead to serious short-term financial pressures.

Several mainstream banks like HSBC, Lloyds TSB and Nationwide building society offer basis bank accounts and by end-2004, there were some 5.7 million account holders.

Nationwide said it offered the same facilities under the basic bank account as it had for a standard current account, except for overdraft facility and debit card. Customers, however, enjoyed a 30-pound overdraft “buffer”.

The study covered 1,520 people with low incomes.

NCC recommends that the basic bank accounts should be more flexible, like offering weekly direct debit facilities and small free overdrafts to fit in with low-income budgeting cycles and even payment holidays.

The study also revealed that some eight million low-income consumers have no access to mainstream credit, while many use high-cost lenders as the government’s safety-net interest-free loans scheme for the poorest is not working effectively. One application in every five for social fund loans is rejected and one in four of those refused approach high-cost doorstep lenders or even unlicensed loan providers.

NCC and Policis will work with the Treasury’s Financial Inclusion Taskforce and other such organisations to address the problem and find out a solution.