Rocket science price of poverty

The Price of Poverty: the impact of financial exclusion on families

21st October 2014

Financial Exclusion and High Interest Debt in the North East

Coming up…

• What is the extent of financial exclusion and high interest debt in the NE?

• How does this compare within the region?

• Little bit on how the problems are being addressed

Financial Exclusion

“the inability, difficulty or reluctance of particular groups to access mainstream financial services”

McKillop, D. and Wilson, J. (2007) ‘Financial Exclusion’, Public Money and Management, 27:1 p9-12 in Mitton, L. (2008) Financial inclusion in the UK – Review of policy and practice

Big messages

• Big growth in personal debt but it is not a single issue with a single cause and a single solution

• Market is nuanced and complex• New interest cap and regulation will have a seismic

effect on ‘payday lending’• Payday is dead/dying• Low income groups still need access to money• Need to understand what the customer wants• Credit Unions are not the answer to high cost, short

term credit.

Difference between the cost of money and the price of money

• This is important to understand• A woman walks into a wine bar and says…• How much is the APR?

The Current Backdrop

• Global banking crisis• Recession• Unemployment• Credit crunch• Dramatic falls in living standards• Austerity measures• Welfare cuts and reforms

The Backdrop

The Backdrop

Banks are reluctant to lend because:• They need to repair balance sheets (Basel II and III;• The mis-selling/over-selling/cross-selling of financial

products (and the need to compensate customers);• The implications of the Vickers Report;• But, when you are looking for a villain – banks made £1.7

bn from unauthorised overdrafts last year.

Credit Today (May 2013) in Alexander and Grimes (2013) Gentoo Housing Association: financial wellbeing review and options

North East Backdrop

• Almost twice the proportion of working age people (14.2%) are recipients of out of work benefits in NE as in the South East (7.4%) – the highest of any region in GB1

• 17% of people in the NE live in a workless household – highest in the UK2

• Except for London, the North East (23.7%) has the highest proportion of children in low income households in the UK3

• The North East has the highest proportion of children (18.7%) living in workless households4

1 NOMIS (Feb 2014) – DWP Benefits: benefit claimants – working age client group2 ONS (2013) Working and Workless Households, 2013 – All Tables: People by region and combined economic activity status of household members: April – June 20133 HMRC (2014) Personal tax credits: Children in low-income families local measure4 ONS (2013) Working and Workless Households, 2013 – All Tables: Children in households by region and combined economic activity status of household members: April – June 2013

• The lowest earning fifth of working people in the North East earn less than £7.06/hour – lower than any other region5

• 71% of heads of household in social rented accommodation are not in paid work compared to 37% in owner occupier households (second highest in England)7

• “The struggle to payday is most acute in the North East, where 56% of adults say they ‘often’ or ‘sometimes’ struggle to payday.”8

6 ONS (2013) Annual Survey of Hours and Earning (ASHE) (provisional) Table 25 – Region by Public and Private Sector7 Poverty.org.uk using ONS (2011) Labour Force Survey8 R3 (2014) Personal Debt Snapshot: Wave 13

North East Backdrop

North East Backdrop

It has been estimated that of 2m adults in the NE:

• 1 million have no savings account;

• 477,000 have no bank account;

• 260,000 have been refused credit;

• 1 million have no home contents insurance.

Rocket Science (2009) Enhancing Financial Inclusion in the North East

Demand for High Interest Debt

Research by Durham University and partners found six factors shaped and constrained 24 poorer households’ financial choices in the North East8:

• Need for credit - low income, no savings plus fall in incomes and major crises• Unavailability of low cost credit – No savings, poor credit record means banks

and credit unions uninterested• Ready availability of high cost credit – Unsolicited offers without checks• Normalisation of high cost credit – especially in poorer communities• Short term approach to money management – focus on weekly repayments • Influence of consumer society – social inclusion determined by purchase of

material goods – especially for children in satisfy peer pressure or deter bullying

8Banks et al. (2013) Debt on Teesside: Pathways to Financial Inclusion

Non-Standard Credit

Range of non-standard products, usually unsecured, from a variety of lenders:

Payday loan companies (Money Shop, Wonga, Quick Quid);

Pawnbrokers (Ramsden’s);

Home collected credit (Provident Financial);

Credit unions;

Community Development Finance Institutions (CDFIs);

Catalogues; and

Rent-to-own stores Brighthouse, Perfect Home).

Alexander and Grimes (2013) Gentoo Housing Association: financial wellbeing review and options

Size of High Cost Short-Term Market

• Payday £2.8 billion (in 2004 it was £100 million)

• Home Collected Credit £1.3 billion• Pawnbrokers £850 million• Rent to buy £450 million

Non-Standard Credit

35

65

41

59

49

51

61

39

male

female

Gender % of short term credit users (Source PFRC 2013)

payday (online) payday (retail) pawnbroker home credit

From Alexander and Grimes (2013) Gentoo Housing Association: financial wellbeing review and options

Non-standard Credit

77% 77%

60%

37%

10%18% 14%

24%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Home Credit Pawnbroker Payday (Retail) Payday (Online)

Whether non standard borrowers are vulnerable and percentage with mainstream alternatives (Source PFRC, 2013)

defined as vulnerable has mainstream alternatives


Non-standard Credit

13

17

22

2523

28

2123 22

5

32

2523

16

3

37

2523

15

1

up to 29 yrs 30 to 39 yrs 40 to 49 yrs 50 to state pensionage

Over state pensionage

Age % of short term credit users (Source: PFRC 2013)

home credit pawnbroker payday (retail) payday (online)


Non-standard Credit

27

13 11 11

19 18

31

15

22

1310

5

63

137 8

4 4

76

14

4 2 1 1

Working FT Working PT Unemployed,looking for

work

Looking afterhome or family

Unable to work(ill-health or

disability)

retired

working status % of short term credit users (Source PFRC 2013)

home credit pawnbroker payday (retail) payday (online)


Home Collected Credit

The seven principal characteristics of home collected credit identified by the British Market Research Bureau (BMRB) analysis of over 24,000 people for the Competition Commission enquiry into the home collected credit market in 2006, appear to mirror the socio-demographic indicators of social housing tenants:

• Of working age but not working; • Women aged under 34 years old;• With children;• Socio economic grades D and E;• At least 50% with an income under £13,000;• Renting from social landlord; and• Within the most disadvantaged neighbourhoods.



SCOTLAND

LONDON

NORTH EAST

WEST M

IDLANDS

NORTH WEST

YORKSHIRE AND THE HUMBER

WALE

S

EAST MIDLA

NDSEAST

NORTHERN IRELA

ND

SOUTH EAST

SOUTH WEST

0.0

5.0

10.0

15.0

20.0

25.0

30.0

13.2 13.5 14.810.9

7.712.3

9.8 10.17.8

11.5

5.8 5.8

11.1 10.6 8.1

8.110.6

5.86.6 5.7

7.93.4

7.9 7.5

Percentage of Households Living in Social Housing Across UK Regions

Local Authority Other Social Rented

UK Region

% o

f Hou

seho

lds

Data from ONS (2013) 2011 Census: KS402UK Tenure, local authorities in the United Kingdom


• It has been estimated that between 4.7% and 6% of the adult population use HCC which gives a figure of between 90,700 and 119,660 individuals in the NE9

• Provident reject 80% of new applicants• Provident customers down from 1.8 m to £1.5 m – going for

less risky clients• HCC business is strong: Provident Financial “pre-

exceptional” profits up 9.9% last year to £196.1m• Shares at 10 year high – doubled since 2008

9 Rocket Science (2009) Enhancing Financial Inclusion in the North East10 Provident Financial Annual Report 2013

High Cost Rent to Own Stores• BrightHouse and Perfect Home offer electrical, white and brown goods to

financially excluded people• Similar demographic to HCC• Brighthouse have increased from 153 to 253 stores since 2007 with at

least 20 stores in NE • 1,000 customers each store (live within 3 miles), spending £25/week.• Pre-tax profits grew 10.1% to £28.5 m in 2013/1411

• Perfect Home – 9 stores in NE- One of the fastest growing companies in the UK- 72.5% growth in profits in latest annual results12

11 http://www.brighthousegroup.co.uk/financials/12 Sunday Times BDO Profit Track 100 (2014) in Jones, T (2014) at http://www.birminghampost.co.uk/business/business-news/perfect-placing-retailer-seven-make-6952301

http://www.brighthousegroup.co.uk/financials/

http://www.brighthousegroup.co.uk/financials/

Payday Lending

• 19% of adults in the North East plan to take out a payday loan in December 2012 – the highest percentage of any region

• Wonga 1st loan is £176 for 16 days – repay £210• Average loan is £260 over 30 days• Customer is male, 25-35, with a bank account and in work• Median income is £16,500 (online) and £13,400 (retail)• Not the poorest income groups

Fisher, S (2012) Less people in Yorkshire take out pay day loans, from research by R3 (2012)

Illegal Money Lending

• “Small businesses and self-employed people in the North East are increasingly turning to illegal money lenders as they find it harder to borrow money in the recession”

• “7% a week on a £10,000 loan”

• Highest rate 131,000% APR

Warburton, D (2012) More North East people turn to illegal lenders in recession

Overall Debt Fears

• “65% of British adults in the North East are worried about their current level of debts – the highest out of all British regions”

R3 (2014) Personal Debt Snapshot: Wave 13

Within the North East

Financial exclusion;• No current account• No savings account• No home contents insurance• Has been refused credit



Those who have been refused credit in the past



Over-indebtedness;

• Has a mortgage • Two or more credit

cards• Credit card balance of

more than £2,000

• Has unsecured loan



Two or More Credit Cards Credit card balance of £2000+:


Cities in North East with pop. greater than 50,000 located in red & amber hotspots:

• Gateshead• Newcastle-upon-Tyne• Hartlepool• South Shields• Sunderland• Washington• Darlington• Stockton-on-Tees• Middlesbrough

Addressing the Problem

• Credit Unions– 7 in NE which are members of ABCUL– Need a different customer to be sustainable because of interest

rate cap (42.6% APR)– £260 loan over a month loses money for CU– Not all may wish to expand

• In the UK there are over 2.3 million HCC customers who could take up a cheaper product if available and save £5/week in interest

• Other CDFIs – 5 Lamps, Moneyline, My Home Finance• More now from Alison….

Rocket science price of poverty

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