Social Networks: Their Role in Access to Financial Services in Britain
Meadows, Pamela, Ormerod, Paul, Tudor, Antony, National Institute Economic Review
Almost one in ten adults in Britain do not use mainstream financial services. Most of them are not in paid employment. However, most people without paid work have accounts. Two hypotheses have been put forward: (i) reluctance by financial institutions to serve low-income customers; and (ii) information failure on the part of non-consumers. Using two different data sources, we find that non-consumers of financial services are distinguishable from consumers only by belonging to social networks where financial services usage is relatively low. As social networks play a key role in transmitting information, this supports the information failure hypothesis.
There has been a debate in Britain over recent years around the issue of financial exclusion--the potential difficulty that some members of the population have in being able to use mainstream financial services such as bank accounts or home insurance. Consolidation of the banking industry over the years means that there are now a limited number of banks. Many (but not all) the mutually owned building societies which traditionally offered savings (and sometimes current) accounts mainly to individual (as opposed to business) customers, along with loans for house purchase, have converted to company status and operate more like mainstream banks. The combination of greater use of telephone and internet banking and bank mergers has led to branch closures which have been concentrated in inner city areas. One of the fears on the part of policymakers and groups representing consumer interests is that greater concentration has reduced competition and has made access to banking services more difficult (Cruickshank 2000; Office of Fair Trading 1999; Social Exclusion Unit/HM Treasury 1999).
A parallel development is that the British government has announced that all social security benefits (covering retirement pensions, unemployment and sickness insurance, disability benefits, child benefit and income support for people in need) will in future be paid into bank accounts. This change has already happened for new claimants and will apply to existing recipients from April 2005. Up until the change most benefit recipients have received order books containing vouchers to be used each week, fortnight or month, or girocheques, both of which have enabled them to draw cash at Post Offices. Many of those who receive their benefits in this way, especially pensioners, do have bank accounts, but enjoy the social aspects of visiting the Post Office. Others find it easier to manage a limited budget in cash. In future all benefit recipients will be obliged either to have a bank account into which their benefits can be paid, or to open a special account with the Post Office. But the policy change does require that many of those who currently operate their daily lives on a cash basis should become consumers of financial services. Moreover, the move to pay all benefits into bank accounts will only be implemented successfully if the recipients have accounts into which their benefits can be paid.
In Britain, most adults already have a bank, building society or Post Office account. Estimates of the proportion without accounts of any sort vary according to the source of the data, but they point to fewer than 10 per cent of adults having no accounts at all. This amounts to some 2 1/2 million people. (See Meadows (2000) for a fuller discussion of these results and their wider context.) It is not clear the extent to which these people are being refused access to banking services by providers, who perhaps perceive them to be a bad risk or unprofitable (which would support the oligopoly hypothesis), or whether they have chosen to use cash for all their financial transactions. In turn, this choice not to use financial services could be an informed one, or it could be based on an information failure.
Previous research (see, for example, Kempson and Whyley 1999) has identified a number of the characteristics of people who are non-users of financial services. …