Towards inclusive service delivery through social investment in the EU. The case of financial services (Delivery 6.3)

This study explores the link between the EU Social Investment Package and availability, access and use of financial services. There are two dimensions to ‘social investment’: the investment dimension refers to resources that need to be invested in order to increase welfare and capabilities of the population, whilst the social dimension is about society’s collective effort for raising such investment as well as sharing in its benefits.

Financial inclusion matters for achieving human capability. Financial services and human capability have a two-way and dynamic relationship, because access to financial services improves human capability, which in turn leads to more efficient use of financial services. This dynamic interaction evolves throughout the life of an individual, its contingencies and changed circumstances in relation to, e.g., health, education, family formation, employment, retirement.

In 2007 the EU started addressing the issue of financial inclusion in the context of the Single Market and with the objective to ‘improve the competitiveness and efficiency of the European retail financial services market’ (EU, 2007). The EU looked for market solutions to tackle financial exclusion whilst at the same time calling for the development of indicators to assess the scale of the problem.

Overall and based on the three indicators (no bank account, no access to revolving credit and savings products), 7% of all adults in the EU15 and 34% of adults in the new member countries ‑ a total of 30 million people ‑ have no access to these financial services and could therefore be considered as financially excluded. The following overview reflects the variation in levels of financial exclusion between higher- and lower-income countries within the EU. Unsurprisingly, the data at household level also reveal a strong correlation between household poverty and financial exclusion.

The financial crisis of 2009 revealed the fragility of a weakly regulated financial sector that not only did not deliver on financial inclusion but also did not support the poor and vulnerable as unemployment and poverty increased. That was mainly due to the financial sector’s view of low income and poor customers as high risk. The overall picture before and after the crisis does not differ dramatically, despite a peak during the crisis: in most countries the same percentage of people reported that they had problems ‘making ends meet’ before and after the crisis. The main exceptions are Greece and Cyprus that continue suffering from the harsh austerity measures imposed by the Troika. The difference between countries also reflects the strong social protection that the high-income welfare states provide.

In short it is not the lack of competitiveness and inefficiency of the financial sector, as argued by the EU that lies behind financial exclusion. Improving access to financial services by offering bank accounts to the financially excluded is the very first step, and indeed a very limited step to tackling financial inclusion. ‘Experiences in countries like France and Sweden, however, has exposed the problem of reconciling universal, non-discriminatory banking (a social objective) with the requirements of safe and sound banking (an economic objective).’ (Carbo, et al., 2007, p. 27.) We should add that the ‘economic objective’ refers to the financial safety of banks and not economic improvement in the situation of the socially and financially excluded people!

But the fundamental cause of financial exclusion is low and precarious income that cannot meet current household needs and their unexpected expenditure. People living in countries with comprehensive and universal social support systems are not only more able to ‘make ends meet’ but also to ‘meet unexpected financial expenses.’ That is where the link with social policy and financial services come into play. The risk of offering financial services to the poor goes down as social protection increases. The EU and the Member States should therefore try to tackle the underlying causes of social exclusion by improving the security and level of income of financially excluded people.

However, there are also policies for the financial sector that can be pursued to reduce financial exclusion, taking note of the level and type of financial exclusion in different EU states:

• Legal standards (beginning with an EU Financial Services Directive) regarding the extension of universal basic banking services (e.g. accounts and bank cards, including for people with no permanent address);
• Adoption of a US style affirmative regulatory system of Community Reinvestment Act (CRA) whereby financial institutions offering banking services are encouraged to meet the credit needs of the communities they operate in, especially in the moderate to low income areas;
• Regulation of client risk assessment instruments of banks for low-income customers. Banks should be encouraged to offer low-interest over-draft facilities that could be partially under-written by the state to reduce the credit default risk to banks;
• Promotion of low-interest loans for housing improvement/repair and purchase of consumer durables by banks;
• State subsidy to insurance companies to cover a range of property (e.g. fire, flooding, theft) and individual (e.g. accidents, disability) risks of low-income individuals and households;
• Protection of and support for low-income and poor households who are in arrears and could face insolvency and bankruptcy; that might result, inter alia, in eviction, loss of property and income and negative credit record.

Note that these measures in turn will reduce the future cost to the state to cover the loss to individuals and households.