This blog is based on an article in Social Policy and Society. You can access a version of the article by clicking here.
Should people play a greater role within the financial system? Policy-makers are looking at a range of ways to boost the involvement of people and households in the financial system. Academics are much more critical of these steps. But, academics and policy-makers are not talking enough to each other about their findings. This leads to a disconnect between the answers that academics and policy-makers are giving on this question. Ultimately, the real losers are the general public and households as they do not benefit from the combined wisdom of academics and policy-makers.
Decisions about money seem an inevitable part of life. How much should I save for the future? How much will it cost to heat-up the home? Do the children have enough money for their school dinners? These questions are a perennial part of everyday living. The answers to the questions are shaped heavily by context. Households may have found it tricky to cope in the aftermath of the global financial crisis of 2007-2008. Today, the unfolding nature of Brexit adds further complications.
Over the past 20 years, policy-makers in the UK have stressed ‘financial inclusion’ as a way of helping people cope with their daily challenges. Although this agenda is not unique to the UK, it is more advanced in the UK than many other countries. And, this agenda has seen renewed interest. In March 2017, a House of Lords Select Committee report calls for steps to reduce financial exclusion to be put at the heart of government. In June 2017, the Westminster government created the post for the first time of Parliamentary Under-Secretary of State for Pensions and Financial Inclusion.
Financial inclusion does not have a fixed meaning and it has shifted over time. The term first began to appear in policy debates shortly after New Labour came to power in 1997. Originally, financial inclusion referred to the access that people have to mainstream financial services such as banking, savings, credit and insurance. There was a concern that vulnerable groups such as those on low incomes faced barriers in accessing such services. For example, those on low incomes may find it difficult to get access to mainstream credit to pay for something as common as buying Christmas presents for the children and have to turn instead to doorstep lenders that charge very high rates of interest.
Exclusion from financial services may be a ‘demand side’ issue where people may lack the knowledge to make financial decisions. Or, ‘supply side’ factors may be much more important, where financial institutions such as banks create barriers for accessing financial services. The precise causes of exclusion will shape the appropriate policy response, for example, government regulation may be needed if financial institutions are the main cause of exclusion.
Policy-makers produce a host of ideas and schemes for supporting financial inclusion. This does not mean that policy-makers are uncritical admirers of the financial system. Rather, policy-makers see the financial system as a part of life and so policy should try to reduce the costs that people face from being outside of the financial system. For example, if people do not have a bank account, then this may contribute to fuel poverty because they cannot take advantage of cheaper deals available to those who can pay by direct debit. This is a particular issue for low income households as fuel bills are a greater proportion of a household budget than higher income households .
Academics have been much more critical of financial inclusion. There is a significant body of scholarly work that sees financial inclusion as little more than the effort to shift citizens from the collective security provided by the welfare state onto the risks associated with financial markets. This is part of a wider project of extending free market ideas and so financial inclusion policy is part of the problem and not the solution to the challenges that people and households face.
This results in two bodies of work on financial inclusion that have very different views and conclusions. Policy-makers are sympathetic to and scholars are very critical of the financial inclusion agenda. Of course, there are exceptions to this general pattern. Some commentators contribute to both the policy and scholarly literatures on financial inclusion. But, these commentators are exceptions and one sign of the split is how the different literatures tend to ignore and not refer to each other.
Does this divide between policy-makers and academics matter? Academics should be free to pursue knowledge for its own sake and should not be confined to evaluating government policies. But, social policy research is interested in the nature and effects of a range of social polices including efforts to include people in the financial system. Scholars could learn many useful things from the policy literature. Academic criticisms of financial inclusion are often at a fairly abstract level and engaging with the detail in the policy literature could provide for a more nuanced scholarly analysis. Conversely, policy-makers would benefit from having a much more critical attitude towards financial inclusion policies. This will allow policy-makers to sift through which policies should be extended and which schemes should be rolled back.
For example, policy-makers and academics have contrasting views about ‘financial capability’, that is the knowledge, skills and confidence of people to make financial decisions. Scholars claim that financial capability policies are aimed ultimately at turning people from citizens into consumers. Policy-makers claim that making financial decisions is an unavoidable part of life and so people should be equipped to make these choices. Both groups could learn from each other. Any economic system that involves money will require people to make decisions about budgeting. But, financial capability can be shaped in many ways. Some versions might turn people into consumers, but other versions might bolster citizenship. To make progress on financial inclusion, policy-makers and academics must talk much more to each other.
About the author
Dr Rajiv Prabhakar is a Senior Lecturer in the Department of Economics at The Open University. His research is on areas such as asset-based welfare, wealth taxation and financial inclusion.
He is co-chair of the new personal finance module at the Open University DB125 You and Your Money