Theresa May in 2016 made a very powerful speech demonstrating her willingness to fight against what she called “burning injustices”. She noted that “if you’re born poor, you will die on average nine years earlier than others […] If you’re one of those families, if you’re just managing, I want to address you directly.”

To her party’s conference that year she also said:

“Where companies are exploiting the failures of the market in which they operate, where consumer choice is inhibited by deliberately complex pricing structures, we must set the market right.”

Recognising the plight of poverty, and the extra costs associated with it, is something that unites the political spectrum. The Fair by Design initiative recognises it’s not easy to solve, but it is focusing on solutions not just words.

Poverty is increasing

The Centre on Household Assets and Savings Management (CHASM)’s 2018 Financial Inclusion Monitoring Briefing Paper, demonstrates the scale of the problem.  It starts by celebrating some positive recent developments including falling unemployment and increased wages for full time employees. However, poverty is increasing, both in and out of work, “with those out of work particularly affected by benefit cuts and delays”.

The report shows that poverty has increased since 2010. In 2016/17, 30 per cent of all children and 16 per cent of all pensioners were living in poverty, while 1.5 million people, including 365,000 children, were destitute at some point during 2017.

Poverty is expensive in the UK. As the concept of the poverty premium illustrates, there are extra costs of being in poverty. The cost of credit, for example, becomes higher if you are obliged to visit an alternative provider like a payday lender for borrowing money. The cost of energy is higher if you are stuck on a costlier tariff, and the costs of insurance increase if you live in a particular area.

Figures in CHASM’s report bear out some of those extra costs. For example in 2014–16, nearly half (47 per cent) of the population had some form of unsecured lending, which can include payday loans and other forms of high cost lending, but is most often credit cards.

In addition to high cost credit from the alternative credit sector (e.g. payday lenders, the rent-to-own sector like Brighthouse), the costs of unarranged overdrafts has been particularly hard for consumers:  whilst one million people took out payday loans in 2017 at least 10 million used an unarranged overdraft.

The report finds that those on the lowest incomes are much more likely to be in arrears on utility bills and credit commitments: 16 per cent of those on the lowest incomes (lowest 10 per cent of incomes) were in arrears in 2012/14 compared with only one per cent of those with the highest incomes (highest 10 per cent of incomes).

One issue for those experiencing the extra costs of being poor is not just how much they spend, but the costs of essential products and services becoming totally unaffordable. From the report we see that only six in ten working-age adults had home contents insurance in 2016–17, and we also know that 60% of those earning £15,000 or less per annum have no contents cover. Of those who did not have it, nearly a third said they could not afford it.

Fair by Design’s plans to eradicate the poverty premium             

In Fair by Design’s recent roadmap, charting how we will get rid of all the extra costs of poverty, we set out plans to get rid of the poverty premium. We call on businesses, including all consumer credit providers, to eradicate the poverty premium from all of their products and services to ensure low income customers aren’t paying more for essentials. Fair by Design want the Financial Conduct Authority (FCA) to broaden its regulation of all forms of high cost credit including caps on those not currently covered: overdrafts, rent-to-own, home-collected credit, catalogue credit, and store cards.

Fair by Design want landlords to ensure every new housing tenant is automatically placed on the cheapest energy tariff, to stop them from paying over the odds on their fuel bills, particularly those unaware of the fuel provider choices which exist, and we want employers to support employees on wage advances to help them to avoid turning to high cost credit lenders.

Find out more about the Fair by Design movement on our website and follow its activities on twitter.

In 2014, in the world of unsecured personal credit, there were few offering credit to those people on low incomes, and who have to take credit and pay it back each week or fortnight; people who can’t get credit from their banks or building society.

Most of those providers charged what most of us would consider to be high interest rates, high fees and inflated prices for the items, which would keep people from ever being able to escape their clutches.

There had to be a better way. So in August 2014, we got funding to get an independent company to run a series of consumer focus groups. They asked users of this type of credit when they used it, why they used it, what they used it for, and how they felt about it.

From what we heard, Fair for You was born. Two years later, we’ve capital and loan finance from four social funders, are fully authorised as a lender by the FCA, and have been trading since December 2015.

Our second Social Impact report has just being released and makes surprising reading.

For instance, we heard that an average loan of just £300 can directly improve customers’ ability to pay their rent (over half of people surveyed said this was the case, rising to two-thirds of lone parents). And that a loan of this size can directly improve the health and wellbeing of our customer’s children’s (one third felt this was the case – rising to 51% of lone parents).

Isn’t that amazing, given the comparatively small size of the loan?

However, a cursory view of Trustpilot will show you that among the 300 people who have so far posted reviews, pricing is only part of the reason that Fair for You has such an impact. It is the whole design of the solution that works for them.

Why? Because, without being too technical about it, we’ve combined structured credit with some of the key benefits of unstructured credit.

Our loans are for items for the home – we don’t do cash loans – and the customer chooses the item they want from our ‘digital high street’. The loan is then structured to purchase that item.

It’s also structured because the loan is clear to the customer, structured repayments on a schedule. They agree to pay an amount of their choosing, over a period they choose – weekly, monthly, fortnightly or four weekly, over any period from 12 weeks to 24 months.

So, if the customer wants to pay £10 a week over 37 weeks, then that’s the loan that we agree; and they are kept up-to-date on their repayments, via text, posted statements and monthly on-line updates.

The benefits of flexibility are that the customer can overpay at any time, and many customers choose to do so. For some it allows them to clear the credit earlier, and for others it allows themselves to miss a payment when facing a difficult week. All clearly get the fact that they don’t pay so much interest if they overpay.

However, the biggest difference is in the assessment of credit. We recognise that many households have low and fluctuating income, such as zero-hours contracts, so we set low repayments and allowing overpayment for when the money’s there. We’re also understanding of past credit problems, so we look instead at a customer’s management of credit over recent years.

It will be interesting to monitor the impact on the financial wellbeing of the households using Fair for You. Our Social Impact report estimates that within 3 years, the majority of customers having switched from using high cost credit regularly to using Fair for You, will no longer have a Poverty Premium in their household.

In the past few years considerable funding has been spent on financial education. For a fraction of this cost, the long term benefit to the households of having access to good financial products may far outweigh being continually taught how to avoid the most aggressive mutations of high cost credit providers.

Better product design, delivered in a more socially responsible manner, may well provide answers in a post-banking crisis world that has seen our society so polarised by their exposure to poverty.

Have you ever tried to survive for a week without something you think is essential to life? Chocolate for lent, booze after Christmas, cakes before your summer holiday?  What if you had to live without access to basic financial tools for a week?  Without access to a transactional bank account, so that you could only pay bills in cash and in person?  Without any form of savings so that the simplest set back meant a trip to high cost credit providers? Without insurance so that something lost is lost for good not lost until a replacement arrives?

Access to basic banking facilities is an essential part of modern life, as employers and government agencies move away from cash and cheques towards electronic payments.  Small and micro businesses are also affected by difficulties in accessing basic affordable financial tools, often relying on easy access to bank branches to bank cash safely.

Effective tools for savings, payments, and accessing credit and insurance can help people to climb out of poverty or get through a crisis or emergency without falling into debt.  They can help businesses survive and grow and not slide into bankruptcy should a crisis occur.

The UK has made real progress in ensuring that most adults have, at least, some form of bank account. It is estimated that only 3% do not.  This is broadly in line with European neighbours such as Germany, France and Slovenia.  It also compares well with others such as Poland (30% without access to a bank account) and Italy (29%).  Still the 3% in the UK, some three million individuals, are effectively financially excluded by a lack of access.   And access to other types of financial tools remains patchy.  59% of UK households have savings of less than £5,000 and 56% of the poorest households do not have home content insurance. The reliance by many on pay day loans to get them to the end of every month is well documented.

A recent experiment in America organised by the Chicago based Center for Financial Services Innovation gave a group of white collar workers tasks to perform without using mainstream financial services.  These included buying a pre-paid card and cashing a cheque. Needless to say it wasn’t a happy experience.  The cost of transactions, the time spent in queues and the lack of security of personal data took participants by surprise.

This is why the Community Investment Coalition (CIC) is calling for a radical new approach to financial inclusion.  We believe that every adult, household and business should have access to a basic package of fair and affordable financial tools to help them participate in economic life.  These tools are: a basic transactional bank account; a savings scheme; access to affordable credit; physical access to branch banking facilities; insurance; and independent money management advice. We have launched a Community Banking Charter calling for the provision of these basic financial tools and setting out the steps required to achieve these.

Achieving this radical change does not require radical measures.  Political leadership, capital investment, better local partnership working and asking the main retail banks to step up to the plate are some of the steps needed.

The experience of the American white collar workers is shared by ordinary people every day in the UK.  CIC partner Local Trust commissioned a video detailing how a lack of access to basic financial services impacts on everyday life.

The UK’s emergence from recession will not result in a rush by the financial services sector to move into new markets in poorer communities.  Many people will benefit from economic growth.  But those without access to key financial tools are likely to get left even further behind.  We need radical change.  And it needs to happen now.

Jennifer Tankard leads the Community Investment Coalition (CIC) and is Director of Advocacy and Research at CDF.