Following the release of two reports on banking and personal debt, Resources and Resilience Programme Manager Clare Payne explores their findings and highlights how simple banking products can help with debt management and prevention.

This week saw the launch of two reports supported by the Barrow Cadbury Trust under its Resources and Resilience programme. On Wednesday 21 November, the Centre for Social Justice (CSJ) released the first part of its Breakthrough Britain II research on debt – Maxed Out – Serious Personal Debt in Britain.   Then on Thursday the Fairbanking Foundation (FF) released A Better Kind of Banking.

On first reading, these reports cover quite different ground. However, the links are there. Maxed Out looks at the causes and consequences of problem debt, exploring the personal, socio-economic and structural factors that cause it. It isn’t surprising to hear that those on low incomes, the unemployed, single parents, older people and those with mental health conditions are among the most likely to fall into debt. However, the report raises the important issue of the growing scale of personal debt, and the impact of the rising cost of living on this. Individuals who previously managed to get by and endure an occasional financial shock, can no longer do so.

The CSJ estimates that 8.2 million households in the UK now have no savings at all (around 50 per cent of these are from low income households). More and more people are turning to high-cost lenders to cover income shortfalls and half of payday loan users (600,000) took out the loan because they had no other access to credit.  At a time of year when households’ fuel usage will be going up and many will have to borrow to afford Christmas, this is worrying news.

There are solutions to serious personal debt we are told, such as access to affordable credit, free debt advice and better promotion of alternative financial providers such as Credit Unions. CSJ also raises the issue of complex financial products and the need to make these simpler or more appropriate for users. Excessive charges for overdrafts and penalty fees deter many people from engaging with the mainstream banking system altogether.

A Better Kind of Banking offers examples of banking products that encourage saving and/or help customers manage their money better. For example, thinkmoney (not a bank) sets up two accounts for its customers, one receives the customer’s income and is used to pay their regular bills, with remaining funds automatically transferred into the second card account. The client can use this for their spending, but if they want to move some of their designated “bills money” to their card account, they contact thinkmoney and discuss the transaction with a Money Manager.  The Money Manager will try and re-jig their budget to make the transfer possible without missing a bill payment, but where this isn’t possible, give common-sense budgeting advice to clients. Customers also get regular texts on the state of their accounts so they can budget accordingly.

Another example, Secure Trust Bank offers a current account into which customers can pay their income and make direct debits and standing orders. Customers can upload money from their account onto a prepaid card, so they can only spend what they have on their card. As there is no credit facility, there is no need for credit checks. If the items being paid out of its customers’ accounts bounce then the Secure Trust Bank does not charge a fee.

Both of these accounts come at a monthly cost to the customer, which will limit who can engage with them. However, they are great examples of how banking products can help people to try and manage their income. Neither can combat the rise in living costs or prevent a financial shock, but they can help to limit the chance of a person falling into debt into the first place. The CSJ report cites ‘escalating penalty charges’ and ‘juggling of finances’ as some of the contributing factors to a spiral of debt. Any banking products that help customers avoid and manage these better must be a good thing. And, the report tells us, thinkmoney and the Secure Trust Bank have business models that work.

It seems likely that personal debt will continue to grow as Universal Credit is rolled out, the cost of living continues to go up and a rise in interest rates looms. It is even more critical then that more banks offer products that help customers save when they can and manage whatever they have better. The FF report is optimistic that a culture shift amongst the larger banks is coming, but believes that more public and competition scrutiny, improved infrastructure and better regulation is needed. These won’t come easily, but as the authors of the report point out, the ingredients are there.  A different kind of mainstream bank, “based on a culture and business model in which banks are paid for helping customers to manage their money more successfully, including saving and staying out of debt” is not an impossibility and if ever it was needed, it’s now.