The price of poverty: why being poor still costs more

By David Collings and Sara Davies

Over 14 million people in the UK population live in poverty, and many more live on low incomes. Unfair poverty premiums – the additional costs people on low incomes incur when paying for essential goods and services – put undue strain on the household budgets that can least afford it, locking people into cycles of poverty. Since we published our 2016 research, the nature of the poverty premium may have changed but it certainly hasn’t gone away. And according to our latest research for Fair By Design and Turn2Us, a national charity providing practical help to people struggling financially, people already struggling financially are paying almost £500 more for essentials like energy, credit and insurance.

The average premium is almost £500, and reflects the current market and regulatory landscape

In 2019, Fair By Design and Turn2US asked us to explore recent changes to the poverty premium landscape – including both regulatory and technological changes – to understand if they are having an impact on the cost of poverty premiums or the number of people paying them. To do this we surveyed 1,000 people living in low-income households who had contacted Turn2Us for help. Our research showed that low-income households incur an average £478 of extra costs through energy, insurance, and credit poverty premiums:

  • Car insurance was the biggest contributor to the premium in 2019 at nearly £500 – some pay nearly £300 more per year because they live in a deprived area, and additional charges for paying monthly instead of annually could add a further £160. This premium is markedly higher than it was in 2016, when together these cost an extra £155.
  • Credit is particularly expensive on a low income, in whatever form it takes. For example, a sub-prime credit card costs around £200 more per year on average, and personal loans cost more than £500 extra.
  • And we found similar inequalities in relation to energy; the best prepayment tariff could still be around £130 more expensive than the best online-only deal, and paying on receipt of bill could cost an additional £143 more per year. However, the drop in the premiums incurred via energy costs since 2016 suggests that the tariff caps implemented by Ofgem have had a positive effect.

Of course, while £478 is the average premium, there is no such thing as an average low-income household. The extent and experience of the poverty premium varies widely between groups and families.

Unfair poverty premiums are yet another example of the inequality of poverty

Our research was undertaken in late 2019, before the onset of the pandemic. However, recent evidence shows that the economic and social consequences of Covid-19 are being felt most keenly by those on low incomes, with lower-paid workers more likely to have been furloughed or to have lost their jobs. Coping with tough times is hard enough when approached from a generally constrained financial position, but the finances of low-income households had already been worsening in the years leading up to 2020 – real income growth stalled in 2017-18, something that affected the poorest the most. And the social safety net had been badly damaged, with cuts to working-age benefits and tax credits further pushing down the incomes of low-income households. Seen in this context, poverty premiums are yet another example of the inequality of poverty, compounding and extending hardship at a time when increasing numbers are experiencing major falls in income, perhaps tipping people over from just about managing to not managing.

What happens next?

We can be certain that the pandemic’s economic impacts are with us for the foreseeable future. But while much in 2020 remains outside of our control, the poverty premium was and remains a solvable problem. Regulators and policymakers should now work together to find solutions for people struggling across all markets. In recent years we’ve already seen the positive impact of such interventions, most notably in the form of price caps. So what more can we do now?

We’ll leave the last word to Jamie Greer of Turn2Us:

“Stronger regulation of financial products, an improved social security net with crisis grants and protective changes to the energy market would mean we can start eradicating the poverty premium.”


Read the report and executive summary

“Now is literally the worst time in decades to be entering the work force”: the impact of COVID-19 on university students’ finances

By Katie Cross and Sara Davies

As students return to University campuses, the discussion has largely focused on worries over increased COVID-19 rates. But our survey of University of Bristol students suggests their approaching financial position should also be cause for concern. 

The economic impact of COVID-19 has been both rapid and widespread. By June, the economy was around 17% smaller than it had been in February. The sharp increase in Universal Credit claims after lockdown was unprecedented, with almost 2.5 million household claiming between mid-March and late June. And the Office for Budget Responsibility is projecting an unemployment rate of 11.9 per cent in Q4 of 2020. It is a very uncertain time for all.

But one group whose financial position we have heard less about during this time is that of university students. Each year we conduct a survey for the University of Bristol’s Widening Participation team to look at the impact bursaries have on students, comparing the financial experiences of those from low- and middle-income backgrounds who receive financial support from the University, with those from higher-income backgrounds[1], who do not. This year the timing of the survey allowed us to ask students about their financial experiences both pre- and post-COVID, and to look at how they may have fared during the crisis.

Financial impacts so far

As with the wider UK population, COVID-19 and the subsequent lockdown has had an unparalleled impact on student employment. Prior to the pandemic half of students surveyed (51 per cent) were employed in some form. Since the outbreak however, over two thirds of those previously working were no longer doing so, with a further 12 per cent working fewer hours than before. Of those no longer working, two thirds said this was due to their employer being closed (either temporarily or permanently). Although the majority of students receiving some form of maintenance loan, earned income is still important to students in order to manage financially, particularly among those who are not in receipt of a bursary, where this loss of income could be worryingly detrimental.

My maintenance loan does not even cover my rent which means I have to borrow money from family and work in order to cover my rent and food.”  – Year two, unfunded

Overall, the impact of coronavirus on the students we spoke to had been fairly evenly split across those finding it easier to manage financially (30 per cent), much the same (40 per cent) and harder to manage (30 per cent).

This means that, for the majority of students, COVID-19 had not had any major negative impact on their financial situation. Indeed, nearly half said they had been able to save money as their costs had generally reduced – a finding which is perhaps unsurprising as lockdown prevented social spending. A third also reported not having to pay for their final term of accommodation, representing a further considerable saving. This does, however, still leave 65 per cent of students paying for at least part, if not all, of their accommodation for the summer term, despite no physical teaching and (for the majority) returning home. Unsurprisingly the majority (95 per cent) of those who weren’t required to pay for their final term of accommodation were first year students (typically living in University owned halls), as opposed to second and third year students who were more likely to rent privately.

“No change at all despite the fact that our bills are included in rent so we are paying more for water, electricity etc that none of us are using (no one living there at the moment). When we contacted to ask for some reduction in rent, we were told that the property is the landlord’s primary source of income (seems an irrelevant argument) so we wouldn’t get any reduction.” – Year two, funded

Overall, 3 in 10 reported their costs and outgoings being harder to manage due to the outbreak. This rises to over half for mature students (who were more likely to have financial dependents) and around two-fifths for those who had lost income from employment.

Support from family

Many students rely on financial support from their families and friends to manage. Indeed, eligibility for bursaries and maintenance loans is based on parental household income from the previous tax year, and there is an expectation that those from higher-income households will receive support from their family. Almost two thirds of Bristol students who were ineligible for bursaries relied on support from family and friends, with 19 per cent having their accommodation paid for and 57 per cent receiving a set amount of money each week or month. Since the outbreak, a small number of (mainly non-bursary) students had received additional support from family or friends. Mature students were also more likely than younger students to have turned to family and friends for financial support since the lockdown, whereas beforehand they were significantly less likely to have done so.

However, the ongoing impact of COVID-19 – particularly once the furlough scheme comes to an end – may have dramatic impacts on family household income, and the worry is that students may fall through a gap, without university funding or family support.

“[I have] concern over lack of employment for my parents, who I rely on financially to pay for my living and accommodation in Bristol, as my maintenance loan was significantly lower than my accommodation cost.” – Year one, unfunded

Prospects

While almost a third of students were currently finding it harder to manage financially, even more were worried about the coming academic year. Half were concerned over their lack of paid employment/income during the holidays or coming year and 41 per cent were worried about how they would manage financially in the Autumn term. Those who usually rely on paid work may run into financial difficulties, particularly if they are unable to return to work or find alternative employment. In our survey, over a third who worked considered employment income ‘very important’ to financially continuing at the University.

It is also important to consider the longer-term financial impact and job prospects for students. The unemployment rate is expected to rise to almost 12 per cent by the end of the year, and those who have recently left education are likely to be disproportionately affected. We are already seeing a reduction in job vacancies and in our survey 69 per cent reported being generally worried about their future, with nearly four in ten third-year students concerned over their post-graduate prospects since COVID-19.

Now is literally the worst time in decades to be entering the work force.” – Year three, funded

Given the general worry about the future, concern over personal and familial health, uncertainty around teaching in the coming year and reduced socialising with friends, it is unsurprising that some students also commented on the negative impacts on their mental health.

“Due to some of my family members being high at risk to corona, I am increasingly anxious as to what is going to happen to them. My mental health has suffered a lot from being very isolated over the Easter term. I am worried that the global economy is about to collapse and the whole world is going to go into recession. So all in all, quite a lot to be stressed about.” – Year one, funded

“My depression has got much worse, my father is at risk, I am struggling to focus at all so I am behind in all of my work and I don’t know how I will cope financially if I cannot work in the summer” – Year two, funded  

Overall, the student community has faced an unprecedented situation with remarkable resilience, but it is apparent that the challenges brought by COVID-19 will impact students for a long time to come. It is crucial that universities understand that, for some students at least, it will be much harder to manage financially than in previous years, and institutions therefore need to provide an appropriate level of practical and pastoral support to help them.

Firstly, we need greater recognition of how important earned income is to students’ financial position and participation at university. Secondly, the increased likelihood of financial difficulty among families of students should be considered, and the impact of this on students – both financially and emotionally – given the role that family support plays in getting by while at university. This suggests that there will be a need for a well-funded and accessible hardship fund in the coming years, because increased financial difficulties may well effect likelihood of withdrawal from studies.

Some students will need more help than others; previous surveys have found that bursaries appear to have some protective effect, therefore attention should also be given to those from higher-income households, particularly those just outside of eligibility, as they are more likely to rely on income from employment. Mature students, who we have previously found struggle financially more than their younger peers, are already turning to their families for support in greater numbers, but what about those who do not have people to turn to?

Finally, the ongoing emotional toil of dealing with a global crisis should not be underestimated. It is worrying enough leaving university in normal times, let alone doing so during a time of recession and increasing unemployment. Giving students as much support and guidance as possible, both to manage during their studies, and to help them to prosper as they leave, is going to be vital over the next few years.


[1] Low income = Residual Household Income (RHI)  > £25k; Mid income = RHI £25-44k; Higher income =RHI £43-80k

Making a difference in FinTech? Evaluating the impact of Nationwide’s Open Banking for Good programme

By Sharon Collard & Jamie Evans

Nowadays, fintech startups often emerge with the ambition of ‘doing good’ and changing society for the better. This surely is to be welcomed – but what is the best way of ensuring it actually makes a positive difference to consumers? In this blog, we attempt to answer this question, outlining the first stage in our evaluation of Nationwide’s Open Banking for Good (OB4G) programme.

As its name suggests, OB4G was set-up with the ambition of being ‘for good’. Launched by Nationwide in 2018, it is a £3 million programme which aims to leverage Open Banking technology to create and scale new apps and services, all of which are designed to help the 12.7 million adults in the UK who are ‘financially squeezed’. The ambition to support this group of consumers – who tend to have high debt-to-income ratios, coupled with low savings – is clearly a positive one, but how can those designing innovation programmes turn this ambition into reality?

Moving the Dial report cover

That is the question Nationwide has asked us to explore through an independent evaluation of the OB4G programme.  We have already published a report outlining the lessons from the ideation and implementation of OB4G, and we share below three key lessons that we believe can inform the design of future ‘fintech for good’ efforts. We continue to support the successful OB4G fintechs (who we call Challengers) in measuring the financial and social impacts of their Open Banking-enabled products and services on end-users throughout, with a final report scheduled for Q2 2020.

 

Lesson #1: Problems looking for solutions, not solutions looking for problems

One of the early lessons of the programme is the importance of identifying real-world problems that might benefit from tech solutions – rather than retrospectively finding a socially useful purpose for an existing product or service.

To do this, the OB4G team at Nationwide involved charity partners from the very beginning to identify the real-life challenges facing people who are ‘financially squeezed’ that the programme could tackle. These charity partners – including Citizens Advice, Christians Against Poverty, the Money Advice Trust, the Money and Mental Health Policy Institute, and The Money Charity – have great insights into the needs of people living on a financial knife-edge, and so were well-placed to identify the issues facing consumers and help shape the programme. In the words of one challenger, this helped overcome the risk of ‘hipsters designing for hipsters’!

Lesson #2: Locking the ‘innovation cage’

Together, the charity partners and Nationwide’s OB4G team identified three pressing challenges for the OB4G programme to tackle:

  • Income Smoothing – helping the growing number of people who have irregular or unpredictable income to manage their regular outgoings
  • Income & Expenditure – making it easier for someone to produce an accurate statement of their income and expenditure
  • Money Management & Help – helping people to practice and maintain good money habits

In our qualitative interviews with OB4G Challengers, they emphasised the value of having well-defined real-life problems to solve, which kept them tightly focused on doing one thing well for a particular consumer segment. This was described by one as an ‘innovation cage’ that allows creative freedom and innovation but in a way that keeps the social purpose of OB4G front and centre.

Importantly, the startups were not alone in their ‘innovation cage’! They were partnered with a charity (or in some cases more than one charity), which could contribute its knowledge and insight about the target audience throughout the development process. This element of ‘co-creation’ was almost as valuable to the Challengers as funding.

Lesson #3: The challenge of different ways of working

Our evaluation not only sheds light on what works, but also on challenges that innovation programmes like OB4G invariably encounter. One such issue was the very different ways in which startups and established organisations work – whether charities or a large commercial organisation like Nationwide.

While ‘agile’ working is part and parcel of fintech startup culture, for charities – whose focus is often on fire-fighting and delivering their core purpose – this can be harder to achieve. The same is true for large commercial organisations, where there may be many layers of bureaucracy to navigate in order to get things done. So while the startups hugely valued the insight and support they got from OB4G, there were times when things didn’t move quite as quickly as they would have liked.

The key lesson for fintechs and innovation programme designers is that, yes, it is hugely beneficial to work with charities and people with lived experience to co-design products and services. BUT you need to build in sufficient time (and understanding) to make this happen.  Our evidence also indicates that programmes should routinely offer to fund Charity Partners for their contribution (even if Charity Partners aren’t always able to accept such funding).

What next?

So far, our evaluation has focused on the process of setting up and running the OB4G programme. We are now considering the impact that OB4G actually has on consumers. As such, we are working with the five remaining Challengers – Ducit, Openwrks, Toucan, Trezeo and Tully – to measure the effect of their products on consumers’ financial wellbeing. Our aim is to make a useful contribution to a growing body of evidence around how fintech startups can actually ‘do good’ and make a difference to the lives of their users.


Read the first stage of our evaluation here:

Report: ‘Open Banking for Good: Moving the Dial?’

 

Older and poorer communities are left behind by the decline of cash

by Daniel Tischer, University of Bristol; Jamie Evans, University of Bristol, and Sara Davies, University of Bristol
An increasingly rare sight.
ShutterStockStudio / Shutterstock.com

A future without cash seems almost inevitable. Recent statistics paint a damning picture: while cash accounted for 62% of all payments by volume in 2006, this dropped to 40% in just a decade and is predicted to fall yet further to 21% by 2026.

Digital payments, on the other hand, are trending strongly in the opposite direction. Contactless payments in December 2018 in the UK were 28% higher than the same month in the previous year (at 691m in total), while the total number of card transactions increased by 12% over the same period.

In the long term, such a shift may well have benefits for many, given the speed and convenience that digital payments offer. But in the meantime, in the next five to ten years or so, there remain lots of people still dependent on cash – particularly those who are older or from lower income households. These people, it seems, are at risk of being forgotten if current trends continue. Ironically, those who are least likely to need cash have the best access to it.

Cash still king for many

We know there is still a sizeable proportion of the UK population that continues to depend on cash. An estimated 2.2m people report that they only use cash, while there are as many as 1.3m people who are “unbanked” (do not have a current account).

In our research, we regularly encounter people who find it difficult to access mainstream banking products, do not use digital payments because they find it easier to manage their money in cash, and/or simply lack trust in digital banking. For these people, cash very much continues to be king.

This means it’s important to understand the way in which access to cash is changing for the UK population. But much of the debate so far has focused on the overall number of ATMs or bank branches in the UK, without much understanding of the importance of geography. Where these dwindling number of ATMs are located makes a big difference.

Indeed, when this was studied in the early 2000s, we learnt that bank branch closures and fee-charging ATMs were more often found in poorer parts of the country. The issue was then seemingly remedied by measures such as the “Financial Inclusion Programme” put in place by LINK, the UK’s main ATM network. This programme incentivised ATM operators to provide cash machines in lower income neighbourhoods.

More and more people are relying on post offices for cash.
Michael J P / Shutterstock.com

In our new research, we therefore sought to reexamine the geography of cash provision, using Bristol as a case study. Through detailed mapping of the city’s cash infrastructure, we found stark differences in access to cash between different types of neighbourhood. Sites of economic activity, perhaps unsurprisingly, are well served; as were some of the most deprived, relatively central, neighbourhoods.

But we also found that areas we classify as “squeezed suburbs” – relatively deprived areas on the fringes of the city – were poorly catered for. This represents a significant challenge for some of the older and less well-off residents in these areas, who are most likely to depend on cash. We found Post Offices, which offer cash withdrawals and some banking services, are often geographically best-placed to serve these communities and could be a crucial asset moving forward, at least if used correctly.

Deprived areas worse off

There are signs that the situation is now changing again. Recent research revealed that around 1,700 ATMs nationwide changed from free to fee-charging at the start of 2019, likely the result of lower overall demand for cash and a recent drop in the interchange fees paid by banks when someone withdraws cash from another company’s ATM.

This was also noticeable in our research, as we gathered data both in October 2018 and March 2019. Importantly, we found that such changes were happening more often in deprived areas. Over two-thirds of the ATMs that became fee-charging in Bristol over this time period were within particularly deprived neighbourhoods.

This seems to be because ATM infrastructure in more deprived areas tends to be non-bank owned. Comparing a relatively affluent part of the city (Whiteladies Road in the Clifton neighbourhood) with a more deprived area (Stapleton Road in the Easton neighbourhood), we noticed that while just 29% of ATMs in Whiteladies Road are non-bank owned, this rises to 89% in Stapleton Road. Some such non-bank ATM owners have publicly stated that they will convert more free ATMs to fee-charging ATMs following the recent reduction in interchange fees.

This could have far-reaching implications for already under-served communities. So, while a future without cash may be almost inevitable, if the patterns found in Bristol are replicated nationally, it is likely that we’ll see a return to old geographies of financial exclusion, with deprived communities struggling most on the journey there.The Conversation

Daniel Tischer, Lecturer in Management, University of Bristol; Jamie Evans, Senior Research Associate, University of Bristol, and Sara Davies, Senior Research Fellow, University of Bristol

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Read more about this research

Mapping the availability of cash (PDF)