Which financial services are needed for financial inclusion?

The number of financial products on the market today is bewildering – digital wallets, online investment products, instant loans, etc. the list seems endless. Some of them are useful, some are not, and some are traps for the unwary. At the same time, a significant number of Europeans are finding themselves ‘financially excluded’ because they cannot open a simple bank account, or avoid drowning in debt, or get the insurance cover they need to live a normal life. Finance Watch’s new report, “A Common Minimum Basket of Basic Financial Services”, identifies a shortlist of basic financial products and services that we think should be made available to all citizens to help combat financial and social exclusion. 

Access to financial services is needed for modern life and is a right under the European Pillar of Social Rights, yet financial exclusion is still a problem in Europe. Vulnerable groups of citizens who lack documentation, the financial means, or the abilities (social, physical, mental, cultural, …) to access financial products are most at risk of exclusion.

One way to improve Europe’s rate of financial inclusion would be to ensure that all citizens can access a minimum basket of suitable financial products.

Finance Watch, together with partners from around Europe, has conducted surveys, interviews and workshops to understand which products might belong in the basket.

Payments

According to our research, access to a basic payment account and access to cash should both be included in the basket.

The Payment Accounts Directive (PAD) already aims to ensure that everyone can access a basic payments account. The majority of EU citizens have such an account, in fact some countries make it a requirement to have a bank account to receive wages. However, the PAD is not always enforced and vulnerable groups such as asylum seekers can find it harder to open payment accounts because of money laundering rules.

Access to cash is also seen as essential for financial inclusion, especially for those unable to access digital payments or who live in countries where cash is still prevalent, such as Romania and Lithuania. But cash is beginning to fall out of use in some Nordic countries, raising urgent and difficult questions about how to allow digital cash without compromising citizens’ privacy.

Credit

According to our research, household credit products are not seen as essential and should not be included in the basket. But household credit is very widely used and policymakers must ensure that it is fair and not exploitative.

Household debt has been vigorously promoted by the financial industry and by policymakers who see it as a way of driving economic growth. This has helped economic demand but it has also opened the door to exploitation and caused grave problems for those in poverty or with budget problems.

Our research shows that levels of household indebtedness tend to be higher in countries with more developed financial markets. For example, mortgages account for nearly 80% of the value of household borrowing in the EU and have been actively promoted by EU regulation including the Mortgage Credit Directive. But they are only considered essential in nine, mainly northern, Member States, reflecting different local attitudes to home ownership.

Consumer credit accounts for the other 20% of European household debt, including credit cards, store cards, car loans, and overdrafts. Bank overdrafts, certain types of credit card, and micro-finance/credit union loans are seen as useful, especially for those with irregular incomes, those living in near-cashless societies, and vulnerable citizens. But they are not generally seen as essential, apart from in a few northern European countries. Payday loans were not considered essential anywhere outside the UK.

Micro-credit is used in some countries to promote financial inclusion and reduce over-indebtedness. Micro-credit and credit union products are often carefully designed to match the financial capabilities and needs of borrowers. Their success in reducing over-indebtedness illustrates how important it is for credit providers to assess borrower’s financial capacity properly.

The survey showed strong support for banning exploitative practices and plugging gaps in consumer regulation, such as hire-purchase which is not currently covered by the Consumer Credit Directive.

Savings and Pensions

According to our research, basic savings accounts, products that incentivize saving through tax breaks, and supplementary occupational pensions should be included in the basket.

Household savings are essential for surviving life’s accidents as they provide a financial buffer that can reduce the need for high-cost consumer credit and prevent people from falling into over-indebtedness. Credit unions would be the ideal starting point but they are under-developed. Only two thirds of citizens have savings and most of them use savings accounts and a narrow range of other products. Tax incentives can promote saving but are less useful for people on low incomes.

The level of state pensions varies widely between Member States and poverty among over-65s is highest among those who rely only on their state pension. This argues for stronger occupational pensions and better personal pension products, as promoted by the EU’s regulation on Pan-European Personal Pension (PEPP). Personal pension products have tended to suffer from being poor value for money and have had little uptake around the EU, although that is beginning to change.

Insurance

According to our research, medical insurance, fire insurance, motor insurance, and general liability insurance should be included in the basket.

Medical insurance is essential in countries where it is needed to access the health system. Fire property insurance is a necessity and is required to access a home loan in some countries, such as Ireland and Norway, although coverage is patchy in other countries, such as Romania. Motor insurance is mandatory to be allowed to drive and is therefore essential. General liability insurance is more popular in larger or northern countries and is sometimes bundled together with home insurance. Payment protection and income protection insurance were not generally considered essential. The survey did not look at life insurance products.

The minimum basket of financial products and services

Overall, the research identified several financial products and services that are seen as essential to participate in modern life and might be considered for inclusion in a minimum basket of basic financial services. They are:

• a payment account,
• access to cash,
• a savings account,
• a safe third pillar pension product,
• motor insurance,
• health insurance,
• home (fire) insurance, and
• personal liability insurance.

The idea of this basket is not to promote these products or make them mandatory but to ensure that citizens have access to simple versions of them if they want. This should make it easier to participate in modern life without being held back by unnecessary documentation requirements, lack of financial means, or differences in physical and mental capacity.

The contents of the basket might vary between countries, for example containing more products in countries with higher levels of financialisation or digitalisation, as local conditions require.

The research also found a need for stronger consumer protection rules around household credit products, where there are high risks of consumers being exploited or falling into excessive debt. Banning exploitative practices and overhauling the way that borrowers are assessed for credit would be important steps in this direction.

We propose a number of policy changes to promote financial inclusion, including amendments to the Payment Accounts Directive, EU Accessibility Act, PEPP Regulation and Consumer Credit Directive.

Olivier Jérusalmy

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