Credit is cheap for the rich and expensive for the poor. That must change

Most of us need credit at some point. It might be a loan to start a business, a credit card to spread the cost of an unexpected bill, or simply an overdraft to get through the few days before payday. 

For most people, that can feel like a normal part of managing your finances. But if you are already struggling to make ends meet, access to affordable credit can make the difference between getting through the month and falling into a spiral of debt. 

A car repair that you need to get to work. Having to call a plumber. Your child’s school trip. When you don’t have savings to fall back on, a relatively small expense can become a crisis. 

And that is where one of the great ironies and injustices of our financial system becomes apparent: credit is often cheap for the people who need it least, and impossibly expensive for those who need it most. This is part of what’s known as the ‘poverty premium’.  

If you have money, banks compete for your business. If you have little money, or a patchy credit history, you can find yourself shut out of mainstream banking altogether and pushed towards high-cost credit because there seem to be no other alternatives. 

This isn’t inevitable. A big factor is that our banking system is dominated by a small number of very big banks. And in this respect, the UK is unusual internationally. Of course, other countries have large banks – but their populations tend to have far greater choice about who they bank with. Critically, that includes the option to bank with community-based institutions such as credit unions, who are often better placed to provide services and support to people who have been rejected by the algorithms of the bigger banks.  

Look at the United States, where more than 40% of people are members of a credit union. Its community finance sector was transformed by a landmark law called the Community Reinvestment Act, introduced in the 1970s as part of a response to discrimination against predominantly black communities. The principle was simple: banks have responsibilities to the communities in which they operate. They can meet those responsibilities by improving their own lending, but also by investing in and partnering with community-based lenders that are better placed to reach people and places that mainstream banks are unable or unwilling to serve.  

There is growing momentum for a similar approach in Britain, where our community finance sector is still much smaller than it could be.  

Read more:

• How the crisis of affordable credit is endangering the UK’s most vulnerable
• Debunking credit score myths: Can I be blacklisted? 
• Bank of Dave: Meet the man bringing the fight to loan sharks and helping those who need it most

The Fair Banking for All Campaign is calling for changes to the law so banks are properly assessed on how well they provide affordable credit to their communities – including the extent of their provision to people, small businesses and social enterprises in areas that experience higher levels of exclusion. 

This wouldn’t mean forcing banks to make irresponsible loans. It would mean creating stronger incentives for them to improve their own lending and to work with organisations such as credit unions and Community Development Finance Institutions (CDFIs), providing them with the capital and support they need to grow. There are already good examples of voluntary partnerships between high-street banks and community lenders that could be replicated and scaled up across the country.  

The proposal has been backed by the actor and activist Michael Sheen, the Federation of Small Businesses, and a coalition of charities, community finance organisations and financial inclusion experts. Twenty-nine Labour MPs recently wrote to Chancellor John Healey calling on the government to support it. 

There is an opportunity to turn that support into action. Parliament is currently debating the Financial Services and Markets Bill – legislation which will update lots of areas of financial regulation. As it stands, the proposed reforms will do little to address the problem facing people who are locked out of affordable mainstream credit. 

By supporting amendments to the legislation which would shift the practices of our bigger banks and support the growth of community-based alternatives, MPs can help to create a banking system which helps people across the UK build secure lives and thriving communities.  

The government has committed to making life more affordable for people and to creating opportunities in communities across the UK. To make that a reality, we need a financial system capable of supporting that ambition. 

Nick Bryer is director of campaigns at Finance Innovation Lab 

Find out more about the Fair Banking for All Campaign, visit: 
 
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