house-moneyThe past few years have been very tough for households on low to middle incomes. Last September we reported

[1] how over-indebtedness (measured as the proportion of households spending 25 percent or more of their income on unsecured debt repayments) increased between 2012 and the end of 2014. This was a period which saw many households placed under considerable financial pressure due to a lack of real wage growth, welfare cuts, and the rising cost of essentials, especially housing and childcare. The number of over-indebted households increased by 28 percent to 3.2 million (one in eight of all households). Since then, there has been a slight improvement in real wages, but looking at the most recent survey data released by the Bank of England we found that this has had very little impact on levels of over-indebtedness. During 2015, the total number of over-indebted households reduced by just 1 percent and there has also been an increase in over-indebtedness amongst working households with incomes of £30,000 or less per year.  In 2014, 7 percent of these households were over-indebted, but last year this rose to 10 percent.

Given that there is little sign that these households will see incomes rise significantly in the near future, there has been an increased focus on what can be done to reduce the cost of credit, help them manage their money effectively, and build up savings.

Reducing the cost of credit for low income households is a clear priority, and a major breakthrough in this respect came at the end of December with the launch of Fair For You[2]: a charity owned community interest company that is offering a national challenge to the Rent to Own sector, dominated by Brighthouse. Led by Angela Clements, the former Chief Executive of CitySave Credit Union, Fair For You is finally making it possible for low income households, no matter where they live in the UK, to obtain essential items without getting ripped off.   The company received full authorisation from the Financial Conduct Authority just before Christmas, and the initial feedback from customers has been fantastic. But, like any lender, Fair For You needs to get its message out to its target market. Local authorities, housing associations, and community organisations will need to get behind it if it is to get to the scale we need to mount a serious challenge. The infrastructure and lending capital is there, but we need people to distribute its material and advocate on its behalf to low income households.

Helping people to manage their money better in hard times is proving difficult. We know that low income households are often already excellent money managers. They have to be. But new technology might be able to help them plan their increasingly variable and precarious incomes over a longer term. This week sees the launch of a new CfRC report[3] which reviewed technological innovations on both sides of the Atlantic and looked at the possible benefits of this for low income households, as well as the barriers to realising that potential. It found there was a need for the community finance sector to be provided with opportunities to benefit from technological innovation: for example to be linked into peer to peer lending platforms to raise capital, or for its infrastructure to be upgraded to allow it to take advantage of developing ‘Big Data’ approaches. And, of course, in an increasingly digital world, the sector will need help to develop ‘customer-facing’ technology such as smart phone applications that help households budget and encourage savings.

At the moment, these developments are being led by the commercial ‘FinTech’ sector. But these firms do not have the necessary routes to market or an existing relationship of trust with lower income communities. Encouraging collaboration between FinTech firms and the community sector is therefore a priority. Government needs to take the lead here: by pulling together the regulators, social investors, Fin Tech companies, and the community finance sector and encouraging them to experiment with new approaches and products to better meet the needs of low income households. But to realise the potential for collaboration, the community finance sector will need a new infrastructure: one which allows for the pooling of liquidity across credit unions and CDFIs, gives them direct access to the payments system, and allows for them to make joint investments in new product design and testing.