New Frontiers in Banking Services pdf

The goal of the papers that follow is to draw attention, both through a theoretical framework and through field study, to the need for banks, financial institutions, public authorities a

Emanuele Maria Carluccio

(Editors)

New Frontiers in

Banking Services

Emerging Needs and Tailored

Products for Untapped Markets

With 20 Figures and 42 Tables

123

Via Conservatorio, 7

20122 Milan

Italy

luisa.anderloni@unimi.it

Professor Maria Debora Braga

University of Valle d’Aosta – Université de la Vallée D’Aoste

Strada Cappuccini, 2A

11100 Aosta

Italy

m.braga@univda.it

Professor Emanuele Maria Carluccio

University of Valle d’Aosta – Université de la Vallée D’Aoste

Strada Cappuccini, 2A

11100 Aosta

Italy

e.carluccio@univda.it

The research has benefited by contribution of

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This book is devoted to an issue that is the subject of growing interest amongst policy makers, financial providers and academics That issue is the problem of unbanking or underbanking in developed countries The issue has arisen because, faced with an ever more sophisticated and efficient financial system, an increasing number of people have found themselves in danger of being excluded from it

The goal of the papers that follow is to draw attention, both through a theoretical framework and through field study, to the need for banks, financial institutions, public authorities and non profit associations to increase their efforts to understand the process of financial exclusion, so that they can develop approaches to help people on low to moderate incomes to gain access to the whole range of financial services, from payment to savings, and from loans to investment Some farsighted banks and financial institutions have already developed strategies, and introduced new products and services, to promote financial inclusion in these untapped markets

The research group is international and multi-disciplinary The authors are grateful to the Italian Ministry for University Research (MIUR) for financial assistance provided under the “PRIN 2003” programme

The volume has been produced thanks to support from the University of Valle d’Aosta – Université de la Vallée d’Aoste (Italy), which has an leading reputation for encouraging research on financial innovation aimed

at marginalised groups

We would like to record our most sincere thanks to all those who have participated in the research project, and to all the bodies and institutes that have contributed to it

Luisa Anderloni Maria Debora Braga Emanuele Maria Carluccio

Aosta, September 2006

Part I

Access to Bank Accounts and Payment Services

Luisa Anderloni and Emanuele Maria Carluccio 5

Access to Credit: the Difficulties of Households

Access to Investments and Asset Building for Low Income People

Maria Debora Braga 141Appendix to Part I

Methodological Notes to the Field Research in France, Italy and

Spain……… 183

Part II

What Are the Specific Economic Gains from Improved Financial

Inclusion? A Tentative Methodology for Estimating These Gains

From Financial Exclusion to Overindebtedness: the Paradox of

Difficulties of People on Low Incomes?

Economic Growth and Financial Inclusion: the Case of Poland

Italian Banks’ Credit Approach Towards Low-Income Consumers

and Microenterprises: Is There a Bias Against Some Segments of

Customers?

Banking the Poor: Policies to Bring Low- and Moderate-Income

Households in the United States into the Financial Mainstream

Preface V

Part I

1.1 Introduction: Financial Exclusion ………… ……… 5

1.2 Interests, Concerns and Possible Solutions ……… ……… … 11

1.2.1 General Trends ……… ……… … 11

1.2.2 Underbanked Individuals and Fringe Banks …… ….….…… 15

1.2.3 Over-Indebtedness ……… … ……… 16

1.2.4 Financial Literacy ……… ……….…… 21

1.2.5 The Service of General Interest Mission and the Community-Based Approach ……….……… 22

1.2.6 Concerns and Possible Solutions ……… ……….……… 29

1.3 The Issue of Measurement and Comparative Analysis ….…… …… 30

1.4 Types of Response ……….…….………….……… 35

1.5 Case Studies……… ……… … 43

1.5.1 Europe ……… ……… 43

1.5.2 The Situation Overseas ……….……… 69

1.6 Result from a Survey in France, Italy and Spain ……… 84

1.7 Conclusions and Future Perspectives ……….………….……… 95

1.8 References ……… ……… 99

2 Access to Credit: the Difficulties of Households 107 2.1 Introduction ……….……….… 107

2.2 The Use of Credit by Households ……….… 108

2.2.1 The Questionnaire Survey ……… ……… … 112

2.3 A Theoretical Framework for Credit Exclusion …….……….… 117

2.3.1 The Role of Credit to Overcome Social Exclusion ……….… 117

2.3.2 Economic Rationales for Credit Exclusion ………… …….… 118

2.4 Beating Credit Exclusion ……….… 123

2.4.1 Lending to Households: a Profitable Business Area ……….… 124

2.4.2 Reducing the Costs and Risks Associated with Households Loans.……… ……… 128

2.4.3 A Wider Scope for Not-For-Profit Intermediaries and

Organizations ……… ……… …… 132

2.5 Conclusions and Policy Implications ……….………….… 134

2.6 References ……….……… 137

3 Access to Investments and Asset Building for Low Income People 141 3.1 Saving and Asset Accumulation for LMIs: Theoretic Framework… 141

3.2 The USA Experience with the Individual Development Accounts (IDAs) ….……….……… 145

3.2.1 Features of the IDA Accounts/Programs ……….… 145

3.2.2 Stakeholders of the IDA Accounts/Programs ……… … 154

3.2.3 Funding of the IDA Accounts/Programs ……… …… 159

3.3 Saving and Asset Accumulation with Tax Refunds ….……… 162

3.4 The British Experience with the Child Trust Fund and the Savings Gateway …….……….…… 165

3.5 Conclusions …….……… 172

3.6 References and Bibliography … ……….……… 173

3.7 Appendix - Comment on Data About the “Access to Investment Services” ……… ……….……… 178

Appendix to Part I - Methodological Notes to the Field Research in France, Italy and Spain ……… ……….………… 183

Part II 4 What Are the Specific Economic Gains from Improved Financial Inclusion? A Tentative Methodology for Estimating These Gains 191 4.1 Introduction …….……… 191

4.2 Defining Financial Exclusion ….……… 192

4.3 European Evidence on Exclusion …….……… 193

4.4 Market Context and European Policy Responses …….……… 195

4.5 From Exclusion to Inclusion – Identifying the Costs and Benefits … 199

4.6 Measuring the Economic Gains from Improved Financial Inclusion 207

4.7 Conclusion ……….……….….… 209

4.8 References and Bibliography……… ……….…… … 210

5 From Financial Exclusion to Overindebtedness: the Paradox of Difficulties for People on Low Incomes ? 213 5.1 Introduction …….……… 213

5.2 A Definition of Financial Exclusion as a Social Phenomenon ……… 215

5.2.1 Return to the Definitions of Financial Exclusion ………….… 215

5.2.2 Use Difficulties ……….….……….… 217

5.2.3 Financial Exclusion and Social Exclusion: Moving Towards an Overall Definition ……….……….…… 219

5.3 Access and Use of Credit: the Importance of Social Constraints …… 221

5.3.1 The Financialisation of Social Relations …….……… 222

5.3.2 Use of Credit as a Forced Response to Life Risks …… ….… 224

5.4 The Mechanisms Underlying Access and Use Difficulties.… …… 227

5.4.1 The Reasons for the Banking Relationship ……….… 228 5.4.2 The Need for Suitable Advice to Customers on Limited

Incomes ……….…… 231 5.4.3 Banking Imperatives Versus Customisation of the Service … 233 5.4.4 Standardisation of the Service that Is the Source of Access and

Use Difficulties, and Therefore of Overindebtedness …… … 236

Finanzgruppe ……….…… ….… 252 6.2.4 Recent Developments Affecting the Sparkassen-Finanzgruppe 253 6.3 Is the Public Mandate of the Savings Banks Obsolete or a Successful Strategy to Prevent Financial Exclusion? …….……… 254 6.3.1 Stipulations of the Public Mandate of German Savings Banks 254 6.3.2 Provision of Basic Banking Services ……… ….…… 256 6.3.3 Nationwide Provision of Financial Services ….…… …….… 257 6.4 Financing of Small and Medium-Sized Enterprises ……….… ….… 259 6.5 Encouraging the Accumulation of Wealth and Financial Education 261 6.6 Future Outlook on the Sparkassen-Finanzgruppe ……… … 262

Surveys ……… ……… 290

8 Italian Banks’ Credit Approach Towards Low-Income Consumers

and Microenterprises: Is There a Bias Against Some Segments of

Customers? 299

8.2 Methodologies of Credit Risk Measurement: Credit Scoring Models 302 8.2.1 The Choice of Highly Explanatory Variables ……… … 305 8.3 Strengths and Weaknesses of Credit Scoring ……… … 307 8.4 The Effects of the Adoption of Credit Scoring on a Marginal

Borrower’s Credit Process……… … 310

8.5 The Experiences of Some Italian Banks ……… … 313

8.6 Conclusions ……….…… ……….… 318

8.7 References ……….….……….… 319

9 Banking the Poor: Policies to Bring Low- and Moderate-Income Households in the United States into the Financial Mainstream 323 9.1 The “Unbanked” and the “Underbanked”……….….……… … 323

9.1.1 The Alternative Financial Sector …… ……… …….… 324

9.1.2 The Costs of Being Unbanked ……… … …….… 326

9.2 The Banking Sector ……… ……….……….….… 327

9.2.1 Barriers to Banking the Poor ……….… 327

9.2.2 Governmental Policy and Private Sector Innovation …… … 329

9.3 Payments Systems and Distribution Networks ………….……….… 333

9.3.1 Checks and Debit Cards …… ………….……… 333

9.3.2 ATMs … ……….……… 335

9.3.3 Direct Deposit and Bill Payment ……….………… 337

9.4 Transforming Financial Services for the Poor ……….…… … 339

9.4.1 A New First Accounts Tax Credit ……….………… 339

9.4.2 The Community Reinvestment Act ……….……… 344

9.4.3 State Policies and Welfare Reform ……… …….… 345

9.4.4 Financial Education ……… … 345

9.4.5 Reforming the Alternative Financial Sector ……….… 346

9.5 Conclusion … ……… ……….… 349

9.6 References ……… ……… 350

10 Migrants and Remittances 353 10.1 Migration Phenomena: Modern-Day Elements of an Ancient Phenomenon ……… ………….……… 353

10.2 The Risk of Financial Exclusion Within a Broader Perspective … 355

10.3 Migration Phases and Personal Variables as Key Elements of Financial Needs ……… ……… ……… 356

10.3.1 Demand for Financial Services Aimed at Immigrants ….… 357 10.4 Migrant Remittance Behaviour ……… …… …… ……… 365

10.5 Conclusions ……… ……… ……….… 368

10.6 References ……… …….……….… 370

Benoît Jolivet

The world of banking services is a fascinating but complex one It is much more than simply an ideal place from which to observe the interplay of supply and demand for specific services

It is also a mixture of pure markets and of intermediaries, of banks lated by both central banks in charge of monetary policies and by financial supervision authorities Money remains something special, always includ-ing an element of public trust, and the high degree of information asymme-try calls for public intervention on the side of consumers and their protec-tion

regu-This new book attempts to shed some light on this world, which has rules of its own yet permanently interconnected economic, social, insti-tutional and sociological aspects New major concepts such as financial exclusion and inclusion, are clearly defined and show the interconnection with other aspects such as, for example, poverty In this world of finance,

so often seen in terms of technique and marketing, it is very helpful and positive to take into account the independent views of people with different academic perspectives The first part of the book is dedicated to the issue of access to different types of financial services; and includes an analysis based on a wide ranging literature review and desk study of the most interesting examples of practice worldwide, as well as on specific re-search conducted in France, Italy and Spain

Access to banking accounts and to payment services is a most important issue today, because they are seen increasingly as a right and as a key to full citizenship This is also why this right is increasingly enshrined in law

or regulation despite the fact that the question of its status as a basic need

or as a service of general interest is still a matter for debate in many countries Without reasonable and affordable access to these two basic areas of services, however, the chances of participating in normal social life are reduced, leading to a greater risk of social as well as financial exclusion

Access to credit is important to develop the potential offered by employment The issue is complicated by the fact that it is the responsibility of financial institutions to supply and price credit according

to risk, which means denying credit to those who are at risk of not being able to pay it back While there clearly may be no right to credit per se, turning down somebody who is solvent does present difficulties

In the banking world, solutions are linked with principles of tion, scoring methods and the awareness of the sub-prime market This book gives an account of a whole range of new and interesting examples of work currently being developed in different countries that could lead to the adoption of new types of good practice

segmenta-One of these types of practice is in facilitating access to investments and asset building for low-income people Some examples that could lead to new ideas are presented here The most advanced experiences and interesting solutions in this area come from the USA and the UK

The second part of the book presents different studies, all related to specific aspects or projects, showing that, from a theoretical as well as a pragmatic point of view, there is scope for products to meet new and emerging needs This association of new elements of demand and supply, arising from untapped markets, should be to the benefit of all

The development of financial activities as an important part of the key services sector, should bring more activity and employment and therefore more economic growth

Focussed on encouraging financial inclusion, instead of simply fighting against financial exclusion, this development could also lead to improved social cohesion and specific economic gains

All the aspects developed here could herald new frontiers, new iours and new synergies between economy and finance that are of interest

behav-to all - citizens, bankers and decision-makers For example, the ideas of

«banking the poor», without necessarily having recourse to special tions, or of bringing solutions to migrants wishing to make remittances, could open the door to new approaches, especially for those with an inter-est in sustainable development and corporate social responsibility

institu-Some specific perspectives are also of considerable interest, for example

on the prevention of over-indebtedness, financial exclusion, and the merits

of micro-enterprises

The overall message conveyed by each of the authors of this book, the message that we are only at the very beginning of new developments and innovations in the world of financial services, especially ones that take into account new social needs, is an extremely encouraging and refreshing one

Luisa Anderloni and Emanuele Maria Carluccio

1.1 Introduction: Financial Exclusion

The link between finance and growth has been thoroughly studied by several analysts from a macroeconomic perspective, with theoretical approaches, methodological issues and empirical analyses that are still being debated1 In relation to developing countries, the study of access to financial services by families and individuals is fairly recent In this context, both private and social benefits have been shown to accrue from improving access to financial services, such as promoting economic growth and improving income distribution In addition, it can play a key role in reducing risk and vulnerability2

In contrast, it is access to bank relations that has been more recently studied within developed countries3 Since the 80s, special attention has

1 For a wide overview of this debate, see Goodhart C.A (2004), Levine R (1997) and Levine R (2005), in which the main focus is on aggregate growth They consider the impact on real economy, namely on the development of the country’s economic activities in terms of several GNP configurations The essen-tial functions recognised by Levine for the financial system are described from a macroeconomic perspective and focus primarily on business activity However, the most recent analysis and studies highlight new research perspectives on the re-lationship between finance, income distribution and poverty Furthermore, recent studies on the link between finance and growth in the developed countries have tended to address the question of whether bank-based systems are superior to the market-based ones

2 For all of them, see Beck T., A Demirguc-Kunt and R Levine (2004) as well

as Honohan P (2004)

3 A certain attention was given to all this in Europe in the sixties at the time of institutional reforms and/or interventions on territorial articulation and bank institutional structures For example, in France, a set of measures paved the way

been devoted to the issue of financial exclusion, seen as part of the wider issue of social exclusion This has been particularly true of the US, as well

as some European countries – the UK and France in particular The issues have proved to be multifaceted with a range of different solutions proposed The experience of several countries in addressing these issues is described later in this chapter

Both theoretical and practical studies have been undertaken At a theoretical level, studies have looked at the economic, sociological, institutional and behavioural reasons why some market segments have difficulty to accessing the financial system They have also addressed the question of appropriate policy responses

From a practical point of view, the studies have looked closely at who exactly are having access difficulties, the reasons for these difficulties, possible solutions to meet at least the most basic needs, the types of institution most able to play a role in financial inclusion

Several trends in the banking system and, more generally, in the wider institutional framework have tended to exclude people with low-moderate incomes, who have tended to be increasingly lumped together with the poorest elements of the population

The analysis that follows looks at the debate about financial exclusion in several countries Many stakeholders are involved: government, the financial services industry, related authorities and voluntary groups, consumer organisations and different academic interests They have focussed on a number of aspects:

- from the social point of view, the importance of everybody being able

to participate in financial processes and to benefit from the basic mechanisms that provide opportunities for economic independence4;

- from the point of view of society’s economic interest, individuals excluded from financial transactions and payment systems cause inefficiencies within the financial system that results in social costs5;

for a households’ higher level of access to bank services, which went up from 18% in 1966 to 99% nowadays See Gloukoviezoff G (2004c)

4 In this respect, Sinclair S.P (2001), p 14 states that people facing difficulties

accessing banking services can be prevented from being able “to make an economic contribution to the community”.

5 So, as it was underlined, following the renewed interest for the access of retired people or the ones that receive subsidies of different kinds, in the US as well as in UK, the debate on financial inclusion and the offer of basic banking accounts to meet the life-line banking has been also stimulated by the need to reduce the administrative costs related to social subsides management In this respect, it is the electronic forms of payment that have been promoted

- those who are financially excluded also risk being socially excluded and are not able to take part fully in the production of value, and to make a positive contribution to the system as a result;

- from a legal point of view – but with major social and economic plications as well – the debate is around the right to an account, a ser-vice that is an essential part of normal economic and social life, to be provided at a reasonable cost and quality6

im-If the concept of financial exclusion is a multidimensional one7, what are its main elements?

At least two possible definitions of financial exclusion are described in the literature

A wider definition focuses on financial needs It refers to the difficulties experienced by low-income and socially disadvantaged people in accessing the financial system in all its forms in order to meet those needs These needs include opening a bank account, to have the option of non-cash payment services and to have access to affordable credit The needs also include the opportunity to build up modest assets through appropriate savings and investment vehicles offering flexible terms and easy access to funds, and also take account of social security allowances and unstable work patterns

A rather more restrictive definition puts the emphasis on specific services and their absence These services are sometimes described as “essential”

and refer more to a certain notion of universal services, “services that do not have an impact on the households’ budget, but (they) represent at the same time essential elements for the individual’s life, subsistence, security and participation to the economic and social life”8 This definition is

6 On this debate in Europe, see following § 1.2.5

7 See Kempson E and C Whyley (1999) and several other authors that have further studied and confirmed this

8 See Anderloni L (2003a), Pesaresi N and O Pilley (2003) with a specific

reference to State aids in this context See also Pilley O (2004) : “L’accès de tous aux comptes courants et aux moyens de paiement autres que l’argent en espèces,

ne figure pas parmi les services essentiels (électricité, eau, chauffage, santé, cation, justice et services publics et privés tels que la culture, le sport et les loi- sirs) auxquels doivent pouvoir accéder tous les citoyens européens en dépit de l’importance de cet accès pour un exercice plein de la citoyenneté dans une socié-

édu-té de l’information Par contre, le surendettement y figure Il est explicitement connu que le surendettement peut conduire à une fracture sociale et, à ce titre, doit faire l’objet d’une prévention Enfin la responsabilité sociale des entreprises est évoquée spécifiquement comme un moyen essentiel de mobilisation”.

re-usually used in the context of legislative measures to impose an obligation

in terms of a universal service of essential or basic bank services

An additional dimension to financial exclusion also includes

“underbanked” individuals who, while they do in fact have a bank account (they are not “unbanked”), use their account very little as they have a pattern of living in which they mostly use cash or prefer to use other channels outwith the mainstream financial system9 This dimension will also be discussed in later sections

In the light of these features, it seems appropriate to adopt a wider

definition of financial exclusion, such as the following: “The inability to access necessary financial services in an appropriate form Exclusion can come about as a result of problems with access, conditions, prices, marketing or self-exclusion in response to negative experiences or perceptions”10

The advantage of this definition is that it effectively encompasses both objective circumstances, “lack of access to financial services”, as well as specific assessments: whether, as a matter of fact, the services offered are appropriate to the needs Furthermore, it also links the objective situation

to various circumstances that, whether individually or jointly, lead to exclusion These include both obstacles from the supply side as well as barriers from the demand side, such as lack of knowledge or awareness

In general, this concept of financial exclusion can be applied both to individuals and to communities, namely homogenous groups of individuals that live in the same context and share access difficulties In general terms, financial exclusion amongst individuals and/or communities is due to

9 In this respect, Barr M (2004) uses the term “unbanked” to refer to

“individuals that do not have an account (savings, checking, or otherwise) at a depository institution” and refers to the “underbanked” people as those with an account at a depository institute but who rely for their financial services providers (such as check cashers, payday lenders, auto title lenders, refund anticipation lenders, and rent-to-own companies) that largely serve low and moderate income neighborhoods” Barr observes that the problems faced by the “unbanked” and

“underbanked” overlap significantly but diverge in important aspects, which he further develops

10 See Sinclair S.P (2001) This notion is further accepted by Carbó S., E.P.M Gardener and P Molyneux (2004) On the other hand, according to Gloukoviezoff

G (2004c), financial exclusion is the process whereby people encounter such access and/or use difficulties in their financial practices that they can no longer lead a normal social life in the society in which they belong In other terms, he links the notion with the social implications these difficulties imply and clearly underlines that the social consequences that constitute it vary depending on the society under consideration as well as the status of the person concerned

geographical location, low income, general conditions of poverty, age or disabilities, living in depressed urban areas or belonging to specific, often ethnic, groups While earlier studies often focused on the geographical aspects of exclusion11, later studies have taken a broader perspective and have sought to explain wider underlying processes behind financial exclusion.

Following a study supported by the Financial Services Authority in Britain in 2000, the following categories of causes/forms of financial exclusion have been identified and are widely accepted12:

- “geographical access”, referring to the existance of bank and counter

services in particular goegraphical areas;

- “access exclusion”, referring to restricted access as a result of banks’

risk assessment processes;

- “condition exclusion”, the conditions relating to financial products

offered mean that they fail to meet the needs of some groups of clients;

- “price exclusion”, charges associated with products or services that

are too high for some individuals;

excluded by the way marketing and sales are targeted;

- “self-exclusion”, referring the fact that some parts of the population

refuse to approach banks, believing that any request for products or services would be turned down

These main elements of financial exclusion have been further analysed and, depending on the perspective applied, grouped differently in particular cases13

11 See the experiences made in the UK and in the US in § 1.5

12 The classification Kempson E and C Whyley propose has been further addressed by Anderloni L (2003a), Carbó S., E.P.M Gardener and P Molyneux (2004) It is an importance reference for all the following studies In fact, also G

Gloukoviezoff, while studying the issue of over-indebtedness, underlines that “the deprivation of all or part of financial services (from a bank loans and savings products) and over-indebtedness are two side of the same coin” and analyses

financialisation of social relationship within modern societies See his contribution (Chapter 5) to a more precise discussion of the aspects the various authors underline

13 Beck T and A de la Torre (2006) distinguish 3 types: i) “geographic

limitations”, referring, as example, to “the absence of bank branches or delivery

points in remote and scarcely populated rural areas that are costlier to service”, ii)

“socio-economic limitations when financial services appear inaccessible to specific income, social or ethnic group either because of high costs, rationing,

Another useful distinction, focussing on the causes of financial sion, explores concepts such as affordability and access, with an emphasis

exclu-on ecexclu-onomic variables, exclu-on the exclu-one hand and, exclu-on the other, exclu-on behavioural variables14

A further relevant distinction can be made between: i) access and the opportunity to use financial services and ii) the actual use of financial

services15

In many cases, “alternative financial services providers” play an ingly important role, especially payment services (exchange, cheques and transfer of remittances to the original country for migrants, and loans for immediate cash needs) In addition, there are also bank accounts that are opened but that are basically not used So, within the category of self-excluded people, there are also those that refuse any form of bank ser-vice16 This is linked sometimes to a certain resentment towards the system but, more often it is linked to the fact that the services offered are not fi-nancially accessible, fall short of what is needed, or because the potential user believes they would be rejected by the bank and see little point in making an approach in the first place

increas-Difficulties of access and difficulties in using these services are closely linked to the behaviour of both providers and their customers The above approach provides a useful tool to analyse the issues and to identify a wider range of interventions with the potential to facilitate financial inclusion

financial illiteracy, or discrimination” and iii) “limitations of opportunity” when

“talented new comers with profitable projects are denied finance because they lack fixed collateral or are not well connected As a variant to the main above-mentioned classification, Honohan P (2005) explicitly proposes the following

categories: i) “price barrier”, when service is available but too expensive, ii)

“information barrier”, when poor household’s creditworthiness cannot easily be

established, and iii) “product and service design”, when banks fail to offer the

kind of services that would be most useful for poor households The reason for these barriers, Honohan points out, may be technological, regulatory or market factors

14 See Connolly C and K Hajaj (2001)

15 This position is shared by Gloukoviezoff G (2005a) too About this aspect, see also World Bank (2005), further developed in § 1.3 and the above-mentioned distinction between “unbanked” and underbanked,” proposed by Barr M (2004)

16 These responses include the ideological position of refusing to interact with any banks In this respect, see in §1.6 the results of the survey that has been carried out in France, Italy and Spain

Table 1.1 Summary of different types of financial exclusion

screening Counters localisation policies in areas with no socio-economic degradation

Marketing: adverts to profitable/ market segments only (marketing exclusion)

To take advantage of lack of knowledge of their rights from weak customers (undue foreclosure, dishonour of plans in cases of over-indebtedness) Demand

Source: adaptation from Gloukoviezoff G (2005)

1.2 Interests, Concerns and Possible Solutions

1.2.1 General Trends

There are several reasons why growing sectors of the population are interested in having accessing financial services and why increasing attention is being given to the problem of financial exclusion These include:

- an increased focus on all types of social exclusion and discrimination

In Europe, this interest has been encouraged by a number of leading countries (France, Great Britain and some Nordic countries) and has

emphasis has been then put on measures to promote the social and economic potential of all to the full;

- the spread of social and economic organisational models over the past two or three decades that, on one hand, have made it more difficult to survive without contact with banks and other financial services providers and that, on the other, have increased socio-economic instability18 This instability has also made stable relationships with banks and other financial services providers more difficult and expensive and has widened the gap between the provision of necessities, on one side, and the accessibility of what is offered on the other;

- providers own policies may result in the neglect of clients considered marginal In particular, cost based pricing and risk-based policies, with their corresponding techniques of measuring profitability and capital allocation can contribute to this Growing pressures on banks for a higher manufacturing and distribution efficiency call for a stringent reduction in costs in search of greater profitability This results in market segmentation policies with a preference for customers with greater financial resources, whereas those with more modest resources no longer benefit from cross-subsidies from other market segments In fact, until recently, many basic banking services

17 In particular, the Lisbon European Council in March 2003 underlined the positive interaction between economic, social and employment policies, which aim to promote a model of sustainable development for the Union to raise all the European citizens’ lifestyle This would be possible by linking economic growth, social cohesion and safeguard of the environment This objective is pursued also

by modernising the European social model, investing in people and fighting against social exclusion

18 Some phenomena are mentioned, in particular: i) the employment market has

become more flexible with more and more flexible working contracts, compared

to the full-time open-ended jobs, ii) the traditional families have disappeared; see

also the implications of ageing population, rising number of separations and divorces, diminution of marriages and, as a consequence of that, the rising number

of cohabitations and children born to unmarried couples or raised by only one

parent on the social integration solidity, iii) the development has geographically

polarised, with major gaps between urban and suburban areas, economic and

social wellbeing and degraded areas, iv) the speed gaps in the development of a

knowledge society

were effectively cross subsidised by more profitable activities Increasing competition and the emphasis on efficiency and profitability have conspired to eliminate these models Automation and the spread of self-service banking, with low levels of interaction with bank staff, have also had a negative impact on access More traditional users with lower technological and financial literacy and unwilling to use self-service banking, are penalised and do not benefit from the lower bank charges for self-service transactions;

- the transformation of the banking system Many types of bank (such

as mutual, co-operatives, previously public or, more rarely, private banks), have been privatised or taken over by commercial banks The primary task of many of these banks in the past was to develop the local context and to support the poorest parts of the population, as well to encourage involvement in the local community;

- the rationalisation of the network of bank retail outlets as a quence of the two above-mentioned factors19 Outlets are increasingly located in the most profitable areas and increasingly tend to avoid de-graded urban areas and poorly populated rural ones20;

conse measures both to combat money laundering and to combat the ing of terrorism bring a greater bureaucratisation of financial transac-tions in their wake and increase the importance of management and counter staff knowing more about their customers;

financ finally, the increasing withdrawal of the state from the provision of social security means that there is a growing need for personal savings and more use of private sector provision to meet future needs, including the needs of those with the least financial resources

People running the greatest risk of financial exclusion as a result of these trends share important common features even if their context is different Evidence from different countries suggests that financial exclusion is concentrated among people with the lowest incomes and that unemployed people, those unable to work due to sickness or disability, and

19 It should be mentioned that the above-mentioned transformation process has often come along with concentration and revision processes, within a group perspective, with localisation of counters, closure of the ones that were overlapping in some areas and the ones whose profitability was considered not sufficient according to new profitability requirements and the new business’ mission

20 This contributes to the concentration of multiple disadvantages in certain urban and rural communities and among some groups

lone parents are especially affected21 Indeed, many people either stop using, or close down a bank account and cancel insurance policies when they leave the labour market

Furthermore, it is the youngest and oldest parts of the society that have the most limited access to the bank services, though for different reasons Young people on low incomes tend to have poor knowledge of financial services and, in addition, are more likely to have experienced financial difficulties because of a failure to respect their financial (and non-financial) commitments Members of the oldest age groups on low incomes tend to have lived on a low income all their lives, never to have used financial services and to have only used cash They tend to be highly resistant to change and prefer to continue the practice of carrying out their transactions solely in cash22

Recent immigrants and refugees face particular problems, partly through

Cultural and religious factors can also have an impact24 In addition to this, migrants from some specific areas often have either a poor or even no knowledge of the banking system or have little trust in it For this reason, they are reluctant to engage with banks Together, ethnicity and low income can lead to geographical concentrations of serious financial exclusion

In drawing up a picture of factors that contribute to difficulty of access

to the banking and financial services industries, there are three further issues that increase the risk of financial exclusion in the broad sense of the term:

- underbanked people and the use of fringe banks;

- over-indebtedness and payment incidents;

- financial illiteracy and other forms of misuse of the financial system

24 In particular low-income Muslims living in a predominantly Christian often find that there are no Shariah-compliant financial services they can use About Islamic finance, see Llewellyn D and M Iqbal (eds) (2002)

1.2.2 Underbanked Individuals and Fringe Banks

Though underbanked individuals formally have access to a bank account, for various reasons their needs are not satisfactorily met through their rela-tionship with the bank and they remain then partially excluded from the banking system (for example they have no fiduciary instruments at their disposal, such as cheques or credit cards) Because of this they use alterna-tive channels To meet a need for immediate cash, for example cashing a cheque or other payment instrument, or a short-term loan, they address themselves to providers operating in areas of “grey regulation” often out-with the remit of consumer protection legislation The underbanked indi-viduals’ position can take different forms in different contexts For exam-ple, in France where, for historical reasons, cheques still represent an important payment instrument, not having a chequebook puts one at a se-vere disadvantage; moreover, the widespread use of credit cards means that the failure to own one can reflect negatively on a person’s trustworthi-ness In Sweden, internet banking is widespread and bank transactions at the counter are financially penalised and those without access to a com-puter and to the internet suffer

In some contexts, the fact that the unbanked or underbanked individuals use fringe banking services is a matter of some considerable concern since they tend to be associated with exorbitant costs and unfair conditions The sector comprises both providers with a long tradition of meeting the needs

of marginal customers (in particular the pawnshops that provide credit upon pledge, that experienced an exponential development in the 80s)25, as well as newcomers to the market (cheque cashing firms, pay-day loan firms, rent-to-owns and, more generally, finance and loan companies), who provide, immediate cash to this market segment This case is forthcoming

at the expense of very high charges, since they associate a high premium

to the risk involved

This phenomenon is particularly widespread in the US26, in Canada27 and

in the UK28 In these countries, increasing attention has come to be paid to these services and their impact on their customers – most of whom are economically fragile In some other countries (for example in Italy and

25 Caskey J.P (1994)

26 See Caskey J.P (1994), Fox C.J.A (1998), Rhine S.L.W et al (2001), Arthi Varma (2004)

27 See Buckland J., M Thibault et alia (2003) and (2005)

28 See Carbó S., E.P.M Gardener and P Molyneux (2004) and several articles

on the daily press in 2004

Ireland29) there are signs that seem to indicate that these financial services have established themselves and are growing in importance However, since the phenomenon has not been studied in detail, it is not really possible to get an accurate picture of its size, its ways of working and the dangers involved The above-mentioned studies clearly show, however, the risks associated with the fringe banking sector, particularly for low-income, socially and economically fragile customers In fact, the sector encourages a vicious cycle where indebtedness grows, the costs of servicing debt increases, and the repayment arrangements become ever more demanding, with the result that the financial situation of those dependent on the sector becomes more and more difficult with an increased risk of poverty as a result

1.2.3 Over-Indebtedness

Over-indebtedness appears, at first sight, to be a paradoxical phenomenon

In fact, in addition to being associated with financial exclusion on account

of difficulties in accessing the financial services market, modern mies also see financial exclusion resulting from exclusion from the market

econo-as a result of over-indebtedness, and when the situation hecono-as been faced in a way that is damaging30 At the same time there is another growing form of indebtedness This is household indebtedness (to support consumption, to purchase the house, as a result of unforeseeable events, and so on) and it is

a characteristic trend in modern economies: the over-indebtedness risk31 –

29 In particular, usury is mentioned, that is to say funding at so high rates that the loan will be ever redeemed, but it grows so massively to force the debtor to sell all his/her available goods, ask for the family’s help, and includes in some cases slavery and prostitution These are of course illegal operations that remain out of the legal credit market and for which even the rules on threshold usury rates are ineffective

30 On how the two phenomena are compatible, seen as two sides of the same coin, see G Gloukoviezoff in this volume

31 To underline the social implications of the phenomenon, the following

definition is adopted: “over-indebtedness conditions are present when a private subject (a household) is incapable of facing the payment obligations in due time according to its current revenue If it did it, its survival conditions would disappear” See Anderloni L (1997), p 77 On the notion of over-indebtedness

and, even more, on the modalities to measure this phenomenon, the literature’s debate is still open and there is no general agreement about how this is to be defined or measured

and, in particular, so-called “passive over-indebtedness”32 – is higher for the socially and economically fragile individuals It should be remembered

at this point that over-indebtedness can result not only from the need to keep up loan payments, but may also result from other commitments in-cluding rent, utilities, insurances, taxes and duties or cash advances within family structures

In fact, while over-indebtedness can affect all sections of the population, researches have shown that it is primarily related to low income Besides lower incomes, separations and divorces are also often major factors Over-indebtedness has, then, important and complex links with social and financial exclusion While over-indebtedness is often a consequence ofsocial exclusion it can also be a direct cause of exclusion, leading to exclusion not only from financial services, but also from other spheres of economic life such as telecommunications, housing or even employment Problems of over-indebtedness mostly arise through changes in circum-stances that give rise to an unexpected decline in income, making existing commitments unaffordable This can include job loss, divorce and the onset of long-term sickness and disability Some of these tend to be con-centrated among young families At the same time, it is important to note that people who are already socially excluded, and living on low income for long periods of time, also have a high risk of over-indebtedness, particularly taking into account all their household commitments rather than simply consumer borrowing

32 This is distinguished, from a logical point of view, from active indebtedness “Active” over-indebtedness indicates the condition caused by the individual’s high tendency to spend (for consumption and/or investments) because he/she highly trusts his/her current and future revenue capacity In other words, the individual’s economic and financial behaviour makes him/her underestimate his/her engagements’ size (entity and deadlines) Alternatively, he/she implicitly overestimates his/her income flows over time “Passive” over-indebtedness indicates the condition that has been generated after indebtedness decisions, by unforeseeable factors that are generally independent from the individual’s will, job loss as an instance In this context, there is no revenue (or parts of it) and the income flows has been interrupted or reduced; at the same time, some unplanned liabilities have emerged (diseases, disability, rising rent costs) These elements are more likely to occur within the economically and socially weakest and most vulnerable parts of the population and within the economic cycle’s phases that go towards recession The distinction on the practical point of view is not always evident It is clear that the lowest the individual’s current revenue is, the most frequently the “active over-indebtedness” will occur, for cultural and economic needs

over-The links between over-indebtedness and financial exclusion can thus

be summarised as follows:

subject to passive over-indebtedness (see definition above), have much in common with people who find it difficult to access the financial system and gain appropriate and mindful use of financial products and services33;

over-indebtedness often causes financial exclusion For example, modern credit ratings techniques, allow personal information to be distributed through centralised credit reporting systems, so that someone with negative credit information such as a default can find themselves ex-cluded in future from access to finance and, as mentioned above, also telecommunication or even employment;

- the means of preventing the risk of over-indebtedness occurring34 and the ways of dealing with it, once the difficulties have reached a climax35, are often the same as the ones that can be used to prevent the risk of financial exclusion and to help economically and culturally fragile people develop a relationship with the financial system

Besides its links with financial exclusion in general, the issue of the financial exclusion of households has given rise to two particular concerns

over-to a life style that they cannot afford on their income – consequently they live beyond their means by borrowing heavily They also tend to be relatively young, since this is the time when household budgets are most limited and the need to borrow arises

34 The most common initiatives to deal with problems of over-indebtedness are,

on the demand side, programs for promoting financial literacy and to raise levels

of financial capability, on the offer side, initiatives for promoting responsible lending by creditors, and on the institutional side, appropriate arrears recovery practices by creditors

both procedure for bankruptcy or “personal recovery” to deal with the most cult, i.e irreparable, situations, and provision of free debt advice for helping to draw a plan of reimbursement and provision of mediation services with the credit-ors in order to come to an agreement on a rescheduled plan of reimbursement

diffi-The first is the impact on consumers of the enlargement of the credit market, and increased competition and innovation This is in the context of European Union moves towards a single harmonised market for financial

proposal for modifying the Directive on consumer credit37 The priority is

to find a balance between the goals of maintaining accessible and affordable credit together with the promotion of the internal market, while ensuring at the same time, a high degree of protection for consumers throughout the European Union

This debate highlights a discrepancy between the objective of offering financial service providers legislation to allow them to operate in the same way in all the Member States, through full harmonisation of key legislation and, at the same time, the goal of not reducing levels of consumer protection, leaving space for regional problems and combating the increase

in over-indebtedness A major concern is that, in some contexts, aggressive policies to promote the use of credit via revolving cards could lead to an intolerable increase in indebtedness, including over-indebtedness amongst those who are most economically and culturally fragile and who would be most exposed to the risk of taking on too big commitments too quickly The increase in card-based payments undeniably presents a number of policy problems, the most serious of which is the likelihood that the use of cards will contribute to an unjustifiable level of consumer credit and that borrowing on the cards will contribute to an increase in the level of consumer bankruptcy38

Secondly, preventing and dealing with different forms of indebtedness represents, in some countries, an important part of the com-mon objective to fight against poverty and social exclusion The Lisbon European Council has established a political framework, including the fight against exclusion in the Union’s overall strategy39 This is to be achieved through an open method of co-ordination combining national ac-tion plans and a Commission’s initiative for co-operation in that field In accordance with its mandate, the Treaty of Nice endorsed the fight against

over-36 See http://ec.europa.eu/internal_market/finances/policy/index_en.htm

37 See Modified proposal for a Directive of the European Parliament and the council on credit agreements for consumers amending Council Directive 93/13/EC COM (2005) 483 final and the following Council of the European Union, DS258/06 of April 4th 2006 The importance to amend the Directive is reaffirmed

in White Paper, Financial Services Policy 2005-2010

38 Because increasing financial distress imposes externalities on the economies

in which it occurs, the global rise of the credit card poses serious policy questions

39 See Lisbon European Council, Presidency Conclusion, March 23rd and 24th,

issue “Promoting social inclusion”

social exclusion and all forms of discrimination, within its European social agenda40 Furthermore, it has included the fight against exclusion within art 137 of the Treaty establishing the European Community Based on this, the Council has invited the Member States to elaborate a common ap-proach by preparing two-year National Action Plans on Social Inclusion41.

In this context it should be pointed out that, amongst initiatives aimed at preventing the risk of exclusion, several national plans have included spe-cific initiatives to confront over-indebtedness and financial exclusion In particular, as over-indebtedness has increased it has had unfavourable im-plications for poverty and exclusion amongst individuals and households (for example, they were discouraged from looking for or accepting a job)42.Initiatives taken to combat the rise in over-indebtedness include the pro-motion of information and the development of educational activities43 In addition, some countries44 have also adopted measures to improve access

to banking services and to provide free financial advice services On top of this, the reports presented by United Kingdom45, Netherlands, France, Finland, Belgium and Germany highlight the measures taken to combat fi-nancial exclusion, such as easier access to bank accounts, simplified soft

40 See Nice European Council Meeting, December 7th, 8th and 9th 2000, Presidency conclusions, Annex I, European Social Agenda, III Fighting Poverty and all forms of exclusion and discrimination in order to promote social integration

41 See NAPS/Inclusion 2003-2005 and updated reports on 2004-2006 NAPs/ Inclusion

42 The situation and level of attention is different in the various countries, since there is no official or academic shared definition, it is difficult to compare the available data This phenomenon seems to be relevant in Austria, Belgium, Germany, France, Ireland, Netherlands, the UK, Portugal where the NAP on Social Inclusion point out that the phenomenon has reached worrying levels and in Spain where a report of the Bank of Spain underlined the problem that 34.5% of the poorest families had debts which were three times more than their annual income See Commission of the European Communities, Commission Staff Working Document, Implementation and update reports on 2003-2005 NAPS/Inclusion and update reports on 2004-2006 NAPS/Inclusion, COM (2006)

62 final

43 Examples of that are Austria, Belgium, France, Luxembourg, Portugal that include these initiatives within the 2003-2005 NAPs on Social Inclusion

44 France and Belgium in the first case, the UK in the second case

45 The experience is particularly articulated in UK: generally, also afterwards, the government sets out the goal to reduce by 50% the number of people that do not have any bank account; to this purpose, it has created a special fund for financial inclusion Some regions (Northern Ireland, Wales and Scotland) have taken specific initiatives

loans and face-to-face counselling to cater for the needs of people on low incomes In these cases, financial exclusion is seen as part and parcel of social policies to fight poverty and promote social inclusion

Other initiatives taken to prevent and manage over-indebtedness include

legislation on the regulation of debt47

1.2.4 Financial Literacy

The lack of financial understanding amongst consumers is a second major

financial literacy levels are particularly low amongst the less educated, minorities and those on the lowest incomes Financial literacy is increasingly important today for a number of reasons:

- the wide range of financial products and services designed to meet a range of often sophisticated needs that are not easily understandable

by the inexperienced user;

- the increasing complexity of financial products, with a very cated range of options; combined with a time gap between the pur-chase of a financial product and its use to do what it is supposedly de-signed to do Therefore, it is only at a later stage that it becomes apparent whether the original choice made was appropriate or not;

integration of public and private provision or the substitution of the latter for the former The choices involved are complex ones, in which the risk tends to be transferred from the provider to the worker;

- the general growth in standards of living and therefore the increasing number of individual investors who have money saved that needs to

be invested At the same time, the increasing level of job insecurity in

a more flexible labour market often make this saving essential to provide a buffer in the face of sudden changes of income;

- the trend towards the liberalisation of markets with a proliferation of providers and distribution channels, together with increasing product innovation, increases the risk of mis-selling and of consumers being actually “ripped off”

46 See the experiences of Austria, Belgium, Germany, Finland, France, Hungary, Netherlands, Ireland and the UK

47 With reforms introduced in Germany, France and presently under discussion

in Belgium, Finland and Netherlands

48 See US, the UK and Australia

Financial literacy and financial education initiatives49 are thus very important weapons in the fight against financial exclusion in its broadest sense, since access to appropriate financial services requires conscious and adequate choices on the part of consumers

1.2.5 The Service of General Interest Mission and the

Community-Based Approach

Finally, mention should be made of the fact that, given crucial importance

of suitable access to financial services – particularly to payment services –

in many areas of social and economic life, a debate has developed in some countries about basic banking services as services of general economic interest It is argued that they should be made accessible to all consumers and have a good price/quality ratio since they are indispensable for individual life, subsistence, and safety, as well as for involvement in economic and social life

Generally speaking, private sector providers perceive the possibility of imposing a requirement for the provision of services of general interest as

a threat, especially if they are to receive no benefits to compensate for the costs of rendering services to unprofitable customer sectors50 At the same time, the granting of compensation benefits is also perceived as harmful by public authorities because of the risk of introducing bureaucratic mech-anisms that compromise market competition

As far as individual countries are concerned, the obligation of universal service with regard to basic banking services has been discussed and intro-duced, through different forms and methods, in the UK, in France and in Belgium51 In other cases, such as Germany and Austria, it has been ac-knowledged that this function is effectively performed in the market, by

49 The following definition is relevant here “Financial education is the process

by which financial consumers/investors improve their understanding of financial products and concepts and, through information, instruction and/or objective advice, develop the skills and confidence to become more aware of financial risk and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being” See OECD

(2005)

50 The granting of compensation benefits is becoming increasingly difficult as a consequence of both the reluctance as regards direct or indirect government aid, and of the general reduction of public resources available to support the economy

At the same time, as already mentioned, competition erodes spaces for monopoly and use of cross-subsidies

51 See § 1.5 below

some categories of banks or, as happens in Sweden, by a subsidiary of the postal service52.

In order to understand the approach to the subject of services of general economic interest on a Community level, it is first of all necessary to consider the general framework of the debate over time and how the latter was supported by the discussion concerning the Services Directive proposed in January 2004 under Commissioner Bolkestein53

General economic interest missions were initially created by the Treaty

of Rome as a means of justifying exceptions to competition, but later on they became a development and social concept (reflecting the shared val-ues of the Union as well as playing a role in promoting social and territo-rial cohesion”)54 The Council of Nice approved a Statement on Services of

General Economic Interest that shared the Commission’s view that “the scope of services of general economic interest should not remain fixed, but should reflect our rapidly changing economic, scientific and technological environment” It also argued that the opening of some of them to the mar-

ket could have a positive impact in terms of availability, quality and price55 As regards Communications56, the Commission issued a report to

52 See Report of the European Commission to the Council of Ministers: Services of general economic interest in the banking sector, adopted by the Commission on 17 June 1998 and presented to the Ecofin Council on 23 November 1998

53 The directive serves the purpose of making it easier for service providers to deliver services in other Member States, with the underlying assumption that liberalisation will lead to better quality services and lower costs The proposal in its original form would have lumped together a vast range of services under the same umbrella: from financial services, employment agencies, to water, gas and social, education, health and housing services

54 Thus in the new art 16 of the Treaty signed on June 18th 1997

55 Moreover it recognises their contribution to European competitiveness, as they serve specific purposes (protection of consumer interests, user safety, social cohesion and regional planning, sustainable development), reaffirms the importance of the principles of neutrality, freedom and proportionality, and underlines that the tasks performed by them should be carried out in such a way as

to meet the legitimate expectations of consumers and citizens In addition, it expresses a number of concerns related to the fact that application of internal market and competition rules should allow services of general economic interest

to perform their task under conditions of legal certainty and economic viability which ensure - inter alia - the principle of equal treatment, quality and continuity

of such services as well as the necessity of a regular assessment of the contribution made by services of general economic interest to economic growth and social well-being See Nice European Council Meeting, 7th, 8th and 9th December, Presidency Conclusions

the Laeken European Council57 and the Green Paper on Services of eral Interest58 The latter document built on the distinction between eco-

Gen-nomic and non-ecoGen-nomic services, and also highlighted the fact that “the range of services that can be provided on a given market is subject to technological, economic and societal change and has evolved over time”.

As a consequence, the distinction between the two categories has been a dynamic and evolving one, and in recent decades more and more activities have come to have economic relevance For an increasing number of ser-vices, the distinction has become blurred As a consequence there has been

a reluctance to draw up a definitive list of general interest services garded as non-economic Rather, in an attempt to paint a Community-wide picture of services of general interest, the Commission has identified a common set of types of provision that include the concept of universal ser-vice59 These should be provided in a continuous way, meet specific re-quirements in terms of quality and affordability, in order to be accessible for everybody, and comply with user and consumer protection standards The general examples provided include network services (energy, trans-port, telecommunications) and, as far as non-economic services are con-cerned, justice, safety, national education and a compulsory basic social security scheme Though the documents issued by the Commission fre-quently make a distinction between Services of General Interest (SGI) and

56 See “Services of general interest in Europe”, respectively OJ C 281, 28.9.1996, p 3 and OJ C 17, 19.1.2001, p 4

57 See COM (2001) 598 final, 17.10.2001

58 See Com (2003) 270 final where an effort is made to define and clarify terminology

59 Mention should be made here of the definition of universal service contained

in Green Paper: “the concept of universal service refers to a set of general interest requirements ensuring that certain services are made available at a specified quality to all consumers and user throughout the territory of a Member State, independently of geographical location, and in the light of specific national conditions, at an affordable price” It has been developed specifically for some of

the network industries (i.e telecommunications, electricity, and postal services) The concept establishes the right for every citizen to access certain services considered as essential and imposes obligations on industries to provide a defined service at specific conditions, including complete territorial coverage In a liberalised market environment, a universal service obligation guarantees that everybody has access to the service at an affordable price and that the service quality is maintained and, where necessary, improved Reference to this concept has been made by some countries when underlining the need to impose on banks the obligation to supply basic banking services

Services of General Economic Interest (SGEI), there is no clear definition

of either these terms60

From the evidence of Community documents, however, there are not many instances of the application of these concepts to the banking sector When working documents mention sectors and services, this is usually done merely for the purpose of exemplification

1997 on the freedom of service provision and the general interest missions

in the Second banking directive lays down the necessary criteria for a general interest measure to ensure that the set objective will be reached The above mentioned Report to the Council of Ministers states that, with respect to the liberalisation of the market, the financial services sector has been the subject of Community legislation aimed at establishing fair and open competition and that the banking sector is already characterised by a satisfactory level of competition Only overriding community interest could justify the placing of constraints on this An investigation conducted

by the Commission on services of general economic interest in the banking sector revealed that a certain number of Member States consider that a number of credit institutions fulfil specific tasks that constitute SGEI The

main ones are: i) promotion of small and medium sized enterprises, ii) granting or guaranteeing of export credits, iii) social housing loans, iv) municipal financing, v) financing of infrastructure projects and vi) regional

development In most cases these services are delivered by specialised credit institutions, especially established for that purpose, and in the vast majority owned by public authorities Two member States61 consider the supplying by a certain group of credit institutions (namely the savings banks) of a comprehensive financial infrastructure providing territorial coverage as fulfilling the remit of a SGEI62 None of the Member States had given (until that time, i.e 1998) the banking sector a duty to provide basic banking services The Commission adopted a prudent attitude on the matter, deciding that this type of regime should be the object of an individual evaluation, on a case to case basis63

62 Also mentioned in paragraph 35 of the document “Com 2000 580 final”

63 Some of these will be examined in detail later on

Most recently, the proposed amendment to the services directive on the one hand stipulates that SGEI fall within the scope of the directive because these services are of an economic nature64 and, on the other, excludes financial services – among numerous other exclusions – from its scope, arguing that these activities are the subject of specific Community legislation aimed at the same goals65 The solution mentioned above was adopted, despite some criticism that no specific consideration had been given to the concept of basic banking services

Finally, in order to gauge the role of the European Commission in this matter, we should bear in mind that, as the guarantor of the Treaty, it also has the task to monitor the compatibility of the provision of public services with the common market when they are provided by a company which, at the same time, is operating in the competitive sector Various measures aimed at preventing or redressing financial exclusion have been notified to

financing by the government of services of general economic interest (falling within the SGEI category) that offered deposit and payment services through the postal counter network covering the whole country and, in the specific cases presented to the Commission, serving citizens living in isolated regions or receiving social security benefits67

In the UK case, the authorities gave notice of an array of measures under the headline of “universal banking services” As a part of the Gov-ernment modernisation policy, the measures introduced the compulsory migration of the payment of social security benefits to automated credit transfer systems and were also aimed at facilitating access to a current ac-count to those who were “unbanked” The mechanisms were being put in

64 Following the amendments by Parliament, the revised text by the Commission reads as stated here, but also adds that the directive does not provide for their liberalisation or for the privatisation of public entities providing such services, nor does it deal with their funding or with state aids Vice-versa services

of general interest, which are not performed for an economic consideration, fall outside the scope of the directive

65 This exclusion covers all financial services such as banking, credit, insurance (including reinsurance, occupational or personal pensions), securities, investment, funds, payments, investment advice and services listed in annex I to Directive 2000/12/EC There is, as already mentioned, a large number of exclusions in a wide array of sectors; most importantly the exclusion covers all social and healthcare services, transport services and matters of electronic communication services

66 Reference is made here to cases from different socio-economic contexts: Great Britain, Sweden and Ireland

67 See Pilley O (2005) and Pesaresi N and O Pilley (2003)

place to ensure that the net cost of the services of general economic interest granted to Post Office Limited and the contributions to the new Post Office Card Account would not be overcompensated These two measures did not involve any State resources Therefore the Commission decided not to raise any objections to the notified proposal for universal banking services

In the Swedish case, the postal company, wholly owned by the State, was entrusted with a new universal basic cash service for which it receives

an annual State compensation through a budget appropriation In this case too, the Commission decided not to raise any objection as the measure did not involve any over-compensation

Finally, in the Irish case, the proposal was for a one-off equity injection

to An Post aimed at enabling the redevelopment of the Post Office network, where the revenues to the postal counter network from the delivery of services of general economic interest (postal, financial and governmental) represent about 80% of turnover As the compensation received is no higher than the extra cost of the related general economic interest service of the country-wide country cover, this transaction also got the green light

Another recent decision by the Commission concerns the creation and operation of the Postal Bank in France The operation is complex: its aim

is to split the banking and insurance activities of La Poste and entrust them

to a subsidiary, Banque Postale, of which 100% was initially owned by La Poste, established as a joint stock company and with a credit institution statute It is not possible here to go into detail about the implications of such an operation from the various viewpoints of Community law Suffice

it to say that the position taken by the European Court of Justice supported the view that La Poste has an important general economic interest role More specifically, mention is made of its connection with the local area

and service to the latter (“CRAT – Contribution à l’aménagement du territoire”) which, according to French authorities, falls within the scope

of a SGEI68 The result is that there are complex methods for the allocation

of the management costs for the counter network attributed also to financial services and therefore to Banque Postale These are subject to validation and approval by the Commission to ensure that such methods are not in contrast with Community principles and do not involve Government aid The situation is obviously complex and has economic relevance: suffice it to say that La Poste’s financial services account for

68 The Government imposes on the French postal services two SIEG missions related to the density on contact points in the area: one is universal postal services,

the other one “aménagement du territoire”.

25% of turnover69 and the costs allocated to financial services include the share of structure services common to the group, taxes and the residual CRAT mentioned above, not compensated by the reduction of taxation Based on the complex and articulated analysis by the Commission, the decision was taken not to raise any objection because the measures under examination do not involve economic advantages and could not therefore

be regarded as Government aid70 It is worth mentioning here, however, that the importance of the distribution and convenience of retail outlets was acknowledged, since this enables them to provide services in areas with low population density or at an economic-social disadvantage

Finally, an indication as to how the Community has approached the topic of access to bank accounts and basic banking services is contained in the White Paper on Financial Services Policy 2005-2010 that paves the way for the development of Community activities as regards financial ser-vices for the current five-year period There, the Commission, considering further actions that are needed to open up the fragmented retail financial

services, mentions bank accounts It points out that “accessing a bank count is the entry point for most consumers to financial services and mar- kets and increasingly important for citizens to participate in the market and society” It also calls attention to the fact that this is even more impor-

ac-tant when electronic payments are made within a Single Payment Area The subsequent conclusion is that undue barriers associated with all types

of bank accounts (current, savings, securities accounts) must be removed, that consumer choice must be widened and competition between service providers must be increased In particular the Commission wished to iden-tify existing problems associated with user mobility, that is to say opening accounts across-borders – including online – closing fees and transfers be-tween banks Moreover, the Commission has also put forward the idea of assessing the usefulness of an optional standard bank account, also in col-laboration with experts chosen among the industry and users

While this proposal is actually driven more by a concern for the development of a borderless European market than by the a desire to promote social banking initiatives, it paves the way for a recognition of the central importance of banking services and accounts in the today’s social and economic context

69 See C(2995) 5412 final, Mesures liées à la création et au fonctionnement de

la Banque Postale.

70 See C (2005) 5412 final

1.2.6 Concerns and Possible Solutions

From the above discussion, a wide range of factors contributing to financial exclusion emerges

They can be grouped into the following categories:

- macro environment (level of revenues, unemployment, social ance, development’s geographical polarisation);

assist personal features (education and culture, family structure and volvement in the local community);

in commercial context (bank, financial services, utilities and consumer goods)

In addition, factors contributing to difficulties of access or financial exclusion are to be found both in the supply side and the demand side In fact, an examination of these factors can help point us in directions that can help remove obstacles and facilitate access and financial inclusion The battle against financial exclusion should be fought, at several levels: the macroeconomic and the institutional one, with reference to support and care for those most in need, the offer side with appropriate structures supplying bank and financial products and services appropriate to low-moderate income people, and at the level of the underlying philosophy and motivation underpinning the actions of providers

The approach certainly needs to be much more consistent and it is also important to establish policies that allow all aspects of financial exclusion

to be monitored on a permanent basis and also allow intervention in areas not so acutely affected

Financial exclusion is not in its nature an absolute concept but a relative one, similar to that of the “poverty line” As the level of financial inclusion improves, the focus of attention is likely to move For example, it may move from the unbanked sector to the underbanked, so that the underbanked benefit as a result of the original intensive focus on the unbanked While some gaps in access to financial services may be inevitable, if they go too far, the social implications can be considerable For example, on one hand there is the gap between those prepared to enter into litigation and seek damages in societies where private insurance is the norm and, on the other hand, the decrease in the welfare state’s role in, for example, pensions, sickness and unemployment benefits, as they are replaced by insurance/financial products designed to meet these needs A final further example: while nowadays, a lack of access to the internet (or not being able to use it) generally causes only minor problems in terms of being able to use a bank account, the day may well come when online

management will become the rule, and lack of internet access will then become a source of exclusion from banking services

1.3 The Issue of Measurement and Comparative Analysis

As discussed above, measuring financial exclusion raises both conceptual and practical issues The concept of financial exclusion is a multi-faceted one and there is a range of different types of difficulties involved in getting access to financial services

Such indicators are, however, useful in assessing the extent of the problem, in suggesting answers and in monitoring progress They can also provide information to policymakers about the main barriers to access, to the private sector about market opportunities, and to researchers to provide data to inform policy recommendations

From a methodological point of view, at least four questions stand out:

- first, should a distinction be made between access to, and use of, nancial services?

fi secondly, with reference to what exactly should access be ed? Should it be considered with reference to financial institutions, to financial services, to functions performed by the latter, or to specific financial products?

consider thirdly, should we take into account the types and levels of access For example, are we talking about access to banks or quasi-banking institutions, with formal financial institutions or with informal finan-cial operators?

- finally, should the measurement refer to individual adults or to the families and households?71

We could add to these, in respect of financial products, the question of which minimal product portfolio should be considered Furthermore if, apart from the distinction between access and non-access we consider that there is a continuum of situations involving difficulty in use or sub-optimal use with respect to needs, the question arises as to whether to detail the precise range of difficulties involved in exclusion72

In other words, access to services can be analysed with reference to stitutions, to needs satisfied, to specific products and can be measured both

in-in absolute and relative terms, takin-ing in-into account the reference framework

71 The methodology problem was set out in these terms by the World Bank (2005)

72 See also Gloukoviezoff G (2005b)