Show me the money

What is meant by financial inclusion? Dr Rajiv Prabhaker of the Open University poses that this may seem an obvious question but how we define financial inclusion shapes how this concept may adapt to current challenges. 

Financial inclusion is often taken to refer to the access that people have to mainstream financial services such as banking, savings, insurance and credit. Allied to this is a stress on the importance of financial capability, that is the knowledge, skills and confidence of people to make financial decisions. This blog argues that financial inclusion is about more than access and skill and must include resources and money. This is consistent with the approach taken by the University of Birmingham Financial Inclusion Monitoring Reports that gives an insight into the progress (or not) of the key parts of financial inclusion in areas such as ownership of bank accounts, savings and so on, as well as income and employment.

Challenges to financial inclusion

But there are now a new set of challenges that might pose questions of how financial inclusion is understood. Arguably, one of the main challenges facing people and households in the UK is that of the rising cost-of-living. For many parts of the population, rising costs – such as a rise in energy bills – and stagnant incomes have meant a squeeze on personal or household finances. Not all parts of the population have been hit by these twin pressures, but for much of the population they have given rise to dilemmas such as choosing between heating or eating.

The money saving expert Martin Lewis provided a sign of this when he claimed recently that he was virtually out of tools to help people and households face the challenges they face. It is notable that many of his recent campaigns focus on trying to ease the financial pressures on households, for example with his calls on government to help people cope with energy bills by imposing an energy price cap.

This points to the importance of money. The Financial Inclusion Commission is an independent commission that was formed before the 2015 UK general election with the aim of putting financial inclusion high on the political agenda. In the foreword to a report published just before the 2015 election, the Chair Sir Sherard Cowper-Coles wrote that: ‘Financial inclusion is about ensuring that every adult in the United Kingdom is connected to the financial ‘mains’, just as he or she is connected to mains electricity or mains water’.

Financial inclusion here is likened to the electricity or water mains, that is part of the essential networks of everyday life. More widely, this taps into discussions about the importance of the foundational economy, that is the infrastructure that underpins the economy. This view of financial inclusion being part of the mains leads naturally to a focus on the access that people have to mainstream services such as credit, banking, savings and insurance. 

Resources and money

While access to financial services is important, scholars have recently suggested that the concept of financial inclusion should go beyond being seen as access to the financial system. In particular, financial inclusion ought also to refer to the resources that people bring to financial markets. The importance of resources was recognised early on in geography research, when authors noted that people living in better off neighbourhoods could often rely on networks that made it easier for them to access financial services than those in less well off areas.

One might argue that the most obvious resource when thinking about the financial system is money. Looking at the metaphor again of the electricity or water mains, the mains is only useful to the extent that electricity or water runs through it. Adopting the metaphor then would suggest that policy-makers pay attention to the money that runs through the financial system.

What does this mean in practice?

There is much to debate about what access to money might involve. During the Covid-19 pandemic, governments across the world provided people with emergency payments. The UK government provided furlough payments - Coronavirus Job Retention Scheme - for those employees who were instructed not to go to work during the pandemic. There were temporary uplifts to Universal Credit. Later on, there has also been support for households in paying for energy bills. All of these schemes highlight how policy has already centred on cash payments to help people cope with emergencies.

These policy developments perhaps highlight ways that financial inclusion might develop further.  There are debates to be had about possible rises in benefit levels, temporary income payments or even ideas such as universal basic income, which would be a regular income payment to all citizens and no conditions upon how such payments are used.

The next phase of financial inclusion might shift more closely to examine these issues. There are no settled answers in these debates. However, thinking about the role of money raises questions then of how money combines with steps to boost access to financial services to boost overall financial well being. These relationships may be complex but point to the next phase for financial inclusion.  

Dr Rajiv Prabhakar is Senior Lecturer in Personal Finance at the Open University. His recent research focuses on financial inclusion and he is author in 2021 of the book Financial Inclusion: Critique and Alternatives (Policy Press). He is a Senior Fellow of the Higher Education Academy.