Thursday, 9 February 2012

Can we reduce the "poverty premium" without repeating those sub-prime mistakes?

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Niall Cooper from Church Action on Poverty has written a piece of what he calls “fair pricing”:

And secondly, fair prices.  Much of the ‘logic’ of the way markets have developed in recent years is to move towards ‘risk (or cost) pricing’ and away from shared risk.  Some of the assumptions behind this are extremely dodgy:  The majority of high cost lenders claim that their premium prices are based on the ‘risk’ of lending to low income customers… any yet, when customers pay week after week, year after year, the cost doesn’t go down.  But fundamentally, is it socially (or morally) acceptable to operate ‘cost’ pricing models which force the poorest to pay most?  How can companies square all their talk in recent years of corporate social responsibility, with charging their poorest customers the most?

It has become a mantra of anti-poverty campaigners that poor people pay something they call the “poverty premium”:

Lack of access to the best online prices, bank accounts and managing their budget via cash all adds together to give the poorest families the worst deals around. The result is a poverty premium that costs the poorest families more for the same energy, cookers and household items, credit and insurance than their wealthier peers.

The two prime culprits for this premium are energy and financial services especially lending. In the case of energy this is mostly about methods of payment – the understandable reluctance of people on low incomes to use direct debit as a means of payment. So, in reality, the whole problem is – as Niall Cooper implies – down to financial services. Especially since the ‘food desert’ argument turns out to be a bit of a myth.

“The U.S. Department of Agriculture defines a food desert as a low-income census tract where a large number of residents are more than a mile from a grocery store…. [L]ess than 4.5 percent of the U.S. population [falls into that category].

The question then is how to make is easier for poor people to access affordable financial services given that those poor people are less likely to repay loans, more likely to over draw and live in places where car crime and burglary heighten insurance risks. For this Niall Cooper suggests intervening in the market:

And if individual businesses are unwilling to offer products to low income consumers at fair prices (not least by claiming they can’t do so if their competitors don’t), then is there not a role for market intervention?

The problem is that – certainly where lending is concerned – we have been down this route before. After all mandating lending to high risk borrowers was a central driver in creating sub-prime problems especially in the USA. And if you introduce price caps (as Stella Creasy wants) without mandating lending to poor people then you kill the market entirely. The consequence of this is to create an even bigger problem for which the only solution is unregulated and illegal lending.

Rather than looking at forcing price cuts on suppliers, we should instead consider whether block buying is an option. Social landlords could, for example, purchase energy more cheaply than tenants and have the systems to collect payments in place already. And, certainly for contents insurance, the same should apply. It would be interesting too to look at whether local councils or social landlords could broker other insurances such as third party car insurance helping to spread risks and reduce costs.

If we look to new generation mutuals such as credit unions there are perhaps similar opportunities to reduce costs and spread risks. What we can’t do is wholly eliminate those risks (something the world is finding out very painfully right this minute) meaning that poor people will continue to have problems with access and pricing in financial services. In using co-operative solutions we can ameliorate these considerably and, in market terms, safely. Mandating prices simply takes us back into the financial disaster of sub-prime lending.

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2 comments:

Alex B said...

The only problem with brokering is that the individuals using such a broker presumably wouldn't build up their own individual credit history, which, if they buck the statistics and pay on time, will eventually give them access to the cheaper deals that their wealthier peers have access to.

Jack said...

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