Tackling the poverty premium - a case study of the potential positive impact of stakeholder capitalism
- David Duffy
Introduction
The global pandemic has created a once in a generation crisis that has the potential to have deep and lasting effects on our economy and the lives and businesses of everyone within it.
Unlike the 2008 crash where the banking sector was seen to be punishing rather than serving its stakeholders, the sector’s response to the pandemic has highlighted a shift in behaviour that has been steadily evolving over the past decade. Rather than acting solely in the interests of their bottom line, banks have rediscovered their role in the stakeholder economy and have sought to be a helpful partner to Government, businesses and consumers with the rapid provision of loans, payment holidays and interest-free overdrafts.
This action was a critical response to the initial shock of the pandemic; however, this won’t be enough to help the UK economy rebuild. For banks and other major companies our role in the stakeholder economy is about much more than offering good products and support services to customers in their hour of need – it is about pre-empting potential customer detriment from economic shockwaves with innovative, responsible and thoughtful Environment and Social Governance (ESG) strategies.
There are a multitude of ways industry can do this, but I would like to draw on just one example as a case study for the benefit that true stakeholder capitalism can bring – the importance of tackling the “Poverty Premium”.
The Poverty Premium
In 2021 it seems regressive that we still live in a society where those on lower incomes pay a “Poverty Premium” to access essential services including utilities, access to credit and insurance. It is estimated that around 14 million people in the UK pay a poverty premium – one fifth of our population. According to research from the University of Bristol, the premium levies impacted households with an average of £478 in excess costs each year and for one in ten these costs can rise to as much as £780 each year. What is worse is that many of those impacted have no idea they are being penalised.
For a family on an average income the Poverty Premium would be a significant sum, perhaps making the difference as to whether or not they could go on holiday or make home improvements. For a lower-income household, however, this could be the difference between coping and crisis or between food and heating – and the pandemic has only made things worse.
The FCA estimate that in the first six months of the pandemic the number of adults exhibiting signs of vulnerability increased by over 15 per cent. This is one of several reports that indicate an increase in people struggling financially, many of whom will be paying the penalty for being poor, at the same time as the UK seeks to rebuild. Meanwhile, the reliance on digital during the pandemic has only served to strengthen societal divides between those who can afford to get online and use digital services easily and those who do not have easy access to a Laptop/smart device or WiFi and perhaps lack confidence with digital skills. But why is this an issue for business leaders to be concerned with?
As well as a moral concern, the Poverty Premium puts UK productivity at risk as many of those who pay this premium will be employees as well as customers. Money worries have long been associated with issues of anxiety, insomnia and the knock-on impact on concentration, motivation and creativity. Research commissioned by Aegon estimated that, in 2018, poor financial wellbeing resulted in 4.2 million days of work being lost annually, with a productivity cost to the UK economy of £1.56bn.
In a stakeholder economy, the more people that we have supporting and driving it, the more likely it is to rebuild, grow and flourish, creating more opportunities and wealth for the stakeholders within it. If the Poverty Premium is not addressed, we will exclude people from the UK’s future success and hinder the speed of our recovery.
"In a stakeholder economy, the more people that we have supporting and driving it, the more likely it is to rebuild, grow and flourish, creating more opportunities and wealth for the stakeholders within it."
Our approach to tackling the Poverty Premium
While COVID-19 has brought a variety of challenges, it has also helped to sharpen our focus at Virgin Money on supporting our customers when they are most vulnerable.
In November, we launched our refreshed ESG strategy. As well as commitments around important issues like the climate crisis, we set ourselves a new challenge to eliminate the Poverty Premium from our customer base by 2030.
To do this, we are working with Fair By Design, an organisation dedicated to tackling the Poverty Premium, and other organisations who are similarly committed to driving systemic change around this issue.
The University of Bristol identified that Poverty Premiums can be put into seven different categories with 23 component premiums across those categories, covering a variety of sectors. The seven categories are:
- Use of prepayment meters
- Non-standard billing methods
- Not switched to best fuel tariff
- Area-based premiums
- Insurance for individual items
- Access to money
- Higher-cost credit
We are using the categories as a basis for our work, investing in data analysis to identify the customers that are paying a premium for these services. Some of these premiums we may be able to address ourselves, while others will require collaboration with other sectors.
The first premiums we are focused on relate to energy. We have already identified those customers who are overpaying for energy services because of their payment method and we will be contacting them shortly to make them aware they are being penalised; highlight that they may be able to save money by paying by Direct Debit, or switching to another tariff; and dispel myths and false perceptions about taking these actions.
This, of course, will not be enough to eradicate the energy Poverty Premium from our customer base. That is why we are working across sectors to understand what other solutions we can bring, in particular for those who are digitally excluded and struggle to shop for the best deal and those with poor or no credit history who may not be eligible for monthly billing and the discounts that brings.
As we start to learn more we are reaching out to others who are passionate about finding a sustainable solution to Poverty Premiums and will be looking to convene a cross-sector group to share best practice and identify what more can be done to tackle this important issue. We are focussed on learning from experts, sharing knowledge as we go, and bringing some smart disruption to some of the more complex challenges.
There are some actions that we have already taken – most importantly our new basic bank account offering, the M Account. Basic bank account customers are likely to be subject to the Poverty Premium as they typically have low and/or fluctuating income, with poor or no credit history and often low financial literacy or confidence. Rather than offer them a vanilla, transactional product we have developed an account that gives these customers access to money management tools, where they can set limits, send balance alerts, track their transactions, more easily save and, crucially, power down their energy bills through an in-app partnership with Go-Compare. A small step, but one of the most significant Poverty Premiums is being on the wrong energy tariff. Ironically, tools like these are often incorporated in the more sophisticated bank accounts that are targeted at consumer-savvy, affluent customers but aren’t readily available to those that actually need them the most.
"If businesses are serious about stakeholder capitalism there is a moral obligation to tackle the Poverty Premium swiftly and effectively"
Our call to action
We are at the very beginning of this journey and know that such a complex, systemic issue cannot be solved by an individual organisation, however determined we are.
That is why we are calling on the industries that contribute to the Poverty Premium to take five simple actions that we believe will go a long way to tackle this issue:
- Make tackling the Poverty Premium an ESG commitment.
- Develop stretching targets to tackle the premium and publicly disclose progress.
- Invest in data, technology and resources to identify those customers most at risk from paying a poverty premium and develop solutions to safeguard them.
- Join us in working with experts and other sectors to share insights, best practices and find innovative solutions.
- (For banks) invest in basic bank accounts so they are no longer ‘basic’ and instead incorporate the tools that help those most in need of support to thrive.
Conclusion
As the UK seeks to rebuild, it is more important than ever that all of society has the opportunity to contribute to the country’s future success. If businesses are serious about stakeholder capitalism there is a moral obligation to tackle the Poverty Premium swiftly and effectively, but crucially for productivity and UK GDP, it is essential that is addressed so that we can truly build back better and faster post-pandemic.
To read the full 'Banking on building back better' joint essay series with the Social Market Foundation, click here.