Jam Jar Bank Accounts

Guy Opperman Excerpts

Tuesday 28th February 2012 Westminster Hall

[Damian Hinds]

The hon. Gentleman is absolutely correct. There is a generation that is more comfortable with managing such matters online, if they have access to a desktop personal computer, or, for those who do not have that, through smart phones, mobile phones and auto-voice recognition. However, there is a cadre of people for whom that is less appropriate.

The third question on product design is how to market such accounts, by whom and to whom.

Why would we want a great increase in jam jar banking? First, it would reduce the extent to which people trip into debt. Secondly, the poorest would pay less, both directly, through lower bank charges; and indirectly, because service providers would have a lower average cost of collection. Therefore, the poverty premium, as highlighted by Save the Children and others, would be reduced. Thirdly, and just as importantly, it would stimulate savings through a sort of a nudge. One of someone’s jam jars would automatically be a savings account, and they would have to say yes or no to put a few pounds away every week or month. We all know what a difference that makes; it can be quite transformational to have savings and assets.

[Guy Opperman (Hexham) (Con)]

As my hon. Friend knows, I am leading a campaign for the establishment of community-based local banks. Would one of the best custodians for jam jar accounts not be a community-based local bank? Such banks allow people to save locally with a local bank manager, with whom there can be a close, personal relationship. That would increase savings and the benefits of a jam jar account.

[Damian Hinds]

My hon. Friend makes a fine point, and I commend him on his leadership in the local banking movement. I will say a few things about credit unions, which I think share some characteristics.

I have talked about the “Why?” of jam jar accounts, and it is also fair to ask, “Why now?” There are three good reasons why the issue is particularly relevant at the moment. First, the Government and Members on both sides of the House are focusing, rightly, on the cost of living. We discussed heating bills in the preceding debate, and there are active debates about rail fares and petrol and diesel costs. Bank charges are also a significant part of the cost of living. The second reason why the debate is particularly timely is because of the introduction of universal credit, the move from fortnightly to monthly payments, and the move away from direct payments to landlords. The third reason is the sector modernisation fund of £73 million for credit unions that the Government are supporting. That presents new opportunities for development in that sector.

[Damian Hinds]

My hon. Friend is right. Of course, there is a potential benefit for landlords and other service providers. There is a line of argument that goes: why not just keep the two-weekly payments and the direct payments to landlords? However, a key objective of universal credit is to make the receipt of benefit feel more like being in work, which usually means having to cope with monthly payments, not having money paid direct to a landlord and so on. The use of such accounts is a good way of helping people through that, which is a perfectly legitimate aim, while keeping the key features of universal credit.

We know that Ministers are interested in this area. Most recently, in answer to a written parliamentary question tabled by my hon. Friend the Member for North Swindon, which was published after I applied for the debate, the Minister of State, Department for Work and Pensions, my hon. Friend the Member for Thornbury and Yate (Steve Webb), confirmed that the Government are actively looking at the potential for low-cost budgeting accounts.

So why do they not exist already? Well they sort of do, just not on a particularly big scale. Last year, there were four providers of jam jar accounts, although three of them are not the household names that most of us would recognise. Until now, a key driver for the development and roll out of such accounts has been debt management companies wanting to have greater security of payment schedule, rather than consumer advertising. So although they exist, they do not exist at scale. Social Finance estimates that there are only about 150,000 such accounts in the UK. They do not exist through big brand institutions—by the way, the exception to that is the Royal Bank of Scotland. I know that it is not very fashionable these days to say nice things about RBS, but I commend it for having such an account, which it uses for its most challenging customers. However, that also means that the account is not actively marketed to the general public. Someone would struggle to walk into an RBS branch and open such an account, unless they are referred on to it.

[Guy Opperman]

Given that RBS will potentially be sold or divested by the Government in the longer term, is that something that should be carried through post-sale and hopefully made part of a community-based organisation?

[Damian Hinds]

In the interests of time, I will have to leave that question hanging—fascinating though it unquestionably is—because I must plough on.

The third important point is that such accounts are not available at an attractive price—with the exception of the RBS account. Typically, they cost the consumer about £150 a year. Why are such accounts not available at scale through big brand institutions at an attractive price? That is a very good question. Intuitively, such accounts seem like an attractive concept. In fact, many hon. Members here might reflect that, in our own personal finances, we mimic how jam jar accounts work. We might have a separate current account for household bills or a separate credit card that we use for car payments or something like that.

There is an attraction to such an idea, but the key stumbling block is economics. There is no reason to believe that the banks that do offer such accounts at the prices I talked about are making above normal profits, although at scale the cost should come down. Social Finance estimates that it should be possible to provide such accounts at between £5 to £7 a month, which is around £60 to £85 a year. The biggest sensitivity to that cost is the extent to which call centre human support on budgeting and so on is provided.

In any case, that is still a lot of money, so the question of how to pay for it remains. My hon. Friend the Member for Wirral West touched on some of those issues a moment ago. There is some reason to believe that people—consumers themselves—would be willing to pay something. In the credit market, if we think about how much consumers implicitly are willing to pay for the convenience and flexibility of home credit over cheaper sources, there is some evidence that people value and would pay for control. Some research suggests that maybe people would be willing to pay £1 a week—£50 a year. However, that still seems rather a lot. That could possibly be augmented with some other charges for ATM withdrawals and so on.

Some people might say, “Get the banks to pay for it. They’ve done all these bad things, so they should do it.” To be fair to banks, they do quite a lot in the corporate social responsibility sphere already, including with credit unions. We could perhaps get them to provide such accounts on a semi-commercial basis, forgoing their normal profit margin. What would not be a good idea is to suggest that other customers should cross-subsidise those with jam jar accounts. There are two reasons for that: first, for competition policy reasons and, secondly, because it is generally a bad idea in the interest of effective markets.

As my hon. Friend the Member for Wirral West mentioned, there may be a role for service providers, particularly housing associations and utility companies, who would benefit from having a more reliable payer. Particularly for the most risky customers, a housing association, for example, might even be willing to provide cash support for the costs. Perhaps more generally, one would be looking for softer support in terms of marketing and so on to reach scale.

We are talking about banks and consumers, but is there a role for the Government? There is certainly not a role for the Government in telling people what sort of bank account they should have. There is also not a role for the Government in telling banks what should be in their new product development pipeline. However, there is a real social interest in all these issues, as I outlined earlier. If it is a question of bringing together organisations that may all have an interest, some of which may not know about it yet, in developing this market, perhaps the Government are best or uniquely placed to do that.

In my final minute or so, I have three simple asks of the Government, to which I would love to hear the Minister’s response. The first ask is to prod the banks and continue to stress to them the benefit that may be had both to society and potentially to them in developing these products. There may even be a pure commercial case to be made for them. After all, I often remark that nobody knew until 3M brought it to market that the thing that was really holding back their office productivity was a little yellow square piece of paper that can be stuck to the wall. Sometimes products just have to get out there before we realise their potential.

The second ask is to consider having a pilot scheme in one area, working with a housing association and one or more utilities. It would then be possible to quantify the benefit that comes from security of payment and collection cost, as well as to assess the beneficial impact on individuals in terms of their budgeting behaviour, the amount of money they save and their propensity to start to make savings.

My third ask is to work with credit unions. This Government have been a great supporter of the credit union sector, particularly through the £73 million modernisation fund. If part of that were to be used to develop a robust, sustainable common banking platform, it would open up all sorts of possibilities, including this one. There would also be the potential to work with the Post Office, which would provide a great new source of revenue and business to post offices, which matter so much to all of us in our communities and constituencies.

We know that financial inclusion, helping people to make the transition into work and helping hard-pressed families with the cost of living are all things for which Ministers have shown a passion. They are also all things where jam jar banking could make a substantial difference. I hope very much that Ministers will continue to work with consumer groups, housing associations, utilities, banks and credit unions to help to stimulate such accounts into becoming an at scale reality.