Incomplete data means more than 5 million UK adults needlessly “financially excluded” as cost of living crisis looms

More than 5 million UK adults are unnecessarily financially excluded, meaning they could potentially struggle to access affordable and fair financial services and the most affordable home energy and broadband deals, according to research conducted by LexisNexis® Risk Solutions, part of global data and analytics giant FTSE100 RELX PLC. The report found that 1 in 7 adults in the UK (c.7.1 million people) fall into the definition of ‘financially excluded’, of which more than 75% could be more effectively risk scored using alternative data sets. 637,000 people across the UK were defined as ‘Credit Invisibles’, meaning they are effectively un-scorable using a traditional credit scoring approach that looks at credit history.

The news comes as the UK faces the biggest cost of living crisis in living memory and UK inflation hits its highest level for 30 years. Financially excluded individuals – already paying more than others for equivalent services –will feel the effects of rising costs all the more starkly, likely forcing more to turn to unaffordable and unfair sub-prime lending, putting them at risk of further financial vulnerability.

Our data shows Millennials are already turning to subprime credit – a reliable barometer of future financial exclusion – with 2 in 5 (37%) short term loan applications between 2018 and 2021 made by 26-35 year olds. However, 56-65s and 66-75s are the most likely age groups to experience financial exclusion, with almost 2 in 5 excluded individuals belonging to one of these age groups.

The report also highlights how the inability to effectively risk-score someone can have far wider implications for their wellbeing than just access to credit, with the effects likely to be more pronounced among older generations. For example, they may not qualify for the most affordable energy and broadband provider tariffs, which often require customers to have a suitable credit score and Direct Debit facility, forcing them onto expensive pay as you use energy tariffs, and perhaps ultimately into fuel poverty.

The national average financial exclusion rate is 13.2%, with all mainland regions of the UK having similar distributions of financial exclusion. The highest levels of financial exclusion exist in Northern Ireland (22.8%) and Wales (14.8%) with the lowest in London at (11.8%). This suggests that the underlying causes of exclusion – thin credit file and lack of credit reference data or current account – are being felt relatively consistently, everywhere.

A notably different pattern of distribution can be seen in the derogatory and subprime lending data, with people in the North West (8.54%) and North East (8.37%) – areas with some of the highest levels of deprivation in the UK – more likely than anywhere else in the UK to have derogatory data on their file, well above the UK average of 6.5% and a little under 1 in every 20 people. Levels are also high amongst the populations of Wales (8%), the West Midlands (7.35%), East Midlands (7%) and Greater London (6.94%). Subprime lending follows a similar pattern with the North of England leading, followed by the West Midlands (7.4%), Scotland (7.3%) and East Midlands (7.2%).

Defining financial exclusion

The primary drivers of financial exclusion – i.e. the inability to access fair and affordable financial services – are: a thin credit file (the unavailability of credit history against which an individual can be effectively risk scored), and lack of a current account.  The report also considered derogatory data (negative financial markers, such as County Court Judgments or debt reduction tools like IVAs) and levels of subprime lending, both of which can contribute to limiting someone’s future creditworthiness.

The data shows that Thin File to be significantly impacting younger people, with a quarter (24.8%) of Thin Files aged 16-21. However, it’s pervasive throughout, with 51% of Thin Files being aged 26-65.

Graduates or young people choosing to live at home to save money, newly independent individuals such as divorcees or those coming out of long-term care, migrants new to the UK, returning British ex-pats and the long-term unemployed are all at risk of becoming Thin File as a result of their lack of engagement with the UK financial services sector.

Migrants are estimated to be responsible for starting one in every seven UK businesses, despite being effectively invisible to the UK financial services sector in credit scoring terms, when they arrive in the UK.

The data also indicated concerning appetite for subprime lending among the younger half of the UK’s adult population with 1 in 7 (14%) applications made by 22-25 year olds, over a third (37%) by 26-35 year olds and a quarter (23.2%) by 36-45 year olds, compared to just 5.5% by 56-65 year olds. Widely seen as a negative in credit files and associated with higher default rates, subprime applications are a strong indicator of both current and future vulnerability and exclusion.

Steve Elliott, MD at Lexis Nexis Risk Solutions, commented “Our study reveals a staggering flaw in the UK credit sector at the moment. It is increasingly clear that credit scoring methods relying on generic credit history trends are becoming ineffective in the face of an increasingly dynamic UK population in which people’s lives are nuanced and complex. Placing people in broad risk buckets using limited data and models that have not changed in decades is a system that needs urgent rethinking. By using alternative data, we can help build a clearer, fairer and more realistic picture of a person’s creditworthiness and drastically reduce the problem of financial exclusion.”

Benefits of financial inclusion

Financial exclusion can be driven by a number of situational and cultural factors, over and above a person’s ability and willingness to repay credit or socio-economic background. Age, geographical location, new financial independence (for example after a divorce or a period in care) or long-term unemployment all play a role.

Financial inclusion has been shown to vastly improve both personal and economic outcomes. As well as making credit and savings products more accessible, individuals can access more affordable insurance, business accounts and loans, or a mortgage. Financially-included people are more likely to invest in education and health**, and it can even influence the energy tariffs people pay – those with the poorest credit ratings or lacking access to a bank account are unlikely to qualify for the best rates, which often require a Direct Debit, instead being forced onto expensive, pre-paid tariffs.

By using technology to draw on alternative sources, like public and consumer data, it is possible to understand other factors which determine how likely a person is to repay credit. RiskView™ an alternative data tool from LexisNexis Risk Solutions, was able to give an effective risk score to astaggering 77% of the financially excluded using expanded data sets. That could mean potentially transformational access to fairer and more affordable financial services for as many as 5.5 million UK adults if such credit scoring methods were adopted industry wide.