Over 7m people in the UK (one in seven, or around 14% of the adult population) fall into the definition of ‘financially excluded’, meaning they can't be credit scored via traditional models, and could potentially struggle to access affordable and fair financial services.
People can become financially excluded through no fault of their own, and can have no alternative to taking on highly leveraged loans, pushing them further into financial stress.
“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,” says Steve Elliott, managing director of LexisNexis Risk Solutions, part of RELX.
As many as 77% could be helped using alternative data solutions, meaning a further 5.7m UK adults could gain access to fairer and more affordable financial services, for the first time ever.
Why it matters
Access to financial services can have a huge impact on personal and economic outcomes, with a bank account often considered a gateway to other credit, savings and insurance products. Current account holders are more likely to start and grow businesses, invest in their education or health, manage risk and weather financial shocks, all of which can improve the quality of their lives.
The negative effects of exclusion can be far reaching, with individuals, facing high charges simply to access everyday cash and paying a premium for everything from financial and lending services, energy tariffs and even mobile phone data, resulting in them paying an estimated £1,000 annual ‘poverty premium.’ Moreover, financially excluded people can experience other forms of social exclusion, or have other vulnerabilities related to old age, disability, deprivation, or a lack of digital skills.
highlights
LexisNexis® Risk Solutions has carried out in depth analysis of its UK data sources, combining two of the UK’s largest Credit Reference Agencies (CRAs), short term loan applications and around 30 alternative public and private sources, to create a unique and comprehensive picture of UK Financial exclusion.
One in seven financially excluded
Analysis shows that around 7.1m people (one in seven, or around 14% of the adult population) in the UK fall into the definition of ‘financially excluded’, meaning they could potentially struggle to access affordable and fair financial services. We also found over 637,000 people fall into the definition of Credit Invisibles, rendering almost three-quarters of a million people effectively un-scorable in credit-risk terms.
Regional matters
We analysed financial exclusion and negative financial data by age, across 380 UK local authorities to provide a granular picture of the extent to which populations, right down to a community level could be suffering from financial exclusion and vulnerability.
Use our interactive heatmaps to view how the causes of financial exclusion – including lack of a credit footprint or a bank account, use of subprime lending and the presence of negative financial credit history (CCJs and bankruptcy) – are distributed across the UK population, and how regions compare.
financial exclusion in numbers
~320,000
...individuals in the UK are classed as Thin File with no data footprint, financial or otherwise.
1.7m
...people have no financial or credit service activity in the past 24 months (no Credit Reference Agencies (CRA)).
5.8m
...people have no record of an open or closed bank account.
~7.1m
...can be defined as potentially financially excluded – i.e. they would struggle to access the most affordable credit.
over
637,000
...people can be classed as credit ‘invisibles’, making them impossible to credit score.
Almost 2 in 5 (38%)
...short term loan applications are made by 26-35 year olds.
Younger generations
...have a worrying dependence on subprime lending with a trend of defaulting on highly leveraged loans.
Around
1 in 10
...26-35 year olds and 36-45 year olds – over a million people in each group – have some sort of derogatory data on their credit file.
What does the UK picture look like?
Our data shows around one in seven adults (7.15m people) in the UK fall into the definition of ‘financially excluded’, meaning they could potentially struggle to access affordable and fair financial services. Among them are over 637,000 people (or 1.1% of the population) defined as Credit Invisibles, or over half a million people who are effectively un-scorable in credit risk terms.
As our definition of financial exclusion attests, the primary driver of exclusion – i.e. the inability to access fair and affordable financial services – is the unavailability of credit history against which an individual can be effectively risk scored, or in other words a thin credit file. At face value, our data shows that less than 1% of adults (around 320,000 individuals) in the UK meet our definition of Thin File, namely no financial data footprint and no history of derogatory data. From this it could be concluded that the UK’s financial exclusion problem isn’t a problem at all, but in reality this may only be a snapshot of the overall picture. A further 1.7m people (3.2% of adults) have no credit reference data associated with them in the past 24 months, suggesting that this group are not actively using formal, regulated credit services, although they are set apart from Thin File people by the fact that they could have some derogatory data (negative financial markers, like CCJs) against them. Either way, we can say with relative certainty that both groups would struggle to be effectively risk scored via traditional methods.
A third group of around 5.8m people – one in ten adults – have no record of an open or closed current account. This is significant, given how intrinsic a current account can be to applications for other financial and credit services. An individual with no current account is unlikely to be actively participating in products such as a mortgage and with no Direct Debit facilities, will unlikely benefit from competitive tariffs for a host of services beyond banking. Moreover, most legitimate employers stipulate a salary must be paid into a current account.
How these classifications of exclusion are distributed across age groups and how they individually contribute to exclusion and vulnerability are dealt with in more detail, later in this report.
Our financially excluded group of 7.15m adults represents a combination of these three key data groups described above – no current account or no credit reference data and/or Thin File and no derogatory data. At the extreme end of this group are around 637,000 Credit Invisibles – defined by the fact that all of the above financial exclusion criteria apply to them simultaneously, thereby earning them the moniker, Unscorables.
In any study of financial exclusion, it’s important to look not only at factors that influence current exclusion, like derogatory data, but also consider those that could indicate potential future exclusion, such as subprime application rates. Our data shows that some 3.51m people (6.5% of UK adults) have some form of derogatory data on their credit history, which will inevitably affect their ability to access the fairest financial services. Remember, this not insignificant group can be counted as additional to the 7.15m financially excluded adults, by virtue of the fact that the presence of derogatory data omits them from the latter definition. What is more revealing (and more than a little concerning) is the distribution of this derogatory data across the population age groups, which will be discussed later.
Our data coverage for UK subprime loan applications looks at two leading vendors and shows that over 3.6m people made at least one subprime application between 2018 and 2021, representing some 6.8% of UK adults, and almost 1m people (1.76%) made 2-3 applications. What is more, the data suggests an unhealthy dependence on subprime lending amongst particular millennial groups, with two in five (37%) short term loan applications between 2018 and 2021 made by 26-35 year olds. The concern around subprime lending is the long-term effect on applicants’ credit scores – not only are subprime applications themselves viewed negatively by prime lenders, but the higher propensity for lenders to default makes future financial vulnerability more likely.
REGIONAL BREAKDOWN
Our data provides a comprehensive view of the indicators of financial exclusion and vulnerability across the UK, today. Combining 2.6bn records with our powerful statistical linking technology, we can identify over 54m unique individuals living in the UK; our report uses this extensive coverage to provide a detailed picture of financial exclusion and its underlying causes across the UK adult population, including negative financial data and levels of subprime lending.
The human impact
Read these stories to find out more about how people can become financially excluded through no fault of their own and the impact it can have on their lives
The Graduate
Marketing graduate, Jennifer, 24, works full time as a project manager and lives rent free in London with her parents while she saves for a deposit for her first home.
In the past 12 months, Jennifer applied for a loan to help pay for her first car, so that she could gain some independence by commuting to work and seeing friends and socialising more easily.
Jennifer believes that she was denied the loan due to her low credit score, although, she explains; “They didn't give me a reason, they told me to get in touch with a credit reference agency.”
After her first application was turned down, Jennifer looked to other lending providers. “I did find some other loan offers but the rates on offer were high and clashed with my income,” she explains.
“The impact is frustrating. It stops me from fulfilling specific needs like having my independence. It’s difficult to have to rely on a small pay cheque each month on top of saving as much as I can for my deposit, so in the end I resorted to borrowing money from my parents, but that leaves me feeling trapped in a vicious cycle."
Jennifer says her situation sets off a mix of emotions. “Some days I feel motivated and try to be positive about life, but on other days, it’s all very overwhelming.”
“Things that many people take for granted, such as going on a holiday and buying a car are simply a dream for me. The more I think about it the more it affects me.”
“I’m fortunate I can rely on parents to help and support when the going gets tough, but not being able to live alone or be as independent as other people my own age is something I struggle with,” she concludes.
New to the UK
Entrepreneur, Ahmed arrived and settled in Leeds, UK, a few years ago with the aim of setting up a business.
He needed financial help with his new venture, however, Ahmed found that credit provider(s) were either refusing him finance or not offering him preferable or affordable rates due to his very small credit footprint, as a result of being relatively new to the UK.
“When I applied for a loan facility to start a business here in the UK, I had no credit score since I have only been in the UK for a few years. The lack of assistance has really slowed my progress in starting and growing my business here,” Ahmed explains.
Being financially excluded has impacted Ahmed’s wellbeing both mentally and physically, leaving him demoralised.
“The lack of support is surprising,” he says. “There are no such credit scoring hurdles in the country I am from to access finance. It was only based on ability to pay back the facility.”
In order to improve his situation, Ahmed is now trying to build on his credit score so that in future he has access to credit to help grow his UK business.
Newly Independent
Since separating from her husband in the last 2 years, Julie, 51 from the East of England, has struggled to access affordable, prime financial products, due to having a poor credit rating.
Julie’s poor credit rating is due to her ex-partner previously handling all of the couple’s finances, including having no regular payments in and out of her current account and all household bills being in her partner’s name, meaning that for an extended period of time, Julie’s credit footprint was almost non-existent.
As a result, she is currently only eligible for high interest, subprime loans and related financial solutions.
The effects of this are impacting Julie’s wellbeing both mentally and physically, at a time when she should be enjoying her new-found independence.
Julie explains: “I’ve had no choice but to decline offers to do activities and socialise with friends and it has made me feel quite trapped and down at times, generally I’m really fed up with everything.”
Julie is now taking steps to improve her credit rating by using credit cards and other short term credit services.
“I was aware that this could happen to people, but I never thought it would happen to me,” she concludes.
Long-Term Unemployed
June, 58 is unemployed. Over the past three years she has tried on numerous occasions to secure credit to help make ends meet, but has consistently been offered only the most expensive and uncompetitive lending rates, due to her poor credit score. She is therefore forced to rely heavily on cash for day-to-day transactions.
With no mortgage or loan history to show for over the past few years, and previous borrowing being too low, June believes that she was too high a risk for lenders. To help manage her finances, she even applied for an overdraft, but being unemployed at the time, it was denied.
June explains; “Once they know I’m unemployed, they no longer consider you for additional credit facilities.”
“I fully understand the need to be able to demonstrate that I can repay debt and I totally respect that banks have to follow procedures. I’m currently looking into working from home in telesales to help change my situation.”
How alternative data solutions can help
Using alternative data sets, such as postcode indicators, public records and registers, UK Land Registry data, directorship information and educational and professional accreditations, can help organisations to build a more effective risk assessment of an individual.
In the US, the approach has already been proven successful, allowing 87% of a group of previously Unscorable individuals to be effectively scored, two thirds of whom proved to be the lowest risk customers.
Analysis of financially excluded UK individuals found that as many as 77% could be helped using alternative data solutions, meaning a further 5.7m UK adults could gain access to fairer and more affordable financial services, for the first time ever.
Methodology
LexisNexis® Risk Solutions has carried out in depth analysis of its UK data sources, combining two of the UK’s largest Credit Reference Agencies (CRAs), short term loan applications and around 30 alternative public and private sources, to create a unique and comprehensive picture of UK Financial exclusion.
About LexisNexis® Risk Solutions
LexisNexis® Risk Solutions harnesses the power of data and advanced analytics to provide insights that help businesses and governmental entities reduce risk and improve decisions to benefit people around the globe. We have offices throughout the world and are part of RELX (LSE: REL/NYSE: RELX), a global provider of information-based analytics and decision tools for professional and business customers across industries. For more information, please visit risk.lexisnexis.co.uk and www.relx.com.
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