How can we disrupt markets to better serve low income consumers?

The interests of low income consumers are being failed by markets across a wide range of sectors and the State has too often failed to intervene. We should not be under any illusion as to the impact of this market and state failure on society as a whole and low income households in particular. You don’t have to be an advocate of the Spirit Level (which says inequality is bad for all of us) to recognize the challenges and problems caused by this:

The recent financial crisis resulted in billions of pounds of State guarantees and bailouts, a huge increase in national debt and a slashing of public spending and essential services that poor people rely on.

Research from Joseph Rowntree Foundation shows that recent inflation has risen much faster for those on lower incomes. In-work poverty, food poverty, fuel poverty and financial exclusion are not going away. On top of this we have a continuing ‘poverty premium’ that means cost of living for lower income households is much higher than the more affluent.

Perhaps that is just ‘the market functioning efficiently’, but what are mere externalities for financial service providers, energy companies or the food sector, are huge challenges to the State, consumers and communities.

If banks want to cherry-pick who they offer affordable financial services to, that’s their prerogative…but let’s be clear about this: It is society (and tax payers) that must bear the burden in terms of the costs of their financial exclusion.

Of course it would be naïve of me to suggest that everything is getting worse. It’s not. There are some notable exceptions to this bleak picture of market and state failure.

We’ve seen increasing competition in the telecoms sector (or parts of it) that have offered consumers cheaper goods and services. In the groceries market, we’ve seen prices stay incredibly low, or even fall in real terms for a number of years. This is despite a very small number of retailers dominating the market.

However even these consumer benefits come at a cost. These costs are externalities for the retailers but they must be borne by the State and communities. Giant supermarkets increase food miles, squeeze producers margins and can have an adverse effect on local high streets and retail. The social, environmental and economic costs are significant and government spends considerable amounts of money attempt to alleviate their effects.

By contrast, local, community led (or based), initiatives are far better equipped to understand and respond to local needs and serve the interests of the whole community. They offer significant added value and retention of wealth within local communities and where assets are locked in (through cooperatives, charities and social enterprise structures) they place consumer interests above shareholder returns. Some argue this approach is inefficient as it lacks the economies of scale that huge multi-nationals bring, but that overlooks the externalities which the state ends up footing the bill for and the added value community-based services can offer.

Consider the added value of, say, community food growing schemes. There is considerable evidence of their benefits to health and wellbeing…which is not something you can buy at your local supermarket.

They can increase physical activity and reducing the risk of obesity, increase healthy fruit and vegetable consumption, help people cope with physically challenging circumstances, such as intensive cancer treatment or learning how to live with chronic conditions such as asthma or severe allergies. They contribute to improved social interactions and community cohesion, reduce stress and associated depression. They can reduce reliance on medication and psychiatric services, whilst also improving alertness, cognitive abilities and social skills, alleviate symptoms of dementia and Alzheimer’s.

It’s a similar picture in other sectors such as energy and finance.

For example, Brixton Energy have installed hundreds of square metres of solar panels on housing estates in Lambeth, using community shares to raise capital and providing a 3% return on investment to investors. Any surplus they generate is ploughed back into energy efficiency programmes that benefit the local community and they reduce costs and carbon footprint and increase energy security.

Credit Unions and CDFIs like, such as Fair Finance in East London, offer a range of financial products and services designed to meet the needs of people who are financially excluded. Fair Finance offer access to bank accounts and affordable credit as well as free money advice. They have helped their customers deal with £300,000 of problematic debt and £120,000 of housing arrears.

These sorts of community led initiatives are taking hold up and down the country. They are small and fragile but they are growing and they have the potential to change things.

Whether these constitute market disruption or not I think is an interesting point…my feeling is probably not yet, but we should not underestimate their potential to do so.

It’s worth distinguishing between the sort of collective purchasing and switching initiatives we’ve seen over recent years and changing the source of production to such as community owned micro-renewables and CDFIs. Collective purchasing has tended to generate little added value to consumers, to date, though there are signs that this may be about to change. Nonetheless, collective purchasing can be a useful stepping stone to community based production, as was highlighted in Urban Forum’s 2010 research report ‘Community Power Empowers’.

But there is such vested interest in the status quo and the barriers to new entrants to these markets remain so high that they will remain peripheral (at a macro level) without state intervention. If we want to disrupt these markets and bring greater competition to them in order to better serve the interests of low income consumers then we need to look creatively at the role of regulation.

We should look to the State to create an effective regulatory framework that offers incentives for pro-social behaviour, without placing undue burden on providers. In the US the Community Reinvestment Act has had a major impact on supporting growth in the community finance sector.

The CRA didn’t compel banks to invest in CDFIs, but they quickly realized it was an efficient way to satisfy regulatory requirements to demonstrate pro-social practice. The effect of the CRA has been to encourage collaboration between larger mainstream providers and local community organisations that fosters understanding and mutual benefit.

We should also look at ways to make better use of capital and revenue streams – such as benefits and pension funds – to provide the necessary finance for ventures that reduce demand on public services, increase low income households finance or prevent longer down-stream cost, such as public health.

And to those who regard any form of state intervention and regulation as unhelpful, it’s worth reminding ourselves that even free-market advocates like Adam Smith recognized the need to intervene where the risks of not doing so posed a major risk to society at large.

Smith acknowledged that such regulations are “a manifest violation of that natural liberty which is the proper business of law. But…the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments… ”.

The societal risks of markets dominated by a tiny number of providers are plain to see. Perhaps we ought to start heeding Adam Smith’s suggestions and look at how we can make markets work for the whole of society.

This post is based on a presentation I gave at the Joseph Rowntree Foundation’s event ‘Making markets work for low income consumers’ held on 5th November.


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