Financial Literacy & Inclusion: The state of play in research

and practice

Guy MendelsonHead of Personal Loans

RMIT Conference – Financial Literacy, Banking and Identity

25 October 2006

• Improved Financial Literacy and Inclusion can assist in responding to long-term strategic issues:

• Widespread staff support for financial literacy initiatives because of relevance to “what we do every day”

• Staff rated ‘Community involvement’ as our third highest current value in the 2006 Engagement survey

A more informed market place

lessens market failures which

prompt regulation

Empowered and confident

consumers more deeply engage with

financialinstitutions

Rebuilding ourreputation

Why is Financial Literacy and Inclusion important to ANZ?

What are we doing?

1. Research

a) Causes of Financial Difficulty (2005)

2. Business operations

a) Responsible Lending commitmentsb) Progress Loans

3. Innovative community programs

a) Saver Plusb) MoneyMindedc) MoneyBusiness

1. Research

2. Business operations

3. Innovative community programs

1. ANZ’s research into financial difficulty

• Conducted qualitative research into the causes of financial difficulty in 2005

• Part of our updated quantitative research into the levels of financial literacy

• To respond to the growth in household debt in Australia and address questions about the marketing practices of lenders

• Qualitative research focused on the 2% of the population who:

– feel ‘out of control’ and– have borrowings of some type

• What are the core factors causing financial difficulty and what is the role of the lender?

Three core factors

Lack of Skills Lack of Skills & Knowledge& Knowledge

Circumstances Out Circumstances Out of Individual’s of Individual’s

ControlControl

Unhealthy Unhealthy Financial Ways Financial Ways of Thinkingof Thinking

Over-Spending &/ Over-Spending &/ Over-CommitmentOver-Commitment

Decreased Income Decreased Income &/ Increased &/ Increased

ExpensesExpenses

Poor Financial Poor Financial Decision-MakingDecision-Making

What does this tell us?• Financial difficulty most often due to behaviour and traits of the

individual or unexpected events (or a combination)

– lack of financial skills and knowledge is only a small factor

– many in difficulty had good financial literacy skills but they were over-ridden by unhealthy ways of thinking

• People particularly vulnerable where they do not have the capacity to deal with financial pressure when it arises

• Lenders can indirectly influence the path to financial difficulty

– CLI offers provide the ‘opportunity’ to access credit where customer has pre-existing ‘unhealthy ways of thinking’

– ‘it must be OK if the lender sent it to me’

• ANZ’s focus is to filter the most vulnerable customers from CLI offers

1. Research

2. Business operations

3. Innovative community programs

(a) Responsible Lending• The revised ANZ Customer Charter includes new ‘responsible

lending promises’ (introduced November 2005)

• Primarily aimed at credit limit increase offers

• ANZ will:

– not offer a CLI to those with poor recent credit performance or struggling to meet repayments

– not offer a CLI to customers whom we know are on a fixed income (eg. receiving a government benefit) and

– with any CLI offer, outline how much the minimum monthly repayment would increase if the offer was accepted

• ANZ’s performance on these promises is independently audited every 6 months

How are we doing this?• Credit card customers go through an enhanced filtering process

- they will not receive a CLI offer if:

– they have been repeatedly overdue in the last six months

– they have made only minimum payments (or slightly above) for the last 6 consecutive months

– they have an ANZ deposit account receiving Centrelink, DSS or DVA benefits

– they have a deeming account or other ANZ account specifically designed to receive benefit payments

• Remaining customers go through a second filter based on behavioural scores:

– eliminates customers with unreliable credit behaviour over previous 12 months or those showing signs of struggling with repayments

Why are we doing this?

• We have an obligation to lend only to those customers we believe can repay

• Consistent with running a sustainable business:

– to ensure acceptable level of debt losses– to meet community expectations that we lend responsibly

• Driven by our research into the causes of financial difficulty which tells us:

– lenders have a role in causing financial difficulty

– for the most part financial difficulty is not caused by a lack of knowledge or information

– excluding the most vulnerable is more likely to be effective than increasing disclosure or asking for more details

Results so far• Pool of customers who would otherwise have received a CLI

offer reduced by around 11%

• Breaking this down:– 5% reduction due to exclusion of customer making late or

only minimum payments– a further 6% reduction due to exclusion of customers on

fixed incomes

• Improving data matching exercise

• Verifying Government benefit codes to identify eligible customers

Next steps• ANZ’s promises is a first step

• Spotting customers in difficulty– proactive offer of assistance

• New products– repayment flexibility

• Transparency– online calculator

(b) Progress Loans• Small loans program for people on low incomes (who would not

normally fit ANZ’s lending criteria)

• Developed in partnership with Brotherhood of St Laurence, recognising their expertise and proven track-record in microcredit

• Developed following research conducted for ANZ by Chant Link and Associates into levels of financial exclusion in Australia:

– Around 6% of adults have minimal financial access, owning only a transaction account

– Around 120,000 people, or 0.8% of the population, could be considered totally excluded with no financial products

• Launched in May 2006 and in 2007 ANZ and the Brotherhood plan to expand the partnership to other community organisations across Australia

Objectives• Affordable and transparent: cost comparable to standard

personal products and mainstream consumer protections

• Sustainable: financially viable in the long term

• To build scale: effectively targeted to reach as many eligible consumers as possible – this also contributes to financial sustainability

• ‘Inclusive’: loans on normal commercial terms so participants can build a good repayment history, a sense of social inclusion and confidence to apply for future mainstream credit.

Eligibility and features• To be eligible, individuals must:

– be on a low income with a Health Care or Pension Card– be up-to-date with their bills– have lived in their current residence for a minimum of six months

• Progress Loans features:

– between $500 and $3,000– loan term ranges from 6 months to 3 years– pilot interest rate of 12.70%– one-off approval fee of $40 applies

• Loan purpose

– household items (including whitegoods)– education or self-improvement– medical and dental purposes– motor vehicles (including registration and insurance)

Roles of the partners• Brotherhood of St Laurence:

– Program promotion– Participant recruitment– Initial assessment of of applicant’s ability to make

repayments– Check of applicant’s ID and income– Explain product features and requirements to the applicant

• ANZ:

– Review the credit history and record of the applicant– Receive initial assessment from the Brotherhood and make

the formal credit decision based on modified credit approval criteria

– Provide the funding and training for dedicated loans assessors at the Brotherhood

– Loans advanced under the program are fully funded by ANZ

Results so far• On track to meet December 2006 objective

• Loan purpose:

• Key reason for declinals – negative credit bureau record– Brotherhood encourage these customers to obtain the

bureau information and coach them in how to rectify this situation

Whitegoods 20%

Furniture25%

Car22%

Other18%

Computer6%

Car rego/ repairs

6%

Results so far• Customers are more careful and considered with their personal

finances than mainstream customers– This has ensured that no delinquent portfolio activity has

occurred

• ANZ needs to employ a different approach when liasing with these customers – more education focused

1. Research

2. Business operations

3. Innovative community programs

Innovative Community Programs

• Saver Plus– Financial literacy and matched savings program– Helped 668 families together save $617,000 in 2003-05– Being expanded from four to 18 regions, with a goal to involve

5,400 people between 2006 – 2009– Delivered with Brotherhood of St Laurence, The Smith Family,

Berry Street Victoria and The Benevolent Society

• MoneyMinded– Adult financial education program delivered by financial

counsellors and community workers– 15,279 participants in past 12 months– Goal to reach 20,000 over next 12 months

• MoneyBusiness– Money management initiative in six remote Indigenous

communities in WA and NT– Delivered with the Dept Family, Community Services and

Indigenous Affairs

This is the last slide. Click here to return to slide 1