Reading financial services: texts, consumers, and ... - CiteSeerX

Environment and Planning D; Society and Space 1998, volume 16. pages 29 55

Readingfinancialservices: texts, consumers, and financial literacy Andrew Lcyshon, Nigel Thrift Department of Geography, University of Bristol, Bristol BS8 1SS, England; e-mail: [email protected]; [email protected] Jonathan Pratt Department of Geography, University of Southampton, Southampton S017 1BJ, England; e-mail: [email protected] Received 29 January 1997; in revised form 14 July 1997

Abstract, The authors focus upon the changing nature of production and consumption within the retail financial services industry. The perennial problem which faces all producers of financial services is information asymmetry; that is, providers and consumers of financial products have unequal amounts of information about whether or not customers have the wherewithal to make them 'capable* purchasers. Thus, the problem of information asymmetry is usually manifested in a priori decisionmaking about the suitability of customers. This problem has traditionally been overcome by forging interpersonal relationships of trust with consumers through coprcscncc. Increasingly, however, trust in consumers is being forged through technologically mediated means of information collection functioning 'at a distance* so that financial services producers are coming to 'read* consumers as 'texts', through the medium of databases. These developments have had a number of effects, such as increased competition in retail financial markets, while branch networks, which acted as durable barriers to entry to the market, have become less important as sites of market intelligence and knowledge. Consumers have also been forced to forge new relations of trust with retail financial service providers. This is increasingly being achieved through the use of various media and through identification with brands. Such developments have served to create social and spatial divisions of financial inclusion and exclusion, as producers use at-a-distance information to discriminate between 'good* and 'bad* customers. Those 'inside' the financial system are able to use their financial knowledge to take advantage of increased levels of competition between financial service providers. However, those excluded from the financial system are doubly handicapped as they live in both a financial and an information shadow. Such individuals are likely to pay an increasingly heavy price for their exclusion, particularly given the collapse of universal welfare provision and the allied growth of private welfare-related financial products. In recognition of this, in the final part of the paper we consider ways of countering problems of financial exclusion and low levels of financial literacy. 1 Introduction The main argument of this paper is that, in a number of Western countries, of which we take Britain to be an exemplar, the financial services industry is moving towards a model which increasingly valorises the consumer of financial services. This turn towards the consumer is, we argue, the result of a number of processes, of which two are particularly important. First, information and communication technologies are increasingly being applied to provide an 'at-a-distance' means of constructing an understanding of the consumer which contrasts with that which has hitherto been used in the financial services industry. Second, there is the growing power of the media. Not only is the provision of financial services increasingly mediated, but the products themselves are now becoming increasingly linked to their media possibilities. We argue that these linked developments have brought about a change in the ways in which information is being used both by producers and by consumers. Financial services providers are increasingly having to produce and read 'texts', both about themselves and about their customer 'audiences' (du Gay, 1996). Increasingly, therefore, consumers have also had to become active 'readers' of these texts in order to survive.

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A Leyshon, N Thrift, J Pratt

These changes have been brought about by a transformation in the kind and extent of information producers have about consumers and, in turn, a change in the kind and extent of information consumers have about producers. As a result of these changes, the ways in which financial services firms tackle the problems of information asymmetries, which are endemic to the industry, have changed. As far as producers are concerned, the possession of an extensive branch network is no longer a prerequisite for entry to the retail financial services market. In the past, the branch was the main source of market knowledge, gathered through face-to-face contact with customers, the site where products were sold to customers, and where the firm conducted much of the processing of the day's business. The central role of branches ensured that they served as effective barriers to entry to the retail financial services market. However, branches are expensive, and the main cause of the high cost-income ratios of financial services firms.(1) Over the last few years there has been a revolution of practice in retail banking in Britain which has seen a shift to 'multichannel banking', which has decreased the relative importance of the branch network. Market knowledge about customers is increasingly determined at a distance through the use of databases and credit-scoring systems; products and services are now delivered through 'remote' means, including ATMs and 'direct' or telephone operations; meanwhile, many firms have introduced factory operations for processing outside branches which enables them to take advantage of economies of scale. These developments have meant that producers and consumers are having to forge new 'discursive' relationships of trust which have important implications for the geographies of retail financial services production and consumption, as we shall outline later in this paper. Thus, a key concern of this paper is with what we describe as 'discursive' regulation. In a previous set of papers and books (Leyshon and Thrift, 1997a; Leyshon and Tickell, 1995; Thrift, 1996a; Thrift and Leyshon, 1994) we have considered the ways in which international financial services have been discursively regulated. In this paper, we switch our attention from the 'wholesale' and predominantly international financial markets to 'retail' and predominantly national financial systems. In so doing we also switch our attention from financial products which are more likely to be bespoke to those which are more likely to be mass market in character. Given the nature of the changes underway in the retail financial services industry we believe our attention to discursive regulation is particularly appropriate. Such an approach does not deny the power of the rules and regulations of explicit regulatory regimes but it is much more concerned with how those rules and regulations are worked out in practice. A key focus in such an approach, then, is the 'economy of expectations' that surrounds and motivates any regulatory system as well as the often unspoken conventions that act both to underpin regulation and, to borrow a term from Pickering (1995), to 'mangle' it. In the long run, we believe that the changes we analyse in this paper are of lasting importance for consumers of financial services. First, consumers are likely to become more 'financially literate' as they take a more active interest in the workings of the financial system. However, levels of literacy will vary substantially within the population, because there exist marked social and spatial divisions of financial knowledge (Pratt et al, 1996a; 1996b). Second, the industry as a whole will experience increasing 'demand pull' from certain groups of consumers. With increased information about the performance of financial products and financial markets, and the growth of more user-friendly products, many consumers will increasingly find themselves able to exert (1)

Analyses of transactions costs have revealed that the average cost of transactions in branches are twice that of a telephone banking operation and more than three times more expensive than transactions conducted via ATMs (automatic teller machines).

Reading financial services

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demand. Although we doubt that such developments mean that financial services consumers are about to become a vanguard of the kind that Miller (1995) describes, we suspect that some consumers will increasingly be able to exert a greater degree of influence on the financial services industry, perhaps for better or, as Miller would probably argue, perhaps for worse. Third, the changes we relate are part of a growing social and spatial divide between the mainstream financial system and poor and disadvantaged groups in society. As the financial services industry moves towards a more 'remote' and at-a-distancc form of doing business, it is retreating fastest from those areas made up of those social groups who are least able to participate actively in the increasingly discursive and reflexive realm of retail finance (Leyshon and Thrift, 1997b). The remainder of the paper is therefore divided into four parts. In part 2, we attempt to underline what is at stake, by turning to a specific, sharply defined case of financial literacy involving the court case between the musician, Gordon Matthew Sumner ('Sting') and his accountant, Keith Moore. We use this case to generalise the problems that financially illiterate consumers will face in a system which will increasingly assume that they are literate and able to fend for themselves. In part 3, using the example of the international financial markets as a precursor of the kind of developments we might now expect to see in national financial systems, we consider the importance of information asymmetries in generating specific forms of trust between producers and consumers. Our argument here is that, over a long period of time, 'process-based' trust based on personal knowledge has been replaced by 'characteristicbased' and 'institutional-based' trust which is based upon empirical knowledge (Zucker, 1986). This switch from one form of trust and knowledge to another may be taken to be increasingly constitutive. In part 4 we consider some of the processes by which the British retail financial system has restructured in recent years, paying particular attention to consumption. In part 5, which concludes the paper, we return to the problem of financial literacy and of financial exclusion and consider some measures that might effectively tackle both and their uneven geographies. 2 Financial literacy In September 1995 Gordon Sumner, professionally known as Sting, brought a civil action against his former accountant, Keith Moore. Moore was accused of stealing £6 million of Sumner's money in order to pay off debts and fund various unsuccessful business ventures. A central issue in the case turned out to be the degree to which Sumner actually understood how his financial affairs were organised and the extent to which he gave approval for the actions taken by his accountant. It emerged in court that the alleged incidences of theft were only brought to light after an anonymous tip-off, which prompted Sumner and his other advisers to take a closer look at the management of his money. This investigation uncovered fifteen specimen charges of theft between 1988 and 1992. During this period Sumner had suspected nothing and had routinely approved many of the transfers subsequently identified as illicit. Sumner's problems in monitoring his financial affairs were both particular and general. The particular problems he had were the result of a labyrinthine financial architecture which Moore had constructed around his affairs, involving the use of over 100 separate bank accounts. The more general problems faced by Sumner was a sense of unease and discomfiture when faced with reading and interpreting information provided by his accountant and by his banks. Sumner admitted as much in court: "I tried [as] far as possible to understand what was presented to me. I was sent bank statements occasionally. I couldn't pretend I sat down with a pencil and added

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numbers up. I'm not an accountant, I'm a musician". Many bank documents were "written in code as far as I'm concerned" (Knight, 1995, page 3). Much was made in the press and by the defence counsel of Sumner's inability to read these documents despite the evidence of a more-than-average familiarity with economic and financial matters, gained from passing an A' level examination in economics and from a brief period of employment at the Inland Revenue. However, the defence ploy to prove that Sumner really knew what was going on, or could have known what was going on, failed. At the end of the case the jury found in his favour, resulting in his former financial adviser being given a six-year prison sentence. At one level this case may be seen as a trivial incident, made notable only by the celebrity of the plaintiff. At another level, it is an interesting insight into the extremes of wealth in a divided society, where one individual can be so fabulously rich that he does not notice the loss of £6 million from his bank account(s).(2) But at a further level still, this case is significant in that it points to the growing importance of financial literacy. In this particular incident, the loss of large sums of money did not prove ruinous. Far from it. Sumner did not even notice the loss of money until it was anonymously drawn to his attention. But, for the majority of the population, a lack of financial literacy can, in relative terms at least, be extremely costly. This is clearly recognised by those who live on very low incomes, many of whom purposely exclude themselves from the financial system as a result (Ford and Rowlingson, 1996). According to Kempson (1994, page 15), many people on low incomes "choose not to have current accounts and to [cash] budget weekly because cash gave them greater control over their finances". Or, in other words, "When every penny counted, people liked pennies they could actually count and so went over to a weekly cash budget" (Kempson, 1994, page 27). One of the major reasons for closing bank accounts and switching to cash budgeting is the real fear of incurring the charges which could result from the mismanagement of such accounts, charges which people on low incomes recognised that they could ill afford to pay. In short, faced with the difficulties of negotiating the financial system at the margin, many people prefer to exclude themselves and attempt to survive in the cash economy.(3) However, surveys have revealed that many of those who retain a stake in the financial system, and sometimes even a considerable one, are, at best, only quasi-financially literate. For example, take the case of the 'annual percentage rate of change', or APR, which was introduced as part of the 1974 Consumer Credit Act to help consumers compare the true cost of credit across a range of lending products. An Office of Fair Trading survey in 1994 revealed that only 11% of respondents knew what its purpose was (Moore, 1996). Another example is the low level of knowledge about pensions. A recent survey by National Opinion Polls found that 75% of the 1000 adults interviewed were unable even to guess what the current level of the state pension for a single person might be (Caine, 1996). Approximately one in three had made no form of pension provision and 58% did not know what their savings would yield at retirement. Yet this finding comes at a time when the issue of pension provision assumes a new importance in peoples' lives as a result of the New-Right-inspired decision to let state pensions wither on the vine while encouraging occupational, and especially, private pensions (Waite, 1992): (2)

Sumner had a fortune estimated at £70 million in 1997, making him the joint 266th richest person in Britain (Beresford and Boyd, 1997). (3) However, living in the cash economy is increasingly difficult and problematic because of the growing tendency for important financial transfers, such as wages and salaries, to be mediated only through the financial system (see Pratt et al, 1996b).


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"For at least three generations the state has gradually taken on increasing responsibility for handling individuals- finances, It has taken away more and more of their money and (after deducting expenses) given more and more back in services and other benefits. That whole process is now in reverse ... . Even if taxes do not come down by very much, the benefits will, because there will be fewer earners and more dependants. It is therefore absolutely vital that the financial services industry takes on some of the responsibility shed by the state. This means creating products we can trust, making them cheaply and selling them efficiently. It also means that all people, not just the pop stars but—-more importantly—the rest of us, need to learn a modicum about money" (McRae, 1995, page 21, emphasis added). In other words, as the state withdraws its support from welfare services such as the retirement pension, universal health care free at the point of provision, state-funded education, and the like, so individuals will increasingly turn to the financial system to convert investments into the wherewithal needed to support a comfortable retirement, adequate health care, school fees, etc. Such developments will require a far greater involvement in and understanding of the workings of the financial system than is necessary merely to maintain an ordinary cheque or savings account. One of the key reasons why there is a need for greater consumer involvement is outlined in the next part of the paper, in which we focus on the changing bases of trust in the retail financial services industry. 3 Information, knowledge, and trust in financial markets As economists working in the area of information asymmetries have argued over a long period of time, information on actual or potential customers is critically important to the functioning of the financial services industry (Dymski, 1994; Jaffe, 1989; Mayer, 1994; Stiglitz, 1985; 1994; Stiglitz and Weiss, 1981). Credit-granting institutions require this information to distinguish between 'good' and 'bad' customers; where good customers are those who repay their debt, and bad customers are those who do not. The nature of this dilemma, and the necessary importance that lenders afford to gathering information about borrowers, has been outlined by Dymski (1994, page 4): "Because of the zero-sum aspect of the scenario, wherein the lender's gain is the borrower's loss (and vice versa), borrowers cannot credibly inform lenders of whether they are good or bad. The lender's action here depends, in turn, on whether potential borrowers have any way to signal their acceptability. If they cannot, lenders settle for a pooling equilibrium with excess demand for loans at the prevailing interest rate. Lenders then choose their borrowers randomly from among their applicants. If borrowers can signal their capability, lenders may be able to construct separating equilibria that divide borrowers neatly into groups according to their creditworthiness scores." The problem for lenders, therefore, is to be able to recognise and act upon the informational signals that will allow them to distinguish 'capable' borrowers from 'incapable' ones. In order to understand more clearly how financial services are able to discriminate between potential borrowers in this way it is useful to turn to research in which the aim has been to identify the economic role of knowledge and information. The rise of institutional economics, the resurgence of economic sociology, the increasing interest in 'hetarachic5 forms of governance, and the proliferation of research in geography on regional economies have all helped to bring into being a new network or associative paradigm (Cooke and Morgan, 1993). According to Morgan (1995, page 1), this new paradigm is informed "by the belief that 'markets' and 'hierarchies' do not exhaust the menu of organisational forms for mobilising resources for innovation

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and economic development". Thus researchers on networks and associations seek to chart a route between oversocialised and undersocialised accounts of social change (Granovetter, 1985), and pay particular attention to issues of trust and the role of knowledge and information in processes of economic change (Powell and Smith-Doerr, 1994). The transmission of economic knowledge and information through networks of association is increasingly recognised as being central to the success of a wide number of institutional ensembles, ranging from regionally concentrated industrial (or technology) districts (Amin and Thrift, 1994; 1995; Grahber, 1993; Storper, 1992; 1993; 1995) to geographically looser associations such as business groups and strategic alliances (Granovetter, 1994; Olds, 1995; Powell and Smith-Doerr, 1994; Thrift and Olds, 1996; Yeung, 1994). A key advantage of such networks is the way in which they generate trust, which in turn serves to reduce uncertainty and introduce a degree of predictability into economic life (Gambetta, 1988; Kramer and Tyler, 1996; Misztal, 1996). Moreover, trust-rich environments avoid the costs incurred by economic actors who undertake transactions in the absence of trust: "people who do not trust one another will end up co-operating only under a system of formal rules and regulations, which have to be negotiated, agreed to, litigated, and enforced, sometimes by coercive means. This legal apparatus, serving as a substitute for trust, entails ... 'transaction costs'. Widespread distrust in a society, in other words, imposes a kind of tax on all forms of economic activity, a tax that high-trust societies do not have to pay" (Fukuyama, 1995, pages 27-28). Trust is clearly of critical importance to the financial services industry. On the one hand, trust is important to the suppliers of financial services. For example, its existence makes the granting of credit easier to sanction. On the other hand, trust is also important to the consumers of financial services, for they must have trust in financial institutions and in the safety, reliability, and general utility of their products and services. But in recognising the importance of trust, at least two problems arise. First, how is trust produced? And second, are there different types of trust? An attempt to answer these questions will be made by reference to the work of Zucker (1986) who has sought to identify the social, cultural, and institutional origins of trust in economic relations. 3.1 Trust The creation of trust in economic exchange is dependent upon the existence of what Zucker describes as 'background' and 'constitutive expectations'. The two sets of expectations exist in an inverse relationship to one another, so that where "one component increases in importance, the other tends to decrease" (Zucker, 1986, page 59). It is the specific combination of these two sets of expectations which Zucker argues influences the ways in which trust is produced in any particular circumstance. In particular, Zucker identifies three ways in which trust may be generated (table 1). First, trust may be process based. This form of trust is generated through the act of economic exchange itself, and requires the compilation of an historical record of successful transactions between social actors. Process-based trust is, therefore, generated through repeated interpersonal contact, often face to face and usually over the course of a long-term relationship. Second, trust may be characteristic based. With this form of trust the need to generate a successful record of transactions is relaxed, and emphasis is placed instead upon the social similarity of economic actors engaged in transactions. With characteristicbased trust, "Others with similar characteristics—such as ethnicity—may be sought out for exchanges under the premise that many background understandings will be held in common, smoothing or eliminating the negotiation over terms of exchange and making


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Tabic 1. Modes of trust production (source: Zuckcr, 1986, table 1, page 60). Oasis 1 Process 2 Characteristic 3 Institutional (a) Person or firm specific (b) Intermediary mechanisms

Source

Tied to exchange, Reputation, brands, past or expected gift-giving Tied to a person, Family background, ethnicity, sex ascribed Tied to formal Signals social structures Professional, firm associations Bureaucracy, banks, regulation

Measures No market; Investment in trust No market; Free trust Active market Purchase of trust

it more likely that the outcome of the exchange will be satisfactory to both parties" (Zuckcr, 1986, page 61). In other words, trust may be based upon a sense of familial, social, cultural, or religious commonality with others (Deakin and Wilkinson, 1994; Zuckcr, 1986). Third, trust may be institutional based. In this case, trust is produced from the association of economic actors or organisations with social institutions, the standings of which are sufficiently robust to confer trust 'by association'. Institutional-based trust is a far more abstract and impersonal form of trust than either process-based or characteristic-based trust, for it may be generated through the acquisition of professional credentials or through intermediary mechanisms, such as regulatory supervision, which provides "some form of guarantee that the transaction will take place as promised*' (Zucker, 1986, page 61), without any knowledge of the personal or cultural characteristics of the other party, beyond their attachment or affiliation to a recognised social institution.*4* 3.2 Knowledge and the production of trust The different bases of trust identified by Zucker are founded in large part upon the availability of different types of information and knowledge. Therefore, process-based trust is produced through the capture and manipulation of information and knowledge generated firsthand through regular interpersonal exchange, although this information may also be "obtained secondhand or by imputation from [past] outcomes of prior exchange" (Zucker, 1986, page 60), which encourages "persons and firms [to] make investments in process-based trust by creating positive 'reputations' or name brands" (page 61). This type of information may also be described as being 'embedded', inasmuch as it points to the entanglement of economic and noneconomic information, and to the importance of economic transactions being situated within stable, ongoing social relations (Coleman, 1994; Granovetter, 1985). Characteristic-based trust is produced through the capture and manipulation of information on social similarity (Zucker, 1986, page 61) which may be generated more remotely than through an interpersonal relationship. This information may be obtained (4)

An example given by Zucker is the trust placed in an accountant that he or she will perform tasks honestly and evenhandedly, trust which is in large part generated through their membership of a professional supervisory body. As in the case of Keith Moore, discussed in the introduction to this paper, the associative trust conferred by membership of professional bodies is not always warranted, although the illegal abuse of such trust does usually lead to expulsion from the professional body which serves to confer such trust. In Moore's case, his conviction saw him permanently struck off from membership of the Institute of Chartered Accountants (Chaudhary, 1995).

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via a remote information source—'knowledge at a distance'—defining the customer as a certain type based on a range of perceived 'characteristics'. The standardisation of information associated with characteristic-based trust is taken still further in the creation of institutional-based trust. The production of institutionbased trust "generalizes beyond specific sets of exchange partners. In order to generalize ... 'locally produced trust' must be reconstructed as intersubjective, exterior to any given situation, and as part of the 'external world known in common5, objective in that they are repeatable by other individuals without changing the common understanding of the acts. This process of reconstruction ... [can be] called institutionalisation" (Zucker, 1986, page 63). Therefore, the different forms of trust identified by Zucker are produced through the capture and manipulation of different types of information and knowledge. Or, put another way, different types of knowledge are required to reproduce the different types of trust which permit economic exchange to take place. The next stage in our argument, therefore, is to identify these different types of knowledge. In order to do so, we can turn to research in social theory to identify the types of knowledge which circulate between social actors and which form the basis for social action. For example, Thrift (1985) has argued that it is possible to identify three different types of knowledge: unconscious knowledge, practical knowledge, and empirical knowledge. In the context of the argument being pursued in this paper the least important is unconscious knowledge. Far more important for our purposes are the categories of practical knowledge and empirical knowledge. Practical knowledge may be defined as "that informal ... type of knowledge that is learnt from the experience of watching and doing in highly particular contexts in direct mutual interaction" (1985, page 373). The unarticulated, repetitive, and local nature of practical knowledge means that this sort of knowledge would be strongly associated with the (reproduction of processbased trust, through time - space-specific episodes of economic exchange. Empirical knowledge "is built up as a result of the general process of [the] rationalisation of knowledge, which has a double interpretation as the proffering of a rational explanation and the organisation of knowledge in a systematic fashion. Empirical knowledge, like practical knowledge (with which it continues to share many similarities), is bent towards the mastery of the conditions of existence" (Thrift, 1985, page 375). The rationalisation of knowledge has occurred over a long period of time in human history, and can be linked to the rise of particularly powerful social groups, social institutions, and social formations, ranging from the church, to natural science, through to the modern state and the capitalist economy. All these social formations are associated to a greater or lesser degree with the growth of surveillance and the collection and manipulation of empirical knowledge, although the modern state and capitalism may be seen to be particularly significant in this regard (Thrift, 1985). It is important to stress that, although much empirical knowledge is developed in order to substitute for practical knowledge, this process of substitution is only achievable up to a point. As the literature on the sociology of scientific knowledge makes clear, all acts of interpretation and 'understanding' involve a complex mixture of both empirical and practical knowledge (Harding, 1991; Porter, 1995). Understanding these different types of knowledge in turn contributes to our understanding of the production of trust, and the relationship between knowledge and the different bases of trust identified earlier. We suggest that each type of knowledge is associated in different ways with the production of the forms of trust (figure 1). Thus, at one extreme, the availability of practical knowledge is likely to be particularly important in the production of process-based trust, given that process-based trust is

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Raiding financial services

rounded upon repeated acts of economic exchange between social agents, involving intcrsubjcctivc contact, usually over the course of a long-term relationship. In this way, trust is founded in large part upon knowledge which is unarticulatcd, repetitive* and involves mutual interaction or, in other words, is founded upon practical knowledge/5* At the other extreme, the production of institutional-based trust is more dependent upon the availability of empirical knowledge, for here acts of economic exchange take place against the background of a codified system of laws and regulation. Empirical knowledge also plays an important role in the production of characteristicbased trust, in that codified information about the characteristics of the other party involved in the economic exchange is required before it can proceed, although here practical knowledge is also moderately important. Having undertaken this rather lengthy exposition on the nature of trust and knowledge, and on the relationship between them, we can now move onto the next stage of our argument, in which we seek to illustrate how understanding the relationship between trust and knowledge helps to explain the evolution of financial markets. Trust Characteristic based

Process based

"8

Practical

Empirical

s

\ 'jttadtK'jite

Institutional based

weak

>Ve»k~mtiteafc

Figure 1. Relationship between types of knowledge and the production of trust (source: adapted from Zucker, 1986; Thrift, 1985). 3.3 Knowledge, trust and the evolution of international financial markets The importance of process-based trust to the development of monetary and financial systems can hardly be overemphasised. The very use of money as a basis for economic exchange relies upon the existence of a degree of intersubjective trust or faith in the ability of money to act as an embodiment of universal value which will be readily accepted as a medium of exchange. As studies of the early history of money have revealed, the investment of trust in money was mostly contingent upon the prior use of money objects in a wide range of cultural exchanges within often highly circumscribed social groups (Dalton, 1965; Davies, 1994; Einzig, 1966). Thus the trust invested in money as an instrument of economic exchange was for the most part dependent upon the existence of a prior history of noneconomic exchanges of a wide range of artefacts which acted as money. With the backing of this 'trust in process', money was able to evolve from relatively narrow, culturally specific uses to take on a wider range of economic functions which we now take for granted (Dodd, 1994). Where such (5)

This is not to say that empirical knowledge is absent in the production of process-based trust. Although empirical knowledge has a relatively weak relationship with process-based trust, the presence of a set of codified laws and regulations is important to all acts of economic exchange, even though they might appear to be remote and opaque in different contexts. For example, consider the history of money. Money is taken for granted as a medium of exchange only because of a regulatory history which has served to guarantee its role as a source of value in economic exchange over a long period of time (see Dodd, 1994; Leyshon and Thrift, 1997a).

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process-based trust exists, economic exchange may proceed even in the absence of money proper, with money becoming in effect disembodied as credit money or money of account.(6) The continuing and central role of process-based trust in the financial system may be seen in the importance of social networks and social knowledge to the functioning of international financial centres (Thrift, 1994; Thrift and Leyshon, 1994). For example, the economic success of the City of London has over a long period of time been based upon a rich supply of process-based trust produced by dense transactional networks tied together by bonds of repeated interaction and sociability, as well as bonds of gender, ethnicity, and class. The importance of social networks in generating process-based trust can also be seen from the long-standing importance in the international financial system of what has been described as 'relationship banking'. Over a long period of time, financial institutions employed a key group of workers—described by Allen and Pryke (1994) as 'conversational dealers'—to meet and greet clients on a regular basis in the conducive surroundings of their expensively furnished boardrooms (see Auletta, 1986; Eccles and Crane, 1988). These face-to-face meetings are opportunities for gathering practical knowledge, which is vitally important for the production of process-based trust. According to Kay (1995, page 7) the importance of such meetings is precisely that they make possible the exchange of tacit and nonverbal signals that are impossible to receive other than through copresence: "The barely perceptible hesitation introduced by a satellite link invites misunderstanding when we are used to interpreting hesitation in other ways. Shared experiences and values are a central element in developing trust. The linking of social and commercial relationships increases the penalties for opportunistic behaviour. That is why the lunch room is a central facility of the City of London and expensive entertainment an integral part of Japanese business culture." Although process-based trust remains important within the financial system, it has increasingly been supplemented by a reliance upon trust based more upon the manipulation of empirical knowledge. The growing importance of characteristic-based trust within global financial markets can be seen, for example, in the relative decline in the importance of relationship banking and the rise to prominence of securitised financing. It is now far easier to collect 'at a distance' characteristic information on potential clients in global financial markets, because of the growth of specialist informationgathering firms, and the rise of standardised evaluations of this information, such as those provided by credit-rating agencies (Cantor and Packer, 1994; Sinclair, 1994). The growth of such 'knowledge at a distance' means that banks, for example, no longer need to 'know' a firm through a relationship in order to lend it money, because the rating provides an indication of the level of risk associated with particular borrowers. Of course, many banks and investors continue to strike up such relationships in order to ensure a steady and reliable source of information, but the ease with which this at-a-distance information can now be obtained by financial institutions has encouraged the growth of a wide range of generic financial products which are available to firms with suitable risk profiles. Such products permit these firms to gain access to funds from a wide range of investors. In other words, the key which unlocks the investments funds is the credit rating rather than any other specific knowledge that the investor may have about the borrower. (6)

An excellent example of the ability of economies to function on the basis of deferred payments in the absence of money but in the presence of process-based trust is provided in Cronon's (1991) analysis of the Mid-West of the United States in the 19th century before the coming of the railroads.


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Such developments have served to polarise further the nature of provision in global financial markets, as the transparency of information about who is a good or a bad customer (or at least, not revealed as good by the characteristic information used) has resulted in more powerful blue-chip companies being provided with extremely high levels of service provision, being offered extremely favourable rates of interest, and so on. These favoured companies have become increasingly reflexive in their use of financial products and financial institutions, and capitalise upon their power as desirable clients in financial markets in order to get ever more favourable terms in their financial transactions/7) Meanwhile, companies which lack the required characteristics which would mark them out as good borrowers are either charged more for credit or arc denied access altogether.(8> The increasing significance of characteristic-based trust in the financial system has been paralleled by a growth in the importance of institutional-based trust. This has meant that financial activity has increasingly been conducted against the backdrop of statutory regulation which in effect produces an environment of trust within which anonymous economic actors may enter into economic exchange within one another. The reregulation of the City of London during the 1980s provides one of the best examples of the rise to importance of institutional-based trust. Here a long-standing system of self-regulation was replaced by a system of statutory regulation (Moran, 1991). The old system was based upon an expectation of process-based trust, which was overseen by the Bank of England through a mixture of moral suasion and social pressure, often through face-to-face meetings, where the use of a raised eyebrow as signal of regulatory disapproval has passed into legend (Fay, 1987; Pryke, 1991). The regulatory reform of the City in the 1980s introduced a far more codified system of financial regulation, based squarely upon a US model of regulatory practice (Moran, I99I). (7)

However, it is important to add that, although the use of at-a-distance credit assessments serve to polarise the provision of investment between different types of firm, it does not necessarily mean that the favoured pool of firms is small or even declining. Indeed, the use of such techniques may have had the effect of widening the provision of funds. When lending decisions were based solely upon relationship-based bank-industry contacts it may have been difficult for some firms to break into these tight economic and social circuits. The turn to empirical knowledge and the use of at-a-distance assessments may reveal a whole host of firms eligible and suitable for funding but which would not have been considered as such under conditions of mainly process-based trust. Similar processes of inclusion have undoubtedly occurred within retail financial markets too. (8) Note that the capture and manipulation of empirical knowledge may subsequently be used to initiate relationships within which knowledge of a more practical nature may be unearthed. Potential customers who successfully fit the desired profile through an analysis of characteristic information may then be cultivated through a relationship which would generate additional process information. The importance of this strategy leads us to suggest that a third category of financial knowledge exists, which we describe as characteristic-process. (9) The installation of this new system of regulation was part of a wider global process, and similar episodes of regulatory reform occurred in the financial systems of other leading industrial economies, such as Japan (Leyshon, 1994; Moran, 1991). In part these changes were the result of geo-economic pressures being brought to bear upon regulatory authorities to restructure their financial systems to bring them into line with the imperatives of an international financial system increasingly characterised by processes of securitisation and disintermediation (Lash and Urry, 1994; Leyshon and Thrift, 1997a). It is significant in this regard that one of the key attributes of institutional-based trust identified by Zucker was its ability to facilitate trust over great distances. Economic actors are encouraged to trust one another in the absence of interpersonal contact because codified regulatory structures promise to penalise and punish malfeasance which anonymity might otherwise encourage. Thus, institutional-based trust assumed a new importance in the globalising financial markets of the 1980s.

40


So much for the example of global financial markets. To what extent does an understanding of the relationship between different types of knowledge and the production of trust in these markets throw light upon recent changes in the retail financial services industry in Britain? We attempt to answer this question in the next section of the paper. 4 Knowledge, trust, and the restructuring of retail financial markets in Britain Although national retail financial markets are different from global financial markets, there are a number of developments underway in the British financial system that parallel what has been going on in the global financial system. For one thing, institutional-based trust has become more important, in part because the reregulation of the City of London referred to in the last section has had a parallel in retail financial markets by way of the Financial Services Act (1986) and the Building Societies Act (1986) (Gentle, 1993). For another, there has been a decline in the importance of process-based trust and a growth in the importance of characteristic-based trust as a basis for economic exchange between financial institutions and their customers. These changes have brought about a transformation in the nature of financial services production and supply as well as in the nature of financial services consumption. 4.1 Knowledge, trust, and the production and supply of financial services Within the realm of production and supply, there are at least three developments which signal the changing bases of trust in the financial services industry. The first development, which we referred to in the introduction to this paper, is the waning importance of 'local' branch-based market information about customers, which is typically embodied in the local manager and his or her staff, and the more systematic use of empirical information on customers by retail financial service providers. This development has been made possible by the rise of technologically mediated databases (Gandy, 1996; Poster, 1996), which are often connected to geographical information systems (GIS). Most retail financial institutions have now constructed information systems that are national in scope and which contain detailed information on customers and their demand, or potential demand, for different financial services products. This 'geodemographic' information is available even for quite small spatial aggregations, and is usually produced by amalgamating information on population types (age, sex, social class, etc) with a propensity to hold accounts or products of certain types (Goss, 1995a; 1995b; Longley and Martin, 1995; Pickles, 1995). Such practices are becoming increasingly important within the British insurance industry, particularly among 'direct' insurers. One such firm, Prospero Direct Insurance(10), was the first insurer in Britain to use a GIS which draws upon the entire six digits of the postcode in order to price risk (Gardner, 1995). Previously, the GIS used by insurance companies relied upon just the first four digits, although most are now moving to six-digit systems. The consequences of such practices is the production of microgeographies of 'good' and 'bad' areas. Indeed, the management of Prospero Direct boast of the ability of their system to be able to rank the 'best' and 'worst' streets classified in terms of insurance risk (table 2). These ranked differences are then experienced in marked geographical differences in annual average premiums. The analysis and interpretation of databases have become an important component of retail financial services practice, as firms seek to gain more information and knowledge about consumers so that financial institutions can adapt in appropriate ways. (10)

Prospero Direct Insurance is a subsidiary of Provincial Insurance. Following the commercial success of Direct Line, most UK insurance companies have introduced a direct insurance subsidiary based upon a computer-supported telephone delivery system.


41

Tabic 2. Microgcographics offinancialinclusion and exclusion: Prospero Direct Insurance ranking of the 'best* and 'worst* streets in Britain in order of insurance risk (source: Gardner, 1995). Best streets (low risk, low premium) 1 Ncwburgh Road, Bridge of Don, Aberdeen 2 Maperton, Wincanton, Somerset 3 Church Street, Appleby Magna, Derbyshire 4 Davies Close, Silverton, Exeter 5 Burnham Close, Trimlcy, Ipswich 6 Abbey Close. Denbigh, Clwyd 7 Hubbard Close, Buckingham 8 Larson Road, Upper Hey ford, Oxfordshire 9 Bellman's Grove, Whittlesey, Peterborough 10 Hawkesmore Drive, Little Hay ward, Stafford Worst street (high risk, high premium) 1 Cuthbert Road, Birmingham 2 Villicrs Close, London 3 Myddlcton Road, London 4 Nithsdalc Road, Glasgow 5 Wenlock Road, Edgvvarc, Middlesex 6 Ford Lane, Liverpool 7 Scotland Road, Liverpool 8 St George's Avenue, Manchester 9 Bradgate Close, Manchester 10 Monday Crescent, Newcastle upon Tync

AB22 8QY BA9 8HN DB12 7BB EX5 4DL IPIO OXJ LL16 3HU MK18 IYS 0X6 3TA PE7 ITX ST 18 OUA B18 4AQ E10 5HJ N22 4NS G4I 2AN HA8 9JF L2I OHP L5 8TN M15 4FR M22 4LX NE4 5BG

In part this is done in order to be able to sell more services and products to good customers, by classifying consumers into different life-cycle and lifestyle groups, But it is also done in part to be able to identify bad customers at an earlier stage, For example, many UK building societies have used the mortgage debt crisis of the early 1990s to good effect by compiling databases on arrears. As a manager with a leading building society has made clear, such databases have obvious advantages in helping lenders to discriminate between different types of borrower in terms of the likelihood of default: "Our recent experience has given us the opportunity to develop a tremendous database. We have a very detailed knowledge of which kinds of borrowers default, and are in a better position to predict their repayment pattern than ever before. Although we have no plans to do so at the moment, we could easily use this information to actively differentiate between customers on price" (quoted in Hunter, 1995, page 1, emphasis added). Therefore, it is possible to argue that the growing use of databases means that consumers are increasingly being constituted by financial services producers as 'texts' which need to be interpreted in order to inform future action. The second development which signals the changing bases of trust in the industry is the growth of generic, transparent, and lower cost retail financial products which are marketed to specific types of customer, who are often identified through the use of databases and GIS. The 1990s have seen the creation of a mass market in what were once considered to be products suited only to the more 'sophisticated' consumer. This mass market has relied on the use of well-known brands which can communicate information about trustworthiness. A case in point is the 'affinity' credit card which can be branded by well-known companies or other organisations and associations (for example, including such bodies as the Royal Society for the Prevention of Cruelty to Animals and the National Trust, to name just two of many). An even better example is the case of equity investment funds. Retailers such as Virgin, Direct Line, and even British Airways have launched or are launching personal equity plans based on index

42


trading which are sold direct rather than through branches, and which are specifically aimed at "attracting wary investors from bank and building society accounts who have shied away from stock market investment because of a lack of understanding" (Gardner, 1996, page 5.1, our emphasis). But also, no doubt, because of a lack of trust. Again, these products are targeted towards a very specific audience. The third and final development in the production and supply of retail financial services of relevance to the argument being pursued here is the increased level of competition in financial markets. Increased competition is a product of both the diversification of financial services into new markets and the entry of new firms into existing markets. Both diversification and market entry have been made easier because of the rise of databases. Over a long period of time, the extensive branch networks of financial services firms acted as effective barriers to entry to a market in which the collection of local information through interpersonal relationships was seen as central to business success. However, the growing importance of databases and generic financial products means that this market barrier no longer works as once it did. Indeed, many of the recent entrants to the retail financial services market have entered either because they were already in possession of a customer database or a strong brand image, or in some cases, both. Thus, although supermarkets such as Tesco have a strong brand image, their entry into financial services only followed their construction of detailed customer databases from the information collected through a 'loyalty card'. Marks and Spencer too has both a strong brand image and a comprehensive database which is founded on the information provided by their own in-store charge card. Other firms have begun to dip their toes into the market, recognising that they too are in possession of a valuable customer database. Thus, British Airways' further expansion into the financial services market is likely to exploit the information held on its database of up-market Executive Club frequent flyers (Ham and Jones, 1996). Utility companies, which possess extremely comprehensive customer databases, have also begun to move into financial markets, the lead being taken by British Gas which launched its own credit card in 1996 with an expectation that it will branch out into the provision of other financial services (Jones, 1996). In the face of such competition, many established financial services firms are discovering that the branch networks are not only less effective in gathering market information but also confer heavy operating costs, which firms have sought to reduce through branch-closure programmes (Leyshon and Thrift, 1994; 1995). As well as being saddled with the costs of running large branch networks the more established providers of financial services have witnessed the 'new competition' move into the more lucrative parts of the market, which has undermined their ability to use the income they would have earned to cross-subsidise a range of other less-profitable products and customers. The alleged links between such strategies of cherry picking and the consequent exclusion of a category of customers which would formerly have been catered for under cross-subsidisation has recently been the subject of considerable debate within the British insurance industry, the competitive structure of which has been remade in the wake of the telephone-based insurer Direct Line, a subsidiary of the Royal Bank of Scotland, established in 1985. Direct Line's success has been the result of its consistent ability to quote lower premiums than its competitors, as a result of at least three factors. First, it has relatively low operating costs, because of its highly concentrated mode of operation, which is based upon a small number of computer-supported telephony call centres. Second, it has high levels of service and accessibility, for all those who have access to a telephone at least.(11) Third, the firm (11)

As Graham and Marvin (1996) show, there are still marked inequities in access to telephones in Britain.


43

pays particularly close attention to the accurate pricing of risk. This has resulted in a greater variation in the premiums it quotes for different types of risk. Thus, for many customers Direct Line is able to provide lower quotations than other firms, because they arc identified as good risks. However, such low quotations are only possible because of the way in which bad risks are identified and accordingly priced at a higher level. Therefore, for some customers Direct Line will provide much higher quotations, or perhaps not even quote at all, effectively passing the risk off onto another part of the industry. This strategy has stirred considerable debate and disagreement within the insurance industry, but it is one which Direct Line vigorously defends, even at the cost of creating a class of 'uninsurablcs'. In a letter to The Times newspaper which responded to an article which criticised Direct Line's business strategy of so-called cherry picking, the firm's chairman was unapologetic: "If the root of ... concern is that insurance companies should subsidise some people—rather than trying to offer the most competitive prices for their riskthen ... worries are focused on the wrong issue. The logical extension of this kind of thinking is that supermarkets should also act to help people who cannot afford the food they stock" (Wood, 1996). Similar pressures on cross-subsidisation can be seen in the banking industry (Pratt, 1998), following the entry of telephone-based operations such as First Direct, which has been equally selective in choosing its customer base (Marshall and Richardson, 1996). 4,2 Knowledge, trust, and the consumption of financial services The changing bases of trust in the financial system have also been reflected in shifts in the consumption of retail financial services. Here too there have also been three important developments. First, there has been an increase in demand for personal financial products. Fuelled by factors such as the wearing down of the welfare state (a central principle of which was the end of the principle of universal provision), campaigns to increase the use of private health and pensions, and the growth of precarious employment, there are simply more products on the market to buy.(12) But it is not just a matter of an increase in the range of products but also of the selection and type of products that are available as a result of increased competition. The marketplace has 'filled up', especially for those who are discerning. This has resulted in consumers displaying much less allegiance to the products of particular institutions than hitherto and in the growth of products with shorter time horizons and greater returns.(I3) The declining loyalty of consumers presents problems for the traditional providers of financial services, as one City-of-London-based analyst of retail banking has made clear: "If the banks continue to assume that their customers are stupid, they will wake up one morning to find that they have all moved elsewhere" (quoted in Gardner and Caine, 1996, page 5.1). Even discounting for a degree of hyperbole, it is certainly true that retail financial services cannot count on the long-term loyalty of customers in the way that they used to. (12)

Indeed, there is an interesting and unfortunate parallel between the end of the principle of universal welfare provision and the decline of cross-subsidisation of costs and risks within the retail financial services system. (13) Take the example of home mortgage products. There are now more than 1500 loan packages on offer in Britain. But evidence to illustrate the increased 'mobility' of consumers in the face of this situation is not easy to find. However, one survey of mortgage holders revealed that 75% of those surveyed had actively considered moving their mortgage to take advantage of lower rates or other offers, but only 5% had actually done so (German, 1996).

44


Second, in making the choice between a range of financial services products, consumers have increasingly come to rely upon brand names. This development may be seen to be linked to the need for consumers to forge a relationship of trust in the products they buy. With a decline in regular interpersonal contact with identifiable individuals in the retail financial services industry, consumers look for other points of contact to establish trust. Although it is important to note that process-based trust can be maintained through a successful history of at-a-distance exchanges, the financial services industry's ability to forge such trust has been handicapped by an historical record of poor service and high-handedness.(14) Moreover, in terms of the creation of process-based trust, most consumers have more regular contact and knowledge of other firms with which they interact on a more regular basis. It is this reason in particular which in part explains the entry into the financial services market of retailers such as Marks and Spencer, Tesco, and Sainsbury's. Third, just as financial service firms can use databases to discriminate between different types of consumer through indicators of past or likely future performance, so the growth of financial media means that customers now have at least some measure of discriminating more effectively—although of course, less comprehensively—between different types of financial institution on a similar set of criteria. Since the latter part of the 1980s, the financial media have grown very rapidly, which we would suggest has resulted in the circulation of increasing levels of knowledge about financial markets and products among certain social groups, so that although there may well have been an increase in financial knowledge it is also riven by marked social and spatial divisions (Pratt et al, 1996a; 1996b). Willings Press Guide provides some indication of the rate of expansion of printbased financial media. Whereas there were 9 titles aimed specifically at personal finance in 1984, by 1995 there were 23. These titles are of a number of kinds (table 3). First, there are the standard mass market personal finance guides such as Investors Chronicle, usually with circulations of between 25 000 and 50 000. As the reader profile of Investors Chronicle shows, these titles appeal to an older, overwhelmingly male and middle-class audience with degrees, incomes above the average, and high levels of personal assets. Second, there are a series of more specialised personal finance journals which often sell in quite large numbers but are targeted at niche markets, from savings and equity investment journals, to expatriate journals, to tax guides. Third, there are financial publications which reach much larger audiences, and which enable consumers to 'research' their own financial strategy. These are of two types. First, there are the publications sent free to customers of financial services companies. More importantly, there is the national press. In recent years, the national press has tended to publish more and more advice and information on personal finance, culminating in separate sections in some newspapers. For example, The Sunday Times has included a separate Money section for the last ten years. The Independent has carried a dedicated column on Wednesday, Saturdays, and Sundays since its inception in 1986. The Mail on Sunday has had a separate money section since 1994, and the downmarket The Daily Mirror has had a dedicated personal finance section on Thursdays since 1984. Fourth, there are radio and television programmes. Until recently, there were very few specialised personal finance programmes but, in the last ten years, they have increased in number and audience. Currently four exist, reaching anything from 0.2 to 1.4 million people. These programmes tend to reach a mainly male, older, (14) Although, as we have discovered in our research, it should be noted that 'quality' and 'service' are currently something of a mantra among the management of banks and building societies.

Reading financial .services

45

Table 3. The growth of print-based financial media (source: Witlings Press Guide 1984; 1995). Title

Frequencya Price (£) b

Circulation I995

Mass market Inside Money In vestors Chronicle Investment Trusts Money Observer Moncywise Personal Finance What Investment? What Mortgage? Which? Which Mortgage? Which Pension?

M M 4Y M M 6Y M M M M 4Y

25.00pn 1.60 3.00 2.25

c

Established 1984

25000 50000 30000 29800 124250 (ABC)

2.00 35000 50000 20000 40000 792000 (ABC) 650000 25000

1995 1894 1986 1979 1994 1982 1982 1968? 1986 1995?

More specialised or city basccl Financial Pulse 2M W IC Stockmarket letter New Issue Share Guide M Penny Share Guide M Planned Savings M Stockmarket Confulential 2M Trusts and Estates 6Y

2.00 80.00pa 6.00 4.95 55.00pa 3.95 25.00

39000 6000 4000 35000 5200 (ABC) 4000 8000

1986

Ex-patriates The International Resident Abroad

M M

free 55.00pa

38000 (ABC)

1988

18000 (ABC)

1979

Companies own Homes & Savings (Halifax) Future First Moneyline

4Y 4Y 2Y

free free free

450000 500000 200000

Others Check your Tax Daily Mail Income Tax Guide

A A

2.95

45000

1982 1978 1966 1984 1992

1983 1995 1990

1951

n

W weekly 2M twice a month, M monthly, 6Y six times a year, 4Y four times a year, 2Y two times a year, A annual. b Price per issue except pa per annum. c ABC socioeconomic groups A, B, C. middle-class audience (although a more populist programme, Dosh, has also recently started). But, as figure 2 (see over) shows, they are by no means exclusive. (As might be expected, these programmes are watched chiefly by viewers in London and the southeast in line with the general population distribution). To summarise then, we suspect that the result of these changes has been to make many financial consumers far more reflexive than hitherto (Beck et al, 1994; Giddens, 1991; Lash and Urry, 1994; Miller, 1987). A majority of financial consumers have been given far more power to choose between more, and more varied, products. Consumers are increasingly able to produce their own financial strategies, and this possibility can be indicated in a number of ways. First, through the power of technology, they are able to keep a constant watch on their finances in ways which were not possible before. Twenty-four-hour telephone banking was the start of this process. Recent developments in information and communication technologies, and the growing use of the internet

46

UK population


Business Breakfast

Working Lunch

The Money Programme

High Interest

• ABtHQCl E£3C2^DE Figure 2. Audience (%) of selected financial and business television by social class (figures based on last quarter of 1994; source: Broadcasting Research Department, BARB). by financial services firms, means that a person in possession of a personal computer is now able to assess their personal finances in real time.(15) Second, consumers are increasingly able to make decisions that were not available to them before. For example, ethical investment has now become a viable option and, as a result, has been rapidly increasing in volume. Again, some consumers will soon have the opportunity to decide where to invest their monthly company pension contribution, as in the United States. For example, Fidelity will allow employees full access to their scheme on demand and these employees will be able to invest their contributions in a selection of Fidelity's thirty UK-authorised unit trusts (Ham, 1996a). Third, consumers are able to turn for financial advice to more and more actors if they lack the time, inclination, or knowledge to arrange their own financial affairs. Banks and building societies offer financial reviews, tax advice, investment advice, and so on. Private banking networks, which give detailed financial advice to those with a large asset base, have grown in number and size. And this is to ignore the large number of independent financial advisers. In 1994, 5575 'groups' (partnerships, limited and public limited companies) were registered as financial advisers with the Personal Investment Authority and Financial Intermediaries, Managers and Brokers Association, as were 20 950 'individuals' (sole operators and individuals registered with groups). In other words, consumers are externalising or subcontracting their finances in ways which mirror wider economic processes (Marshall and Wood, 1995). As a result of these developments, consumer demand is increasingly able to make itself felt in retail financial markets. There are clear parallels here with developments in retailing more generally, in that there is far greater sensitivity within this industry to 'demand pull' in the commodity chain (for example, see Crewe and Davenport, 1992; Doel, 1996; Hughes, 1996; Lowe and Crewe, 1996; Marsden and Wrigley, 1996). What is emerging then is what can be described as a 'financial audience', made up of consumers who are far more able to obtain information on what is happening in the financial sphere, to interpret that information, and to act upon it. In future, understanding this audience is increasingly likely to mean recourse to media theory as much (15)

Firms in Britain offering such a service include the Nationwide Building Society (see http:// www.nationwide.co.uk) and the Royal Bank of Scotland (see http://www.rbos.co.uk).


47

as it is to economic theory (du Gay, 1996; Thrift, 1996b). But becoming a part of this audience requires both money and information (the two being linked) which only a part of the population has access to. What we see, then, is that the more affluent social groups are experiencing a process of \superineIusion' (Leyshon and Thrift, 1996). Their money power results in them being offered higher levels of information and more service provision which in turn provides them with the opportunities to make more money. However, the corollary of this process of inclusion is that poorer people are increasingly subject to financial exclusion because they do not display the database characteristics required by producers or the knowledge increasingly demanded of consumers. 5 Conclusion: the social and geographical consequences of financial literacy The changes we have outlined in the Financial services industry and in the consumers of its products are leading to greater levels of uneven development, which is both financial and informational, the two being clearly related. On one side of the system are the majority of consumers who are relatively well informed and able to purchase either generic and increasingly transparent financial products or tailored products. These are the consumers who have benefited from the financial service industry's use of databases to target and risk-price financial consumers more effectively, from the rise of generic financial products, and from the turn to a more diseinbcdded and at-a-distance means of financial services provision such as telephone banking and insurance. The 'losers' in all this are a sizeable minority of less-affluent consumers who are increasingly characterised as bad financial risks because of who they are or where they live, or both. However, although this more distanciated, at-a-distance form of financial service provision is increasingly the norm for the mass of consumers, such developments have also accentuated more local financial services provision, which cleave along lines of class. Thus, there are several examples of the 'reembedding' of the financial services industry in order to provide financial service either to more affluent or to poorer consumers. There are three types of reembedding associated with the industry's provision of services to wealthy customers. First, databases are being used to identify selected customers with whom financial services firms seek to strike up personal relationships, with the intention that they can then be sold additional financial services. Second, banks are establishing private banking networks for an elite, 'high net worth' customer base (Leyshon and Thrift, 1993; 1995). Third, there have also been processes of wholesale reembedding, as in the case of the Midland Bank which has adopted a strategy of refocusing on branches in the wake of its takeover by the Hong Kong and Shanghai Banking Corporation (HSBC). In some locations Midland is reversing the hub-and-spoke structures which have become commonplace in the industry in recent years, a development which served to concentrate management at the centre of clusters of branches (Pratt, 1997). Midland is moving away from such a model in order to pick up both more small company business and more in the way of professional and managerial retail business through face-to-face personal relationships: "What we are aiming to do is take some managers out of centres and return them to branches, where they can get plugged into the local network of lawyers and rotary clubs, and gain business introductions" (Richard Whitson, Chief Executive, HSBC Holdings; quoted in Gapper, 1995). Meanwhile, at the other end of the financial system, 'embedded' financial services are also important, but they are of a very different order. For the poor and marginalised, access to the financial system is increasingly difficult to obtain because of the growth of disembedded characteristic information systems which summarise creditworthiness as

48


an average, and because of lack of access to an alternative informational infrastructure, save those services provided by Citizens Advice Bureaux, local authority money advice centres (Hinton and Berthoud, 1988), friends and family, or even the 'man or woman in the pub'. In these circumstances it is no surprise that the provision of financial services at the margins of the formal financial system is undertaken by a motley collection of about 1200 moneylending firms (employing 27 000 door-to-door sales persons). This form of distribution is also used by mainstream financial institutions of course, and for many years was the main method by which working-class communities in Britain bought household insurance. However, the salesforces of such firms have been cut back over many years, for two main reasons. First, the products sold in this way tend to be more expensive, partly in order to cover the extra costs incurred by this form of service delivery. For this reason these products have become much less competitive to those customers who are aware of other alternatives, and are able to buy insurance from direct insurers. Second, insurers are also pruning their salesforces in response to the fears over 'misselling' products, as occurred with personal pensions in the late 1980s (Atkinson, 1996).(16) The retreat of such firms has effectively handed this form of product delivery to less well-known firms, such as moneylenders (Rowlingson, 1994), who are quite happy to sell financial products at much higher prices. These more expensive services are nevertheless in demand in many communities. Sometimes they are bought out of desperation, for they are the only products available; sometimes they are bought in ignorance, because of a lack of information about alternatives, such as credit unions (Rowlingson, 1994). But such services are also used because the regular contact between providers and consumers creates process-based trust on both sides of the exchange. This enables these firms to be able to lend to consumers who would be identified as high risk by formal credit rating procedures. For such consumers, moneylending firms provide regular access to funds that would otherwise be unavailable to them, albeit at a relatively high price (Ford and Rowlingson, 1996; Rowlingson, 1994). Are there any possible solutions to the growing gulf in financial provision between the better off and worse off sections of the community? What seems certain is that although alternative financial infrastructures, such as credit unions (Thomas and Balloch, 1993; 1994), rotating savings and credit associations (Ardener and Burman, 1995; Herbert and Kempson, 1996; Sterling, 1995), and local exchange and trading systems (LETS) (Lee, 1996; Thorne, 1996; Williams, 1996), can provide a vital service for some of the poorer sections of the community, their influence is limited and chiefly restricted to relatively small low-interest loans or, as in the case of LETS, an ability to purchase goods and services in absence of conventional money. Although the proliferation of such an alternative financial infrastructure is a clearly helpful and welcome development, we would point to three other possible solutions to the problem of social and spatial divisions in financial provision and financial literacy in Britain, which provide something closer to what might be termed an intermediate financial infrastructure which aims to reconnect people to formal financial infrastructure, either by better identifying risk amongst the less well off, or by pooling risk on an affinity-group basis.(17) (16)

One of the reasons for such misselling scandals is the surprisingly high level of financial illiteracy within the financial services industry itself. For example, a recent survey indicated that 40% of financial advisers failed their basic professional qualifying examinations. Nevertheless, this does not stop them from being able to sell often complicated financial products to consumers (Ham, 1996b). (17) Intermediate financial infrastructure has been pioneered in 'Third World' countries where alternative financial institutions have been able to reconnect themselves to formal financial institutions by the use of innovations such as regional credit committees (see, Leyshon and Thrift, 1996).


W

The first of these would capitalise upon the ubiquity of the Post Office which, in the form of Crown Post Offices and numerous sub-Post Offices, has some 19 500 branches around the country. We would suggest that a benefits bunk', based on benefit income, might be one solution here (Kompson, 1994). The Post Office would be particularly well placed to provide such services. The role it plays in distributing benefits to welfare claimants means that repayments for financial products could be extracted at source. Indeed, developments in this direction are already underway. Taking advantage of the recent freedoms ceded to it following the government's failed attempt to privatise it, the Post Office is moving into the financial services market. In 1996 the Post Office began to trial a range of low-cost financial services within a number of English regions. The products included a personal banking service (as part of a joint venture with the Co-operative Bank), life assurance, as well as health and critical-illness insurance (Ham and Hill, 1996). One of the Post Office's justifications for this move was that it was attempting to serve a market that was being abandoned by the banks: "Stuart Sweetman, managing director of Post Office Counters, said that as the bank's branch networks declined, the Post Office would be taking over their personal services ... . 'In many communities, post offices are replacing banks to meet customers' needs'" (Ham and Hill, 1996, page 5.1). Similar substitution effects may result from the parallel entry of the supermarkets into the banking market, which in turn offers a second possible solution to the problems of uneven financial services provision. Indeed, according to one retail analyst, it is the supermarkets and not the banks which represent the future of retail financial services, because firms like Tesco "have stronger brand values and better access to their customers than banks and building societies. Supermarkets are opening branches, banks are closing them. Banks are moving further away from their customers with telephone banking; supermarkets are moving closer to theirs" (Gould, quoted in Cope, 1996, page 3). The loyalty cards that form the basis for the entry of firms such as Tesco and Sainsbury's into the retail banking market provide databases rich in information on the spending behaviour of customers. The information from such cards, linked to and pooled with other EFTPOS (electronic funds transfer at point of sale) information, might make it possible to produce the kind of detailed characteristic information which is currently unavailable for poorer members of the community and might in turn make it easier to identify who are good loan risks. A third solution revolves around the problems poor communities face in gaining access to household insurance. A number of schemes exist which aim to provide affordable insurance for those communities (McCormick and Whyley, 1996). These are, to begin with, local authority 'insurance with rent' schemes. Councils negotiate a block insurance policy for their tenants with mainstream insurers such as Guardian Insurance and Royal Insurance. Local authorities usually require the insurer to charge the same rate for a standard level of cover, regardless of where the tenants may live. In 1996, 32 English metropolitan authorities or London boroughs quoted such schemes (46% of the total), as did 18 district councils in Scotland (32% of the total). As McCormick and Whyley (1996, page 14) point out, "Urban councils, where the problem of insurance failure is concentrated, include areas where the risk of burglary is both high and low. This allows insurance costs to be pooled on the basis of cross-subsidies between those least likely to make an insurance claim and those more likely. In other words, the council might agree to act as an intermediary on behalf of insurers. One of the key advantages of councils is their regular cash link with tenants through rent payments. The result is a standard rate of cover offered at the same

50


price throughout the authority (compared with market costs, which might be twice as high in one street as in a neighbouring area)." There are also a series of other organisations who offer affordable insurance, including Housing Associations and some charities, such as Age Concern, which has a special Insurance Services Company.(18) The advantage of each of these solutions is that they have relationships with lowincome customers that, in one way or another, overcome the problem of information asymmetries which cause the excess demand for financial services among certain individuals and communities. This problem is probably overcome most successfully in the case of the Post Office, which can invest considerable 'trust' in borrowers who are benefit claimants because it is the Post Office which is responsible for the distribution of Welfare from the Department of Social Security. We would suggest that such developments could have a marked impact upon the uneven nature of financial service provision. However, as we illustrated earlier, there will still exist marked social and spatial divisions of financial knowledge, which cast long and deep information shadows (Pratt et al, 1996a; 1996b). Poor and disadvantaged people still face enormous problems of gaining information or understanding about the financial system. Here we would want to suggest that there needs to be much greater emphasis in the education system as a whole on financial competence as a marker of citizenship which is just as important as many other skills that are taught. This is not exactly a novel observation. As long ago as 1930 Angell remarked that "It is still true to say that in the case of ninety percent of our elementary and secondary and public-school children they will not hear one word about [money] from the day that they enter school to the day they leave. The assumption that we do not need to give the young some notion of this thing seems to be based on the belief, either that we are in no danger from ignorance, or that people get to know 'naturally', by common sense, all that is necessary about this subject. 'All a man [sic] needs to know about money', we are apt to say, 'is how to make some'. Yet the truth is—and we have had a dramatic, and monstrous demonstration of it this last ten years—that if we are content, each to know only 'how to make some', we shall find ourselves one day, having placed it all in jeopardy, seeing it perhaps utterly vanish. That thing, which sounds so fantastic, has actually happened this last few years, in a civilisation as stable as America's and economically as highly developed, in the civilisation, that is of Germany and Austria (and in only less degree of France, and Italy and Britain), where millionaires have had to learn that the safety of any man's property in our days is dependent upon the wisdom of his neighbours, the ideas that they entertain about such things as money and economics. A very large proportion of the propertied classes in Europe have seen their money melt away, in many cases utterly vanish, because the public, they themselves that is, were ignorant of the nature of money and pursued wrong policies with reference to it" (Angell, 1930, pages 4-5). Angell's conclusions still ring true and, interestingly, there seems to be general agreement in many quarters that financial literacy is an important element of citizenship. Thus the financial services industry, spurred on by various misselling scandals (for example, recent scandals over pensions in Britain), has become increasingly concerned about consumers levels of financial knowledge and how therefore to ensure probity in contacts with the public. Since 1994, National Westminster Bank has run an educational programme—Face 2 Face with Finance—targeted on secondary schools (18) In principle, at least, there is no reason why credit unions could not offer household insurance, although to date none have done so, in part because of legislative difficulties.


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(more than half the secondary schools in England and Wales have signed up). Now a government-backed task force, led by the directors of a number of firms such as Rothschild, Abbey National, and FroShare, has argued: "We would like to sec a personal finance money management course introduced into the school curriculum, as an examination .subject, and in addition the financial services industry should be encouraged to fund a joint educational initiative in personal finance both in schools and further educational establishments" (Donovan and Buckingham, 1996, page 1, emphasis added). Subsequently, a Personal Finances Education Group has been set up, with 18 members including the Community Investment arm of National Westminster, to promote financial literacy, especially by targeting teachers. Of course, the retail financial industry is not proposing this initiative for charitable reasons. In particular, it would have the useful effect of allowing them to depict consumers as more knowledgeable and therefore more able to be subject to the principle of caveat emptor, buyer beware. The attractions of such a development to the government are also revealed in the report, in that it would help legitimate and ease the rundown of state funding of welfare, enabling individuals to "take greater personal responsibility for their own long term financial security" (quoted in Donovan and Buckingham, 1996, page 1). In the face of such arguments the reaction from some on the Left, that, in effect, financial literacy is a ramp for capitalism, is understandable, but a little too predictable. It may also be exaggerated. For example, the Citizens Advice Bureau has consistently argued that, if poorer people were clearer about the alternatives and strategics open to them, they would be better protected from misfortune. In other words, financial literacy may be an idea whose time has come not only because it increasingly reflects new market conditions in which the consumer has to become a reader but also because it also provides some measure of protection over and above formal rules and regulations which are always likely to be slanted towards the finance industry. Acknowledgements. We are grateful to David Knights, Gerry Pratt, and three anonymous referees for their helpful comments on earlier versions of this paper. The usual disclaimers apply. This paper was produced as part of the Economic and Social Research Council-funded research project, "Access to Financial Services and Financial Infrastructure Withdrawal" (ESRC grant number R000235431). References Allen J, Pryke M, 1994, 'The production of service space" Environment and Planning D: Society and Space 12 453-475 Amin A, Thrift N, 1994, "Living in the global", in Globalisation, Institutions and Regional Development in Europe Eds A Amin, N Thrift (Oxford University Press, Oxford) pp 1-22 Amin A, Thrift N, 1995, "Institutional issues for the European regions: from markets and plans to socioeconomics and powers of association" Economy and Society 24 41 - 66 Angell N 1930 The Story of Money (Cassell, London) Ardener S, Burman S (Eds), 1995 Money-go-rounds: The Importance of Rotating Savings and Credit Associations for Women (Berg, Oxford) Atkinson D, 1996, "Death of a salesman as recession and watchdogs take their toll" The Guardian 21 June Auletta K, 1986 Greed and Glory on Wall Street: The Fall of the House of Lehman (Penguin Books, Harmondsworth, Middx) Beck U, Giddens A, Lash S, 1994 Reflexive Modernization: Politics, Tradition and Aesthetics in the Modern Social Order (Polity, Cambridge) Beresford P, Boyd S, 1997, "The Sunday Times Rich List 111997: Britain's richest 1,000", supplement to The Sunday Times 6 April Caine N, 1996, "Huge ignorance about pensions" The Sunday Times 11 February Cantor R, Packer F, 1994, "The credit rating industry" Federal Reserve Bank of New York Quarterly Review 19 1 - 2 6

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