Where companies are exploiting the failures of the market in which they operate, where consumer choice is inhibited by deliberately complex pricing structures, we must set the market right

Theresa May

In 2016 I picked up a short consultancy contract with Cambium for Citizens Advice Scotland to report on business models that companies use in regulated markets that alleviate or exacerbate the so-called Poverty Premium. The relevance of business models designed around exploiting the poorest is still relevant.

We began the summary with:

“Hitherto the market has struggled, in many instances, to respond sufficiently to the specific needs of vulnerable consumers of essential products and services. Our research highlights the interplay of three key factors which make up the poverty premium: the higher price low-income consumers pay; the appropriateness and quality of the products often targeted at this group; and issues around accessibility to the markets of essential services.

We continue to uncover concerns about these markets not functioning well, which manifest themselves through these three factors. We found only patchy evidence that firms in each of the regulated sectors we examined are treating the poverty premium with sufficient importance.

In this rapid overview we look at a range of business models/practices and their impact on the poverty premium and attempt to draw conclusions on the scope for lessening the burden on low-income consumers.

Our review does not pretend to be a comprehensive survey, but rather an attempt at identifying examples of good practice and reframing some of the questions around the way that businesses can examine aspects of their value chain, introduce or vary business models, vary their customer proposition, and engage their customers, without necessarily sacrificing margins or revenues.

So what are the emerging models that would provide a better fit for the low- income consumer? Can technology deliver? Are regulations too lax or too restrictive to enable more benign innovations and new business models?”

and concluded thus:

“Against a backdrop of limited access to affordable credit for the most vulnerable, there seem to be rich opportunities for market development and new business models to challenge the more dubious ones.

Areas for development include:

  1. developing the social enterprise sector to provide affordable solutions that more closely match the needs of the most vulnerable;

  2. invigorating the credit union and Community Development Finance (CDFI) sectors through novel partnerships with the financial technology sector;

  3. developing multilateral partnerships that address poverty in a holistic way, which include businesses working more closely with experts and local authorities to tailor customer propositions;

  4. financial technology, where more accurate and reliable assessment of credit risk is potentially a game changer.

A case for mobilising support and investment to stimulate new business models has been made by a number of organisations, but requires alternative forms of finance (grants, debt and equity) and, perhaps, a more permissive regulatory environment.

The UK is seemingly very well placed to nurture such innovation, with some exemplary peer-to-peer technology lending successes, which appear beneficial.

We spotlight some alternative models showing potential in each of the markets we studied. We found that white labelling offers new entrants a low-cost entry point, which can widen access to basic services.

We do not exclude the possibility that for-profit business models can meet the needs of the poor and vulnerable and have observed this in a number of businesses that are engaged in energy and credit markets. The market is however still very immature.

Finally, there is a role for the large incumbent energy, banking and telecoms companies to provide greater leadership and to become platforms for innovation, in part through creative partnerships AND at the same time adjusting their customer propositions more closely to the needs and wants of low-income customers.”