Financial Literacy & Inclusion: The state of play in research and practice

Financial Literacy & Inclusion: The state of play in research and practice Guy Mendelson Head of Personal Loans RMIT Conference – Financial Literacy, Banking and Identity 25 October 2006

Why is Financial Literacy and Inclusion important to ANZ? • Improved Financial Literacy and Inclusion can assist in responding to long-term strategic issues: • Widespread staff support for financial literacy initiatives because of relevance to “what we do every day” • Staff rated ‘Community involvement’ as our third highest current value in the 2006 Engagement survey A more informed market place lessens market failures which prompt regulation Empowered and confidentconsumers more deeply engage with financialinstitutions Rebuilding ourreputation

What are we doing? • Research • Causes of Financial Difficulty (2005) • Business operations • Responsible Lending commitments • Progress Loans • Innovative community programs • Saver Plus • MoneyMinded • MoneyBusiness

Research • Business operations • Innovative community programs

1. ANZ’s research into financial difficulty • Conducted qualitative research into the causes of financial difficulty in 2005 • Part of our updated quantitative research into the levels of financial literacy • To respond to the growth in household debt in Australia and address questions about the marketing practices of lenders • Qualitative research focused on the 2% of the population who: • feel ‘out of control’ and • have borrowings of some type • What are the core factors causing financial difficulty and what is the role of the lender?

Decreased Income &/ Increased Expenses Poor Financial Decision-Making Three core factors Over-Spending &/ Over-Commitment Unhealthy Financial Ways of Thinking Circumstances Out of Individual’s Control Lack of Skills & Knowledge

What does this tell us? • Financial difficulty most often due to behaviour and traits of the individual or unexpected events (or a combination) • lack of financial skills and knowledge is only a small factor • many in difficulty had good financial literacy skills but they were over-ridden by unhealthy ways of thinking • People particularly vulnerable where they do not have the capacity to deal with financial pressure when it arises • Lenders can indirectly influence the path to financial difficulty • CLI offers provide the ‘opportunity’ to access credit where customer has pre-existing ‘unhealthy ways of thinking’ • ‘it must be OK if the lender sent it to me’ • ANZ’s focus is to filter the most vulnerable customers from CLI offers

(a) Responsible Lending • The revised ANZ Customer Charter includes new ‘responsible lending promises’ (introduced November 2005) • Primarily aimed at credit limit increase offers • ANZ will: • not offer a CLI to those with poor recent credit performance or struggling to meet repayments • not offer a CLI to customers whom we know are on a fixed income (eg. receiving a government benefit) and • with any CLI offer, outline how much the minimum monthly repayment would increase if the offer was accepted • ANZ’s performance on these promises is independently audited every 6 months

How are we doing this? • Credit card customers go through an enhanced filtering process - they will not receive a CLI offer if: • they have been repeatedly overdue in the last six months • they have made only minimum payments (or slightly above) for the last 6 consecutive months • they have an ANZ deposit account receiving Centrelink, DSS or DVA benefits • they have a deeming account or other ANZ account specifically designed to receive benefit payments • Remaining customers go through a second filter based on behavioural scores: • eliminates customers with unreliable credit behaviour over previous 12 months or those showing signs of struggling with repayments

Why are we doing this? • We have an obligation to lend only to those customers we believe can repay • Consistent with running a sustainable business: • to ensure acceptable level of debt losses • to meet community expectations that we lend responsibly • Driven by our research into the causes of financial difficulty which tells us: • lenders have a role in causing financial difficulty • for the most part financial difficulty is not caused by a lack of knowledge or information • excluding the most vulnerable is more likely to be effective than increasing disclosure or asking for more details

Results so far • Pool of customers who would otherwise have received a CLI offer reduced by around 11% • Breaking this down: • 5% reduction due to exclusion of customer making late or only minimum payments • a further 6% reduction due to exclusion of customers on fixed incomes • Improving data matching exercise • Verifying Government benefit codes to identify eligible customers

Next steps • ANZ’s promises is a first step • Spotting customers in difficulty • proactive offer of assistance • New products • repayment flexibility • Transparency • online calculator

(b) Progress Loans • Small loans program for people on low incomes (who would not normally fit ANZ’s lending criteria) • Developed in partnership with Brotherhood of St Laurence, recognising their expertise and proven track-record in microcredit • Developed following research conducted for ANZ by Chant Link and Associates into levels of financial exclusion in Australia: • Around 6% of adults have minimal financial access, owning only a transaction account • Around 120,000 people, or 0.8% of the population, could be considered totally excluded with no financial products • Launched in May 2006 and in 2007 ANZ and the Brotherhood plan to expand the partnership to other community organisations across Australia

Objectives • Affordable and transparent: cost comparable to standard personal products and mainstream consumer protections • Sustainable: financially viable in the long term • To build scale: effectively targeted to reach as many eligible consumers as possible – this also contributes to financial sustainability • ‘Inclusive’: loans on normal commercial terms so participants can build a good repayment history, a sense of social inclusion and confidence to apply for future mainstream credit.

Eligibility and features • To be eligible, individuals must: • be on a low income with a Health Care or Pension Card • be up-to-date with their bills • have lived in their current residence for a minimum of six months • Progress Loans features: • between $500 and $3,000 • loan term ranges from 6 months to 3 years • pilot interest rate of 12.70% • one-off approval fee of $40 applies • Loan purpose • household items (including whitegoods) • education or self-improvement • medical and dental purposes • motor vehicles (including registration and insurance)

Roles of the partners • Brotherhood of St Laurence: • Program promotion • Participant recruitment • Initial assessment of of applicant’s ability to make repayments • Check of applicant’s ID and income • Explain product features and requirements to the applicant • ANZ: • Review the credit history and record of the applicant • Receive initial assessment from the Brotherhood and make the formal credit decision based on modified credit approval criteria • Provide the funding and training for dedicated loans assessors at the Brotherhood • Loans advanced under the program are fully funded by ANZ

Other18% Whitegoods 20% Computer6% Car rego/ repairs6% Furniture25% Car22% Results so far • On track to meet December 2006 objective • Loan purpose: • Key reason for declinals – negative credit bureau record • Brotherhood encourage these customers to obtain the bureau information and coach them in how to rectify this situation

Results so far • Customers are more careful and considered with their personal finances than mainstream customers • This has ensured that no delinquent portfolio activity has occurred • ANZ needs to employ a different approach when liasing with these customers – more education focused

Innovative Community Programs • Saver Plus • Financial literacy and matched savings program • Helped 668 families together save $617,000 in 2003-05 • Being expanded from four to 18 regions, with a goal to involve 5,400 people between 2006 – 2009 • Delivered with Brotherhood of St Laurence, The Smith Family, Berry Street Victoria and The Benevolent Society • MoneyMinded • Adult financial education program delivered by financial counsellors and community workers • 15,279 participants in past 12 months • Goal to reach 20,000 over next 12 months • MoneyBusiness • Money management initiative in six remote Indigenous communities in WA and NT • Delivered with the Dept Family, Community Services and Indigenous Affairs

Financial Literacy & Inclusion: The state of play in research and practice