Pay day loans are the tip of the iceberg. Flickr/michael goodin. Some rights reserved.Despite figures released earlier this year recording a seven-year high in consumer debt levels, and the IMF’s warning that the UK’s reliance on household debt puts any potential recovery at risk, the election campaign has been fairly quiet on the subject. Perhaps the news that the highest profile payday lender, Wonga, in a dramatic turnaround from the £62 million profit made in 2012, just posted a pre-tax loss of £37 million, together with the Financial Conduct Authority’s (FCA) new interest rate cap of .8% per day and tighter affordability checks, are being read as indicators of a problem solved? The timeline from Wonga’s beta launch in 2007 to Guardian ‘digital entrepreneur of the year’ award in 2011 was short and sharply followed by a series of public shamings, abetted by effective campaigning, not least by MP Stella Creasy. This led to the dumping of the notorious oldster puppets and the single 5843% APR price for borrowing, to chastened apologies and a revamped business model.

A persistent problem

But the problem of financial services for the poor has not gone away. In the face of the Archbishop of Canterbury’s, admittedly overreached, promise to force payday lenders out of business by helping credit unions to compete, the poor still face huge obstacles of access to financial services and pay much more for those they can. The low participation in credit unions measured against the substantial take-up of eye-wateringly expensive short-term loans is a hint that how and why borrowers act remains a puzzle to regulators. With the FCA remarking that tighter lending criteria and the possible disappearance of payday lenders means ‘many people will find a way to tighten their belts, or turn to family and friends for help’ it is not clear that regulators have made much progress in the old problem of understanding the lived experience of a demographic group they are generally not members of.

Reform and regulation is still too often driven by a ‘deficit model’ of human reasoning. In this model, people will adopt new habits and discard old ones as they encounter new barriers, information, education or skills training. This may be being tempered by the recent enthusiasm in some policy circles for the application of behavioural ‘nudges’ designed for busy and cognitively limited human beings. But this does not seem to have extended to incorporating the customs, habits and practices of particular target groups. This inattention has changed little since Peter Townsend’s classic sociological riposte that the poor would need to live like ‘skilled dieticians with marked tendencies towards puritanism’ (1954: 134) to reach the nutritional standards that policymakers deemed achievable.

Long before Townsend, Charles Masterman wrote on much the same point that the urban Victorian poor are very silent, so very silent that no one to this hour knows what we think on any subject or why we think it. A century of welfare policy has lifted the poor out of the ‘abyss’ of absolute urban poverty that Masterman was describing. This is faint praise measured against the tide of evidence documenting the extent and consequences of increasing inequality and the continuing failure to find more effective means of engaging target users in policy design. It’s worth revisiting one of the welfare reforms Masterman was pivotal to, to see how badly this inattentiveness can turn out.

Masterman was one of the primary architects of the 1911 National Insurance Act, which in providing the UKs first contributory national health insurance scheme, was the most decisive policy step towards Britain’s post-war welfare settlement and the establishment of the NHS. Like many of his generation of reformers, Masterman had spent time in the slums but even he could not speak for the poor. Just how much the National Insurance Act was detested by the working poor it was meant to help, bears witness to this.

Another indication of the distance between Masterman’s generation and the targets of their reforms was their bewilderment at the continued growth of what was by far the most popular method of working class saving until as recently as the 1980s: the commercial industrial life assurance industry. This industry was first established in Victorian Britain and was based on the door-to-door sale and premium collection of small life insurances. Beginning in the 1840s, it was trading on a colossal scale by 1910 with an estimated 42 million policies in force and by the 1940s more than 100 million. This was double the British population at the time and possible only because multiple policies were taken out on the same lives. The scale of the industry meant it was the closest thing there was to a universal system of financial provision and as a direct consequence it was seldom far from the scrutiny of policymakers.

Deserving and undeserving poor

Industrial life assurance flourished as a means to certain forms of consumption even among the poorest. Not all that much has been written about the consumption habits of the poor. They spent larger proportions of their income on things poverty researchers like Charles Booth and Seebohm Rowntree defined as ‘necessaries’; the rent, food, clothing, fuel and so on; but money was also found for other things, like alcohol, tobacco and gambling. By being consumed even when there were insufficient funds for the necessaries, these other things bothered poverty researchers and often lead them to conclude that there was a wilful element to deprivation among a large section of ‘undeserving’ poor. The persistence of this (first) Elizabethan distinction between the deserving and undeserving poor is evident still in the election rhetoric surrounding ‘hard-working British families’, the bedroom tax and an aversion to an imaginary ‘Benefits Street’ dependency culture.

Insurance doesn’t sound like an indulgence, but for many reformers, the percentage of income spent on it, even in the poorest households, was an outrage. It is almost implausible that the hard scrimp necessary to save an average of between 5-10% of weekly income was done for life insurance. This sacrifice for a complicated savings product, based around a distant future need when present necessities might have seemed more pressing, is perplexing.

At least it is perplexing if the focus is on the product, rather than what it was used for. Industrial life assurance grew out of the demand for funeral cover. Its policies initially covered deaths not lives, paying out only enough to meet funeral expenses. Funerals mattered more then, than any other ritual event, and more was spent on them. Industrial assurance provided the means for this by offering a product that enabled the poor to access the sums involved. It wasn’t, however, only the amount spent, or even what it was spent on, that provoked outrage: it was the structure of the whole system. Weekly collection was notoriously expensive to deliver, and for the first few decades around 50% of premium receipts went on administrative expenses. This stoked an argument that the poor were paying far too much for a product that they didn’t need which did little to promote the qualities of thrift, responsibility and independence that they did.

But these arguments, the terms of which remain almost unaltered today, misunderstand what exactly the poor were up against. They were confronted with an industry that specialised in the design of products that could fit so snugly into the everyday lives of its users as to become part of its familiar fabric.

One single characteristic mechanism or ‘device’ for accommodating users stands out. Industrial life assurance was sold on the doorstep and premiums subsequently collected by agents at weekly intervals. Agents were devices or more accurately ‘devisers’. They built their markets, coaxing and disciplining customers, even becoming themselves part of what was sold. They were a two-way customer relationship channel. They collected and sold, but they also listened and gathered information and adjusted their performance and the products offered accordingly.

A striking example of this is how important the agent’s ‘book’ was. Books recorded transactions: payments received and missed, policy types, names, addresses and ages. But they also become valuable repositories of agents’ impressionistic insights into customer lives and experience. In a process that bears a strong resemblance to how data is now being used by companies to solve a range of challenges, from customer relationship management to marketing, this combined record of private details and minute transactions was then fed into the bureaucratic machinery of the companies. There it was stored, analysed and used to modify and market further products.

Carefully calibrated marketing

Whether customer behaviour was rational in the financial literacy sense hardly matters. These were products that were explicitly designed to take account of lived experience; they could be made to fit into lives where extreme financial precariousness was common. Weekly payments were small, taken quickly and could be missed without penalty. These features made saving possible and presented reasonable means to ends that were desired in ways that were fathomable to agents, if not to policymakers. It was the unique properties of this machinery that eventually drew Masterman and his colleagues to rely on the industry to administer the National Insurance Act. This was a volte-face that hardly anyone – excepting the companies – was comfortable with.

It is perhaps easier now to see the logic at work. Critics at the time targeted their fire on the cost of collecting industrial life assurance payments. The conclusion that the poor should not be paying into such an expensive system, that it was not rational for them to do so, was irresistible. Unfortunately, the question of whether or not the poor should be paying for collection was probably the wrong question when they already were, had been for a long time since, and in such numbers. A better, seldom asked question was why: why exactly was it that savers would pay so much to save?

From the perspective of the present, the anachronisms of this question are striking: debt has now largely replaced saving as the financial product that not just the poor but huge sections of society turn to in times of need. The question that we might ask is why exactly are poorer borrowers willing to pay quite so much, and quite so regularly, for access to this facility. Yet now as then the answers that are often provided to such questions often betray a misapprehension of the commercial potential of understanding the intricacies of lived experience.

The reason the poor paid so much to save then, and now pay so much to borrow, is not because of a fundamental irrationality, or a deficit of calculative capacity. This is partly because the distinction between rational and irrational, between the calculative and the sentimental, is one that doesn’t stand up to scrutiny in the first place. There is always a bit of reason in sentiment and in sentiment a bit of reason, a simple observation that is all the more striking given the disciplinary conflicts that have been fought in the attempt to keep these two features of human behaviour separate.

At the same time, this is also not in any overly simple way because of a domineering ‘culture’ of financial behaviour. It is not that a cultural context is irrelevant. However, in the world of domestic finance, any cultural backdrop is always in the process of being filtered through the carefully calibrated techniques of market providers. The success of industrial life assurance collection, however expensive it may have been to savers, can be attributed to a large degree to the ability of companies to devise techniques of sweeping up details about lived experience and to then incorporating this into their products and marketing platforms. Collection took account of lived circumstances, it connected offices to policyholders and afforded an easy means of entry, information, feedback, influence and so on – all facilities that government alternatives lacked.

Through it, companies maintained a channel that gave them insight into customer experience, to the ways they practiced economies that were adapted to their knowledge of their own situations. Industrial assurance enforced the discipline of collection and separated people from the funds they had accumulated. This meant that when the next exigency arose, the funds were not there to be dipped into. This hard separation facilitated savings for people for whom there would seldom ever be any surplus.

‘We need to get them back to work and we need to be tough’

The lessons for the present are clear: to understand exactly how it became easier to borrow than to save demands spending time amongst the nitty gritty of the techniques and technologies of contemporary lenders. This work is beginning to be done. Social scientists are increasingly coming to recognise that, in order to understand the forces that drive the expansion of debt, far more attention needs to be paid to the lengths that creditors go to, to understand and respond to lived experience.

This is partly about the promise that such organisations see in the collection and exploitation of data about current and future borrowers, through conventional credit scoring systems, most notably, but even in some cases by harvesting information about potential borrowers as they browse online. It is also about recognising their relatively sophisticated understanding of the conditions of everyday life as they become able to manage the hopes and fears of defaulting debtors and to predict exactly what it takes for a borrower to answer a call from a particular debt collector, or to pick up one of their letters. These are all lessons that have been learnt and are constantly being relearnt by the credit industry in a way very similar to their early 20th century life insurance cousins.

In the present as in the past, however, it is far from clear that this learning process extends in any meaningful way to the corridors of central government, or to those currently vying to inhabit them. Ed Miliband may not like the phrase the ‘undeserving poor’, but he, like his main political rival, is quite sure that the solution to the problems posed by this nameless group lies in morally virtuous employment and discipline: ‘we need to get them back to work and we’ve got to be tough’. Perhaps if politicians and policy makers spent more time paying attention to what it really means to live in poverty, including to the mixtures of sentiment and rationality that give it its varied character, debate would rise above the poor being told when they are to be treated firmly or not and what they deserve and don’t.