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Poverty Premium

New models

People in poverty or on low incomes often pay more for the same products or services than people who are better off financially.

This is called the “poverty premium” – the extra cost of being poor.  The poverty premium is often dubbed the ‘double penalty’: in addition to not being able to buy many goods and services, people in poverty also end up paying more for the ones they can buy.

There is not one ‘poverty premium’, but many increments in cost that when added together can represent a significant drain on tight personal budgets. Such increments or premiums are most concentrated in four sectors and are typically centred around a specific set of issues: in energy & utilities and telecommunications, poverty premiums are paid through prepaid tariffs and/or lack of being an ‘actively switching consumer’; in financial services, the poverty premium manifests itself mostly through high-cost credit and issues around financial exclusion; and finally, in household goods, the rent-to-own model of buying household goods financed by extremely high-cost weekly payments (e.g. through shops such as BrightHouse) results in people paying high amounts for essential items, often three or four times the original price.

Potential social investment solution

Big Society Capital in partnership with Joseph Rowntree Foundation is developing a targeted holistic programme designed to eliminate the poverty premium by 2027.

It will do this in two main ways. First, it will develop a Venture Development Programme underpinned by research and evaluation, impact monitoring, and a strong advisory network of sector experts and mentors. This will support ventures primarily working to eliminate the poverty premium in the four key sectors of financial services, energy, telecommunications and household goods, but will also consider cost reducing ventures in areas of large wallet share for people in poverty (e.g. food). We are currently considering applications from fund managers to run this fund. Secondly, it will build a strong campaigning arm to advocate for better policy, influence corporate behaviour and inspire the public to rally around this issue.