COMMENTARY: CREDIT FINANCE Ron Delnevo looks back over seven decades of mounting UK household debt and asks if financial services are the solution or the problem The UK Financial Conduct Authority (FCA) recently announced that it is looking to create rules for buy now, pay later (BNPL) credit. I have the Klarna shopping app on my phone, which gives me access to a host of major retailers where I can make purchases on a BNPL basis. The good news is that BNPL deals usually offer a period of interest-free credit, which can vary from one month to a year and, if you pay the original price in full within the defined timeline, you incur no cost. The bad news is that if you opt for extended credit, beyond the interest-free period, the typical rate is around 40 per cent. It is understandable, therefore, that UK regulators are concerned about BNPL. The nation’s household debt already stands at more than 120 per cent of disposable income. In fiscally-conscious Germany, the figure is around 85 per cent. This got me thinking about how the UK got into this position, with households sinking in a sea of debt. Many people must be ignoring the famous advice offered by Mr Micawber to David Copperfield: “Young friend, I counsel you: annual income, 20 pounds. Annual expenditure, 19 pounds. Result? Happiness. Annual income, 20 pounds. Annual expenditure, 21 pounds. Result? Misery.” It is not necessary to go as far back as the Dickensian era to find a time in the UK where the public appreciated the good sense of living within their means. Back in the 1950s, as the country began to emerge from a long period of post-war rationing, it was socially unacceptable to resort to credit. People were proud of their ability to cope financially and worked hard to buy things they wanted.
The first step towards a debt-ridden future was the introduction of Hire Purchase (HP), a payment system where the customer neither paid up front nor owned the merchandise. Instead, hire/ rental payments were made. In theory, if you made enough of them, the item became your property. In practice, interest rates frequently increased and penalties for slow payments were imposed. Because of this, HP became known colloquially as the ‘never, never’: the customer never finished paying and, as a result, never owned the item. When HP was first introduced in 1938, customers were expected to pay 30 per cent of the total cost of the purchase upfront. However, in 1955, Chancellor of the Exchequer Harold Macmillan capped the up-front payment at only £1. This may be judged to have been a populist measure, because he was promoted to Prime Minister two years later. The change to hire purchase coincided with the launch of commercial television in the UK. By the early 1960s, TV advertising was promoting the latest fashions and domestic appliances in most living rooms. Soon, this continuous exposure made the attainment of these latest products irresistibly appealing to the public, overpowering the stigma previously associated with debt. It’s worth mentioning here that, in those days, access to cash was not an issue because the vast majority of people were paid in it. That changed in the mid-1960s when, rather than being handed out at the workplace in cash each week, wages started to be paid into bank accounts. If you were no longer paid in cash, a trip to a bank branch was now necessary to get the cash you needed to meet your daily expenses. But banks were only open for around five hours a day and not at all at weekends. In other words, they were only open when most of their customers were busy working. That led directly to the introduction of branch ATMs in 1967. It is important to bear in mind, that stopping paying wages in cash was not
done to help the workers. It was done to suit the government, employers and their bankers. The government saw it as a route to better tax collection, employers reduced their costs for cash handling and banks got their hands on the workers’ wages. Getting wages deposited was particularly important to banks, because they operated on the basis of fractional reserve banking, a system which, in the 1960s, allowed them to lend out 20 times or more of the value of monies they held on deposit. Perhaps it was just a coincidence that credit cards came along at exactly the same time. As most people ceased to be paid in cash, these tiny bits of plastic became more popular. Instead of visiting your bank branch several times a week to get cash – because for decades that’s the only place you’d find an ATM – you could use plastic to make your daily purchases and only visit the branch once a month. This visit was to get the cash to settle your credit card bill, of course, which you did at the branch at the same time. Oddly, perhaps, your shiny new plastic credit card was of no use to you if you wanted to get cash from the first ATMs. Here, again, it was to be a couple of decades before the convenience of being able to insert your credit card in an ATM to get cash became a reality. Credit cards (by default or design), let banks hold onto a worker’s deposits longer – so increasing lending power. And, if the bill wasn’t settled in full at the end of the month, the worker could be charged interest on the debt. Such cards also earned banks fees from retailers, who paid for the privilege of accepting the plastic, no doubt convinced by messaging from the issuers that people using cards would spend more in their shops. So, three wins for the banks – and largely at the cost of the workers, who had been quite happy to be paid in cash in the first place! Economists will tell us that the changes of the 1950s and 1960s were great for our country, leading to a massive expansion of the UK economy.
SOS: spend or save? 80
TheFintechMagazine | Issue 20
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