We are on the last lap, the final straight, with the finishing line now in sight for the end of the working year.
The holidays are almost upon us and most of us are just exhausted from what has been a year of turmoil and change. This week was one final push to get across the line.
But as thoughts turn to Christmas, mince pies, mulled wine and bad TV here is a quick last look at the news and developments this week.
Decline of the Credit Card
Credit card spending continues to be down, with the great migration to debit card spending and in particular to contactless continuing. The drivers of this are informative, especially in the midst of such economic uncertainty.
- Consumers moving away from large ticket items, such as holidays or flights where they need to spread the cost, to smaller online purchases.
- Also, arguably some consumers have lower expenses, if working at home, and therefore higher disposable income. The need for credit is just not as high.
All of this has consequences for banking and lending, where products such as credit cards drive such a large degree of revenue.
Consumers still financially stretched
Whilst this may be true for credit cards, lending is not however done as yet. For some customers there continues to be a need for credit and some customers now more financially stretched that ever.
Rise of Buy Now Pay Later
Much has been made of the Buy Now Pay Later (BNPL) sector, which has been on a tear since lockdown. More than 15% say they will now select the option if available at checkout.
The industry argues that loss rates are low, they never charge interest, nor report to the credit bureau, so there are not creating problem debt… they are ‘different from credit cards’.
However, all this reminded me very much indeed of the early days of credit cards. There was explosive growth, loss rates were low and customer rewards high. The parallels are striking. Even the product itself is not much different from early charge cards, which also do not charge interest and have no credit limit.
In a high growth phase, with high interchange rates charged to retailers, it is possible to outrun your losses. The numbers look great and with slick marketing campaigns easy to persuade yourself, and customers, that it is different this time.
However, for those in financial difficulty, this is extra debt and can contribute to problem debt. It is a big issue for them.
… and when the growth music stops, either due to market competition, in the case of credit cards, or regulatory change (high cost short term (payday) loans), loss rates shoot through the roof, crushing profitability.
These are some of the hard yards learnt by the regulated credit industry over the last 20-30 years. The current focus on positive customer outcomes, especially in the current environment is undoubtedly a good thing.
With the FCA now circling and the BNPL specifically mentioned the sector is in its sights. Regulation is likely, and some seeing the writing on the wall are already getting authorised.
So, as we finish the year, it is important to remember that life can be a circle, new products can be old products in disguise.
It has of course always been the case, however, the problems and solutions often repeat too, it is solvable, it has been done before… something to think about to plan and get ahead of the trend for next year.
Have a good weekend everyone…. @chris_w_tweet