View from the bridge

View from the bridge

Andrews, David

David Andrews compares the UK consumer’s attitude to debt with our European neighbours, and questions our lack of initiative when it comes to our finances.

We are, it has (in)famously been said, a nation of shopkeepers. A quick glance around my home city of Brighton will confirm that. You cannot move for shops, usually selling candles and that over-priced fancy merchandise that looks nice in the window but once you get it home you wonder what on earth you were doing buying it in the first place.

We are also a nation of debtors – carrying more than twice the level of average personal debt compared with any other EU country. UK consumers now collectively owe £158bn, according to the snappily titled Guide To Consumer Lending in Europe. The study reckons we carry individual debt averaging £2,637. Wow. UK consumers accounted for approximately 30 per cent of total EU consumer credit. Wow. Now that is the kind of market share you do not necessarily want.

Peter Welch, of web-based banking service BankEcon, which conducted the research, said: “Consumers’ appetite for credit varies greatly across Europe. High demand markets such as the UK contrast strongly with less developed markets such as Italy and Spain, and the research found that people in Greece, Finland, Italy and Portugal, owe an average of less than £650.”

Well that makes sense. Our generally robust economy, low interest rates and the confidence boost given by the phenomenal rise in house prices – remember, the majority of people in these rival economies do not own their own properties – gives us more incentive to borrow more.

There are also significant differences in the size of consumer credit markets between countries within the EU. According to BankEcon, Germany dominates the area, accounting for over 40 per cent of consumer borrowing, whereas Spain and Italy only accounted for 10 per cent and 9 per cent respectively.

The main sources of consumer credit were also found to deviate widely between countries, with Ireland and the UK remaining the major European markets for bank-issued credit cards. By way of contrast, current accounts and car finance remain particularly important to German consumers, with French consumers favouring specialised consumer finance companies which often operate through third party distributors.

So despite the exhortations of various pro-Euro groups with the rally cry of ‘we’re all European now/ when it comes to our borrowing habits, we are patently not. And that is how it should be. Our banks and credit card firms spend a fortune on market research to gauge demand in different indigenous geographical areas to establish likely demand for plastic and other forms of borrowing. But they are also quietly beavering away assessing demand in the Euro economies as well.

Never ones to let the grass grow under their feet, Barclays and Royal Bank of Scotland (RBS) have been among the most active in the continental stakes. RBS owns Comfort Card, the Dutch consumer credit business operating in Holland, Austria, Belgium, and Germany, while Barclaycard, part of the Barclays group, operates in France, Germany, Greece and Spain.

“Though cross-border lending is in its infancy in Europe, developments such as the Single Euro Payments Area and initiatives to promote cross-border access to credit registers, will increase the opportunities for those banks keen to expand beyond their domestic market,” adds Peter Welch.

Opening up the market across the Channel is to be applauded. Far too few British firms show the same kind of initiative as our major lenders in expanding their operating frontiers. But if my postbag at the World’s Greatest Newspaper is anything to go by, plenty of card carrying Brits would like to see the big credit card operators moderating their charges for overseas usage. The mark up – around two per cent is not unusual for cash and purchase transactions – is hefty, and profit is clearly not an issue with the big players. There is room for lower charges while continuing to stoke up the coffers.

Time to Mint it in

Mind you, that is not to say there are not good deals around on the home front. I have been bombarded with requests for more details on the new Mint card. As most professionals working within the industry will be aware, Mint is the re-branded RBS Advanta card. It could be a re-branded Donald Duck card for all your average card carrier on the street cares. Because when they offer these kinds of deals – a 10 month zero per cent offer period before moving to a highly competitive 10.9 per cent APR – then there is bound to be a stampede for the card and plenty of defections from more punitive rivals.

It is only a matter of time before a major player comes up with a 12 months interest free period. A bottle of champagne to the first reader who correctly predicts which firm will be first past the tape with a full year’s no interest card.

Getting it off Pat

That said, I sometimes wonder how these cards – even with their compelling attractive offers – actually find their way into consumer wallets and purses. And that is despite the high profile ad campaigns. Take my local dry cleaning lady. Every time I call to collect or deposit a suit, she says – in a very loud, Geordie accent: ‘Here’s David, our local financial expert. He writes for the newspapers, you know What do you recommend this month, love?’ she booms, making absolutely certain that I cringe with embarrassment as several people in the shop – and on the street outside – turn to stare at the ‘expert’. Today, I told her – just as I did last week – that the Mint card is almost certainly the best deal on the market for someone who, like her, wants to transfer a balance to enjoy a long interest free period. seeing her eyes glaze over at the name – ‘Mint’ will clearly take a bit of getting used to as a trusted brand -1 pointed out the freephone number advertised in that day’s Daily Express. Only then, with my physical endorsement and literally standing over her – did she call. If accepted I’m sure she’ll be delighted with the card. And as much as I like Pat – for it is she -1 can’t help myself marvelling sometimes at the sheer lack of initiative perfectly bright people display when it comes to getting their own financial house in order. No wonder we are the most indebted nation in Europe.

At the beginning of the year, credit and store card companies were slated by MPs for a ‘lack of transparency, irresponsible lending and charging excessive interest rates/ just those, then. The Treasury Select Committee said consumers had been “badly let down” by card companies whose lack of transparency left them confused about charges and unable to shop around.

It added that the companies marketing practices were “highly misleading and highly damaging” to the interests of consumers, and could lead to people sleep-walking into debt. In a highly critical report it said other problems included having two different ways of calculating APRs, which measure how much interest is charged, and 10 different ways of calculating charges on cards making it difficult for consumers to know if they were getting a good deal.

Lemming-like consumer behaviour

Well I’m sorry to use the example of Pat the dry cleaning lady again, but it strikes me as a fantastic example of lemming-like consumer behaviour. There is no great mystery to how interest rates and other charging works on credit cards. Some charge a lot more than others and even the most naive of shoppers must by now be aware that store cards are very high charging and should only be used for convenience, not as borrowing tools. And you don’t have to have one.

John McFaII, chairman of the Treasury Select Committee, is not a fan of the credit industry: “Consumers have been badly let down by credit and store card companies,” he raged, and called for a number of reforms. These include the introduction of a single method for calculating APRs, as planned by the Government in its Consumer Credit White Paper, and standardising the way interest charges are calculated.

But interest charges are by and large standardised, and as it must by now be abundantly clear, credit card borrowing is one of the least efficient ways of borrowing. Used wisely they are fabulously useful ways of buying goods and services, and few would argue that the credit industry has not revolutionised the entire retail landscape. But still the whining from officious busybodies. They should sort out their own shops first. Wild horses would not part the vast majority of the millions who use credit cards on a daily basis from their plastic.

Copyright Institute of Credit Management Ltd. Mar 2004

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