Consumers face plastic squeeze
ALTHOUGH British consumers have reduced their borrowing on credit cards, there is an increasing concern that if the cost of mortgages increases, many may use their plastic to make ends meet, according to the latest annual report on consumer credit by accountants PricewaterhouseCoopers.
Precious Plastic 2008 finds that consumer indebtedness has more than doubled since the start of the millennium. People are faced with mounting debts, with the average adult now owing £33,000, compared with £17,000 in 2000.
Households have already stretched their borrowing capacity. Their finances will be further tested as PricewaterhouseCoopers (PwC) estimates that many households that are currently benefiting from fixed-rate mortgage deals could see their average monthly mortgage repayment increase by around £140 if they do not re-finance their debt: this will put further pressure on default levels and could have an impact on consumer spending.
Richard Thompson, partner at PwC, said: “There are tough times ahead for both consumers and credit card companies. Banks are continuing to take action in response to the rise in consumer debt by tightening their credit acceptance policies. Many consumers will find it increasingly difficult to obtain credit in the run-up to Christmas.”
PwC believes there could be a spike in personal insolvencies next year as a result of over-borrowing by consumers. While the trend in Individual Voluntary Arrangements (IVAs) has declined in recent quarters, this is partly due to a hold-up in the processing of IVAs due to ongoing fee discussions between banks and insolvency providers, as well as fairly flat levels of unsecured debt in the past two years. The expected increase in personal insolvencies next year could put further pressure on lenders' bad debt charges.
Mr Thompson, added: “Credit card net yields after charge-offs are at their lowest levels since the start of the millennium – the result of a highly competitive market and increases in charge-offs. This “lost profit” amounts to £4bn for the market as a whole. PricewaterhouseCoopers continues to believe that it is only a matter of time before annual fees on cards becomes the norm.”
Significant new opportunities exist for the banking industry through innovation in the consumer credit market. Consumer research recently conducted by PwC found that more than half of respondents would be quite or very likely to replace their existing credit card with a 'green' credit card if it helped them tackle their carbon footprint. At the same time, two in five said they would give up an existing loyalty programme or cash reward card in favour of a green alternative.
PwC also predicts that one in 10 people will regularly use a contactless card by the end of 2008. The cards, which were launched this year, allow consumers to pay for small purchases under £10 rather than using cash.
Such payments are quicker and more secure and PwC predicts that there are likely to be five to six million cards in issue by the end of next year.
Outside the UK, PwC sees a period of subdued growth for consumer credit in the Eurozone, reflecting the caution showed by consumers generally, although credit growth is outstripping GDP growth in countries such as Italy and Greece. However, the consumer credit markets in Central and Eastern Europe have expanded rapidly in recent years and the growth in credit card usage continues to be impressive.
A copy of the PricewaterhouseCoopers Precious Plastic 2008 study on consumer credit in the UK can be requested from www.pwc.com/uk/preciousplastic
