EXCLUSIVE: ‘SOS: Spend or Save?’ – Ron Delnevo in ‘The Fintech Magazine’
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. However, it is worth recalling that the following decade was largely characterised by economic turmoil and societal unrest, culminating in the Winter of Discontent in 1978/79. That was followed, in 1979 by the emergence of a Conservative government, led by Margaret Thatcher, that was able to convince many of the workers that the ills of the UK could largely be blamed on the fact that too many industries were effectively owned by said government.
This may seem an odd thing for workers to believe – after all, many of them were employed by those self-same nationalised industries. But when the message came with a promise of cheap or even free shares for every worker in the event their industry was privatised, it turned out to be very convincing.
So, how to sum up the 30 years we’ve covered so far? Workers went from being paid in cash and living within their means to being paid through banks and building up significant personal debt. They were then persuaded that they needed shares in privatised industries to help repair their finances, surrendering as they did so the job security they had enjoyed while being employed in those self-same previously state-owned Industries.
By the 1980s, the debt landscape had changed dramatically in the UK. Yet, even so, by 1980 household debt was running at only around 30 per cent of disposable income. By the early 1990s, that had doubled to 60 per cent. What had happened? Thatcher’s concept of ‘popular capitalism’, for one thing. Suddenly, millions of British people discovered they had to own shares. This was partly fuelled by free or cheap shares that workers had been given as part of the privatisation process, but there was also a surge in initial public offerings, which people rushed to buy, especially in retailers such as The Body Shop, Sock Shop and Tie Rack.
The UK Stock Market’s Black Monday crash of 1987 – the year, incidentally, that debit cards first appeared – only temporarily dented the public’s belief in the ‘get-rich-quick’ potential of share ownership. By the time Mrs Thatcher left office in 1990, her decade in power had seen the number of share-owning Brits increase from around three million to at least 12 million. And, as she was departing Downing Street, one of her favourite policies – building society demutualisation – was only just starting to take effect.
In 1989, Abbey National converted to a PLC, followed by many other societies within the next decade. The shares gifted to former members added yet more millions to the number of UK shareholders, reaching a high of 15 million in the mid-1990s. Today, the number stands at around 12 million, though many of those may only hold shares in one PLC – often the one they work for.
Consistent, real-terms wage increases since the 1950s and the debts UK consumers were prepared to allow themselves to build up, fuelled massive extra expenditure. But the decade of austerity that the UK endured, following the financial crash of 2008, saw household debt peak at a high of more than 150 per cent of disposable income. So, what does the future hold as we look forward from 2021?
Circling back to where I started this article, it has to be said that many believe the emergence of BNPL credit is not a positive sign. It is arguable that the last thing we need is for fintech innovators to provide novel ways of increasing our debt burden. However, there have certainly been some more helpful interventions from fintechs. A number of app-based banks try to assist users to better manage their personal finances. A good example is Monzo, which has four million users, including me, who use overdraft facilities, loans and a debit card, but also have access to products such as Get Paid Early, Salary Sorter and Bills Pots.
Can the app-based banks help customers escape the debt-trap that has been almost 70 years in the making? Or does it really come down to education? Financial education is certainly best started early and many believe that using cash gives children a proper understanding of personal finances and budgeting. But apps have also been playing a role in the education process for quite some time, too: the likes of Kids Money, Allowance+, Savings Spree, PiggyBot and, more recently, Nimbl – an app linked to a prepaid debit card with control features available to parents. It’s been nominated as the Best Children’s Financial Provider in the British Bank Awards 2021.
Perhaps a combination of right-minded banks and app educators such as Nimbl can help exert downward pressure on the UK’s household debt. Who knows, maybe one day household debt levels can be reduced to those of the 1950s, an era when cash was definitely king and living within their means was second nature for the vast majority of the UK public.