The uncertain economic outlook continues to play on the mind of the UK consumer, and with no improvement in confidence since the financial crisis; households continue to struggle with some of the highest levels of debt in the world according to PwC’s annual report on the UK consumer credit industry ‘Precious Plastic 2012’.
Levels of unsecured borrowing fell for the third successive year by over £355 per household in 2011 and it seems UK consumers are finally showing commitment to paying off their debts. However, worrying signs remain in their ability to continue to pay off their debts, particularly in the 25-34 year old age group where 25% admitted to needing to use credit to fund essential purchases in the last year.
Simon Westcott, director in PwC’s Financial Services practice commented:
“UK consumers are among the most indebted in the world, with the average UK household still saddled with nearly £8000 of unsecured debt. Although the UK Government’s austerity drive appears to be hitting home, with households paying off an average of £355 worth of their debt in 2011, three years of austerity by UK consumers has only made a small dent in the total levels of borrowing.
“In addition to this, our credit confidence survey has shown that there is a growing reluctance to borrow in the future and a marked deterioration in confidence about meeting repayments, particularly among 18 to 24 year olds consumers where less than half of those surveyed believing they will be able to repay their debts”
Total household borrowing in 2011 remained relatively static compared to 2010 at £1.45 trillion. Within this amount, unsecured credit declined, with outstanding balances down £9.2 billion on 2010 to £206.6 billion. PwC believes this downward trend is set to continue with outstanding balances being under the £200 billion mark by 2013.
The credit card’s ‘mid-life crisis’ and the rise of the pay-day lender
Although overall levels of unsecured borrowing have fallen, credit card borrowing has declined at a faster rate highlighting the particular challenge faced by this section of the industry. Total outstanding credit card debt fell by 5% in 2011, leaving the average credit card balance at around £1000. Credit cards have lost market share to other payment types – most notably debit cards which have grown by 10% in 2011 and are now used more frequently than cash in payments for the first time. Credit card providers have also been scarred by the scrutiny they’ve received from regulators and media over the last few years. The fact that those consumers that do wish to borrow and have found it increasingly difficult to obtain credit has further compounded the issue.
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Simon Westcott, director, PwC continued:
“45 years since it was first introduced, the credit card is suffering a midlife crisis. Consumers discarded nearly one million cards in 2011, taking the number of credit cards in circulation down to levels not seen for almost a decade. The longer term trend suggests that numbers will continue to decline, with the younger generation showing a preference for debit cards and emerging digital alternatives such as mobile payments. This generation seems unlikely to switch to increased credit card usage in later life, as perhaps they would have done in the past, suggesting that debit cards, mobile payments and other innovations will force the credit card into an ever decreasing market.
“Credit card providers will need to quickly look at ways to attract consumers by exploring digital technologies and mobile payments if they are to continue to compete in the payments market.
“As the credit card model comes under pressure, there may be a return to annual fees as regulators push for more transparent ways of charging. Other banking products are likely to go the same way as consumers and regulators look for simpler products and the free bank account may become a thing of the past.”
In addition, as consumers turn away from credit cards or are unable to obtain credit from mainstream lenders, we are seeing increasing evidence of consumers seeking alternatives such as so called ‘pay-day loans’. The convenience and innovation offered by alternative lenders are encouraging a broader and more prosperous selection of consumers to choose their services over banks.
Simon Westcott, director, continued:
“Mainstream lenders need to aware that what may have begun as a last resort, could be an enduring relationship as consumers are pleasantly surprised at the convenient and innovative service they receive from these smaller, more agile providers.
“As these providers become more conventional, we are likely to see them venture further into the mainstream market with their own credit-card, longer term loan products or even current accounts.”
The chink of light at the end of the tunnel for credit card providers is that write-offs have decreased significantly in 2011 as the impact of improved collection strategies and changes to underwriting criteria filter through.
Consumer confidence survey: All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 1997 adults. Fieldwork was undertaken between 26th - 27th October 2011 and 11-14 November 2011. The survey was carried out online. The figures have been weighted and are representative of all GB adults (aged 18+).
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PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See pwc.com for more information.