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This story appears in the January 2009 issue of Cards&Payments.
As an American living in the United Kingdom, I often am struck by the differences between life in the United States and in my new home. Here in the UK, I drive on the "wrong" side of the road, refer to soccer as "football," and use my chip-and-PIN card to make purchases. In my professional life, I have been witness to many other differences between the U.S. and UK, specifically as they relate to the current credit crisis.
British consumers are using their credit cards less frequently, and those that do use their cards are having increasing difficulty repaying their balances.
Our consumer research publication, Cardbeat, recently reported that the percentage of UK cardholders who revolve balances decreased 21% over the course of 2008. Meanwhile, the payment rate has decreased 13% over the same period.
This is not good news for UK credit card issuers, especially considering the fact that Brits already prefer using debit cards for their day-to-day purchases (even more so than Americans) and use credit cards primarily for revolving debt and as a vehicle for short-term financing. Given this fundamental difference, where will credit cards stand in the aftermath of the British credit crisis?
To answer this question, we must first understand the current situation in the UK. Insolvencies (or bankruptcies) are increasing, and collection shops are overwhelmed with volume. Charge-offs are at record levels; at the end of 2008, net losses were exceeding 10% of receivables, twice as high as the 2007 loss rate. The unemployment rate in the UK is 6.3%–an 11-year high–and is expected to exceed 8% by year-end 2009. Charge-off levels likely will continue to increase as consumer indebtedness rises.
Though the levels of these leading indicators are different from what we are familiar with seeing in the U.S., the conclusion is the same: Consumers are moving away from bank-based lending–either by choice or by force–and are more conservative in their spending and borrowing behaviors.
To further complicate matters, 16% of all British households are due to come off of promotional-rate mortgages over the next two years. Another Cardbeat study found that at least one-third of UK consumers are unable to obtain cash in the case of an emergency, especially because British consumers do not look to credit cards in this situation.
Certainly, consumers will continue to have a need for short-term loans throughout the credit crisis, particularly if their obligations increase because of rising housing expenses.
However, even affluent British consumers are finding that it is increasingly difficult to obtain credit at favorable terms.
From a commercial perspective, British credit card portfolio managers are trying to mitigate risk by going through similar exercises as their U.S. counterparts: reducing credit lines, closing dormant accounts and using aggressive predelinquency collection strategies.
Additionally, the British government is becoming increasingly involved in regulating lending practices, introducing debt relief orders (a kind of "bankruptcy-lite") that allow low-net-worth consumers to relieve themselves of their debts more easily.
Authorities also are encouraging credit issuers to be more willing to lend to consumers during these challenging times, though the criteria to obtain a loan or line of credit will be more restrictive than in the past.
To further complicate matters, British regulators are in the process of restricting the sales of payment-protection insurance. Payment protection insurance is the equivalent of credit-protection insurance in the U.S. and is a major revenue stream for lenders in this country.
In short, the UK is in the same boat as the U.S., though perhaps the market here is facing a slightly smaller tidal wave because of consumer preference for debit.
We expect credit cards will be less widely used in the wake of the credit crisis, and issuers soon will move to fee-based lending to counterbalance lost revenues and mitigate the risk associated with issuing credit during such a turbulent time. CP
Megan Bramlette is a managing associate in Auriemma Consulting Group's London office, where she leads the firm's European research practice. She can be reached at megan.bramlette@acg.net or at 44 (0) 207 629 0075.
