50 years of credit card revolution
This year marks the 50th anniversary of the introduction of credit card – a banking innovation and revolutionary product which allows consumers to buy with monies they had not yet earned and pay later. The introduction in the UK, which was a refinement of the travel and entertainment card hitherto operated in the USA in the late 1950s, was a watershed in the UK banking system approach to consumer credit sales and administration.
Since then, it has heralded a fundamental change in consumer spending by giving millions the opportunity to spend the money they hadn’t yet received, thereby expanding the economy, increasing aggregate demand of goods and services, increasing job creation and economic growth, and even government tax receipts. It has served as a vehicle for the successive revolutionising of the banking system.
Subsequent to the initial credit cards roll by Barclays Bank on Wednesday June 29, 1966, many working class individuals who were previously locked out of the UK financial system were incorporated by this masterstroke. Banking industry since the Second World War was masculine, conservative, manually driven, protected itself through cartels, resisted change, and were largely local based. Owning a bank account was elitist – an exclusive preserve of businessmen and women – and access to banking credit used to be the preserve of the rich and the well connected.
Most people receive wages in cash, shops pay with cash and many never had bank accounts in their lifetime. Obviously cash was king and was vulnerable to theft. For instance, the great train robbery which occurred on a royal Mail train travelling between Glasgow and London in the early hours of Thursday August 8, 1963, had resulted in a loss of £2.6 million (equivalent of today’s £50 million) in sterling notes and most of it were never recovered.
Therefore, in the early 1960s, there was a restless new generation of bankers that reasoned that things could be done better especially in the handling of cash, and that banks should be automated, compete more with each other, and bring in new products. At inception the local bank managers were opposed to the introduction of credit cards as it centralises credit decisions and took powers away from them. However, this phase gradually faded within a decade as the generation of bank managers retired.
Because credit card customers were not known individually, credit scoring system via automated systems were introduced to calculate the likelihood of customers’ default on credit cards. This was later rolled out as a credit administration criteria, thereby effectively getting rid of the hitherto powerful branch managers.
By the 1990s, credit cards became an important means of accessing short term credits and obviously extremely profitable banking product, such that between 1980 and 1990, aggregate credit card debts owed by individuals and households grew almost six fold from £5 billion to £28 billion, which is an average of £600 consumer debt per British adult which was perceived then as unsustainable. Therefore, by the early 2000s, the financial regulators stepped up their activities with the aim of improving efficiency of the payment system, and encourage competition as well.
One nagging issue which is yet to be addressed till date is the sustainability of debts by individuals who have their credit limits increased year on year. By March 2016, about 30 million people which represent 60% of the British population have at least a credit card. The total credit card bill had grown to £64.3 billion, which represents £2,381 per household.
Although this represents a considerably lower balance to the average balance of £25,000 per household at the beginning of the 2008 financial crisis, the debts are still as difficult to pay as what obtains in 2008. Out of this 30 million, about two million of them are either in serious default or arrears, another two million are in danger of not repaying, having missed a payment, and another 1.6 million only make the minimum repayment. Invariably, over 18% of the customers are in financial difficulty.
The credit card model has been a gravy train one for the banks as they make on average, three times the income earned on a typical lending of personal loans. It is argued that the main advantages of credit card is the flexibility it offers the customers and access to credit to people who otherwise would have been shut out of the banking system. However, it has been debated that many lenders have acted irresponsibly in consumer lending, and are promoting a debt culture which sees the consumers as victims rather than customers. The business model unfortunately relies on the consumers holding high levels of debts to sustain the profit appetite of the banks. This may have serious wider implications on health issues and other social problems.
The credit card system is yet to develop in Nigeria due to the enormous credit risks attached to the administration and management of the system, many of them systemic and environmental in nature. At best, the banks only grant overdraft to their own customers with verifiable credit history. However, lessons can be learnt on how to enlarge the scope and breadth of the monetary system now, as it is evident that access to credit is a key driver of economic growth, especially for small and medium scale businesses that provide employment to majority of Nigerians.
The chill wind before the CBN, the money market regulator is how to remove all identified impediments encumbering the operations of the financial institutions from attaining full-fledged development of the credit space. Some of the issues are beyond the capabilities of the banks, for instance proper identification of customers and proof of Nigerian address via automated system. At the moment, these are cumbersome and expensive know your customer (KYC) matters.
The Central Bank has been slow in actively promoting financial inclusiveness until most recently. After the introduction of the BVN system, it is expected that the next phase in the expansion of the credit space would be the promotion of a robust credit scoring and management system. Unfortunately, this issue may remain a ball and chain where electronic records of citizens are not being maintained by the central government.
Olatubosun wrote from the United Kingdom.