Credit
Crunched
A COMMENTARY ON THE UK’S CHANGING ATTITUDE TOWARDS BORROWING AND SPENDING
CREDIT CRUNCHED
This report has been researched and written by the Consumer
Finance Association, a trade association that represents short-term
lenders in the UK.
It was commissioned to investigate the UK’s changing attitude
towards finances and spending. This report explores the reasons for
the growth of short-term credit and identifies the users of this type
of consumer credit.
The analysis draws on a wide range of data sources, reflecting the
latest information that is available.
All data is cited throughout the report and further information is
available online. Reference to this data does not imply endorsement
by the originators.
www.cfa-uk.co.uk/creditcrunched
ABOUT THE CFA
The CFA is the principal trade association representing the interests of the short-term lending businesses operating in
the UK. The CFA is setting the standards for payday lenders by driving industry improvements and best practice and
through proactively participating in consultations and research about the industry.
Central to setting industry standards is an industry-wide Good Practice Customer Charter and the CFA’s own Code of
Practice. These commit our members to delivering better communication, robust affordability assessments, clearer
information about price and payments, and practical help for those in financial difficulty.
CREDIT CRUNCHED
CONTENTS
EXECUTIVE SUMMARY
PAGE
4
UNDERSTANDING PAYDAY CUSTOMERS
Research overview
Overview findings
6
6
7
THE DRIVERS OF CHANGE
Life in the UK is getting more expensive
Transport
Utilities
Housing
8
8
9
9
9
Earning power and wages
Employment trends
Part-time UK
Self-employed
10
10
11
11
THE FINANCES OF UK HOUSEHOLDS IN 2013
12
Traditional credit is harder to get
12
Paying off long-term debts
12
Savings13
Use of unsecured credit and attitudes towards debt
14
The cost of missed payments
16
Technology16
The future of cash?
17
CHANGING ATTITUDES
Lack of trust in the mainstream providers
A rise in alternative lending
18
18
18
THREE EXAMPLES OF CRUNCHED BRITAIN
SKINNY JEANS AND SMARTPHONES
BUGGIES AND BIGGER BILLS
BURDENED BABY BOOMERS
20
22
28
34
CONCLUSION38
People’s behaviour has adapted to match the climate
38
Responsible and rational consumer choices
38
Attitudes to money management are changing
39
Consumer protection and regulation
39
APPENDICES41
Appendix 1: Research and methodology
41
Appendix 2: Alternative forms of lending
42
CREDIT CRUNCHED
EXECUTIVE SUMMARY
The global economy changed dramatically in 2008 and UK households are
still enduring one of the longest and deepest economic downturns in history.
Five years on, the credit crunch continues to have a profound impact on all
aspects of life and this has driven a fundamental change in the attitudes of
households across the UK towards their borrowing and spending.
With the pressures on their financial stability increasing on all sides, UK
households are certainly doing things differently compared to the way they
approached financial management before the credit crunch.
This report aims to examine this attitudinal shift. It is based on the largest
study of UK payday customers that has ever been undertaken, and also calls
on a wide range of secondary research sources regarding macro and micro
economic changes; cultural shifts; and technological advancements.
Credit Crunched provides an authoritative overview of the diverse range of
people now using short-term loans. It has also uncovered three particular
groups who have been crunched since 2008 and who have adapted the way
they approach financial management to incorporate short-term loans into their
financial toolkit.
These groups are challenged but they are not vulnerable. They are intelligent,
financially-savvy consumers who are making critical, proactive and positive
financial decisions every day to help them live within their means whilst coping
with the varied challenges of the post-credit crunch era.
The post-credit crunch era is defined by the increasing cost of living with rising
food bills, energy, transport costs and rent. While households are also suffering
from stagnant wages and uncertain earning power.
At the same time the credit crunch has hit employers. With increased economic
uncertainty, confidence remains low and businesses are reluctant to commit to
the recruitment of full-time, permanent staff. This lack of investment is stifling
economic recovery and employment figures suggest that although work is
available, it is increasingly part-time. This has two effects. First, those in work
have an uncertain income and second, people are taking multiple part-time jobs
to make ends meet.
This lack of confidence also prevails in consumer spending. With household
budgets squeezed and uncertainty over future earnings, consumers are
increasingly risk averse. The impact of any financial shock is immense so they
are seeking to minimise their exposure by paying off long-term debts.
Interest rates remain low but the credit tap has been turned off by mainstream
lenders to both households and businesses. So neither savers nor borrowers are
getting the expected benefits. And many people now lack trust in their banks,
which has further driven people to look for alternatives forms of credit.
4
CREDIT CRUNCHED
At the same time we have seen a continued integration of technology into our
lives. The advent of social media, ecommerce platforms, mobile technology,
bandwidth and smart devices, are all impacting on the way people interact with
their banks, especially the young.
Consumers expect instant results. Instant access. Instant service. Instant responses.
Younger generations are not only adapting to the new technology but they use
it intuitively, naturally and instinctively. They are Digital Natives. Where they lead
other generations follow, albeit at a slightly slower pace of adoption. The younger
generation embraces technology for everything, including financial services.
With the combination of rising costs, uncertain earnings and expenditure, lack
of access to mainstream credit and a cultural shift through varying working
patterns with multiple part-time jobs coupled with the growing reliance on
technology, there’s little wonder that consumers in the UK are adapting their
attitudes towards their borrowing and spending.
This report investigates these changes in detail and shows that today’s
households are most definitely credit crunched.
The three particular groups that the report reveals are:
SKINNY JEANS AND SMARTPHONES
Just entering the world of work, tech-savvy and eager to get life underway,
but without the salaries or savings needed to access the constrained
world of mainstream credit. This group is borrowing what they need,
when they need it, not committing to long-term debts that their uncertain
employment and earnings may not allow them to service.
BUGGIES AND BIGGER BILLS
The rising cost of living in the UK is putting pressure on all household
budgets but embarking on family life adds another layer of significant
expense. This life-changing event has always been a financial shock, but
in 2013 it is causing many young families to completely re-evaluate their
finances; what they spend, if they save and how they borrow.
BURDENED BABY BOOMERS
Reaching middle age used to mean financial comfort for many but with
children now ‘flying the nest’ later and parents living longer, middle age in
2013 means sandwiched responsibilities. Dealing with unexpected family
expenses is a conundrum. Should they eat into hard earned savings, which
may be needed for greater emergencies such as redundancy? The reality
is that many are choosing to maintain their security but also minimise
exposure by borrowing on a flexible short-term basis.
5
CREDIT CRUNCHED
UNDERSTANDING PAYDAY CUSTOMERS
Much has been written and discussed about the growth of short term-lending in
the UK yet the people using the service, the customers, are often portrayed in a
stereotypical way, as the vulnerable and the un-banked.
The primary objective of this report was to uncover, once and for all, the diversity
of people that are using short-term loans in 2013, and the challenges and issues
that these customers face against a continued backdrop of economic uncertainty.
RESEARCH OVERVIEW
In 2012, the CFA commissioned the largest study of UK payday customers that
has ever been undertaken. This comprised extensive telephone research and a
number of focus groups, which were conducted between July and November 2012.
This extensive, in-depth research provided a unique insight into payday
customers in the post-credit crunch era. It sought to identify why customers
use payday loans. How satisfied they were with the service. What were the
important aspects of the service. How could the service be improved.
This research, when combined with supplementary data from secondary sources,
paints a surprising picture, which is counter-intuitive to the popular stereotypes.
Telephone interviews
Leading financial services research consultancy1, Harris Interactive, conducted
the telephone survey. In total there were 1,105 telephone interviews completed
amongst customers of the following CFA members:
Cash Converters
Cheque Centre
The Money Shop
Payday Express
Payday UK
Quick Quid
The interviews took place between Monday 24th September 2012 and Monday
29th October 2012.
Focus Groups
To supplement these telephone interviews and gain a greater insight into
customers’ views of payday lending, two one-day workshops were held. These
were attended by 37 people (both payday loan customers, and those who
had used - or considered using - similar forms of alternative credit, such as
pawnbroker loans, home credit or catalogue loans).
These workshops were held in Brixton, London in late July 2012, and Camden,
London in mid-October 2012. Vanilla Research facilitated the workshops.
1http://www.harrisinteractive.com/uk/AboutUs/AwardWinningResearch.aspx
6
CREDIT CRUNCHED
Full details of the research methodology are included in the appendices of this
report.
Overview findings – who are payday customers?
Payday customers are a diverse group of people who come from all walks of life
across the UK, with varying incomes, responsibilities, ages, gender and marital
status. Here we set out the top level findings of the primary research and later in
the report, explore in detail three particular groups of customers; examining the
pressures on their household finances, and the reasons they are being compelled
to consider short-term loans as a part of their overall money management tools.
Gender:
Age:
52%
48%
1%
65+ Yrs
7%
55-64 Yrs
18%
45-54 Yrs
25%
35-44 Yrs
30%
25-34 Yrs
19%
18-24 Yrs
Male
Female
Marital status:
2%
11%
53%
34%
Widowed
Divorced/separated
Single
Married/Co-habiting
Region:
3% 8%
12%
22%
4%
12%
9%
8%
13%
10%
Northern Scotland
Ireland
Yorkshire &
Humberside
North West
Wales
West Midlands
East of
England
South
West
South East
London
Income:
17%
20%
14%
11%
8%
8%
3% 1% 1%
17%
Less than
£10,000
£10,000
to
£14,999
£15,000
to
£19,999
£20,000
to
£24,999
£25,000
to
£29,999
£30,000
to
£39,999
£40,000 £50,000 £75,000
to
to
+
£49,999 £74,999
Refused
7
CREDIT CRUNCHED
THE DRIVERS OF CHANGE
KEY FACTS
UK households average
spend a week2
In 2013, Britain’s households are squeezed like never before. Costs are rising.
Wages are stagnant or falling. Savings are being eroded rapidly as is the
property equity that was enjoyed by many during the boom times of the
housing market. As a result, there is little flexibility in household budgets for
unforeseen bills or financial shocks.
LIFE IN THE UK IS GETTING MORE EXPENSIVE
As inflation continues to put pressure on the prices of everyday goods,UK
households are spending more and getting less for it2.
As can be seen below the gap in 2012 grew – households purchased a similar
amount of goods but the prices increased.
£483.602
in 2011
250000
245000
240000
235000
230000
£471.002
in 2008
225000
220000
215000
210000
205000
200000
Inflation still high at4
3.3%
195000
2007
2007
2008
2008
2009
2009
2010
2010
2011
2011
2012
Q2
Q4
Q2
Q4
Q2
Q4
Q2
Q4
Q2
Q4
Q2
Current price
Chained volume measure
Chart 1: ONS, Consumer trends Q3, 20123
However, it is also important to note that although the Retail Price Index (RPI) is
rising (up from 3.2% in February 2013 to 3.3% in March 2013), back in 2008, as
the global financial crisis was taking hold, prices were rising at an annual rate of
about 5%4.
Less than a year later, prices were actually falling by about 1.5% on the RPI
measure5.
2 UK households spent an average of £483.60 a week in 2011 compared with £471.00 a week in 2008. Source ONS, Family Spending 2012 edition (http://www.ons.gov.uk/ons/rel/family-spending/family-spending/family-spending-2012-edition/index.html)
and ONS Family Spending 2010 edition (http://www.ons.gov.uk/ons/rel/family-spending/family-spending/2010-edition/index.html)
3http://www.ons.gov.uk/ons/rel/consumer-trends/consumer-trends/q3-2012/stb-consumer-trends-q3-2012.html
4http://www.bbc.co.uk/news/10612209
5http://www.bbc.co.uk/news/10612209
8
CREDIT CRUNCHED
So although inflation has been volatile since the start of the credit crunch, this
alone is not the key driver in changing consumer behaviour. It does however give
a stark illustration of the increased pressure on household budgets.
The largest expenditure categories were transport, leisure, and housing
(excluding mortgages) fuel and power6. Research shows that those on lower
incomes spend a higher proportion of their income on essential items, so they
are being squeezed the most. Little wonder that nearly 7 out of 10 people said
they are cutting back on spending7.
KEY FACTS
Fuel prices have increased by
44%=
TRANSPORT
Driving a car is now significantly more expensive than it was pre-credit crunch.
According to the AA, fuel prices alone increased by 44% between November
2008 and April 2013. The average new car costs £18.33 per day to run and it
cost £66.05 to fill a 50 litre tank with unleaded petrol in January 20138.
But leaving the car at home and letting the train take the strain has offered little
respite from rising prices for commuters. Since 2004, an average rail ticket has
risen in price by more than 50%9. In January 2013, rail fares for season ticket
holders increased by an average of 4.2%. Overall, ticket prices have gone up by
3.9% in England, Wales and Scotland. The TUC has claimed average train fares
have risen nearly three times faster than average incomes since 200810.
UTILITIES
The price of domestic gas and electricity has increased by 159% since 200411.
All six major energy suppliers had increased gas and electricity prices by between
6% and 11% by the end of 2012. In the medium to long-term the pressures on
price all appear to be upwards and the only way for most consumers to reduce
the impact of increased unit costs, and even to reduce their bills, is through
energy efficiency improvements12.
The cost of gas and electricity11 has
increased by
159%
Housing costs14 are forecast
to rise by
Indeed this trend is set to continue with The Office for Budget Responsibility
predicting above-inflation rises in energy prices in 201313.
19.1%
HOUSING
A roof over our heads is costing more too.
It is forecast that in five years’ time a typical home will cost £261,000,
representing an increase of 19.1% compared with 2013. Average prices this
year are expected to edge up to £219,000, marking a 0.8% increase compared
with 2012, the Centre for Economics and Business research (CEBR) said14.
=
The AA Fuel Price report
6 ONS, Family Spending 2012 edition http://www.ons.gov.uk/ons/rel/family-spending/family-spending/family-spending-2012-edition/index.html
7http://www.resolutionfoundation.org/publications/squeezed-britain-2013/
8http://www.creditaction.org.uk/assets/PDF/statistics/2013/february-2013.pdf
9 Hay Group via http://www.guardian.co.uk/news/datablog/2013/jan/02/rail-fair-increases-commuter-routes
10http://www.bbc.co.uk/news/uk-20881684
11http://www.uswitch.com/gas-electricity/news/2013/01/31/rising-costs-force-seven-in-10-households-to-go-without-heating/
12 www.parliament.uk/briefing-papers/sn04153.pdf
13 http://www.telegraph.co.uk/finance/personalfinance/consumertips/household-bills/9738793/Energy-bill-rises-will-outpace-inflation-next-year-fore
casters-warn.html
14http://www.thisismoney.co.uk/money/mortgageshome/article-1671748/House-prices-What-expect--news-predictions.html
9
CREDIT CRUNCHED
With this sustained depression of the housing purchase market, renting is the
only option for many, however rents are also expected to rise by 4% over the
coming year15.
KEY FACTS
Nearly twenty years of
wage stagnation predicted19
Wages in
2000
Wages in
2017
Those in the South East of England are faring worst with Londoners now
struggling to afford accommodation16.
Household finances are therefore squeezed with all of their monthly bills rising
significantly.
EARNING POWER AND WAGES
Wages for many are either frozen or have declined in real terms.
UK wages have had the third largest fall of any developed country between
2008 and 201117. Over a four year period, more than 50% of working age
people find themselves living on a low to middle income for at least one year18.
Official projections suggest that median real full-time wages in 2017 will be at
roughly 2000 levels – a near twenty-year stagnation in earnings. However, while
wages have fallen in real terms across the board following the credit crunch, the
stagnation of real median wages didn’t begin with the crisis in 2008, but a good
five years earlier in 200319.
With all of these pressures on both earnings and expenditure, there is little
wonder that British households are thinking carefully about how, where and
when they spend their hard earned money. But the ways we earn that money
are also changing.
EMPLOYMENT TRENDS
Despite the credit crunch and ensuing economic downturn, official employment
figures are not, at first glance, what may be expected. Unemployment peaked at
almost 2.7 million at the end of 2011, its highest level for 17 years20.
The number of unemployed people in the three months between September
and November 2012 was 2.49 million (7.7%). This is down by 37,000 from the
previous three months, and down by 185,000 from a year earlier21.
158,000 people (1,727 a day) reported they had become redundant over those
three months. This is up by 27,000 from the previous three months, but down by
6,000 from a year earlier22.
15http://www.creditaction.org.uk/assets/PDF/statistics/2013/february-2013.pdf
16 London Evening Standard, 12 February 2013
17 http://touchstoneblog.org.uk/2012/12/wages-the-financial-sector-investment/
18http://www.resolutionfoundation.org/publications/squeezed-britain-2013/
19 http://touchstoneblog.org.uk/2012/12/wages-the-financial-sector-investment/
20http://www.bbc.co.uk/news/10604117
21http://www.creditaction.org.uk/assets/PDF/statistics/2013/february-2013.pdf
22http://www.creditaction.org.uk/assets/PDF/statistics/2013/february-2013.pdf
10
CREDIT CRUNCHED
892,000 people had been unemployed for over 12 months between September
and November, down 5,000 from the previous three months, but up 33,000 (90
a day) from a year earlier23.
The beginning of 2012 saw the first fall in unemployment for over a year. For
some this is a positive sign of economic recovery. For others it is tied to the
higher numbers of people working part-time, with record numbers only doing so
because they cannot find a full-time job24.
KEY FACTS
Working part time
In 200825
In 201226
25.3%
27.2%
PART-TIME UK
As at December 2012, 8.076 million people were working part time. That is an
increase of almost 600,000 people compared to the start of the credit crunch in
2008.
August 2008 7.48m people worked part-time = 25.3% of workforce25
December 2012 8.08m people working part-time = 27.2% of workforce26
Within the part-time work force is a significant element of underemployment.
These are the people who are working part-time but want to do more hours.
According to the ONS this is around 3m or 1 in 10 of the working population27.
Self-employed
SELF-EMPLOYED
With a lack of full-time jobs available, people are striking out on their own.
In 200828
In 201229
April 2008, 3.843m were self employed = 13% of the working population28
December 2012, 4.215m were self employed = 13.9% of the working population29
This is an increase of almost 1% or 372,000 people.
13%
13.9%
23http://www.creditaction.org.uk/assets/PDF/statistics/2013/february-2013.pdf
24http://www.bbc.co.uk/news/10604117
25 ONS Labour Market Statistics October 2008 http://www.ons.gov.uk/ons/rel/lms labour-market-statistics/october-2008/index.html
26 ONS Labour Market Statistics February 2013 http://www.ons.gov.uk/ons/dcp171778_297429.pdf?format=contrast
27 ONS http://www.ons.gov.uk/ons/rel/mro/news-release/underemployed-workers-up-1-million-since-onset-of-downturn/underemp1112.html
28http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/october-2008/index.html
29http://www.ons.gov.uk/ons/dcp171778_297429.pdf?format=contrast
11
CREDIT CRUNCHED
THE FINANCES OF UK HOUSEHOLDS IN 2013
“
Against the backdrop of a
highly uncertain economic
environment, the consumer
credit market contracted
for a third successive year
in 2011, with unsecured
borrowing falling by around
4%34.
From a time when 100%+ mortgages were the norm and multiple credit cards
filled the UK’s wallets, regardless of how much you earned, the credit situation is
now very different. There is a constrained credit supply from mainstream lenders
and this is combined with a cultural shift towards paying off longer-term debt30.
TRADITIONAL CREDIT IS HARDER TO GET
We all see the signs. Mortgages are difficult to secure31. Less pre-approved credit
card applications are landing on the doormat32.
The consumer credit market is shrinking. According to the Bank of England,
consumer credit (excluding student loans) decreased by £0.5billion in October
2012, compared to the previous six-month average increase of £0.2bn. The
twelve-month growth rate was 0.0%. Credit card lending decreased by £0.1bn
and other loans and advances decreased by £0.3 bn33.
“
Against the backdrop of a highly uncertain economic environment, the
consumer credit market contracted for a third successive year in 2011, with
unsecured borrowing falling by around 4%34.
“
As UK households seek
to pay off their longterm debt the number of
credit cards in circulation
has fallen from 65.9m to
54.5m35.
“
KEY FACTS
The credit crunch fundamentally changed the economic climate. 20, 30
and 40 somethings have responded rationally and responsibly, leading to a
dramatic shift in the way money is managed.
PAYING OFF LONG-TERM DEBTS
Despite paying off an average of £355 in 2011, each household still has around
£7,900 in unsecured debt, leaving UK consumers among the most indebted in
the world. PwC projects this contraction will continue for at least the next two
years36. As a society we have become dependent on credit and this will not
change easily, but UK consumers are seeking to regain control by paying off
their long-term debts.
The number of cards in circulation fell by around a million in 2011 alone, taking
us back to levels not seen for almost a decade. At the same time, total credit
card borrowing has fallen by around 5%37.
The consumer credit is
shrinking. According to
the Bank of England,
consumer credit
decreased by £0.5billion
in October 201233
Credit card lending
decreased by £0.1bn and
other loans and advances
decreased by £0.3 bn33
30 http://www.pwc.co.uk/financial-services/publications/precious-plastic-2012.jhtml
31http://www.cml.org.uk/cml/media/press/3463
32 http://www.theukcardsassociation.org.uk/2008-facts-figures/index.asp and http://www.theukcardsassociation.org.uk/2011-facts-figures/index.asp
33http://www.bankofengland.co.uk/statistics/Documents/li/2012/oct/Lending%20to%20individuals.pdf
34 http://www.pwc.co.uk/financial-services/publications/precious-plastic-2012.jhtml
35 UK Cards Association annual statistics from http://www.theukcardsassociation.org.uk/2008-facts-figures/index.asp
36 http://www.pwc.co.uk/financial-services/publications/precious-plastic-2012.jhtml
37 http://www.pwc.co.uk/financial-services/publications/precious-plastic-2012.jhtml
12
CREDIT CRUNCHED
100
80
60
40
20
0
2008
2009
Credit Cards (m)
2010
2011
Debit Cards (m)
Chart 2: No. of credit and debit cards in issue38
SAVINGS
Saving for the future is an increasing luxury as the rising costs of living in the UK
consume our incomes.
Most households have very low levels of easily accessible savings, with threefifths (60%) having savings of less than £5,00039.
In particular, households using unsecured credit have below-average savings;
half of this group has savings of less than £1,00040.
The likelihood of having a higher level of savings (£10,000 or more) increases
steeply with age and household income. It is also above average for couples
with no children (38% compared with 28% overall) and below-average for loneparent households (8%)41.
Over half of savers (53%) admit that they are regularly forced to dip into their
savings account when money runs tight42. 30% of savers are accessing their
funds to cover unexpected outgoings such as emergency household repairs
or car maintenance. 21% are using their savings to cover day-to-day living
expenses, and 20% use their savings to avoid going overdrawn43. People are
struggling to commit to saving, with 34% saying that they weren’t able to save
at all in 2012, and just 23% saying they were able to save a regular amount on
38 UK Cards Association (http://www.theukcardsassociation.org.uk/2008-facts-figures/index.asp)
39 http://www.bis.gov.uk/assets/biscore/consumer-issues/docs/c/12-948-credit-debt-financial-difficulty-in-britain-2011
40 http://www.bis.gov.uk/assets/biscore/consumer-issues/docs/c/12-948-credit-debt-financial-difficulty-in-britain-2011
41 http://www.bis.gov.uk/assets/biscore/consumer-issues/docs/c/12-948-credit-debt-financial-difficulty-in-britain-2011
42http://www.creditaction.org.uk/assets/PDF/statistics/2013/february-2013.pdf
43http://www.creditaction.org.uk/assets/PDF/statistics/2013/february-2013.pdf
13
CREDIT CRUNCHED
a monthly basis. The main reason behind people not saving is simply that they
do not have enough spare income to put aside for a rainy day, with 67% saying
this is the reason for their lack of saving activity44.
That said, savings levels increased in November 2012 with Britons saving 7.33%
of their income each month – equivalent to £90 in real terms – an increase
from 7.17% in August. Unfortunately, 28% of Britons do not believe that they
will be able to sustain their current levels of saving over the next three months
and this figure rises to 36% amongst those aged 45-54. However, one piece of
good news is a significant upswing in savings levels amongst 35-44 year olds
– November’s survey saw the proportion of monthly income they saved rise to
7.22% (equivalent to £103 in real terms) from 5.62% (£81) in August45.
CHANGING ATTITUDES TOWARDS SAVINGS
Young people are increasingly characterised as a generation that ‘has to have it
now’ and isn’t prepared to wait46. This is somewhat unfair.
People have a tendency, referred to as ‘hyperbolic discounting’, to prefer rewards
‘smaller and sooner’ rather than ‘larger and later’. Saving involves foregoing
rewards in the present, which can be gained by spending, for benefits in the longterm and therefore is directly counter to this natural psychological tendency47.
Another reason why young people prioritise spending over saving is that they
expect they will earn more money as they get older and be more able to save48.
They also expect to have greater financial responsibilities and be less frivolous
with their money as they age49.
Given the constraints on income and outgoings, UK households may want
to save, but their ability to do so is limited. This, combined with record low
interest rates which minimise the rewards for saving, and hyperbolic discounting
described above, is pushing savings down the priority list for many households.
A lack of savings, however, also reduces our sense of security. There is little or no
safety net in the event of financial shocks and this is having a huge impact on
our attitudes towards debt.
USE OF UNSECURED CREDIT AND ATTITUDES TOWARDS DEBT
Unsecured consumer credit has been falling consistently since 2008 even though
net consumer credit lending actually rose in December 201250.
Looking further back, our changing attitude towards debt becomes clear. In a
report before the banking crisis, the Bank of England reported that ‘although
44 Lloyds TSB via http://www.creditaction.org.uk/assets/PDF/statistics/2013/february-2013.pdf
45http://www.nsandi.com/media-centre-savings-levels-rise-second-successive-quarter
46http://www.ted.com/conversations/8911/the_culture_of_want_the_now_g.html
47 Young people and savings – A route to financial resilience’, Institute for Public Policy Research, November 2012
48 Synovate 2004 via Young people and savings – A route to financial resilience’, Institute for Public Policy Research, November 2012
49 Pettigrew et al 2007 via Young people and savings – A route to financial resilience’, Institute for Public Policy Research, November 2012
50http://www.creditaction.org.uk/assets/PDF/statistics/2013/february-2013.pdf
14
CREDIT CRUNCHED
debt had grown very quickly in recent years in aggregate it has mainly been
used to finance asset accumulation rather than spending on goods and
services’51. In other words, people were borrowing to increase their net wealth
rather than using the borrowings to pay for higher consumption.
By the time the credit crunch hit, UK households were already recognising
that their debts were becoming a burden. Between 2006/08 and 2008/10 the
percentage of individuals considering their financial debt a burden increased by
1.9% to 49.4%52. KEY FACTS
The number of individuals who
consider their financial debt
a burden52
The same report also reveals that:
In 2008/10 the combined financial debt of households in Great Britain was
£94.7 billion and just over half (51.0%) of households had financial liabilities. For households with financial debt, over half owed at least £3,200; households in the South East had the highest median financial debt (£4,200), whilst households in Wales had the lowest (£2,000). Individuals living in the least wealthy households were 13 times more likely to report that their financial debt was a heavy burden, than those living in the wealthiest households. The least wealthy 10% of households had over £4 worth of financial liabilities for every £1 held in financial assets.
49.4%
An increase of 1.9%
since 2006/08
The number of heavy credit
users has declined from54
The UK acted on this burden of long-term debt. Official figures show that the
average proportion of households with unsecured credit commitments declined
from 58% in 2009/10 to 54% in 201153.
8%
The proportion of heavy credit users – those holding four or more different types
of credit – also declined from 8% to 6%.
The use of most unsecured credit products declined relative to 2009/10,
following a more marked decline in the previous year. Credit cards remained the
most common source of unsecured credit, held by 25% of households, followed
by authorised overdrafts (17%)54.
Analysis by household characteristics shows the usual pattern of variation in
use of unsecured credit – decreasing with increasing age and with increasing
levels of household savings. There was also a high level of credit use among
households with children.
6%
Lone-parent households had high levels of usage for all types of loans, while
couples with dependent children had above-average prevalence of credit and
store card debt and use of mail order/ hire purchase.
51
52
53
54
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb070105.pdf
http://www.ons.gov.uk/ons/dcp171776_296201.pdf
http://www.bis.gov.uk/assets/biscore/consumer-issues/docs/c/12-948-credit-debt-financial-difficulty-in-britain-2011
http://www.bis.gov.uk/assets/biscore/consumer-issues/docs/c/12-948-credit-debt-financial-difficulty-in-britain-2011
15
CREDIT CRUNCHED
THE COST OF MISSED PAYMENTS
Despite efforts to pay down long-term debts, the squeeze is catching many
people out and impacting their ability to get credit in future.
Over one in six Britons has missed a payment for at least one bill in the last 12
months, potentially damaging their credit profile and putting their financial
future at risk55. According to the same research, three million people have missed
a credit card bill in the last year, two million have missed a council tax payment.
Mobile phones, and electricity bills were also high up on the list as payments
most missed.
A missed credit card payment costs £1256 57 and the instant cost of missing
a utility bill payment is at least £26 (£1458 late payment fee and a £12 bank
charge59 for a returned direct debit) plus the additional impact of incurring a
black mark on the customer’s credit record.
“
Digital interaction is
now set to redefine
customer experience
and expectations within
banking65.
TECHNOLOGY
Technology is changing the way that households think about how their finances
and how they access financial services.
Many people now manage their finances entirely online and do not visit their
branch very often. Less than half, or 45%, of people with a bank or building
society current account visit their local bank branch once a month or more.
This figure is compared to a massive 81% who use online banking and 20%
who use mobile banking once a month or more. One in four UK adults access
their bank account online every single day, compared to just 3.5m who made
use of online banking in 200060.
“
Technology is particularly having a major impact on young people’s attitudes
towards financial services. 70% of 18-24 year olds now have a smartphone61
and expect to be able to order products and services 24/7 without any drop in
service levels. This compares to two fifths of UK adults now own a smartphone,
with the same proportion saying their phone is the most important device
KEY FACTS
45%
visit their bank once
a month or more60
70%
of 18-24 year olds have
a smartphone61
55 https://www.moneyadviceservice.org.uk/en/news/millions-risk-their-financial-future-by-missing-crucial-bill-payments
56http://www.barclaycard.co.uk/cs/Satellite?c=Product_C&cid=1306413446320&pagename=BarclaycardPersonal%2FProduct_C%2FBCPCreditCard
SummaryBox
57http://www.americanexpress.com/uk/gold-card/pdf/Gold-Charge-SummaryBox.pdf
58http://www.britishgas.co.uk/content/dam/british-gas/help-and-advice/documents/lots_of_ways_to_pay.pdf
59http://www.natwest.com/personal/current-accounts/g6/rates-charges/current-charges.ashx
60 http://www.telegraph.co.uk/finance/personalfinance/consumertips/banking/9706566/Banks-must-improve-online-services-to-retain-customers.html
61 Comscore, March 2012
16
CREDIT CRUNCHED
for accessing the internet62. People in the UK downloaded more data per
connection than the other comparator countries63.
PwC highlighted the importance of technology in financial services in its Precious
Plastic 2012 report which said ‘While still relatively small as a proportion of
overall unsecured lending, smaller and more agile players [payday lenders] are
leveraging digital technology to deliver an innovative and fast service, which is
particularly attractive to younger people… customers are pleasantly surprised at
the convenient and responsive service they receive.64’
Digital interaction is now set to redefine customer experience and expectations
within banking. The PwC digital ‘Tipping Point’ survey of some 3,000 consumers
in nine countries found that digital, mobile and social media are pervasive across
all countries, ages and social groups, and it suggests that traditional means of
interacting with customers (branches, call centres, etc.) will soon be overtaken by
digital channels as the primary point of contact65.
THE FUTURE OF CASH?
Contactless payment is also emerging. According to Which? by the end of this
year, five million contactless payment cards will have been issued by banks in the
UK to replace existing credit and debit cards – these will be accepted by 100,000
retailers66.
So the days of cash could be numbered and that can only serve to further
change our relationship with our money and the way we manage our finances.
62 Ofcom Communication market report 2012 http://stakeholders.ofcom.org.uk/market-data-research/market-data/communications-market-reports/
cmr12/telecoms-networks/
63http://stakeholders.ofcom.org.uk/market-data-research/market-data/communications-market-reports/cmr12/international/icmr-6.3
64 http://www.pwc.co.uk/financial-services/publications/precious-plastic-2012.jhtml
65 The new digital tipping point’, published by PwC in January 2012
66 http://www.which.co.uk/money/credit-cards-and-loans/guides/contactless-payment-cards-explained/facts-and-figures/
17
CREDIT CRUNCHED
CHANGING ATTITUDES
“
Camden*
“
If you’ve got a credit
card there’s always that
temptation that it’s in
your purse and, ‘Oh I’ll
just.....’ you know? Yet if
you borrow a fixed-term,
short-term thing, then
there is less temptation
to then overspend or max
that out.... Once you’ve got
a credit card, it’s an easy
thing to think, ‘Oh, well I’ll
just put £25 on, I’ll just put
£20 on or £50 on,’ then
you’ve used your credit.
“
Brixton*
In addition, an investigation by the Office of Fair Trading71 into the personal
current account market found that, despite improvements, comparing the costs
of current accounts continues to be challenging and that people lack confidence
in the switching process. Overall, a combination of a lack of competition, low
levels of innovation and customer apathy in the face of unclear costs and a lack
of diversity in the choices of current accounts available, mean that this market is
not working well for consumers or the wider economy.
Even those with lesser requirements from their banks are being affected with the
erosion of basic bank accounts. These accounts are under threat as more banks
are reducing what these accounts offer72.
A RISE IN ALTERNATIVE LENDING
A lack of trust in the banks, constrained credit availability and risk aversion due
to volatile costs and earning power has driven demand for alternative sources of
credit (see appendix 2).
“
It doesn’t feel like it’s your
money if you use a credit
card – until the bill comes.
“
“
I’ve used payday loans,
family and friends and
pawnbrokers but I wouldn’t
go near a credit card.
LACK OF TRUST IN THE MAINSTREAM PROVIDERS
Many people believe the credit crunch was caused by the banks. With the
Libor fixing scandal67, ‘fat cat’ and city bonuses68 and PPI mis-selling69, it
is unsurprising that people no longer trust the motives of financial services
organisations. Nearly two thirds of banking customers no longer trust their
lender to look after their money, with 60% saying they have lost faith in their
bank and 49% saying they believe high-street banks to be dishonest70.
Camden*
*From CFA Vanilla research
67http://www.independent.co.uk/news/uk/home-news/public-trust-in-banks-obliterated-over-scandal-7904075.html
68http://www.bbc.co.uk/news/business-21867735
69http://www.fsa.gov.uk/consumerinformation/product_news/insurance/payment_protection_insurance_/claim-back-ppi
70http://www.independent.co.uk/news/uk/home-news/public-trust-in-banks-obliterated-over-scandal-7904075.html
71http://www.oft.gov.uk/news-and-updates/press/2013/10-13#.UUSAv6mFbww
72http://www.consumerfocus.org.uk/news/the-best-of-british-banking-consumer-focus-calls-on-banks-to-ensure-the-successes-of-the-basic-bank-ac
count-are-not-swept-away-in-a-race-to-the-bottom
18
CREDIT CRUNCHED
“I took out a payday
loan because I broke our
(landlord’s) fridge. I had
to buy a new one or face
eviction.”
Camden*
*From CFA Vanilla research
19
CREDIT CRUNCHED
THREE EXAMPLES OF CRUNCHED BRITAIN
In 2012, the CFA commissioned the largest ever study of UK payday customers.
This extensive, in-depth research provided a unique insight into payday
customers in the post-credit crunch era. It sought to identify why customers
use payday loans. How satisfied they were with the service. What were the
important aspects of the service. How could the service be improved.
Often portrayed as vulnerable and the un-banked, the study also revealed, for
the first time, who payday customers really are.
This research, when combined with supplementary data from secondary sources,
paints a surprising picture, which is counter-intuitive to the popular stereotypes.
Here we look in detail at three groups of customers whose lives have been
impacted in different ways by the credit crunch and in one case have adapted
their attitude to money and credit because of technological changes that have
taken place during the same period.
However, all these groups have one thing in common – the requirement and
ability to access money at relatively short notice – at a time when traditional
forms of credit (loans, credit cards, overdrafts) have become increasingly difficult
to access.
Each group tells us something about the way that Britain’s households are
changing the management of their finances to adapt to these changing
economic times. For one group, it is advances in technology, most notably
the impact of smart phones and mobile devices to access finances, that have
impacted the most on their behaviour.
For another group, it is the need to access loans to get a short-term boost to
their household finances.
Finally, we have identified an older demographic who have multiple demands
on their finances because of the needs of their dependents (older children at
university, for example) or lifestyle choices like the need for a family holiday
abroad. These have had the biggest impact on their monthly outgoings.
20
CREDIT CRUNCHED
We have summarised these groups as follows:
SKINNY JEANS
AND SMARTPHONES
BUGGIES AND
BIGGER BILLS
BURDENED
BABY BOOMERS
21
CREDIT CRUNCHED
Skinny Jeans
and
Smartphones
Insight: Technology can
deliver quick and informed
short-term choices about
financial management. Queuing
for decisions is unnecessary
and isn’t designed around the
smaller amounts of money
people want to use over a short
period of time.
CREDIT CRUNCHED
KEY FACTS ABOUT THIS GROUP
Age:
25-35
Income:
19%
20%
14%
14%
7%
7%
Less than
£10,000
£10,000
to
£14,999
£15,000
to
£19,999
£20,000
to
£24,999
£25,000
to
£29,999
£30,000
to
£39,999
2%
1%
£40,000 £50,000
to
to
£49,999 £74,999
Employment:
Marital status:
64%
36%
Single
Married
61%
24%
5%
10%
Least likely to have savings to call on if they
need access to emergency funds.
3%
Full time employment
Part time employment
Self employed
Unemployed**
THEY BORROW FOR:
As well as for:
EMERGENCY NEEDS
HOLIDAYS
DAY TO DAY LIVING
Food
Child
essentials
Vehicle
expenses
Utility bills
** Unemployed: includes those who are unable to work as well as those who drop in and out of work but were unemployed when interviewed. It also
includes men or women taking out loans on joint accounts where only their partner is working.
22
23
CREDIT CRUNCHED
“
I have used payday loans
to offset other deadlines
because some banks will
charge you £6 a day for
going overdrawn. People
are going to need to borrow
money without feeling they
are being judged. It’s bad
enough you haven’t got
enough money, having to
go cap in hand to your boss,
bank or even your family
is pretty bad form. With
payday loans you get paid
in cash immediately…I can
pay this off now. You can
go home and have a cup of
tea. It’s all done for you.
“
Darren, London
HOW MUCH DO THEY BORROW?
Single men in this age group borrow consistently: £181 per loan regardless of
whether they have children.
Single women have a marked difference. Those with children borrow an average
of £125 but those without borrow £216. This discrepancy may be explained
by the likelihood of lower earnings through part-time work for single mothers,
whereas those without children have a greater income.
WHY DO THEY BORROW?
The main reasons for young females without children borrowing are emergency
(personal or family), food shopping, vehicle related expenses or holidays. Food
shopping also features for those with children but they also need extra funds to
pay outstanding utility bills, buy gifts and clothing and also to cover day-to-day
expenses.
Men on the other hand are likely to borrow for day-to-day living expenses just to
tide them over or for vehicle related expenses and to pay outstanding utility bills.
Given the instant cost of missing a utility bill payment is at least £26 (£1473 late
payment fee and a £12 bank charge74 for a returned direct debit) it soon starts
to make sense for these youngsters to borrow the necessary funds to cover an
impending payment rather than incur the charges and a black mark on their
credit record.
Since 2008 it is estimated that 5 million people have become 25. This group is
not traditionally defined as ‘financially excluded’, but they are a new financial
generation who have entered the adult world at a time when the global
economy has fundamentally changed.
Their financial attitudes are shaped by a unique set of factors: most notably the
state of the economy; the restricted credit market; evolving technology and their
learned experiences.
These are an educated group. They can peer into the low interest rate world but
they don’t have access to the free flowing consumer credit that was available
prior to the credit crunch.
KEY FACTS
Single men
consistently borrow
Single women borrow
between
£181
£125
£216
and
73http://www.britishgas.co.uk/content/dam/british-gas/help-and-advice/documents/lots_of_ways_to_pay.pdf
74http://www.natwest.com/personal/current-accounts/g6/rates-charges/current-charges.ashx
24
CREDIT CRUNCHED
“
They work for a living but a high proportion of jobs are part-time, so their
incomes are constrained and medium-term prospects are pessimistic. To make
ends meet, they have more jobs with less security.
For this group, family life has to wait - they move in with their partner later than
previous generations. Unfortunately, being single comes at a premium – with no
shared financial responsibilities, being young, free and single is expensive.
They value personal control over decisions more than advice and are cynical
about financial institutions and brands, – so no independent financial advisers
are needed here. They like to solve problems quickly, so the fact that they are
technology savvy helps them to seek out solutions, make decisions and resolve
them quickly.
This combination of factors, although challenging for young borrowers, has
made them more, not less, financially savvy.
According to PwC, the credit card market is shrinking as people cut back on debt
and younger people move towards debit cards and other emerging alternative
payment types. There is a clear preference among these younger consumers for
other payment types, underlining the credit card industry’s struggle to reinvent
itself for the digital age75.
Crina, London
“
Young people today face an
uncertain future as a result
of the double-dip recession,
with a challenging and
competitive employment
market, government
spending cuts and the high
cost of housing, travel and
general living costs.
“
Even if they could get a mortgage, saving a deposit for their first home is all but
impossible. As a result, they rent their homes and even this is challenging with
rising rental charges, which only exacerbate their lack of ability to save for the
future.
If I want to borrow money
from the bank, I have to do
some paperwork and that
can take 1 or 2 days and I
need that money now.
“
Many have been to university where they had access to student loans, but
having graduated, the credit options have dried up, partly because the
mainstream lenders are not lending as freely as they once did and partly
because they have no credit history to call on.
This shunning of more traditional credit options can also be seen in the store
cards sector. Research76 suggests that while there has been a general decline in
store card debt in recent years, it is a declining problem for younger borrowers
but a growing issue for older ones. The average store card debt for those over 60
has increased by £36 since 2009 but has fallen by £75 for under-25s.
So, traditional credit is either not available or is unappealing for young people.
75 Precious Plastic, PwC, February 2012
76 Consumer Debt and Money Report, Q2 2012, Consumer Credit Counselling Service (Now StepChange Debt Charity)
25
CREDIT CRUNCHED
THE HOUSING CHALLENGE
The average house price for first-time buyers was £173,000 in November 2012,
which is an annual increase of 2.7%77.
The typical first-time buyer deposit in November 2012 was 20% (around
£31,106). The average first-time buyer borrowed 3.22 times their income and
the average first-time buyer loan was an estimated £124,42478.
With this sustained depression of the housing purchase market, renting is the
only option for many.
In the rental market, demand for property rose at its fastest rate since the early
part of the year during the three months to October. RICS say that 15% more
surveyors reported tenant demand rising rather than falling over the period.
Rents are expected to rise by 4% over the coming year79.
TECH-SAVVY
70% of 18-24 year olds now have a smartphone80 and expect to be able to
order products and services 24/7 without any drop in service levels.
PwC highlighted this trend in its report which said: ‘While still relatively small
as a proportion of overall unsecured lending, smaller and more agile players
[payday lenders] are leveraging digital technology to deliver an innovative and
fast service, which is particularly attractive to younger people.’81
So, whilst young people may have a reduced number of credit options, the way
they access that credit is of increasing importance.
Our research82 shows that 19% of payday customers are aged 18-24 and that
the top priority in the mind of this customer is the speed of providing the payday
loan. Followed by clear explanation of charges and fees, and being treated with
dignity and respect.
77http://www.ons.gov.uk/ons/rel/hpi/house-price-index/november-2012/stb-november-2012.html
78http://www.creditaction.org.uk/assets/PDF/statistics/2013/february-2013.pdf
79http://www.creditaction.org.uk/assets/PDF/statistics/2013/february-2013.pdf
80 Comscore, March 2012
81 http://www.pwc.co.uk/financial-services/publications/precious-plastic-2012.jhtml
82 Harris Interactive survey of 1,105 payday customers, October 2012
26
CREDIT CRUNCHED
27
CREDIT CRUNCHED
CREDIT CRUNCHED
Buggies and
bigger bills
Insight: People value the local
relationships they have with shortterm lenders. They want to use a
local and immediate solution to
money needs rather than a
distant call centre geared
to much larger, less frequent
financial choices.
KEY FACTS ABOUT THIS GROUP
Age:
35-44
Income:
11%
19%
12%
11%
11%
11%
10%
4%
Less than
£10,000
£10,000
to
£14,999
£15,000
to
£19,999
£20,000
to
£24,999
£25,000
to
£29,999
£30,000
to
£39,999
3%
1%
£40,000 £50,000 £75,000
to
to
to
£49,999 £74,999 £99,999
Employment:
Marital status:
54%
46%
Single
Married
16%
71%
3%
10%
63% HAVE KIDS
Full time employment
4%
Will resort to their credit card and this is the only group
to pawn items if they hadn’t taken a payday loan
Part time employment
Self employed
Unemployed**
THEY BORROW FOR:
As well as for:
DAY TO DAY FAMILY NEEDS
Emergency
needs
Food
Pay off loans
& credit cards
Utility bills
** Unemployed: includes those who are unable to work as well as those who drop in and out of work but were unemployed when interviewed. It also
includes men or women taking out loans on joint accounts where only their partner is working.
28
29
CREDIT CRUNCHED
“
It was easy to go to them
as they were quick and
convenient. The shop
staff were very helpful and
clear with the terms and
conditions. The service is
good for people who only
ever need a short-term
boost to their finances.
“
Tracy, Ellesmere Port. Single mum
with two children.
HOW MUCH DO THEY BORROW?
The impact of parenthood is stark. Married men with children borrow £229 per
loan whereas married women with children are slightly more conservative at
£198 per loan.
WHY DO THEY BORROW?
Although they do not borrow for specific child-related expenses, this group
borrows for outgoings that are important to the whole family. There is little room
for luxury here.
The main reasons married men with children borrow are emergency costs
(personal or family) (22%), paying off other loans, bills or credit cards (17%)
and paying utility bills (14%).
Married women with children, on the other hand, prioritise payment of
outstanding utility bills (18%), paying off other loans, bills or credit cards (15%)
and food shopping (15%).
This is the prudent financial management of a credit crunched family. They
are squeezed by rising prices but focused on their financial affairs so paying off
long-term debt or bills where there is a high penalty for a missed payment are a
priority.
There are nearly 8 million families with dependent children in the United
Kingdom and having children sends a shockwave through the household
finances.
As with the Skinny Jeans group, life decisions are delayed and starting a family
is no exception. The average age to have a first child is now 2883 but a fifth of
babies are born to mothers older than 3584 and 65% of babies have fathers
aged over 3085.
The financial challenges faced today may well account, at least partially, for
this. Starting a family is expensive. New parents face a £10,261 bill during the
first twelve months of their new baby’s life, taking into account expenditure
on equipment such as buggies, cots and prams, but that increases to £14,140
KEY FACTS
Married men with
children borrow
Married women with
children borrow
£229
£198
per loan
per loan
83http://www.ons.gov.uk/ons/rel/vsob1/characteristics-of-Mother-1--england-and-wales/2011/sb-characteristics-of-mother-1.html
84http://www.ons.gov.uk/ons/dcp171778_296157.pdf
85http://www.ons.gov.uk/ons/rel/vsob1/characteristics-of-Mother-1--england-and-wales/2011/sb-characteristics-of-mother-1.html
30
CREDIT CRUNCHED
The delayed start to parenthood allows this group to establish their career and
increase earnings to a level where they can consider buying a family home and
absorbing the costs of rearing children. Unfortunately, with jobs and earnings
under pressure, this is not as easy as it sounds.
1 in 3 households (5.6m) fall into low to middle income Britain, which the
Resolution Foundation defines as those people relying primarily on their own
earnings but with incomes below the median (middle) in the UK. There are 9.8m
adults (5m men, 4.8m women) of whom the vast majority are workers (7.8m) as
well as 5m children. 60% of these people are homeowners, 24% are renting87.
“
They were very good. I felt
under no pressure from
the staff in the store, who
were extremely helpful and
helped me to feel confident
in what they were doing.
They were thorough in
checking everything and
overall very responsible.
The added drain on resources of starting a family means that low to middle
income households are unlikely to be saving for the future. 55% have no savings
and two-thirds have less than a month’s income in savings88.
“
for the next three years with toddlers86. These costs, on top of increasing
expenditure for essentials such as accommodation, utilities and travel identified
at the start of this report, add significant pressure to household budgets.
Kelly, Ellesmere Port. Married
mother of two children.
With the added responsibility of parenthood it is unsurprising that mums and
dads of under-twos worry about their income and finances (56%), argue about
money with their partner / family (22%) and see an increase in their household
debts (19%)89.
Money is tight and means that financial shocks have a significant impact. Their
income is all but committed so the household budget lacks any real flexibility to
cope with unexpected bills. So it is perhaps unsurprising that this group had the
highest proportion saying they found it difficult to meet the repayment date,
suggesting that they need payday loans the most.
But there is a plus side to this. New parents are likely to be trying to get to grips
with their finances. Around one in three people with children aged one (29%)
say having children has motivated them to tackle their debts90. On top of this,
those with two-year-olds are most likely to know exactly how much they spend
on bills and essentials each month (26%) compared to an average of 19%
across parents of all age groups91.
KEY FACTS
The first years cost for having a baby86
This increases for the next three years
with toddlers86
£10,261
£14,140
86http://www.lv.com/upload/lv-rebrand-2009/pdfs/other/11665_LV_COAC.PDF
87http://www.resolutionfoundation.org/publications/squeezed-britain-2013/
88http://www.resolutionfoundation.org/publications/squeezed-britain-2013/
89 http://www.aviva.co.uk/media-centre/story/17083/birth-to-two-years-is-most-financially-stressful-t/
90 http://www.aviva.co.uk/media-centre/story/17083/birth-to-two-years-is-most-financially-stressful-t/
91 http://www.aviva.co.uk/media-centre/story/17083/birth-to-two-years-is-most-financially-stressful-t/
31
CREDIT CRUNCHED
“
Going into the bank was
intimidating. I felt like I had
to dress up; I felt like I had
to look really smart for them
to take me seriously and
they still turned me down!
So what’s the point? In a
payday loan shop you can
just be how you are.”
“
Jennie, London
Our research shows that people with dependent families borrow slightly less
(£175.10) than those without (£180.60). In times of need, of our three groups,
these people are most likely to call on their credit card, which is unsurprising as
this is the generation that was wooed most by the card providers in the 90s and
noughties, but are much less likely to borrow from a family member.
So their attitudes are certainly changing. With little room for manoeurvre,
borrowing is essential but has to be taken on selectively, used effectively for the
specific need and then paid off so that the debt does not become a burden in
the long-term.
That’s where short-term loans really meet their needs. There is no temptation to
use up a credit limit that they cannot repay or to pay back a minimum and allow
their debt to revolve. Short-term borrowing gives them control and the speed
of delivery, in a hectic household with work and children consuming all of their
time leaving them with precious little opportunity to manage their finances,
minimises the effort whilst meeting their needs.
That said, they are more likely to visit a store than go online for their loan. They
are often settled in their community and like the face-to-face element of the instore service. This allows them to build a trusted relationship with a local cashier
which, in turn meets their need for close control of their finances.
This group are certainly working but they are often receiving additional income
from Child Benefits and Working Tax Credits.
32
CREDIT CRUNCHED
33
CREDIT CRUNCHED
CREDIT CRUNCHED
Burdened
baby boomers
Insight: Control over
borrowing smaller amounts
is important. This group
has a range of choices
available to them including
their savings or family
members but sometimes
value speed and control when
dealing with a £300 problem.
KEY FACTS ABOUT THIS GROUP
Age:
45-54
Income:
14%
17%
13%
10%
11%
15%
Less than
£10,000
£10,000
to
£14,999
£15,000
to
£19,999
£20,000
to
£24,999
£25,000
to
£29,999
£30,000
to
£39,999
4%
£40,000 £50,000 £75,000
to
to
to
£49,999 £74,999 £99,999
Employment:
Marital status:
45%
35%
20%
Married
Single
Divorced/Widowed
3% 1%
16%
71%
2%
1%
10%
38% still have dependent children
Would ask for help from a family member if they hadn’t
21% taken a payday loan
Full time employment
Part time employment
Self employed
6%
Would use savings if they hadn’t taken a payday loan
Retired
Unemployed**
THEY BORROW FOR:
University
fees
Bank of Mum
and dad
Emergency
expenses
** Unemployed: includes those who are unable to work as well as those who drop in and out of work but were unemployed when interviewed. It also
includes men or women taking out loans on joint accounts where only their partner is working.
34
35
CREDIT CRUNCHED
“
My Mum went into hospital
and a loan put money in
my pocket until payday so I
could get to mum and feed
her because she doesn’t
eat hospital food. So even
though there was extra
interest, for me it worked.
It was straightforward, I
knew what was happening,
I knew when it was coming
out, so it didn’t bother me.
“
Brixton*
This is the group which said it was not at all difficult to repay on time, suggesting
that payday was an active choice rather than a last resort.
40% earn more than £20,000 a year. 7% earn more than £40,000.
HOW MUCH DO THEY BORROW?
The average amount borrowed for this age group is £184.20 per loan. Married
men with children, however, borrow significantly more at £212.
WHY DO THEY BORROW?
This is the only group that says they have taken out the loan specifically for
university expenses (books, fees) for their children.
It is also the group that has the highest proportion of family emergencies to pay
for (18%).
In years gone by, reaching middle age meant an empty nest, home ownership
and early retirement on the horizon. This is no longer the case. We are working
until we are older, living longer and paying mortgages off later.
Today’s group of 45-54 year olds are the sandwich generation. They are parents
of grown up children who are increasingly calling on the ‘bank of Mum and
Dad’, but they are also children of parents who are living longer and who need
their financial support92.
In the vanguard of the ‘delayed life decisions’ cultural shift (buying a house,
getting married, starting a family), it is inevitable that a high proportion of this
generation of middle agers still have dependent children.
Many more have children that are no longer classed as dependent (i.e. over 18)
but are still financially reliant on their parents as they go through university or
enter the world of work. With deposits for mortgages now out of reach for many
youngsters, the sandwiched generation are footing the bill and may even be
paying two mortgages – their own and their children’s. The end result is that the
financial demands of their offspring last well into middle age.
*From CFA Vanilla research
KEY FACTS
The average amount borrowed
by this group is
Married men with
children borrow
£184.20
£212
92http://www.pewsocialtrends.org/2013/01/30/the-sandwich-generation/
36
CREDIT CRUNCHED
Recent research found that about 20% of young drivers in the 1960s had their
car bought for them. Today this stands at 33%, showing how difficult it is for
young people to be financially independent of their parents93.
Furthermore, a child’s first year of driving can cost their parents as much as
£8,00094. For younger (17-22 years old) male drivers, the average premiums are
more than £3,500, while young women face average bills of almost £2,30095.
This reality means their parents are increasingly having to pick up the bill. And
it’s not just driving costs – many children require their parents’ help to purchase
a house, and a growing number of 40 year olds still holiday with their parents
because they cannot afford to travel by themselves96.
Over the last 50 years (1960-2010) the average life span has increased by
around 10 years for a man and eight years for a woman. The most common age
at death in England and Wales in 2010 was 85 for men and 89 for women97.
With increases in care costs and the increased cost of essentials eating up the
state pension, the sandwiched generation find themselves being called upon
increasingly by their ageing parents.
Carrying the financial burden of both their children and parents means fewer
people in their 40s and 50s are now able to use their pre-retirement years to pay
off their mortgage98. It also gives them tough financial choices. Their salaries
are certainly higher than the other groups identified in this report, but they are
living to their means and the extra responsibilities stretch their salaries and their
wallets.
They may well enjoy two holidays a year, but spending what they earn means
they have no spare capacity for unexpected or emergency costs. And with house
prices stagnant, they can no longer rely on the increasing value of their home as
a “nest egg”. If they borrow, they have to pay back now.
Rather than putting emergency expenses on the plastic, they are most likely to call
on a family member (21%) or their personal savings (6%) if they hadn’t taken
out a payday loan. But a short-term loan appeals as it is quick to arrange and
relatively anonymous (online) but has fixed costs and no risk of long-term debt.
Given their higher salaries and the fact that they do have savings, this is the
group that said it was not at all difficult to repay on time, suggesting that
payday was an active choice. Clearly this is not the case for every customer as
some have no other option, however it appears that short-term loans are being
used as a substitute for credit cards by a significant proportion of this group,
because in uncertain economic times they are less willing or unable to take on
longer term debts.
93http://www.uswitch.com/blog/2012/09/21/young-drivers-relying-on-parents-to-pay-for-car-and-insurance/
94http://www.uswitch.com/blog/2012/09/21/young-drivers-relying-on-parents-to-pay-for-car-and-insurance/
95http://www.uswitch.com/blog/2012/09/21/young-drivers-relying-on-parents-to-pay-for-car-and-insurance/
96http://www.uswitch.com/blog/2012/09/21/young-drivers-relying-on-parents-to-pay-for-car-and-insurance/
97http://www.ons.gov.uk/ons/rel/mortality-ageing/mortality-in-england-and-wales/average-life-span/index.html
98http://www.dailymail.co.uk/news/article-2266193/Why-middle-age-getting-harder-Thousands-40s-50s-having-care-frail-parents-AND-adultchildren.html
37
CREDIT CRUNCHED
CONCLUSION
PEOPLE’S BEHAVIOUR HAS ADAPTED TO MATCH THE CLIMATE
In the post-credit crunch era, the attitudes and behaviours of UK consumers
towards their finances have fundamentally shifted. This is partially due to factors
beyond their control but much relates to their trust in financial institutions and
desire to regain control.
They have had enough of the boom and bust of previous generations. The
house price rises of the last decade gave a false sense of increasing wealth and
security, which has now been exposed. And with living costs rising but savings
and assets plateauing in value, combined with lower wages and job security,
there is an acceptance of responsibility for not over-burdening themselves with
debt on the promise of good times ahead.
As a result of the credit crunch they trust financial institutions less and their
brand loyalty to organisations that take them for granted or treat them poorly is
diminishing. Young people have entered the adult world without ever having had
access to the low interest rates and free flowing credit that was available prior to
2008. Their attitudes are defined by need and availability.
At the same time, they want control and transparency so are paying down their
long-term debts.
There is no longer an average family unit and people no longer get married and
have children when they are 20. They are single longer and stay at home longer.
When they move out it is to rented rather than bought houses, unless the ‘bank
of Mum and Dad’ helps them to raise a deposit. They are starting a family in
their 30s and often both parents have to work to make ends meet and cover the
significant costs of rearing children.
The impact-horizon of people without a mortgage is not 25 years but in many
cases, 25 days. This shorter money-management timeframe warrants quick
decisions.
Rising costs of living and spending to their means, with all income fully
committed, has resulted in a lack of flexibility. So the impact of financial shocks
is all the more significant. Those with savings may call on them but they also
want to choose whether to set this money aside.
RESPONSIBLE AND RATIONAL CONSUMER CHOICES
As a result, people are making responsible and rational choices.
Responsible because they need access to credit but also want to pay it back
quickly.
Rational because the cost of their credit has to be transparent and because they
want to call on it when they need it. So it has to be cheaper and faster than a
bank or a more informal arrangement elsewhere.
38
CREDIT CRUNCHED
ATTITUDES TO MONEY MANAGEMENT ARE CHANGING
Attitudes to debt are different. Without a pool of available funds to call on,
credit is now a tool of financial management rather than one of last resort.
People are open to new ideas about financing and they are happy to use
technology to solve their problems.
CONSUMER PROTECTION AND REGULATION
The challenge for any emerging industry is ensuring that consumers are
protected at all times from the rogues that will try and capitalise on the new
market opportunity.
This is particularly true of the online world where anonymity and security
increase the potential for fraud. But the internet has become such an integral
part of life for all parts of society, and technology has evolved to such a degree
that this is no issue for reputable online businesses and tech-savvy consumers.
Nonetheless, standards and regulation need to serve the needs of the whole of
the market, not be polarised on protecting the minority of customers that are
deemed to be vulnerable.
This is the opportunity for the Financial Conduct Authority, which assumes
responsibility for consumer credit in April 2014.
It is vital that the new regulator is able to consult robust evidence and hear the
voice of the customer in such a fast-moving, rapidly-growing yet complicated
area before making decisions with far-reaching implications.
This report sets out a body of evidence that should not be ignored.
The fact is that people from all walks of life are moving with the times. Their
needs are developing and their attitudes and behaviours towards their finances
have altered dramatically as a result of the financial downturn since 2008.
This is not a blip and the future will see this trend continue, so it is vital that the
consumer protections put in place by the industry and the statutory regulation
take account of these cultural and economic shifts to safeguard all customers,
not just those that are perceived to be in need of protection.
The industry is already responding to these changing needs and wider
demographic through an enhanced set of standards, embodied in the CFA’s
Code of Practice, which came into force in November 2012. This includes specific
consumer protection measures including enhanced affordability assessments;
a commitment to transparent communication for the benefit of all customers;
limiting the number of times a loan can be rolled over to prevent short-term
loans becoming long term debts; and specific help for those that find themselves
in financial difficulty such as freezing the interest and charges, arranging
39
CREDIT CRUNCHED
extended repayment plans and providing time to get their financial affairs in
order.
Although this is a voluntary Code, it is backed up by an independent compliance
monitoring and enforcement body, called the Short-term Lending Standards
Board (SLCB), to ensure the standards are met.
The CFA is continuing to work with the government, regulator, consumer groups
and debt advisers to identify further consumer protections and improvements in
service delivery.
This will drive further amendments and additions to the Code in future which will
be agreed in partnership with the SLCB.
Short-term lending is an industry that is growing and maturing against a
continued backdrop of economic uncertainty. Understanding the increasingly
diverse demographics, challenges and issues that its customers face is vital for
industry and policymakers alike.
It is clear that in 2013, UK households are most definitely credit crunched
and so the statutory regulation implemented and enforced by the Financial
Conduct Authority from 2014 must take account of these changing needs and
behaviours.
40
CREDIT CRUNCHED
APPENDIX 1
RESEARCH AND METHODOLOGY
In 2012, the CFA commissioned the largest study of UK payday customers that
has ever been undertaken. This comprised extensive telephone research and
a number of focus groups which was conducted between July and November
2012.
All research was undertaken by independent researchers in accordance with
Market Research Society guidelines.
TELEPHONE SURVEYS
Leading financial services research consultancy, Harris Interactive, conducted
the telephone survey.
In total there were 1,105 telephone interviews completed amongst customers
of six Payday lenders who are members of the CFA. Each interview lasted for
approximately 12 minutes and was conducted by telephone between Monday
24th September 2012 and Monday 29th October 2012.
FOCUS GROUPS
The focus groups provided a further level of feedback. These two one-day
workshops were attended by 37 customers (both payday loan customers, and
those who had used - or considered using - similar forms of alternative credit,
such as pawnbroker loans, home credit or catalogue loans).
They were held in Brixton, London in late July 2012, and Camden, London in
mid-October 2012. Vanilla Research facilitated the workshops.
The locations were chosen as the wider areas are home for a number of payday
loan outlets. A total of 18 participants in Brixton and 19 participants in Camden
were brought together, recruited both on-street (10 participants in each case)
and from lists of payday loan customers provided by the Consumer Finance
Association (8 in Brixton, 9 participants in Camden). Some of those recruited
on-street had themselves used payday loans in the past.
Summary videos of these focus groups are available at www.cfa-uk.co.uk
41
CREDIT CRUNCHED
APPENDIX 2
“
Payday lending has grown
rapidly in the UK. The Office
of Fair Trading estimates
that the market was worth
£2.0 to £2.2 billion in
2011/12.
ALTERNATIVE FORMS OF LENDING
There are many forms of consumer credit that are considered ‘alternative’ or
outside of the mainstream.
Some of these have been around for generations, others are completely new.
What is certain is that there is a demand, which mainstream lenders no longer
satisfy.
PAYDAY OR SHORT-TERM LOANS
Payday loans are short-term loans, usually for small sums, that are due to be
repaid in one or two installments within two months. These loans are often
known as ‘payday loans’ because the customer usually repays the loan once
they have received their salary. Borrowing small sums on a short-term basis
enables customers to manage personal cashflow by smoothing out the peaks
and troughs of income and expenditure.
“
Payday lending has grown rapidly in the UK. The Office of Fair Trading estimates
that the market was worth £2.0bn to £2.2bn in 2011/12, which corresponds to
between 7.4 and 8.2 million new loans; this is up from an estimated £900m in
2008/0999.
CREDIT UNIONS
Credit unions are non-profit mutual financial organisations, which are set up
within a community to provide a service to the people living within it. In order
to become a member there must be a ‘common bond’ i.e. living in the same
town, working in the same industry or belonging to the same church, trade union
or association. Credit unions are owned and controlled by their members. As
of 2012, organisations as well as individuals are eligible for membership of the
credit union 100.
The Association of British Credit Unions (ABCUL) advises that there are
approximately 400 credit unions currently available in England, Scotland and
Wales with just over one million members. As of June 2012 there was £776m
being saved across Great Britain with £602m out on loan to members101.
PEER-TO-PEER LENDING
Peer-to-peer lending (also known as person-to-person lending, peer-to-peer
investing, and social lending; abbreviated frequently as P2P lending) is the
practice of lending money to unrelated individuals, or “peers”, without going
through a tradition financial intermediary such as a bank or other traditional
financial institutions. This lending takes place online on peer-to-peer lending
companies’ websites using various different lending platforms and credit
checking tools.
99http://www.oft.gov.uk/news-and-updates/press/2013/20-13#.UUrhBamFbww
100http://www.moneysavingexpert.com/banking/credit-unions
101http://www.abcul.org/media-and-research/facts-statistics
42
CREDIT CRUNCHED
Keen to encourage alternative lending policies, the Government recently
announced that four peer-to-peer lenders were to be given a combined total of
£55m in taxpayers’ money, alongside a private donation of equivalent value.
This £110m fund is part of the £1.2bn Business Finance Partnership, which has
been created to diversify commercial funding102.
Zopa, one of the larger peer-to-peer lenders, has around half a million members
who have now lent more than £285m to each other.
102http://www.hm-treasury.gov.uk/bfp.htm
43
© Consumer Finance Association, May 2013
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Registered in England no. 6731978. Registered office: 78 Pall Mall, London SW1Y 5ES
Consumer Finance Association
T: +44 (0)203 178 7408
F: +44 (0)203 170 5909 E: enquiries@cfa-uk.co.uk
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