by GK Strategy 9th February, 2018

Overdrafts: the new payday loans?

Questionable practices among payday loan and credit card providers continue to attract the scrutiny of politicians like Stella Creasy MP, who this week described credit card providers as “the new Wongas.” But overdrafts, rather than credit cards, are the real issue for poorer consumers.

New research by GK Strategy and onefourzero found that demand for overdrafts increased by 23% in 2017. Overdraft demand is concentrated in the North of England and the Midlands, while credit card demand is highest in the affluent towns of the South East.

Our report, Life on credit: the new normal, found that higher demand for both forms of credit reflects a society where credit is the ‘new normal,’ with consumers using credit to cope with the rising costs of living rather than using it as a last resort. This has had a major impact on savings too: an ING International survey published yesterday showed that 27% of people in the UK have no savings on which to fall back on in an emergency.

The issues that led the payday loan sector to lose its social license to operate – high fees and interest rates, poor transparency and consumer information – also apply to overdrafts.

The FCA said last week that they will consider intervening in the market for overdrafts: “For unarranged overdrafts, we see no clear relationship between how much is borrowed and what is charged.”

The increase in demand for credit is also driven by the unpredictability of income within a growing gig economy, now covering approximately five million people. Workers outside the gig economy are resorting to credit as living costs increase but wages stagnate.

Credit providers, whether they are banks or credit card companies, need to offer credit with predictable, transparent and proportionate costs, or else they face much stricter regulation and a dramatic loss of consumer trust, as payday loans have done. The FCA has questioned whether unarranged overdrafts “should have a place in any modern banking market.”

Providers of subscription services can also do much more to help consumers. Consumers now spend on average £56 per month on such services – up from under £20 in 2016, but these services can be inflexible and unclear, with consumers often unaware of the risks and costs they are taking on.

Many companies offering products and services on a subscription or regular payment basis fail to give customers the flexibility to manage their costs. Cancelling or revising monthly payments to gyms, broadband, phone or software providers is often frustratingly difficult, and can carry sharp penalties. This also applies to non-subscription arrangements where eventual ownership is an option, such as Personal Contract Plans for cars.

As ordinary people become squeezed financially, it falls on banks and credit providers to do what they can to help customers avoid getting into ‘problem debt.’

Before life on credit becomes an inescapable reality for millions more people, regulators and credit providers should ensure consumers have a clear idea of the risks and costs they are taking on.

Open banking should create the opportunities for alternative providers to enter the market and create innovative credit or budgeting products to help avoid problem debt, and give consumers a much better grasp of their finances. Outside the financial services sector, companies need to do more to help consumers understand costs and affordability.

Britain’s credit problem was once strongly associated with the most vulnerable members of the society, and seen as a last resort. Reliance on credit is now the ‘new normal’ for much of Britain. Providers need to understand that the political debate and public attitudes around credit have changed, and that they now must demonstrate excellent practices when it comes to lending to vulnerable customers.

If you would like to find out more about GK’s Life on Credit report and research, or want to know more about how we can help companies offering financial or subscription services, please contact Martin Summers at martin@gkstrategy.com

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