Consumers International World Congress
I saw a movie in 1962. It was called - Live now, pay later.1 A warning about
the dangers of credit.
Forty years on the warning voices say the same thing, but the credit world has
moved on. Borrowing per household has increased astronomically and
consumer goods bestride the globe.
A new cry – almost as strident as the warnings – is the call for everybody to
be able to get into debt. The respectable name is financial inclusion.
What do consumers want? More debt or less debt? Of course our slogan at
the time of Live now Pay later was “What do we want – Everything; When do
we want it – Now”.
We now live in more moderate times, but wanting it now is a healthy
consumer characteristic which will be with us for a long time.
In order to be able to get it now we need not just money but access to money.
And we need not just access to money we have now, but immediate access to
money we shall have in the future.
The world of lending has made that available to consumers with
unimaginable efficiency – imagine the UN or the OECD creating an
interoperable network worldwide of holes in walls through which we can get
hold of money in any currency from our savings or our borrowing
This consumer paradise has helped the economy as well as it has helped us:
the consumer’s access to lifetime income spins the wheels of commerce,
creating work and jobs in factories worldwide.
Research by Burke et al2 has shown that the velocity of spending through
credit cards gives the economy an additional boost.
At high level, quot;The totality of lending leads to the totality of debt”. More than
90 percent of consumers borrow, spend and repay wisely. Research for the
European Union by Dourmashkin et al3 shows that in a liberal economy with
light regulation, repayment is easier rather than harder for consumers.
But if 90 or more percent of us lead charmed lives, perhaps seven percent of
borrows hit the buffers. A small percentage but a large number of people.
The question is: how do we help them while avoiding polarisation between
state funded, rights-based and often adversarial services on the one hand and
the for-profit companies on the other, who may not act in the best interest of
the borrower? Here, I would argue, consumer credit counselling, which acts
for consumers and engages lenders, offers the magic bullet.
Its efficiency however depends on asymmetry of information, which returns
us to the role of the credit card.
Here, as of now, the world divides into the anglosphere – where the credit
card accounts for a high proportion of borrowing - and the rest.
To illustrate the gulf for you; in the European Union, UK and Ireland account
for three-quarters of all credit card debt - that is the dividing line between the
anglosphere and the rest.
The trend worldwide is towards the wider use of the credit card and we are
likely to see elsewhere a pattern of individual multiple debt, with credit cards
and personal loans accounting for over 90 percent of borrowing between
them, more or less evenly shared.
But there is a major difference between the credit card on the one hand and
the personal loan on the other.
The personal loan is in the sensate band of credit - like the mortgage. The
consumer is fully conscious of borrowing.
The credit card on the other hand is insensate – because for many
transactions, at the moment of payment, neither the consumer, nor the bank,
nor the merchant knows whether borrowing is taking place.
As a result the credit card has dangerously blurred the distinction between
borrowing and payment and that is why it calls for special treatment.
What is to be done to protect the small proportion of consumers at risk
without inconveniencing the vast majority of confident consumers?
Micawber put it simply quot;Annual income twenty pounds, annual expenditure
nineteen nineteen six, result happiness. Annual income twenty pounds,
annual expenditure twenty pounds ought and six, result miseryquot; 4
That simple truth can be extended into lessons, courses and no doubt degrees
as credit replaces annual income with access to lifetime income.
But there are doubts about the efficacy and value for money of education in
First, there is little evidence that education works. I refer you to a paper
presented last year to G8 by the Federal Reserve Bank5, which evidenced only
two examples of proven success, in both cases involving the raising savings
ratios in individual US states.
The OECD produced last month a non-proven verdict on national education
In our sector there is a clear need for evidence-based education; it is no
Education at time of need is obviously more useful - that is the moment when
the consumer is most likely to want it and be receptive. But you cannot
educate away the unexpected – which is the cause of many debt problems –
other than perhaps warning borrowers that the unexpected might happen to
But borrowing is as much about behaviour and psychological need as about
finance. We have started behavioural work in the Foundation for Credit
Counselling but more needs to be done7.
The stigma attached to borrowing has virtually disappeared. Through
student loans in most countries governments are saying - we think borrowing
is part of life.
At the same time the main cause of financial distress is distress of some other
kind - neither overborrowing nor overlending.
These stresses hit our relationships, our health, our ability to work. Under
their pressures our normal common sense crumbles as does any education we
might have been given.
WHO papers in progress suggest that half the people in debt are clinically
depressed and vice versa. When helping the overindebted we are not dealing
with fully rational people. That is why we at FCC are working on an online
form of free treatment with cognitive behaviour therapy, specially adapted
for people with current debt problems.
In these circumstances what is to be done by governments and lenders to help
the victims without harming the happy users of modern services?
Regulation or legislation is rarely the answer beyond a framework. Too often
the laws of unintended consequences override the laws of good intention.
We need efficient and understanding regulation, ready to out bad practices -
such as stealth charges by banks or turning payment insurance into a bonanza
for the lender.
And that is where in recent years lenders, and credit card companies in
particular, have ceased to keep their part of the contract in the anglosphere
where good behaviour axiomatically earns light regulation in the interests of
Today the main onus to improve lies with lenders. They need to reflect
whether their own recent practices have damaged their own long-term
interest as well as inviting regulatory intervention.
The search for short term gain by individual lenders may well have imposed a
collective loss on the industry.
Lenders have relied too much on sophisticated risk modelling at the expense
of considering the consumer because they were sure that it would allow them
to lend beyond the rate of economic growth without incurring higher losses.
Lenders - American lenders in particular - have introduced business models
which rely for their probability on borrowers quot;teetering on the brinkquot;, which
regulation cannot ignore.
In the United Kingdom, lenders have developed products which depend on
penalties for their profitability and collectively…as charged in the Journal of
Business Ethics8…they have undermined responsible lending.
In the United States they have provoked the light touch regulators...the
Federal Reserve Bank and the Office of the Comptroller of the Currency to
In a speech last month9 John Dugan the Comptroller of the Currency
reminded us that “Congress has not been inclined to regulate much beyond
disclosure”. The theory is one to applaud…”if consumers are provided with
adequate information, they will choose the ones they want and like best and
banks will innovate and compete without government interference to meet
the consumers’ demand”
But John Dugan now sees a state of disequilibrium in consumer protection
such that – if credit card companies don’t clean up their act, the state will
have to step in. This is a mighty change in approach.
Already the Federal Reserve has proposed this year improvements in
disclosure including 45 days notice to consumers about rate changes. The
Comptroller is still not calling for a ban on penalty pricing but he is now
suggesting one further step…that consumers should be given the general
right to opt out of a rate increase.
So as we speak the old order in the anglosphere may be yielding place to
new10: the credit card companies are clearly in a last chance saloon.
That would not be good news for most consumers either…regulation imposes
costs and inconveniences as well as slowing innovation. So what are
consumers to do, other than watch the battle from the sidelines?
Consumers need to be rational. We all like something for free. But in recent
years the costs of financial services through cards and lending in particular
have been unfairly loaded on the unhappy and the improvident.
All consumers should pay fairly for the service they use.
Consumer organisations need to be ready to say - Charge most of us a little
Consumer organisations must engage both with regulators and lenders, but
engage with caution.
The road from engagement to co-option is a short one.
In addition to formal engagements there are techniques old and new for
calling lenders to account. The Office of the Comptroller of the Currency was
influenced by the number of complaints from members of the public as well
as vox pop on Capitol Hill. Credit cards are accounting for forty percent of all
the complaints about banks which come to the Office.
New media too have given new force to consumer power. The battle against
bad practice can be led by individuals and by websites in the new world as
well as by formal consumers with 20th century structures.
All of us here need to be not only prominent in organisations but ready for
the hand-to-hand battles too, if we are to be efficient and relevant in these
Ideally we shall persuade lenders to amend their practices in time so light
regulation can survive in the anglosphere and be attractive in other countries
where the wider use of cards can bring benefits to consumers. Otherwise we
shall come to agree unwillingly with the French poet, Theophile Gautier, who
warned us that the looser shoe also hurts the foot.
1British film directed by Jay Lewis, starring Ian Hendry, June Ritchie and
John Gregson 1962
2Burke T, Allison K, Whittaker M Spending Power: the link between credit cards
and retail sales, Credit Card Research Group, UK April 2003
3Dourmashkin N, Betti G, Rossi M C, Verma V, Yin Y Study of the problem of
Consumer Indebtedness: Statistical Aspects, OCR Macro for Directorate-General
for Health & Consumer Protection Commission of the European
Communities October 2001
4 David Copperfield by Charles Dickens
5Hogarth J M, Financial Education and Economic Development paper prepared
for Improving Financial Literacy International Conference hosted by the
Russian G8 Presidency in Cooperation with the OECD November 2006
6 OECD, Education at a Glance, September 2007
7Ata N, Bicakova A, Self-Control and Debt: Evidence from Data on Credit
Counselling European University Institute Finance and Consumption
Programme, June 2007
8Richards M, Palmer P, Bogdanova M, Irresponsible lending? A case study of a
UK credit industry reform initiative, Journal of Business Ethics October 2007
9Remarks by John Dugan, Comptroller of the Currency, to Financial Services
Roundtable, September 2007
10La Morte d'Arthur by Alfred, Lord Tennyson. quot;The old order changeth
yielding place to new.quot;