Will Covid And Klarna Kill The Credit Card
Credit cards were formerly advertised as a “flexible companion” for shoppers by British banks. But even the CEO of one of the fastest-growing card issuers in the country now confesses that “customers are falling out of love with it.”
After credit cards were introduced in the late 1960s, it spread so quickly and took MPS only five years to warn that “we are advancing toward what might be called a ‘cashless society.’”
Parliamentarians are still concerned about the shift away from cash half a century later, but some question whether cards will have any role in the new society are emerging.
Last year, the rapid arrival of the coronavirus pandemic wreaked havoc on credit card borrowing globally. But even before that, the UK’s economy was slowing. According to Bank of England data, the annual increase in credit card lending peaked at nearly 10% in 2018 but dropped to less than 5% by 2020.
Card issuers were already dealing with tighter rules, growing demand for debit cards, and the expanding popularity of alternative credit sources such as “buy now, pay later” programs, and the crisis has just added to their problems.
Senior bankers may be more hopeful, but the confluence of pressures is causing them to rethink their business models to combat the threat.
At its finest, this reform might provide customers with a broader range of payment options from both start-ups and incumbent banks, as well as more precise terms, cheaper interest rates, and less hidden costs.
Many customers have long considered high credit card interest rates, which are currently around 27%, obscene. Customers with lower credit ratings, on the other hand, may find it more challenging to get the best offers, and regulators are concerned that certain start-ups may be just as guilty of risky lending and over-aggressive marketing as their predecessors.
Credit Cards Under Covid
With over 52 million accounts, UK has among the highest rates of credit card adaptation worldwide. However, the numbers have fallen by three million in the 12 months to May.
Between the start of the epidemic in February 2020 and June this year, outstanding credit card balances fell to £41 billion, more than £14 billion, as more consumers trapped at home had less opportunity to s, and many decided to pay off previous debts—according to UK finance.
However, debit card usage has continued to rise despite brief decreases during lockdowns, whether through physical cards or digital systems such as Apple Pay that are linked to a card. According to UK Finance, debit card spending in May was up 18% year on year and 9% higher than the same month last year.
As the economy has reopened in recent months, credit card spending has increased, but balances have not increased at the same rate, as more customers pay off their bills in full each month.
Customers are expected to spend up their savings from last year and resume big-ticket purchases. Still, some CEOs fear the experience of living under lockdown has caused a permanent shift in behaviour.
A Report By Barclays
According to recent research by Barclays, even under the most optimistic “bull case” assumptions, credit card balances in the UK would not return to 2019 levels before the end of 2023.
According to Aman Rakkar, a Barclays analyst, credit card balances usually take a long time to accumulate until industry risk appetite rises and customers suddenly want to borrow.
The influence of some longer-term trends has been obscured by the rapid decline in spending caused by lockdowns. Banks must now begin assisting clients in “chronic debt” in repaying their debts under new guidelines.
When a consumer uses their card, banks receive a small amount of money in transaction fees, but most of those fees go to firms like Mastercard and Visa, which provide the infrastructure that allows banks to issue cards. Lenders make the majority of their money from people who pay a lot of interest. This puts one of their key sources of income in jeopardy.
The new laws will aid vulnerable borrowers, but they will also make banks wary of lending to them in the future, and comparable consumers who they believe would be less profitable. After discovering that certain banks were considering imposing blanket prohibitions on customers in persistent debt, the Financial Conduct Authority had to act.
Denzil is an experienced writer and a procurement graduate on a mission to eliminate poor regurgitated content while advocating for top-notch digital content. When he’s not writing, Denzil joins the rest of the world watching the English Premier League games.