J o d of ConsumerStudies and Home Economics (1989) 13,293-306.
Credit cards, new technology and
consumer debt *
JEREMY MITCHELL Independent Consumer Policy Adviser, London
There has been a rapid expansion in conswner indebtedness in the U. The amount of
consumer debt has doubled in real terms during the lmt I0 years. The majority of
conswners are able to cope with their debt repayments, bur there are a sigtuficant
number of credit wualtia, open burdened with multiple debts. Credit car& have
played a significant bur not ovemhehing part in this h i e a s e in &bt. There are now 62
bank credit uydr for every I ad& in the U. II much higher incidence than in any
other European country. Credit car& have been aggressively marketed and sold, and it
u possible rhot thcy will now move downmorkrr, to comwners in lower income groups.
Thir possibility highlightc the need for a major consumer education campaign on the
cast of credit. U. consunurs' knowledge of and ability to compare credit interest rates
poor, especially among lower income consumers who are most at risk.
The explosion of consumer debt
In recent years there has been a sharp rise in the indebtedness of U.K.consumers,
as shown in Table 1.'
These figures show that, in money terms, total consumer indebtedness has
more than doubled in the four years to the end of 1988, with housing debt (i.e.,
mortgages) rising slightly faster than personal debt. Taking price increases into
account, both forms of debt have more than doubled in red terms since 1980.
Tab& 1. Gmsumer debt outstandiag in W.K. at end-year
Housing debt Personal debt All consumer debt
1984 108.535 22.307 130,842
1985 127568 26.1 12 153.680
1986 154,034 3.4
1987 183,544 35,566 219.110
1988 222,865 42,839 265,704
Corrapondcnce: Jeremy Mitchell. 214 Evering Road, London E5 S N , U.K.
'Based on a paper presented at thc Imtitut f u Fidicnstlungen Conference on
Unemployment and Consumer Debt, Hamburg, 23 Scptembcr 1989.
Credit cards pad amsumer debt
What are the implications of these national figures for individual households?
Table 2 shows the average indebtedness per U.K. household at the end of 1 8 ; 98
converted into dollars (at f 1 = $1.626)and DM (at f 1 = DM3-078) make cross-
national comparisons easier.
The average consumer debt outstanding per household at the end of 1988 of
€12,533does not take account of the fact that, at any one time, only 37% of U.K.
households have a mortgage’ and an estimated 47% have any personal debt
outstanding.* Taking these proportions into account, at the end of 1988 those
households with mortgages had an outstanding housing debt which averaged
f28,140($45,75&rDM86,615).Those households with any personal debt averaged
€4,300 ($6,95WDM13,235) outstanding.
By historical standards, these are very considerable sums. They represent a
substantial increase in the r t o of debt to income, though it is only fair to point
out that the r t o of debt to assets has not changed greatly. This is largely because
of the rise in the absolute and real value o house prices that has taken place in the
Precise international comparisons are difficult to make, but in general terns the
level of consumer indebtedness in the U.K. i lower than in the U.S.and higher
than in other European countries.
How does the use of credit and the level of indebtedness vary among different
kinds of U.K. households? Age is a significant factor. Of those between 25 and
44 years, 89% use one or more types of credit, including mortgages. The
proportion falls to 73% among people between 45 and 64 years and is as low as
28% among the elderly (over 65 years). Among young adults between 18 and 24
years, 71% are credit users. There is also some evidence that households with
children are more likely to use credit than those without.Y6
Evidence about how the amount of indebtedness is related to income is less
easy to interpret. It Seems that the amount of indebtedness increases with
household income, but the evidence that it is proportionately greater i less clear-
cut. However, households at the very bottom o the income scale (i.e., with an
income less than €2,500 per annum) seem to borrow proportionately less than
others, though those that do have little financial margin for debt repayment.’
Tab& 2. Average consumer debt outstanding per U.K.
hOusCbOld 8t end-1988
Housing debt P c m d debt All consumer debt
f 10312 2,021 12.533
f 17,092 3386 20,378
DM 32,356 6221 41,577
What are the reasons for this explosion in indebtedness in the U.K.? There seem
to be five m i contributory factors at work:
(i) Until recently, retail markets were relatively neglected by banks and other
financial institutions. Corporate markets were considered more profitable and
therefore more attractive. This was especially true of credit markets. The
situation started to change rapidly in the late 1970s and early 1980s. Corporate
lending to business became very competitive, leading to pressure on profit
margins in that market. In addition, corporate lending to Third World countries
led to many borrowers being unable to repay their debts on schedule, a situation
which remains largely unresolved today. The relatively high profit margins and
potential for expansion in retail credit markets have proved increasingly attractive
to lenders. For example, in the U.K. personal lending by banks has risen from
39.5% of a l bank lending in 1978 to 57.3% in 1986.*
(ii) There has been an increase in the range of different types of financial
institution marketing credit to consumers. For example, since the passing of the
Building Societies Act 1986, U.K. building societies have been allowed to offer
unsecured personal loans o up to f 10,ooO to consumers. In addition, many large
retailers - such as M r s and Spencer, House o Fraser, Burtons and
Debenhams - now provide credit directly to consumers. This move of U.K.
retailers into the credit business is echoed in France - for example, by Nouvelles
Galeries and Carrcfour - and some other European countries.
(iii) There has also been an increase in the diversity of types of credit available,
including credit cards, which are dealt with in more detail below.
(iv) The provision of credit is less and less linked to the goods or services that
the consumer is buying. Personal loans, credit cards -even second mortgages on
houses - offer the consumer a line o credit which can be used when the
consumer likes to buy what she or he likes. The consumer no longer has to apply
for credit in relation to a specific purchase.
(v) There has been a change in consumer attitudes to the use of credit. O r u
traditional proverbs about credit and debt - ‘Neither a borrower nor a lender
be’, ‘Out’of debt, out of danger’ - have rapidly acquired a musty, antiquarian
flavour which seems to many people to be of little relevance to modern He. Any
moral stigma attached to indebtedness is disappearing in all age groups and all
regions, and at all levels of income. Using credit is now an integral - and indeed
largely unavoidable - part of the fabric of life. As Janet Ford points out, using
credit is now ‘. . . a socially acceptable form of financial rrar~saction’.~
It is clear from a variety of sources that the majority of U.K. consumers do not
consider their indebtedness a burden, but that for a minority it represents a
Credit cards and CoMIIller debt
problem. For example, a recent national sample survey concludes on this point
‘Most credit users felt happy with their present commitments and, indeed, many
felt that they could take on more. Few users expressed wonies about paying off
their debts in future, although there were some instances of considerable credit
repayment difficu~ties among a minority of the samp~e.”O
It is not easy to quantify either the proportion of the population who may be
accurately described as the casualties of credit, or the extent of their problem.
However, the same survey provides a crude measure of the former, and focuses
on the contributory factors:
‘Just over a tenth bf credit users had experienced difficulties with repayment in
the last five years, the greatest incidence being among the 18-24 age group, and
those who were divorced or separated. Over a third of those who had
experienced difficulties had stopped payments for a time. Respondents had
most frequently experienced problems with meeting payments on credit cards,
with mortgages second most difficult. The major contributory factors leading to
problems were a sudden loss of earnings or a mismanagement of funds, either
through taking on too many credit commitments, or overspending on a
This survey report goes on to itemize the main reasons for loss 6f earnings as
redundancy, job loss, strike and loss of overtime. Other sources, especially
money advisers who are in direct contact with consumers with serious financial
problems, confirm marital or relationship breakdown and loss of earnings as the
main reasons why people find it difficult to repay their debts.” A detailed analysis
of the incomes and exptnditures of credit casualties shows that a number of
households with very low or irregular incomes never had any realistic chance of
paying o f the debts they had incurred.”
Using the results of the Office of Fair Trading survey, it is possible to make a
crude estimate that about 11% (i.e., 2.3 million) of a l U.K. households
considered that they had experienced difficulties with repayments at some point
during the previous five years.
’Ibere are indicators which suggest that the number of credit casualties is
inmasing over time. The reepossession of mortgaged houses by building societies
r s from five per 1,OOO in 1979 to 32 per 1,OOO in 1987, though it has since fallen
back to 21.5 per 1,ooO in 1988 (source: Building Societies’ Association). Citizens’
Advice Bureaux and Money Advice Centres report hcreases in the number of
people in financial difficulties who are looking for advice and help. It is not,
however, possible to make even an informed guess about the rate of increase in
Credit cards and consumer debt
The credit card, along with the automated teller machine, is the most conspicuous
example of new technology in financial services. What part do credit cards play in
consumer indebtedness? Table 3 shows the amount of bank credit card debt
outstanding at each year end, both in absolute terms and as a proportion of all
While the outstanding amount of bank credit card debt has doubled in four
years, this rate of increase is much the Same as for other forms of personal debt.
This may seem surprising in view of the widespread holding of bank credit cards
among U.K. consumers, but it should be remembered that an estimated 45% of
consumers use credit cards for deferred payment rather than extended credit,
paying off their accounts in full before they incur any interest charges.
The figures for bank credit card debt i Table 3 underestimate the volume of
consumer debt that is attributable to plastic cards as they do not include debt
outstanding on retailer 'option' and 'budget' credit cards. While there is no
official figure for this, 22-1 billion may be a reasonable estimate. If this is added to
the bank credit card figure in Table 3, the total U.K.outstanding debt on plastic
cards at the end of 1988 was c.U-8 billion ($14.3 billionlDM27.1 billion).
Looking at plastic cards from a different angle, bank credit cards are estimated
to finance about 15% of the value of retail sales in the U.K., and 6% of all
personal consumption. If retailers' credit cards are included, the figures rise to
about 20% and 8% respectively.
Bank credit card Other personal All personal
debt debt debt
1984 3,315 (14.9%) 18.992 22.307
1985 4,123 (154%) 21.989 26,112
1986 5,215 (17.1%) 25,333 30.548
1' 6.017 (16.970) 2999 35.566
1988 6,694 (156Yo) 35,145 42.839
Intcdonnl c o o m ~ a s
While credit card holding among U.K.consumers i kss widespread than in the
U.S., is considerably greater than in other European countries, as the figures
in Table 4 show.15
The figures are for bank credit cards, narrowly defined. They exclude
Eurocheque cards and cards usable only for withdrawing cash from Automated
Teller Machines or guaranteeing cheques. They also exclude deferred payment
cards, such as American Express and Diners Club, where the outstanding debit
balance has to be paid off in full at the end of each month. There are estimated to
T8bk 4. Bank credit cards 1987
T t l number Number per
U.K. 25.125,OOO 62
Luxembourg 85,OOO 31
Spain 5,731,800 21
France 7,683,100 20
Ireland 406.OOO 18
Norway 429.400 16
Sweden 906,400 14
Fdand 398,000 11
Switzerland 445,600 9
IMY 1,645,000 4
&IgiUm 209.700 3
Denmark 110,000 3
Netherlands 183.600 2
Austria 149.000 2
E W ~ C All 44,788,400
be 3.3 million American Express and one million Diners Club cards in Europe. In
addition, retailer credit cards are spreading rapidly in some countries. There are
estimated to be about 10 million in the U.K., five million in Sweden and three
million in France.
The figures in Table 4 show that bank credit cards are as yet relatively little
used in some countries, such as Germany and The Netherlands, where retail
financial services markets are considered to be very sophisticated. It is difficult to
know how much o this is due to deeply rooted cultural differences in the payment
methods used by consumers, or is the outcome o decisions taken by the banks in
thosc countries to limit the credit card market to people who travel abroad on
business. However, the pressures of competition, or the development of the
single European market for financial services, may well lead banks to market
credit cards aggressively in these countries. For example, in Germany, Landesgiro-
kasse Stuttgart, the second largest savhgs bank, is issuing a Visa credit card, as
is Berliner Bank. German retailers are launching their own DKK card. In The
Netherlands, Verenigde Spaarbank (Utrecht) now issues a Visa card.
The consumer balance sheet
Reverting to the U.K.,it would be a mistake to take the attitude that credit cards
fie f a r
are against the interests o consumers. The Ofc o F i Trading survey showed
that credit cards are seen by consumers as offering convenience, flexibility and
availability. The freedom they give to consumers in terms of divorcing the source
of credit from the goods or services being purchased should not be under-
estimated. On the other hand, the survey shows they are considered to be
expensive, in terms of the interest rates charged - and, as has been pointed out
above, they are the most kequent instance of repayment difficulties.
Advertising and marketing
The promotion of credit cards in the U.K.has in many respects followed the U.S.
model. From the earliest days, it has been marked by high-pressure techniques.
Indeed, credit cards were launched in the U.K. by an unsolicited mailing to many
consumers, who found themselves in possession o a credit card whether they
wanted one or not. The public and Parliamentary protest that ensued led to a
provision in the Consumer Credit Act 1974 forbidding this marketing technique.
Similar provisions, but applying to all payment cards and not just to credit cards,
have been incorporated in s.14(1) of the Danish Payment Cards Act 1984 and
para.5 of the Annex to the European Commission's 1988 Recommendation on
There is not, however, any prohibition in U.K. law on credit card issuers
inkeasing the credit limit on a card without being asked by the cardholding
consumer. It is a common experience among U.K.cardholders, at least among
those who have repayed regularly, to have their credit Limit increased as they
approach or exceed the existing limit. Of course, it is a matter for the individual
consumer to choose whether she or he wishes to use the additional credit made
available, but this unsolicited credit is yet another factor contributing to the
economic environment of easy credit.
In the U.K.,credit cards are a 'free-floating' financial service that is to say,
the consumer does not have to hold a current (checking) or other account with the
financial institution which issues the credit card. Many consumers hold two or
more credit cards from different banks and other financial institutions, in addition
to any credit cards issued by retailers. Banks and other financial institutions
engage in extensive advertising campaigns to sell credit cards. Expenditure on
press and television advertising o credit cards increased from f9-3 million ($15.1
millionlDM28-6million) in 1982 to f16-7 million ($27.2 dlionlDM51-4 million)
As well as being subject to the pressure of advertising, which includes direct
mail as well as press and television advertising, consumers are also offered
incentives to apply for a credit card. However, these are not normally very lavish
- recent examples include a travel bag, a road atlas and an H.T.Cross ballpoint
pen. Once the consumer has a credit card, she or he may be offered a further
incentive -for example, a case of wine to suggest the names and addresses of
other consumers who might apply.
Of more consequence are the schemes designed to persuade cardholders to
C d t c u d s and consumer debt
spend more money using their credit cards, and so possibly increase their
indebtedness by quite substantial amounts. For example, if the holder of a
Cooperative Bank Visa card spends €500 in a limited period, she or he gets a
35 mm camera, with lower value rewards if less than f500 is spent. Barclaycard
has a scheme called ‘Profiles’, in which the consumer gets one point for every f 10
of purchases during a calendar year. The consumer can then choose so-called
‘gifts’from a catalogue. At the top end of the scale, the consumer who spends
f75,OOO in one calendar year using a Barclaycard is entitled to a ‘gift’of a stereo
system. National Westminster Bank Access credit card is participating in the A r i
Miles promotion scheme the consumer gets one free air mile for every f10
National Westminster Bank is careful to point out that ‘Collecting Ar Miles
points on a credit card doesn’t mean that you have to spend more. Al you need to
do is usc your NatWest Access card instead of other methods of payment -
cheque, cash or other credit or charge cards.’ While this is fair and proper, the
aggregate effect of all incentive schemes must surely be to increase the use of
credit cards, and thus to increase coosumer indebtedness.
A move downmarket?
Credit cards were initially launched at the top end of the market, to those w t ih
relatively high incomes. Even today, the pattern of credit card holding in the
U.K. markedly skewed towards those w t more money. S w e y research shows
that, while 32% of U.K. adults (individuals, not households) hold one or more
credit cards, the proportion is as high as 59% among those in occupational groups
AB (broadly speaking, professional and semi-professional) and as low as 10%
among those in occupational groups DE (partly skilled and unskilled).
As competition for market share intensifies, especially as building societies and
other hancial institutions, as well as retailers join the ranks of credit card issuers,
it seem likely that many card issuers will look for expansion among consumers
with more moderate incomes. If this happens, it will throw into even sharper
focus the implications for coosumer education on rates of interest and for the
support services needed to help credit casualties. It also raises the question
whether ‘social’ financial institutions for example, those that are publicly or co-
operatively owned - may be expected to meet the credit card needs of low
Consumer knowledgeand use of rates of interest
For those committed to the consumer principles of value for money and the use of
comparative information to obtain it, empirical research on consumers’ know-
ledge and usc of interest rates produces gloomy results. The Ofc of F i ar
Trading Survey indicates that over half of current or recent U.K.credit users do
not know what APR (Annual Percentage Rate) means, against roughly a quarter
who do. Among non-users of credit - who are, after all, potential users - less
than one in 10 understand the concept of APR. Knowledge and understanding are
particularly low among both women and those in the lower occupational groups.
Once the true meaning of APR is explained to survey respondents, just under
half of current and recent credit users say that they have ever referred to APR
when making credit arrangements. Within this group, only 45% are able to make
a reasonably realistic estimate of the current APR on credit card debt. Even this is
higher than the proportion - about 25% - who can make an approximate
estimate of the cost of a bank loan.
These depressing results confirm the general picture of previous survey results,
not only from the U.K. but also from the U.S. They fully justify the view -
widespread in the financial services industry that consumer demand for credit
is notably insensitive to interest rates.
Consumer organizations in the U.S. and the U.K., and indeed in other
European countries, have focused on the need for legislation requiring financial
institutions to disclose the APR for different forms of credit. To complement this,
what is surely needed now is a massive consumer education programme on the
meaning and significance of interest rates in general and APR in particular.
This is most unlikely to come from the financial services industry. Consumer
insensitivity to interest rates helps to preserve profit margins and reduce
competitive pressure on the price of credit. It is consumer insensitivity that must
surely be underpinning the going APR on credit cards in the U.K., which is about
2&29% p.a. on bank credit cards and even higher on most retailer credit cards.
The initiative in consumer education must come from consumer organizations or
Support services for credit crrsuplties
It would not be appropriate to suggest that there should be support services
specifically for the casualtics of credit card debt. Credit casualties are most
frequently involved in multiple debts; A survey of over 1,OOO U.K. credit
casualties shows that 48% have between three and six debts, and that a further
38% have seven or more debts. One respondent had as many as 30 debts." The
same survey shows that only one third of credit casualties are in debt to credit card
issuers, though in those cases the amounts involved are relatively high, third only
to debts owed to finance companies and on other forms of bank credit. It is clear
that support services should be provided which help the consumer who is a credit
casualty to make a comprehensive plan to deal with all her or his debts.
The need for money advice (debt counselling) support services for credit
casualties has been well documented elsewhere." There does appear to be a
growing realization in the U.K. financial-services industry that credit issuers have
a moral responsibility to respond to t i need. For example, Barclaycard has
C d t cards and consumer debt
provided f140,W-l over three years to the Citizens’ Advice Bureaux to develop
money advice support services from a deprived area of Liverpool. National
Westminster Bank has recently made a f250,W-lgrant to the Citizens’ Advice
Bureaux for money advice. However, there is no doubt that the need still far
outweighs the resources available.
The role of ‘social’ fmancial institutions
It has long been an element o public policy in many countries to allow for a range
of financial institutions that are not devoted solely to profit maximization. These
take different forms in different countries and different financial sectors. They
include mutual insurance companies, building societies, savings banks, coopera-
tive banks and postbanks. Some are publicly owned or operate under laws which
simultaneously protect their status and restrict their activities.
Recent trends in the deregulation o financial services have in many countries
affected such ‘ o i l financial institutions in two ways. F i t l y , they have often
been allowed to extend their range of services so that they can compete more
effectively With fully commercial financial institutions over the whole range of
financialservices. Secondly, in some countries legislative changes now allow them
to change their status so that they become indistinguishable f o profit- rm
maximizing financial institutions.
For example, savings banks in Denmark are now allowed to demutualize and
become limited companies. The two largest, SDS and Bikuben, have already
taken t i decision and all the larger savings banks are expected to follow.19
Under a new Italian law, the largest savings bank in Europe, Cariplo, is preparing
to undergo a form of demutualization.m There are rumours that preliminary
planning has started to prepare the German Postbank for privatization, though
this change is still some way away. In the U.K., building societies may now
demutualize, and the second largest, Abbey National, has already done so,
though not without considerable controversy. Some others are expected to
follow. The Trustee Savings Bank has been privatized. The U.K. Post Office
Savings Bank w s turned into the publicly owned National Girobank, which has
recently been sold by the Government to Britain’s fifth largest building society,
Alliance and Leicester. However, Alliance and Leicester is expected to
demutualizc. If that happens, the translation of a Government-owned savings
bank into a profit-maximizing limited company will be complete.
The xope for social financial institutions to adopt an altemative approach to
credit cards for example, by charging a significantly lower rate of interest - is
therefore narrowing. However, it has to be said that there is little evidence, at
least in the U.K., that social financial institutions behave any differently from
profit-maximizing limited companies in t i respect. From their credit card
market behaviour, the Cooperative Bank, National Girobank and the building
societies are indistinguishable from the major banks. It is ironic that the most
effective price competition is provided, not by the Social financial institutions, but
by American Express, with its Optima card.
What about credit unions, a powerful alternative to conventional financial
institutions in the U.S.,Canada, the Caribbean and Ireland? In the U.K., credit
unions do not issue credit cards. However, they could provide an alternative
source of credit, especially for low income consumers. They are limited by law to
making loans with a maximum APR of 12.6% p.a., which is well below the
interest rates not only for credit cards but for most other forms of credit available
to consumers. It is regrettable that these consumer-owned alternative financial
institutions have not made more progress in the U.K. there are about 160 of
them, With a total membership of about 35,000 and combined assets of €10
million. Credit unions tend to make most progress in Catholic communities -
perhaps a heritage of mediaeval Catholic teaching against usury, a trait that
Catholicism shares with Islam.
Ektronic payment systems and debit cards
In a number of European countries (notably, France) new electronic payment
systems are being introduced - they are known in English as EFTPOS
(Electronic Funds Transfer at Point-of-Sale). A transaction is initiated by the
consumer using her or his payment card and PIN (Personal Identification
Number) in a retailer’s terminal. Payment is authoristd and the transfer of funds
from the consumer’s account with a financial institution to the retailer’s bank is
guaranteed. The actual transfer of funds may be instantaneousor may be deferred
by a day or so.
The consumer’s account may be a line of credit if a credit or charge card is used.
However, in the U.K. a new range of debit cards is being developed s that the
money may be transferred directly from the consumer’s current (checking)
account. Strictly speaking, EFPOS is neutral so far as consumer debt is
concerned it is merely a new method of payment and does not in itself affect
The EFTPOS consumer balance sheet in Europe has been explored
elsewhere,21 but it is worth focusing on some possible social implications.
In the US..it is reported that some larger banks are moving towards gearing
their branches and paper-based payment systems to the needs of their more
affluent customers and pushing their lower income customers towards electronic
banking, yet it is just these people who most need the advice and help that bank
staff can provide.a
New payments technologies such as EFITOS tend to discriminate against the
elderly, who may 6ad it difficult to key in PINSand read VDU screens and who
are enjoined to secrecy in situations in which they need personal help.=
There is also increasing anxiety about whether the spread of EFI’POS as a
payment method might paradoxically lead to a reduction in the number of
Credit cards and consumer debt
payment methods open to the consumer. This might happen if retailers, having in-
vested heavily in EFTPOS systems, refused other forms of payment. This is an
issue which has been examined both by the Swiss Commission Fddtrale de la
Consommationa and the European Commission’s Consumer Consultative
Committe~.~ stressed the importance of consumers not being under any
pressure to use electronic methods of payment and urged that consumers should
have the right to pay in cash - a right which Swiss consumers have, but which
does not exist in some countries, including the U.K.
Prepaid payment cards
Little public attention has so far been given to the consumer implications of
prepaid payment cards. These have been introduced by a number of telephone
administrations in Europe, including British Telecom in the U.K. and RTT in
Belgium. They enable cardholders to use public telephones which are designed to
accept the cards rather than cash. At first sight, they would appear to be an
effective way of preventing consumers from incurring indebtedness though of
course the individual amount involved in paying for one telephone card is small.
However, in Japan, where cash is still the overwhelmingly predominant method
of payment and credit cards are very little used, prepaid cards are big business.
The first one, a telephone card, was introduced by Nippon Telegraph and
Telephone (NIT) in 1982. By March 1988, “ T had sold 440 million telephone
cards, worth Yen 280 billion (fl-2 billiodS2-0 billion/Dh-l3-7 billion). Prepaid
cards have been adopted by a wide range of outlets, including petrol stations,
supermarkets and cinemas.=
’here are two consumer issues. Firstly, when they buy prepaid cards,
consumers are in effect being asked to make an interest-free loan to the issuer.
This may not amount to much on any individual prepaid card, but there can be no
doubt that in aggregate prepaid cards do wonders for the cash flow of the issuers.
In addition, issuers make surplus profits f o prepaid cards that are lost or put on
one side before they are fully used.
Secondly, prepaid card issuers are in effect acting as institutions that are taking
deposits from the public, but are not subject to prudential regulation, as are banks
and other deposit-taking institutions. There are no safeguards against them going
out of business and no redress for consumers who have bought prepaid cards if
they do. It is the prospect of companies coming together to issue multi-purpose
prepaid cards which could be used for a variety of consumer purchases that has
prompted the Japanese Ministry of Finance to prepare plans for regulating the
issue of prepaid cards. One aspect of regulation may be to require issuers to
deposit part of the value of the cards with a bank or to take out a bank guarantee
against repayment of the cards.n
Credit cards have played a sigruficant but not overwhelming part in the rapid
expansion in consumer indebtedness that has taken place in the U.K. Consumers
have in general benefited from their introduction. They have helped to divorce
the source of credit from the source of supply of the goods or services being
bought, s providing consumers with greater flexibility.
Despite the growth in consumer indebtedness, debt is not considered a burden
by most U.K. consumers. However, it does at one time or another present a
problem for about one tenth of U.K.credit users, some 2.3 million people. It is an
acute problem for an unknown but almost certainly increasing proportion of these
- the casualties of credit, whose crisis is often precipitated by marital or
relationship breakdown, or loss of earnings. Credit casualties usually face
multiple debts. Again, credit card debt takes a significant but not overwhelming
place in these multiple debts.
Bank credit card holding in the U.K.is much more widespread than in other
European countries -compare the 62 credit cards per 100 adults in the U.K.with
the two per 100 adults in Germany, Austria and The Netherlands. The launch and
spread of credit cards has been characterized by aggressive advertking and
marketing, and there is a possibility that in future marketing will be targeted on
lower income occupational groups.
In the U.K., consumers' knowledge of and ability to compare credit interest
rates - including credit card APRs - is poor, especially among lower income
occupational groups. A major consumer education campaign is needed, initiated
by public authorities or consumer organizations.
More support services are needed for credit casualties. Here, the financial
services industry has a moral responsibility to provide the resources.
The launch of EF"OS as an electronic payment method should not be used as
an opportunity to deter consumers from using cash. Many consumers find it easier
to manage their financial affairs and payments on a cash basis and they should
have the right to pay by cash.
The use of prepaid payment cards in Europe is limited at present, but their
rapid spread in Japan has led to anxieties that consumers' prepayments to
unregulated businesses may be at risk and that consumers are being induced to
give free loans to these businesses.
& S&&cs (July 1989) HMSO. London.
2. & Starkria, op. cir.
3. General Household Survey (1985) HMSO. London.
4. Officc of Fair Trading (1988) Comumcn' U5e of C r e d Survey. OFT, London.
5. Ofc of Fair Trading, op. cit.
6. Jubilee Centre (1988) F d i a in Debt. Jubilee Centre. Cambridge, U.K.
Credit cards and consumer debt
7. Jubilee Centre, op. cif.
8. Annual Abstract of Banking Statistics (1987) Committee of London and Scottish Banken,
9. Ford, J. (1988) Thr Indebted Society. Routledge. London.
10. O f a of Fair Trading, op. cir.
12. Andrews, A. (1988) 'The UK borrower. money advice and the need for reform'. In Money
and rhe Conrwncr (Ed. by J. Mitchell). pp. 114-127. Money Management Council, London.
13. Jubilee Gntre. op. cir.
14. F a c c l Suuisriu, op. cir.
15. BorvUe ImNUir Newsletter (April 1988) London.
16. Jubilee Gntre. op. cit.
18. Andrcws, A, op. cit.
19. Retail Banker Intmwional (10 April 1989) London.
20. Retail Banker Intemazional (8 May 1989) London.
21. Mitchell, J. (1988) EIcnronic B&g and the ~ n s w n c r - the Ewopcpn Dimension. Policy
Studies Institute, London.
22. Gross, L (1988) 'The Fmancial n e revolution in the US. In Money and the Conrunvr
(Ed. by J. Mitchell), pp. 1-11. Money Management Council, London.
23. Reifncr, U. (1988) 'Access t financial services a Geman view'. I n M o w and h e
Conrwnrr (Ed. by J. Mitchell), pp. 3343. Money Management Cound. London.
24. Commission FCdtrale de l Consommation (1986) Lo monnaie & plattiqur. CFC, Berne,
25. Consumer Consultative Committee of the Commission of the European Communities
(1986) Interim Opinion on New Payment Merho&. CEC, B-k. Belgium.
26. Elecmnic Payments International (April 1989) London.
27. E h n i c Payments Intmrcltional, op. cU.