A Concerning Creep Towards Credit
Across Europe, there’s a growing credit concern, recently spurred by new “Buy Now, Pay Later” schemes.
Whereas credit was once reserved for funding big-ticket items like a house or a car, more often consumers are turning to credit to fund their lifestyles, leading many into the dangerous territory of living beyond their means. This behavior is largely fuelled by social media pressure, increased accessibility to fast credit, and online shopping, according to credit management company Intrum’s European Consumer Payment Report 2019.
But the creep towards credit doesn’t just enable shoppers to score new items they might not be able to afford otherwise. Perhaps more concerningly, one in five European consumers even need to borrow just to pay household bills, reports Intrum. When you look more closely at 18- to 21-year-olds, that figure increases to 31%, which is especially troublesome given their lower disposable incomes.
Market differences
Of course, these behaviors surrounding credit vary from country to country and demographic to demographic, which speaks not only to the economic health of the country, but cultural attitudes towards spending and savings as well.
In Germany, for instance, more than 90% of consumers are confident they can pay their bills on time each month -- the highest in Europe -- while only 18% say they have borrowed money in the past 6 months in order to pay bills, compared to 24% across Europe. In contrast, UK consumers are highly reliant on credit, borrowing more money more frequently than their European counterparts.
In the US, Millennials outlooks’ towards money is different from their parents’, perhaps a result of seeing people drowning in debt, some even losing their homes in the 80’s crash. This has caused them to be more aware and responsible when it comes to how they spend, and as a result, only 1 in 3 American Millennials even carry a major credit card, according to a survey done by bankrate.com.
Paying for it later
The emergence of the “buy now, pay later” scheme is also reportedly hurting consumers’ credit scores, which could have longer lasting effects. In fact, a recent survey conducted in the UK by comparethemarket.com finds that more than two million Brits may have seen their credit scores fall, but 41% of those surveyed by comparethemarket.com said they were unaware that “buy now, pay later” schemes could affect their credit score.
Governments step in
In some countries, governments are taking action to discourage consumers from taking on more debt than they can pay ― or at least making it a more conscious decision. Take Sweden, for example, where Per Bolund, Minister for Financial Markets, says consumers should not be tricked into using “payment paths that cost more.”
To prevent such from happening, Bolund has proposed potential legislation that aims to encourage consumers shopping online to think twice before assuming credit and instead pay with money they already have. In practice, this could mean that online checkouts will not be allowed to position credit as the first payment option, or as a pre-selected option, when other options are available.
Konsumentverket, the Swedish Consumer Agency, is also cracking down on ads that push credit on consumers too aggressively, with hefty fines for those companies that don’t cooperate.
While Sweden’s government is leading the charge, it may be only a matter of time before other countries, the UK among them, take action to prevent potentially harmful consequences.
Sustainable spending
Given this shift in attitude towards credit, coupled with technological advances related to Open Banking, there's a growing appeal for convenient alternative payment methods that put shoppers in control of their finances and spending.
Online banking payments, which empower consumers to spend the money they already have rather than taking on credit, are becoming an increasingly popular option. And given that many shoppers will abandon their carts if their preferred payment method isn’t available, it’s important that online retailers are offering a relevant payment mix to optimize conversion.
If legislation limiting how credit payment options are presented in the checkout enters into force, it will be technically challenging to distinguish debit cards from credit cards in the checkout. In Sweden, the government is proposing that payment cards for that reason should be subject to the same rules as pure credit alternatives (not on top of checkout, not pre-selected). This means Online Bank payments is a way to future proof the checkout conversion with convenient pure debit method.
While credit will likely remain an important part of the payment mix in most markets, staying up to speed on local regulatory changes will be crucial for online retailers that want to win.
Source: Intrum, “European Consumer Payment Report 2019,”
Credit Freedom measures the extent to which consumers are borrowing money to pay bills, their level of borrowing in relation to monthly income, and the gross debt-to-income ratio of households. This chart shows that consumers in relatively wealthy countries are burdening themselves with an increasing amount of debt.
Denmark, for example, has the highest household debt-to-income ratio in Europe, one of the reasons it ranks in 24th place on the Credit freedom pillar. Hungary, in contrast, ranks first on the Credit freedom pillar, indicating low dependency on credit. The country’s household debt-to-income ratio is currently the lowest across Europe, according to Eurostat data. Over three-quarters (76 percent) have not borrowed money, apart from a mortgage, or reached their credit card limit in order to pay bills, over the past six months."
MARTIN JÄGERSTAD
martin.jagerstad@trustly.com
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This article was originally published in The Retailer, our quarterly online magazine providing thought-leading insights from BRC experts and Associate Members.