Scots now Britain’s least indebted and most confident about financial future
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Scots are amongst the least debt-laden citizens in the UK, despite unsecured borrowing increasing by £23 billion to reach a record level of £270 billion across the land.
The findings of the latest PwC UK Consumer Credit Outlook report reveal that the UK’s Welsh and Scottish citizens were most confident about their ability to make repayments, service debt and already held lower levels of personal unsecured debt, while London and West Midlands were the least confident about servicing their personal debt.
Across the UK, unsecured borrowing is now at an all-time high, with (among other types of borrowing) credit card, overdraft and personal loan debt standing at the equivalent of close to £10,000 for every household in the country.
Table 1: Regions ranked by average value of personal unsecured debt
(Highest and lowest marked in each column)
PwC expects unsecured borrowing to continue its rise, however affordability will come under pressure in the coming years, with debt as a proportion of household disposable income, set to reach around 165 per cent by 2020, a high last seen in the run-up to the financial crisis.
While 43 per cent of Scots claim to have zero unsecured loans, 13 per cent of Scots confessed to being worried about making loan repayments in the coming year while 4 per cent admitted to having missed a payment in the last six months.
Table 2: Breakdown of unsecured lending across nations
Meanwhile, PwC’s Credit Confidence Survey found that households’ credit confidence is now at its highest level since it began in 2009, on the back of continued low interest rates, record levels of employment and above-inflation earnings growth.
Table 3: Personal Financial Confidence Index
(Higher rank = more able to make repayments, less concerned about future ability to service debt, holds lower levels of personal unsecured debt, on average)
Chris Meyrick, financial services director for PwC in Scotland, said: “It may be an old saying, but it looks like the saying about canny Scots is still ringing true in certain sections. But there’s also a curious disconnect between consumers and businesses. While many businesses and industries have expressed fears and worries over Brexit, consumer confidence is still rising.
“In part, this confidence may be coming from having little to no debt. This is a spin-out of the last financial crisis. People’s instincts, in the wake of the financial crisis, were to reduce their unsecured debt, which fell by around 10% between 2008 and 2012 across the UK.
“However, since 2013, buoyed by consistently low unemployment and ultra-low interest rates, consumers have felt sufficiently confident to begin increasing their borrowing once again. Unsecured debt has now passed the high water mark set in 2008.
“While current levels do not necessarily raise cause for concern - household debt as a proportion of income has fallen markedly since peaking in 2008 - independent forecasts suggest that this ratio is set to return to pre-crisis levels in the next three to five years.”
Chris Meyrick added: “Unsecured borrowing in the UK remains dominated by traditional lending products. Excluding student loans, credit cards make up around 60 per cent of the total unsecured credit market, with personal loans, car finance and overdrafts contributing the majority of further outstanding debt.
“However, it has taken banks almost ten years to recover the total value of lending that they provided to consumers in 2006.”
The PwC analysis shows there are between 10m - 14m people in stuck in ‘near-prime’ credit limbo. Despite having only relatively minor blemishes on their credit history, or only having a limited credit history, this large group of people still find it difficult to obtain credit from mainstream sources.
It is clear that near prime borrowers now represent a substantial market (irrespective of their likelihood to apply for a card). And it is likely this market will grow in the years ahead given factors such as immigration and population growth, as well as the potential for lenders to set stricter criteria.
With a rise in consumer confidence, there is a rise in opportunity for the banking sector. However, mainstream banks have made a considerable retreat from personal lending since the financial crisis, particularly in those bands where probability of default most closely aligns with the near prime segment. More recent regulatory changes have compounded this effect. Overall, some 1,400 consumer credit firms have left the sector since 2014.
PwC’s expectation is that mainstream lenders seeking to improve their margins will return to the near prime segment, given its potential to offer superior returns to other product lines. Also consider that the total volume of unsecured lending in the UK rose 9.5 per cent during 2015, relative to 3.5 per cent for secured lending.
Mr Meyrick said: “For the financial sector, there is considerable opportunity here as unsecured lending looks set to be a growth area for the coming years – but there will be calls for that opportunity to be tempered to ensure people do not over-stretch themselves. That’s bad for individuals, bad for business and the economy in general. The last thing anyone wants or needs is a repeat of some of the situations of the last 8-10 years.
“There are a number of other issues needing to be taken into consideration. These include the risk of real wage growth slowing or going into reverse, due to the risk of imported inflation linked to a weak pound and uncertainties regarding the implications of Brexit.”
The report notes banks will face competition from non-bank lenders, which benefit from being free from capital requirements and are also adept at exploiting new technologies to target customers effectively to offer potentially superior service.
However, it’s expected that the FinTech companies will target the prime segment of the market, nudging the banks back towards near-prime.
Fraser Wilson, financial services risk assurance partner for PwC in Scotland, said: “These ‘data driven’ businesses are adept at skills such as consumer analytics and capable of exploiting advances in these technologies to enhance their growth prospects. They are already skilful users of risk-based pricing.
“To date, FinTech lenders have so far targeted the prime segment of the credit market, with a particular focus on professional borrowers, including doctors, lawyers and accountants. Though such lenders can – and do – price according to risk, they have largely steered clear of the near prime and sub-prime segments of the credit card market.
“FinTech lenders’ depositors are often relatively risk-averse. Also, near prime and sub-prime lending poses more significant underwriting challenges, which may put banks, which have developed more sophisticated risk models, at an advantage. FinTechs may also baulk at the costs of additional collections and arrears management that near prime and subprime segments require.
“As a result, the increasing competitive threat posed by FinTechs is most likely to be felt in the prime segment of the lending market. This will add to the pressures faced by traditional lenders in this area – and add to the relative attractions of near prime lending.
“The other FinTech area to look at is the considerable rise of mobile payments
“This foundation for growth has been laid by the introduction of Apple and Android Pay in July 2015 and May 2016 respectively.
“The merchant acceptance challenges of the past have been largely overcome and, while data from the UK remains relatively sparse, parallels can be drawn from the US, where adoption rates of Apple Pay among eligible users have almost doubled in the past year.
Mr Wilson added: “As the FinTech juggernaut rolls on, we expect mobile payment adoption rates in the UK to increase significantly as mobile payments become accepted by ever more merchants and consumer nervousness regarding the security of mobile payments recedes.
“A future where digital wallets take over entirely from plastic cards may not be too far away.”
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