Consumer credit

The history of consumer credit is a story of rising living standards, the emergence of an affluent and aspirational middle-class and commercial innovation.

While allowing buyers time to pay has always been a basic tool of commerce, consumer credit in its modern guise of instalment plans, consumer loans and, eventually, the credit card was a byproduct of the Industrial Revolution, a period which heralded a new era in consumerism.

The factory workers who swelled cities such as Manchester, Bristol and New York to make clothing and tableware, and later televisions, refrigerators and cars, became a new breed of consumers as well as producers.

Delayed payment for certain goods and services was made possible by wages paid at regular intervals, even if these remained relatively low.

Meanwhile, consumption became the new creed and credit fuelled the sales of goods, which in turn spurred profitability and economic growth. And that increased consumption helped to raise living standards.

Credit became ever more sophisticated, with American Express and Bank of America launching credit cards in 1958. While demand in the US and Europe has been blunted since the financial crisis, consumer credit is once more in a phase of innovation.

New models such as peer-to-peer lending platforms, which allow ­individuals to lend to each other and to small businesses, have emerged, with the promise that they are able to provide credit as the biggest banks deleverage.

More controversially, there has been the rise of a crop of payday loan companies, which have come under fire from politicians and consumer groups for the high interest rates they charge.

However, there are two principal challenges for both new and old providers. First, the jolt of the financial crisis – combined with stagnant wage growth and employment uncertainty – has left consumer spending sluggish and many customers focusing on meeting ­repayments rather than taking on new debt.

Second, increased regulatory scrutiny after low interest rates and a rapid expansion of bank lending prompted a surge in household debt to unsustainable levels in the years before 2008.

Partly for these reasons, those looking to develop retail loan portfolios are turning to the growing middle-classes of markets such as India, Russia and eastern Europe. Those areas are where the next burst of growth in consumer credit is likely to come from.

Jennifer Thompson