Credit cards are obsolete. Is consumer debt heading the same way?

The technological history of credit.

Slate's Matt Yglesias, in a post about the effect higher bank capital requirements could have on the real economy, gives a brief overview of the changing nature of credit in America:

Once upon a time credit overwhelmingly meant business credit, which then expanded into the personal sphere primarily in the special case of houses and what you might call household investment goods (cars, large appliances). That then metastasised into the all-in culture of consumer debt and credit that we know from the past 25 years.

Yglesias' point is that high capital ratios will reverse that trend, boosting the price of consumer debt while making corporate debt cheaper. This, he adds, might not be a bad thing, "disproportionately encouraging business borrowing to finance investment while discouraging consumer borrowing to enhance consumption".

But what I find interesting is how that "metastasisation" of a relatively small field of debt into the widespread credit economy we now have was born. It was, broadly, a technological imperative, as the Financial Times' Isabella Kaminska points out:

The credit component in credit cards came into play because in the “old days” extending credit was the easiest way to transact remotely without the use of physical cash.

Any alternative back then would have involved waiting hours (if not days) for the merchant to call your bank, who would then verify who you were, who would then make a deduction from your account, who would then send an instruction to the merchant’s bank, whose bank would make a corresponding credit, who would both use different parties to clear and confirm the transaction. Sometimes by post.

It was basically much easier (from a velocity point of view) for a bank to guarantee to the merchant that you were good for the money by means of a piece of plastic. The transaction would take place and you would then owe the bank, whilst all the settlement processes continued on in the background. If you didn’t pay, it was between you and the underwriter bank. The merchant was covered. You were probably black-listed.

Initially, then, the fact that credit cards enabled people to freely and easily spend beyond their means wasn't deliberate — it was a by-product of the real aim, which was just to let people pay for things. It wasn't quite a bug in the system, because card issuers were always more than happy to let people pay off their credit card bills in instalments, racking up healthy interest payments in the process. But it was hugely important in getting the concept of borrowing to pay normal daily bills into people's heads.

Nowadays, of course, that technological imperative is nonexistent. Although they will take every possible opportunity to delay payments, squeezing marginal gains from the extra interest, banks are capable of transferring money instantly. At the very least, the fact that debit cards are now possible renders the initial rationale for credit cards obsolete.

Of course, if this apotheosis of the credit economy is something which is worth pushing back against, as Yglesias suggests, then doing so by just raising interest rates is about the most damaging possible way. People have got used to boosting their standard of living with easy credit, and until they can achieve the same standard without resorting to credit, making it more expensive to borrow could backfire heavily.

Credit cards. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Theresa May confirms Brexit Britain out of the single market – 8 other things we learnt

The Prime Minister dropped the Brexit bombshell that we're out of the single market, and more. 

Theresa May confirmed suspicions that the UK will leave the single market after Brexit in a major speech on her objectives.

The Prime Minister said the Brexit vote was a clear message about controlling immigration, and “that is what we will deliver” – but this meant the UK could not continue following the rules of the single market

She said: I want to be clear. What I am proposing cannot mean membership of the  single market. European leaders have said many times that membership means accepting the “four freedoms” of goods, capital, services and people.

"And being out of the EU but a member of the single market would mean complying with the EU’s rules and regulations that implement those freedoms, without having a vote on what those rules and regulations are."

May also repeated that maintaining the open land border between Northern Ireland and the Republic of Ireland would be a priority, and that she wanted trade deals with the rest of the world.

But leaving the single market wasn’t the only Brexit bombshell May dropped. Here is what we learnt:

1. The single market may be replaced by a European free trade deal

The Prime Minister has ruled out a single market, but is hoping for a deal to replace it. She said: “As a priority we will pursue a bold and ambitious free trade agreement with our neighbours in Europe."

2. No more European Court of Justice

May said Brexit will end the jurisdiction of the European Court of Justice in Britain, and that “laws will be interpreted by judges not in Luxembourg but in courts across this country”.

3. Parliament will get a vote on the Brexit deal

Most MPs already expected to get a vote – as their peers in the European Parliament would get one. May confirmed this, saying: "I can confirm today that the government will put the final deal that is agreed between the UK and the EU to a vote in both Houses of Parliament, before it comes into force.."

4. EU citizens still face uncertainty

May has always been clear she wants to confirm EU citizens’ right to remain in the UK, but only if British citizens receive the same guarantee in other EU countries.

She made no further guarantees, saying: "I have told other EU leaders that we could give people the certainty they want straight away, and reach such a deal now. Many of them favour such an agreement - one or two others do not"

5. She will try to stay in the customs union

May explicitly said the UK will have to leave the EU single market, but she was far more nuanced on the customs union, which negotiates trade deals on behalf of the EU member states.

She does not want Britain to share the EU’s common commercial policy, or be bound by common external tariffs, but does want to “have a customs agreement with the EU”. This could mean the UK becoming “an associate member of the customs union”. 

6. Some payments may continue

May said that Britain voted to stop large contributions to the EU, but she stopped short of ruling them out altogether. There may be payments that are “appropriate”, she said, if there are programmes the UK wants to be part of.  

7. Brexit could be in phases

The PM said several times she wanted to reassure businesses – who are increasingly unhappy about the uncertainty ahead. She wants the negotiators avoid a “cliff edge”, but also avoid “permanent political purgatory” (something Brexiteers fear). 

May suggested a deal could be done by the time the two-year process of Article 50 ends, and this could be followed by a “phased process of implementation”.

It’s worth bearing in mind at this point that two years in EU deal-making time is extremely speedy.

8. The UK’s nuclear option: Corporate tax haven

The Chancellor Philip Hammond has already floated the idea that a disgruntled Britain could slash corporate tax in order to attract unscrupulous multinationals to its shores.

May said that the UK would be prepared to crash out without an agreement, saying “no deal for Britain is better than a bad deal for Britain”. 

In such a situation, Britain "would have the freedom to set the competitive tax rates and embrace the policies that would attract the world’s best companies and biggest investors to Britain". In other words, become an offshore tax haven. 

 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.