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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Lord Sainsbury pulls funding from Progress and other political causes

The longstanding Labour donor will no longer fund party political causes. 

Centrist Labour MPs face a funding gap for their ideas after the longstanding Labour donor Lord Sainsbury announced he will stop financing party political causes.

Sainsbury, who served as a New Labour minister and also donated to the Liberal Democrats, is instead concentrating on charitable causes. 

Lord Sainsbury funded the centrist organisation Progress, dubbed the “original Blairite pressure group”, which was founded in mid Nineties and provided the intellectual underpinnings of New Labour.

The former supermarket boss is understood to still fund Policy Network, an international thinktank headed by New Labour veteran Peter Mandelson.

He has also funded the Remain campaign group Britain Stronger in Europe. The latter reinvented itself as Open Britain after the Leave vote, and has campaigned for a softer Brexit. Its supporters include former Lib Dem leader Nick Clegg and Labour's Chuka Umunna, and it now relies on grassroots funding.

Sainsbury said he wished to “hand the baton on to a new generation of donors” who supported progressive politics. 

Progress director Richard Angell said: “Progress is extremely grateful to Lord Sainsbury for the funding he has provided for over two decades. We always knew it would not last forever.”

The organisation has raised a third of its funding target from other donors, but is now appealing for financial support from Labour supporters. Its aims include “stopping a hard-left take over” of the Labour party and “renewing the ideas of the centre-left”. 

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

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