Stakeholder credit: why widespread access to finance is a force for good
"There are certain things in life we often take for granted. In the course of managing our household finances, we know that it’s good to plan expenditure to fit our income. But in that daily and weekly balancing act, we are helped immensely by a phenomenon now widely available: credit."
Credit helps to smooth the flow of available free cash from month to month and has had a transformative – and positive – impact on the standard of living for billions of people worldwide. It’s no longer necessary to force individuals to save up the full cost of expensive items before they can make use of them. Credit has made it possible for those without deep reserves, but who do have regular earnings, to access higher value capital items that would otherwise be beyond reach.
In a market economy, helping people benefit from the building blocks of decent living standards today, rather than wait years and years going without, has had a transformative impact in opening up opportunities and new horizons that many of our predecessors never had. Modern prosperity has been accompanied by the invisible benefit of credit: a hundred years ago GM cars made in Detroit became obtainable for the first time with a 35 per cent down payment; Diners Club credit cards replaced the need for separate revolving credit at multiple merchants in the 1950s, introducing significant new convenience for customers.
The story of Twentieth Century progress would be incomplete without a nod to the benefits that greater access to finance and credit helped bring – improving access to decent housing, furniture, refrigeration, entertainment, travel and more besides. Obtaining a home loan with repayments spread over 25+ years made it possible for millions to make choices on where and how they live in a way simply impossible in generations gone by. How many of Britain’s nearly six million businesses – and the innovations they have generated – would have got off the ground without the kickstart provided by credit?
The basic concept of a facility that frees many people to acquire new benefits and opportunities ought to be chalked up as a formidable social achievement. Alongside other great advances for humanity in the past hundred years – literacy, science, hygiene, communications and technology – access to finance has helped reduce the number of people living in extreme poverty according to World Bank data from two-thirds in 1950, to 42 per cent in 1981, then less than ten percent in 2015. And this at a time when population growth has burgeoned.
There are of course new challenges which have emerged – for example, a shortage of housing supply and high demand driving house prices often beyond the multiples available through today’s mortgage frameworks. But these are problems involving a myriad of factors (town planning, taxation, financial regulation and so on) that are capable of being solved if, as a society, we will our governments and parliamentarians to do so.
There have also been examples of bad practice and abuse requiring society to respond; excessive charges or rogue operators pursuing morally questionable tactics. It was precisely to combat these that the UK has established one of the most comprehensive and rigorous regulatory regimes governing financial services of any country in the world, and why trade associations such as the Credit Services Association have developed strong codes of practice to provide additional reassurance to customers and creditors alike. We have learned that good governance and common standards must accompany financial services innovation.
Credit does come with a cost. But if regulated appropriately, society benefits from available credit – the convenience it offers, providing choice for individuals, flexibility if required and forbearance in repayments when necessary. For every borrower there is a creditor, in a cycle of credit driving the engine of our economy. Creditors are too often perceived as faceless banks, when the truth is they are collectives of savers, pensioners or households. A family moving home and renting out their property until ready to sell. The local gym offering membership benefits. A restaurant waiting for the invoice to be paid after catering a wedding party. They all offer credit in varying forms.
Sometimes we forget that our economy is built upon these millions of individual transactions, agreements, deals and choices, where each participant has a mutual responsibility to one another (often unspoken) and where those shared responsibilities – creditor to borrower and vice versa – are the bonds of trust and reciprocity we each have as stakeholders in society.
If the last decade helped us realise the importance of regulatory standards, then maybe this is the decade in which we begin to properly value and appreciate the obligations we have to one another as stakeholders in the credit cycle.
How best should we nurture those mutual responsibilities so we all gain as a result? The obvious starting point is basic financial literacy and money education, equipping young people so they understand how credit works, the considerations made by both lenders and borrowers, how legal obligations are framed, how mortgages work and the nature of compound interest. Making sure society’s financial stakeholders have full insight into the obligations they are entering into should be a basic prerequisite.
Signposting those in need of support to the right advice and supporting the vulnerable is crucial. But this should go alongside a concerted effort to destigmatise conversations about money and debt. People shouldn’t be afraid to pick up the phone and talk to their creditor or collection agency, not least as it is in everyone’s interests to reach a mutually acceptable repayment plan as soon as possible and get to a quicker resolution as a result. Dialogue – and not reticence – is a litmus test for a well-functioning stakeholder economy. Money advice agencies, creditors and government should work together to promote the benefits of early engagement and conversations as soon as issues crop up for individuals.
With the climate change challenge and the need to build a robust recovery out of the COVID-19 pandemic in the years ahead, flexible and available finance will be absolutely crucial to underpinning the public infrastructure and household investment we need to cope.
It is not possible to have a well-functioning stakeholder economy without widespread access to affordable credit. And if we don’t work towards an open ‘stakeholder credit’ culture, but instead descend into the narrative that lending and borrowing is some sort of ‘demerit’ activity to be constrained or reserved for the privileged, then millions of people who might gain from the flexibility offered by credit tailored to their circumstances simply won’t have that option available in the future.
The global financial crisis of 2008 severely damaged the reputation of banking and financial services, rightly forcing new regulatory safeguards. There were indeed bad practices and major policy failings. But in an era of polarised debate, the case for responsible credit availability feels very much drowned out by those seeking to make wider ideological conclusions. A casual glance at social media shows that there is a vocal anti-credit, anti-capitalist zeitgeist which, if given unchallenged credence, would risk throwing the baby out with the bathwater.
The truth is that credit and financial services can be a force for good – even if it is unfashionable to say so. Orwell was right when he said that sometimes it is our first duty to restate the obvious. And while it is quite telling that today very few policymakers feel able to do so, it does need to be said.
To read the full 'Banking on building back better' joint essay series with the Social Market Foundation, click here.