If you have ever seen me present, you will probably have heard me use the word ‘friction’ a lot. Which naturally leads to words like ‘lubricant’ and all the jokes that naturally follow from there. But the lubricating effect of technology on so many aspects of life is not a joke. For me it is one way of understanding one of the greatest drivers of change today. And in my most recent talk for Equiniti Credit Services, I’m applying that understanding to the world of consumer credit and specifically, the future of consumer credit.

Lubricating your spending

The digitisation of money has been perhaps one of the greatest lubricating effects of technology. Not only has it made the flow of money easier, it has abstracted us away from the physical reality of cash in a way that makes it easier to spend, and to borrow. This is evident in the slang term for the credit card, “the never-never.” Don’t have the cash to pay for it? Put it on the never-never. That neatly encapsulates the frequent attitude we have to credit, until it gets too much. Electronic cash, and particularly electronic credit, just isn’t real. It’s fantasy money.

The evidence base

This isn’t just me extrapolating from slang and anecdote. It’s the stuff of multiple research papers going back to the late 1980s. Take these excerpts from a 2013 paper by Farah Diba Abrantes Braga, Giuliana Isabella, and José Afonso Mazzon:“Past studies have addressed the … how payment modes influence consumer spending behavior (Chartterjee & Rose, 2012; Faber & O´Guinn, 1988; Feinberg, 1986; Hirschman, 1979; Mendoza & Pracejus, 1997; Prelec & Loewenstein, 1998; Prelec & Simester, 2001; Soman, 2001; Soman & Cheema, 2002; Srivastava & Raghubir, 2008).”That’s a lot of papers that show how you pay changes how you spend.“These studies have shown that credit card usage increases the probability of spending (Prelec & Simester, 2001; Soman, 2001; Soman & Cheema, 2002) and that the spending amount increases as well (Prelec & Simester, 2001; Soman, 2001).”So, you are not just more likely to spend money, you are likely to spend more.Braga, Isabella and Mazzon’s paper takes this analysis beyond the credit card into the world of digital wallets and beyond. They say:“From credit cards onwards, electronic payments have [shown] increases in purchasing probability, in spending amounts and, most worrying, is that it might elicit compulsive behaviour.” So, this is not just about lowering the friction of commerce: abstracting you away from the actual cash you are spending can create compulsive behaviour.

OpEx Lifestyles

Now put this into the context of our modern lifestyles where much of our expenditure is moving, in business terms, from capital (CapEx) to operational (OpEx). We don’t own cars, we effectively rent them. Same for homes. And music, video. Clothes, beauty products and electronics are increasingly moving to an OpEx model, with payment services like Klarna, subscription models like Dollar Shave Club, and the subsidising of smartphones through connection contracts.I would argue that this shift serves to further abstract us away from the money in our bank accounts. It makes the achievement of a successful lifestyle about cashflow rather than wealth. And with our abstraction away from the realities of our financial situation that digital payment brings, it’s easy to place much of the burden of that subscription lifestyle onto credit.

Attitudes to debt

This is further compounded by the changing attitudes that we have to debt. In a 2018 paper, Johan Almenberg, Annamaria Lusardi, Jenny Säve-Söderbergh, and Roine Vestman argued that the rising levels of consumer debt in OECD countries could be explained in part by a softening attitude to it. Fewer of us now think of borrowing with guilt or shame. It is a normal part of adult life.Looking to the future, where does all this point us?

Reality buffer: the future of consumer credit

Take the current trends in digital payments, open banking, and AI and use them as the basis for a vision for a future world where we are even further abstracted from cash. We think less and less about how we pay and more about what we want and what we get.It’s easy to see that we live at least the first twenty years of our adult lives with the minimum of limits on our experiences - our extended adolescence. There will be highs and lows in terms of our relative expenditure to our earning capability: the first few years of work, credit will allow us to live the high life before perhaps our earning potential catches up. We might spend a few years paying that off before we re-enter a period of living on credit, whether driven by children or the acquisition of capital assets like a home.

Endless buffer

We might never hit that stage though, living our entire lives through highs and lows of income and expenditure. Our personal AIs will act as a ‘reality buffer’ in between, nudging our behaviour to keep us within the bounds of our borrowing limits and helping us to occasionally reign it back in.Plug in its knowledge about our health and it might even be able to minimise the impact of future shocks to our earning power, though limiting today’s experiences for tomorrow’s will never feel appealing.

Future of consumer credit: sustainable success

For the credit providers, this creates a more challenging world. There are great business opportunities as more of us borrow more, more flexibly. But there are also risks to those who want to build sustainable success based on ethical behaviour. How do they maintain a trusted relationship with customers who have low-friction access to diverse sources of credit? How do they help them maintain the lifestyle they want without over-reaching? These challenges are huge today and they are only going to get bigger tomorrow.