British consumers and firms will continue to face a credit squeeze even as the economy recovers, with costs remaining high and credit card companies re-imposing annual and monthly fees, a report out today says.
The Precious Plastic 2010 study by accountancy firm PricewaterhouseCoopers (PwC) also found there had been a "striking" drop in new lending, with unsecured lending across the industry falling by 39 per cent and secured lending by 79 per cent this year.
Supply of credit is unlikely to increase even if consumers do regain their confidence, pushing some into the arms of less mainstream parts of the industry – such as door-to-door lenders or pawn- brokers – which often charge punitive rates. "As the recovery gains momentum and consumer demand for credit begins to return, PwC believes lenders will be unable or unwilling to increase supply sufficiently to match demand," the report says.
"This will leave consumers surprised at both the cost of credit and the difficulty in gaining access to it. Some consumers will be forced towards less mainstream corners of the industry." Even those who manage get their applications for credit accepted will face new charges, as lenders seek to repair balance sheets ravaged by the credit crunch.
The report particularly highlights that some credit card companies' business models are "no longer sustainable", with some finding it hard to gain funding even from their own increasingly risk-averse treasury departments.
"With traditional revenue lines under pressure, the current credit card business model is no longer sustainable. PwC expects annual or monthly fees to become the norm," the study says. "Fees will come from both the higher end of the market (where customers will pay for access to premium benefits) and from the lower end of the market (where more marginal customers will be expected to pay for access to even a basic credit card)."
The trend is already in evidence. Egg has started levying a £1 monthly "inactivity fee" on some account holders. M&S Money "Premium Club" customers pay £10 a month for triple reward points, travel insurance and in-store café vouchers.
Despite the difficulties, there are still new players interested in entering the market, and the Financial Services Authority is reporting "a number of applications for new banking licences". Bank of China, for example, has said it is interested in operating in the UK. The Government is keen to see new entrants boost competition in a market it sees as dangerously over-consolidated.
HSBC and Barclays are this week expected to make statements giving more signs that the alarming levels of bad debt are starting to ease.