Millennials think doing things is more important than buying things. Brian Caplen assesses what this means for the banks when they decide on credit card and personal loan limits.
An executive of Swedish furniture retailer Ikea made headlines when he said: “If we look on a global basis, in the West we have probably hit peak stuff.” Ikea’s head of sustainability, Steve Howard, said business would have to adapt to changes in consumption patterns and talked about “a circular Ikea where you can repair and recycle things”.
The CEO of UK fashion chain Next, Lord Simon Wolfson, blamed a fall in profits on “the continuing trend towards spending on experiences away from things”.
Millennial shoppers, it seems, are not buying as many new clothes and curtains as previous generations. They prefer going to restaurants, bars and cinemas and doing things that can be shared on social media. This has been dubbed 'the experience economy'.
But is an experience a direct substitute for a consumer good in economic terms? And should banks and their regulators be any more concerned about the granting of 'experience credit' as opposed to consumer credit?
For far too long the US consumer has kept the global economy ticking over and the role consumption plays in Western economies makes them hostage to fickle changes in sentiment. Since the financial crisis, the US consumer has offset reduced mortgage spending with increased consumer spending financed by credit, even though average household incomes are less than they were 10 years ago.
Similarly in the UK, the economy performed better than expected post the EU membership referendum because the UK consumer didn’t take fright and carried on spending.
But such sentiments may not last. Spending limits will be reached at some stage. Credit card debt per capita in the US is $2603, and is $1340 in the UK, but only $130 in Taiwan, according to personal finance researcher ValuePenguin.
In the UK in 2016, banks had £19bn ($24.5bn) of credit card impairments on their balance sheets compared to £12bn due to mortgages, according to the Bank of England. So concerned are the UK authorities about the growth in consumer credit that the Prudential Regulation Authority is to launch a review of lending standards.
It is obvious that economies powered by consumer credit will eventually get into difficulties in the same way as housing bubbles generally burst. Banks will then discover how well or poorly their credit scoring models have been working.
The shift to the experience economy may make things even more unstable. Consumers may be switching from buying goods to spending on going out for now, but they are just as likely to switch off in the future and stay at home. When they do, will they feel as inclined to repay the debts of their experience binge as readily as they would for a furnishings and clothes binge?
Banks should be thinking about these changes in their monitoring of credit card limits. Usually a household will cut back on almost every kind of spending before they stop paying their mortgage. But paying off for past experiences may be less appealing.
Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen
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