16 February 2022

Helping consumers manage their spending and saving goals

Written by Dr. Heather Kappes, Associate Professorial Lecturer in the Department of Management at the London School of Economics and Political Science, studies consumer behaviour and marketing.

Consumer credit, which includes credit cards, vehicle financing, and personal loans, has been rapidly growing in the UK. Easy access to financing has given many Brits freedom to shop and spend. But it has also raised concerns about growing levels of debt.

There’s another concern about consumer credit: that it decreases the need to practise delaying gratification. Psychologists have studied delay of gratification with the “marshmallow test,” where young children struggle to resist eating the fluffy treat in front of them as they wait for a researcher to return with a second snack. (If you haven’t “awwed” over a video of this yet, click here.)

In a similar way, adults often struggle to resist spending on temptations like a nice meal out after a long week, a cute jumper, or a treat for the kids, even while saving up for bigger purchases like a sofa or computer.

Of course, financing lets you make that big purchase without prior saving. So it isn’t surprising that financing is appealing, especially when interest rates are low. In a recent YouGov survey of more than 2,000 people, 33% of respondents said nothing would stop them from applying for 0% finance for a purchase over £500. The percentage was identical for respondents from middle-class and working-class backgrounds, showing that it isn’t only people with lower incomes who want to spread their payments out over time.

But even with 0% interest, there are reasons to think twice before financing a purchase. Applying for credit typically leads a lender to search your credit records, which can negatively impact your credit score. Many people don’t know about this potential impact of applying for credit. In the same YouGov survey, only 12% of respondents said they would hesitate to apply for financing because it could affect their credit score.

People may be learning about the costs of credit applications the hard way. About one in seven respondents in that survey reported that they had previously applied to finance an online purchase and had been rejected.

Those who had been rejected were, not surprisingly, much more likely to worry that they would be rejected again (21% versus 3%). However, they were also more likely to hesitate to apply because of the concern that applying would affect their credit score (21% versus 10%). In fact 73% of those with the experience of rejection were aware that applying for credit affects credit score; only 43% of those who had not been rejected said they already knew that.

The challenges of managing finances and delaying gratification have stimulated an appetite for companies to help us spend responsibly. After the recession of 2008, as consumers tried to reduce their use of credit, some American retailers reintroduced layaway schemes. And there’s been a rapid growth in banking apps that help track progress toward savings goals. But sometimes we just really need a new sofa or mattress or computer or phone, and don’t have the funds handy. Until now, there haven’t been many private market solutions to help.

One promising approach is exemplified by etika, which works with select retailers to offer funding to customers. etika does two things differently than traditional consumer credit providers. First, they give consumers budget guidance before they shop, without conducting a credit check that can impact consumers’ credit scores. And second, by charging retailers instead of consumers, they keep interest rates low or nonexistent.

Children are more successful at the marshmallow test when researchers give them strategies to distract themselves and pass the time, or to make the marshmallow seem less tempting. In the same way, there’s a clear market opportunity for tools that help consumers meet their needs and wants while using credit responsibly.

Companies like etika highlight the opportunity for retailers to profit while helping consumers manage their spending and saving goals. Most adults are well aware of their challenges with temptation, and are eager for products to help. Retailers that brought back layaway a decade ago got a positive response from customers. Those that partner with transparent, fair, low-cost credit providers today are likely to get the same.

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