Is Ireland a nation of credit card junkies?

The popularity of plastic money has increased enormously in Ireland. The number of personal credit cards in use has increased over the five years since February 2004 by 21½%, similar to the percentage increase in the labour force between then and May 2008.

But personal credit card indebtedness, according to Monthly Statistics for February 2009 issued by the Central Bank, has increased by a massive 70% over these 5 years and now amounts to €2,896,700,000. Credit card indebtedness over the past 12 months has increased by €119.4 million, or just 4.3% since February 2008, so the current credit squeeze has not accounted for the bulk of this overall increase of almost €1.2 billion since February 2004. We are now spending less and repaying less, but owe more.

Credit cards offer many attractions, including the relative ease with which personal unsecured debt can be accrued. Some people use them as a cash substitute while others avail of the opportunity for a revolving, if a relatively expensive credit facility. They also, of course, offer a means to readily obtain cash at ATM’s.

Advances in internet technology, together with the evolution of the European single market, has spurred the growth of internet commerce in Ireland. One of the impediments that Irish consumers faced was that retailers did not enjoy the benefit of economies of scale because the Irish market was relatively small, choice was limited and prices expensive. But that impediment is now overcome as consumers can easily shop throughout the European Union for items of interest and these can be delivered to them in Ireland at a reasonable cost. Many regular service providers also encourage the use of electronic payment systems for a whole host of products and everyday services.

Retail sales in Ireland contracted in 2008 by 20%. Tax revenue dropped by 19% in January, compared to January 2008. New monthly spending by personal credit card users dropped by 18.3% to €766.4 million and monthly payments by personal credit card holders dropped by 15.8%, or €157.9 million in February 2009, compared to February 2008. The number of personal credit cards currently in issue is 2,212,000, just 1.6% more than a year previously. Depsite such a significant drop in new monthly spending and monthly payments that corresponds to the overall drop in retail activity, the total level of credit card indebtedness has increased by €119.4 million (4.3%) in the year to February.

The average indebtedness per personal credit card in Ireland is €1,310. Credit card holders typically make a monthly payment of €380 but spend slightly less, €346, each month.

Credit card trends and spending patterns have to be seen in the context of general economic trends.

The severity of the economic downturn is reflected in the most recent Live Register statistics. These are not designed to measure unemployment because they include part-time workers, who work up to 3 days each week, seasonal and casual workers entitled to Unemployment Assistance or Benefit. But, nevertheless, the trend is awesome and worrying, not just in the context of paying credit card debt but also, of course, in securing a stable livelihood.

The number on the Live Register in March 2004 was 168,880, an increase of 821 over a 12-month period. The seasonally adjusted total number under the age of 25 years on the Live Register in March 2004 was 32,900.

The number on the Live Register in March 2009 was 371,271, an increase of 173,279 over the most recent 12-month period. The seasonally adjusted total number under the age of 25 years on the Liver Register in March 2009 was 79,700.

The credit card industry emerged from the long-established practice in the United States of hotels and merchants providing customers with paper indetification cards for the purpose of doing business with that particular firm.

The credit card, as we know it today, made its debut in New York in 1950. Diners Club became the first all purpose credit card, which, of course, allowed the cardholder to use the card at multiple businesses. The Bank of America ‘BankAmericard’ arrived in 1958. American banks were not allowed to operate outside their home state and this would have been a constraint on the development of the credit card business so Bank of America set up a separate entity known today as Visa and it became an association controlled by its member banks' and financiial institutions'. It was 1966 before Master Card was created. Today both cards account for 70% of the world credit card market. The American Express charge card also emerged in 1958 - the difference being that all money outstanding has to be paid in full at the due date each month. Larger retailers were reluctant to accept credit cards at first - but smaller retailers considered that they offered them a competitive advantage against their larger rivals.

Visa and Master Card are associations owned by member financial institutions worldwide – 16,400 in the case of Visa and 23,000 in the case of Master Card. Last year Visa processed €2.3 trillion in payments covering 55 billion transactions by 1.7 billion card users.

Master Card processed 21 billion transactions used by 981 million card holders. Apart from processing transactions and having sophisticated technology platforms to mitigate fraud, both entities offer insights into consumer behaviour and buying trends. Neither issue cards, set annual fees, determine annual percentage rates on cards or solicit merchants to accept cards. The customer’s bank deals with these matters. Boards of directors are elected by member firms based on a voting system that is correlated to the transaction volume of particular banks.

The credit card industry is considered mature because such a high proportion of the population are users, sometimes of several cards concurrently. The original credit card family now includes debit cards, charity cards, special cards for discrete subsets of customers such as high net worth individuals and the promotion of loyalty points. But one of the big issues for credit card issuers is the reduction of interchange fees and the impact of these on competition. Larger merchants can negotiate lower fees. The issue of fraud, identity theft and the obligation to secure confidential information also exercises this industry.