Consumer Credit in Europe

In this introductory chapter I explain the reasons why I have written this book. Firstly, because there is a gap in the literature on this subject. Next, because they are particular kinds of credits with substantial risks for consumers. I also mention my professional experience relevant to this book. To give an overview of the contents of the book I describe the order of chapters and the relationship between them.

The objective of this chapter is to explain how consumer credits evolved in Europe during the last 20 years (between 2000 and 2019) and what role they have played for the economy as a whole. While being of much smaller size than mortgage credits, they contributed to economic growth via boosting expenditures for consumption. They filled the gap between the incomes of the population and their need (or wishes) to consume. But this type of credit being easy to rise and to shrink, has contributed also to fluctuations in economic growth and over-indebtedness.

This chapter analyses the outcome of the digitalization of financial services in terms of the more and more frequent use of digital channels by consumers and by financial services providers. The outcomes of this tendency will be analysed in terms of: Structural changes of the European consumer credit market: the role of new credit providers (FinTechs and BigData operators) and their relationship with traditional providers (competition or cooperation with traditional credit providers); new business models of providing consumer credit stemming from new technologies and their prevalence over more traditional models; possible future changes in the consumer credit market in line with the development of new channels and models of providing consumer credit outside Europe; challenges for European legislation on consumer credit stemming from digitalization.

This chapter explains the role of law in the finance sector, focusing in particular on European law protecting consumers in this sector. It describes the principal legislation for the consumer credits market, namely the Consumer Credits Directive of 2008. It presents the history of its introduction and the level of compliance of market players with this legislation and possible reasons for incomplete compliance. It describes also the relevant elements of some other European legislation relevant for shaping the consumer credits market (Distance Marketing of Financial Services Directive, Directive on Residential Credits, Directive on Unfair Contract Terms and Directive on Unfair Commercial Practices). Following on from chapter three presenting the challenges of technological and organizational changes ongoing on the European consumer credits market it indicates the expected adjustments to laws regulating this market.

This chapter compares the borrowing and saving trends of the poorest European households in the wider perspective of financial decisions taken by a household over its lifetime. It uses the classical permanent income and life cycle hypotheses but admits other reasons and also the irrationality of decisions taken by households. It takes into account the increasing inequality of European households and growing numbers of the poorest. It takes into account also the impact of recently proliferating financial products, as short-term loans, as a substitute for income in the financial planning of households. Using microeconomic data, it concludes that the behaviour of the poorest households significantly departs from classical life cycle hypotheses. Mortgage borrowing is less frequent and seems to be for some households replaced by non-mortgage borrowing for current purposes. The poorest households are more frequently refused credit and suffer from credit repayment burdens. Financial stress and probably also behavioural biases make the poorest households have less financial resources for retirement. Among underpinnings may be indicated their poverty, but also lower financial awareness, less appropriate borrowing decisions and being subject to deselection from financial offers dedicated to better customers, and aggressive selling of short-term and high-cost loans.

This chapter summarizes the most important findings of the book. It compares the crisis of consumer credits in 2008 and the recent one linked to the Coronavirus pandemic. The first was provoked by optimism and loose regulation, the second has external origins. As to more permanent changes, it describes the consequences for consumers, positive and negative, of the digitalization of credits. It underlines particular role of credits for poorer households. It indicates regulatory responses to new conditions in crediting, like digitalization.