Financial Excess Learn how to correctly analyse this topic.
Sarah Simon
11 min Read Time | September 6th 2022
Key takeaways
What is it?
Being in debt means owing money to someone else, usually a bank. A person's debt can mean they cannot afford necessities or pursue their goals. It is also a large source of mental strain. It is accompanied by interest payments, meaning that more is paid back than was borrowed, making it a very cost-ineffective means to pay.
Increases in personal debt can cause a short-term boost to the economy, but this usually turns negative after 3-5 years, as people need to pay it back and then have to stop spending to repay it.
Lots of debt is unnecessary and encouraged by banks and other financial institutions as they benefit from interest payments. Credit cards, in particular, are a large source of personal debt as they are very easy to get and often come with incentives, such as rewards and cashback. About 20% of people have credit cards globally. Many people are very vulnerable to overusing credit cards, particularly young people and those with low incomes. Despite this, criteria are often too loose and spending limits too high, allowing people to become engrossed in debt.
Sources:
https://www.moneysupermarket.com/credit-cards/gen-z-and-credit-cards/
https://www.theglobaleconomy.com/rankings/people_with_credit_cards/
https://www.smbcompass.com/every-country-ranked-by-average-personal-debt/
https://blogs.imf.org/2017/10/03/rising-household-debt-what-it-means-for-growth-and-stability/
General Impact assessment
This topic is meant to talk about how banks are giving people loans, credit cards, and other financial services irresponsibly (giving them to someone who probably or might not be able to pay them back). This applies to credit cards and loans.
Introduction
The introduction of any topic needs to contextualise the issue, explain why it is important, and what factors should be considered when assessing the company's actions.
In the introduction, please include the following:
Why debt is damaging, both on a personal level and towards the economy as a whole
How widespread the problem is, how many people are affected by excessive debt, and how many people own credit cards and are struggling to pay back what they owe
Which factors exacerbate the problem and why, for example, incentives for credit cards increase the likelihood of getting into debt, higher likelihood of certain age groups overspending, the ownership of more than one card is a risk factor, etc.
For the above, ensure that it is tailored to the main text - for example, if the company offers specific rewards on credit cards, make sure the introduction includes an explanation of why this is an important factor.
- It should provide context on the country/regions the company has the greatest presence in, including a statistic showing the current situation.
Core Analysis
The core of the analysis needs to explain what this company is doing to exacerbate excessive debt.
There needs to be proof that the bank is giving loans and credit cards irresponsibly (higher than average interest rates, low-income borrowers, borrowers with multiple credit cards, etc.).
To do this, consider the following points:
How much has the company lent in personal loans over the past year?
Where possible, split the above into relevant categories.
You should disregard more productive loans such as mortgages and focus on ones that tend to be the most destructive.
How many credit cards does the company have in circulation?
This point is sometimes disclosed directly. However, there are multiple ways to estimate it.
Do they deliberately entice people into debt?
Most banks offer rewards, bonus points, cashback, etc. for using their credit cards; look at how much of this the bank offers and what kinds of rewards they offer.
Do they have special offers for specific groups?
Most often, this is young people who are particularly likely to overspend. Banks sometimes offer lower initial fees, extra rewards, and so on for young groups using their credit cards" change the bold part for "it is."
They might also offer particular things to groups less likely to want a credit card.
The introduction should have explained why these groups are relevant.
Do they have low eligibility requirements, for instance, having no income threshold, no credit score checks, and so on?
Whether they allow for things such as the ownership of multiple credit cards at a time.
Allowing under-18s to have or use a credit card should be included.
Add the % of default (like missing payments/reimbursements and any indication of predatory lending).
For example, the key example mentions interest rates, low standards, the high number of outstanding payments, failure to pay, etc.
- A helpful tip is to look at news articles to see if there are issues with lending practices and average interest rates for a product - which would be helpful to see how it compares to other players.
If they disclose the total credit card debt they hold:
1. Look for the average debt per card in the country they mainly operate in or the global average if they are international.
2. Divide the total debt by this amount to estimate the number of cards.
Using the market share:
1. The market share can be calculated by the bank's assets compared to the assets of their main country of operations or globally.
2. Look for the total number of cards in the area, and multiply it by the market share.
3. Ensure that the number of cards and the market share is using the same place, i.e., the global market share multiplied by the global number of cards. This should be chosen based on their operations
4. Do not use a country-specific amount if they have global operations.
Using the number of customers:
If there is no possibility of calculating the market share, a possibility is to estimate the number of cardholders by multiplying the number of bank customers by the general number of account holders with credit cards.
If they disclose the number of credit cards but not the total debt, the total debt should be calculated by multiplying the number of cards by the average debt per card.
Make sure to describe the scale of the impact by taking into account:
6.1 The breadth of the impact
Is the impact local, national, or global?
How many people are concerned? Thousands? Hundreds of thousands?
6.2 The depth of the impact
Is the life of people concerned deeply affected, or does the issue just marginally impact them?
Are the changes brought by the issue profoundly changing society or the planet?
6.2 The persistence of the impact
How long would the impact described last for? Months? Years? Decades?
How reversible is the impact described in the impact analysis? Can it be easily stopped/extended?
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