From 1920 to 2020: how loans have changed over the last century
Lending is an age-old concept and has existed in some form or another for centuries. Over the last 100 years, there has been an incredible shift in the way we lend money and how we think about borrowing money. We have seen the launch of the credit card, student loans have been introduced to help students pay for tuition fees, and mortgages have changed from a luxury only available for the wealthy to a viable option for most people living in a western country. In addition to this, the rise of technology has resulted in the natural development of online banking and lending systems, which have also significantly shaped the lending landscape.
In this article, we will dive deep into the timeline of how and why lending has changed. From political movements to technological evolution, the lending landscape has seen dramatic shifts, for better or for worse.
Let’s start with one of the most common ways money is lent - credit cards.
The credit card came into prominence in the 1950s when banks were looking to make lending more efficient, which would, in turn, increase its customer base. The first transactions facilitated by a credit card came in 1950 when the businessman Frank McNamara forgot to bring cash and paid a restaurant bill with what he named the Diners Club Card. Credit cards in the 1950s were made of cardboard and were not electronic, meaning that the individual credit payment would be made by the cashier taking down the details from the card so the payment could be made in due course.
BankAmericard, which is known as Visa today, was launched in 1958 and was the point at which the use of credit cards started to snowball. Merchants were wary of credit cards when BankAmericard was created because of some inherent changes to the systems surrounding customer spending. Still, the bank managed to convince businesses to endorse the change by posting 60,000 cards to residents. This showed retailers that customers were in favour of this brand new way of lending money, and, if they decided to go against this change in payment, companies would be losing out on business. The bank and eager customers effectively forced merchants to accept the change, which allowed the credit card market to grow aggressively.
Barclays Bank introduced the UK’s first credit card on the 29th of June, 1966, the ‘Barclaycard’, which was inspired by the BankAmericard that had been introduced eight years earlier.
The first-ever cashpoint was developed by Barclays Bank and was installed in Enfield, North London on the 27th of June 1967. Cash machines were initially designed to accept hole-punctured vouchers which were paid for and used at the dispenser when a customer needed it.
The days of manually taking credit were finally over - Dee Hock - the CEO of BankAmericard - introduced the first computerised transaction in 1973 and reduced waiting time to just one minute. Credit cards now rivalled the speed of cash payments, making it a much more attractive proposition for consumers.
A change which was described as ‘duality’ - banks began to now issue both Visa and Access cards, which was another financial service corporation that facilitated the transfer of electronic funds. The Access group began to break up and was eventually disbanded, but Mastercard emerged in the UK as its replacement, bringing worldwide acceptance to the UK's credit cards.
Cashback became a new way to withdraw cash. Customers simply entered any accepting shop and asked for an amount of money with or without shopping - this made cash withdrawal much more accessible and easier for the consumer.
As financial services found new ways to innovate, new types of cards - such as the gold card - were released to offer premium services for more wealthy consumers. It allowed customers who had a good credit score (a lengthy credit history that demonstrates substantial loan repayment on time), to lend more money on credit cards. It was targeted at individuals who enjoyed leisure activities like shopping, eating out at restaurants, and going for drinks at bars, as credit cards made the retail and hospitality sector more accessible.
Credit card users were now able to purchase low cash transactions with a tap of a card. This sped up transactions to a matter of seconds and allowed customers to get in and out of shops quickly.
Next up, business loans. There are so many different types of loans out there, so we’re not going to go into the history of them all. Instead, here are some of the key developments over the past 100 years that have shaped business lending.
Although lending systems were already fairly well-formed and sophisticated in the early and mid-20th century, complicated paperwork and slow processes meant that getting a loan was laborious and time-consuming. The rise in technology and the increasing accessibility of computers propelled loans into modernity, in the 1980s online banking and lending systems made applications and processing efficient and quick. This also made loans much more accessible and meant that banks were able to cope with higher demand.
Since the first online banking and loan systems were set up, there have been major advances in this field. As the FinTech sector has grown and evolved, numerous digital lending platforms have been developed, which have revolutionised business loans. Historically, small business loans have mostly been provided by banks, as the field continues to shift and diversify, it will be interesting to follow future developments. Today, there are a variety of alternative lending models, like peer-to-peer lending, for example, which allow loan-seekers to circumvent banks entirely.
Student loans are different from other loans and have played a crucial role in making higher education more accessible.
After the atrocities of World War II, the government enforced legislation which allowed students to claim student tuition fees and a maintenance grant for living costs from the local education authorities (LEAs). This was a legal obligation and required the LEAs to give full-time university students who had proof of an offered place from their chosen university a maintenance grant. The act allowed families of all backgrounds to have equal opportunities for education at university, regardless of income or social status.
By the start of the 1980s, any grant supplied by the LEA was dependent on parental income. Students whose parents had high income were imbursed the minimum grant, which was changed from £380 to £430 for a year of full-time education. Those whose parents who had low income and qualified for the maximum loan were granted £1430 for a full-time year of schooling. Roughly 155,000 students accepted the full grant in 1980, and about 30,000 students received the minimum grant.
The birth of student loans happened under the control of Margaret Thatcher’s Conservative Government. The SCL was founded within the 1990/91 academic year and granted loans to students to provide help for meeting living costs. Loans were low-interest and allowed students to finish their course before they were required to start payment. In just the first academic year, the SLC provided 180,100 loans to students, which represented 29% of the student population at this time. The average loan was small in comparison to modern student loans, only £390.
Sir Ron Dearing, a Senior Civil Servant, wrote a report advising the government to introduce tuition fees for students. Tony Blair’s Labour government subsequently passed the Teaching and Higher Education Act in 1998, which enabled Universities to charge students £1,000 for tuition fees for every full- time student’s academic year, starting in 1998/99. The poorer students were funded with a repayable student loan rather than receiving a free maintenance grant for living costs. The SCL increased the expenditure for student loans from £941 million in the 1997/98 academic year to £1.23 billion in 1998/99, the year in which tuition fees were introduced.
In January 2000, the Scottish government, which was a coalition formed by Labour and the Liberal Democrats, decided not to abide by the annual tuition fees for students. In replacement, they charged students £2,000 after graduation. However, this policy didn’t last long - in 2008, the Scottish government abolished the fee, and Scottish students now receive a free university education. The Welsh government has a similar ruling to the Scottish government’s 2000 policy, whereby a Welsh student studying at a Welsh university pays a fee after graduating.
Tuition fees were increased for students from £1,200 to £3,000 in 2004 under the control of Tony Blair's Labour government. In the first academic year of this change - 2005/06 - the Student Loans Company was providing over to £2.7 billion in loans to over a million students. The Higher Education Act of 2004 was implemented in an attempt to make higher education fairer for people from lower socioeconomic backgrounds. Loans became deferred meaning they were only paid back once a student was earning an adequate income, while contingent loans were increased to factor in living costs and higher fees. New, generous, maintenance grants were also introduced to provide financial help for significantly worse-off students.
University tuition went up from £3000 to £9000 starting from the academic year of 2012/13. Loans were still available for all people wishing to enter higher education, and people from lower socioeconomic backgrounds were given higher maintenance loans to make living costs more manageable. This change was brought into place by David Cameron’s Conservative government, and the reasoning for this new policy was to attempt to compensate for the 80% cut in the teaching budget which was part of an attempt to recover from the financial crisis in 2008. When this change was passed through parliament, thousands of students and academics protested as many believed it was farcical to plummet students into huge debt before they had embarked on their careers. Despite the resolution from the general public, England's government continues to charge increased tuition fees across the board.
George Osborne, the Chancellor of David Cameron's Conservative government, implemented rulings that by the time the 2017/18 academic year started, students must pay a slight increase on loans to account for inflation in the economy. Students now pay £9,250 for a year of full-time higher education - £250 more.
Finally, last but not least, mortgages.
The government introduced new legislation which helped the construction industry build 1 million new homes - half of which were designed for private property, and the other half were council houses. This policy was successfully passed through parliament - the Chamberlain Housing Act of 1923 provided money for private contractors and builders, and the Wheatley Housing Act of 1924 subsidised the construction of big council estates.
As an influx of new properties came on the market, and mortgages became widely available to the middle classes on low-interest rates, the housing market continued to boom throughout the 1930s. There was a desire from government and local establishments to eradicate harsh living conditions and move tenants into new affordable housing.
As housing became a priority for the UK government, the number of people owning homes increased quickly to 27%, but then, World War II struck. The war halted the investment into the housing sector with a newfound focus on supplies for the army and the general public. Soon enough, a large portion of the achievements of the government and the construction industry were in ruins due to the persistent bombings from enemy forces.
After the recovery from the economic fallout caused by WWII, the 1950s and 60s saw Britain experiencing very high standards of living. This period was characterised by full employment, the doubling of salaries, and low housing prices and interest rates. This period of economic prosperity coupled with reasonable property prices encouraged many to take out mortgages. At the same time, the Conservative government passed a new policy through parliament called the ‘property-owning democracy’. The legislation was facilitated by limiting Stamp Duty and increased loaning to building societies to improve the availability of mortgages.
This new effort from the government had increased homeownership from 1951 to 1964 by a staggering 16%.
With an exponential increase in population in the 1970s, there wasn’t enough council housing to meet the rising demands. Due to increasing homelessness, the Labour party passed new legislation called the Housing Act of 1997, which changed requirements to allow the people who needed social housing the most to get access first. The citizens who didn’t meet the criteria were stuck with a decision to make - should they privately rent a property, or should they buy their first home? Although many would rather own property, mortgage requirements left many only able to rent.
A few years later, under Margaret Thatcher's Conservative government, two new policies were passed - the Mortgage Interest Relief At Source scheme (MIRAS), and the Right to Buy Scheme. The MIRAS scheme gave people tax relief on the first £30,000 of their mortgage, which encouraged people to leap into buying a house, while also allowing more people to qualify for a mortgage.
The Right to Buy Scheme allowed tenants who live in social housing to buy their council house. House prices were based on the current market evaluation, but tenants were also given a discount of 32-50%, which was dependent on their accumulation of rent payments. This allowed people who wouldn’t have been able to buy a house in the current climate a chance to own their own home.
Both the schemes helped increase homeowners exponentially - 67% of Britons either owned a house outright or had a mortgage by the end of 1991.
The deregulation of the financial system let banks devise different mortgages to suit different customers from a range of socioeconomic backgrounds. Previously, building societies were commonplace for consumers to go to secure mortgages, but in the 1990s, banks started to dominate the market. Banks were much more aware of advertising and marketing products than the more traditional building societies. The banks’ market share increased significantly from 3% in 1977 to 36% in 1987, demonstrating the market shift that was about to take place in the 1990s.
Because of the increasing demand for homeownership in the 1980s, house prices were growing year after year. House prices in the 1990s increased faster than inflation and wages, meaning it was becoming increasingly difficult for people to enter the housing market. In 1996, Buy-to-Let mortgages had also been introduced, which led to another surge in demand for homeownership.
Due to the economic downturn of 2008, house prices went down a costly 7.6%, leaving homeowners in a difficult situation. The reduction in house prices worsened the recession, as it was becoming increasingly difficult to source a mortgage, and banks and building societies were imposing stricter rules on lending money.
The schemes initiated in previous years that offered council house users the option to buy property had made accommodation challenging to find. Many citizens without a mortgage had no other choice but to rent privately, and people with private landlords doubled to 15%. Due to the lack of available housing, it became a landlords market, which subsequently meant that rent increased, and landlords could now be picky and choose their preferred tenant.
The overuse of sub-prime mortgages in western countries was detrimental to the economy all over the world. Banks had taken out high-risk loans which were unlikely to be paid back, and on some occasions had lent money to facilitate these loans. Some banks had to be bailed out by the government and the Bank of England, while others resulted in nationalisation.
Since the economic calamity in 2008, further regulations have been put in place by the government. Mortgage applicants are subject to a more rigorous audit called the ‘full affordability assessment’, which focuses on salary and outgoings. This has made it particularly hard for young people looking to purchase their first property in the housing market. Still, the government argues that they want to avoid the disastrous mistakes that led to the economic crisis in 2008.
The government has seen the impact of this regulation on young people's prospect of buying their first home, and they have reacted, introducing help to buy schemes designed to give first-time buyers a helping hand in the housing market.
That concludes our journey into the history of loans in the last century. As technology is facilitating even more rapid developments, the next 100 years are sure to be filled with exciting innovations.