Commentary - Executive magazine October 2007
When I was in London recently I tried withdrawing some cash from my British bank, but was denied access. On calling the bank I was asked if I had made several transactions – when “no, no, no and no” were my replies I was informed I’d been defrauded. Thousands of dollars had been taken from my account.
I’d get the money back, but would first have to sign a declaration form, get a new credit card and wait 10 days to be reimbursed. Whew.
Relating the story to friends it was surprising to find that all of them had either had a relative defrauded or experienced it themselves; in some cases more than once.
How it happens is by ‘phishing,’ where hackers send in what are called Trojans - software downloaded without knowledge of the user - that take screen shots of your computer, allowing the capture of passwords and credit card details.
In Britain the problem has become so acute that the Association for Payment Clearing Services, a banking industry body, said there had been an 8,000 percent growth in online fraud between 2004 and 2006, estimated at losses of $90 million last year alone. Online business is big business in Britain, with 26.5 million people undertaking an estimated 372 million online transactions a year.
As technology becomes more widespread phishing could increasingly happen in the Middle East. Indeed I had been ‘phished’ in Beirut, albeit by some crooks working through Italy, the destination for my looted cash. Whether Arab banks are facing this issue yet it is not making any headlines, but de-frauding will no doubt come to the region as banks and goods outlets increasingly adopt the online service and hackers size up another global region to plunder.
The other financial shocker of my trip to the overcast British Isles was the extent private debt was affecting the lives of most inhabitants. The majority of people I encountered had debt, with my former student friends (American friends are another story) owing thousands of pounds, years after they had graduated from a university system partially funded by the state. Such debt is hindering that all-important purchase, a property – but that of course requires going even further into the red.
For young people starting out in life such debt looms over them like a Damocles sword, with the average 18 to 24-year-old owing $5,720 in unsecured borrowing, and some 108,000 in the same age bracket having credit card debts of more than $10,000.
The willingness of Brits to go into debt is only rivalled by the Americans, with the average Briton owing twice as much in unsecured borrowing – overdrafts, personal loans, credit card debt – than the typical European.
According to consultancy firm Grant Thornton, Britain owes a collective $2,690 billion in mortgage and unsecured debt. For the fist time that figure is higher than Britain’s expected gross domestic product (GDP), forecast at $2,660 billion for 2007.
This debt has trebled in the decade that Labour has been in 10 Downing Street, and is largely based on a runaway housing market, which accounts for $2.261 trillion of debt while personal loans and credit card debt stands at $428 billion.
But such disproportionate debt in relation to GDP poses a problem. Britain is essentially consuming more than it produces, in goods and services. Adam Smith, that doyen of capitalist thinking now commemorated on the back of the new £20 note, would have been horrified. Smith disapproved of speculative fever (which is now getting hedge funds and banks in deep water) and an economic emphasis on buying and selling (Britain’s “buy now, pay later” culture) rather than producing actual assets. The true healthiness of an economy that is based on such intangibles is highly questionable.
Arab financial institutions should watch, very closely, how Britain and America deal with the current financial crisis, particularly as this part of the world is striving to emulate the Anglo-American economic model.
Such out of control debt, and the ease with which banks dish out cash, even to the unemployed, has caused serious reverberations around the world as well as negatively impacting on the lives of millions of home-owning Americans and now, Brits.
The run on Britain’s fifth-biggest mortgage lender, Northern Rock, last month – with $2 billion withdrawn in a day over fears the company could go bust – shows how dicey the interlinked financial system is. Northern Rock was forced to turn to the Bank of England to bail it out as the firm’s ability to withdraw from financial institutions had been compromised by the $200 billion valueless US mortgage market, where risk has been sold on to such an extent internationally that any its anyone’s guess which bank will be hit next.
The Arab world would do well to hedge its bets on a more realistic debt market that is in line with GDP as well as trying to avoid the pitfalls that have beset online transactions.