Consumer shopping around and switching
There are a large number of active consumers in the market, with around 6 million new accounts opened in 2014. We find that consumers are engaged and willing to switch. We estimate around 14% of existing credit card consumers took out a new card in 2014. According to our consumer survey, a further 8% compared at least two credit cards but did not take one out. Over half of active consumers in our survey that took out a new credit card in the previous 12 months shopped around (that is, compared at least two cards).
Most consumers do not perceive material barriers to switching between credit cards, and firms do not consider a lack of switching to be a significant barrier to entry or expansion. However, almost a quarter of higher risk consumers said a reason why they did not shop around was that they did not think that any other provider would accept them. Higher risk consumers were also concerned about the impact of multiple applications on their credit rating.
Credit cards are complex products as a result of being used for different purposes and having a variety of different features. Most respondents to our consumer survey claimed that credit cards are not difficult to understand or compare. However, there is also evidence that respondents do not know important features of their credit card and some respondents said they incurred unexpected or higher than expected charges.
We find competition is focused on a small number of features such as promotional offers and rewards, and when choosing a credit card consumers often disregard important features, such as long-term interest rates or fees and charges that can add significantly to costs.
We find that consumers may end up not choosing the best card for them. This may be because:
- they have not been able to effectively compare the different cards available to them
- they have given insufficient weight to certain product features when making their decision or
- their actual card usage differed from what they expected when they took out the card
We found that many consumers could save a large proportion of their interest by choosing a different credit card. However, for most consumers who transact a lot and borrow a little, the potential savings in absolute value are not substantial. In addition, taking into account rewards and other product features, the fact that these consumers are not minimising interest cost does not necessarily mean that they are not on the best deal. For those who borrow more, though, the potential savings from choosing a cheaper credit card are clear and significant.
This chapter outlines our interim findings on the extent to which consumers drive effective competition through shopping around and switching. These emerging findings are based on:
- the results of our consumer survey
- conversations with consumer groups, firms and trade bodies
- our account-level data analysis
- a literature review on consumer behavioural biases
To drive effective competition in the credit card market, consumers need to be both engaged and active. Consumers can drive effective competition by:
- shopping around effectively, by comparing relevant features of the products offered by firms and
- monitoring the competitiveness of the products they already hold and switching to get the product(s) which best satisfies what they are looking for (or switching usage between existing cards where one becomes more attractive).
Engaged and active consumers will incentivise firms to compete, allowing those firms that offer good deals to grow their market shares. Credit card firms will only face material competitive constraints from firms offering a more attractive proposition if consumers are aware of these offers and consider them when shopping around for a new credit card or deciding how to use existing cards.
In many markets, active consumers help to protect the interests of the more passive consumers and drive competition in the market as a whole. However, shopping around and switching by active consumers will be less effective at driving competition for the benefit of others if firms are able to segment consumers and price discriminate, such as by offering better deals to active consumers than passive consumers. This can be seen in the credit card market through the attractive promotional rates offered with new accounts.
To understand whether consumers are driving effective competition through shopping around and switching we considered:
- consumers’ understanding of credit cards, what drives their choice of credit card, and whether they are able to identify the cheapest product given their usage and
- consumer switching behaviour, including reasons for switching and not switching
Product complexity and comparability
Credit cards are complex products because they are used for different purposes and have a variety of different features. This variation in product features offers consumers choice, meaning it is more likely they can find a card that closely matches what they are looking for. However, it may also mean that comparing credit card products and choosing the best one is more difficult.
Our consumer survey shows that many consumers believe that credit cards are easy to understand or compare, with 65% of active credit card users thinking it is easy to understand credit cards and 50% thinking it is easy to compare them.
The survey also found that some consumers:
- did not know important features of their main credit card – 42% of those who have paid interest on their main credit card in the last 12 months say they do not know their interest rate on purchases; and 46% of consumers who use their main card abroad do not know their foreign currency fee
- with balance transfers may not fully understand how they work – we asked a sample of consumers who had made a balance transfer to or from their main card in the last 12 months a series of three true or false questions about 0% balance transfer deals; 59% of respondents answered all three questions correctly46
Figure 8: Do you know the current amount or rate for the following features?
FCA Consumer Survey47
Transparency of information
We reviewed48 a sample of credit card terms and conditions and financial promotions. We found that information about credit card features is generally available to consumers and, for the most part, appears to be clear and easy to follow, without complicated language. Based on our consumer survey, over 60% of active credit card users said they had received enough information during the application process and 65% said the information they received was clear or very clear.49
However, we found that the font used for some documents was too small and at times illegible. We also found that financial promotions did not outline the impact, if any, on the initial promotional offer should a consumer miss or make a late repayment. We considered that this would have been helpful to consumers.
The overall picture on consumers’ ability to understand and compare credit cards is mixed. While many consumers report that they understand and can compare credit cards, there is also evidence that many do not know important features of their credit card and some respondents stated they incurred unexpected or higher than expected charges.
Price comparison websites (PCWs)
PCWs play an important role in the credit card market. For consumers they can help navigate complex products and reduce search costs by comparing products in one place. For firms, including new entrants, they can help attract consumers with good credit ratings in high volumes.
Our survey found that PCWs are used by a significant number of credit card consumers (66% of those who shopped around for credit cards). Of those that took out a credit card in the last 12 months after shopping around, 39% said they used one PCW and 27% said they had used two or more, indicating that consumers not only use PCWs to search for suitable credit cards, but that some are also comparing between PCWs. Of respondents that used PCWs, 90% reported that they found them to be either useful or very useful, indicating that consumers value the services.
Nonetheless, our review has highlighted a number of issues that may limit the effectiveness of PCWs in helping consumers navigate product complexity, such as:
- the presentation of headline rate offers may not aid the comparison process because it does not account for the fact that a consumer may not be eligible for that rate/offer
- ranking criteria may not be sufficiently personalised to allow consumers to find products that best suit their needs or may be based on assumptions that do not reflect how they use their credit card
- sometimes cards from providers with whom the PCW does not have a direct relationship are ‘hidden’ or difficult to find in search results
- some savings claims are unclear or inaccurate
- several firms offer exclusive deals to PCWs so consumers need to ‘multi-home’ (i.e. look at more than one PCW) to ensure they receive the best deals
- meaningful comparisons are more difficult for some types of credit cards, such as in the higher risk and rewards segments
We consider that there is scope to boost the role of third party intermediaries (including PCWs) in cutting through the complexity consumers face when seeking the best deal. In Chapter 8 we consider how that can be achieved.
Our review of PCWs can be found at Annex 7.
Extent of shopping around
The results of our consumer survey show that, of those consumers that took out a credit card in the previous 12 months, 51% said they had shopped around (compared two or more credit cards), 40% said they did not shop around when they took out a card in the last 12 months, and 10% said they did both. In the balance transfer segment, 62% said they had shopped around.50 The extent of shopping around appears to have increased in recent years – in 2008 the OFT found that only 32% of consumers shopped around for the card they took out.51
A further 8% of consumers compared at least two or more credit cards in the last 12 months but did not take one out. The most common reason cited was they did not find a credit card that better suited their needs than the one they already had.
How consumers shop around
PCWs play a significant role in shopping around with our survey finding that, of those that took out a credit card in the previous 12 months after shopping around, 39% had used one PCW and 27% used two or more PCWs. Consumers are also positive about the experience of using PCWs with 90% of those in our survey that used PCWs finding them very or quite useful.
Some consumers report that an existing relationship with a provider is still an important factor in their decision-making, with around a quarter of active consumers in our survey listing having another financial product with the provider as a reason to choose a credit card from them. Consumers’ choice of credit card is not limited to their personal current account provider or other firms to which they have an existing relationship – while a third of all active credit card holders stated they had a PCA with the provider of their main credit card, a larger proportion, 42%, did not have any prior relationship with the provider of their main credit card.
What features consumers consider when shopping around
Given the large number of product features, consumers understandably focus on a few key features when shopping around.
In the consumer survey, we asked respondents to select up to three of the most important features they considered when shopping around. Most (54%) selected three features but 19% selected only two features; 23% selected only one feature; and 4% were unsure or looked at things the questionnaire did not list.
Of all respondents that took out a credit card after shopping around:
- 24% selected discounts, rewards and benefits linked to using the credit card
- 21% selected the balance transfer fee
- 21% selected the introductory offer on balance transfers
- 20% selected the annual fee
- 15% selected the APR
- 13% selected the interest rate on purchases
As would be expected, the features consumers focused on varied depending on the type of card they took out:
- For those consumers looking for a ‘low and grow’52 card, around a third focused on only one feature (in part, reflecting that these cards tend to have fewer product features such as balance transfers or other promotional offers). For these consumers, the likelihood of acceptance was the most commonly cited feature (39%), followed by APR or interest rate (31%) and size of the credit limit (20%). 15% considered both the APR and likelihood of acceptance.
- For consumers looking for a balance transfer card, 39% cited the balance transfer fee and 37% the introductory offer on balance transfers as features they focused on - 20% of respondents stated that they considered both.
- For consumers looking for a rewards card, discounts, rewards and benefits of using the card (39%) and discounts, rewards and benefit linked to taking out the card (26%) were the two most commonly cited features. 24% stated that they considered the annual fee.
While consumers look at features that they consider as important for their requirements and circumstances, our consumer survey indicated that they may be neglecting features that are important given how consumers actually use their credit card. For example, of those who paid interest on their main credit card, which they took out in the past year after shopping around:
- 82% did not select interest rate as one of the most important features
- 78% did not select APR as one of the most important features
- 64% did not select either interest rate or APR as one of the most important features
The survey also indicates that the lack of focus may influence consumer outcomes. Figure 9 shows the proportion of respondents who did not expect to pay interest on their main credit card when they took it out but paid interest on it in the last 12 months. Of those who paid interest rarely, 40% did not expect to do so when they took the card out, while 16% of those that ended up paying interest occasionally and 12% of those who paid interest frequently did not expect to do so when they took the card out.
Figure 9: Consumers who did not expect to pay interest on their main credit card when they took it out but paid interest on it in the last 12 months
Source: FCA Consumer Survey
Overall, the survey evidence suggests that consumers are focusing on relevant key product features when choosing their credit cards based on their preferences and circumstances. They may be neglecting other important features that may affect their ability to make good choices. For example, a significant proportion of consumers in our survey (64%) who took out their main credit card in the previous 12 months after shopping around and subsequently paid interest did not select either interest rate or APR as one of the most important features.
Repayment of balance transfers
Based on a sample of the account-level data, we analysed what proportion of consumers repay their transferred balance by the end of the promotional period or in subsequent months.
We estimate that almost half of accounts repaid the full amount of the balance transferred by the end of their promotional period. This increases to 60% three months later and to 71% six months later.
We observe that, overall, 41% of all balances transferred are not repaid by the end of the promotional period. This figure decreases to 20% by the beginning of the sixth month after the end of the promotional period.
These results suggest that there are likely to be consumers who are able to repay but do so with a few months of delay – possibly because they only realise that their promotional period ended when they start incurring interest.
We also looked into how many consumers are paying off their balance transfer with another balance transfer. We found around 20% of consumers that carried out a balance transfer in 2014 had previously taken out a balance transfer in either 2012 or 2013.
The extent to which consumers who obtain a new credit card make good choices
There are a few reasons why consumers may not end up choosing the best card for them:
- They may not have been able to effectively compare the different cards available to them. For example, consumers may not know the actual terms they will be offered when they apply for a credit card due to firms’ differential pricing.
- They may have given insufficient weight to certain product features when making their decision. For example, our survey found that, of consumers looking for a balance transfer card, only 20% of respondents stated that they considered both the introductory offer on balance transfers and the balance transfer fee.
- Their actual card usage differed from what they expected when they took out the card. For example, 19% of consumers we surveyed who paid interest on their main credit card in the previous 12 months did not expect to do so when they took it out. Our survey found that 64% of those who used their main credit card for cash withdrawals had not expected to when they took it out, and 70% that used a money transfer had not expected to do so when they took out their main credit card.53
To help understand whether consumers are making good choices when choosing a credit card, we analysed whether consumers paying interest on purchases could have benefitted from choosing a lower cost card.54
- We found there is a significant variability in interest rates available to consumers (even when taking into account their credit risk); most accounts that incur interest could save at least some of it by choosing a different card.
- The majority of accounts transact a lot and borrow a little. For example, over 80% of accounts in our sample incurred less than £20 annual interest on purchases in the first two years after taking out their credit card.55 Thus, for many consumers, the fact that they are not minimising interest cost does not necessarily mean they are not on the best deal once you take account of the value of rewards and other product features. We therefore consider the results below to be an upper bound.
- We estimate that consumers who pay interest on purchases could save over 60% of the interest they incur by choosing a different card. This amounts to an average saving of less than £50 a year per interest paying account as, on average consumers do not pay much interest in a year (on average less than £75).
- For those who borrow more, the potential savings from choosing a cheaper credit card can be significant. For example, 8% of accounts in our sample incurred over £100 interest on purchases a year in the first two years after taking out their credit card. We estimate that consumers on these accounts pay on average £225 a year in interest on purchases of which they could save over £150 by choosing a cheaper credit card.56
- Potential savings as a proportion of interest paid are similar across different risk categories.
Consumers are willing to shop around before taking out a credit card and are focusing on some relevant key product features, often the introductory promotional offers57, when choosing their credit cards based on their preferences and circumstances. However, they may not end up choosing the best card for them and, as a result, may end up paying more than they might in debt service.
Consumers can hold multiple credit cards and can open a new card without closing an existing credit card, or switch usage between existing credit cards. Hence, analysing switching is more complicated than in other markets such as mortgages where consumers close their account when they move from one provider or product to another.
Switching in the market for credit cards can comprise:
- Consumers opening a new credit card with either their existing provider or a different provider and either close their old credit card or stop using it permanently.
- Consumers opening a new credit card with either their existing provider or a different provider but keep their existing card open.
Where consumers keep their existing card open, their behaviour could take a number of different forms, for example:
- They may transfer an outstanding balance from the old card to the new card and continue to spend on the old card.
- They may use the new card for new purchases while continuing to pay off the debt on the old card.
- They may use the new card and keep the old card dormant in case they need to use it in the future.
- They may continue to spend and borrow on both cards, utilising the increased overall credit limit.
- They may keep the old card as their primary card and use the new card for particular expenditure, for example foreign transaction spend.
Estimated switching rates
When looking at estimated switching rates, the rates by themselves do not tell us whether the market is working well or not. For example, it could be that although we observe high switching rates, consumers are making bad choices and switch to worse products. On the other hand, low switching rates are not necessarily a cause for concern if there is evidence of low switching costs (in this case low switching rates may only indicate that consumers are content with their current products).
Based on data supplied by firms, we estimate that, in 2014, consumers opened around 6 million new credit cards. Just under half of credit card applications were successful.
From the consumer survey we estimate that about a quarter of new credit cards opened were by consumers without an existing credit card and about three-quarters by consumers with an existing credit card. This is broadly consistent with the account-level data from which we estimate that 13% to 14% of existing consumers opened at least one new credit card in 2014.58
Estimates of the percentage of existing consumers who opened at least one new credit card in 2012 and 2013 are slightly higher than the 2014 results at 15% to 16% in 2012 and 14 to 16% in 2013.
Most of those who open a new credit card obtain it from a new provider, and overall it does not appear that higher risk consumers switch significantly less than lower risk consumers.
These figures suggest that over the course of a year, almost one in five credit card consumers opens a new credit card.59 When considered alongside those consumers who shop around but decide not to switch, apply for a new card but are unsuccessful, or are on a promotional introductory offer, it suggests that a significant proportion of consumers are active and engaged.
As discussed above, within the credit card market there are different types of consumers and their behaviour varies greatly:
- At one end are the so-called ‘rate chasers’, a cohort of consumers who pay close attention to the products and rates being offered and will tend to switch between products with introductory promotional offers as their existing introductory deal ends. These consumers tend to be very active and engaged.
- At the other end, there is a group of consumers who pay little attention to their product or what other products are on offer that may better meet their needs. These consumers tend not to be active and engaged and either do not change their credit card or respond to credit cards offered to them without comparing alternatives.
- In the middle are those consumers who will only occasionally consider switching, often either because of a change in personal or financial circumstances or because of a negative event such as poor consumer service or unexpected fees or charges.
Factors that influenced consumers’ decision to choose their main credit card
Our survey asked consumers to select what factor(s) applied when they took out their main credit card. As shown in Figure 10, for respondents overall, the key driver was rewards, followed by online purchases.
Figure 10: Which of the following applied when you took out your credit card? I decided to take out a credit card because…
Source: FCA Consumer survey
As expected, these results varied based on the type of card a consumer took out:
For rewards consumers:
- 60% chose their credit card to benefit from rewards
- 22% to make safe online purchases
- 15% to use it abroad safely60
- 15% to benefit from an introductory offer
For balance transfer consumers:
- 28% to benefit from an introductory offer
- 26% because of a change in personal circumstances
- 25% because of a change in financial circumstances
- 23% to make online purchases safely
- 23% to benefit from rewards
For low and grow consumers:
- 36% chose their credit card to build or improve credit history
- 34% because of a change in personal circumstances
- 30% because of a change in financial circumstances
- 23% to make online purchases safely
Reasons for switching without shopping around
Around 40% of consumers surveyed who took out a credit card in the last 12 months did so without shopping around – about a third of these respondents stated that they did not shop around primarily because the offer from the credit card company selected ‘met their needs’ (32%), it was quick and easy to apply to that company (22%), and they trusted the company (21%).
We also explored how consumers that did not shop around found their credit card. Over a third responded to an offer from a company. Of these, 29% received the offer in store/branch while 21% received the offer through the post.61
For ‘low and grow’ consumers, the most common reason for taking out a credit card without shopping around was the perception that they did not think that any other provider would accept them. They were also nearly three times as likely to cite concerns about their credit rating for not shopping around (13% compared to 5% overall) and were more likely than other groups of consumers to say they received a letter through the post (37% compared to 21% overall).
We also considered why some consumers do not switch. There are two factors that could reduce consumers’ willingness to switch:
- Consumers perceive that the gains from switching are low or non-existent
- Consumers perceive there to be switching costs (including the impact of multiple applications on their credit rating).
Gains from switching
1.1For many consumers, particularly those on an introductory promotional offer there may be little or no gains from switching. Given the many promotional offers and long-term low rate cards currently available, for many other consumers (particularly those who have not switched for a number of years), there could be material gains from switching.
Switching costs refer to the real or perceived costs that are incurred when changing credit cards but which are not incurred by retaining the existing credit card. Switching costs may take many forms including:
- the time and effort involved in searching for a new product and/or provider
- the time and effort involved in switching to a new product and/or provider (for example, completing the application form and setting up payments)
- the time and effort involved in learning how to navigate a new provider’s services, for example its internet banking
- the potential impact of multiple credit card applications on credit rating
Responses to our survey indicate that a perception of switching costs amongst respondents was low.
Impact of multiple applications on credit rating
Making multiple credit card applications in a short period of time can impact on your credit rating. This may discourage effective shopping around and switching and lead consumers to accept the first card they get offered rather than comparing other options. This appears to be a particular concern in the ‘low and grow’ segment:
- 16% of those in the ‘low and grow’ segment who neither considered nor took out a credit card in the previous 12 months say that they did not do so (partly) because they did not want to hurt their credit rating – compared to 4% of all consumers.
- 22% of those in the ‘low and grow’ segment who compared two or more credit cards in the last 12 months but did not take out one as a result, say they did not take out a credit card because they were worried about the effect of making multiple applications on their credit rating – compared to 16% of all consumers.
- 13% of those in the ‘low and grow’ segment who took out a credit card without shopping around did not consider other credit cards because they were worried about the impact on credit rating, compared to 5% of all consumers.
Some firms and PCWs now allow consumers to get an indication of their likelihood of being approved before submitting a full application. At present there is variation between firms on the information provided to consumers. For example, some firms may provide a probability of being approved but not the actual terms that the consumer will be offered if approved. Some firms are also offering ‘quotation searches’ which do not leave a ‘footprint’ on the consumer’s credit reference file but give an indication of the price and terms the consumer will be offered if they submit a full application (but not necessarily an indication of eligibility).
The way that consumers shop around and make their purchasing decisions can have an impact on the way that firms design and promote their products. In particular, there is likely to be greater competitive pressure on the features that consumers focus on when choosing a product. Those features that consumers tend not to focus on, or underestimate the importance of (as a result of behavioural biases) or expect not to be relevant to them may be subject to less competitive pressure. For example, this could include post-promotional interest rates and conditional charges such as cash withdrawal fees and default fees, may be subject to less competitive pressure. This is explored further in Chapter 5.
A lack of switching by consumers can act as a barrier to entry and/or expansion for providers. This is because, if there are insufficient numbers of consumers shopping around or switching, it becomes difficult for new entrants or providers offering more attractive product offerings to gain sufficient market share.
The results set out above and discussions with firms suggest that this is not a serious issue, with a significant number of consumers shopping around or switching over the course of a year for firms to compete for. Indeed, in their submissions to us firms have not identified a lack of switching by consumers as a significant barrier to entry or expansion.
47. Results for “foreign currency fee” are restricted to those that used their main credit card abroad; results for “interest rate on purchases” are restricted to those that paid interest; results for “interest rate on cash withdrawals” is restricted to those that used cash withdrawals; results for “cash withdrawal fee” are restricted to those that used cash withdrawals; and results for “late payment fee” are restricted to those that missed at least one payment. See Annex 3 for further details.
48. See Annex 8 for the review of terms and conditions and Annex 9 for the review of financial promotions. These reviews concentrated on the consumer’s journey rather than focussing on compliance with specific rules.
49. Excluding those consumers that did not recall these percentages increase - 92% of active credit card users considered that they had received enough information during the application process and 91% said that the information they received was clear or very clear.
50. These figures exclude those who both took out a credit card after considering two or more credit cards and those that took out a credit card without considering other cards, so in practice more people took out credit cards after shopping around.
51. OFT, Credit card comparisons (2008): OFT987
52.In the questionnaire we asked respondents whether they had a credit card that was designed for someone with ‘no credit or poor credit history’ which may or may not be a ‘low and grow’ card. Given that most cards of this type are ‘low and grow’ we refer to them as such throughout this chapter for simplicity.
53. The results are restricted to those consumers that took out their credit card in the last five years.
54. See Annex 4 for methodology and detailed results.
55. This applies to accounts that use domestic purchases only.
56. Using the median rather than the mean, we find that half of these consumers could save more than £125 per year.
57. The literature review on consumer behaviour and behavioural biases also found empirical evidence to support present bias in the credit card market. See Literature Reviews.
58. This includes both consumers who kept an existing card open and those who closed their old credit card. We estimate that 3% of existing consumers opened at least one new credit card and closed a previous credit card in 2014.
59. This includes existing consumers opening a new card and consumers without an existing credit card opening one.
60. That is, the additional protection afforded by section 75.
61. This result includes both respondents who responded to an offer and those than responded to an advertisement.