A number of different products within the credit card market enable consumers to use revolving credit to make one-off purchases, carry out everyday spending, refinance existing debt, and build credit history. These include balance transfer cards, 0% purchase cards, combined balance transfer and purchase cards, low-rate cards, credit building cards and reward cards.
Around 60% of UK adults hold at least one credit card product. The market can be broadly segmented by credit risk between lower risk consumers (who have an established credit history) and higher risk consumers (those who are either new to credit, have had negative credit events in the past, or have lower income or are a sole trader or self-employed).
While there are over 20 credit card firms, the market is moderately concentrated with four firms accounting for two-thirds of all outstanding balances. Higher credit risk consumers have less choice of products and providers than lower risk consumers, with four firms accounting for nearly all outstanding balances in this segment.
While there are material costs to entry in the credit card market, we have seen some limited entry in recent years and new entrants have been able to gain significant market share.
56% of new accounts opened in 2014 were opened online, with 30% of all new accounts coming through price comparison websites. The relative importance of different acquisition channels varies by product type and between firms. Direct mail is an important acquisition channel in the higher risk segment, accounting for almost a third of new acquisitions.
Within the credit card market there is a lot of variety in products, firm strategies and in how consumers use their credit cards. As a result it is important for our analysis to look at issues at a sufficiently granular level, with certain issues applying only to particular segments and/or particular usage behaviours and not across the whole market.
There are currently around 30 million credit cardholders in the UK, meaning approximately 60% of the UK adult population owns at least one credit card. We estimate that in January 2015, around 46% of credit cardholders held two or more credit cards.
As shown in Figure 2, over a third of card holders are over 55 years of age, with only 2% of card holders aged between 18 and 24. The gender split is fairly even, with slightly more men than women holding a credit card (53% to 47%).
Figure 2: Distribution of credit card holders by age and gender
Source: FCA estimates based on sample of account-level data
The market can be segmented by consumer credit risk and by consumer preferences (reflecting the varying ways consumers use their credit cards). We consider each of these in turn.
The willingness of firms to offer consumers particular products, and the terms on which they offer them, will vary depending on the perceived credit risk of the consumer. For example, consumers that are perceived to be higher risk are likely to be offered lower initial credit limits and may be offered products with higher interest rates and shorter (or no) promotional offers.
Firms have stated that consumers typically perceived to be lower risk tend to have a good, established credit history. Consumers are typically perceived to be higher risk because they are either:
- new to credit
- low income/sole trader/self-employed
- credit rebuilders (have had negative credit events in the past)
Different consumers will use credit cards in varying ways and have particular preferences in what they are looking for in a credit card.22 These preferences may also alter over time as consumers’ circumstances change. What consumers are looking for can be broadly broken down into four main categories, with individual consumers looking for products that meet one or more of these attributes:
- Borrowing for purchases – consumers who want to make new purchases which they intend to pay off over a number of months, either a larger purchase such as a holiday or furniture or regular spending such as utilities.
- Everyday spending – consumers who want to use their credit card for everyday spending but with a view to repaying their balance in full every month. In this case consumers may be attracted by rewards, the flexibility of being able to revolve a balance if they need to, or the legal protection23 that comes with purchasing on a credit card. In our consumer survey rewards was the most common reason for consumers to take out their credit card.
- Refinancing existing debt – consumers with existing debt looking for a more cost-effective way to pay down their debt.
- Building credit history – consumers who have limited or impaired credit history and want to build (or rebuild) their credit history whilst having access to a revolving credit facility. This was the primary reason for consumers in the higher risk segment taking out a credit card, according to our consumer survey.
Alongside these four main broad categories, there are a number of other more specific features that consumers could be looking for, such as cash withdrawals, overseas spending or money transfer (where a consumer can transfer funds to their bank account).
There are a wide range of credit card products currently available to meet these consumer requirements. Each product is made up of a different combination of product features.
The main product features are:24
- Annual interest rate – the interest rate charged on outstanding balances not paid off in full, once a promotional offer has expired. There may be different interest rates on purchases, cash advances, balance transfers, foreign currency transactions and money transfers.25
- 0% purchase offer – a promotional offer that allows consumers to spend on their card without incurring interest for a specific period of time.
- 0% balance transfer offer – a promotional offer that allows consumers to transfer an outstanding balance from one credit card to another and not incur interest on the transferred balance for a specific period of time, usually in return for an up-front fee.
- Balance transfer fee – the fee charged by the credit card firm for making a balance transfer. This is typically a percentage of the balance transferred.
- Annual (or monthly) fee – a flat fee charged for holding the card.
- Rewards – rewards and loyalty schemes, such as cashback and air miles, where consumers typically get rewards based on their card spend.
- Credit limit – the total amount of credit available to the consumer to spend on the card.
- Default fee – fees charged typically when a consumer goes over their credit limit, is late making a payment, or when a payment fails.
- Other – these include money transfers, foreign transaction fees, cash advance fees and other fees and charges.
Types of credit card
3.11 There are many different possible combinations of these product features as reflected in the wide range of credit cards available. These different credit cards can be broadly grouped into seven main product types:26
- credit builder
- balance transfer
- combined balance transfer and purchase
Standard products are those that tend not to have long promotional offers on either balance transfers or purchases. Their main feature is the annual interest rate charged, with the advertised rate typically ranging from 12% to 25%:
- products with an introductory promotional period often revert to this product type at the end of the promotional period.
- some of the smaller banks who offer only one or two products, often only for personal current account consumers, tend to offer this product type.
- reward products also most commonly have these product features.
A variant of the standard product is the low-rate product, which offers consumers an on-going lower interest rate, with advertised rates typically between 6.5% and 12%, but usually without any promotional offer on either balance transfers or purchases. For some consumers these could be an alternative to 0% balance transfer or purchase cards for longer term borrowing or for everyday spending.
Credit builder products
Credit builder products are the main products offered to higher risk consumers who are looking to build a credit history or improve their credit score. These products have advertised annual interest rates starting around 30%. Along with the higher interest rate, these products tend to be characterised by an initially low credit limit (often £150 to £500) which can then be increased over time based on the consumer’s behaviour, so called ‘low and grow’.27
Balance transfer products
Balance transfer cards are primarily designed to appeal to consumers looking to refinance existing credit card borrowing. They offer 0% interest on balances transferred, typically within the first 90 days of account opening, across from another card for a set length of time in return for a percentage up-front fee.
As shown in Figure 3, the length of balance transfer offers has been steadily increasing over recent years while the balance transfer fee has remained fairly constant. The ‘go to’ interest rate charged at the end of the promotional period has increased slightly.
Figure 3: Average (mean) terms of 0% balance transfers taken out over time
Source: FCA estimates based on sample of account-level data
Note: Figures are three month rolling averages (mean)
There has been increasing fragmentation within the balance transfer space, with a range of balance transfer length and fee combinations now being offered. This can be seen by looking at the median, upper and lower quartile28 lengths of balance transfers over time (Figure 4). In particular, the drop in median length of balance transfers in the second half of 2014 reflects the increasing prevalence of shorter balance transfers with lower fees.29 Over the course of 2015, we have also seen headline balance transfer fees on a number of long length balance transfer products reduced.
Figure 4: Median length of balance transfers taken out over time
Source: FCA estimates based on sample of account-level data
Note: Figures are three month rolling averages
Purchase products are primarily designed to appeal to consumers who are looking to borrow for new purchases on a credit card. They have an introductory 0% interest offer on new purchases for a number of months.
Combined balance transfer and purchase products
Combined balance transfer and purchase products offer both 0% interest on new purchases as well as 0% interest on balances transferred. There is no fee charged on new purchases, although balance transfers on combined products do usually incur a fee in the same way as standard balance transfer products.
These products can take three broad forms:
- purchase-led product – where the purchase promotional period is longer than the balance transfer promotional period;
- balance transfer-led product – where the balance transfer promotional period is longer than the purchase promotional period;
- dual product – where the balance transfer and purchase promotional periods are of the same or similar length.
Reward products offer consumers benefits, discounts or other rewards based on their credit card usage.
There are three main types of reward cards:
- cashback, where consumers get a percentage of their card spend back as cash (typically credited to their statement either the following month or annually)
- affinity/co-brand cards30, where consumers may receive loyalty points or money-off with the co-brand partner, such as a high-street store, based on their card spend (typically with higher earn rates on spend with the co-brand partner) or charity cards where the firm donates a proportion of card spend to the co-brand charity
- proprietary schemes run by the card firm, where consumers receive points for card spend which can be exchanged for vouchers or products from a range of retailers
Reward products often come with a promotional introductory offer of bonus points or a higher earn rate for the first few months after the card is opened, or when a spending hurdle is reached.
While most reward cards do not have long introductory purchase or balance transfer offers attached, some 0% purchase and combined balance transfer and purchase cards do have rewards attached. For these cards, some consumers will be attracted by the rewards and may have limited interest in the other features. Others may be attracted by the balance transfer/purchase offer with the rewards not being a significant consideration in their decision making, while for others the overall proposition may be attractive.
Annual (or monthly) fees
Annual fees are most commonly seen on reward cards, although some low-rate and combined balance transfer and purchase products also have them. Most fees are around the £25 per year level, although they go up to £150 for some of the airline co-brand cards. Credit cards with annual (or monthly) fees typically offer a higher level of rewards per pound spent and are therefore primarily targeted at higher spending consumers.
Firms claim that cards with fees tend to have higher consumer engagement and need to offer a very attractive proposition for consumers to be willing to pay for the card.
Based on our analysis of firm submissions, we note that reward schemes are primarily a method for encouraging usage of the card, a key driver of profitability. The reward scheme can especially encourage early use of the card. Typically, an account that spends on the card in the first few months is more likely to be active over a longer period. Where consumers are paying a fee the firm will need to factor the perceived value of the reward scheme to the consumer against the fee charged. The extent to which the reward scheme will improve usage of the card will depend on consumers’ perception of this value proposition.
As a result of the Interchange Fee Regulation, a number of firms are considering introducing or increasing annual fees. In some cases, fees may be waived for in the first year or for consumers who reach certain spending thresholds or are paying a large amount of interest.
Other product types
There are a number of other credit card products targeted at specific consumers, for example student cards and cards for private banking customer31; or specific consumer requirements, such as cards offering commission-free foreign transactions or money transfers.32
There have been several innovations in the credit card market in recent years. These have included:
Product innovation – including new product types such as low-rate cards and low or no fee balance transfer cards and new product features such as statement credits when spending a certain amount in a particular retailer.
Search innovation – including tools which allow prospective consumers to get a better idea of their eligibility for particular cards (eligibility checkers) and/or the likely price (quotation searches) without having to submit a full application; these may be offered by price comparison websites seeking to better tailor search results to an individual consumer’s needs or by firms.
Technological innovation – new developments such as contactless technology and mobile/online banking have increased convenience for credit card consumers, including new acquisition channels, such as applying via a smartphone. More recently, new innovative payment mechanisms have also entered the market such as Apple Pay and ZAPP, which have further widened potential payment platforms for consumers.
Terms and conditions
Alongside the product features outlined above, there are a number of terms and conditions associated with credit cards. In this section we summarise the general market practice in relation to four of the key areas of terms and conditions, namely interest-grace periods (often called ‘interest-free’ periods), minimum payments, consumer re-pricing, and promotional withdrawals.
Interest starts accruing from the date transactions are applied to the account if consumers do not pay their outstanding balance in full, and stops accruing once the balance is cleared in full. For purchase transactions, provided the borrower repays in full by the due date and cleared the previous month’s bill in full, then no interest is charged.33 There is no interest-grace period on cash withdrawals.34
Minimum repayment practices are governed by FCA rules.35 These require the minimum repayment to be an amount equal to at least that amount which repays the interest, fees and charges that have been applied to the customer’s account, plus one per cent of the amount outstanding.
These rules do not apply to agreements made before 1 April 2011.36 However most firms now apply these minimum repayment practices to older accounts as well, although a few continue to apply previous repayment practices to these accounts.
In Chapter 6, in the context of potential problem credit card debt, we look at consumers who are making systematic minimum repayments while incurring interest.
Consumer re-pricing refers to the changing of a consumer’s interest rate after the opening of an account and is a common feature of the credit card market.
We have seen three broad scenarios where consumer re-pricing takes place. These are:
- Risk-based – this is carried out by some firms in order to adjust an individual consumer's rate after the account has been opened, to reflect changes in the consumer’s risk. Depending on a consumer's behaviour and changing credit score, an account is upwardly or downwardly re-priced to account for risk.37
- Retention – firms will sometimes re-price an account downwards in order to offer existing consumers more attractive terms as part of a consumer retention strategy or as part of a consumer reactivation process where an account has been inactive for at least 12 months.
- Portfolio-wide – firms re-price groups of consumers as a result of the wider economic, regulatory and competitive environment, for example to reflect changes in funding costs.
Some firms have confirmed that they withdraw a consumer’s promotional offer (such as their 0% balance transfer offer) if the consumer fails to make a minimum payment by the due date or if the consumer exceeds their credit limit. A few have noted that they are willing to reinstate the offer in some circumstances if the consumer contacts them.
Based on figures submitted by firms, it appears that, for most firms that withdraw promotional offers, around 5% to 10% of their consumers on promotional offers lose their offer before the end of the promotional period, and for some firms the figure is considerably higher.38 We are pursuing this issue with the individual firms in question.
As at October 2015, 2439 firms were issuing credit cards in the UK. This is a mix of banks, building societies and monolines. There are a small number of large providers, with four firms holding approximately two-thirds of all credit card balances.
Estimates of market concentration show that the credit card market is moderately concentrated40 with concentration declining slightly over the past five years.
Figure 5: Market concentration (across all credit risk) in credit cards over time
Source: FCA calculations based on firms’ financial submissions
Estimates of concentration increase when looking at smaller segments of a market. The higher risk segment of the credit card market is highly concentrated with four firms accounting for virtually all credit card balances in this segment41 while the lower risk segment is only slightly more concentrated than the overall market.
While there are barriers to entry in the credit card market, caused by the large sunk costs required along with a high level of expertise and data, we have seen some entry in recent years (Metro Bank, Sainsbury’s Bank, Tesco Bank, TSB and Virgin Money). Firms that have entered have been able to gain significant market share.
We consider there to be broadly four possible strategies for entering the credit card market:
New entry – where a completely new firm enters the market and builds a business from scratch. As an entry strategy this is very rare with no completely new firms entering in the last ten years, likely in part due to the barriers to entry outlined above.
Joint venture or partnership with existing issuer – where a firm enters the market through establishing a joint-venture or co-brand partnership with an existing credit card issuer and subsequently acquires their partner's stake and begins issuing their own credit cards. This appears to provide an effective way of obtaining the requisite level of expertise and data to operate in this market. Tesco Bank and more recently Sainsbury’s Bank have adopted this strategy.
Strategic portfolio acquisition- where a firm acquires a credit card portfolio from another credit card issuer. While there have been acquisitions in recent years, these have been primarily by existing firms as a way of expanding their book - for example over the past ten years NewDay has acquired portfolios from three different issuers. The divestment of TSB by Lloyds led to the creation of a ‘new’ credit card firm.
Development out of personal current account offering – where a bank offering personal current accounts (or another financial product) begins issuing their own credit cards. Metro Bank (a challenger bank) entered the credit card market in this way.
Many firms have been successful at expanding their credit card business and gaining significant market share through organic growth. As mentioned above, there has also been some strategic portfolio acquisition by existing firms in recent years. Firms can also expand by securing new co-brand partnerships, either partners without an existing credit card partner or by winning co-brand partners with an existing credit card from a rival firm.
Firms use a range of different channels to acquire their consumers. These can be broken down into two broad categories:
- online – this includes price comparison websites, online marketing, internet search and credit card firms' own websites
- offline – this includes direct mail, telephone and face-to-face marketing. Banks with a high street presence can also take advantage of branches, and this is an important channel for some of these firms
Firms offering co-brand cards also use their co-brand partner's retail stores, website and email channels as acquisition channels.
Overall, (see Figure 6 below), online is the most significant acquisition channel, accounting for 56% of new cards opened in 2014. Approximately 30% of all new cards opened in 2014 were applied for via a price comparison website.
Figure 6: Acquisition channels
Source: FCA calculations based on firms’ account-level data submissions
The relative importance of different acquisition channels varies significantly between different types of products, different types of consumers, and between firms.
Variation by product type
Price comparison websites are the main acquisition channel for long duration balance transfer cards. However, acquisition volumes via price comparison websites drop off sharply for those products that do not rank near the top of price comparison website results.
Unsurprisingly, for co-brand cards the co-brand partner is a major acquisition channel, whether that is at point of sale or through targeted marketing to existing consumers. Products without introductory promotional offers, such as low-rate cards, tend to fare less well on price comparison websites, as do rewards cards because of the difficulty in comparing different reward propositions.
Variation by consumer type
For firms targeting higher risk consumers, direct mail is an important way of attracting consumers and accounted for around 32% of cards in the higher risk segment in 2014 (see Figure 7 below). Some firms also use face-to-face sales in targeting these consumers, although this makes up only a small share of their total acquisitions at present.
Figure 7: Breakdown of acquisition channels (2014) – higher risk consumers
Source: FCA calculations based on firms’ account-level data submissions
Variation between firms
For some banks, branches remain an important acquisition channel for new credit card consumers, while monolines do not have branches that can be used as an acquisition channel and rely more on their digital presence and price comparison websites.
Variation between firms within a product type can also reflect strategic considerations (for example, firms investing heavily in advertising may see increased sales on their own website) or the competitiveness of the product offering (for example, a less competitive offering on particular product features is likely to attract fewer sales via price comparison websites).
Firms’ strategies in relation to credit cards revolve around effectively managing credit risk and offering products that meet the preferences of the consumers they target.
Different firms have different risk appetites which determine their willingness to lend to higher-risk consumers. Within their risk appetite, firms are in general willing to pursue products (that is, combinations of product features) that are expected to meet internal profitability targets42 and that fit with their strategy.
Within the credit card market, there is variation in the wider strategies firms have adopted:
- The product types focused on – different products are designed to attract different consumer behaviour types (see Chapter 5 for more detail). Most firms seek to offer a range of product types to appeal to different consumer preferences, although some firms focus more on particular product types, such as rewards. There are only a small number of firms currently competing in the long-duration balance transfer segment (these are a mix of banks and monolines). Other firms have told us that they are not active in this space, either out of choice or because they cannot make the economics of the product work.
- The segments focused on –the higher risk segment is primarily served by monolines, with most of the banks and building societies not operating in this segment of the market. Firms have cited their risk appetite and brand considerations, for example a reluctance to offer headline interest rates above certain levels, as reasons for not offering products in the higher risk segment.
- The range of products offered – in general the number of different products that firms are offering has reduced over the past few years, as firms have sought to consolidate and simplify their propositions. However, there remain differences in approaches between firms. Some choose to have a several different products, each targeting a particular consumer preference, while other firms have fewer products that cater for a wider range of consumer preferences.
- Differential pricing – some firms offer consumers applying for the same card different prices or promotional terms based on their risk profile.43 This means some consumers will not get the headline rate offered but instead will be offered less generous terms. Other firms have a policy of not varying pricing at acquisition in this way and will either offer the consumer the headline terms or decline the application.
- Variation by distribution channel – some firms offer different products and/or pricing across the different distribution channels they use, for example offering better terms or exclusive products on a price comparison website compared to their own website or in-branch. Other firms have chosen to apply consistent pricing across distribution channels.
- Existing consumers – some firms seek to promote loyalty by offering preferential terms or exclusive products to consumers who already have an existing relationship with the firm, for example personal current account holders.
- Wider strategic considerations – for firms that have a wider relationship with consumers than the credit card product, wider strategic considerations may influence their credit card strategy. This includes:
- banks and building societies who may not offer particular products for wider brand reasons, or be more willing to accept lower returns from certain consumer groups if they are profitable for the wider group
- retailers who offer credit cards may consider the wider retail group benefits of developing brand loyalty and reducing the cost to the group of consumers paying by credit card
In the higher risk segment, more of the focus is on effectively managing risk. This is typically seen in the ‘low and grow’ approach whereby credit limits are initially set at a low level and then increased over time as the firm learns more about the consumer.
For some products, one of the key drivers of acquisitions is a product’s ranking on price comparison websites. By improving elements of their proposition that drive price comparison websites’ rankings, firms can seek to move their products up the rankings. This not only increases the quantity of applications but also the quality of applications in terms of credit risk. Firms may respond to other firms’ pricing changes in order to maintain their position in the rankings.
Given consumers can hold multiple cards, firms seek to compete to be ‘front of wallet’, that is to gain as large a share as possible of the consumers’ card spend.
Retaining consumers at the end of introductory promotional periods is an important part of firms’ overall strategy. This can be through seeking to deepen the consumer relationship during the promotional period, or through targeted offers as the promotional period comes to an end.
Interchange Fee Regulation
The most significant change to the market in recent years has been the introduction of Interchange Fee Regulation44 which from 9 December 2015 caps consumer credit card interchange fees at 30 bps (0.3%) of transaction value. This means credit card firms’ revenue from interchange will fall from around 80bps45 to 30bps. This is a gross reduction of around 60% in interchange revenue across the industry. Estimates from firms suggest this will lead to around a 5% to 10% reduction in overall revenue. In Chapter 5 we discuss the likely impact of the Interchange Fee Regulation on the market.
22. See Annex 3 on consumer survey.
23. Under section 75 of the Consumer Credit Act. Other protections include ‘chargeback’ (under the scheme rules) and limits on liability for unauthorised transactions.
24. These features tend to vary by product.
25. The APR for a credit card is usually the ‘go to’ rate for purchases (being the most common drawdown mechanism) plus any annual or monthly fee. In calculating the APR, no account is taken of any introductory rate or rates/charges for other drawdown mechanisms such as balance transfers.
26. There is a degree of overlap between these product types.
27. The interest rate may also decrease over time based on the consumer’s behaviour.
28. The upper quartile level indicates that 25% of consumers had a balance transfer length equal to or greater than this level, while the lower quartile level indicates that 25% of consumers had a balance transfer length less than or equal to this level.
29. Over this period the median balance transfer fee dropped from around 3% to 2.7%.
30. Affinity/co-brand cards are discussed in more detail in Annex 5.
31. These are often high net worth individuals.
32. Money transfers allow consumers to transfer money from their credit card to their bank account.
33. If the balance is not repaid in full, interest is charged on the entire balance from the date of each transaction, irrespective of how much is repaid – for example, if you owe £100 and repay £99 you will pay interest on the whole £100 and not just the £1 remaining.
34. This also usually applies for quasi-cash purchases like gift card purchases, foreign currency purchases and gambling transactions as well as credit card cheques.
35. CONC 6.7.5R
36. CONC 6.7.5R(3) in line with the Lending Code.
37. CONC 6.7.16R sets out requirements where the interest rate is increased based on the customer’s risk.
38. This is broadly consistent with our analysis of the account-level data.
39. We have counted firms at the group level. Some firms have a number of brands beneath this.
40. The estimates of market concentration use the Herfindahl-Hirschman Index (HHI) measure of market concentration. This is calculated by adding together the squared values of the percentage market shares of all firms in the market. It therefore takes account of the different sizes of market participants as well as their number. The Office of Fair Trading’s Merger Assessment Guidelines (September 2010, OFT1254) indicate that a market with an HHI exceeding 1,000 may be regarded as concentrated. The HHI scores for the credit card market indicate that it is slightly above that threshold with an HHI in 2014 of 1171 based on number of accounts and 1496 based on value of borrowing.
41. We estimate the HHI in 2014 to be just over 3000 for the higher risk segment based on value of borrowing, compared to just under 1600 for the lower risk segment.
42. To put it more technically, firms consider whether the product has an expected net present value (NPV) greater than zero. Typically the discount rate of the NPV model is reflective of the internal hurdle rate required by the product. This is typically set at or above the cost of capital/equity for the firm. An NPV above zero indicates a forecast that will generate a rate of return at or above this required level. Depending on how management information is prepared, similar models made be used that are not NPV models.
43. This is commonly referred to as risk-based pricing.
45. As noted in the Payment Systems Regulator’s CP14/1 (November 2014), interchange fees for consumer credit card transactions have ranged from 0.65% to 1.85% of transaction value, depending on the card payment system (MasterCard or Visa), the card type (e.g. standard or premium) and the transaction type (e.g. Chip & PIN, card not present, etc.). The average interchange fee on such cards has been around 0.8% of transaction value (80bps).