We are carrying out this study to build our knowledge of the credit card market and assess whether the market is working well in the interests of consumers and, if not, to understand why and to identify appropriate ways to improve the situation. The study was launched in November 2014.
The credit card market is large, with around 30 million consumers holding at least one credit card, together having an estimated £61 billion of outstanding balances. This is one of the largest areas of unsecured lending within our remit, and represents 32.5% of total unsecured personal borrowing in the UK.15 The credit card market is therefore important and if it functions well, can deliver significant benefits to consumers.
In a market where competition is working effectively in the interests of consumers we would expect to see well-informed and active consumers who choose the available products that best suit their needs and use them in an optimal way. In such a market, credit card firms would need to continue to offer competitive products to retain and attract consumers. As illustrated in Figure 1 below, when both the consumer side and firm side of the market are functioning well, this can lead to a ‘virtuous circle’ of competition and to better outcomes for consumers.
Figure 1: Virtuous circle of competition
- Credit cards provide a free service for many, but the market may not be working well for certain groups of consumers – for example, over-borrowing on credit cards may be a significant problem for some consumers.
- There are a range of behavioural factors at play that may lead consumers not to choose or use cards in a way that best meets their needs – for example, consumers find the multiplicity of credit card features confusing and focus on one or two features when making their selection, there is also evidence that certain consumers select a credit card without considering alternative products, e.g. when responding to direct mail or pre-filled credit card application forms.
- Consumers paying interest on balances may be paying more than they realise or expected. They may also be subsidising users for whom card usage is free.
- Some consumers tend to use up credit limits quickly, repeatedly making minimum payments and not considering how they will repay their credit card debt.
- A proportion of consumers may be using credit cards unsustainably and taking on too much debt.
In carrying out the market study, we focused on three main areas:
- the extent to which consumers drive effective competition through shopping around and switching
- how firms recover their costs across different consumer groups and what impact this has on the market
- unaffordable credit card debt, in particular whether some consumers are over-borrowing/under-repaying on their balances, and whether firms have incentives to provide unaffordable lending that results in consumer detriment
This study focuses on credit card services18 offered to retail consumers by credit card providers (including banks, monolines and their affinity and co-brand partners) through a range of distribution channels. As set out in our terms of reference, although we have looked at both the borrowing and payment functions of credit cards, we have focused on the use of credit cards as a form of revolving credit, given that this was where most of our initial concerns lay.
We did not consider the provision of business credit card services to SMEs/corporates as part of the study. Our analysis has captured smaller SMEs (small and medium-sized enterprises) that use their personal credit card for business financing. The study has not specifically covered charge cards and store cards.19
The regulation of interchange fees and card payment systems more generally falls within the purview of the Payment Systems Regulator (PSR). We therefore do not focus on these issues, although the implications of the Interchange Fee Regulation20 on credit card services offered to retail consumers is reflected in our analysis.
This report is not intended as a compliance report. In relation to some findings or factual scenarios that we have observed we make reference to our rules or to other legal provisions to assist readers. However, the fact that we do not do so in other cases should not be taken as a suggestion or as an implied statement that FCA would view a particular factual scenario or matter as compliant with our rules or other legal provisions.
We sought views on our terms of reference following its publication in November 2014 with respondents broadly supportive of our proposed scope. The feedback we received is summarised in Annex 1.
We are publishing this interim report to give all interested parties an opportunity to comment on our emerging thinking and analysis. We hope this will help assure the robustness of our findings and promote continued constructive engagement between the FCA, the firms, trade associations, consumer bodies and other interested parties.
Since launching the study we have collected a significant amount of evidence from credit card firms, and have a met a number of market participants, trade bodies and consumer groups.
In this report we set out our initial observations on how competition functions in the credit card market and highlight areas of potential concern. We also set out initial thinking on potential remedies we may consider in light of our final findings.
To gain a better understanding of the market, we analysed a wide range of data and information. We also met with firms, trade associations and consumer groups, and received input from interested parties in response to our terms of reference.
To provide information on how consumers shop around and switch credit cards as well as to understand the challenges they face when shopping around and switching, we commissioned an online survey which was completed by 39,837 consumers.
Request for firm data and information
To understand the supply side of the market, we requested quantitative and qualitative data from credit card firms. Smaller credit card firms received a shortened version of the information request. We asked firms for:
- Financial data on their actual and forecast financial performance at the portfolio and product level. We also asked for details of how they measured performance and for additional details regarding their financing and bad debt policies.
- Strategy documents, including information on their current strategy and business model in relation to credit cards, including affinity and co-brand relationships, product design, pricing and acquisition strategies. We also requested documents detailing how their strategy is impacted by external factors such as competitors, technology and the potential impact of the Interchange Fee Regulation.
- Consumer research they had carried out on consumer behaviour in relation to credit cards, including on searching and comparing credit cards, switching, consumer responses to new products and changes in credit card product features, use of price comparison websites and repayment behaviour.
- Marketing and financial promotion documents and literature as well as copies of the information provided to consumers as part of the application process.
- Credit assessment and approval processes, including how they assess credit risk and affordability, their approach to setting and reviewing credit limits and their forbearance policies.
We have also undertaken a focused review of a sample of price comparison websites, financial promotions and products’ terms and conditions.
We requested monthly account-level data for 34 million consumers and 74 million active accounts from a sample of 11 credit card firms representing around 80% of the market over a five-year period (Jan 2010 - Jan 2015). The data contained information on monthly balances and repayments, as well as product information such as interest rates and fees.
This was an extensive data request and we appreciate the effort on the part of the firms in providing this data. Without this granularity we could not have undertaken some of the detailed analysis presented in this report.
Meetings with firms, trade associations and consumer groups
Over the course of the market study we have also had a number of meetings and engagement events with consumer groups, firms and trade associations. We would like to thank participants at these different events for their time and for their constructive engagement to date.
We commissioned two academic literature reviews for the market study: one on consumer behaviour and behavioural biases; and one on affordability. Both reviews are published separately alongside this report.
We conducted an international comparison exercise involving 10 other countries21, principally to understand how other jurisdictions have sought to address issues giving rise to concern in the credit card space. As part of this work, we liaised with international regulators and are grateful for their input and assistance. The results of our international comparison exercise can be found in Annex 11.
18. This encompasses a wide range of different credit card products and consumers, as we discuss in Chapter 3.
19. As set out in the Terms of Reference (para 4.5) this study has not covered charge card and store cards for the following reasons:
- The number of credit cards far exceeds charge cards. Charge cards tend to have higher (or no) credit limits, annual fees, and are often used for corporate purposes. Many charge cards can be used for payments like credit cards, but balances have to be repaid in full at the end of the month, so they cannot be used to borrow for longer periods. Our concerns about revolving credit therefore do not apply.
- Store cards are provided by a retailer (the card issuer can be another institution) and can only be used for purchases with that retailer (so are not part of a card scheme). Store cards typically provide discounts and/or rewards, but tend to have lower credit limits. Retailers are increasingly moving from traditional store cards to offering store-branded credit cards, which have similar features to store cards. Given the trend of these cards becoming store-branded credit cards, we have not included store cards as a focus of the market study.
20. See Annex 2 for more detail on the regulatory framework, including the Interchange Fee Regulation.
21. Australia, Canada, China, France, Mexico, Singapore, South Korea, Spain, Taiwan, and USA.