Sector Insight: Credit and debit cards - Cashing in

The headline-grabbing news that UK consumer debt has reached £1 trillion may have led to criticism of the credit card industry, but it was quick to counter that most people manage to pay off their balances every month.

Last year, credit card issuers advanced £133bn to the public, equivalent to 64% of gross consumer credit lending. Net lending - outstanding debt - totalled £8.2bn. The sector has been growing steadily in the UK over the past decade, with ever-higher card penetration. At the end of last year, 66.8m credit cards and 62.9m debit cards had been issued, with many people owning more than one, according to Mintel.

Divergent use

Consumers typically use debit cards for everyday purchases and to access money from high-street cash machines. Meanwhile, credit cards tend to be used to make larger purchases, as they offer a credit facility and consumer protection. Credit cards invariably offer additional services as well, such as free annual travel insurance or links to loyalty schemes.

Transaction volumes on debit cards have increased 7% over the past year.

The average annual transaction value per debit card was £4100 in 2003 while, for credit cards, which are generally used less regularly, it was £1700.

UK purchases accounted for 89% of all credit card transactions, compared with 60% for debit cards. But only 3% of credit card transactions were for cash withdrawals, much lower than the 35% for debit cards, because most credit cards charge a fee for cash advances.

In the UK, the Visa, Debit and Switch brands control the majority of the debit card market, although Solo and Visa Electron also operate and have experienced the greatest growth since 1999. The number of debit card issuers fell from 37 in 2002 to 29 in 2003, mainly due to mergers.

Both Switch and Solo are linked to the global Maestro debit card scheme, and all Switch cards are to be rebranded as Maestro by 2007 to form a unified brand for both domestic and international use.

Visa and MasterCard are the two card payment brands for credit cards.

Visa is the biggest player, issuing 43m cards in 2003, compared with MasterCard's 24m, according to Mintel, although MasterCard has experienced better growth.

Wide-ranging entrants

The market for credit card issuers is extremely competitive. As well as the traditional banks and building societies, other players are offering their own cards: retailers, such as Sainsbury's and M&S; direct providers, including Smile, Egg and First Direct; and specialist card issuers, particularly those from the US, such as MBNA and Capital One.

Barclays is the biggest provider, with 14.6% of the market. It launched the first UK credit card, Barclaycard, in 1966. Access entered the UK five years later, and when MasterCard bought Access in 1996, the other banks that had jointly owned Access launched their own, branded cards.

However, it has been the arrival of the US brands in the UK over the past decade that has really shaken up the market. With their heavy reliance on direct marketing and competitive interest rates, they have had a major impact on the ways cards are promoted.

With so many special introductory rates, such as the ubiquitous 0% APR, a major concern for credit card providers is the high level of customer churn as people transfer their outstanding balances to new card accounts to take advantage of a lower interest rate.

Innovative differentiation

While pricing is the key battleground between rival companies, increasing competition has meant that issuers have become more innovative with the products they offer.

Barclaycard has launched a card with a 0% introductory interest rate on balance transfers and purchases until August 2005. This long offer is designed to build customer loyalty.

Meanwhile, Lloyds TSB updated its dual-branded credit card, Create, this year to provide customers with more flexibility and their own price plans.

'It uses "dynamic personalisation technology", which allows people to set their own rate of interest, annual fee and level of cashback within the allowed parameters,' says a spokesman for Lloyds TSB. 'Everything is linked together and customers can change them throughout the year.

Research showed that personalisation is what customers want and chasing the lowest APR isn't necessarily the best route.'

Capital One's single flat rate of 5.9% APR for its No Hassle credit card is the lowest such offer in the UK. It is aimed at consumers who want a low, long-term interest rate and don't want to get caught with a high APR once the introductory offer period ends.

Demographic targets

According to consumer research from Mintel, just over half (52%) of all British adults currently hold at least one credit card and 64% have a debit card. While ABC1s are the group most likely to own both types of card, the penetration of credit cards among C2 and DE consumers has been increasing rapidly as more cards targeting this group are launched.

The future of this market is very much linked to the wider economic health of the country. If there is an economic slowdown, spending on cards will be reined in, which could lead to market contraction. However, Mintel predicts that any decline will be temporary and expects both the value and volume of transactions to continue to rise.

While the market is approaching saturation point, there are new opportunities, such as increasing the use of debit cards by introducing basic bank accounts that target the lower-income groups and the roll-out of chip and PIN cards to combat fraud.

As a result, the overall, combined number of debit, credit and charge cards issued in the UK is expected to increase by 23% to 165m by 2009.

ESTIMATED MARKET SHARE OF DEBIT AND CREDIT CARD ISSUERS, 2004 (%)

Debit Credit

cards cards

1 Barclays 16 16

2 Lloyds TSB 19 12

3 NatWest/RBS 15 16

4 HSBC 13 10

5 MBNA n/a 13

6 HBOS 8 12

7 Capital One n/a 6

8 Others 29 16

Source: Mintel

TOP 15 CREDIT CARD ADVERTISERS

May 03- May 02- % May 02-

Apr 04 Apr 03 change Apr 03

pounds m pounds m % share

1 Capital One 58.1 33.4 74 18.2

2 MBNA Europe Bank 38.6 27.3 41 12.1

3 Lloyds TSB 23.2 15.4 51 7.3

4 Barclays 22.0 5.3 314 6.9

5 Mint 21.1 13.9 52 6.6

6 Egg 20.7 12.5 66 6.5

7 Morgan Stanley 15.5 18.4 -16 4.8

8 American Express Europe 12.9 28.2 -54 4.0

9 Barclaycard Services 12.5 14.3 -13 3.9

10 MasterCard 10.7 15.0 -29 3.3

11 Goldfish 10.3 6.3 64 3.2

12 Marks & Spencer Money 8.1 n/a n/a 2.5

13 HBOS Card Services 8.1 13.7 -41 2.5

14 Royal Bank of Scotland 8.0 7.0 14 2.5

15 HFC Bank 6.9 9.2 -25 2.1

Total* 319.9 273.4 17 100

Source: NMR/Mintel *Total includes all advertisers

ANALYST COMMENT

Gordon Hill Head of financial services, Acxiom Data

Last year, experts predicted total saturation of the UK credit card market, with new brands advertising almost weekly. But most survived and there are some 40m cards in use. The tug-of-war between customer acquisition and retention is toughly fought, but with attrition rates of up to 30%, keeping customers is key.

Acxiom's 'National Shoppers Survey' reports that customers of Marbles, Mint, Egg and Capital One are the most prolific card switchers, with 27%-31% considering change. Conversely, customer loyalty is at its highest at NatWest, HSBC, Lloyds TSB and Goldfish, where 63% of customers are unlikely to switch.

A major development has been the interest-free balance transfer period first introduced by Capital One. Though effective for customer acquisition, it has created a nomadic group who switch from one offer to the next in a state of permanent free credit. Tough new government regulations limiting firms to only advertise interest rates available to most customers may curb such offers and some brands are already testing other incentives.

Encouraging maximum spend is the second priority. Morgan Stanley customers have the highest revolving balance values (more than £1000 a month), followed by Mint and Marbles.

There is an interesting correlation between balance and intention to switch: those attracting most customers with a monthly balance of less than £500 include Lloyds TSB and BarclayCard.

The new phenomenon seems to be the market for people who have found it hard to get these facilities, typically due to bad credit. It is a high-risk strategy that is paying off for many new players. According to PricewaterhouseCoopers, it is a market involving 8m consumers.