Overview 1
Catalyst 1
Summary 1
Executive Summary 2
Introduction 2
The UK plastic card market continued to grow in 2006 and this trend is set to continue 3
The resilience of the economy, consumer attitudes and an expanding infrastructure have sustained the market 5
Market Statistics and Key Trends 5
Credit and debit cards accounted for 87% of the total number of UK-issued payment cards in 2006 5
Forecasting the UK Payment Card Market 6
Datamonitor forecasts annual growth in the value of payment card transactions of 6.6% to 2011 6
Regulation, Competition and the Threat to Revenues 7
Competitor Market Shares and Developments in the UK Plastic card Market 8
Visa remains the largest debit brand in the UK 8
RBS remains the largest player in the UK credit card market by cards in issue 8
Product Design in the UK - What can be learnt from Abroad? 9
Issuers in the UK can learn much from issuers elsewhere 9
The threat from Debit to the UK Credit Card Market 9
Debit is rapidly becoming the payment tool of choice for UK consumers 9
Debit cards account for a far greater proportion of total card transaction values than in 2002 9
Non-standard Credit Cards in the UK 11
The non-standard market refers to consumers who are not considered for credit by mainstream issuers 11
Table of Contents 12
Table of figures 13
Table of tables 14
UK Plastic Card Market in Review and Future Outlook 15
Introduction 15
The UK plastic card market continued to grow in 2006 and this trend is set to continue 15
Datamonitor forecasts that the value of payment card spending will reach £645 billion in 2011 18
The resilience of the economy, consumer attitudes and an expanding infrastructure have sustained the market 19
The market has benefited from consumers using their payment cards more often 19
Competition in the market has continued to encourage multiple cardholding, while the drive for efficiency has seen dormant accounts close 20
Plastic cards are growing in importance as payment tools. Card spending is equal to 63% of the value of retail sales 21
Plastic cards are also growing in popularity as a means of accessing credit 22
From 2002-05, the performance of the economy was an important driver of the market 24
A sustained boom in the UK housing market has driven spending and card-based borrowing 24
Falling levels of unemployment have also bolstered the market 25
The increased spending levels are reflected in the solid GDP growth in the UK 26
While economic fundamentals remain sound, economic conditions are no longer driving the credit card market forward 27
Inflationary pressure has caused the Bank of England to raise interest rates 28
Uncertainty in the housing market has compounded the problem 30
Collectively, these factors have reduced overall consumer confidence in the UK 31
As a result of decreased consumer confidence, the demand for unsecured consumer credit has fallen 32
Gross advances on credit cards have broadly matched the wider consumer credit trend 32
Cards and Payments Team view 33
Despite the slowdown in the credit card section of the market, the infrastructure has continued to expand 34
The growth in the number of ATMS has been fueled by the independent sector 35
The introduction of EMV has lowered the levels of card fraud in the UK 35
The implementation of EMV has caused a shift to card not present fraud 36
The value of fraudulent transactions has slightly risen from 2002 to 2006 37
Summary 39
Market Statistics and Key Trends 40
Credit and debit cards continue to dominate the market in terms of issuance 40
Credit and debit cards accounted for 87% of the total number of UK-issued payment cards in 2006 40
Multiple cardholding continues to be an important feature of the market 42
Within the credit card market, the number of co-branded and premium cards grew at the expense of standard varieties from 2003-06 42
The private label card market remains in decline 45
Limited acceptance and card limits-and consequently usage-have severely restricted issuer profitability 46
Migration to general purpose credit cards has proved to be an effective solution to many of these problems for certain players 46
Datamonitor Cards and Payments Team view 47
Debit cards continue to account for the lion's share of card activity 48
More than 76% of all plastic card transactions were made by debit card in 2006 48
Debit cards are the most frequently used card product 50
In 2006, over two thirds of the value of total plastic card transactions were accounted for by debit cards 52
Average transaction values are highest on charge cards 54
Card turnover is highest on charge cards. However, debit cards enjoy the greatest total activity per adult 55
UK consumers have shown a growing willingness to use plastic cards for payments and when abroad 56
UK consumers are using payment cards for more purchase transactions than ever before 56
This trend is most evident in the debit card market 57
Credit cards have traditionally been used for purchases 58
Purchases dominate transactions abroad, but cash acquisition transactions are growing in importance 59
In 2006, debit cards accounted for a higher value of transactions abroad than credit cards 61
Growth in online commerce represents a major opportunity 62
Summary 63
Forecasting The UK Payment Card Market 64
Datamonitor's forecast for the UK plastic card market 64
Datamonitor forecasts annual growth in the value of payment card transactions of 6.6% to 2011 64
Datamonitor's forecasting model assesses the relationship of macroeconomic factors with respect to consumer credit products 66
Datamonitor bases its neutral view on forecasts provided by the Treasury 66
Forecasting the credit card market 67
Datamonitor forecasts annual growth in the credit card market of 3.9% to 2011 67
Under an optimistic view of future economic performance, Datamonitor forecasts an annual growth of 5.5% 70
Under a pessimistic view of future economic performance, Datamonitor forecasts annual growth of -0.7% 74
Forecasting the charge card market 78
Datamonitor forecasts annual growth in the charge card market of 3.4% to 2010 78
Forecasting the debit card market 81
Datamonitor forecasts annual growth in the debit card market of 7.6% to 2011 81
Forecasting the private label card market 82
Datamonitor forecasts that the private label card market will decline at an annual average rate of 2.6% to 2011 82
Regulation, competition and the threat to revenues 85
The UK card market continues to face regulatory intervention at the national level 85
2006 saw many issues wrapped up 86
The OFT has set a threshold of £12 for default fees 86
ATM fees have been the subject of scrutiny 87
Credit card purchase cover has been extended to overseas transactions 89
The CCA 2006 has extended protection offered to consumers and was enacted in April 2007 89
Datamonitor Cards and Payments Team view 90
The OFT has referred its report on payment protection insurance to the Competition Commission 91
The FSA has been investigating the sale of PPI since 2005, and has imposed penalties on several players 92
Datamonitor Cards and Payments Team view 93
The OFT has called for greater information to be provided with credit card cheques 94
The DTI began a consultation following earlier discussions by the TSC and the Task Force on Tackling Over-indebtedness 94
Following up on this, the OFT has agreed that further regulation is required to improve transparency 95
Datamonitor Cards and Payments Team view 96
The Payment Systems Task Force was wound up in December 2006 and replaced with a new strategic governance body 97
The PSTF published a report into access and governance of the LINK ATM network 97
The PSTF did not pursue its investigation into the access and governance of UK card schemes 98
Following an appeal, the OFT's ruling on MasterCard's MIF was overturned. However, it has vowed to continue its investigations 99
The OFT's current investigation is likely to focus more closely on the principle of interchange itself 100
Datamonitor Cards and Payments Team view 101
Background to interchange and its regulation 102
Interchange is one of five key revenue streams for the industry 102
Merchants are behind the downward pressure on interchange 104
The OFT's current interest in domestic interchange began when MasterCard applied for an exemption from the UK Competition Act 1998 106
In its September 2005 ruling, the OFT accepted the need for a collective agreement on interchange, but objects to what it sees as 'extraneous costs' 108
In response to this finding, MasterCard, backed up by the rest of the industry, lodged an appeal with the CAT 109
Although reasonably unlikely, there remains a possibility that domestic interchange fees could be reduced to around 0.7% 110
Domestic regulators are pushing to make interchange a more accurate reflection of costs 111
A cut in interchange would significantly reduce issuer revenues, forcing them to make cuts elsewhere 112
Datamonitor Cards and Payments Team view 112
The UK card market also continues to face regulatory intervention at the international level 113
The European CCD promises to make further changes to regulation in the UK 113
Timeline of the directive 113
The revised proposal has seen changes to a number of key areas, but the commitment to maximum harmonization remains 115
Other areas of the directive remain unchanged from its previous form 117
Despite being well intentioned, there are key problems with the directive 117
Datamonitor Cards and Payments Team view 119
The European banking industry continues to work towards the creation of SEPA 119
For a number of years the EC has pushed to create a single payments area 119
However, Europe's banks were initially reluctant to change their practices 119
Yet the threat of further regulation pushed the industry to take steps to self-regulate 120
At the end of 2004, the EPC issued a roadmap to 2010 122
However, there are signs that regulators are becoming frustrated with the slow progress of the banks with SEPA 122
In March 2006, the EPC published a second version of its Cards Framework 123
Datamonitor Cards and Payments Team view 123
Intense competition in the market has driven down interest margins 124
Intense price competition has kept a downward pressure on introductory rates, while the pressure to earn revenue has kept headline rates up 124
APRs have risen, reflecting recent rises in the base rate and the pressure to generate revenue 125
Introductory APRs have fallen 5.6% relative to the base rate since January 2001 126
The introduction of balance transfer fees reflects this shift away from the aggressive acquisition campaigns of recent years 129
Regulation and competition have cut into issuer revenues. Current regulatory moves will reduce this further 130
Datamonitor's UK Credit Card Industry Revenue Model 130
This model estimates revenue flows from the card issuance side of the business only 130
A wide range of data resources and qualitative input have been brought together to form this model 131
Datamonitor estimates that the revenue pool from issuance in the UK credit card market has shrunk to £9.9 billion 131
Interest is the key revenue stream for the industry 133
Other sources make up the remaining revenue income 134
Interest is accounting for a greater share of revenue as the base rate increases and income from other areas is cut 135
The recent changes in regulation and the general slowdown of the UK card market have cost issuers approximately £357m in revenues. Future restrictions on the sale of PPI could cost issuers even more. 136
Issuers have a range of levers to pull in terms of revenue generation 137
Scenario 1: the fall in revenue is countered by an increase in the standard rate of APR charged by issuers 137
Scenario 2: the fall in revenue is countered by the introduction of annual fees on a greater proportion of cards 138
Scenario 3: 'hidden charges' can help issuers recover revenue 138
Datamonitor Cards and Payments Team view 140
Summary 140
Competitor Market Shares and Developments in the UK Plastic Card Market 141
Introduction 141
Card scheme market shares 141
Visa remains the largest debit brand in the UK 141
Solo is losing market share while Visa Electron has maintained market share 142
Visa is also the leading debit scheme in terms of cards in issue 142
Visa is the leading credit card scheme, but continues to lose ground to MasterCard 143
American Express is now the largest scheme in the charge card market 143
Card issuer market shares 145
RBS remains the largest player in the UK credit card market by cards in issue 145
Barclaycard remains the biggest issuing brand in the market 146
The dominance of the 'big five' banks is being challenged 147
Monolines and other issuers continue to grow at the expense of the large retail banks 147
Co-branding continues to be a successful strategy in the UK 147
Specialist lenders have also made an impact on the market 147
MBNA has built upon its position in 2005 to become the clear leader in terms of balances outstanding 148
GE Money continues to dominate the private label market 149
Card issuer developments 150
The UK market continues to be relatively quiet in terms of consolidation 150
The costs of regulatory compliance and a downturn in market conditions have seen the pace of consolidation slow from 2002 onwards 151
Strategic changes have also been important-many issuers have sought to grow organically through co-brand partnerships with non-financial entities 152
Entry into other market segments is also likely to be a profitable diversion for issuers 153
In the most significant recent acquisition in the UK, Citigroup has acquired Egg 154
Barclays sells off its subprime card portfolio 155
While mergers and acquisitions have been thin on the ground, there have been many notable product launches in the UK 155
The number of co-branding partnerships continues to increase, with Barclaycard being particularly active 155
Prepaid cards have been introduced by several issuers 157
Contactless payments have been tested and are being rolled out in the UK 159
Cards and Payments Team view 161
Issuers are responding to the demand for 'green' products 161
Cards & Payments Team view 162
Lloyds TSB launches debit card savings product 162
Cards & Payments Team view 163
Summary 163
Product design in the UK - What can be learnt from abroad? 165
Introduction 165
Markets in the Middle East lead the way in chip-based loyalty programs 165
Chip-based loyalty schemes offer several advantages over traditional schemes 165
Garanti Bank offers cardholders a range of options on its chip-based bonus program 165
The chip allows for instant redemption 166
Garanti also has several non chip-based innovations 167
Moreover, since the success of Bonus Card, Garanti Bank has since launched a new and more innovative scheme 169
Mashreqbank's WOW! Card rewards repeat purchases rather than transactional loyalty 170
The chip allows Mashreqbank and its partners to reward transaction frequency as well as value. 170
Other data stored on the chip can help further the relationship between the program and the partner 171
The value offered to the retailer is considerable 172
Cards & Payments Team view 173
There have been a range of innovations in the US 173
Citibank has extended its loyalty scheme to its other banking products and has a loyalty program that helps to pay off cardholders' mortgages 173
Citibank's Home Rebate Card can help cardholders pay off their mortgage early 174
Cards & Payments Team view 174
American Express has a range of interesting loyalty propositions in the US 175
The One Card encourages cardholders to save money and results in more bank accounts at American Express Bank 175
Cards & Payments Team view 175
American Express also issues a series of cards tailored to particular cities 175
Cards and Payments Team view 176
Bank of America launches affinity banking 176
Cards & Payments Team view 176
Issuers in the UK can also learn from their European counterparts 176
In the Netherlands, Greencard offsets the cardholder's carbon emissions 176
Cards & Payments Team view 177
Allied Irish Bank's (AIB) 'be' credit card varies the APR according to how much consumers spend 177
AIB uses one pricing strategy to acquire and then two different pricing strategies to retain customers 177
Cards & Payments Team view 178
Raiffeisen Bank in Hungary has introduced a new card that functions both as a debit and credit card 178
Such a functionality brings huge innovation on the part of Raiffeisen Bank to the market 179
Cards & Payments Team view 179
In Spain, issuers have tried to make the most of colors and shapes 179
Card appearance has been a focus for innovation 179
Cards & Payments Team view 181
Summary 181
The Threat from Debit to the UK Credit Card Market 182
Introduction 182
Debit is becoming the payment tool of choice for UK consumers, presenting a major challenge to the credit card market 182
Debit is rapidly becoming the payment tool of choice for UK consumers 182
Debit cards account for a far greater proportion of total card transaction values than in 2002 182
Indeed, debit is now more than ever the 'top of the wallet' choice for consumers when it comes to spontaneous purchases 183
This trend is ultimately driven by the value propositions offered by debit and credit 184
At a time when credit card issuers are being squeezed from all sides, this is a major challenge 185
Greater replacement of credit with debit has further hit interest income; it is not just transactors who are turning to debit 186
Replacement of credit with debit is also unlikely to have alleviated the problem of transactors 188
There are three core strategies open to credit card issuers to counter the threat from debit 189
Attacking debit as a day-to-day payment tool offers a clear route to revenue growth 189
Co-branding is the most obvious route to driving growth in POS use, but is a developed segment 190
Issuer-driven loyalty programs can achieve the same aim, but have been less successful 190
However, there are other approaches to this problem that can be learned from other markets 191
Repositioning the product as a borrowing tool will allow issuers to target other areas of consumer credit 193
This is an area that UK issuers have already managed to exploit successfully, but more can be done 194
However, the current credit climate makes this strategy a risky one 195
Repositioning the credit card to attack payments made by other means provides another clear route to revenue growth 196
Payments to utilities and for other bills are a huge potential market 197
The person-to-person payment market is also one that holds significant potential 198
Contactless technology represents a huge opportunity in capturing low-value cash payments 200
The threat from debit is a serious one, and there is no single remedy 202
The threat from debit is one of the key challenges facing the industry 202
Product development holds the key to growing revenues, but there is no single solution 202
Non-standard Credit Cards in the UK 203
Introduction 203
The non-standard market refers to consumers who are not considered for credit by mainstream issuers 203
The non-standard market covers the sub-prime sector 204
The term 'non-standard' covers a wide range of perceived risk 205
Despite the risks involved, the non-standard market has proved an attractive market to certain issuers in the UK 206
Careful segmentation and risk management is the key 207
Issuers in the non-standard segment face greater risks but charge a higher interest rate 207
Issuers in the non-standard space mitigate their risk with lower credit limits 208
Intense competition has led to decreasing margins and profitability in the mainstream market 208
Datamonitor estimates that the non-standard market in the UK consists of seven million adults and 5.6 million credit cards 208
Datamonitor estimates that there are seven million adults in the UK that fall into the non standard category. 208
Datamonitor uses seven steps to size the UK non-standard population 209
Elimination of double counting 211
Several factors can explain why the non-standard population has been growing in the UK 212
The number of registered CCJs increased for the second year running 212
Mortgage repossessions are rising, though arrears slowed in 2006 213
Personal bankruptcies hit another record 215
Payments in arrears are at a high 216
Mainstream issuers have been tightening their criteria 217
Datamonitor estimates that there are 5.6 million credit cards issued to non-standard individuals in the UK 217
Self employment and having a CCJ account for over half of the non-standard cards in issue 218
Average cardholding is lower in the non-standard segment 219
The value of transactions on non-standard credit cards amounted to £7.8 billion in 2006 220
Datamonitor's estimation methodology 220
Datamonitor estimates that the value of transactions on non-standard cards reached £7.8 billion in 2006 221
The market is composed of mainstream and specialist providers 222
Capital One and Barclaycard are still active in this market 222
Several mainstream players have acquired specialist lenders in order to gain the expertise needed to issue in this market 223
There are several advantages to this approach, as compared to direct market entry 224
Mainstream players have used different branding strategies to enter this market 225
Market entry through a subsidiary allows mainstream issuers to protect their prime brands 226
However, Capital One has stayed faithful to its prime brand 227
Other specialist issuers target the lower end of the non-standard spectrum 228
Profile: SAV Credit 228
Profile: Vanquis Bank 229
Non-standard specialist lenders are benefiting as a result of mainstream lenders tightening their issuing criteria 230
As a result, Vanquis and SAV have continued to grow rapidly 231
As a result, non-standard specialist providers are confident about the future 231
It is likely that other firms will eventually enter the non-standard market 232
Datamonitor forecasts moderate growth in the non-standard credit card market 232
Datamonitor forecasts that the value of transactions on non standard cards will grow at a CAGR of 5.4% 232
Datamonitor's estimation methodology 232
Datamonitor forecasts the value of non-standard credit card transactions to reach £10 billion by 2011 232
A number of factors are forecast to drive growth in the non-standard credit card market 234
Growth will be fastest among those with poor or limited credit histories 236
Summary 236
APPENDIX 237
Supplementary data 237
Market statistics and Key trends 237
Data table relating to the revenue model 237
Definitions 238
AAGR 238
APACS 238
Average transaction value 238
Balances outstanding 238
Bank of England base rate 238
CAGR 238
Charge card 238
Credit card 238
CVV 239
Debit card 239
EMV 239
Fraudulent use of card details (card-not-present fraud), also known as fraud on phone, mail order or internet transactions 239
Interchange 239
Non-standard 239
OFT 239
Methodology 240
Primary research 240
Secondary research 240
Further reading 241
Ask the analyst 242
Datamonitor Consulting 242
Disclaimer 242