The UK's economic woes and attendant drop in consumer spending could be to the benefit of debit-card brands, if not credit cards.
These days one rarely reads the word 'credit' without 'crunch' following close behind. While the economic climate has left the global banking institutions reeling, on a more personal level, most people's view of credit centres on the cards in their wallets.
This market will be affected as consumers take a more cautious attitude to money, and limit their borrowing. Lenders may begin to tighten their criteria and chase profitable, low-risk customers.
While some people are cutting back on credit-card use, others are turning to it as a last-ditch approach to staying solvent. More than 4m people used credit cards to pay their rent or mortgage in the past 12 months, according to Mintel.
Credit and debit card use is extensive, with 84% of UK adults holding a debit card. By the end of 2007, there was a total of 145m payment cards in circulation.
However, as times get tougher, credit-card use is changing. Many consumers are limiting use, turning to debit cards to better monitor their spending. As a result, the debit-card market grew steadily in 2007 while the volume of credit cards issued declined, falling 3.2% in 2007.
In 2008 it is estimated that pounds 111bn will be spent on credit cards, compared with pounds 247bn on debit cards.
The credit-card market has changed. As new banks and financial institutions enter the UK market, competition has become fierce. Zero-interest offers have become commonplace, and a wave of credit-savvy consumers has learned to move from one card to another to achieve cheaper, long-term borrowing.
Consumers are most likely to put higher-value purchases on their cards, and although cash and cheque use is decreasing, people remain less likely to use plastic for smaller purchases.
The food and drink sector accounts for the greatest proportion of transaction volumes (about 30%) for credit and debit cards, according to APACS, the payments trade association.
MasterCard
is the market-leading scheme in the credit-card category, while Visa is the primary provider for debit cards.
The big five banks (
Lloyds TSB
,
Barclays
,
HSBC
,
HBOS
and
Royal Bank of Scotland/NatWest
) dominate the sector, despite competition from entrants such as US institutions MBNA and Capital One.
Barclaycard has a leading position among credit cards with a 22% market share. It has broadened its range to appeal to different customer segments. Its latest innovation was a tie-up with Oyster for the OnePulse three-in-one card, which works as an Oyster travelcard, a credit card and a cashless payment system at participating stores.
Lloyds TSB
leads the debit-card account category. In 2007 it launched its AirMiles Duo account, a dual
American Express
and
MasterCard
through which air miles can be earned.
Despite the AirMiles Duo's popularity, relatively few consumers are attracted by cards that offer reward schemes, so there may be opportunities for providers to innovate in this area. Some cards offer cash-back as an incentive, which often works well for consumers who pay off their balance every month and are heavy card users.
Over the next five years, the UK market for credit cards is predicted to grow by 17% to reach a value of pounds 130bn by 2013, according to Mintel. When inflation is taken into account, the rate is a more modest 4%. Debit cards are expected to benefit more from the credit squeeze and grow by 66% to reach pounds 410bn over the same period - a 48% growth rate when inflation is considered.
