Credit Cards to be ‘Reinvented’?
Credit card lending models are unsustainable and must change to cope with borrower behaviour according to a report out today.
Precious Plastic, published by PricewaterhouseCoopers (PwC), said 2009 has been a watershed year for consumer credit in the UK with both lenders and borrowers reassessing their balance sheets. Increasing bad debts, funding constraints and the tough macro-economic climate are challenging current models, said the authors, with the introduction of the Consumer Credit Directive and the prospect of further regulation adding to the pressure.
Richard Thompson, partner, PwC, said: “Over the last 12 months there has been a cooling passion for plastic – credit card borrowing has fallen by three per cent to £64bn and the number of cards in circulation has fallen by eight per cent.
“Bad debts in the sector have reached historic highs, standing at nearly six per cent of outstanding balances. Our analysis suggests that bad debts are likely to continue to rise and could reach nine per cent by the end of 2010. This would have enormous implications for the profitability of credit cards in the UK market.”
He added: “Large scale change within the sector over the next few years is inevitable. We’re likely to see credit cards being reinvented as payment rather than borrowing tools.”
Total household borrowing has remained broadly constant over the last 12 months; however it still remains high in comparison to the rest of Europe. On average, each UK household has total debt of around £60,000, made up of approximately £50,000 of secured debt and £10,000 of unsecured debt. These debt levels mean that the average household will need to spend approximately 15 per cent of its net income purely to service the interest payments arising from this debt.
PwC expects APRs to increase and annual fees to become a common feature. At the higher end of the market it said customers will pay for access to premium benefits and at the lower end more marginal customers will be expected to pay for even a standard credit card.
Innovation is one way of repairing the credit card business model, as providers experiment further with contactless cards, prepaid cards and mobile payments. For example, critical mass is building in terms of retailers accepting contactless cards and new acceptance environments such as taxis, vending machines and public transport will serve to accelerate the expansion of contactless acceptance.
PwC said there is a rare opportunity for new entrants to make significant inroads into the UK banking market – a number of the existing players are on the back foot and encumbered by a lack of profitability in legacy assets. Growing political support for increased competition and the possibility of ready-made capability being for sale (as the banks seek to dispose of non-core aspects of their businesses) means time to market could be significantly reduced.
Thompson added: “Consumers do not fully appreciate the likely future changes to the market. As the recovery gains momentum, consumer demand for credit will return. Lenders will be unable or unwilling to increase supply sufficiently to match demand. This will leave consumers surprised at both the cost of credit and the difficulty in gaining access to it.
“Lenders will focus on those customer segments that are the most profitable, rather than those that are in the most need of credit. Some consumers will therefore be forced towards the less mainstream corners of the industry in search of credit, a trend that may not be in their interest. We expect there to be an increasing number of transactions in debt portfolios as lenders make these operational decisions about whether they want exposures to particular segments of the population or geographies.”
