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The threat from debit to the UK credit card market

Datamonitor
October 16, 2007
29 Pages - SKU: DFMN1589089

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Countries covered: United Kingdom

Introduction

The UK payment card market has continued to grow strongly over the last five years. However, this growth has been driven by growth in the use of debit, rather than credit, cards. At a time when the credit card market is facing pressure on each of its major sources of revenue, this is a major challenge. This brief examines both the issue itself and the strategic options open to credit card issuers

Scope

This briefing examines the changing trend in the use of debit and credit cards in the UK between 2002 and 2006 The impact of this trend on credit card issuers is discussed, with particular reference to current market challenges The way in which issuers can look to respond to this challenge is discussed in detail, focusing on three areas of product change Repositioning the product as a lending tool, attacking debit head-on, and moving credit into other areas of the payment landscape are all considered

Highlights

UK consumers are now more likely to turn to debit than credit for day-to-day transactions. Over the period 2002-2006, the share of the total value of personal spontaneous transactions accounted for by credit and debit cards grew from 80.6% to 88.1%. However, the share of credit cards within the total has declined from 27.2% to 24.3% This substitution has seen consumers making greater use of overdrafts to finance some short-term borrowing, depriving credit card issuers of interest revenue. The slowdown in credit card transaction values from 2004 onwards has been accompanied by strong growth in overdraft borrowing. There are three areas of strategic response for issuers: attacking debit directly, re-positioning the card for lending, and targeting new areas of payments. Each offers significant opportunities and a clear path for exploitation. There are, for example up to £92 billion of untapped gross advances in the consumer credit market.

Reasons to Purchase

Understand the scale of the current market challenge debit card usage growth is posing to UK credit card issuers Discover the size of the potential payment and borrowing market segments that are ripe for further exploration Learn which areas hold the largest potential and what the most effective strategies are for maximizing the gains

Overview: Catalyst; Summary; Methodology; Table of Contents; Table of figures; Table of tables; The Threat from Debit to the UK Credit Card Market; Introduction; Debit is becoming the payment tool of choice for UK consumers, presenting a major challenge to the credit card market; Debit is rapidly becoming the payment tool of choice for UK consumers; Debit cards account for a far greater proportion of total card transaction values than in 2002; Indeed, debit is now more than ever the 'top of the wallet' choice for consumers when it comes to spontaneous purchases; This trend is ultimately driven by the value propositions offered by debit and credit; At a time when credit card issuers are being squeezed from all sides, this is a major challenge; Greater replacement of credit with debit has further hit interest income; it is not just transactors who are turning to debit; Replacement of credit with debit is also unlikely to have alleviated the problem of transactors; There are three core strategies open to credit card issuers to counter the threat from debit; Attacking debit as a day-to-day payment tool offers a clear route to revenue growth; Co-branding is the most obvious route to driving growth in POS use, but is a developed segment; Issuer-driven loyalty programs can achieve the same aim, but have been less successful; However, there are other approaches to this problem that can be learned from other markets; Repositioning the product as a borrowing tool will allow issuers to target other areas of consumer credit; This is an area that UK issuers have already managed to exploit successfully, but more can be done; However, the current credit climate makes this strategy a risky one; Repositioning the credit card to attack payments made by other means provides another clear route to revenue growth; Payments to utilities and for other bills are a huge potential market; The person-to-person payment market is also one that holds significant potential; Contactless technology represents a huge opportunity in capturing low-value cash payments; The threat from debit is a serious one, and there is no single remedy; The threat from debit is one of the key challenges facing the industry; Product development holds the key to growing revenues, but there is no single solution
APPENDIX: Definitions; APACS; Average transaction value; Balances outstanding; Charge card; Credit card; Debit card; EMV; Interchange; OFT; Methodology; Primary research; Secondary research; Further reading; Ask the analyst; Datamonitor consulting; Disclaimer
List of Tables: Table 1: Current relevant Datamonitor publications, 2007; Table 2: Future relevant Datamonitor publications, 2007
List of Figures: Figure 1: From a roughly even position in 2002, debit cards now dominate transactions at the POS, in addition to remaining the primary tool for cash acquisition, 2002-2006; Figure 2: Consumers are turning to debit rather than credit for spontaneous payments, 2002-2006; Figure 3: The revenue mix on the issuance side of the business has been squeezed over the last 12 months, 2005-2006; Figure 4: The slowdown in the credit card market has been mirrored by an upturn in overdraft borrowing, indicating the substitution of credit for debit cards, 2002-2006; Figure 5: The average value of a debit card purchase has increased much more rapidly than that of credit, reflecting the growing use of debit for higher value payments, 2002-2006; Figure 6: The unsecured consumer credit market represents a huge potential opportunity for credit card issuers to tap into, 2004-2006; Figure 7: Consumer credit write-offs have risen sharply from 2004 onwards, particularly in lending on credit cards, 2002-2006; Figure 8: Payments for commitments such as utility or telephone bills represent a large potential market for UK credit card issuers, 2006; Figure 9: The P2P payment market offers significant potential to credit card issuers, 2004; Figure 10: The value of cash payments below £15 in target sectors for contactless payments represents a significant potential revenue opportunity, 2006

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The threat from debit to the UK credit card market

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