The UK is Europe’s largest and most highly competitive industry for payment cards, accounting for 17.6% of Europe’s total transaction value in 2014, as well as 20.3% of its transaction volume that year. The UK payment cards market is mature, with a high penetration of credit and debit cards throughout the country

Following the financial crisis, banks and card issuers were forced to introduce bespoke product and service offerings in order to retain their market share.

Consumers in the UK – especially the younger generation – are showing an inclination towards faster and more secure payment options.

This has resulted in mobile operators, traditional and online retailers and other service providers introducing quick and efficient digital payment options. Consequently, payment cards are anticipated to lose share to alternative payment instruments.

Cards’ comeback after 2008
Credit cards are set to get back on a growth trajectory. The UK credit cards market is mature, with a variety of product offerings available.

Banks and card issuers offer value-added services such as cashback offers, reward points and discounts on purchases. Coupled with flexible repayment options, consumers have shown a preference for using credit cards frequently, due to the value-added

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The financial crisis adversely affected the UK’s economy, unemployment levels, and disposable income.

It also had a direct impact on the number of credit card purchases as consumers were forced to cut down on unnecessary purchases and borrowing.

With the UK’s economy recovering from the crisis and employment opportunities gradually growing from 2013 onwards, consumers have started to use credit cards more frequently.

However, consumers are using credit cards for low-value transactions at POS terminals as they look to benefit from low-rate, long duration balance transfer facilities and reward programmes.

Consequently, low-rate, long-duration balance transfer periods have emerged as a vital marketing tool for banks and card issuers. As the country’s economy is anticipated to improve gradually between 2015 and 2019, credit cards transaction value and volumes are anticipated to grow.

Contactless cards were first issued in the UK in 2003, and by 2014 there were nearly 58 million cards in circulation featuring contactless functionality, accounting for a 36.3% share of the total payment cards in circulation.

The ease of making quick payments using contactless cards has gained in popularity among both consumers and retailers in the UK.

An increase in the number of retail outlets accepting contactless payments enabled consumers to opt for card-based payments. To encourage contactless payments further, the UK Cards Association is increasing the spending limit from the existing £20 ($30.80) to £30 ($46.20) from September 2015 onwards.

Interchange fee regulations
In July 2014, the European Commission (EC) published proposals to regulate card payments across Europe by creating a new inflexible interchange rate.

Under the EC’s proposals, interchange fees for debit and credit transactions in the EEA are capped at 0.2% and 0.3% of the transaction value respectively. These caps will enter into force in a phased manner:

  • During the first phase, all cross-border transactions in EEA member states will have to comply with the caps. However, the caps will also apply to centrally acquired (domestic) transactions, for example when a merchant contracts with an acquirer established in another EEA member state, the central acquirer will pay a 0.2/0.3% interchange fee.
  • In the second phase, after 22 months, all domestic transactions – including domestic transactions acquired by a domestic acquirer – are capped at the same level.

Commercial card interchange fees are not subject to the cap (but are subject to the other provisions in the rest of the proposed regulation).

All forms of interchange fee are covered – when set either by the scheme, or set multilaterally by the banks – as well as set bilaterally by an issuer and acquirer pair.

Even if retailers did pass on savings from their Merchant Service Charge reductions in full to consumers, prices would only fall by between $0.0005-0.13 per transaction for debit cards and between $0.60-93 per transaction for credit cards, while credit and debit card fees would increase.

UK Card Transaction by channel 2010-2019