Since the crisis, popularity for prepaid cards has grown in the UK market, across most sectors. The growth of e-commerce and increased smartphone adoption, coupled with high consumer confidence in online transactions has boosted the cards and payments industry with further healthy growth predicted ahead
The UK is Europe’s largest and most highly competitive industry for payment cards. It accounted for 17.6% of Europe’s total transaction value in 2014, and 20.3% of its transaction volume. The UK payment cards market is mature, with a high penetration of credit and debit cards. Following the financial crisis, banks and card issuers were forced to introduce bespoke product and service offerings in order to retain their market share.
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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 between 2015 and 2019.
Credit cards market to get see growth
The UK credit cards market is mature, with a variety of product offerings available. Banks and card issuers offer value-add 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 services. The financial crisis adversely affected the UK’s economy, unemployment levels and disposable income, and 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.
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By GlobalDataConsequently, 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 gradually improve over the forecast period, credit cards transaction value and volumes are anticipated to grow.
Adoption of contactless payments to increase scope of card payments
Contactless cards were first issued in the UK in 2003, and by 2014 there were nearly 58m cards in circulation featuring contactless functionality, accounting for a 36.3% share of the total payment cards in circulation. Most leading banks in the UK – Barclays, Capital One, Clydesdale, American Express, MBNA, HSBC and Royal Bank of Scotland (RBS) – are offering payment cards with contactless features.
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 further encourage contactless payments, the UK Cards Association is increasing the spending limit from the existing £20 to £30 from September 2015 onwards.
Interchange fee regulations to impact the UK’s payment cards market
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. 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 rest of the proposed regulation), and
- All forms of interchange fee are covered – when set by the scheme, or set multilaterally by the banks – as well as set bilaterally by an issuer-acquirer pair.
The already mature UK payment cards market will be affected by the proposals. A study by Europe Economics examined the possible economic impact if this regulation is forced upon the UK:
- Losses in card issuers’ revenues of up to $3.8bn (£2.4bn);
- Cardholder fees would rise by up to $17.3 for debit cards and $39.3 for credit cards;
- Large retailer savings of up to $3.5bn, and
- No evidence that these savings would be passed on to the consumer in the form of lower prices
Even if retailers did pass on savings from their Merchant Service Charge (MSC) 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.
Growth prospects in prepaid cards market
Following the financial crisis, prepaid cards gained popularity in the UK. Banks and card issuers are offering a comprehensive range of prepaid cards, including youth, transport, fuel, and shopping and remittance cards. Prepaid cards are also gaining prominence among businesses as they offer better control over employees’ spending, more efficient risk management and immediate liquidity, and are more secure than cash.
UK companies are increasingly offering prepaid cards to employees either under reward and recognition schemes, to manage expenses or to pay staff that don’t have bank accounts. To increase the reach of prepaid cards to low-income groups, in August 2014 prepaid card company Pockit, introduced a card that can be loaded online free of charge. This prepaid MasterCard costs $50.4 a year and includes cashback offers.
As the low- and middle-income populations are increasing, prepaid cards are being used more often to pay utility bills and taxes. There has been an increase in usage from students, as these cards keep check on spending and offer no risk of running into debt. The number of prepaid cards in circulation grew between 2009 and 2014.
E-commerce offers growth prospects
The UK is Europe’s leading e-commerce market. E-commerce posted a CAGR of 16.02%, going from $90.4bn in 2010 to $163.7bn in 2014. Although the UK is a smaller consumer market than that of the US, Germany, China or Japan, its shoppers spend more money online.
According to eMarketer, a digital marketing research firm, B2C online sales in the UK averaged $3,585 per individual in 2012. It further states that UK shoppers make 13.5% of their purchases online – more than their counterparts in Germany, the US or South Korea – which are considered some of the world’s most digitally active populations.
By 2016, online retail is expected to make up 23% of the UK’s retail sales, up from 13.5% in 2010, according to a report by the Boston Consulting Group. This is the highest proportion of any of the G20 economies. The rapid growth of the e-commerce market was due to rising online and mobile penetration, high consumer confidence in online transactions and the increasing presence of online gateways.
A contributing factor to the growth of UK e-commerce in the last five years was an increased focus on customer retention tactics used by retailers, which included customised e-mails to consumers based on their buying patterns, display ads about product and services on their social networking pages based on their previous purchases and on-site personalisation features offering them an enhanced shopping experience. These initiatives have led to a healthy relationship with customers, and resulted in repeat purchases.
The young population has a strong inclination for mobile devices and online-media use, providing opportunity for e-commerce companies. Online shopping including mobile transactions is expected to grow between now and 2019.
