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March 1, 2016updated 04 Apr 2017 3:59pm

The UK is embracing new payments

While the UK remains one of the largest and most mature payment markets, it still needs to keep up with innovation and new technology. Luckily, it has the contactless boom, particularly in travel, and the release of mobile payment options to keep it up to speed

By EPI editorial

While the UK remains one of the largest and most mature payment markets, it still needs to keep up with innovation and new technology. Luckily, it has the contactless boom, particularly in travel, and the release of mobile payment options to keep it up to speed.

The UK is Europe’s largest and most highly competitive industry for payment cards. It accounted for 19.5% of Europe’s total transaction value in 2014, and 20.1% of the volume.

The UK payment cards market is mature, with high penetration of credit and debit cards. Banks and issuers were forced to introduce bespoke products and services to retain market share following the financial crisis.

Credit transfers account for the majority of UK payment transactions by value, and are used for both high-value corporate and low-value retail transactions. In the UK, salaries are generally paid through credit transfers. Paper-based credit transfers usually take three days to clear, and are generally initiated by smaller companies or consumers.

Direct debits are used for low-value recurring payments such as utility bills, and accounted for the second-largest share of transaction value in 2014. In the UK, preauthorised direct debit options are the most common form of direct debit, and take three days to process.

Cheques are gradually disappearing from consumer payments, primarily due to consumer preference for electronic payments, and the government’s withdrawal of the cheque guarantee card scheme in 2011.The government is working to reduce the use of cheques, and 2018 has been selected by the UK’s Treasury Select Committee as a target year for their abolition.

Use of payment cards rose between 2010 and 2014, although it still lags behind cash in terms of transaction value. A growing number of POS terminals, preference for contactless payments, and a rise in the number of retailers accepting cards for payments contributed to rises in payment card transaction volumes and values. The rising number of online shoppers and the growing retail sector are expected to increase the value of card-based transactions until 2019.


Cash continues to dominate in terms of transaction volume, as consumers generally use it for day-to-day, low-value transactions. According to the UK Payment Council, cash transactions represented just under half of all payments for the first time in 2014. Use of cash is anticipated to decrease further until 2019, due to a growing preference for payment cards, and a rise in contactless transactions from September 2015.

Banks and regulators are taking initiatives to encourage consumers to use cards by offering secured payments.All payment cards issued after January 2011 are EMV-compliant, offering enhanced security. This and the increased convenience of payment cards with technology such as EMV and contactless are anticipated to drive card-based transactions over the next five years.

UK consumers – especially the younger generation – are increasingly inclined towards faster and more secure payment options. This resulted in mobile operators, traditional and online retailers and other service providers introducing quick and efficient digital payments during 2010-2014.

However, payment cards are anticipated to continue to dominate as a payment method, largely due to familiarity of use, availability of infrastructure, and the emergence of contactless technology.


The rise of digital-only banks is likely to accelerate a shift towards electronic payments. Atom Bank, which was granted a license by the Bank of England in June 2015, may become the UK’s first digital-only bank, allowing customers to conduct transactions entirely online or by mobile. German-based Fidor Bank, and UK-based Tandem Bank and Starling Bank are also entering the market.

Credit card market continues to grow

The UK credit card market is mature, with a variety of products available to consumers. Banks offer value-add services such as cashback, reward points and discounts on credit card purchases. With flexible repayment options, UK consumers have shown a preference for using credit cards for both in-store and online purchases.

With the UK’s economy recovering, and employment opportunities gradually growing from 2013 onwards, consumers have started to use credit cards more frequently at POS terminals, as they look to benefit from interest-free credit periods and reward programmes. Consequently, credit card transaction volumes and values have risen in the last five years; a similar trend is expected up to 2019.

UK banks also offer credit card balance-transfer services. These have become very competitive, as cardholders look to defer credit card debt repayments. Banks offer long low-rate transfer periods, while increasing the annual percentage rate on cards outside the repayment period.

In September 2014, Barclays Bank introduced a balance-transfer card offering 0% interest for up to 35 months. This model was followed by Lloyds Bank, which released a platinum credit card offering a 34-month balance-transfer period.Low-rate transfer periods have become an attractive proposition for banks and issuers to increase profitability on credit cards, and to retain customers. Balance transfers also encourage consumers to reduce the number of cards owned, and card debt.

Interchange fee regulation to impact profit

The UK government implemented the EU rule on the interchange fee cap effective from 9 December 2015, capping fees for credit and debit cards at 0.3% and 0.2% respectively.The regulation is anticipated to have a major impact on profitability in the UK payment cards market. Issuers are likely to cut card offerings and benefits for consumers, and look at new ways to generate revenue. One way could be to increase fees levied on debit and credit cards. Alternatively, high-street banks may end free current accounts.

The cap on interchange fees is expected to reduce card issuers’ revenue from consumer cards, but not commercial cards. Therefore, card issuers are likely to compensate for some of the lost revenue by issuing more commercial charge and credit cards.

Increasing adoption of contactless

Contactless cards were first issued in the UK in 2003. The number of contactless cards is expected to reach 78 million by the end of 2015, equivalent to 42.5% of all UK payment cards.

The number of contactless card transactions also rose: In September 2015 alone, 103.2 million contactless transactions were made in the UK – 89.7 million with debit cards and 13.5 million with credit and charge cards.Since 2013, the UK payment cards market has seen the uptake of contactless technology.

According to the UK Cards Association, the number of contactless transactions rose from 1.7 million in 2010 to 319.2 million in 2014. The number of contactless transactions rose by 220.5% year-on-year in September 2015.Major issuers including Barclays, RBS, Lloyds Baking Group, HSBC, Nationwide, Santander and American Express have all issued contactless cards.

A key driver of contactless payment has been its introduction on London’s public transport system. In 2014, there were 17 million contactless payments on bus journeys, and 14 million on rail trips. According to the UKCA, this upward trend is expected to continue following a rise in the contactless spending limit. The growing popularity of mobile and wearable NFC payments is anticipated to support its growth.

The ease of quick contactless payments has led to their growth in popularity among UK consumers and retailers, supported by a rise in the number of retail outlets accepting contactless payments. To encourage these payments, the UK Cards Association increased the spending limit from £20 to £30 from September 2015.

Growing e-commerce market

The UK is Europe’s leading e-commerce market. E-commerce recorded a compound annual growth rate (CAGR) of 16.02%, from $90.4bn in 2010 to $170.1bn in 2014. The growth was partly a result of rising online and mobile penetration, high consumer confidence in online transactions and the presence of secure online gateways.

A contributing factor in the growth of e-commerce in the UK was an increased focus on customer retention tactics by retailers, including customised emails to consumers based on buying patterns, display advertising about products and services on social network sites based on previous purchases, and on-site personalisation features offering enhanced shopping experiences. These initiatives have led to a healthy relationship with customers, and resulted in repeat purchases.

The young population has a strong inclination for mobile phones and online media use, giving a platform for e-commerce companies to reach more customers.

Growth in online shopping and a rise in e-commerce transactions by mobile phone are expected to expand the scope of card-based payments.

Although the UK’s consumer market is smaller than the those of the US, Germany, China and Japan, UK consumers spend more on online purchases. By 2016, online retail is expected to account for 23% of UK retail sales, up from 13.5% in 2010, according to the Boston Consulting Group. This is the highest proportion of any G20 economy.

Credit and debit cards and payment facilitators such as PayPal are all used extensively in online shopping. The availability of digital wallet services such as and MasterPass are also increasingly being preferred by UK consumers for online shopping. Lloyds Bank, Halifax and TSB Bank are contemplating launches of their own digital wallets in the near future.

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