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  1. Analysis
March 26, 2009

UK issuers fumble in the dark

The UK banking landscape is very different to how it looked just a year ago

By Verdict Staff

The UK banking landscape is very different to how it looked just a year ago. Familiar names have fallen by the wayside as consolidation has swept over the sector, and issuers are nervous about the future. Economic and regulatory pressures are only adding to the uncertainty, as CI reports.

UK: Credit card outstanding balancesThe UK, already in the throes of recession, could be one of the worst-hit economies in Europe over 2009 and 2010, with GDP growth rates slipping into negative territory, and a slew of economic forecasts predicting further bad news to emerge over the coming months.

The International Monetary Fund (IMF) recently announced that the UK recession could be deeper and longer than in most other parts of the world, and could well last into 2010. The IMF expects the global economy to shrink by 0.6 percent in 2009, instead of growing 0.5 percent as it previously predicted, but it predicts that the UK economy will shrink by 3.8 percent, with a further 0.2 percent contraction in 2010.

The importance of the UK housing market to the country’s economy has led some economists to predict that falling house prices will have dire consequences for the capability of already highly-leveraged UK consumers to service their debts (the total indebtedness of the UK population was almost £1.5 trillion [$2.19 trillion] as of September 2008, and UK house prices fell by around 15 percent from August 2007 to October 2008).

Also, a spate of disastrous losses at some of the UK’s leading banks has been the catalyst for a recent spate of mergers and acquisitions which will leave the country’s financial landscape very different to how it was just a year ago, not least in the payment card market.

Despite this tumultuous backdrop, the UK payment card market remains one of the most competitive in the world. Although credit card profitability is unlikely to reach the giddy heights of a few years ago, there are other areas where UK issuers are innovating and thriving. Changing consumer payment preferences, technological leaps forward, and refocused business strategies by the country’s major issuers who are now retracing their steps back to their core domestic markets are converging to redraw a payment landscape that still offers potential for those who are nimble enough to adapt to changing fortunes.

Debit card trends

UK: Debit card statisticsThe high level of current account penetration in the UK (around 93 percent of the population have a current account) has given debit card usage an entrenched position in the UK payment card market and made debit cards the preferred way to pay with plastic in the UK.

In 2006, there were 68.3 million debit cards in circulation and 41 million cardholders. By the end of 2008, those figures had risen to 75 million and 42.1 million respectively. According to UK payment industry body APACS, debit cards accounted for 73.5 percent (or 5.5 billion purchases) of all plastic card purchases in the UK in 2008, compared with 71.7 percent in 2007.

But debit cards are also facilitating an increasing number of cash withdrawals in the UK. At the end of 2008 there were 805 million cash withdrawals amounting to £52.7 billion, compared to 726 million and £49.7 billion in 2007 respectively. Cash machine numbers have also risen strongly, rising from 58,286 in 2005 to 63,916 by the end of 2008.

As of 2008 there were approximately 64 million current accounts in the UK, of which 54 million were estimated to be active. The five largest banks – Barclays, HSBC, Lloyds TSB and HBOS (now together known as Lloyds Banking Group), and Royal Bank of Scotland (RBS) – provide around 80 percent of current accounts in the UK, with the remainder supplied by Nationwide Building Society, Abbey and other smaller institutions, according to the UK industry regulator the Office of Fair Trading (OFT).

The 16 banks which supplied relevant information to the OFT into its 2008 report into the UK current account market, and which together account for around 95 percent of the UK current account market, earned £8.3 billion in revenue from current accounts in 2006, equivalent to £152 per active bank account and representing more revenue for banks (31 percent of revenues) than savings accounts (17 percent) and credit cards (13 percent) combined.

Banks earned over 85 percent of their revenues on current accounts from two sources, net interest income from credit and debit balances (£4.6 billion), and levying charges associated with insufficient funds (£2.6 billion).

The most popular current account model in the UK is the ‘free-if-in-credit’ model, also known as the ‘free banking’ model, which has been predominant in the UK since 1985. Consumers who are in credit do not pay any direct fees for core transactional services such as direct debits, but there are significant charges on unauthorised overdrafts or if the bank refuses to make a payment that would take an account beyond an agreed limit.

The issue of free banking is under intense scrutiny in the UK, with the OFT concluding in its 2008 report that the market in its current state does not work well for consumers, due to a combination of complexity and lack of transparency over “less visible” fees. According to the OFT, the market is distorted and not as competitive as it should be.

In early March, UK banks lost their appeal against a decision allowing the OFT to decide whether or not charges on authorised overdrafts are fair. This could mean bank customers will be able to reclaim billions of pounds in bank charges later in 2009, if the OFT decides the charges are unfair as expected.

Another issue expected to bite into bank profit margins is the banning of the sale of payment protection insurance (PPI), following investigations by the Financial Services Authority (FSA) and the Competition Commission. As of next year, it will be illegal to sell PPI policies alongside credit cards and loans – providers will have to wait at least seven days after the sale of a credit card or loan to sell a policy to the same customer.

But the pressure to end free banking is largely being driven by the economic woes that UK banks have suffered over the last year, since the beginning of the credit crunch in mid-2007. Interest rates are at an all-time low (the Bank of England base rate was reduced to just 0.5 percent in March 2009), with banks warning that free accounts may be in danger because of the pressure on bank interest rate margins.

Credit card trends

The UK credit card market has stagnated over the past few years, with the number of cards in circulation gradually declining. According to UK payment industry body APACS, at the end of 2008 there were 30.2 million credit cardholders, and 71.3 million credit and charge cards in circulation, compared with 71.8 million in 2007. Credit and charge cards accounted for 26.5 percent of all plastic card purchases in 2008, compared with 28.3 percent in 2007.

Figures from the Bank of England show that gross credit card lending to individuals in 2008 amounted to £131.4 billion, compared to £128.5 billion in 2007, indicating that the declining number of credit cards in circulation is pushing up the average outstanding balance per card.

In its Precious Plastic annual report into the state of the UK consumer credit market, global consultancy PricewaterhouseCoopers stated that the increase in outstanding balances and a fall in the number of credit cards led to an increase in average borrowing per card of 4.7 percent in the year from September 2007 to September 2008. The contraction of unsecured credit extended to UK households by issuers over the past year has also pushed up average outstanding balances.

In its Credit Conditions survey, published in January 2009, the Bank of England reported that issuers had further tightened scoring criteria for credit card borrowers in the three months to December 2008, with approval rates remaining broadly unchanged for credit card borrowing.

For those credit card borrowers that met lending criteria, credit limits had been reduced, with issuers expecting a further reduction in overall unsecured credit availability. The decline in credit availability is being driven primarily by continuing concerns over the UK’s economic outlook along with a decline in risk appetite.

According to price comparison website, millions of UK credit card customers have had their credit limits cut by an average of £2,000 over the past six months. Approximately 2.7 million customers have had their limits cut, an increase of 50 percent on the same period a year ago, with the average being around £1,960, saving issuers around £5 billion.

However, issuers also reported that there was a small increase in demand for credit card borrowing by households, whereas demand for other forms of unsecured lending, such as personal loans, had fallen, indicating that UK consumers are increasingly feeling financially distressed.

UK issuers would appear to have restricted opportunities available to boost profitability on their credit card portfolios due to the vagaries of the UK market. Annual fees are almost non-existent, except on premium cards aimed at high net worth individuals, and regulatory intervention on default charges in 2006 severely curtailed the default fee levels charged by issuers for late payment of credit card bills, being reduced from £20 to £12, putting further strains on issuer profitability.

A long-time staple of new customer recruitment, the zero percent balance transfer offer, is nowhere near as popular as it was a few years ago, as most issuers still running this kind of promotion now charge between 2 and 3 percent of balances transferred, compared to an average of 0.59 percent in 2005. In many cases, issuers have also restricted these deals to existing customers only or for those with near-perfect credit scores.

Charges for using UK-issued cards abroad have also risen – earlier this year, UK building society Nationwide announced it would be reversing its long-standing policy of not charging their customers to use their cards abroad, and would be passing on the fee charged by Visa when people use their cards outside Europe.

In relation to credit card lending spreads, the Bank of England’s Credit Conditions survey stated that issuers reported that these had remain broadly unchanged, although spreads are expected to narrow over the coming months, in contrast to spreads on other forms of unsecured borrowing where they were reported to have increased.

PwC’s report also states that net interest yields on credit cards after charge-offs have significantly declined over the past decade due to the intensely saturated state of the market, but over the last 12 months, net yields have actually increased, thanks to falling default rates and changes in lending and acceptance criteria.

Also, with the average APR increasing from 15 percent in September 2007 to 16.1 percent by September 2008, revenues gleaned from revolving balances have helped issuers to offset rising costs of funding, although PwC warns that this effect may be short-lived due to the worsening economic outlook and an expected rise in charge-offs and delinquencies. However, with the banning of PPI selling looming, it is likely that APRs will continue to rise despite the low base rate, due to the fact that issuers are more dependent on LIBOR (London Interbank Offer Rate) as a source of wholesale funding, which is significantly higher than the base rate.

A recent agreement which came into force in January 2009 between credit card issuers and the UK government means that issuers will no longer be able to raise interest rates without notice, and will only be able to increase rates twice a year.

Issuers were threatened with intervention from the OFT if they did not agree to the proposals. Issuers will also be unable to raise interest rates on credit cards for at least a year after a new customer has taken out a deal. After that period they will be able to increase rates every six months, but each time they do so they must give consumers 30 days’ notice of any changes, and give them the chance to close their card and pay off their outstanding debt at their existing lower rate.

However, there will be no cap on the amount by which lenders can increase their rates, and cardholders have not been told to cut rates, despite the average APR being almost nine times the Bank of England base rate.

Payment networks

According to statistics from the British Bankers Association (BBA), for many years, Visa was the largest credit card network in terms of cards in issue in the UK, with a market share of 58 percent as of December 2005, but in July 2007 MasterCard overtook Visa, due to a series of portfolio migrations at UK banks and building societies.

As of December 2008 there were 27.06 million Visa-branded credit cards in circulation, and 39.63 million MasterCard-branded credit cards in circulation, giving market shares of 40.5 percent and 59.4 percent respectively.

However, in the debit card space, Visa recently scored two coups that fundamentally altered the balance of power between the two.

In early 2008, it was announced that HSBC’s Maestro-branded debit card portfolio (numbering 10 million customers) would be migrated to Visa’s debit platform. HSBC’s rationale for the decision was based on Maestro being less widely accepted worldwide than Visa, and was “to benefit customers who make international transactions”, according to the bank.

But this claim was derided by the British Retail Consortium (BRC), which said that the move would cost merchants an extra £25 million a year in interchange and other charges. Stephen Robertson, the BRC’s director general, said the fee retailers will pay for a Visa debit transaction is 34 percent higher than for an equivalent Maestro transaction. According to the BRC, HSBC accounts for 40 percent of the market in personal debit card transactions.

Later in 2008, Royal Bank of Scotland (RBS) also decided to make the switch from Maestro to Visa debit. The RBS switch is due to take place from mid-2009, although the bank’s credit card portfolio will remain MasterCard-branded. MasterCard’s debit platform is set to replace the Maestro platform, although no timetable has been given.

MasterCard debit cards will support POS purchase and refund, contactless payment, cashback with authorisation and handling by non-UK domiciled merchants the same as per MasterCard credit cards. MasterCard debit cards will be issued as hybrid EMV and magnetic stripe and magnetic stripe-only cards. Clydesdale and Yorkshire Banks will be two of the first UK institutions to roll out new MasterCard debit cards later in 2009.

Major issuers


In its 2008 annual results, Barclays reported a 4 percent growth in the number of current accounts to 11.7 million, compared to 11.3 million in 2007. In its Barclaycard credit card division, 2008 profit before tax rose by 31 percent to amount to £789 million, compared to £603 million in 2007.

The £789 million figure included £260 million from Barclaycard International. Income growth of 27 percent was driven by growth in Barclaycard International, £156 million of income related to the acquisition of the Goldfish portfolio in 2008, and gains related to the Visa IPO and sale of MasterCard shares.

As of 2008, Barclaycard had 11.7 million customers, compared to 10.1 million in 2007 – the bulk of that increase came with the acquisition of Goldfish customers in early 2008, which also pushed up Barclaycard average outstanding balances amounted to £9.9 billion from £8.4 billion in 2007.


HSBC reported $5.84 billion in card net fee income as of December 2008, compared to $6.49 billion in 2007, with the fall in large part due to the divestment of HSBC’s UK card acquiring business, resulting in reduced card acquiring fees.

Credit quality in the personal financial services portfolio remained broadly stable, reflecting early risk mitigation through the tightening of lending controls and the sale of non-core credit card portfolios during the year.

Credit quality in the unsecured portfolios of M&S Money, HSBC Bank and partnership cards in the UK showed a slight deterioration in 2008, particularly in the second half of the year, due to the weakening UK economy. In the UK, HSBC extended $11.2 billion in credit card loans, compared to $15.01 billion in 2007.

Lloyds TSB/HBOS (Lloyds Banking Group)

Lloyds Banking Group was born from the merger of Lloyds TSB and HBOS in late 2008, which led to the group having £20.6 billion in current account balances in 2008, compared to £20.3 billion in 2007, a rise of 2 percent.

Lloyds TSB’s retail bank opened one million new current accounts during the year, having placed special focus on cross-selling new products to existing customers. As of 2008, Lloyds TSB’s credit card balances stood at £6.6 billion, unchanged from the previous year.

One of its most successful products is the Lloyds TSB Airmiles Duo credit card, which now has over 1.4 million customers. According to the bank, customers of this card tend to be more credit-worthy and transactional.

In terms of market share in new credit cards, Lloyds TSB estimates it has a market share of around 13 percent, and also claimed to be the leading consumer debit card issuer in the UK during 2008. Around 90 percent of new credit cards sold during 2008 were to existing customers.


As a separate entity before its acquisition by Lloyds TSB, HBOS reported outstanding credit card balances of £6.7 billion in 2008, compared with £6.8 billion in 2007, with the group noting that the appetite for credit card lending remains cautious, and credit availability being tightened up for existing customers.

Total credit exposure was reduced by £593 million since June 2008. Over 615,000 new credit card accounts were acquired during 2008, giving HBOS a market share in new credit card accounts of 11 percent. In the debit card market, its market share of new current accounts in 2008 was 16 percent, in line with the year before, and new bank accounts opened totaled 960,000, compared to one million in 2007.

Royal Bank of Scotland

In 2008, RBS reported credit card loans to customers of £6.4 billion, compared to £7.8 billion in 2007, with the fall largely due to the sale of the Tesco Personal Finance business to Tesco during 2008, which reduced personal unsecured balances by £1.9 billion. The sale of the business, which has around 2.2 million credit cards in issue, reaped RBS £442 million in sale proceeds and income of £285 million in 2008.

RBS also claims to be the market leader in the UK current account market with around 17 percent market share. RBS, alongside Barclays, has been at the forefront of pushing contactless and mobile payment projects in the UK over the last year, and in the second quarter of 2009 will be involved in the roll-out of a contactless transit trial in the city of Liverpool.


2008 – current account statistics


Customer accounts (m)



Lloyds Banking Group










*now includes Abbey, Alliance & Leicester and Bradford & Bingley. E= Estimate Source: CI, banks



Credit card market share


2008 receivables (£bn)



Lloyds TSB








Source: CI, banks

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