In the UK, the rapidly increasing popularity of debit cards - where there is no revolving credit element - suggests that the humble credit card may be reaching its limit, according to a new report entitled 'Consumer Credit and Debt Market Assessment 2005', available from Research and Markets.
According to the report, consumer credit is supplied by a combination of banks, building societies, finance houses, insurance companies and retailers. Banks dominate the market, frequently securitising their loans through finance companies, making consumer credit a financial instrument exploited by the financial markets.
In most cases, consumer credit is a low-risk asset, particularly when secured against property. Even unsecured credit is checked by credit scoring software before being granted, ensuring that most mainline lenders have low levels of bad debt.
Of course, banks currently dominate the markets for mortgages, remortgages, personal loans and credit cards. In many cases, banks own the finance houses that offer credit to poor risk consumers. These lenders are also specialists in specific market segments (for example, cars) and can set interest rates and credit terms that maximise the return on credit.
But the credit-card market is dominated by two consortia of banks: Visa and MasterCard, and banks are often members of both. Historically, it has been difficult to enter the credit market unless the new entrant is a Visa or MasterCard member. The UK market has been dominated by Barclaycard (Visa) for many years, but in the 1990s the market became much more competitive as rivals offered better and cheaper cards. With falling general interest rates, the main providers have lost market share and consumer credit through credit cards has become much cheaper.
However, the report concludes, a newfound popularly of debit cards, which don't involve revolving credit, may mean that the credit card is reaching its limits in the UK market. This has affected non-bank providers (such as retailers) whose share of the credit-card market has fallen. The success of generic cards (e.g. Cofinoga and Cetelem) in taking a major share in the EU market has so far not been repeated in the UK, despite the success of Cetelem in conjunction with HBOS.
Regulatory changes (to moderate interest rates and to ensure that the consumer is fully informed about the implications of credit) is likely both at European and UK levels. The deliberations of the UK's Competition Commission, and reports from the Office of Fair Trading (OFT), could potentially lead to legislation that ensures a more competitive market. But the Competition Commission's report on store cards in April 2005 could yet fall victim to a General Election, which means that although consumer credit should remain a highly profitable market, the immediate future remains somewhat uncertain.