With the UK's imminent launch of the Marks & Spencer credit card being the latest in a series of retailer offerings, it is retailers that pose the biggest threat to the stability of the UK's big five banks, according to research from industry analyst, Datamonitor. However, the UK's chip card market is set to sprout loyalty programmes while consolidating and saving costs.
As consolidation has led to growth in the UK market, the combination of mergers and acquisitions has allowed issuers to fund growth for not only themselves but the market as a whole. However, retailers pose the latest threat to the incumbents.
Not surprisingly, established market players are trying to use their weight to secure their positions. According to Datamonitor, it is questionable whether current customer acquisition tactics are sustainable, as they attract reward seeking high earners and 'rate tarts' who only use their credit card as a free short-term borrowing facility. Looking to the non-standard market, flexible pricing for cards could perhaps define the future for card issuers, allowing them to cross-subsidise transactors with a higher proportion of revolvers.
The UK plastic cards market grew by 9.5% during 2002 and, despite fears of saturation, the strongest growth was seen in the credit and charge card market, which grew by 12.5%. But although such growth may be surprising, the competitive dynamics behind the market are the major catalyst for market developments: Barclaycard bought Providian; MBNA acquired Alliance & Leicester's portfolio; Lloyds TSB bought out Accucard; Northern Rock is currently in talks to sell its book to the Co-operative Bank and, more recently, the future of Capital One as a stand-alone entity has been called into question.
Datamonitor points out that the UK's credit and charge card market is still very competitive, and only the strongest players have survived so far. As a result, consolidation and outsourcing characterised the market during 2002 - either due to a lack of scale, or an attempt to remain at the forefront of the lucrative market.
As supermarkets have grown at astounding rates, and with Marks & Spencer's forthcoming debut in the UK credit card market, the foundations of the big five banks could find themselves shaken.
Growth in the UK credit card market was inspired more by additional cardholding than by new customer acquisition, and balance transfer offers have flooded the market, causing consumers to transfer existing debt to other cards. Perhaps more effective at fuelling growth are the introductory offers of 0% APR for limited periods. All of this encourages card usage, and growth in outstandings. Balances outstanding grew by 13% to 47.2 billion over 2002.
This is nearly double the growth experienced over 2001, illustrating the effectiveness of such offers. However, while they help with customer acquisition, retention is becoming an issue. The 'rate tarts' perpetuate the decline of smaller issuers, yet they are a function of a market that has been created by its players.
Loyalty as cheap as chips
Market players can perhaps turn to cashback or other loyalty schemes in order to sustain customer interest when introductory offers expire. While customer inertia in the UK is astounding for financial products in general, it is more recently becoming a safety net for cards. Perhaps more of an issue is that consumers generally take out a new card without cancelling their old one. The real problem for card issuers, therefore, is combating dormancy, which may be a very expensive problem for card issuers when chip cards are introduced across the board.
Of course, the pending reduction of interchange fees and the cost of chip migration will affect issuers' ability to fund loyalty schemes and cashback offers. Eventually, according to Datamonitor, only the bigger players will be able to afford teaser rates and loyalty schemes, which will instigate yet more consolidation in the market. With debit and private label cards increasing their functionality through scheme additions and multi-retailer networks, the credit card industry can expect to face further pressure to remain competitive in the future.
But apart from combating fraud, chip cards also have the potential to reduce the costs involved in operating loyalty programmes, and the ability to collect substantial data about individual cardholders will enable targeted reward schemes for consumers. Known as 'third-generation loyalty', these schemes will allow multi-retailer coalitions to up-sell or cross-sell more effectively while delivering highly personalised reward programmes. Payment-plus schemes (such as an e-purse) can also be added to chip cards, along with personal data storage including passport details, drivers' license details, and emergency medical information.
However, Datamonitor says that these developments are not expected in the near future. The UK chip migration has been driven so far by fraud prevention rather than added functionality. Issuers involved in EMV deployments in countries such as Australia (ANZ Bank), Hong Kong (Standard Chartered), Hungary (K&H Bank) and Turkey (Garanti Bank) already have added-value applications on their cards, including loyalty schemes, in addition to the fraud-prevention applications. But it is interesting to note that although Egg failed in its attempt to have Boots Advantage points loaded on to its EMV chip contained in the card, the market can expect to see more similar efforts being made after 2005.
Meanwhile, the more developed UK card market has not heard any announcements from card issuers of intended added applications on their cards, and such announcements are not really expected until the national rollout of chip cards is completed successfully.
Datamonitor concludes that the first movers in the third-generation loyalty offering will retain customers at a higher rate, and even lure some cardholders away from competitors.