credit and store cards review

Credit & Store Cards Review of 230 © The UK Cards Association 2010

Credit and Store Cards Review Response to A Better Deal for Consumers: Review of the Regulation of Credit and Store Cards: A Consultation by the Department for Business, Innovation and Skills January 2010


Foreword By Melanie Johnson, Chair of The UK Cards Association


Foreword The UK Cards Association welcomes the BIS consultation - A Better Deal for Consumers: Review of the Regulation of Credit & Store Cards: A Consultation and is now pleased to publish its response. The consultation document covers key features of credit cards that are fundamental to their operation: credit limits; minimum payments; allocation of payments; and risk-based pricing. Hence The UK Cards Association has commissioned extensive independent research to formulate this response. This reflects the industry’s firm belief that any decisions on the future direction for the industry should be based on a full understanding of the facts. It is vital that any far-reaching decisions are fully evidence based. The research shows that credit card customers are generally satisfied with current practices in the credit card industry. Customers would not benefit from a number of the options discussed in the BIS consultation paper. These options would reduce competition within the industry, something that has served the interests of customers well over many years through the operations of the market. They would also have far-reaching consequences for customers and lenders alike and would change the basic ‘deal’ offered by lenders to their customers and lead to increased financial difficulties for many and to more defaults. The research also points to the right way forward on the issues set out by BIS in the consultation document, namely how to extend and enhance customers’ ability to manage their money and control more effectively their credit and use of credit cards. On allocation of payments, the credit card industry believes that there is a case for adopting a high to low allocation so that customers’ balances above the minimum payment would be paid off at the highest rate first. But to help preserve the availability of balance transfers and other promotions which customers appreciate, lenders would have leeway to decide how to allocate the minimum payment. On the other issues on which BIS is consulting – unsolicited credit limit increases, minimum payments and risk-based re-pricing, the evidence shows that current standard practices are both acceptable to customers and are to their advantage. Change could mean reduced access for some customers to credit cards and, for others, increased financial difficulty and default. So the credit card industry is proposing to put in place additional measures to ensure that customers understand and exploit to the full their existing powers to make payments above the minimum required, to decline a credit limit increase and to opt-out of a risk re-pricing. We look forward to working with Government as it develops more detailed proposals on the way forward. Melanie Johnson Chair The UK Cards Association


1. Introduction and Management Summary


Introduction and Management Summary

1 Introduction

1.1 This response to the consultation issued by the Department for Business Innovation and Skills (“BIS”) in October 2009 has been prepared by The UK Cards Association on behalf of those of its members who issue credit cards in the UK (the “Response”).

1.2 The industry has considered the issues raised and the options for change proposed in the consultation and has taken on board the considerable evidence that has been gathered. As a result, this Response recommends certain changes to current practices, which are designed to put the customer more in control, whilst also ensuring that vulnerable customers are protected.

1.3 The proposals are tempered by the need to ensure that maximum flexibility and consumer choice remain and because, as BIS is aware, responsible lending does not end with the initial underwriting decision, with flexibility being as important for the lender as it is for the customer. It is also important to bear in mind that the consumer credit industry has been subject to an extremely high degree of regulation in recent years that has already served to suppress income and increase costs which has driven a reduction in profitability, competition and innovation.

1.4 Before summarising the industry position on each of the five key areas identified in the consultation, it is useful to make a number of preliminary points, both about key aspects of the credit card industry and competition within it as well as the general approach of The UK Cards Association and its members to this consultation.

The Credit Card Industry

1.5 The UK credit card industry is one of the few industries that can genuinely claim to be mass market with more than 30 million customers holding, between them, 66 million cards. The industry exists to provide tailored products for consumers to meet individual needs and to yield profits for credit card companies, within the boundaries of responsible lending practices. It is a key contributor to the overall UK economy both in its own right as an employer, providing jobs for over 110,000 people, as well as a fundamental facilitator of commerce, with the liquidity and availability of credit provided by cards in the UK being worth £22 billion of projected GDP growth over three years. Credit cards also provide higher levels of statutory consumer protection and greater security than other forms of payment such as cash or cheques.

1.6 Consumers value credit cards because they allow greater control over their expenditure by offering an open-ended credit facility. This gives customers the opportunity to manage their money by bringing forward spending at their own discretion on goods and services of their choosing; and in a form which enables the debt to be paid off at a rate that suits the individual circumstances. There is a very high level of consumer satisfaction, with 79% of those questioned in the recent UK Cards Association commissioned survey expressing satisfaction with their cards and 95% showing no level of dissatisfaction.


1.7 Nonetheless, the industry is also firmly committed to the protection of vulnerable customers; and wishes to work with the Government to develop practices seen to be fair to customers and to enhance further customers’ ability to manage their money effectively.

1.8 We therefore welcome the opportunity to respond to the BIS consultation which covers some of the fundamental features of the credit card business: minimum monthly payments, credit limits, allocation of payments and risk-based pricing.

1.9 We recognise that certain of the options advanced in the consultation paper would enable more effective decision-taking and money management by customers and would meet both the needs of customers and the industry’s aspirations. We believe, however, on the basis of the evidence we have commissioned, that several of the options for change advanced in the consultation document would strike at the competitiveness and effectiveness of current arrangements and would disadvantage both the credit card industry and its customers.

The Research Evidence

1.10 In order to ensure that the conclusions of the Response are robust, The UK Cards Association instructed three sets of external consultants, GfK, Oxera and Argus to assist it during the consultation process. The data compiled, survey evidence gathered and reports written, which are relied on in this Response, are all available to BIS as appendices. The scale of this evidence is significantly greater than anything previously produced. It has involved data mining and analysing the behaviour of 44 million UK credit card accounts. There were a number of occasions in the consultation paper where assertions, unsubstantiated by evidence, were made about the effect of certain practices on consumers. In addition to supporting the Response, the evidence directly contradicts some of those unsupported assertions.

1.11 The research evidence commissioned by the credit card industry shows that customers generally accept the basis on which credit cards operate. There is a widespread acceptance among customers that when they take out credit cards it is part of the deal that they have limits agreed with credit card lenders, minimum monthly repayments set by credit card lenders, and that the price may change. Among those customers who take advantage of balance transfers and the ability to withdraw cash through credit cards, there is a proportion of consumers who realise and maximise the benefits of the current practice on allocation of payments – though the standard practice here is poorly received across a broader customer base.

The evidence shows that:

the current practice relating to unsolicited credit limit increases (UCLIs) does not lead to increased debt (but customers in practice may use UCLIs in the same way that they generally use credit, to bring forward spending)

the current practice relating to risk based re-pricing of debt leads to changes in customer behaviour to reduce spending on credit cards – which benefits both customers and credit card lenders


the minimum payments regime is used rationally by customers, and customers who make minimum payments pay off debt, over the long term, at the same speed as customers who do not make minimum payments. The regime does not increase debt, although changes to the regime might well do so; and

customers make significant use of the balance transfer deals on offer; that are made possible through the practice currently operated by most credit card lenders on allocation of payments

Effect on Competition

1.12 Over-regulation (including material changes to consumer offerings prompted by self-regulation) is likely to affect the competitive dynamic in the market, to the detriment of the consumer. The potential changes represented by a number of the options in the consultation would remove some of the key tools available to credit card lenders to enable them to compete for business. Such a result would be inconsistent with the Government’s position on competition in this sector and also the recent work of the UK competition authorities, which recognise that there is a fine line between acceptable regulation and interference with the competitive process. Certain of the options floated in the consultation are in danger of crossing that line.

1.13 Competition and product differentiation drive innovation and give rise to enhanced choice for the consumer, who is able to benefit as a result of differential prices and other offerings. In the banking sector in particular, the Government has continually emphasised the need for greater competition in the post-credit crunch market. By way of example, in the HM Treasury document “Reforming Financial Markets of July 2009”, the report notes that: “Competition and choice are vital for improving the efficiency and responsiveness of financial markets for their users. The government remains committed to maintaining such competitive markets in the UK.”

1.14 Whilst the market is highly competitive, there are already limited forms that competition can take given the need for a universal and co-operative infrastructure, and partly because there are a limited number of features which contribute to competition for consumers. It would be very unfortunate if these features were further limited by over-regulation.

Competition Law Limits the Boundaries of Self-Regulation

1.15 In compiling this Response, the credit card members of The UK Cards Association have been acutely aware of their own legal obligations to ensure that competition between them is not reduced and that their competitive behaviour is not co-ordinated. For this reason, specialist competition law advice from external lawyers has been sought throughout the process. As part of this advice, concerns have been raised about the legitimacy of any industry-wide agreement to adopt certain of the options floated by BIS, in particular those which seek to standardise certain elements of credit card terms and statements and those which deal with caps on amounts or frequency of action. As BIS will be aware, credit card lenders are unable as a consequence of law to agree amongst themselves, measures which would limit competition between them.


1.16 The industry proposals which follow have therefore sought to strike a legitimate balance between compliance with competition law obligations and a recognition that certain measures do need to be taken by the industry. These measures are therefore focussed on increased transparency and guidance which will assist to protect consumers, whilst also allowing competition to flourish amongst industry operators. In this way, in the one instance where the industry is proposing a structural change to an existing industry practice (in relation to the allocation of payments), it is vital that scope remains for competition between lenders.

Industry Profitability

1.17 Finally, BIS will be aware that the imposition of further restrictions on the ability of credit card lenders to offer flexible and innovative products, will significantly reduce the profitability of the industry. The Response includes evidence which seeks to quantify the likely industry loss in the event that various of the options are imposed. In doing so, the Response illustrates that the scale of loss from the most far-reaching options suggested by BIS could be as much as £2.5 billion per annum. No doubt, each lender would react differently to imposed changes which negatively affect profitability. However, the evidence demonstrates that the likely response may be to :

restrict favourable consumer offerings

raise interest rates generally; or indeed

begin charging for credit card usage

1.18 It certainly seems to be the case that a reduction in profitability will lead to less innovation and fewer choices for consumers and will reduce the likelihood that the market opportunities are sufficiently attractive for new entrants.

1.19 Our proposals for the way forward on the issues set out in the consultation document therefore reflect our evidence and major, for most issues, on improving information and transparency.


2 Allocation of Payments

2.1 Allocation of payment methods are inextricably linked to the 0% balance transfer offerings which drive competition and foster customer switching in the market. It is a trade-off for these balance transfer deals that the majority of credit card lenders allocate payments to the lowest interest bearing portion of any outstanding balance through to the highest. In practice, this issue affects around 28% of credit card users and yet the allocation of payments has fostered an environment in which competition can flourish for consumer benefit. In the consultation document, BIS makes it clear that it wishes to see a change in the way payments are allocated. It indicates that despite the level of information available to the consumer, there is still a high level of misunderstanding of how payments are allocated. BIS is also concerned that there is cross-subsidisation of customers by those that withdraw cash (with higher interest rate payments) and that generally the allocation model increases debt levels.

2.2 Although there are strong arguments in favour of leaving lenders to pursue their own policies on the allocation of payments unchecked, the industry has been mindful of the fact that its own qualitative research indicates a belief among consumers that, whilst a subset understand the commercial logic behind the current practice, most would wish to see change. Nonetheless, the need for change must be seen against the context not only of the scale of the perceived problem, but also the consequences on the consumer offering of structural change to the existing business model.

As BIS will see, the industry evidence demonstrates that there is a far greater awareness and understanding of allocation of payments than the 30% of card users referred to in the consultation document. The GfK survey demonstrates that only 12% did not know that most credit card companies charge a different rate of interest on different borrowing and that this surprised them

Moreover, any remedy option which will significantly impact lender profitability must be considered against the scale of the perceived problem. The evidence gathered demonstrates that the number of accounts impacted by allocation of payments is around a quarter. Whilst the industry must clearly respond to consumer concerns, all stakeholders must also bear in mind the proportionality of any measures taken to address such concerns

Most importantly, a consideration of the effect of allocation of payments methods on users and lenders must take into account that the current low to high interest allocation is effectively a trade-off for the ability of lenders to offer attractive 0% or low rate balance transfers. Implicit in all trade-offs is that if one side of the trade-off changes, then so will the other


2.3 In the event that allocation of payments policies were to be changed, the evidence from Oxera suggests that, faced with a reversal of payment allocation, with the resulting significant drop in profits, lenders are likely either to:

(a) shorten the promotional period for balance transfer deals

(b) reduce the availability and worsen the terms of promotions available to existing customers

(c) employ higher interest rates or fees for cash withdrawals or reduce the availability of cash withdrawals altogether

2.4 This is consistent with the position in the United States following the implementation of the relevant provisions in the US CARD Act, where a change to the model has resulted in the reduced attractiveness of promotional deals, with smaller promotional periods and less attractive promotional interest rates.

2.5 Not surprisingly, the instinctive positive reaction seen in our consumer research to changes suggested by Government in the consumer survey are significantly modified and tempered once the potential implications for customers are outlined. By way of example, when told that the Government is thinking of making credit card providers allocate payment to the part of the balance with the highest interest rate first, 44% thought that this was a good idea. However, this favourable view reduces to only 18% when told that this might mean that credit cards come with an annual fee in future.

2.6 However, in particular because its own survey evidence has indicated consumer desire for change, and provided that all stakeholders recognise the consequences of structural change on the industry model, the Response is able to recommend a move away from the traditional low-to-high payment allocation policy of the majority of UK lenders. Specifically, the proposal is to move to a high-to-low payment allocation for anything above the minimum payment, with the minimum payment allocated at the discretion of the card issuer, thus preserving as much scope as possible for competition.


3 Unsolicited Credit Limit Increases

3.1 As with the other elements of the credit card offering which are the subject of the BIS consultation, unsolicited credit limit increases (“UCLIs”) are a cornerstone of responsible lending and enhance the lender’s ability to manage risk on a tailored basis for each of its customers. Nonetheless, the BIS consultation raises concerns as to whether consumers have enough control over their credit limits and views UCLIs as contributing to the recent growth in personal debt. As is explored in more detail in the Response, this concern is not supported by the evidence.

3.2 As with all the issues raised by BIS, UCLIs have already been the subject of a number of increased protections in recent years, with protections contained in the Lending Code and as a result of the impact of the second Basel Accord (“Basel II”) which had the effect of curbing any previous tendencies to set excessive credit limits (since these have become costly to maintain).

3.3 Increasing consumers’ control over credit limits is an aspiration shared by the industry. However, BIS must recognise that a balance needs to be struck between giving customers greater control (in circumstances were consumer behaviour is often characterised by inertia) and the level of risk that this injects into the credit market at a far earlier point in the customer relationship. Responsible lending does not and cannot end with the initial underwriting decision, but continues throughout the entire period that a customer has a credit card account; UCLIs represent a key part of the management of such accounts. As a consumer’s personal circumstances change over time it is imperative that the extent to which that consumer is able to borrow on their credit card reflects this.

3.4 It is also imperative that credit card lenders continually monitor their portfolios and individual customer accounts, effectively re-underwriting accounts on a daily basis. This is a characteristic of the open ended nature of a credit card as distinct from other types of consumer lending, where checks are not required with the same frequency. It is also the reason why credit card customers can be selected for credit limit decreases. BIS cannot ignore the evidence in the Response which demonstrates that credit card risk management and responsible lending results in almost as many decreases as increases.

3.5 Accounts will only be selected for a UCLI following stringent checks. There is a rigorous exclusion process to eliminate non-qualifying accounts. The result of these checks is that it is predominantly low risk customers who are considered for a UCLI because the lender believes they can afford it and therefore will have no problem maintaining payments on their accounts.


3.6 The evidence presented in the Response demonstrates that greater default levels occur where customers have sought credit limit increases themselves (solicited increases), as opposed to UCLIs, where default rates are comparatively low. This renders the BIS’ option to ban all UCLIs, with increases only to be given in response to specific customer requests, entirely counterintuitive. Equally, default rates among customers who have been given a credit limit increase are significantly lower than among outwardly similar customers who, as a result of credit assessment analysis, did not receive an increase. The evidence does not support the statement in paragraph 4.6 in the consultation paper that UCLIs have contributed to the growth of personal debt.

3.7 In short, and contrary to the BIS position, the evidence gathered by the industry demonstrates that:

credit limit increase strategies are robust and do not have any material impact on delinquency rates

the vast majority of customers understand that limits on their accounts can and do change

customers are not in favour of the consequences should a change in practice be enforced

3.8 The evidence also demonstrates clearly that it is in any event the case that the number of limit increases has fallen considerably in 2009, which is likely to be as a result, not only of worsening economic conditions, but of the measures already put in place following Basel II and within the Lending Code.

3.9 On the basis that significant changes have already been made to the UCLI practice in recent years, it is the industry’s view that the optimal solution to deal with the BIS concern about control is with improved transparency and better execution.

3.10 What cannot be justified, however, is imposing any limits, either on the amount of an increase (whether a percentage or otherwise), its frequency, or an opt-in requirement (which would significantly reduce take up). Such measures represent a real threat to the long term viability of the otherwise flexible credit card model and would result in the lenders setting higher limits at the outset, or refusing to lend altogether. Based on current practice, lenders are able to wait, following the opening of a new account, until they have sufficient experience of the customer to make an informed decision about raising the credit limit.

3.11 This is particularly important for credit offered to sub-prime consumers, where the “start low and grow” model is absolutely key. Without the flexibility to offer initially very low credit limits (e.g. at the circa £200 level), then to grow these in small steps at regular intervals (i.e. every few months), credit card lenders will not have a sustainable business model for the sub-prime sector, and sub-prime consumers will have to seek alternative, potentially more expensive forms of credit elsewhere.


3.12 On the basis of the high degree of customer inertia that must be assumed under a model where a credit limit increase must be directly requested, credit card lenders would have no choice but to assume that customers would simply remain on the limits set at the outset of the agreement. The entire business model would therefore change, with there being only one chance to get the limit right. Moreover, any opt-in model would introduce additional cost and bureaucracy for both lenders and consumers.

3.13 The industry therefore proposes to a strengthened version of the set of principles discussed with BIS during the summer of 2009 to contain key commitment including:

Provide for a 30 day notice period ahead of a limit increase Provide clarity on the multiple channels by which the customer can

opt-out Provide clarity that the customer can opt-out of an individual

increase and/or permanently using an industry standard document / format

Provide cardholders with a means to decrease their limit without a need for personal interaction e.g. on-line; automated telephone

Incorporate an exclusion relating to habitual minimum payers Incorporate the three core exclusions as set out in the risk-based

re-pricing principles Commitment that customers will not find it difficult to decline the

higher limit


4 Minimum Payments

4.1 The current minimum payment requirement is a key element of the credit card offering and contributes to the general flexibility of credit cards which consumers find attractive. This flexibility is a core part of the product offering and differentiates credit cards from more inflexible products such as personal loans, which have more structured repayment mechanisms.

4.2 The Response explains the recent practice and prevalence of minimum payments in the industry and explores the existing protections available to consumers. It also analyses evidence of cardholder behaviour and deals with the potential financial impact for consumers and the industry of the BIS proposals. The Response concludes that to the extent that there are harmful effects for consumers of existing minimum payment practices, these can be addressed by assisting habitual minimum payers to understand better the consequences of making only minimum payments to pay down credit card debt.

4.3 The Lending Code already sets out key consumer protections in respect of minimum payments. Equally, recent evidence suggests that some lenders are currently experimenting with increasing the minimum payment for new customers in order to reduce risk. The industry proposal set out in the Response will complement these existing protections, whilst ensuring that high risk consumers are not pushed further into debt or towards default (for example by increasing the amount of minimum payments).

4.4 The evidence presented in the Response on consumer behaviour demonstrates that only a very small proportion of users make the minimum payment over the long-term and that consumers have a highly sophisticated approach to managing their accounts and to making repayments. What is more common practice is that some card holders will take advantage of the flexibility to pay the minimum amount on only a couple of occasions during the course of a year.

4.5 More particularly, key facts arising from the evidence are as follows:

The majority of accounts making a minimum payment during the course of the year did so on just a single occasion

The average number of minimum payments in the year for even the highest risk category of consumers is only 2.4

Very few customers consistently make the minimum payment, even over a 12-month period: only 3.1% of consumers did so in the year ending June 2009


4.6 The Response explains that any regulatory change is likely to harm rather than benefit consumers. In particular, BIS should be aware that the overriding reason why consumers choose to make the minimum payment is that the minimum payment is all that they can afford. There is therefore a strong possibility that increasing the minimum payment across the industry will exacerbate the risk of getting into financial difficulties for a significant number of customers.

4.7 The consumer research presented in the Response shows that, of those consumers who do choose to make only a minimum payment, 56% say that they do so because the minimum payment is all they can afford. However, if, for example, the minimum payment across the industry were set at 5%, nearly 40% of all accounts would be impacted in some way and the typical cardholder would, on average, have to find an extra £99.65 a month to meet the increased minimum payment. In other words, increasing the minimum payment is likely to create exactly the kind of financial difficulties that BIS is keen to avoid.

4.8 It is also the case that a sizeable proportion of those making the minimum payment do so because they are on a promotional rate. If the minimum payment rate were to rise, this would reduce the incentive to switch that such promotional offers are designed to foster, thereby harming competition in the market.

4.9 There are also real concerns that even the ‘recommended minimum’ outlined in consultation paper, sitting alongside the contractual minimum, would simply increase complexity and consumer confusion and it cannot be excluded that some card holders who were previously paying above the minimum, might simply reduce their payments to the recommended amount.

4.10 Recognising that it is only habitual minimum payers who may need greater transparency and assistance to manage their accounts effectively the industry proposal is that:

Credit card lenders will separately contact habitual minimum payers every 6 months to bring to their attention the implications of adopting such a practice


5 Re-pricing of Existing Debt

5.1 Risk based re-pricing of existing debt is essential to allow consumers access to the full flexibility which credit cards have traditionally been able to offer. However, BIS have raised a number of concerns, notwithstanding the recent introduction of the Statement of Principles agreed following the Credit Card summit in November 2008 which it has recognised has led to a marked decrease in complaints about re-pricing. The concerns raised in the consultation continue to focus on transparency and consumer understanding, with residual concerns that certain instances of re-pricing may be unjustifiable. As part of the consultation exercise, BIS is also considering whether re-pricing of existing debt is unfair in principle and whether consumers may be better off with greater certainty (i.e. no re-pricing at all).

5.2 The Response explores the rationale behind re-pricing, the sophistication of the risk-based calculation and the evidence gathered from the independent consultants. It is a consequence of the sophisticated risk profile analysis that any attempt to go further than increasing the transparency of re-pricing and the opt-out opportunity embodied in the Statement of Principles can only affect consumers in a negative way. BIS appears to ignore the key consequences of either capping or ending the ability of operators to re-price, which are that certain groups of consumers would be subject to higher interest rates and increased cross-subsidisation and credit may not be extended at all to high risk customers. Those lenders with little access to information about potential customers (i.e. those mono-line credit card lenders who do not offer current accounts) would be at a further disadvantage.

5.3 Credit cards have certain key advantages over traditional loan agreements for consumers. They are open ended credit products, where card holders are free to borrow up to their credit limit and to repay debt over any time period which they choose, subject to a contractual monthly minimum payment. It is these features however which, whilst making the product attractive to consumers, also require highly sophisticated risk profile models, taking account of complex sets of variables in order to offer credit limits and interest rates tailored to particular needs and the ability to repay. Inevitably, risk profiles change and accordingly, there is a need for re-pricing, both up and down, ensuring that the cross-subsidisation which would need to take place without re-pricing, does not occur.

5.4 Despite the level of consumer understanding, the significant measures which have already been taken in response to concerns raised by Government in 2008 and the inherent rationale of keeping the risk based pricing system in place, the industry does recognise that the evidence indicates there is still scope for increased transparency and customer support. There is already a high level of knowledge and understanding by the consumer that re-pricing is a common feature of credit cards and, in this respect, it is no different in principle from insurance, where risk profile changes have a direct impact on premium levels.


5.5 Although BIS appears to remain concerned about the level of re-pricing and the amount of the re-price, the evidence in the Response demonstrates that re-pricing takes effect in a much lower volume of accounts than seems to be assumed and that price changes are clearly targeted only at accounts where a change is necessary. As the Response demonstrates, sophisticated models of risk profiling are used, resulting in re-pricing of risk downwards on almost as many occasions as risk is re-priced upwards.

5.6 Although the segments with proportionately higher numbers of price increases are high risk and high utilisation customers, lenders tend not to re-price the very highest risk customers, because affordability checks are likely to reveal that these customers are more likely to default if the costs were greater. In this way, lenders take into account the interests of the borrower, as much as their own interest.

5.7 It is worth setting the actual scale of the problem for consumers against the potential measures, in order to assess proportionality. On average, the cost to a typical consumer of a rate increase will be £84 per year (ranging from less than £10 amongst low use customers to more than £200 for high use customers). Equally, almost 80% of accounts did not have a price increase in the two years between July 2007 and July 2009, with 17% having one increase and only 3.5% having more than one increase.

5.8 The evidence also demonstrates that card holders modify their spending and borrowing behaviour in response to a price increase, with upwardly re-priced accounts showing faster account attrition. This demonstrates customer awareness of both the fact and effect of upward re-pricing.

5.9 The evidence is unable to link events of default to any of the industry practices raised as potential concerns by BIS.

5.10 The industry firmly considers that the Statement of Principles agreed following the Credit Card Summit in November 2008 is working effectively and that consumers already have a good awareness of the availability of the ‘opt-out’. The industry is therefore committed to continuation of the Principles and to further promotion and explanation of the opt-out.

5.11 Nonetheless, the industry recognises that transparency can always be improved and for this reason is, in addition, ready to develop an additional generic leaflet to help customers better understand how re-pricing works, why it is necessary and what options are available to them. Moreover, the industry recognises that there is a need to make clearer to customers how the opt-out actually works and how they will subsequently be expected to pay down the balance at the original rate of interest over a reasonable period.


6 Summary & Conclusion

6.1 Should the Government decide to adopt the majority of the more far-reaching proposals in the BIS consultation paper, the result would be a much more limited and basic service being provided to consumers. Whilst some credit card companies might still make some profit, the costs for consumers would be higher and choice would be reduced, giving rise to a market where:

a customer’s credit limit is fixed from the outset – where the credit card lender has in effect one chance to get it right in what is a dynamic, data-rich, risk-based business where individual circumstances often change

a customer’s pricing is fixed from the outset – where, again, the credit card lender has in effect one chance to get it right

promotional offers and the ability to use credit cards to access cash are much more limited as a result of requiring higher rates to be paid off first

6.2 Such options would have negative consequences for credit card customers, including:

a reduction in the availability of credit card credit - some current customers would no longer be able to access credit cards if a “low and grow” strategy ceases to exist

an increase in the cost of credit card credit - the inability to re-price risk would mean that pricing would be much higher at the outset and that balance transfer special offers would become less generous if these need to be paid off last; and

an increase in default levels if risk based re-pricing did not exist - the resulting higher repayments would lead to increased hardship and default by a proportion of customers

6.3 As a result of the factors highlighted above, the industry would also expect to see on the part of credit card customers:

a migration to other forms of more expensive credit (e.g. overdrafts; home credit, pawn shops, payday lending, the unregulated market etc); and

a migration to other forms of payment (debit cards, cheques and cash – none of which offer the same statutory level of consumer protection as credit cards).


6.4 Moreover, there is likely to be a reduction in price competition and in market participants. The type of changes proposed by the Government in the consultation paper could lead to disproportionate impacts on mono-line and specialist lenders which make it comparatively more difficult for them to achieve a return they may need for their shareholders and could lead to some players leaving the market. The industry certainly does not see any prospect of new lenders entering the UK credit card market, with competition more likely to diminish as lenders leave the market. Alternatively the industry might see further consolidation among credit card lenders.

6.5 In many respects customers need better information to give them stronger control over the management of their card accounts. This will maintain the existing levels of choice and competition for consumers with similar offerings to those available today.


The industry’s proposed way forward is therefore summarised in the Table below:

Policy Area Industry Proposals

Allocation of Payments

Move to a high-to-low payment allocation for anything above the

minimum payment (i.e. where any payment above the minimum is allocated first to the card balance bearing the highest rate of interest and then to each successive balance bearing the next highest rate of interest) with the minimum payment allocated at the discretion of the card lender

Unsolicited Credit Limit Increases

Provide for a 30 day notice period ahead of a limit increase Provide clarity on the multiple channels by which the customer can

opt-out Provide clarity that the customer can opt-out of an individual increase

and/or permanently using an industry standard document / format Provide cardholders with a means to decrease their limit without a

need for personal interaction e.g. on-line; automated telephone Incorporate an exclusion relating to habitual minimum payers Incorporate the three core exclusions as set out in the risk-based re-

pricing principles Commitment that customers will find it simple to decline the higher

limit

Minimum Payments

Contact ‘habitual’ minimum payers (i.e. those that are doing so with no

obvious reason e.g. benefiting from a promo rate) every 6 months to remind them of the implications

Commitment to work with BIS in reviewing the output from Warwick University

Re-pricing of Existing Debt

Continuation of the existing Statement of Principles Produce a generic leaflet / fact-sheet entitled “Risk-based Pricing

Explained”, covering both increases and decreases. Needs to cover what are ‘high risk’ indicators; factors that are NOT used; how to appeal etc. Delivery options must be flexible.

A commitment to further promotion and explanation of the opt-out

Simplicity & Transparency

Industry is happy to consider further the merits of all three suggestions post consultation closing date Annual statement ‘Stakeholder’ lending product (‘vanilla’ credit card) Standardised product labelling / benchmarking


Table of Contents


Chapters

Foreword Message from Melanie Johnson, Chair, The UK Cards Association

1 Introduction and Management Summary

2 The Facts About The Credit Card Industry Today (Addressing questions from Chapter 1 of the consultation paper) Introduction The UK Credit Card Market Profitability of Credit Card Lending and the Impact of the Economic Downturn Lenders’ Income Sources Consumer Behaviour Credit Card Holding Customer Satisfaction New Accounts Credit Card Borrowing Credit Card Transactions Balance Transfers Cash Advances The Cost of Fraud and Fraud Prevention The Cost of Providing a Service Data on Multiple Card Holding Data on Company Card Holding

3 Allocation of Payments Management Summary Introduction Current Practice Consumer Research Existing Protections (The Summary Box) The US CARD Act Balance Transfer Users Cash Users Financial Impact on Consumers Financial Impact on the Industry Consequences for the Cash Advance Facility Further Comments on the Consultation Paper Policy Options Conclusions Proposal Summary

(Cont.)


4 Credit Limit Increases Management Summary Introduction Consumer Research Existing Protections (Basel II; The Lending Code) The US CARD Act Rationale “Waterfall of Exclusions” The Purpose of Credit Limits and Credit Limit Increases Current Prevalence Number of Accounts Given a Credit Limit Increase Type of Accounts Given a Credit Limit Increase Credit Limit Increases in Q2 2008 Credit Limit Increases in Q2 2009 Customer Initiated Credit Limit Increases Size of Credit Limit Increases Timing of Credit Limit Increases Credit Limit Decreases Result of a Credit Limit Change – the Consumer Result of a Credit Limit Change – the Lender Communication of Limit Changes Financial Impact on the Industry Further Comments on the Consultation Paper Policy Options Conclusions Proposal Summary

5 Minimum Payments Management Summary Introduction Recent Practice and Prevalence Direct Debit Payment Existing Protections (The Lending Code) The US CARD Act Cardholder Behaviour Frequency of Making a Minimum Payment Reason Consumers Make the Minimum Payment Financial Impact on Consumers – Impact on Outstanding Balances Impact of Increasing the Minimum Payment Balance Transfer Customers Financial Impact in Industry Further Comments on the Consultation Paper Policy options Conclusions Proposal Summary

(Cont.)


6 Re-Pricing of Debt Management Summary Introduction Overview of Recent Activity and Trends Existing Protections (Credit Card Summit November 2008; Statement of Principles; The Lending Code) The US CARD Act Current Prevalence Number of Accounts with a Price Increase Types of Account Re-Priced Upwards Size of Price Increase Frequency and Timing of Rate Increases Types of Account with Price Decreases Results of a Price Increase – The Consumer Results of a Price Increase – The Industry Financial Impact on the Industry Policy Options Conclusions Proposal Summary

7 Transparency & Simplicity Annual Credit Card Statement Stakeholder Card lending Product Standardised Labelling System Proposal Summary

(Cont.)


Appendices

1 Key Information and Background Introduction Contribution of the Credit Card Industry to the UK Economy Differing Business Models Customer Satisfaction Customer Complaints Complaints to the Financial Ombudsman Service Recent Legislative and Regulatory Activity Impacts of Other Government Legislation and Activities OFT Irresponsible Lending Guidance Consumer Credit Directive Industry Self-Regulated Improvements The US Card Act Impact of the US CARD Act The Industry Evidence Base The Government Evidence Base Further Comments on the Consultation Paper

2 Consultancy Profiles and Methodologies

3 Oxera - An Economic Assessment of BIS’s Proposals for Credit Card Regulation

4 GfK Quantitative Consumer Research Tabulations

5 GfK Qualitative Research Management Report - UK Card Users Attitude to Credit Cards and Four Industry Practices

6 Economy.com - Plastic Money: The Credit Card Industry’s Contribution to the UK Economy

7 Irresponsible Lending - OFT Guidance For Creditors - The UK Cards Association Response

8 Argus - Recent Trends in the US Card Landscape


2. The Facts About The Credit Card Industry Today (Addressing questions from chapter 1 of the consultation paper)


The Facts About The Credit Card Industry Today (Addressing questions from Chapter 1 of the consultation paper) Introduction Chapter 1 of the consultation paper – the Introduction – calls on consultees to submit evidence about the current nature of the UK credit card market, including in particular the profitability of the credit card industry, the incidence of multiple credit card use, particularly among the most indebted customers; and the use of personal credit cards by businesses.


The UK Credit Card Industry The UK has the largest, most mature and most competitive credit card market in Europe and is second in size, globally, only to that in the United States of America. Some pertinent figures are as follows: 66 million credit cards in issue at the end of 20081 57 million credit card accounts open as at the end of 2008 (this number has fallen

to around 55 million by the middle of 2009) 30.2 million credit card holders as at the end of 2008 Around 9 million secondary credit card holders as at the end of 2008 An average of 2.3 credit cards per holder during 2008 1.6 billion purchase transactions in the UK in 2008 accounting for £101 billion, an

average of 24.7 transactions per card during the year A further 139 million purchase transaction outside of the UK in 2008 accounting

for £11.6 billion, an average of 2.1 per card 41 million cash acquisition transactions in the UK in 2008 accounting for

£5.2 billion A further 6 million cash acquisition transactions outside the UK in 2008

accounting for £802 million £63.1 billion of credit outstanding on credit cards at the end of October 2009

(down from a peak of £67.5 billion in December 2005)

1 All figures shown are to the end of 2008. 2009 figures will be available shortly


Profitability of Credit Card Lending and the Impact of the Economic Downturn At a general level some industry representatives have already shared with BIS the view that, for most lenders, the credit card industry has moved from being an industry that delivered reasonable returns up until 2007, through to one which generally broke even between 2007 and 2009, to one that now is largely unprofitable. This has been largely driven by a combination of increasing bad debt charges (due to the economic downturn) and the unintended consequences of previous regulation that have either driven up costs or driven down revenue. Other than dealing in such broad generalisations it is difficult for any trade association to be more explicit about the profitability of its member organisations given the commercially confidential nature of the information that would be required. This is also complicated by the fact that the UK credit card market is comprised of a number of different types of credit card lender operating to different business models, susceptible in different degrees to any proposals for change. Credit card lenders can broadly be categorised as follows: Larger high street lenders typically providing credit cards to their existing retail

bank customer base with some penetration into non-retail bank customers such as HSBC, RBS etc

Smaller high street lenders such as National Australia Group, Co-operative Bank,

Bank of Ireland etc Mono-line credit card lenders principally providing credit cards (and limited other

products) to the mass market, attracting customers from the high street banks and customers new to credit cards, such as MBNA and Capital One etc, and who have considerably increased price competition in the market since their entry in to the UK in the mid-1990s

On-line only financial services providers such as Egg whose credit card operation

is more akin to a mono-line Three-party credit / charge card models such as American Express, Diners Club

and JCB where the card issuer is also the acquirer (as opposed to participants in four party card payment schemes such as Visa and MasterCard)

High-street affinity credit card providers who have emerged from the ex-store

card market or developing financial services on the back of their wider businesses, such as John Lewis Partnership (within HSBC); Tesco Bank, Sainsbury’s Bank (within Bank of Scotland) etc

Highly specialised lenders operating in the sub-prime / non-prime / home credit

type market such as Vanquis; SAV (within Bank of Scotland) etc


Lenders’ Income Sources Paragraph 1.11 comments that lenders are increasingly relying upon revenue from those borrowers who do not pay off their balance every month rather than on income from card transaction volumes. This is not surprising and largely reflects intervention and regulation by Government and regulators with regard to other aspects of the credit card business model that have diminished income from income streams other than interest and fees. Fundamentally card lenders have four main income streams: Interest, fees (including annual fees) and other charges Interchange fees Ancillary products and services e.g. Payment Protection Insurance (PPI) Default fees (though these can only be set at a level to cover costs) Of these income streams: In 2006 the OFT intervened in respect of credit card default fees which, as a

consequence, were reduced from previous levels to a maximum of £12.00. Whatever the merits of this decision it has resulted in credit card lenders having to adjust to a significant shortfall in cost recovery2. In addition this has inadvertently provided an opportunity for Claims Management Companies (CMCs) to pursue card lenders for historic fees which is proving a significant drag on lender resources

Interchange3 fee income for card lenders has reduced steadily since the early

part of the decade as the card schemes (Visa and MasterCard) have been forced to reduce their interchange rates. Visa reached an agreement with the European Commission in 2002 which led to a long term reduction in interchange levels, which are now c20-30% lower than they were in 2002, directly impacting card lenders’ income. Interchange was eliminated altogether for European cross-border MasterCard transactions4 between December 2007 and April 2009 before returning at a much reduced level. Interchange fees remain the subject of investigation by both the European Commission and the Office of Fair Trading, the outcome of which remains uncertain in terms of both prospective timing and the magnitude of the impact of any decisions

2 For example, in June 2009 some 4.1% of accounts missed a payment and, in theory, would have been liable for a default fee (though a proportion will have been waived). Assuming an average pre-intervention default fee of £25.00 and a post-intervention average default fee of £12.00 then the difference in income for this alone would be almost £28 million that month across the industry (no allowance being made for waived fees) 3 Interchange fees are paid between banks when consumers make a payment using a credit (or debit) card. They are a way of correcting the imbalance in costs incurred by each party in a four-party card payment system such as MasterCard or Visa in order to optimise the payments network to the benefit of all. For each transaction a small payment is made by the retailer’s bank to the consumer’s bank to compensate the latter for their higher costs. The exact fee paid between banks depends on the type of card being used and the type of transaction being conducted. The interchange fee is a major component of a card issuer’s income driven by card usage. For more information on interchange fees and their regulation please refer to http://www.theukcardsassociation.org.uk/industry_issues/interchange_fees/-/page/484/#interfee and http://www.theukcardsassociation.org.uk/view_point_and_publications/-/page/680/ 4 Accounting for 70 million transaction during 2008


The reductions in interchange revenues resulting from regulatory intervention

have been compounded by the general stalling in credit card transaction values and volumes seen since 2005

Following intervention by the Competition Commission and the Financial Services

Authority, Payment Protection Insurance (PPI) has now become such a regulated product that some lenders do not see a future for the product and therefore any income / profit associated with it

This leaves interest, fees and charges as the only area where losses in other income streams can be recouped if they can not be absorbed. However, annual fees for credit cards are rare in the UK despite predictions in recent years that they would be re-introduced. The key reason for this is one of first-mover disadvantage. Whichever lender introduces annual fees first is effectively inviting their competitors to poach their customers – something we have been calling the annual fee cul-de-sac. Whatever the merits of these interventions it is a fact that credit card lenders are left with huge shortfalls in income that have to be either: Recouped elsewhere Simply absorbed; or That will result in the business model no longer being viable No industry can continue to absorb such major reductions in revenue in the short term without consequence if they are to continue to provide the same standard of service. Indeed, PriceWaterhouseCoopers, in their annual Precious Plastic report for 2010, go as far as to conclude that:

“With traditional revenue lines under pressure the current credit card business model is no longer sustainable”. “PWC expects annual or monthly fees to become the norm. Fees will come from both the higher end of the market (where customers will pay for access to premium benefits) and from the lower end of the market (where more marginal customers will be expected to pay for access to even a basic credit card)”.


Consumer Behaviour In addition, the credit card industry has also had to adapt to changes in consumer behaviour, particularly since 2005, which have impacted on revenue, including: A reduction in credit card outstandings which would have led to a reduction in

interest income had interest rates and the proportion of outstandings bearing interest remained unchanged

A stalling in credit card transaction volumes leading to a stagnation in interchange

fee income for lenders A reduction in balance transfer activity leading to a reduction in balance transfer

fee income A reduction in cash advance activity leading to a reduction in cash advance fee

income A rise in defaults since 2007 reflecting the worsened economic conditions The evidence suggests that, at an aggregate level, consumers responded to changing circumstances as early as 2005 when they became more cautious in their use of credit cards, most likely translating into growth of debit cards. Consumers apparently responded to underlying conditions and undertook a major readjustment without regard to specific legislative or regulatory changes. The following sections deal with each of these issues respectively.


Credit Card Holding The number of credit cards in issue peaked in 2004 after a number of years of steady growth and has remained fairly stagnant ever since, albeit exhibiting a gentle decline. Credit Cards In Issue 1998-2008 (millions5)

0

10

20

30

40

50

60

70

80

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: UK Plastic Cards 2009 Whilst the number of credit cards in circulation has fallen, the number of adults with a credit or charge card has also declined to 30.2 million in 2008 from a peak of 31.6 million in 2005. This represents 62% of the adult population (down from 67% in 2005). 20.5 million credit or charge card holders used their cards regularly in 2008 (at least once a month), up from 19.7 million in 2007. On average each regular user made 88 transactions during the course of the year, an average of 1.7 per week.

5 These figures are for MasterCard and Visa and exclude American Express credit cards, but include MasterCard and Visa business cards


Credit (and Charge)6 Card Holders 1998-2008 2003 2004 2005 2006 2007 2008 Change UK adult population

46.0

46.6

47.0

47.4

47.9

48.3

1%

Personal credit/charge card users (m)

69.6

72.4

72.6

72.3

70.8

70.3

-1%

Credit/charge cardholders (m)

30.4

30.6

31.6

31.4

30.8

30.2

-2%

Penetration of adults (%)

66%

66%

67%

66%

64%

62%

Cardholders using (%)

64%

67%

68%

66%

64%

68%

Credit/charge card users (m)

19.4

20.6

21.5

20.7

19.7

20.5

5%

Personal credit/charge card payments

1694.9

1809.2

1775.3

1769.4

1792.1

1815.1

1%

Annual credit / charge card payments per user

87.6

87.7

82.4

85.3

91.2

88.4

-3%

Source: UK Consumer Payments 2009

6 Although data for charge cards can not be separated out the number of adults only have a charge card and no credit card is very small so will not have a material impact on the numbers in the table


Customer Satisfaction GfK monitor satisfaction levels within their long-running Financial Research Survey (FRS)7, the benchmark market research survey which informs the industry. Customer satisfaction with credit cards is monitored within the survey, giving the following results for respondents’ satisfaction with their main credit card: Satisfaction With Main Credit Card (%) Satisfaction % Extremely satisfied 15 Very satisfied 47 87 Fairly satisfied 25 Neither satisfied nor dissatisfied 8 8 Fairly dissatisfied 2 Very dissatisfied 1 4 Extremely dissatisfied 1 Don’t know 1

Source: GfK Financial Research Survey In the specific quantitative consumer research commissioned by The UK Cards Association from GfK to support this response8, respondents were taken through a series of questions relating to each of the four main issues raised as negatives about the credit card industry in the consultation – allocation of payments; re-pricing; credit limit increases (and decreases); and minimum payments, along with some of the Government’s proposals. At the end of the questionnaire respondents were asked, taking everything into account, how satisfied they were with their credit cards. Having had the four perceived downsides of credit cards discussed with them it would be no surprise to see satisfaction levels fall, which is indeed what happens, albeit to a very limited extent. Q: Taking everything into account, how satisfied are you with your credit card(s)? (Base: all credit card holders) Satisfaction % Extremely satisfied 6 Very satisfied 39 79 Fairly satisfied 34 Neither satisfied nor dissatisfied 13 13 Fairly dissatisfied 5 Very dissatisfied 2 8 Extremely dissatisfied 1 Don’t know 1

Source: GfK research for The UK Cards Association, December 2009

7 GfK’s Financial Research Survey (FRS™) is the definitive consumer-based monitor of the personal financial services sector. The FRS covers consumer behaviour in almost all personal finance sectors including: current accounts; payment cards; loans; general insurance; savings and investments; mortgages; life insurance; pensions; and health insurance. FRS is the largest and longest running survey of its kind, interviewing 60,000 GB consumers in the home or online every year. The questionnaire covers product holding; acquisition and usage behaviour; the value of holdings; and a wealth of demographic and attitudinal data. FRS is bought by almost all major financial organisations in the UK. 8 For details on methodology see Appendix A


Overall, the FRS shows that 95% of card holders are not expressing any level of dissatisfaction, compared to 92% in our specific survey.


New Accounts According to credit card lenders’ returns to The UK Cards Association9 during the period January to October 2009 some 12.5 million new credit card applications were processed (compared to 14.5 million in the same period in 2008). Of these new applications 48% were declined, compared to 42% in 2008 In terms of the risk quality of new accounts credit card lenders’ have become more risk averse during 2009, with the profile of new accounts skewing towards lower risk applicants. In 2009 over three quarters of new accounts were in the lowest risk band compared to two thirds in 2008. Risk Quality of New Accounts 2008 & 2009

0.4 0.3

33.0

66.4

0.1 0.1

21.4

78.4

0

10

20

30

40

50

60

70

80

90

Highest risk High risk Medium Risk Low risk

Dis

trib

utio

n, %

2008 2009

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset

9 Data provided by 13 issuers accounting for c96% of the market


Credit Card Borrowing The amount of credit card borrowing showed steady growth until 2005 since when outstandings have effectively stalled and, more recently, started to show a gentle decline. Total Credit Card Outstandings 2000-2009 (£billion)10

0

10

20

30

40

50

60

70

80

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: British Bankers’ Association (includes Visa and MasterCard only) NB: paragraph 1.3 of the consultation notes that the level of debt on credit cards has been falling since 2005 as consumers have become increasingly cautious about credit cards. However, it points to an increase in credit card debt in July 2009 as possible evidence that consumer may be turning increasingly to their credit cards as access to other forms of borrowing dries up and as banks become more cautious in their lending. It is simply not robust to attempt to draw such a conclusion on a single month’s data within such a volatile time series. Credit card borrowing as a proportion of all lending to individuals has steadily fallen from 5.1% in mid 2004 to 3.8% in November 2009. This is largely due to the rise in mortgage lending than to any credit card related factor. In particular, housing equity withdrawal may well have had a downward influence on credit card demand up until Q1 2008. More significantly, credit card borrowing as a proportion of all unsecured lending has fallen from 27.3% in mid 2004 to 24.1% in November 2009. Repayment levels as a proportion of credit card expenditure have increased from typically below 90% pre-2002 to around 97% today. Although repayment levels have edged down slightly in recent times they are still at historically high levels.

10 Figures are for MasterCard and Visa, including business cards, but do not include American Express


Credit Card Transactions Since the middle of 2004 spending on credit cards (volumes and values) has plateaued at around £10.25 billion per month accounted for by some 160 million transactions per month. This has been in direct contrast to transactions on debit cards, which have continued to show strong growth over the same period. Consumers have therefore not developed an aversion to plastic cards as a payment method in general, but have become more cautious with regard to credit cards in particular (although merchant encouragement of alternative payment methods will also be an influence here). This will have translated into a stagnation of interchange income for card lenders and, in all probability, a decline in income in real terms assuming interchange levels have continued to fall during this period. Card Transaction Volumes 1998-2008 (£ billions) Purchases and Cash Acquisition in the UK and overseas

0

1

2

3

4

5

6

7

8

9

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Credit Debit

Source: UK Plastic Cards 2009; credit is Visa & MasterCard only


The same pattern can be seen when looking at transaction values. Card Transaction Values 1998-2008 (£ billions) Purchases and Cash Acquisition in the UK and overseas

0

50

100

150

200

250

300

350

400

450

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Credit Debit

Source: UK Plastic Cards 2009; credit is Visa & MasterCard only


Balance Transfers Balance transfer volumes have similarly shown a steady decline since reaching a peak around 2005 and are now back to levels lower than were seen in 2002. Monthly Balance Transfer Volumes 2002-2009 (thousands)

0

200

400

600

800

1000

1200

2002 2003 2004 2005 2006 2007 2008 2009

Source: British Bankers’ Association statistics In part, the decline in balance transfer volumes reflects the introduction of balance transfers fees around 2005. Industry believes that the more far-reaching of the BIS proposals, particularly changes to the allocation of payments, will exacerbate this long term decline due to the likely restriction on or removal of promotional offers. The implication of this is less switching by customers and a reduction in competition in the market.


Cash Advances Cash advances on credit cards have been in long term decline since reaching a peak in 2005 and are now back at levels last seen in 1999. Revenue from fees associated with cash advances will have fallen accordingly (assuming interest rates on cash advances have remained stable). Cash Advances on Credit Cards 1998-2008 (£ millions)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

Val

ue (

£m)

Source: UK Payment Statistics 2009


The Cost of Fraud and of Fraud Prevention Meanwhile, despite continuous investment in fraud prevention measures including major project such as chip & PIN, the industry has also seen steady fraud losses on credit cards, peaking at around £250 million in 2008, representing a true cost to the industry. Gross Fraud Losses on UK Issued Credit Cards 1998-2008 (£ millions)11

0

50

100

150

200

250

300

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Fra

ud lo

sses

(£m

)

Source: UK Payment Statistics 2009 Every now and again the industry will have to take major steps to keep ahead of fraudsters, the most obvious example being the chip & PIN programme which ran between 2004 and 2006. The cost of implementing the chip & PIN programme alone was estimated at £1.1 billion (2000 prices) with about two thirds of the cost accruing to the card industry (covering both credit and debit cards). Without that investment the industry faced an uncertain future should fraud have spiralled out of control to an extent that consumers, retailers and banks lost confidence in card payments. Chip & PIN was but a highlight in the constant work that the industry has to undertake to tackle payment card fraud which is ongoing and takes many forms, such as: online security measures neural networks address verification services hot card files the industry funded Dedicated Cheque & Plastic Crime Unit (DCPCU) the Fraud Intelligence Sharing System (FISS) etc

11 Whilst figures for 2009 have not been finalised, the early signs are that fraud figures have shown an encouraging reduction during 2009


The Cost of Providing a Service The cost of providing and maintaining a card payment service of high security and integrity is not insignificant. Credit card lenders have to cover significant costs, some of which are not associated with other forms of lending, including but not limited to: the cost of funding the cost of authorising and processing point-of-sale payments the issuing of monthly statements the issuing (and reissuing) of plastic cards collecting and processing (variable) payments by different methods handling customer queries the cost of fraud and fraud prevention the cost of providing added value benefits to cardholders (where offered) the cost of legal compliance including the processing of Section 75 claims the cost of card scheme membership compliance with any changes to card scheme rules and consequent IT update

requirements Significant one-off costs can also accrue in the name of innovation (including those required to prevent fraud), such as: contactless card payments mobile payments chip & PIN (as discussed above) Other credit products such as loans and mortgages are usually much simpler, where the cost of funding comprises a greater proportion of the cost of providing the credit.


Data on Multiple Card Holding Data on multiple card holding is set out in the following table. This shows that, while most people have more than one credit card, two thirds either have just one or two cards. The table does not, of course, enable conclusions to be drawn about the extent of credit available across the cards customers are holding; any other credit facilities they may have; and the extent to which they are being used. For example, in terms of credit available someone with five cards, each with a credit limit of £500, is in no different a position to an individual who has one card with a £2,500 credit limit. They may also have other borrowing via a mortgage, personal loans, store cards, home credit etc to take into account. In addition, there can often be a difference between the number of cards an individual holds and how many they regard themselves as holding/using. Accounts that they have stopped using and are dormant may be disregarded by an individual when considering their financial holdings. Nonetheless, the following profile of multiple credit card holding is taken from the UK Consumer Payments Survey. It shows that the average number of credit cards per holder is 2.3 with higher incidences of multiple credit card holding among males, the higher socio-economic groups and higher income groups, as might be expected.


Multiple Credit Card Holding 2008

GB Adult credit/ charge card holding population (millions) Row percentages Total One Two Three Four Five+

Average cards per

holder

1 2 3 4 5.5

Total 29.54 37.8% 29.8% 15.1% 8.6% 8.7% 2.33

Sex

Male 15.04 35% 27% 17% 10% 11% 2.51

Female 14.49 41% 32% 14% 8% 6% 2.13

Age

16-24 0.92 51% 31% 9% 4% 5% 1.87

25-34 5.16 44% 25% 15% 9% 7% 2.18

35-44 6.33 37% 32% 15% 7% 9% 2.35

45-54 5.58 35% 29% 15% 10% 10% 2.43

55-64 5.33 34% 26% 18% 12% 10% 2.51

65+ 6.22 38% 35% 13% 6% 8% 2.23

Social Class

AB 10.34 30% 30% 18% 11% 12% 2.60

C1 9.06 38% 29% 16% 9% 8% 2.32

C2 5.68 41% 31% 12% 7% 9% 2.24

D 3.34 50% 28% 12% 7% 3% 1.89

E 1.12 59% 31% 9% 1% 0% 1.53

Working Status

Employed Full/ Part Time 18.62 36% 29% 15% 10% 10% 2.42

Self Employed 3.03 37% 26% 13% 9% 15% 2.59

Household Income

Up to £5000 0.46 72% 10% 13% 0% 5% 1.61

£5,000 - £9,999 2.21 45% 31% 15% 6% 4% 1.99

£10,000 - £14,999 2.67 40% 34% 12% 7% 5% 2.11

£15,000 - £19,999 2.69 42% 30% 13% 11% 4% 2.11

£20,000 - £24,999 2.95 50% 25% 15% 3% 7% 2.00

£25,000 - £29,999 2.58 38% 30% 11% 11% 10% 2.41

£30,000 - £39,999 4.26 25% 35% 21% 8% 10% 2.59

£40,000 - £49,999 2.78 31% 25% 19% 12% 12% 2.65

£50,000 or More 2.39 33% 28% 19% 9% 12% 2.56

NB: the base figure of 29.54 million credit & charge card holders compares to a figure quoted elsewhere in this document of 30.2 million credit & charge card holders. 29.54 million is a Great Britain figure whereas 30.2 million is a United Kingdom figure. Source: UK Payments Consumer Payments Survey 2009


Data On Company Card Holding Data on the use of personal credit cards for company business is unobtainable. We can provide the following information on the known prevalence of business cards and their usage, broken down by credit and charge card. Business Cards in Issue 1998-2008 (thousands) Credit Charge Total

1998 27 788 815

1999 45 953 998

2000 32 1124 1156

2001 24 1311 1335

2002 65 1385 1450

2003 121 1355 1476

2004 131 1582 1713

2005 126 1637 1763

2006 306 1649 1955

2007 356 1643 1999

2008 481 1625 2106 Source: UK Payment Statistics 2009 As can be seen, by 2008 the number of business credit cards in issue accounts for around 23% of the total business cards in issue.


The value of transactions on business cards – both credit and charge – has shown steady growth over the last decade. Value of Transactions on Business Cards 1998-2008 (£ millions) of which

Credit Charge Total Cash Purchases Overseas

1998 97 3761 3858 259 3076 523

1999 195 4779 4974 351 4024 598

2000 83 6087 6170 367 4868 935

2001 57 7264 7321 450 5880 992

2002 251 7778 8029 489 6545 995

2003 494 7828 8322 466 6738 1118

2004 649 9729 10378 482 8642 1255

2005 684 10752 11436 494 9657 1284

2006 1082 11750 12832 530 10736 1565

2007 1840 12401 14241 532 11476 2233

2008 2603 12865 15468 515 12316 2637 Source: UK Payment Statistics 2009


The Five Issues The following five issues are now considered in more detail: Allocation of Payments Credit Limit Increases Minimum Payments Re-pricing of Debt Simplicity and Transparency Whilst the following chapters consider each of the issues in isolation there are likely to be compounding effects through combinations of policy proposals and their interactions on top of the other recent and/or expected legislative and regulatory interventions.


3. Allocation of Payments


Allocation of Payments Introduction Most UK credit card lenders allocate payments to the lowest interest-bearing portion of any outstanding balance through to the highest (with a few exceptions). The breakdown of individual types of balance will be dependant on the type of transaction undertaken by the customer. A cardholder can have more than one type of balance if, for example, they transferred £1,000 from another card, withdrew £100 in cash and made £500 in purchases during a month, but only paid £75 at the end of the month, which would go towards the £1,000 balance transfer first. In effect the current practice of most credit card lenders requires cardholders taking advantage of promotional offers to pay back first what they have received for free, or at a discounted or lower rate. As such, the allocation of payments does not have any impact on the 72% of card holders who either pay in full each month or who only make one type of transaction (i.e. one of point-of-sale purchases, balance transfers, or cash advances). The accounts that are impacted by the allocation of payments are those where different rates are being applied to different parts of the balance, typically accounts where: There is a balance transfer at a promotional rate in operation (perhaps related to

a consolidation of their debt by the customer); or Where the cardholder has taken cash advances against their credit card and is

revolving their balance For many credit card lenders (often depending on the business model) balance transfers and promotional offers are a competitive tool in order to: Attract new customers to a lender from other card lenders Reactivate dormant cardholders (through special offers to existing cardholders) The allocation of payments plays a key role in enabling more generous zero percent balance transfer deals and therefore facilitates switching and competition. As such there is a clear consumer benefit from the way in which payments are allocated in enabling consumers to obtain low cost credit through attractive offers on balance transfers. Any change to current practices would inevitably impact the nature of the deals offered by credit card lenders to their customers and produce losers from the change as well as winners. Evidence from the US suggests that provisions in the US CARD Act on the allocation of payments have reduced the attractiveness of promotional deals being offered by card lenders in terms of reduced promotional periods and less attractive promotional interest rates. About a quarter of accounts are impacted by allocation of payments though the financial impact of change on industry could be significant:


In the period July 2007 to December 2008 around 1.3% of accounts each month had a balance transfer (or 2% of active accounts). The percentage of revolving accounts with a balance transfer was approximately 1.75% per month. However, these number have been in decline since December 2008 and by July 2009 had fallen closer to 1% of all accounts, 1.5% of all active accounts, or 1.5% of all revolving accounts per month

At the end of this period the percentage of balance transfer accounts that had no

spend in the three months following a balance transfer, and therefore taking full advantage of the offer, was around 60% (up from around 55% at the beginning of the period). For highly utilised accounts this figure was around 22%

In the period July 2007 to October 2008 around 3-4% of all accounts featured

cash advances (or 5-6% of all active accounts). The percentage of revolving accounts with a cash advance was around 8-10%. However, these numbers have been in decline since then, and by July 2009 had fallen towards 2.5% of all accounts, 4% of all active accounts, or 7% of all revolving accounts

More than 70% of accounts and 55% of balances would be unaffected by any

changes in payment allocation. Also, approximately 35% of balances impacted are among customers with 2+ non promotional APR balances i.e. their balance comprises of at least two ‘buckets’ e.g. typically purchases and cash, at standard (i.e. non-promotional) rates

According to data provided by 13 credit card lenders accounting for approximately 96% of the market to The UK Cards Association, there were around 7,000 complaints (from a total of 30.2 million cardholders) regarding the allocation of payments between January and October 2009, accounting for 0.82% of the total complaints in that period.


Current Practice The credit card industry has already recognised the importance of providing information on the allocation of payments and makes it readily available, with allocation described as concisely as possible within credit card lenders’ Summary Boxes, both the pre-contract version and the credit card statement version. The credit card statement version ensures that cardholders are reminded of how their payment is allocated every month. However, it may be difficult for some consumers to translate this explanation into a tangible financial impact upon themselves individually. Whilst the other allocation methods proposed by BIS in the consultation document are immediately less expensive for the consumer, there is nothing intrinsically unreasonable in the current deals offered by credit card lenders to potential customers – provided that they are transparent and understood by the customer and that the customer derives additional benefit as a result. The key questions are therefore: Do consumers understand the trade off i.e. the deal that they are entering into

with their card issuer?; and What are the trade-offs gained by consumers in respect of different allocation

methodologies? For example, if a balance is transferred from Lender A to Lender B the cardholder would only pay interest on new purchases rather than the entire balance had they stayed with Lender A. It is then a question of whether it is ‘right’ that new purchases on Lender B’s card should be paid off first or whether the commercial terms on which they have offered the card should be respected.


Consumer Research In terms of customers’ awareness and understanding of the fact that different parts of a credit card balance can attract different interest rates and that payments can be allocated to pay off the highest interest bearing part of the balance first, our consumer research shows the following: When told that most credit card companies charge a different rate of interest on

different borrowing, for example there might be a low rate of interest on a balance transfers, another rate of interest on spending and another for cash advances, 66% of credit card holders said that they knew this already with another 22% saying that they did not know this but that it did not surprise them, amounting to 88% in total. 12% said that they did not know this and that it surprised them. This suggests a higher level of actual awareness or intuitive understanding that allocation of payments is a common feature of credit cards than other surveys have shown. This awareness may, of course, have been heightened by the very fact of this consultation and the publicity that it has received

When told that, if they did not pay off their balance in full, most credit card

providers will allocate the payment they make to the part of the balance with the lowest interest first, 59% said that they knew this already and a further 25% that they did not know this but that it did not surprise them, amounting to 84% in total. 16% said that they did not know this and that it surprised them.

BIS is concerned that knowledge of payment allocation is particularly low for

young consumers. The evidence does not support this, with our research showing that awareness is consistent across the age groups, with 55% of 18-24 year olds being aware, in line with the figure for 25-34 year olds and 35-44 year olds

Among those who had taken advantage of a promotional offer the level of

awareness increases to 71% (compared to 59%) with a further 16% who did not know this but are not surprised, indicating a higher degree of awareness among those that need to know. The equivalent awareness figure for those that pay off their balance in full each month (and therefore to whom allocation of payments is not relevant) is lower at 53%, as would be expected

This compares favourably to figures quoted by BIS in paragraph 2.9 of the consultation document which quote moneysupermarket.com research that “found that almost two thirds of consumers surveyed did not know that if they made purchases on a card to which they had transferred a balance their repayments would continue to be allocated to the cheapest balance first”. This data is taken from a moneysupermarket.com press release dated 26 October 200912

12 www.moneysupermarket.com/c/press-releases/credit-card-users-dont-understand-the-order -that-their-debt-is-paid-off/0006971/#


The difference in results demonstrates the importance that the wording of a question on such a topic can make and who is being asked – full payers would not necessarily know the allocation of payments as it is not relevant to them. The precise wording in the moneysupermarket.com research is not published. On the assumption that it was along the lines of “Do you know how payment allocation works?” we would expect such a question to deliver lower results than our own question which was worded “If you don’t pay off your balance in full most credit card providers will allocate the payment you make to the part of your balance with the lowest interest rate first. Would you say you knew this already; did not know this and it surprises you; or did not know this and it doesn’t surprise you?” However, our qualitative research suggested that, regardless of the way in which allocation of payments is explained, consumers see current practice of most credit card lenders in respect of allocation of payments as counter-intuitive. When questioned in depth interviews and focus groups consumers tend to see their debt as a single entity rather than compartmentalised and therefore feel that when they pay money this should apply equally to the whole debt. They therefore feel that they will only know about the rules on allocation of payments if they have been caught out by them. This finding is, however, in stark contract with both the findings of our quantitative research and, more importantly, with the sophisticated behaviour of balance transfer customers who use the allocation of payments to their full advantage.


Existing Protections The Summary Box Since March 2004 transparency for consumers on the allocation of payments has been achieved through the Summary Box. The relevant excerpt from the current Summary Box Version 3.0 (February 2009) guideline, which customers will see when they are considering which credit card to apply for, is shown below. Comments Example Allocation of payments

Succinct description of the order in

which payments will be allocated to the account, in numbered or bullet format. It is acceptable, in addition, to refer the consumer to a more detailed description in the full terms and conditions by means of a footnote.

The order can be presented with

the transaction attracting the lowest interest rate first, or from highest to lowest as long as this is specified. Consumers may also be referred to the terms and conditions

If you do not pay off your balance in full, payments we receive will be applied in the following order of lowest first to highest (transactions may attract different interest rates): 1. Lower rate, promotional or balance transfer offers p.a. 2. Cash advances 3. Purchases For further details, please refer to your credit card terms and conditions. - OR - If you do not pay off your balance in full, payments we receive are applied to the lowest / highest interest bearing transactions first. For further details, please refer to your credit card terms and conditions.

These guidelines provide suggested text that a credit card issuer could use and it is up to individual issuers to decide how this is communicated to their prospective customers.


Statement Version of the Summary Box Similarly the credit card statement version of the Summary Box has a requirement for transparency around allocation of payments with the relevant excerpt from the Cardholder Statement Version of the Summary Box shown below: Allocation of payments

Succinct description of the order in which payments will be allocated to the account. It is acceptable to refer the consumer to the more detailed description in the full terms and conditions by means of a footnote.

If you do not pay off your balance in full we will allocate your payments to balances with a 0% APR before balances with higher APRs. -OR- If you do not pay off your balance in full payments we receive are applied first towards lower rate, promotional or balance transfer offers before cash advances or purchases. -OR- If you do not pay off your balance in full when you make a payment it will be used to pay off any special offer, balance transfer or promotional offers before any cash withdrawals or standard rate purchases.

Allocation of payments is also covered as a specific item in the version of the Summary Box that is required when issuing credit card cheques.


The US CARD Act The US CARD Act addresses the issue of payment allocation head on. The specific provision is as follows: “Upon receipt of a payment from a cardholder, the card issuer should apply amounts in excess of the minimum payment amount first to the card balance bearing the highest rate of interest, and then to each successive balance bearing the next highest rate of interest, until the payment is exhausted”

We understand that this provision is a compromise by legislators to deliver what they believe to be a consumer benefit whilst also preserving an element of competition and offering credit card lenders protection (through the effective exemption relating to minimum payments) against the risk of being left with long-term borrowing at un-commercial rates.


Balance Transfer Users Balance transfer activity has reduced in recent times with the volume of transactions having fallen back to levels last seen in 2002. Accounts with balance transfers are skewed heavily towards lower-risk customers where customers are taking advantage of the cheap borrowing offered by credit card lenders. Distribution of Promotional Balances by Risk Band, Q2 2009

1.5 0.92.4

6.3

12.8

28.1

15.9

10.3

21.8

0

5

10

15

20

25

30

Hi - 1 2 3 4 5 6 7 8 Low - 9

Risk band

Per

cent

age

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. Payments made towards the outstanding balances amongst the non-promotional holding low-risk accounts are significantly higher than those with promotional balances, demonstrating that promotional accounts change behaviour to maximise the benefit of their low cost borrowing and reducing the effective average rate across their total balance. Almost half of new accounts opened on the back of a balance transfer incur minimal interest, taking maximum advantage of the cheap borrowing. Therefore, these customers will not be immediately impacted by any change to the payment allocation methodology, but would be affected in the longer term if the promotional rates that they are exploiting become less attractive or were withdrawn. With regard to whether balance transfer customers taking full advantage of the allocation of payments to their financial gain are being cross-subsidised by other customers, Oxera conclude that:

“Data shows that surfer balances account for a small share of overall balances. In the second quarter of 2007, balance transfers for surfers amounted to an average of £85.1m per month, or less than 0.2% of total revolving balances of £48.0 billion. The interest lost from surfers not paying a standard transactions APR on their balances amounts to approximately £1.1 million per month and is insignificant, implying that any distributional issues would also be small.”


“The cross-subsidy would be further reduced if the balance transfer fees which are paid by any user of promotional balances (including surfers) were taken into account.” “It is not surprising that the cross-subsidy is limited. There are a number of market constraints that limit the extent of cross-subsidisation.” “First, the industry has an interest in minimising surfing behaviour as much as possible, since lenders do not want a group of consumers which is loss-making. To discourage surfers, lenders have introduced fees for balance transfers. These fees, which are typically 2–3% of the promotional balance, cover part of the cost of servicing the promotional balance and therefore provide a deterrent to surfers.” “Second, there are alternative options available in the market. Consumers who value the benefit of reverse allocation can choose cards with different allocation methods. Nationwide, for example, has a standard policy of using payments to pay down the highest-interest balance first.”


Cash Users The largest proportion of accounts affected by the allocation of payments are those with part cash balances. Cash advances on credit cards have been in long term decline since reaching a peak in 2005 and are now back at levels last seen in 1999. Cash advances are a core facility available through credit cards, providing convenient and immediate access to cash and a contingency for many consumers in the event of any urgent requirement. Around 12% of cash advances by volume and 13% by value are made overseas. Cash balances are more prevalent amongst higher risk accounts. Cash Balance by Risk Band Q2 2009

Risk band Percent

High 21 Medium 11 Low 6

Overall 12

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset Customers with a cash balance are highly likely to also have a non-cash balance, with these non-cash balances being for higher amounts. The presence of a cash balance for an account increases the likelihood of charge-off compared to similar customer accounts, which is one of the reasons why cash is typically priced higher than for point-of-sale transactions (i.e. because users are higher risk). This pricing for risk stands not to be realised if the payment hierarchy is reversed, meaning that cash balance pricing may need to rise higher than current levels in order to compensate.


Financial Impact on Consumers Changes to the way in which payments are allocated will create winners and losers among consumers. It is difficult at this time to quantify the precise impact on different consumer segments which will depend on the particular payment allocation model that is envisaged. Generally speaking, change would mean that those who are currently benefiting from the way in which payments are allocated, perhaps by virtue of their better understanding of how payment allocation works, will lose out to those that do not have an understanding. In effect the more sophisticated group will be penalised for either understanding more or having made the effort to understand more. The reason that those benefiting from allocation of payments will lose out is through the reduction in the attractiveness of balance transfer deals that we believe will occur in terms of the promotional rate applied (currently many 0% offers which we believe will be priced higher in future) and the duration of promotional periods, which we believe will shorten. This is borne out by Oxera who conclude that:

“A reversal of payment allocation would likely cause issuers to respond to compensate for the loss in revenue. There could be both an output effect and a price effect. On the output side, users of balance transfer deals could be most directly affected, as issuers may reduce the availability of balance transfer deals or the duration of those offers remaining. In the US, the recent CARD Act has introduced partial reversal of payment allocation; anecdotal evidence is that issuers are reducing both the duration and availability of BT offers.”

“On the pricing side, issuers may increase balance transfer fees or post-promotional APR rates. It is also possible that 0% deals would be replaced by slightly higher rates. In the US, anecdotal evidence suggests that 0% deals are no longer available to existing customers and fewer are available on new acquisitions and some issuers have been raising BT fees. Each of these changes could make the balance transfer product less transparent and less attractive to consumers.”

“Another possible reaction by issuers would be to increase the transactions APR associated with promotional accounts. Under current allocation practices, the effective interest earned on balances in accounts with one promotional and one non-promotional balance is 1.58% per month. Under reverse allocation, the effective interest would fall by 25 basis points to 1.33%. To maintain the same revenue overall, issuers would need to raise the transactions APR for promotional accounts by 2.75 percentage points per year to 17.56%.”

The material annual cost to a customer of the allocation of payments is, on average, £3.95 and £1.69 relative to the ‘highest first’ and ‘pro-rata’ alternatives. High-risk customers will save, on average, £9.50 a year, while most customers (those whose balance comprises only one type of transaction) will be unaffected. Coupled with a restriction on re-pricing of debt, the impact could be even more dramatic in that it would further discourage credit card lenders from offering low promotional rates. Otherwise lenders could end up offering indefinite low-cost loans via credit cards at un-commercial rates.


Financial Impact on the Industry Although the individual benefits to consumers are limited the aggregate cost to industry is high, meaning that the financial impact on the industry of a change to allocation of payments is potentially considerable: In the reversal scenario i.e. allocating payment high-to-low, the cost to industry in

the first two years would be £533 million. This cost will increase in year three and beyond, though at some point in the future the annualised cost will plateau. However, given the limited time frame of the Argus database developed for this project it has not been possible to model beyond a two-year horizon and determine when the plateau occurs. The financial impact on industry reduces among the various alternative payment methodologies that might be considered

However, across all of the payment methodologies modelled, the impact is

reduced if the minimum repayment is exempt from the regulation (as is provided for in the US CARD Act). This provision allows for the minimum payment to be allocated against the lowest tier APR. Nevertheless, change would still result in a significant loss of income to lenders

Summary of Financial Impact on Industry Allocation of payment methodology

£m - 2007-09

(i.e. first two years) # Highest APR first

533

Highest APR first & US *

248

Pro-rated payments **

241

Pro-rated payments & US

114

Equal payments ***

311

Equal payments & US

152

Cash first then low

394

Cash first then low & US

184

* & US = including US CARD Act provision that allows minimum payment to be applied to the lowest tier first ** Prorated = applied based on the relative size of each tier balance *** Equal payment = split up equally among all tiers # i.e. cumulative interest yield lost during years 1&2, August 2007 to July 2009 impact NB: due to the historical limitations of the Argus database and the absence of ‘vintage’ data it has not been able to model a ‘first-in first-out’ scenario.


The reduction in revenues is largely driven by the prevalence of cash balances in the industry and is not wholly driven by promotional balances, which is what we might have expected. Approximately 60% of the impact is due to cash balances

In the face of such reductions in revenue, credit card lenders would be faced with a number of choices (which are not necessarily mutually exclusive), including: Absorbing some, or all, of the reduction in revenue; Recouping the revenue from cardholders by other means, such as higher rates of

interest, annual fees, or new types of fees and charges; or The offering of less attractive promotional offers through shorter promotional

periods at less generous interest rates We have already seen some evidence of this in the US following the US CARD Act, where: The percentage of balance transfers that involve a fee has increased by 6.6% in

the year to June 2009 to around 87%. The fee as a percentage of the transaction amount increased by 49% in the year to June 2009 and now stands at around 2.7%

The proportion of new accounts with a balance transfer that involved a fee has

risen by 23.1% in the year to June 2009. The amount of the fee has increased by 22.9% over the same period to 2.8%


Consequences for the Cash Advance Facility Furthermore, the evidence shows that customers with a cash usage within each of the risk bands are more likely to go into arrears in the following year than those without such a cash usage. If cash were higher up the payment hierarchy, and were therefore paid off first, then pricing methodologies to compensate for this risk (i.e. to cover the incremental losses) would, in effect, not be realised. Lenders would then be faced with a decision as to whether to: Increase the price of cash advances Increase the cost of purchases; or To withdraw the cash advance facility altogether As already highlighted, these conclusions are borne out by Oxera.


Further Comments on the Consultation Paper Period of Repayment Paragraph 2.10 of the consultation paper suggests that “it may take decades to pay off a relatively small cash advance at a high cost”, though no evidence, anecdotal or otherwise, is presented to support this assertion. This is closely associated with assertions made about minimum repayments and consumers taking 25 years to pay off a credit card balance, which is discussed in the chapter on minimum repayments. Cash Users & Vulnerability Paragraph 2.11 of the consultation paper discusses cash users and asserts that it is likely to include a significant number of vulnerable customers, although no evidence is presented to support this assertion. Whilst there may be an element of truth in the statement, the scope and scale of any problem is not assessed. The perceived vulnerability of those who use cash excessively and the industry’s ability to identify and manage such customers was one of the driving forces behind the Behavioural Data Sharing project mentioned in Appendix 1 which has resulted in lenders sharing more granular data on customers’ use of cash advance facilities. The full impact of this innovation has yet to be fully realised but it represents a significant advance in risk management. Although this data is now widely shared it is common for the influence of new data such as this to take some time to come through as lenders learn how to interpret and use the new information. Human Error Paragraph 2.12 of the consultation paper sets out a scenario of a cardholder with a revolving balance mistakenly using their credit card instead of their debit card at a cash machine and thereby incurring additional cost as a result of the allocation of payments. This implies a view that legislation is required to address all eventualities in every walk of life where human error might occur. This view of Government is not shared by the credit card industry. The Case for Intervention Paragraph 2.14 makes the case for Government intervention to alter the allocation of payments in the consumer’s favour if they are perceived as being disadvantaged by confusing complexity. There is a clear trade-off here, argued later in this chapter, that what disadvantages some consumers advantages others, hence a need to be clear on the possible inadvertent consequences of intervention.


Policy Options Consideration of the BIS policy options needs to be set against the following background information on consumer attitudes derived from our consumer research. In general, instinctive positive reaction to changes suggested by Government are significantly modified and tempered once the potential implications for cardholders are outlined: When told that the Government is thinking of making credit card providers

allocate payment to the part of the balance with the highest interest rate first, 44% thought that this was a good idea. 51% did not think that it was a good idea

Among those who thought it was a good idea, when told that this might mean

credit cards no longer offered promotional or lower interest rates, 31% changed their mind and no longer thought it was a good idea. 65% still thought that it was a good idea. Overall, this meant that 29% thought that it remained a good idea

Among those who thought it was a good idea, when told that this might mean

credit cards came with an annual fee in future, 57% changed their mind and no longer thought it was a good idea. 40% still thought that it was a good idea. Overall, this meant that 18% thought that it remained good idea


Improve Information Transparency Given the current information provided to consumers in the Summary Box in pre-contract materials and on credit card statements, the main way in which transparency within the Summary Box approach could be improved would be to provide a ‘pounds and pence’ illustration. This would rely on developing a set of assumptions similar to those used to calculate an APR. Changes to the Method of Allocation The options for revision to the allocation hierarchy are slightly broader than discussed in the BIS consultation document and, in fact, might include:

i. First in, first out ii. Proportionally to debts attracting different interest rates

iii. Cash first iv. Highest interest rate to lowest for anything above the minimum payment, with

the minimum payment allocated at the discretion of the issuer13 v. Highest interest rate to lowest

i. First In, First Out If transparency, understanding and intuitiveness are concerns, this method may at first appear to be among the easiest methodologies for consumers to understand. However, though conceptually simple to understand, payment allocation towards the most recent transaction first and then to the next most recent, is actually highly complex to model. Indeed, data processors that operate for credit card lenders have stated that they can not support the requirement to store individual transactions as distinct balances and apportion payments to the most recent balances as would be required for this methodology without expensive, fundamental system changes. Furthermore, the goal of providing clear and transparent processes for the customer is lost, as explaining how interest is charged to an account across multiple transactions, on different dates, where different APRs might be present, would be very difficult to understand and communicate. ii. Proportionally To Debts Attracting Different Interest Rates Otherwise known as ‘pro-rata’ allocation i.e. to each part of an outstanding balance based upon the proportion of the balance that it accounts for, would mean an individual paying off part of their most expensive debt and part of their cheapest debt (and part of anything in between) simultaneously, when rationally one would choose to pay off the most expensive debt first.

13 This is the same method as specified in the US CARD Act


iii. Cash First For those consumers who take cash advances, their balances would be paid-off more quickly, assuming that cash advances incur the highest interest rates (which is not always the case, with some lenders offering promotional rates on cash). Again, some consumers would repay less over the term of the agreement, for a shorter period of time. However, in terms of indirect costs the Oxera analysis suggests that, in the medium term, some groups of consumers will pay more. Lenders might move to higher interest rates on other types of balance, or reduce their offers of very low introductory rates to compensate, but in this case the impact may be less severe compared to the scenario of allocating payments proportionally. Alternatively, in this scenario lenders might be forced to increase the cost of cash advances so that pricing reflected the risk associated with such transactions, increase the cost of purchases; or withdraw cash advance facilities on their cards, whether domestically or globally. The reduction in the utility of cards to consumers that this would represent is difficult to quantify without fully understanding why cash advance customers obtain cash this way, assuming that they understand that the costs associated with cash on credit cards are generally higher (although this did not form part of our research) iv. Highest interest rate to lowest for anything above the minimum payment, with the minimum payment allocated at the discretion of the issuer If the payments were allocated in this way, assuming no other changes, consumers would repay less over the term of the agreement, for a shorter period of time. However, in terms of indirect costs, the Oxera analysis suggests that, in the medium term, there would almost inevitably be a reduction in the number and duration of promotional offers available from lenders, and those consumers who take advantage of such offers will pay more. The exemption for the minimum payment i.e. the contractual amount the customer is required to pay, has the effect of preserving an element of competition and offering credit card lenders protection against the risk of being left with long-term borrowing at non-commercial rates whilst also meaning that anything the customer chooses to pay in excess of the minimum will be allocated in their favour to the highest cost debt. The provision also enables those lenders, whose business model allows, to allocate a payment in its entirety to the highest interest rate first to do so and may actually result in this element of competition becoming more apparent to consumers as lenders seek to differentiate themselves on this feature. v. Highest Interest Rate to Lowest If the payments were allocated to the highest interest debt first, assuming no other changes, consumers would repay less over the term of the agreement, for a shorter period of time. However, in terms of indirect costs, the Oxera analysis suggests that, in the medium term, there would almost inevitably be a greater reduction in the number and duration of promotional offers available from lenders than in the scenario above, and those consumers who take advantage of such offers will pay more.


Conclusions The consultation document sets out a number of options, which are set out below: 1. Do nothing beyond current legislative and regulatory activity 2. Improve information transparency 3. Allocate repayments proportionately to debts attracting different interest rates 4. Allocate repayments to the most expensive debt first 5. Allow consumers to pay off cash advances first The view amongst many members of The UK Cards Association has been that the allocation of payments is all about communicating with the customer to clearly explain the terms of the “deal” between the two parties, e.g. that the customer enjoys a period of interest free credit, or immediate access to cash when they need it, and that this requires credit card lenders to allocate payments in a particular manner. The rationale is that, if customers understand this scenario, they can then make an informed choice around their particular use of a credit card facility. As such, it has been suggested that there are further opportunities for transparency improvements, particularly in terms of taking additional steps to strive to ensure that informative messages are better targeted at those customers who actually plan to transfer balances, or to use the cash facility. This option of further increasing transparency is strongly supported by the quantitative research carried out for The UK Cards Association. It would mean the continuation of “allocation of payments” as a potential tool for competition within the cards industry. And it would mean the current wide range of different “deals” in terms of balance transfers and cash advances would remain available to consumers. However, we are also mindful of the fact that our own qualitative research, with consumers who are not necessarily currently enjoying the benefit of offers on balance transfers or cash advances, indicates a belief among consumers that, whilst understanding the commercial logic behind current practice, they would also wish to see change. If, therefore, the Government and other stakeholders are prepared to accept the consequences for consumers discussed earlier in this chapter – namely a reduction in competitiveness within the industry and less attractive deals to consumers on balance transfers and cash advances – the industry would be prepared to move towards a high-to-low payment allocation for anything above the minimum payment with the minimum payment allocated at the discretion of the card issuer.


The industry sees this as a highly significant commitment, which will lead to a reduction in income in the region of around £250 million in the first two years. Proposal Summary The industry’s proposal for addressing Government’s concerns around the ‘The Allocation of Payments’ is to move to a new model based upon a high-to-low payment allocation for anything above the minimum payment with the minimum payment being allocated at the discretion of the issuer.


4. Credit Limit Increases


Credit Limit Increases Introduction Unsolicited credit limit increases (UCLIs) are the embodiment of the strategy used by many credit card lenders often referred to as ‘low and grow’ and lie at the heart of the operation of many modern credit card portfolios. They are a key component of operating a successful, responsible and balanced credit limit management programme on behalf of customers. Lenders regard limit increases as a means of engaging customers and solidifying the customer relationship, with many customers regarding a limit increase as a reward. In fact, our consumer research found that 23% of customers regarded credit limit increases positively (with a further 51% having a neutral view). We found no evidence of serious customer concern about the basis of the current UCLI regime. UCLIs also allow headroom to stimulate balance growth, attracting a customer’s spending that might be made using another card, or other payment method, or for the transfer of debt currently held elsewhere. As such, they are a means of maintaining and possibly increasing the profitability of a lender’s better customers. But that is the motivation of any business and the very embodiment of the intense competition that characterises the credit card market. UCLIs are a central feature of the way in which the use of credit cards has been successfully extended to “high risk” groups who would not otherwise have access to the industry and could need to turn to other sources of credit (including loan sharks and the like). A “low and grow” strategy is the only one that enables credit card lenders to responsibly start customers with no real credit history with a card and gradually, as their record of payments grows, then to move to a higher credit limit. The only way such low starts are viable longer-term is if they can be reassessed and gradually raised where the customer is managing well. Otherwise the costs of very small lending make such accounts unviable, thus depriving these consumers of access to credit cards. Changes to the UCLI regime would lead to a less competitive card industry in the UK. For consumers, changes could well mean that some current customers become frozen out of the credit card market (or become tied to their current provider because they could no longer take out a new card with another provider). For all customers, credit card companies would have, in effect, just one chance the set the “right” credit limit which could not subsequently be altered by the credit card company to more accurately reflect risk assessments based on customer behaviour. Our research shows that customers taken through a ‘low and grow’ programme experience lower default rates. The most careful assessment is carried out by credit card lenders before granting a UCLI in order to minimise the risk to both the credit card lender and also to the consumer.


Consumer Research Our consumer research shows that consumer awareness of their credit limit is high, the main findings as follows: 78% of cardholders were able to recall the credit limit on their credit card. Of the

remainder, 11% didn’t know whilst 11% refused to answer Consumers have either a high level of actual awareness or intuitive understanding that the current practice around unsolicited credit limit increases and how they are applied is a common feature of credit cards: When asked if they knew that most credit card issuers might increase their credit

limit without the cardholder doing anything in terms of asking for or accepting the change, 72% said that they knew this already and a further 17% that they did not know this but that it did not surprise them (an aggregate total of 89%). 11% said that they did not know this and that it surprised them

Within our qualitative research, whilst there was a view that the way in which UCLIs are currently applied does not necessarily represent best practice, it was not something that intrinsically breached what consumers might regard as a ‘reasonableness’ bar. Most customers had taken an increased limit – some had used it and many appreciated the benefit – liking the reassurance of having further resources just in case. Whilst some consumers saw UCLIs as a negative others maintained that the responsibility for using or not using the facility rested with the consumer. Consumers’ main worries were over the increased exposure to fraud that UCLIs create (despite the fact that they themselves will ordinarily not be accountable for any fraud losses) and a concern that the ‘wrong’ people were being given too much credit as a result. As such, views on what, if anything, needed to be done about UCLIs varied, ranging from: A need to protect vulnerable customers from their own impulses to amass debt A need for consumers to exercise control over their limit A need for clear communication / warning of a credit limit increase in advance in

a way that can be easily declined, along with information on the new minimum payment that would be associated with the new limit (though the minimum payment is determined by the balance, rather than the limit)

According to data provided by 13 credit card lenders accounting for approximately 96% of the market to The UK Cards Association, there were around 400 complaints (from a total of 30.2 million cardholders) regarding unsolicited credit limit increases between January and October 2009, accounting for 0.05% of complaints during that period. This compared to around 16,000 complaints regarding credit limit decreases, meaning that credit limit decreases generate 38 times as many complaints as credit limit increases.


Existing Protections Basel II Since January 2008 credit card lenders have had to comply with Basel II14. Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially published in June 2004, was to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks that banks face. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability. In summary, Basel II has had the following impacts on credit card lenders. The amount of capital required to be held is relative to the risk of the underlying credit card borrowing and unused credit lines. The implication of these requirements is that it is not in the economic interest of a credit card company to: Extend credit to high risk customers Provide large amounts of unused credit (‘headroom’) To that extent, Basel II has effectively acted as an “external calibration” upon the credit limit policies adopted by credit card lenders, curbing any previous tendencies to set excessive credit limits which would otherwise be costly to maintain. According to PriceWaterhouseCoopers in their annual Precious Plastic report for 2010:

“Forging an explicit link between sources of capital, credit scoring and lending will require greater cross-functional communication and co-ordination. Capital managers at group level have had to put new frameworks into place and fundamentally change the way they operate to ensure that ‘capital in’ and ‘credit out’ functions work closely together” “For consumers this is likely to mean that the cost of borrowing will increase while credit availability will decline”

14See Basel Committee on Banking Supervision, 2004, International Convergence of Capital Measurement and Capital Standards, Bank for International Settlements, Basel (http://www.bis.org/publ/bcbs107.pdf?noframes=1).


The Lending Code Credit limit management has been the subject of external scrutiny for a number of years, particularly since the Treasury Select Committee hearings in 2003 and 2004. As such, certain protections and procedures already exist, as follows: The Lending Code & Credit Limits Credit card limits Before giving a customer a credit limit, or increasing an existing limit, subscribers should assess whether they feel the customer will be able to repay it. Subscribers should follow The UK Cards Association best practice guidelines for credit card limit increases http://www.theukcardsassociation.org.uk/best_practices/ Subscribers should give customers notice if they increase the credit limit on their credit card and explain how customers can refuse the increase. Customers can contact the subscriber to reduce their credit card limit or opt-out of the increase. Customers can request an increase to their credit card limit. The request should be considered after subscribers have made appropriate checks. Where an emergency increase to a credit card limit is granted (i.e. when a transaction goes for authorisation and will take the customer over their pre-agreed limit) the issuer should always assess the customer’s ability to repay. Issuers should advise customers that checks are made before a limit is increased (the method and timing of advice will be at the issuer’s discretion). Credit card limit increases should not be offered on accounts that are in arrears and should not be granted for accounts that fall below credit scoring thresholds. Subscribers should periodically review customers’ credit card limits using credit reference agency (CRA) and internal data. The requirement to use CRA data does not apply in specialist customer segments, such as private banking, where use of credit reference agency data is not always appropriate. Where the subscriber feels it is appropriate, the credit card limit should be reduced and notification given to the customer. According to credit card lenders’ returns to The UK Cards Association15 the current opt-out rate from a credit limit increase is around 0.6%. Examples of lenders’ communication of credit limit changes are shown later in this chapter.

15 Data supplied by 13 issuers accounting for 96% of the market


The US CARD Act The US CARD Act does not contain any provisions related to credit limit increases.


Rationale The recurrent theme of the consultation paper with regard to UCLIs is a desire to increase customer control. Customer control – of spending and of credit – is central to the effective operation of all credit cards. But there is a clear trade-off between giving customers greater control over credit card limits and the level of risk that this injects into the credit market and at a far earlier point in the lender / customer relationship. The “low and grow” strategy adopted by many credit card lenders – and not a “customer control regime” – is the best way to minimise risks to credit card lenders and card users. In retail financial services the vast majority of decisions about providing a loan, by whatever method, are based on a credit scoring model. Each lender has a suite of such models, each with different inputs depending on the amount of information available to the lender concerning the applicant. Lenders decide upon an initial credit limit based on the information available to them at the time of the lending decision. For example, if a credit card applicant already has a current account, mortgage, existing credit card and/or personal loan with an institution, all of the transactions and repayment behaviour will be used to build a model that allows a better assessment of the risk that the individual may not repay. However, for many credit card applications (e.g. particularly for non-retail banks) the applicant will be new to the lender and, at the time of application, they will not have the same level of information available to them. In these circumstances, the lender has to rely more on their access to other data sources to help assess risk, such as data provided by credit reference agencies (CRAs)16. In essence, the more complete the information about an applicant, the more credit the lender may be prepared to grant at the time of application, with less information leading to the lender needing to be more conservative. The best information that any lender can have, and which would lead to an assessment that the customer can be granted a higher (appropriate) credit limit, relates to the customer’s management of their credit card account over a reasonable period of time. This can only be established some time after the point of application, as the customer builds up a ‘history’ with the lender. It is imperative to recognise that responsible lending does not end with an initial underwriting decision, but continues throughout the entire period that a customer has a credit card account. The general principle is that, at whatever point in the relationship between lender and borrower, the lender will only make a decision about whether or not to change the terms of credit based on an objective assessment of a borrower’s risk propensity (for a fuller introduction to credit scoring see, among many others, Thomas, 201017).

16 The three major credit reference agencies operating in the UK are Experian, Equifax and Callcredit. Most credit card issuers will subscribe to all three providers 17 Thomas, LC (2010), Consumer finance: challenges for operational research, Journal of the Operational Research Society, 6, 41-52


In today’s sophisticated credit environment, credit card lenders continually monitor their portfolios, effectively re-underwriting accounts every day – an example of how the open-ended nature of a credit card product differs from other types of consumer lending (e.g. personal loans) where checks are not required with the same frequency. In recent years the increasing availability of additional internal and external data (from the CRAs) in the segmentation of accounts, together with improved risk management, have helped lenders to better identify customers who are demonstrating a need for additional, affordable lending, and who represent an acceptable level of risk. Accounts will only be selected for a UCLI following stringent checks. In deciding to offer a credit limit increase to a given account, credit card lenders will go through a rigorous exclusion process to eliminate non-qualifying accounts based upon an assessment of both internal and external information, with the latter typically being from CRAs. Individual lenders will have their own sophisticated and unique risk policies which determine the frequency and scale of UCLI activity for any given portfolio or customer. Checks will be made relating to: Internal behaviour scores – how that particular account is performing; the age

of the account; previous credit limit history; proof over time that the customer is able to manage their revolving debt levels etc

Other existing relationships – performance of those other products that the

customer may have with the organisation such as other credit cards; current account; mortgage; personal loans etc

External data – relating to other credit commitments with other lenders via

credit reference agencies, including repayment histories; any arrears; levels of indebtedness; debt stress indicators etc


‘Waterfall of Exclusions’ The following is a typical ‘waterfall of exclusions’ that might be used by a lender to identify accounts that are or are not eligible for a credit limit increase (numbers are fictional and for illustrative purposes only). Simple logistics mean that there will usually be a time lag of around two to three months between when an account is selected for an increase and when it is applied. During this period the risk-profile of an individual could, in theory, change (for better or worse): % accounts

remaining Number of accounts

Total book 100% 1,000,000 Exclusion factors All customers identified for a potential increase 66% 660,000 All customers considered profitable to increase 25% 250,000 Below internal cards business risk criteria threshold score

22% 220,000

Below internal and external cumulative threshold score

20% 200,000

Below internal non-cards business threshold score 17% 170,000 Subject of recent decrease (e.g. in the last six months)

16% 160,000

Recently had an increase (e.g. max X per year) 15% 150,000 Debt to income ratio 12% 120,000 Below CRA over-indebtedness index threshold 11.5% 115,000 In arrears or record of recent delinquency, CCJ or bankruptcy?

11% 110,000

Is the account over-limit? 10.5% 105,000 Recent repayment behaviour e.g. paying an average of more than x% of their balance each month (above minimum repayment)?

10% 100,000

Is the account dormant? 9.5% 95,000 No data available 9% 90,000 Opted-out of limit increases 8.5% 85,000 Time as a customer <X months 8.0% 80,000 Total eligible population

8% 80,000

As a consequence, only low risk customers whom the lender believes can afford it and whom it is believed will have no problem maintaining payment on their accounts are considered for a UCLI. Lenders will operate sophisticated ‘test and control’ procedures which ensure that their strategies are subject to rigorous ongoing monitoring to ensure that their models remain effective and fit for purpose with any required enhancement or refinements acted upon quickly.


The Purpose of Credit Limits and Credit Limit Increases A lender’s primary consideration in setting a credit limit is affordability. At the outset many lenders may set a credit limit deliberately below that which the lender considers the customer could afford, pending evidence of how the customer manages the account, to minimise risks to the credit card lender and to the customer – a very clear example of responsibility in lending. With the passage of time, whilst there need not necessarily be any additional evidence of material change to a borrower’s circumstances but where there is evidence of their responsible management of their existing limit, a credit limit increase will be granted. This is the first main reason for the existence of UCLIs, built directly on a strong principle of responsible lending and of customers managing their accounts responsibly. A second reason for granting a UCLI, where this is warranted by the customer’s risk profile, is to attract spend and borrowing from other cards held by the customer. The ability to attract spend and borrowing currently on other cards is, of course, central to the competitiveness of the credit card industry and is the essence of competition. It is such market competition that ensures that, in general, consumers get the best possible deals from the credit card industry. Government regulation or self regulation which would limit competition within the industry is not likely to benefit consumers. Generally speaking, credit limit increase strategies are implemented in order to: Allow a graduated approach to managing risk over time Enable the lender to learn more about the customer’s use of their credit card Provide greater headroom for customers to attract spending and borrowing from

elsewhere Provide headroom for balance transfers (limit increases will often be followed up

with a balance transfer offer at promotional rates) Provide headroom for any genuinely new expenditure Keep up with inflationary pressures that would otherwise diminish the spending

power of a card over time Develop a positive relationship with customers Responsible management of credit limits is a source of competitive advantage between lenders. The better a credit card portfolio is managed: The greater the likelihood of profitable usage by cardholders; and The lower the delinquency rates they will experience, impacting directly upon the

price that the lender must charge for their product There is therefore a danger that precipitate action along some of the lines suggested by BIS would eliminate or largely remove one of the key bases for competition between lenders.


Current Prevalence A major point to note regarding the following analysis is that there were sharp changes at the beginning of 2009 in respect of credit limit increases. The Argus dataset developed for this project covers the period July 2007 to July 2009 so earlier data are not available. Given this limited historical perspective it is therefore difficult to determine the extent to which these recent changes reflect changes in the overall financial services market rather than being particular to the credit card market. Where data are shown but not sourced individually they are taken directly from the Argus Credit Card Dataset1819. The breakdown of accounts is as follows:

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 543 236 573 1,407 1,582 4,341 4,491 3,684 13,969 30,82510 < 20 91 35 84 238 278 622 668 665 1,870 4,55220 < 30 83 31 75 183 203 453 435 377 1,016 2,85730 < 40 87 30 73 165 175 374 303 250 623 2,08140 < 50 98 35 77 163 161 328 241 183 412 1,698

50 < 60 118 39 83 170 159 306 203 149 284 1,51160 < 70 150 45 100 192 175 301 179 126 207 1,47670 < 80 221 64 144 247 201 320 172 108 164 1,64180 < 90 401 108 228 391 258 380 180 104 145 2,19790+ 2,661 395 603 821 507 621 242 119 141 6,109

Total 4,454 1,018 2,041 3,976 3,701 8,046 7,115 5,766 18,832 54,946

Risk bandUtilisation%

Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset, numbers in 000s.

18 http://argusinformation.com/services/ukccps.htm 19 The base numbers of accounts covered by the Argus database amounts to more than 44 million accounts which has been grossed up by The UK Cards Association to represent the total market


Number of Accounts Given a Credit Limit Increase During 2007 and 2008, each month only around 2% of credit card accounts were given a credit limit increase. Although some of these would have had more than one increase in a year, most will only have had one. Therefore, in the course of a year, almost a quarter of accounts would have had a credit limit increase. This changed substantially in February 2009, falling to just 0.7% of accounts each month, or around only 8% of accounts for a year. The most likely reason for this is credit card lenders adapting to changing economic conditions. Expressing this as numbers of accounts experiencing a change, 3.7 million accounts were given a credit limit increase during Q2 2008, equivalent to 14.8 million in the year, compared twelve months later to around 1 million during Q2 2009, equivalent to approximately 4.0 million during the year20. In terms of consumer recollection of credit limit increases on their credit card accounts, figures from our consumer research are broadly consistent with a high level of recollection. This is coupled with a high degree of positive or neutral reaction. 24% of credit card holders reported having had their credit limit increased in the

last two years without them requesting it Of these, 51% regarded it neutrally, whilst 23% regarded it very positively or fairly

positively, a total of 74%. 23% viewed it fairly or very negatively

20 These figures compare to a uSwitch figure quoted by BIS in the consultation paper of 5.7 million customers having been granted an unsolicited credit limit increase in a twelve month period


Type of Accounts Given a Credit Limit Increase The highest proportions of accounts given credit limit increases are low risk, and/or those making low to medium use of existing credit, i.e. low to medium credit limit utilisation, as the following distribution of accounts given a credit limit increase by use and risk shows. This distinction was far more pronounced in 2008 than in 2009 and suggests that lenders have adjusted their policies to reflect the economic conditions. It is therefore worth examining both Q2 2008 and Q2 2009.21 The following tables summarise activity around all credit limit increases, not just unsolicited credit limit increases. The Argus database on which the analysis draws is unable to distinguish between an unsolicited increase and one generated in response to a customer request.

21 Paragraph 4.5 of the consultation paper quotes the second report of the Over-Indebtedness Task Force in 2002 as showing that 28% of credit card holders and 10% of store card holders receiving a credit limit increase in the past twelve months, of which 90% were unsolicited. These figures will reflect the economic conditions of the time and are no longer relevant or accurate


Credit Limit Increases in Q2 2008 The following table shows the distribution of credit limit increases across accounts in Q2 2008 broken down by risk and utilisation, confirming that limit increases are targeted on low risk, low utilisation accounts: Distribution of Accounts Given a Credit Limit Increase Q2 2008 (%)

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 0.1 0.1 0.2 0.6 1.2 2.9 2.6 4.8 23.5 36.010 < 20 0.0 0.0 0.1 0.3 0.6 1.2 0.8 1.7 7.0 11.820 < 30 0.0 0.0 0.1 0.4 0.6 1.2 0.7 1.7 4.6 9.530 < 40 0.1 0.0 0.1 0.4 0.7 1.2 0.7 1.6 3.6 8.540 < 50 0.1 0.0 0.1 0.3 0.6 1.1 0.6 1.3 2.6 6.8

50 < 60 0.0 0.0 0.1 0.4 0.6 1.0 0.6 1.1 2.0 5.860 < 70 0.1 0.0 0.1 0.4 0.5 0.9 0.5 1.0 1.6 5.170 < 80 0.1 0.0 0.2 0.4 0.6 0.9 0.5 0.9 1.4 5.080 < 90 0.1 0.1 0.2 0.6 0.7 1.0 0.5 0.8 1.2 5.390+ 0.2 0.1 0.3 1.2 1.0 1.4 0.5 0.8 0.9 6.4

Total 0.8 0.5 1.6 5.1 7.1 12.9 8.0 15.8 48.2 100.0


Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. Overall, some 6.5% of accounts were granted a credit limit increase during Q2 2008, suggesting around 26% of accounts during the course of the year. The following table looks at the proportion in each risk/utilisation segment. Proportion of Accounts Given a Credit Limit Increase by Segment Q2 2008 (%)

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 0.7 1.7 1.9 2.5 2.2 3.9 5.6 3.1 4.6 4.010 < 20 2.2 3.1 5.1 8.5 6.9 9.7 11.2 8.9 11.4 10.020 < 30 2.5 2.4 6.8 11.8 10.1 12.4 14.6 13.5 13.7 12.630 < 40 3.1 4.7 7.8 12.6 13.1 14.9 18.8 18.7 16.9 15.540 < 50 2.4 4.3 5.9 11.4 11.9 14.4 18.0 18.7 17.7 14.8

50 < 60 1.8 4.1 5.6 11.0 12.2 14.0 18.3 18.5 18.5 14.360 < 70 1.7 3.3 5.2 10.3 10.9 13.4 17.0 18.0 18.0 13.070 < 80 1.2 2.9 5.5 9.9 10.3 12.2 16.3 17.4 18.3 11.780 < 90 1.0 1.9 4.7 9.0 8.9 10.8 13.6 15.6 17.3 9.290+ 0.4 0.8 1.7 6.7 5.6 8.8 9.5 11.4 11.2 3.9

Total 0.7 1.9 3.4 6.8 5.9 8.0 9.6 6.8 7.1 6.5


Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset.


In terms of how this translates in to the number of accounts that were granted credit limit increases, 3.8 million accounts (out of 54.9 million) were granted an increase during Q2 2008, broken down as follows: Number of Accounts Given a Credit Limit Increase by Segment Q2 2008 (000s)

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 4.1 2.7 6.5 23.9 44.7 110.6 97.4 181.6 883.6 1,355.010 < 20 1.8 1.2 3.8 12.4 23.0 46.4 28.7 63.6 262.2 443.020 < 30 1.8 0.8 4.6 14.3 24.2 46.8 27.7 63.7 172.6 356.630 < 40 2.3 1.6 5.3 14.4 25.4 46.3 28.0 62.2 134.5 319.940 < 50 1.9 1.6 4.2 13.0 21.7 40.7 23.7 50.2 98.3 255.2

50 < 60 1.7 1.6 4.4 13.2 21.3 36.8 21.6 41.2 76.9 218.760 < 70 2.0 1.6 4.5 13.7 20.0 34.9 18.7 35.8 60.1 191.470 < 80 2.1 1.8 6.2 16.4 22.8 34.7 18.1 33.6 51.2 186.980 < 90 3.4 1.9 9.2 22.5 28.0 38.8 18.3 31.7 45.0 198.890+ 8.7 3.2 10.6 46.7 37.8 51.1 18.9 31.4 33.3 241.7

Total 29.7 18.1 59.2 190.4 268.9 487.1 301.1 594.9 1,817.8 3,767.2


Total


The average size of a credit limit increase during Q2 2008 was £87922 but shows no particularly strong pattern in relation to risk or utilisation. Average Size of a Credit Limit Increase By Risk & Utilisation – Q2 2008

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 902 684 851 863 909 818 672 830 762 77910 < 20 1,096 921 900 976 1,069 1,022 931 1,105 888 95320 < 30 1,074 790 970 986 1,092 1,048 946 1,155 891 98230 < 40 1,017 942 962 997 1,078 1,036 941 1,132 854 96540 < 50 1,002 814 948 949 1,046 1,013 932 1,115 816 947

50 < 60 775 803 928 1,006 1,031 1,017 927 1,109 790 94260 < 70 776 1,024 948 928 987 992 910 1,052 810 93070 < 80 832 856 974 886 935 959 876 1,020 757 89780 < 90 837 862 837 858 893 938 863 988 728 86890+ 640 739 773 863 906 911 891 1,021 815 866

Total 818 816 875 914 982 952 834 1,007 806 879


Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset, numbers in £. This table needs to be considered in conjunction with the small proportions of customers in the tables on distribution and proportion above which show the relatively small number of accounts in the higher risk bands that are granted credit limit increases.

22 This compares to a uSwitch figure quoted by BIS in the consultation paper of £1,538


However, the resultant credit limit following a credit limit increase shows clearly that higher risk accounts and higher utilisation accounts typically have lower limits following a limit increase than lower risk accounts. Average Credit Limit Post-Line Increase by Risk & Utilisation – Q2 2008

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 2,749 3,594 3,492 3,759 3,815 4,356 4,859 4,584 5,792 5,18410 < 20 3,462 4,423 5,062 5,696 5,297 5,702 5,931 5,874 6,592 6,11420 < 30 3,329 4,181 5,101 5,679 5,371 5,768 5,943 6,023 6,351 5,95030 < 40 3,183 4,245 4,949 5,543 5,319 5,780 6,064 6,159 6,357 5,89140 < 50 3,128 4,132 4,801 5,264 5,111 5,648 6,047 6,098 6,449 5,743

50 < 60 3,132 3,965 4,660 5,194 5,064 5,582 5,914 6,060 6,532 5,60760 < 70 2,962 3,819 4,417 4,912 4,829 5,406 5,740 5,833 6,600 5,33370 < 80 2,905 3,634 4,165 4,605 4,553 5,209 5,592 5,719 6,598 4,98880 < 90 2,766 3,573 3,814 4,362 4,369 5,100 5,375 5,490 6,589 4,58590+ 3,114 3,640 3,827 4,227 4,080 4,865 5,314 5,420 7,017 3,986

Total 3,031 3,737 4,035 4,436 4,334 4,929 5,273 5,025 5,979 5,177


Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset, numbers in £.


Credit Limit Increases in Q2 2009 Comparing the Q2 2009 profile with the Q2 2008 profile above it is apparent that there has been a significant shift in the way that lenders have implemented credit limit strategies more recently. Although there is still a skew towards low-risk, low utilisation accounts, the number of limit increases has fallen considerably, particularly among low-risk, low-utilisation accounts. This presumably reflects the worsening economic conditions and perhaps a continued adaptation to the Basel II requirements. Distribution of Accounts Given a Credit Limit Increase – Q2 2009 (%)

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 0.2 0.1 0.2 0.9 1.0 2.3 2.3 2.5 3.8 13.310 < 20 0.1 0.1 0.2 0.6 0.7 1.5 1.8 2.0 1.7 8.720 < 30 0.1 0.1 0.3 0.8 1.0 2.1 2.8 2.1 1.7 10.930 < 40 0.1 0.1 0.3 0.9 1.1 2.4 3.5 2.2 1.9 12.540 < 50 0.1 0.1 0.4 0.9 1.0 2.1 2.7 1.6 1.6 10.4

50 < 60 0.1 0.1 0.3 0.9 0.9 1.9 2.3 1.3 1.3 9.060 < 70 0.1 0.1 0.3 0.9 1.0 1.8 2.1 1.0 0.9 8.370 < 80 0.1 0.1 0.4 1.0 0.9 1.7 1.9 0.9 0.7 7.880 < 90 0.2 0.2 0.6 1.1 1.0 1.7 1.5 0.6 0.5 7.590+ 0.8 0.7 1.5 2.2 1.5 2.3 1.7 0.6 0.4 11.7

Total 1.9 1.6 4.5 10.1 10.2 19.8 22.5 14.8 14.6 100.0


Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. This is also demonstrated if the proportion of accounts with a limit increase by risk propensity and use is examined too, as shown in the following table (again for Q2 2009). Overall, in Q2 2009 1.9% of accounts were granted a credit limit increase, suggesting around 8% of accounts during the year. The following table looks at the proportion in each risk/utilisation segment: Proportion of Accounts Given a Credit Limit Increase by Segment Q2 2009 (%)

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 0.3 0.4 0.4 0.6 0.6 0.5 0.5 0.7 0.3 0.410 < 20 1.1 2.2 2.6 2.6 2.8 2.8 3.0 3.5 1.1 2.220 < 30 1.2 2.2 3.6 4.6 5.2 5.1 7.3 6.3 1.9 4.230 < 40 1.6 3.3 4.2 5.8 7.0 7.3 12.5 9.7 3.4 6.640 < 50 1.2 2.8 4.7 5.6 6.8 7.0 12.0 9.3 4.2 6.6

50 < 60 0.9 3.0 3.7 5.4 6.2 6.6 11.9 9.0 4.6 6.360 < 70 0.9 2.9 3.5 4.7 6.0 6.3 12.1 8.5 4.1 5.870 < 80 0.7 2.5 3.2 4.4 4.8 5.7 10.8 7.8 3.9 4.980 < 90 0.6 1.9 2.8 2.8 4.0 4.7 8.2 5.8 3.2 3.590+ 0.3 1.6 2.4 2.6 2.9 3.5 6.3 4.4 2.4 1.9

Total 0.5 1.6 2.2 2.5 2.8 2.5 3.3 2.7 0.8 1.9


Total



In terms of how this translates in to the number of accounts that are granted credit limit increases, just under one million accounts (out of 52.5 million) were granted an increase during Q2 2009, broken down as follows: Number of Accounts Given a Credit Limit Increase by Segment – Q2 2009 (000s)

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 1.6 1.1 2.4 9.0 10.5 23.5 24.0 25.4 39.5 137.110 < 20 0.9 0.7 2.2 5.9 7.2 15.5 18.1 20.8 17.9 89.120 < 30 1.0 0.7 2.7 8.0 10.0 21.2 29.3 21.9 17.6 112.230 < 40 1.3 1.0 3.0 9.4 11.6 25.1 35.6 22.6 19.6 129.040 < 50 1.2 0.9 3.6 8.9 10.4 21.6 27.7 16.4 16.4 107.1

50 < 60 1.0 1.1 3.0 9.0 9.4 19.1 23.4 13.0 13.4 92.460 < 70 1.3 1.3 3.4 8.8 10.1 18.3 21.9 10.7 9.2 85.070 < 80 1.4 1.5 4.6 10.8 9.6 17.7 19.1 8.8 7.0 80.380 < 90 2.4 2.0 6.3 11.0 10.2 17.8 15.4 6.7 5.4 77.190+ 8.0 6.7 15.7 23.0 15.6 23.5 17.1 6.4 4.2 120.2

Total 20.0 17.0 46.8 103.7 104.6 203.4 231.4 152.6 150.1 1,029.5


Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. NB: it is worth noting that the fifteen cells in the bottom left hand corner of this table (i.e. accounts in risk bands 1 to 3 with utilisation of 50% or more) amount to around 60,000. Across the year this would amount to around 236,000 accounts in these cells being granted a credit limit increase. This compares to an overall estimate (later in this chapter) that around 720,000 credit limit increases were granted in response to a customer request during the year. The industry believes that the majority of increases granted to this group will be in response to a request from the customer. As one would expect, and indeed demand, credit card issuers’ credit scoring models are highly predictive and provide strong indicators. No statistical or economic model is perfect, however, and a small number of people who are high risk, and with relatively high balances, are given a credit limit increase. Such people may be seen in the bottom left segment of the above tables. This group warrants further investigation, but it is believed to be largely driven by customer initiated requests i.e. they are not emanating from UCLI techniques. The following two tables provide information to help with this group and show that in terms of the average size of credit limit increase those in the highest risk (risk band 1), higher utilisation (50% or more) cells are receiving lower increases, though the overall pattern is inconclusive.


The average size of a credit limit increase in Q2 2009 shows more of a pattern in relation to risk or utilisation than in Q2 2008. In addition, the average limit increase has grown. This is thought to be a function of lenders targeting, on average, lower risk customers for limit increases and excluding higher risk customers together with an increase in the proportion of customer initiated increases (which tends to be for higher amounts). Average Size of a Credit Limit Increase By Risk & Utilisation – Q2 2009

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 1,524 1,295 1,547 1,280 1,298 1,409 1,532 1,498 1,556 1,47810 < 20 1,320 1,663 1,265 1,208 1,282 1,320 1,525 1,317 1,348 1,36420 < 30 1,385 1,074 1,020 1,243 1,177 1,328 1,508 1,255 1,238 1,31130 < 40 1,052 1,202 1,130 1,189 1,135 1,292 1,496 1,306 1,236 1,30040 < 50 1,015 1,255 1,059 1,106 1,201 1,323 1,522 1,324 1,201 1,301

50 < 60 914 1,084 970 1,106 1,069 1,240 1,456 1,360 1,184 1,24860 < 70 814 936 1,071 1,068 1,055 1,218 1,413 1,275 1,199 1,21270 < 80 819 902 964 1,084 1,031 1,166 1,337 1,257 1,202 1,15780 < 90 750 925 848 949 938 1,129 1,219 1,186 1,489 1,06490+ 752 808 856 901 867 1,012 1,076 1,182 1,362 938

Total 914 995 1,022 1,079 1,100 1,257 1,446 1,337 1,359 1,263


Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset, numbers in £. Nevertheless, the second of these tables shows that the resultant credit limit following an increase is consistently lower amongst the high risk, high utilisation segments. Average Credit Limit Post-Limit Increase by Risk & Utilisation – Q2 2009

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 2,893 2,764 3,481 3,619 4,125 4,479 4,645 5,724 5,683 5,10410 < 20 3,708 3,989 5,149 5,598 5,551 5,694 5,908 6,243 6,505 6,08520 < 30 3,511 3,904 5,163 5,649 5,599 5,748 6,102 6,267 6,251 5,95630 < 40 3,299 3,841 5,051 5,556 5,573 5,741 6,249 6,343 6,195 5,87940 < 50 3,181 3,703 4,801 5,340 5,308 5,630 6,059 6,284 6,271 5,694

50 < 60 3,239 3,565 4,693 5,145 5,134 5,473 5,886 6,224 6,371 5,51760 < 70 3,217 3,611 4,449 4,876 4,904 5,309 5,666 6,160 6,507 5,28670 < 80 3,181 3,377 4,222 4,584 4,558 5,144 5,417 6,220 6,610 4,95680 < 90 3,042 3,161 3,830 4,219 4,320 4,941 5,110 6,179 6,697 4,52590+ 3,217 3,434 3,805 4,104 4,391 5,012 5,082 6,600 7,306 4,051

Total 3,174 3,309 3,989 4,314 4,584 4,930 5,041 5,914 5,888 5,136


Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset, numbers in £. Whilst it might seem counter-intuitive that some groups should be in receipt of limit increases, lenders use all data available to them to make an affordability assessment in reaching a decision following a request. Lender data shows that around one third of customer initiated requests are approved given the well understood risk of adverse selection.


Using credit card lenders’ returns to The UK Cards Association23, these figures can be put into the following context: Around 1 million credit limit increases were granted in Q2 2009. This

grosses up to around 4 million in the year 1.7 million accounts requested a limit increase in the period January to

October 2009, of which 600,000 (34%) were approved. This grosses up to around 720,000 for the year

Therefore around 17.5% of credit limit increases in 2009 were at the request

of customers Our consumer research shows that: 85% of credit card holders reported that they had never requested a credit limit

increase from their card issuer. Of the 14% that had, 11% reported that the request had been approved and 3% that it had been declined (which suggests a degree of under-reporting among those that requested an increase but were refused)

23 Data provided by 13 issuers accounting for 96% of the market


Customer Initiated Credit Limit Increases As shown above, the occurrence of customer initiated credit limit increases is relatively low compared to unsolicited credit limit increases. For the period January to October 2009 credit card lenders report to The UK Cards Association that some 1.7 million accounts requested a credit limit increase. These will typically be subject to rigorous manual vetting processes. Of these requests 1.1 million (66%) were declined. Of the accounts where a customer limit increase was given in the early part of 2009, almost 5% had defaulted by the end of the year. (This compares to lender reported data that, of accounts offered a UCLI in the early part of 2009, around 2.5% went delinquent later in the year (3% in 2008)). The figures for the same period in 2008 were 1.8 million requests, with 0.9 million (54%) being declined. Our quantitative consumer research shows that: When asked if they would ever request a credit limit increase from their card

issuer 86% said that they would not. Only 13% said that they would. With regard to individual lender behaviour, including experience of customer initiated requests for credit limit increases, a number of lenders have already provided the following additional information (confidentially) to BIS regarding their experiences: “Of the account holders that contact us to ask for a limit increase only 27% of

those applications are approved. The first year loss rate for customers who contact us for a limit increase is almost three times that of the population we select for a credit limit increase”

“Accounts subject to an unsolicited credit limit increase have only 27% of the losses seen on a typical account in the year following the increase”

“The default rate for the UCLI population is 16.1% better than the overall population. The default rate for manual limit increase customers is 20.8% and therefore worse, despite the same (acceptance) criteria being used”

“The default rate for accounts subject to UCLIs is 2.6% compared to 3.1% for the total book. The default rate for accounts requesting an increase (of which only 25% are approved – accounting for less than 10% of all line increases) is 5.4%”

This is tangible evidence of the risk of adverse selection24.

24 Adverse selection is where an issuer performs an action that has a result which is shifted more towards high risk accounts. In the case of solicited credit limit increases, the belief is that a large proportion of people who react positively to receiving an unsolicited credit limit wouldn't necessarily respond to accept a solicited line increase. The belief is that these customers are low risk. Conversely, it is believed that the people who eventually go bad following an unsolicited line increase (even though this is a small population) are the people who would take up the offer for a solicited line increase (because they are in need of the credit and will take it whenever offered). These people would build balances but ultimately cost the lender money due to increased bad debt write-offs as a result of the higher balances.


Size of Credit Limit Increases In terms of the average amount of a credit limit increase, during Q2 2008 the average was around £900 across all risk bands. However, during 2009 the distinction between risk bands has become more pronounced. Whilst fewer increases are being granted in total, lower and medium risk accounts are being granted (i) larger increases than before and (ii) larger increases than are being granted to higher risk accounts. This is believed to be driven, in part, by customer-requested increases (which tend to be for higher amounts) taking up a larger percentage of all increases. Average Size of Credit Limit Increase by Utilisation Segments

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09

Month

Cre

dit

limit

incr

ease

am

ount

, £

Low

Overall

Medium

High



Timing of Credit Limit Increases Lenders grant higher-risk customers lower credit limits at the point of account opening and then select subsets of these customers as being suitable to receive credit limit increases over time. As described in detail earlier in this chapter, lenders do not target credit limit increases towards new accounts, but rather wait until they have sufficient experience of the customer to make an informed decision, using a sophisticated range of predictive data and behavioural scoring models. This is illustrated by the fact that the majority of credit limit increases are granted to mature accounts. More than 40% of limit increases are applied to accounts which have been open for 5 years or longer. The cohort with the highest proportion of limit increases is those that have been open for between 12 and 24 months. Distribution of Accounts with Credit Limit Increase by Months on Books

0.7

8.6

20.7

12.7

18.5

38.8

0.9

9.0

23.2

10.1

13.5

43.4

0

5

10

15

20

25

30

35

40

45

50

<6 <12 <24 <36 <60 60+

Months on books

Per

cent

age



Proportion of Accounts with Credit Limit Increase by Months on Books

0.8

8.6

13.1

9.1

7.1

5.0

0.4

2.4

3.3

2.31.8 1.5

0

2

4

6

8

10

12

14

<6 <12 <24 <36 <60 60+

Months on books

Per

cent

age



Customers recruited in the lowest initial credit limit band, by virtue of being higher risk, receive fewer limit increases over the first two years that their accounts are open. Those who do receive an increase within this cohort are typically those who have exhibited the characteristics of being lower risk (an assessment based, as ever, on behaviour scoring) than those who are not offered an increase25. Average Credit Limit Among Initial Limit Bands for Accounts Opened Q3 2007 by Months on Books

0

2,000

4,000

6,000

8,000

10,000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Month since acquisition

Ave

rage

initi

al c

redi

t lim

it, £

£6000+ <£6000 <£4000 <£2000Initial limit

1.5%

1.9%

2.3%

4.0%

1.1%, £97

4.6%, £233

10%, £280

22%, £229

Average 2-Year Increaseby % of original and £

Average unit loss rate at 6 Months on Books


25 ULR means Unit Loss Rate


Credit Limit Decreases The other side of the coin to credit limit increases is credit limit decreases, which may be impacted directly, or inadvertently, by any regulation. Credit limit decreases are used by lenders as a way of managing risk, by reducing the potential amount that customers can borrow. Indeed, since the introduction of the Basel II regulations (discussed earlier in this chapter) banks have been obliged to include in their capital requirements the amount of unused credit to which they may be liable. It is therefore uneconomic, as well as potentially risky, to give customers large (unused) credit limits. Lenders also use credit limit decreases, targeted towards higher risk accounts, to control the exposure for customers who show a worsening risk profile in the months following initial acquisition. This rigour is a key component at the heart of operating a successful, responsible and balanced credit limit management programme. The following tables show the distribution and numbers of accounts that had their credit limits decreased during Q2 2008. (NB: these tables can all replicated for Q2 2009 and show essentially the same pattern). Distribution of Accounts Given a Credit Limit Decrease by Segment – Q2 2008 (%)

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 1.0 0.1 0.4 1.1 2.5 1.9 1.0 3.0 5.0 16.310 < 20 0.4 0.1 0.1 0.1 0.2 0.1 0.1 0.3 0.6 1.720 < 30 0.4 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.4 1.630 < 40 0.4 0.1 0.1 0.1 0.1 0.2 0.1 0.2 0.3 1.640 < 50 0.8 0.3 0.3 0.3 0.3 0.3 0.1 0.3 0.3 3.0

50 < 60 1.6 0.3 0.5 0.8 0.7 0.6 0.2 0.5 0.3 5.660 < 70 2.0 0.5 0.7 1.2 0.9 0.7 0.3 0.5 0.3 7.270 < 80 3.1 0.7 0.9 1.8 1.2 1.0 0.4 0.6 0.3 10.080 < 90 6.9 1.1 2.0 3.5 2.4 1.8 0.7 0.9 0.3 19.790+ 16.9 2.7 4.1 4.0 2.3 1.9 0.6 0.7 0.2 33.4

Total 33.6 6.0 9.2 13.1 10.7 8.6 3.6 7.2 8.0 100.0


Total



As can be seen in the table below the likelihood of having a credit limit decreased is much higher among the higher risk groups and higher utilisation groups. Proportion of Accounts Given a Credit Limit Decrease by Segment – Q2 2008 (%)

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 1.2 0.6 0.9 0.8 0.9 0.5 0.4 0.4 0.2 0.310 < 20 3.2 1.2 0.5 0.4 0.3 0.2 0.2 0.2 0.2 0.320 < 30 3.8 1.4 1.0 0.7 0.3 0.2 0.2 0.3 0.2 0.430 < 40 3.9 1.9 1.4 0.6 0.5 0.3 0.4 0.5 0.3 0.640 < 50 7.4 5.0 2.5 1.6 1.2 0.7 0.7 0.8 0.4 1.2

50 < 60 12.2 5.9 4.2 4.6 2.7 1.7 1.4 1.6 0.6 2.660 < 70 11.6 7.8 5.8 6.3 3.3 2.0 2.1 1.7 0.6 3.470 < 80 12.6 7.3 5.7 7.7 3.7 2.4 2.6 2.2 0.7 4.380 < 90 14.6 7.8 7.1 9.8 5.3 3.6 3.6 2.9 0.7 6.490+ 4.9 4.7 4.5 4.0 2.3 2.3 2.1 1.7 0.6 3.8

Total 5.8 4.4 3.7 3.2 1.6 1.0 0.8 0.6 0.2 1.2


Total


The number of accounts subject to a credit limit decrease in Q2 2008 was 0.7 million, broken down as follows: Number of Accounts Given a Credit Limit Decrease by Segment Q2 2008 (000s)

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 7.2 1.0 3.0 8.0 17.7 13.4 6.9 21.1 34.9 113.210 < 20 2.6 0.5 0.4 0.6 1.1 0.9 0.4 1.8 4.0 12.020 < 30 2.8 0.5 0.7 0.8 0.8 0.8 0.4 1.5 2.6 10.830 < 40 2.8 0.6 0.9 0.7 0.9 1.1 0.6 1.5 2.3 11.440 < 50 5.8 1.8 1.8 1.9 2.2 2.0 0.9 2.2 2.3 21.0

50 < 60 11.4 2.4 3.3 5.6 4.8 4.4 1.6 3.5 2.4 39.360 < 70 13.8 3.8 5.0 8.3 6.1 5.1 2.3 3.4 2.1 50.070 < 80 21.7 4.5 6.5 12.7 8.3 6.7 2.9 4.2 1.9 69.380 < 90 48.1 7.9 14.1 24.5 16.8 12.8 4.9 5.9 1.8 136.890+ 117.8 18.5 28.3 28.2 15.8 13.1 4.2 4.8 1.7 232.2

Total 233.9 41.4 64.0 91.1 74.4 60.2 25.2 50.0 55.8 696.1


Total



The average decrease was £727. Although accounts of higher risk and with higher utilisation were subject to lower average decreases this will reflect the fact that these accounts typically have lower credit limits to begin with. Average Amount of a Credit Limit Decrease Q2 2008

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 860 807 854 963 921 1,002 1,131 1,097 1,683 1,21210 < 20 532 605 1,089 917 1,227 1,298 1,501 1,695 2,347 1,55320 < 30 736 882 1,222 1,128 1,075 1,309 1,435 1,332 2,232 1,43030 < 40 710 1,039 926 1,364 1,079 1,575 2,169 1,496 1,905 1,42740 < 50 757 1,559 1,653 1,681 1,358 1,795 2,047 1,744 2,390 1,654

50 < 60 1,031 943 1,306 1,519 1,523 1,868 1,782 1,886 2,203 1,58360 < 70 724 917 964 1,105 1,039 1,358 1,374 1,363 1,820 1,13470 < 80 559 514 597 750 811 1,027 986 1,000 1,439 79580 < 90 264 355 362 461 525 635 652 617 1,087 45790+ 186 254 261 279 319 409 448 518 918 252

Total 273 448 501 655 765 973 1,058 1,124 1,764 727


Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset, numbers in £. It is clear from these tables, that, again, credit scoring has worked as is intended and would be expected in that the customers who tend to be in the riskiest segments are those who have had their limits reduced, demonstrating the checks and balances operating within the system. In terms of recollection and favourability our research shows that: Only 7% of credit card holders recalled having their credit limit decreased within

the last two years. Of these 42% regarded it fairly or very positively, with 33% regarding it neutrally. 21% viewed it either fairly or very negatively

Furthermore, according to our consumer research: When asked if they would ever decline a credit limit increase if they were offered

one, 57% said that they would not decline an increase. Of these, 87% said they just wouldn’t bother and 11% that they thought it might affect their credit rating. However, 41% thought they would sometime decline an increase (although few customers in fact do so - current decline levels are very low)

NB: credit card lenders do not typically give prior notice of a credit limit decrease given the risk that a consumer will then immediately spend up to the existing limit knowing that the opportunity to spend will soon be removed.


Results of a Credit Limit Change – the Consumer Consumers in receipt of a credit limit increase typically spend more than usual in the month immediately following their limit increase, but this falls back to slightly below pre-limit increase levels from the second month onwards. That is to say, such consumers do not spend more in total on credit as a result of UCLIs but use the increased limit to bring forward a portion of their spending (which is, after all, the whole raison d’être of the credit industry) or to exploit balance transfers offers (which will offer consumers better rates of interest on any outstanding loans than they currently enjoy). This is true at an industry level though it does not show how successfully or otherwise individual credit card lenders are in increasing business through UCLIs or the impact on particular customer groups. This evidence does not support the assertion that consumers immediately spend up to the new limit when granted a credit limit increase. Index of Purchases for Q3 2008

60

70

80

90

100

110

120

130

140

0 1 2 3 4 5 6 7 8 9 10 11 12

Month after increase

Inde

x

Proxy Control

Increase Group

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. Balances, both total and interest bearing amounts, rise in the months following a credit limit increase by around 10%-15% compared to similar accounts which did not receive a limit increase. This is similar to American research26, which found that, following a credit limit increase, balances rose about by around 10% - 15% of the amount of the increase. More specifically, for accounts with a credit limit increase in April 2009, calculated by comparing the average monthly spend in the preceding 3 months from January to March 2009 to the following six months to October 2009, the uplift in spend as a percentage of the limit increase granted was 5.06%.

26 Gross DB and Souleles NS (2002), Do liquidity constraints and interest rates matter for consumer behaviour? Evidence from credit card data, The Quarterly Journal of Economics, 117, 1, 149-185.


However, it would be wrong to assume that this uplift comprises all new expenditure or borrowing. It will be a combination of customers taking up balance transfer offers often offered in the months after a limit increase; a shift of spend from other cards; and some genuinely new spend.


Results of a Credit Limit Change – the Lender It is not in the interest of either the lender or the card holder if the latter defaults following a credit limit increase. In fact, default rates among customers who have been given a credit limit increase are significantly lower than among similar customers who did not receive an increase, suggesting that current practice is robust. There is no evidence to support the assertion that customers rush to spend up to a new limit that they have been granted. Two years following a credit limit increase (based on accounts granted an increase in 2007), debts of around 2.8% of customers were written off, compared to the debts of around 3.4% of similar customers who did not receive a limit increase. Similar trends are observed for limit increases granted during 2008. Charge-off Rates Among Accounts with a Credit Limit Increase and No Change Accounts

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Month since increase

Acc

ount

cha

rge-

off

rate

, %

Q3 2008 No Change

Q3 2007 No Change

Q3 2008, limit increase

Q3 2007, limit increase

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. This demonstrates the careful deployment of limit increases and how lenders target better quality customers to receive an unsolicited increase. Paragraph 4.6 of the consultation paper suggests that there may not be a direct link between an individual limit increase and increased likelihood of default. The above evidence confirms this view.


The consultation paper goes on to say that “the practice of increasing limits through the life of an agreement has clearly contributed to the significant growth we have seen in personal debt on cards”. 27 This statement is not supported by the evidence. The aggregate of credit limits across the industry (the red line in the chart below) has increased at a faster rate than outstanding credit card balances across the industry (the blue line in the chart below), which has remained fairly stable since the beginning of 2006. This suggests that the two measures are reasonably independent of each other, i.e. personal debt is the amount that has been spent, as opposed to what is available to spend via unsolicited credit limit increases. Aggregate Industry Credit Limits vs Credit Card Outstandings28

0

50

100

150

200

250

300

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Quarter

Am

ount

, £b

n

Credit limit

Balance

Source: The UK Cards Association, Bank of England

27 NB: the consultation paper then relates this to the experience of people seeking debt through the Consumer Credit Counselling Service, which is not a link that can be made on the basis of this evidence 28 Source: The UK Cards Association data covers 19 issuers from December 2001 to August 2009; 21 issuers from September 2009.


In fact, outstanding balances as a proportion of available credit limits has shown a steady downwards incline since 2002, as per the following chart. Aggregate Credit Limit As A Proportion of Credit Card Outstandings (%)

0

5

10

15

20

25

30

35

40

45

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Quarter

Pro

port

ion,

%


Having said this, for those customers who do default, they default for slightly larger amounts than similar customers who have not had a credit limit increase. In the case of accounts that were given a limit increase in 2007, the amounts were around £3,600 compared to £3,300; for those given a limit increase in 2008, they were £4,700 compared to £3,600. Average Charge-off Amount for Q3 2008, Limit Increase vs Proxy Control Group

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1 2 3 4 5 6 7 8 9 10 11 12


Acc

ount

cha

rge-

off

amou

nt,

£

Increase Group

Proxy Control

£3,646

£4,723

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. NB: it has to be noted, though, that the increases in the recent past could equally be a consequence of the worsening economic situation. During 2008–09, unemployment worsened substantially, and, at the time of writing, the UK was in its deepest recession for 50 years. Bad debt on all forms of credit worsened during 2008 and most of 200929 (the one exception being that defaults on secured lending did not worsen in Q3 2009).

29 Bank of England (2009), Credit Conditions Survey, Q3, Bank of England, London.


Communication of Limit Changes Increases are commonly accompanied by statement messages or letters using text such as: Statement message by a major lender – “As a valued customer we are pleased

to inform you that we have increased your credit limit on your account, as shown on this statement. If you prefer to remain at you previous limit, call us on xxxxxx”

Letter sent to cardholder by a major lender – “If you have any queries, do not

want a credit limit increase or would like to discuss a higher limit, call us on xxx xxxx (lines open 24 hours a day, seven days a week)”

Letter sent to cardholder by a major lender – opens with “As a valued cardholder

we are pleased to advise you that your credit limit has been increased to £x,xxx and is available to use straight away”. Letter closes with “If you’d prefer your credit limit to stay where it is or you would like to opt out of future credit limit increases, please give us a call on xxxx xxxx”.

All lenders offer customers the chance to opt-out from credit limit increases on a permanent or individual increase basis as is required by The Lending Code. According to confidential member returns the rate of opt-out from limit increases is very low at 0.6%. Any examples of non-compliance regarding the offering of an opt-out should be reported to the Lending Code Standards Board or taken up through customer complaints procedures and ultimately the Financial Ombudsman Service. In part, the Government seeks to justify intervention on credit limit increases on the basis of ‘popular anger’. In terms of customer complaints to card lenders, unsolicited credit limit increases do not feature. Customer complaints (and media enquiries to The UK Cards Association press office) are predominantly about credit limit decreases. Indeed, there are 38 times as many complaints about unsolicited credit limit decreases as there are about unsolicited credit limit increases.


Financial Impact On The Industry The impact on industry income of removing unsolicited credit limit increases is potentially significant. The reduction in balances and spend ultimately causes a c0.5% drop in overall revenue amounting to £305 million in 2008-09 (an average of more than £5 per account (assuming 57 million accounts as at the end of 2008), with a larger impact in 2007-08 of £354 million (due to the greater prevalence of credit limit increase campaigns in that year). There is a marginal saving in bad debt losses due to reduced exposure, but no change in the probability of default. Impact on Industry Revenue, Cumulative % Income Lost

0.0

0.1

0.2

0.3

0.4

0.5

0.6

1 2 3 4 5 6 7 8 9 10 11 12

Month after regulation implementation

Impa

ct o

n re

venu

e, %

Aug 2007 - July 2008

Aug 2008 - July 2009

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. Summary of Financial Impact on Industry £m

2007-8

2008-09

UCLIs (total ban)

354

305

In the face of such reductions in revenue, credit card lenders would be faced with a number of choices (which are not necessarily mutually exclusive), including: absorbing some or all of the reduction in revenue recouping the revenue from cardholders by other means such as higher rates of

interest or annual fees


Further Comment on the Consultation Paper People With Bipolar Disorder Paragraph 4.9 of the consultation paper states that some consumers may be concerned about unsolicited credit limit increases because a fixed limit on their credit or store card would help protect them against reckless spending, and that this is particularly true for vulnerable customers such as people suffering from certain forms of mental illness such as bipolar disorder. The paragraph continues, saying that studies have linked such mental disorders with exuberant spending. Our qualitative research with focus groups also found concern about the impact of UCLIs on consumers less able to manage their money. How to improve money management by those with bipolar disorder is a large and complex topic that goes well beyond the question of UCLIs. To address the issues successfully would require major reforms of the totality of the financial services industry. Such reforms – and any specific proposals on UCLIs (or, for example, the issue of new credit cards) for those with bipolar disorder – would need to be framed within the context of the Disability Discrimination Act (DDA) 1996. The DDA obliges all providers of products and services not to discriminate against those with a disability. In the case of credit limit increases, lenders – whether through automated systems or decision made by individual members of staff – would need to make a judgment over the customer’s mental capability. The difficulty is in doing this in a legally compliant way when lenders are effectively prohibited from asking direct questions of customers as to their mental health, and from denying service on the basis of any information that they might have. This is complicated by the fact that mental health problems may not be permanent, or may be recurrent. Arguably it is the most obvious examples where a consumer displays mental health issues where it is easiest to fall foul of the DDA. Dealing with customers with mental health issues is a particularly serious and sensitive issue. Much good work has been done in this area which has resulted in the Money Advice Liaison Group’s Good Practice Awareness Guidelines For Consumers with Mental Health Problems and Debt 30. It is difficult to see how a one-size-fits-all constraint on the application of credit limit increases that would impact all cardholders might help. What can be said with certainty is that the risk-based approach that credit card lenders adopt to setting and increasing credit card limits, the “low and grow” approach”, offers the best prospects of ensuring that all those whose behaviour suggests that they should not receive credit limit increases do not, in fact, do so – regardless of whether their behaviour can be attributed to a mental disorder or illness such as bipolar disorder.

30 See http://www.moneyadvicetrust.org/images/Mental_Health_Guidelines_2009.pdf


Policy Options Consideration of the BIS policy options needs to be set against the following background information on consumer attitudes derived from our consumer research. In general, instinctive positive reactions to changes suggested by Government are modified and tempered once the potential implications for cardholders are outlined: When told that the Government was thinking of preventing credit card companies

from increasing credit limits without them asking for or accepting the change, 63% thought that this was a good idea. 35% thought that this was a bad idea

Among those who thought this change was a good idea, when asked how they would respond to such an offer, 55% thought they would respond probably by phone, 13% by letter and 21% by e-mail. 11% thought they would not respond (NB: Acceptance by phone potentially provides lenders with a significant issue depending on the sanction for a failure to comply. If a credit limit increase is granted orally but the customer later denies making the request the lender would need to be able to prove that the conversation had taken place. This would require 100% recording and storage of telephone contacts, something which is prohibitively expensive. To illustrate this further, it is for this reason that lenders are unlikely to accept telephone requests for credit card cheques under the new regulations, a point which was clearly made to Government)

When those who thought this change was a good idea were told that this could mean people who now get cards with a low credit limit could no longer get a new credit card when they wanted one, 38% changed their mind and no longer saw it as a good idea. 55% of those who had thought change was a good idea still thought that change was a good idea. Overall, taking into account those that changed their mind, this meant that overall only 35% still thought it was a good idea

When told that they, the respondent, might not be able to get a new credit card when they wanted one, the percentage who changed their mind increased to 43%. 52% still thought that it was a good idea. Overall, taking into account those who changed their mind, this meant that 33% still thought it was a good idea

When those who thought it was a good idea were told that this might mean that credit cards came with an annual fee in future, 69% changed their mind and no longer saw it as a good idea. 27% still thought that it was good idea. Overall, taking into account those who changed their mind, this meant that just 17% still thought that it was a good idea

When asked what they would do if they could choose their own credit limit31, 73% said that they would keep it the same; 5% that they would be inclined to choose a higher limit; and 21% that they would be inclined to choose a lower limit

31


(Those saying that they would keep it the same may be doing so because they think their current limit is about right but might, of course, expect their limit to keep up with inflation. Those saying that they would reduce their current limit may be doing so because they feel it is too high or that this is the response they think they ought to give to the question. It is, of course, an option open to all customers already to request a lower credit limit)

Paragraph 4.30 of the consultation paper suggests that consumers could be granted the right to set their own credit limit at the outset of an agreement, and that if they chose to receive unsolicited limit increases they could also choose their frequency. They could also, if desired, set a maximum amount beyond which their limit would never be raised. The above suggests that the majority of customers are, in fact, content with the limit that they have been granted and therefore would have no need to take up such options which would add considerable complexity.

When asked if they would ever decline a credit limit increase if they were offered

one, 57% said that they would not decline an increase. Of these, 87% said they just wouldn’t bother and 11% that they thought it might affect their credit rating. However, 41% thought they would sometimes decline an increase (although few customers in fact do so - current decline levels are very low)


Do Nothing The evidence from current practice and from our customer research shows clearly that the current system of UCLIs, the ‘low and grow’ strategy adopted by most card lenders, is fundamentally sound. It minimises the risks of customer default, is a cornerstone of competition within the industry, and has ensured the extension of credit to higher risk customers in a way that is economically viable for lenders and beneficial to those sub-prime groupings who would otherwise depend on other sources for their credit requirements (loan sharks and so on). The market in this instance is demonstrably delivering the best value for customers and new Government regulation would, at best, put this at serious risk. That said, the industry believes that there would be some benefit to the workings of the market – and so to both customers and the industry - from further improvements in the transparency of information to customers (Option 2 in the BIS consultation paper).


Improve Information Transparency With regard to BIS policy Option 2 – improving information transparency – the Statement of Principles proposed by industry to BIS in June 2009 were designed to give customers better information about increases applied to their account without undermining the industry’s ability to lend responsibly. The Statement of Principles on UCLIs proposed in June 2009 were as follows: STATEMENT OF PRINCIPLES ON UNSOLICITED CREDIT LIMIT INCREASES Purpose This ‘statement of principles’ relates specifically to unsolicited credit limit increases. This refers to a

situation where we decide that it’s appropriate to increase the credit limit on your account, as a service to you as a customer

The principles have been developed by the industry following discussions with the Department for Business, Enterprise and Regulatory Reform (BERR)

The principles build on strong existing best practice guidance and with a number of additional commitments designed to respond positively to:

- The difficulties faced by some consumers in the economic downturn; and - The need for customers to have control over their finances

Key Messages for customers A credit card issuer’s ability to actively manage credit limits is a key part of responsible lending,

helping to ensure that you are only provided with a level of credit that you can afford to repay Responsible lending does not start and end when you first apply for credit – we are committed to

such practices throughout the period that you hold a credit card account with us The Principles 1. Where we believe that it is appropriate to increase your credit limit, we want to ensure that

you have control over this change. To support this commitment, we will:

Provide you with a clear and transparent written notification of the change by means of a specific communication, so that you have an opportunity to consider the change

Give you the option to tell us that you do not wish to have the increased credit limit Give you the option to tell us that you would actually prefer the credit limit to be reduced Make it as convenient as possible for you to advise us of your preference

2. We will fully assess whether we feel you will be able to manage the higher credit limit, with

reference to all information available to us

3. We will not increase your credit limit more often than once every 6 months.

4. We will ensure that our staff are able to explain to you:

Why we have increased your credit limit; and The options available to you

In paragraph 4.19 of the consultation paper BIS express the view that these proposals do not go far enough.


Limit The Size And/Or Frequency Of Individual Limit increases With regard to BIS policy Option 3 – placing a limit on the size and/or frequency of credit limit increases – industry is extremely reluctant to implement a one-size-fits-all solution that imposes arbitrary measures, and which would be neither practical to implement nor, we believe, effective in achieving a desired outcome. The industry has already engaged with BIS over the course of 2009, with a number of lenders meeting with officials on a confidential one-to-one basis to explain their processes and how these are robust. Furthermore, the evidence commissioned for this consultation response supports the industry’s case that UCLI strategies are at the heart of a responsible approach to credit limit management. This underpins the industry’s determination to avoid solutions which undermine the strength and sophistication of existing practices and which provide no benefit to customers. Turning to a very specific example, in the highly specialised part of the credit card market for the highest-risk customers – often referred to as the non-prime – a customer will typically be offered no more than a £250 initial credit limit, with an aspiration from the lender (for their ‘good’ customers) that the limit will increase incrementally over time, perhaps as often as every four months, first to £500 (just £250 more – but a 100% increase) and then again to a typical limit of no more than £1,000. Given the limited borrowing available to its consumers and the limited number of transactions that can take place (that would attract interchange income for the card issuer), it is essential to the lenders’ business model in this segment of the market that good customers are progressed through to higher limits for the business to be in any way viable. It is widely accepted within the industry that it is not possible to profitably offer a credit card with a £250 credit limit. Imposing a limit, or opt-in requirement (which would reduce take-up), on this model represents a real threat to the long-term viability of this model (and those lenders who are serving customers through it), as setting higher limits at the outset for all customers would simply represent too high a risk to both lender and borrower. In such a highly specialised segment of the market, existing and future customers would find it difficult, if not impossible, to obtain credit cards elsewhere and are likely to be forced into borrowing through home credit, pawn shops or payday lending at higher cost or, in a worst case, the unregulated market (as well as losing other benefits of credit cards such as Section 75 protection). This has the potential to disenfranchise significant numbers of responsible customers on relatively low incomes. By comparison, a high street lender who offers an initial limit of £3,000 but seeks to increase a limit after twelve months to £4,000, is increasing a limit by £1,000 but this equates to only 33% and as such would not be as affected by an arbitrary control. We would also repeat the Argus evidence that the propensity to change a credit limit is influenced by the length of time the account has been open, in that: Lenders do not target credit limit increases towards new accounts, but rather wait

until they have sufficient experience of the customer to make an informed decision. This is evidenced by the majority of credit line increases being allocated towards mature accounts (>40% of limit increases are granted to accounts of 5 years maturity or longer)


Customers recruited in the lowest initial credit limit band, by virtue of being higher risk, receive fewer limit increases over the first two years. Those who do receive an increase in this cohort are lower risk – an assessment based on behavioural scoring – than those who are not offered an increase

Therefore, it is difficult to see what imposing a limit on the size and/or frequency of individual credit limit increases would achieve, or what problem would be solved. There is also some concern within the industry that agreeing to self-regulate on the amount of credit limit increases could be in breach of competition law.


Ban All Unsolicited Limit Increases (Increases Only To Be Given In Specific Consumer Request) With regard to BIS policy Option 4 – a ban on all unsolicited credit limit increases – given that we know that customer-initiated requests for credit limit increases are associated with greater risk, which the industry seeks to manage to the best of its ability, it would seem illogical to conclude that this would be the right outcome and in the interests of any stakeholder. Our consumer research strongly suggests that consumers would not initiate credit limit increases themselves were it to become a requirement. When asked if they would ever request a credit limit increase from their card issuer: 86% said that they would not only 13% said that they would do so This means that consumers’ collective spending power and use of credit will diminish over time. Given the high degree of customer inertia that would be assumed under such a model, lenders would have to assume the worst case that every customer would remain on the limit set at the outset of the agreement, i.e. that there would be only one chance to get it right, with all of the concerns around the limited availability of data described earlier in this chapter. Removing the capability of lenders to manage responsible UCLI strategies risks a polarisation of ‘front-end’ (underwriting) decisions by lenders in order to compensate for the reduced capability to appropriately manage the customer relationship over time as the lender gets to know more about the customer’s use of their credit card facility. The choice for the lender then becomes one of offering more credit ‘up-front’, or to not offering credit at all. o Higher initial credit limits

Brings a considerable increase in risk at the application stage and could subsequently lead to more widespread and aggressive credit limit decrease strategies, where accounts do not perform as expected (when approved at underwriting at a time when the lender knows least about the customer), with conflicting messages to customers resulting in very poor customer service. This is not to say that granting a higher limit is irresponsible, but that it represents a compromise compared to having the ability to reset a credit limit once a customer’s actual behaviour has been observed.

o Not offering credit at all

There are clearly severe risks that lenders may be forced into a situation where they simply do not offer credit to low income consumers. If this were to happen, hundreds of thousands, if not millions, of people could be forced into other types of – usually expensive – borrowing. For example, home credit, payday loans or the unregulated market.


Industry concerns are supported by the conclusions reached by Oxera as part of their economic impact analysis, where they conclude that:

“The most severe consequence of banning UCLI would be likely to be experienced by high-risk borrowers. As noted…by BIS, it is standard practice with high-risk borrowers to extend very low initial limits of credit and then increase them slowly over time to those borrowers exhibiting good behaviour. Since, in general, it is not profitable for issuers to have customers on low credit limits and it is too risky to grant larger limits initially, issuers would be reluctant to offer credit cards to high-risk borrowers at all if they were not able to choose which borrowers receive subsequent increases.”

“As far as Oxera is aware, no issuers have been able to extend credit to the near sub-prime and sub-prime segment by adopting any strategy other than ‘start low and grow’, for which UCLI is necessary. Banning UCLI may therefore result in (near) sub-prime consumers who do not currently have credit cards being unable to obtain them and being forced to use alternative (and often more expensive) forms of credit, such as home credit, loan sharks or pawn shops.”

“Existing (near) sub-prime cardholders would also be disadvantaged in that they would be unable to obtain new cards and thus be locked into their existing credit cards. Among other effects, this would reduce or eliminate their ability to opt out of any re-pricing and so reduce switching.”

“Removing the flexibility for issuers to increase the credit limit gives issuers an incentive to set higher limits at application. Issuers will have to assess the potential increase in write-offs as a result of higher limits at application (when less information is available than later on) and the potential increase in profits as a result of higher usage of credit. Although setting higher credit limits at application could be rational and profitable for issuers across their entire portfolio, it would not necessarily contribute to a policy of responsible lending. In other words, banning UCLI could make issuers move away from their responsible ‘start low and grow’ policies to higher credit limits at the point of application. The link between the level of credit limits at application and UCLI is also illustrated by anecdotal evidence from an issuer which historically did not offer UCLI to customers. When the issuer began to offer UCLI, the initial limits granted to applicants decreased.”

“A ban on UCLI may also affect the degree of competition in the market by having an impact on consumers’ ability to switch between providers. A new card provider that has less information about a cardholder than the existing provider would need to offer a lower initial limit. Without UCLI, the potential switcher would know that it would take repeated requests over months or years to reach the existing limit. This may deter the cardholder from seeking to switch in the first place.”

“Competition between mono-lines and banks may also be affected. By definition, mono-lines typically will not have any information about an applicant other than that which is available from credit reference agencies. They therefore rely on gaining information about customers through experience. Banks, by contrast, may already have additional information about the behaviour of an applicant since the applicant may hold other products. This gives banks an advantage over mono-liners in selecting an initial credit limit. This advantage would arguably become more important if the ability to grant UCLI were removed.”


“…BIS’s rationale for proposing additional restrictions on issuers’ ability to grant UCLI was based on a lack of consumer understanding and concern that UCLI may contribute to over-indebtedness. This section has presented evidence suggesting that most consumers have a reasonable understanding of UCLI and has also demonstrated limited support for the concern that there is any increase in indebtedness following UCLI.”

“While not applying to the majority or even a significant number of cardholders, there is likely to be a sub-set of cardholders who may not have the self-discipline to assess their ability to repay an increased level of spend when made available to them. For example, in the qualitative GfK survey, one cardholder indicated that she would always be tempted by increased credit availability, even though she knew it would be likely to increase her indebtedness. To the extent that this issue is relevant to a sub-set of cardholders, it would seem most desirable to address it in a way that does not remove the ability of card issuers to adjust credit limits for other consumers, particularly high-risk consumers whose access to credit relies on the ability of issuers to adjust limits.”

“It is possible that the opt-in mechanism proposed by BIS would fulfil this role of providing the option of a commitment device for some consumers while not jeopardising credit access for high-risk consumers. Arguably, this would focus in particular on cardholders with poor impulse control, but less so on those who are also affected by inertia. It is uncertain whether the opt-out mechanism would provide these desired benefits for one group while not imposing undesired costs on another. Thus, it would seem advisable to conduct additional research to assess the efficacy and costs and benefits of such an option before introducing it across the industry.”


Allow Customers To Opt In To Receiving Unsolicited Credit Limit Increases With regard to BIS policy Option 5 – allowing cardholders to opt in to receiving unsolicited credit limit increases – two scenarios are outlined: Customers opt-in to a limit increase programme at the outset of the agreement Customers have to opt-in to each limit increase in response to an offer from the

lender to increase the limit Oxera have concluded on the basis of our consumer research that cardholders do understand UCLIs but are not motivated to take credit limits into their own hands, most (73%) being satisfied with their current limit, and 86% saying that they would not request an increase. This would leave credit card lenders having to assume that consumers will not opt-in and adjust their behaviour accordingly. This option is therefore likely to have the same practical impacts on the credit card industry and on its customers Option 4, a total ban on unsolicited credit limit increases. Additionally such a change would introduce additional cost, bureaucracy and inconvenience for consumers who are largely familiar with the current model. Having been offered an increase, consumers may believe based on their previous experience that they automatically have that spending power without having accepted it and spend up to or over that new limit, possibly incurring default fees There is also some likelihood that not opting in to credit limit increases at the point of application would in itself become a risk indicator and could result in those not opting in as part of their application having their application declined. Paragraph 4.32 of the consultation paper rightly points out that consumers might be concerned about expressing a reluctance to accept credit limit increases at the application stage if they feared it could limit their chances of being approved. Were this option to be pursued, care would need to be taken in implementing an opt-in model, largely dependent upon the sanction for any failure to comply. Using the draft new credit card cheque regulations as an example, failure on the part of the lender to comply with the regulations is a criminal offence. Therefore the lender must have 100% reliable documentary evidence before sending cheques out. Whilst this can be achieved quite straightforwardly for mail and e-mail requests, this effectively precludes a positive response to any telephone requests unless the lender records and stores every single telephone conversation with all of their customers through their call centres – a prohibitively expensive compliance requirement. For many lenders this has rendered the credit card cheque regulations as effective as a total ban, which is not what we believe was intended (otherwise a full ban would have been implemented). If the same sanction were true for credit limit increases then an opt-in would / could effectively be tantamount to a ban.


Conclusions The consultation document sets out a number of options: 1. Do nothing beyond current legislative and regulatory activity 2. Improve information transparency on unsolicited limit increases 3. Limit the size and/or frequency of individual limit increases 4. Ban all unsolicited limit increases – increases only to be given in response to a

specific consumer request 5. Allow consumers to opt-in to receive unsolicited limit increases We believe that the evidence clearly supports the conclusion that current practice is a cornerstone of responsible lending, proven to deliver lower delinquency rates than alternative approaches and ensuring that customers have the flexibility and convenience which they want and expect. In particular, we believe that our evidence shows that: Unsolicited credit limit increase strategies are robust and do not have any

material impact on delinquency rates, actually showing lower rates than for customers who were not selected for an increase

Credit scoring is proven to be robust, working as intended The vast majority of customers understand the fact that the credit limit on their

account can change Customers are not in favour of the likely consequences should a change in

practice be enforced It is for that reason that we disagree with paragraph 4.19 of the consultation paper and believe that the principles already presented to BIS by the industry are sufficiently strong and represent important additional measures around customer convenience and control, without compromising the responsible lending practices of lenders – a win-win. Nevertheless, we have given consideration to how we might further strengthen the principles and propose the following additional commitments: Provide a customer with 30 days notice in advance of the change to the limit Provide clarity on the multiple channels by which the customer can opt-out Provide clarity that the customer can opt-out of an individual increase and/or

permanently Provide cardholders with a means to decrease their limit that does not require

personal interaction e.g. via on-line or an automated telephone service


Incorporate the three core exclusions as set out in the risk-based re-pricing statement of principles (as below) and also an additional specific exclusion around customers who make 6 consecutive minimum payments (on balances which are not subject to a promotional rate):

- Where a customer has failed to make the minimum contractual payment

requested on the last two or more consecutive monthly statements; or - Where an agreed repayment plan is in place in respect of the account; or - Where we have been formally notified by a not-for-profit debt advice agency

that the customer is in serious discussion with it Enshrine a commitment that customers find it simple to decline a higher limit As such, the revised principles read as follows: REVISED STATEMENT OF PRINCIPLES ON UNSOLICITED CREDIT LIMIT INCREASES – JANUARY 2010 Purpose This ‘statement of principles’ relates specifically to unsolicited credit limit increases. This refers to a

situation where we decide that it’s appropriate to increase the credit limit on your account, as a service to you as a customer.

The principles have been developed by the industry following discussions with the Department for

Business, Innovation and Skills (BIS) The principles build on strong existing best practice guidance and with a number of additional

commitments designed to respond positively to:

o The difficulties faced by some consumers in the economic downturn; and o The need for customers to have control over their finances

Key Messages for customers A credit card issuer’s ability to actively manage credit limits is a key part of responsible lending,

helping to ensure that you are only provided with a level of credit that you can afford to repay. Responsible lending does not start and end when you first apply for credit – we are committed to

such practices throughout the period that you hold a credit card account with us. The principles are underpinned by the common industry practice to consider raising credit limits

incrementally over time. Such a practice is at the heart of a responsible approach to credit limit management and is sometimes referred to as a “low & grow” approach.

This means that you may be granted a relatively low initial credit limit and, if the card is used

responsibly and the data available to us suggests that you would be able to manage a higher credit limit, it may be increased (in stages) as we learn more about your use of the credit card.

Not all customers will have their credit limit increased, because such decisions are only taken

where we are comfortable with the level of ‘risk’ associated with a customer. (continued on next page)


The Principles 1. Where we believe that it is appropriate to increase your credit limit, we want to ensure that you have some control over this change. We believe that it is important to make your options as transparent as possible and we will make it as convenient as possible for you to act upon your choices. To support this commitment:

a. We will provide you with a clear written notification of the change we’ve made to your credit limit

(by means of a specific communication), at least 30 days in advance of the change, so that you have an opportunity to consider whether you are comfortable with such a change

b. We will give you the option (in an industry standard format) to tell us that you do not wish to

accept this particular increase to your credit limit, or that you would actually prefer the credit limit to be reduced

c. We will also give you the option to tell us that you do not wish to be considered for any future credit

limit increases, until you advise us otherwise d. To enable you to act upon your choices quickly and conveniently, we will make it possible for you to

reduce your credit limit, with or without the need for personal interaction with us. The latter may include via websites or an automated telephone service

e. Where you do not have access to such means, or where you prefer not to use them, we will also

make it as convenient as possible for you to advise us of your preference in a number of other ways, such as by letter, e-mail and a customer service telephone number

f. Where you wish to decline or reduce your credit limit, we commit that our staff and processes will

make this as easy as possible for you 2. We will not increase your credit limit in the following circumstances: Where you have made 6 consecutive minimum payments (on non promotional balances) Where you have failed to make the minimum contractual payment requested on the last two or

more consecutive monthly statements; or Where an agreed repayment plan is in place in respect of your account; or Where we have been formally notified by a not-for-profit debt advice agency that you are in serious

discussion with it. 3. Before we decide that it is appropriate to increase your credit limit, we will fully assess whether we feel you will be able to manage the higher credit limit, with reference to all information available to us, which will include a comprehensive range of factors, such as information relating to: how you have managed the particular credit card account, including ‘behaviour scores’ and

measures around affordability/utilisation and your payment history (such as whether you often pay the minimum payment)

any other credit card accounts you may hold with us, or other types of relevant lending accounts you may hold with our group of companies (e.g. current account)

Information provided by credit reference agencies, including variations of risk/indebtedness scores/indices and debt/income ratios

information that you have provided to us 4. We will ensure that our staff are able to clearly explain to you why we have increased your credit limit and the options available to you.

Overall, with regard to the BIS policy options, we would urge Government to avoid the imposition of any replacement of the existing UCLI model unless there is strong and compelling evidence of consumer detriment, which industry strongly believes the evidence proves otherwise.


The implications of moving to some of the BIS proposals would be to introduce more risk into the customer relationship earlier in the process, or the denial of credit cards to a significant minority of mainly non-prime customers. This is not a sensible or desirable outcome. If the Government believes that there is an issue around high risk, high utilisation customers being granted credit limit increases, and shares the industry view that these are typically customer driven requests, then it needs to work with industry on a targeted and proportionate solution to address these customers, rather than a one-size-fits-all solution that penalises and/or inconveniences all responsible cardholders. Our challenge to Government is to demonstrate that moving from a model that has been shown to be at the heart of responsible lending, to alternative suggestions, would lead to more responsible lending or fewer indebtedness problems. Any solution proposed: must not compromise responsible lending practices, where this would result in

consumer detriment, including greater delinquency rates must not inject increased risk into the system; or must not risk the other inadvertent consequences that the evidence suggests

might happen Making a non-evidence based change would, in effect, be a live experiment on a mass scale with one of the fundamental features of credit cards that helps drive manage risk and drive competition and is one of the levers of the UK economy.


Proposal Summary Industry’s proposals for addressing Government’s concerns around ‘Unsolicited Credit Limit Increases’ are summarised as: Further strengthen the statement of principles approach originally discussed with BIS in the summer of 2009, with the following additional commitments: Provide a customer with 30 days notice in advance of the change to the limit Provide clarity on the multiple channels by which the customer can opt-out Provide clarity that the customer can opt-out of an individual increase and/or

permanently Provide cardholders with a means to decrease their limit that does not require

personal interaction e.g. via on-line or an automated telephone service Incorporate the three core exclusions as set out in the risk-based re-pricing

statement of principles (as below) and also an additional specific exclusion around customers who make 6 consecutive minimum payments (on non promotional balances):

- Where a customer has failed to make the minimum contractual payment

requested on the last two or more consecutive monthly statements; or - Where an agreed repayment plan is in place in respect of the account; or - Where we have been formally notified by a not-for-profit debt advice agency

that the customer is in serious discussion with it Enshrine a commitment that customers will find it simple to decline a higher limit


5. Minimum Payments


Minimum Payments Introduction The minimum payment is the contracted amount required by the credit card lender to be paid each month by a cardholder, usually expressed as a percentage of the outstanding monthly balance subject to a fixed minimum (e.g. £5.00), whichever is the greater. From the perspective of the credit card lender the minimum payment exists for the following reasons: To cover the ongoing costs of providing credit To avoid negative amortisation, i.e. where requested payments do not cover

interest charges and fees, as codified in the Lending Code To provide a mechanism for lenders to evaluate potential financial distress To maintain regular contact between the cardholder and the lender From the perspective of the customer, the existence of the minimum payment and the flexibility this offers them on an ongoing basis about the period over which credit will be re-paid, is one of the key features that distinguish the credit card product from other forms of credit such as a personal loan. Our research shows that customers value the flexibility of the option to pay a minimum payment, or more if they choose to do so, and the ability this gives them to manage their overall personal finances. The evidence suggests that around a quarter of cardholders take advantage of the flexibility to pay just the minimum at least once during the course of a year. Of those who make minimum payments, 56% say that this is all they can afford, 24% say they have more expensive forms of credit elsewhere, whilst 15% are exploiting to the full a promotional offer (for example, on a balance transfer). It is important to note that very few customers make the minimum payment every month in a twelve month period – just 3.1% in the twelve months to June 2009; and that making minimum payments is not associated with higher ongoing levels of over-indebtedness. Our research on accounts that made only the minimum payment in Q2 2008 shows that the debt they have a year later is no higher than those that make more than the minimum payment – across all risk bands. Our consumer research (depth interviews and group discussions) shows that cardholder awareness of minimum payments is high, with their statements confirming the option each month. Transactors (i.e. those customers who always pay their balance in full) and more sophisticated card users know that only ever making the minimum repayment is a poor way to re-pay a balance because of the long payment periods that result, though some minimum payers can be confused over what they mean. Respondents viewed minimum payments both as a potential ‘trap’ and also a god-send, offering people the opportunity to make low payments where they felt this was necessary for them personally.


According to data provided by 13 credit card lenders accounting for approximately 96% of the market to The UK Cards Association, there were around 300 complaints (from a total of 30.2 million credit card holders) regarding the level of the minimum payment between January and October 2009, accounting for 0.04% of the total complaints in that period. Overall, respondents believed that whilst there may be a profit motive among lenders, ultimately it is the consumer’s responsibility to be aware of such features and make their own decisions. Many respondents saw the minimum payment as being the price to be paid for maintaining an open-ended credit facility. The evidence suggests that the current minimum payment regime is not a cause for major concern among consumers. To make changes to the regime would reduce flexibility for customers who occasionally or often make minimum payments at present, such as: Those who say they can not afford higher payments would have to do so in future

(or risk moving into default) Those exploiting balance transfer offers to the full would cease to be able to do

so Those paying off higher interest loans from other sources would also cease to be

able to so as effectively Some of the changes set out as options in the consultation paper could have far-reaching consequences, also impacting on the behaviour of some of the 60% of cardholders who pay off their balance in full in each month, and those who often but not invariably pay off balances in full each month. The preliminary findings of an independent study into the psychology underlying consumers’ payment behaviours by Professor Neil Stewart of the University of Warwick suggests that those who currently pay off their balances in full could start to make lower payments instead if the minimum payment were set at a higher level as a result of an “anchoring” effect. The industry therefore believes that the way forward on minimum payments is to develop further communications from credit card lenders to their customers to ensure that all customers, and not just the vast majority, understand fully the impact that making only the minimum payment will have on repayment periods.


Recent Practice & Prevalence The Argus dataset developed for this project covers the period July 2007 to July 2009 so earlier data are not available Where data are shown but not sourced individually they are taken directly from the Argus Credit Card Dataset32. The breakdown of accounts is as follows:

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 543 236 573 1,407 1,582 4,341 4,491 3,684 13,969 30,82510 < 20 91 35 84 238 278 622 668 665 1,870 4,55220 < 30 83 31 75 183 203 453 435 377 1,016 2,85730 < 40 87 30 73 165 175 374 303 250 623 2,08140 < 50 98 35 77 163 161 328 241 183 412 1,698

50 < 60 118 39 83 170 159 306 203 149 284 1,51160 < 70 150 45 100 192 175 301 179 126 207 1,47670 < 80 221 64 144 247 201 320 172 108 164 1,64180 < 90 401 108 228 391 258 380 180 104 145 2,19790+ 2,661 395 603 821 507 621 242 119 141 6,109

Total 4,454 1,018 2,041 3,976 3,701 8,046 7,115 5,766 18,832 54,946


Total


32 http://argusinformation.com/services/ukccps.htm


Current Practice and Prevalence In recent years it has been fairly common for credit card lenders to reduce the level at which minimum payments are set across parts of their portfolio. The average required minimum payment for the UK industry is 3% of balances. Oxera comment that the recent decline to this level partially reflects declining credit card interest rates over this time. However, the required minimum payment differs by risk band. Whilst being relatively consistent for the low, medium and high risk accounts, the average required minimum payment for high risk accounts is closer to 5%. Average Minimum Payment Rate Required By Risk & Utilisation – Q2 2009

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 15.5 8.3 6.8 5.8 5.5 5.5 5.3 4.0 3.7 4.510 < 20 9.1 5.5 4.1 4.3 3.6 3.5 3.9 2.8 2.9 3.420 < 30 7.9 3.9 3.4 3.4 2.9 2.9 3.3 2.5 2.9 3.030 < 40 5.7 4.2 2.8 2.8 2.6 2.6 2.8 2.4 2.7 2.840 < 50 5.0 3.2 2.8 2.8 2.7 2.4 2.7 2.3 2.6 2.7

50 < 60 4.5 2.8 2.7 2.6 2.5 2.3 2.4 2.2 2.5 2.560 < 70 4.2 2.7 2.6 2.6 2.4 2.3 2.3 2.1 2.3 2.570 < 80 4.1 2.9 2.4 2.5 2.4 2.2 2.3 2.0 2.3 2.580 < 90 3.7 2.6 2.4 2.4 2.3 2.1 2.2 1.8 1.9 2.490+ 5.0 2.8 2.6 2.6 2.3 2.3 2.4 1.9 0.0 3.4

Total 4.9 2.8 2.6 2.7 2.5 2.4 2.8 2.4 2.7 3.0


Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset, numbers in %. NB: Figures in the lowest utilisation bands will in part be influenced by the impact of a fixed minimum monthly i.e. £5, £10 etc. The bottom right hand cell shows as 0.0% due to rounding and the relatively small number of accounts in this segment. In addition, Oxera have also found evidence that some lenders are now experimenting with increasing the minimum payment for new customers to reduce risk, partly as a response to the current economic circumstances.


Direct Debit Payment Most (if not all) credit card lenders offer cardholders the option to set up a Direct Debit to pay either the minimum payment each month (thereby requiring an additional, supplemental payment if the cardholder wishes to pay off more) or the full balance on the due date. According to credit card lenders’ returns to The UK Cards Association33 around 15% of accounts make payments by Direct Debit. Just over three quarters of these Direct Debit payments, or 4.5 million each month, are for the minimum amount. We believe that most cardholders who set up a Direct Debit to make the minimum payment do so in order to ensure that they do not incur a late or missed payment charge. In such cases the cardholder would need to make an additional, supplemental payment to pay off any more of their balance.

33 Data provided by 13 credit card issuers accounting for 96% of the market


Existing Protections The Lending Code Minimum payments have been the subject of external scrutiny for a number of years, particularly since the Treasury Select Committee hearings in 2003 and 2004. As such certain protections and information requirements already exist relating to (i) the level at which they should be set and (ii) health warnings on statements, as follows: The Lending Code & Minimum Payments Credit Card Repayments Subscribers should ensure that the minimum monthly repayment covers more than that month’s interest. This means that the minimum repayment will cover that month’s interest and a proportion of the balance outstanding from the previous month. The principle should be that the minimum repayment on a credit card should reduce month by month if there have been no further transactions on the card and the lower minimum payment threshold of the card has not been reached, assuming all other conditions of the product remain unchanged. The term ‘transactions’ includes any fees, charges or PPI premiums incurred on the card. The minimum payment amount on the account should be clearly shown. This amount should normally be sufficient to avoid negative amortisation over a period of 12 months (i.e. the sum of 12 minimum payments would exceed the sum of additional interest added to the account over the same 12 month period). It is acceptable for the minimum payment amount to be calculated as a percentage of the balance carried forward, so long as the percentage would normally prevent negative amortisation. Other methods for calculating the minimum payment are also acceptable, provided this principle can be demonstrated. Subscribers may offer payment holidays and should clearly explain the terms and that customers can reject the holiday by continuing payment. Where a payment holiday is provided the minimum repayment afterwards should be sufficient to avoid negative amortisation over a period of 12 months from the start of the holiday. Credit Card Statements The Code also requires an estimate of the amount of interest payable next month if the consumer makes only the minimum payment, and reads as follows: The front of each credit card statement should show a cash figure indicative of the amount of

interest which would be payable by the customer if they paid the minimum amount and it reached the subscriber on the last day for payment.

Health Warning Also, since October 2004, an APACS (now The UK Cards Association) guideline has obliged all credit card statements to include a minimum payment health warning about the risk of only making minimum payments to appear close to the minimum payment figure on a credit card statement that reads: “If you only make the minimum payment each month, it will take you longer and cost you more to

clear your balance”. This guideline was incorporated in to the Code in March 2005.


Furthermore credit card companies also agreed that additional information should be included within pre- and post-contract information – in line with the Code – to highlight that the minimum payment amount does not constitute a recommended payment schedule. In the consultation paper BIS have also observed that “some issuers have chosen to go beyond the basic industry position, with several including a scenario showing the relative costs of only making the minimum repayment compared with making a small monthly payment (in excess of the minimum).”


The US CARD Act The US CARD Act makes provision for certain disclosures around minimum payments to be incorporated into the Truth In Lending Act (but stops short of regulating for a required level of minimum payments) regarding information to be included on credit card statements, as follows: A. A written statement in the following form: ‘Minimum Payment Warning: Making only the minimum

payment will increase the amount of interest you pay and the time it takes to repay your balance.’, or such similar statement as is established by the Board pursuant to consumer testing.

B. Repayment information that would apply to the outstanding balance of the consumer under the

credit plan, including:

I. the number of months (rounded to the nearest month) that it would take to pay the entire amount of that balance, if the consumer pays only the required minimum monthly payments and if no further advances are made;

II. the total cost to the consumer, including interest and principal payments, of paying that balance in full, if the consumer pays only the required minimum monthly payments and if no further advances are made;

III. the monthly payment amount that would be required for the consumer to eliminate the outstanding balance in 36 months, if no further advances are made, and the total cost to the consumer, including interest and principal payments, of paying that balance in full if the consumer pays the balance over 36 months


Cardholder Behaviour The UK Cards Association tracks cardholder payment behaviour through the annual Consumer Payments Survey (CPS). In terms of trends over recent years the following behaviours have been observed: Credit Card Repayment Behaviours 2003- 200834

% 2003 2004 2005 2006 2007 2008

Full 54.0 55.3 55.3 58.0 55.4 60.3 Partial 10.5 10.4 11.0 10.1 11.1 8.6 Revolvers 23.1 24.3 22.8 21.0 22.9 18.7 Minimum 12.5 10.1 10.9 10.9 10.6 12.4

Definitions: Full payers always repay the full balance on all of their cards Partial payers occasionally do not repay the full balance on at least one of their cards Revolvers pay more than the minimum payment but less than the full payment on at least one of

their cards Minimum payers pay only the minimum payment on at least one of their cards (this could include

those borrowing on an introductory 0% interest rate) Source: Consumer Payments Survey 2003-2009 Our consumer research gives similar results that are broadly consistent: Among all credit card holders, 69% of respondents reported that they paid off the

full balance each month on all of their cards. A further 18% said that they sometimes had a balance on at least one of their cards; 4% that they often had a balance, and 8% that they always had a balance on at least one card

30% of consumers who have an outstanding balance say that they hold a card or

cards where they just make the minimum payment every month 57% of cardholders who make the minimum payment know the minimum

payment percentage on their card in percentage (%) terms (for many it will be the sterling amount that is important; they may know this rather than the percentage). Of these 7% know it to be 1%; 9% know it to be 2%; 8% know it to be 3%; 3% know it to be 4%; 12% know it to be 5%; and 18% know it to be more than 5%35

However, whilst this provides a useful overview, this data does not tell the full story of how consumers choose to use the payment flexibility offered by credit cards, which suggests a more sophisticated and complex approach to minimum payments.

34 The CPS question is asked as follows for each different credit/charge card held: When making repayments on your card account do you:

Always pay-off the full amount monthly Usually pay off the full amount monthly but occasionally carry some over Pay off some of the amount monthly but usually carry some over Usually pay only the minimum amount monthly Someone else is responsible for paying off the card

35 NB: the sample size for these data is relatively small and therefore needs to be treated with caution


Making the minimum payment is not necessarily a sign of financial distress and can in fact be perfectly rational behaviour, though a customer’s ability to pay the minimum can be an important signalling mechanism for a lender to help evaluate potential financial difficulties. Between July 2008 and June 2009, 27% of accounts made at least one minimum payment during the twelve months (compared to 25% the previous year). It is possible that this increase suggests that affordability is playing an increasing role in customer motivation and therefore that increasing the minimum would increase delinquency. Looking specifically at Q2 2009, the proportion of accounts making at least one minimum payment during the quarter was 20.9%, broken down as follows: Proportion of Accounts Making At Least One Minimum Payment During the Quarter By Risk & Utilisation – Q2 2009

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 20.9 18.9 19.0 23.6 16.6 15.7 10.3 7.3 7.2 10.110 < 20 19.6 20.0 26.3 28.0 18.3 16.0 9.9 7.2 6.2 10.720 < 30 21.9 24.9 31.9 33.3 23.2 20.4 14.5 10.9 8.5 15.330 < 40 22.6 27.0 36.7 37.8 27.8 23.3 17.9 14.0 10.6 19.540 < 50 24.0 32.4 39.5 39.5 30.0 26.3 21.5 16.8 13.2 23.5

50 < 60 24.3 32.8 40.8 40.7 32.2 27.0 22.3 18.7 15.9 26.160 < 70 26.0 34.5 43.4 41.6 36.2 27.7 23.8 21.0 19.5 29.470 < 80 26.9 36.8 49.3 46.2 36.8 28.5 26.6 22.8 23.2 33.280 < 90 29.0 40.0 47.5 51.9 35.7 30.4 28.9 25.8 28.3 36.690+ 28.1 43.7 45.4 47.0 41.1 34.8 33.1 32.6 0.0 36.9

Total 27.2 38.0 41.7 40.8 29.6 23.6 16.4 11.6 9.4 20.9


Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset, numbers in %. In general, lower risk customers make higher payments and higher risk consumers are more likely to make the minimum payment. In other words, the percentage of accounts making a minimum payment during the quarter increases by risk, with the exception of the two highest risk bands where the percentage falls - possibly because more accounts in these segments are on repayment programmes. Accounts with high utilisation levels are also more likely to make the minimum payment. A proportion of those in the medium and low risk segments are likely to be balance transfer customers for whom making the minimum payment is an entirely rational behaviour. The percentage of accounts making at least one minimum payment during Q2 2009 is reasonably consistent regardless of the length of time an account has been open, at around 20%-25%. The one exception to this is among long-standing accounts (open for more than 60 months), where fewer accounts (18%) are paying the minimum.


Frequency of Making A Minimum Payment Within this, most accounts making a minimum payment during the course of the year did so on just a single occasion. This demonstrates that customers value the flexibility provided for credit card payments and that they use the option to pay the minimum, when it suits them, i.e. they take control. Higher risk accounts are more likely to have made a minimum payment in the last year. For those making at least one minimum payment in the year to June 2009, the average number of minimum payments in the year was as follows. Minimum Payments – Average Number and Proportion of Accounts – Year to June 2009 Average number of minimum

payments Proportion making at least one

minimum payment Highest risk 2.40 49.7 High risk 2.92 49.5 Medium risk 2.04 35.3 Low risk 0.75 18.3

Accounts with a balance transfer were more likely to only pay the minimum across all risk bands, though the difference was more pronounced in the lower-risk segments. It is often stated that cardholders can take many, many years to clear their balance if they were only to ever make the minimum payment. Indeed, this is one of BIS’s claims in the consultation paper (paragraph 3.4). This is a purely theoretical, mathematical outcome that bears no relation to the evidence of how consumers actually behave36. Indeed, very few people consistently make the minimum payment even over twelve months – just 3.1% in the year ending June 2009, a figure which falls to just 1.3% over 24 months (to July 2009). It is therefore highly unlikely that anyone would ever attempt to pay off their balance over such extreme timescales. Therefore, we do not think this is a valid argument. It has often been said that consumers making the minimum payments in the long term (with no good reason, i.e. they are not benefiting from a promotional rate), can be evidence that they are in, or approaching, financial distress. This fact is not lost on the industry and credit card lenders will use a broad range of data to identify the early signs of customers getting into difficulties, one component of which may be habitually paying the minimum payment.

36 Paragraph 3.32 contains illustrative examples on minimum payment scenarios. This same example is used in the accompanying economic impact assessment using the same assumptions but delivering very different results.


Reasons Consumers Make the Minimum Payment The reasons why consumers choose to make the minimum payment has been explored in our consumer research. Our findings show that of those who make the minimum payment: 56% say that they make the minimum payment because the minimum is all that

they can afford A further 24% say that they make the minimum payment because they have more

expensive debt elsewhere (in which case it is a perfectly rational behaviour) 15% say that they are on a promotional rate (again, rational behaviour) These three groups total 94% of minimum payers There is an underlying assumption that making the minimum payment could be an indicator of financial distress. To address this, from the end of 2008, credit card lenders began sharing additional information on their customers’ management of their credit card account, including whether they pay only the minimum payment. The project became known as the behavioural data sharing (BDS) project and the additional data enhances the information previously shared through the credit reference agencies, including the balance, credit limit and payment history. The full impact of this innovation has yet to be fully realised, but it represents a significant advance in risk management. Although this data is now widely shared, it is common for the impact of new data such as this to take some time to be realised as lenders learn how to interpret and use the new information. This data sharing initiative has yet to be allowed sufficient time to truly bed-in. Where customers are showing signs of financial distress – a conclusion that a lender will come to using the full range of data available to them, not just information on minimum payments – all lenders will usually intervene in some way. This can often be a delicate conversation depending on the severity of the situation and the customer’s willingness to recognise and accept that they may have a problem. Hence the nature of that intervention would depend on the individual customer’s circumstances reflecting the probability of the best outcomes for both lender and borrower.


Financial Impact on Consumers - Impact on Outstanding Balances Across all risk bands those accounts that consistently made a minimum payment in Q2 2009 had higher balances than accounts that paid above the minimum at least once, with the average balance amongst repeat minimum payers being reasonably consistent across the risk bands. However, making the minimum payment does not lead to significant balance growth – accounts that only made the minimum payment in Q2 2008 showed comparable or higher balance attrition (i.e. reducing the debt) compared to accounts that paid greater than the minimum by Q2 2009 across all risk bands. In general, the charge-off rates for the next 12 months were higher for accounts that only made the minimum payment in Q2 2008 (i.e. for three consecutive months) than for those accounts that paid above the minimum at least once during the quarter.


Impact of Increasing the Minimum The potential impact on consumers of increasing the minimum payment percentage is potentially significant, with many consumers having to find a sizeable extra amount each month in order to continue to meet their contractual obligations. As such there is a strong possibility that increasing the minimum payment across the industry will exacerbate the risk of getting into financial difficulties for a significant number of cardholders. Our consumer research shows that: 39% of those who make the minimum payment say that they would still be able to

make the minimum payment if it were to double. 29% say they might find it difficult to make the new minimum and a further 22% would definitely find it difficult, a total of 51%. 10% say that they already find it difficult to make the minimum payment

Using the Argus database, it is possible to calculate how many cardholders would be affected by an increase in the minimum payment and to quantify how much more, on average, they would have to pay each month. Four scenarios have been modelled, based upon: Increasing the minimum payment to 3% Increasing the minimum payment to 4% Increasing the minimum payment to 5% Increasing the minimum payment to cover fees and charges plus 1% of the

outstanding balance


If the Minimum Payment Were Set at 3% If the minimum payment across the industry were set at 3%, 29.9% of accounts across the industry would be affected in some way. Those accounts paying less than 3% (though this need not be the minimum payment) are more likely to be in the higher risk, higher utilisation segments, though the larger pound impact would be experienced in the lower risk segments (because more of these accounts are currently paying the fixed minimum of £5 or £10). Percentage of Accounts Paying Below 3% By Risk & Utilisation – Q2 2009

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 4.3 3.8 5.5 9.8 5.0 4.3 2.5 1.5 1.5 2.610 < 20 17.3 17.7 24.1 25.0 18.3 17.5 11.3 8.5 6.9 11.320 < 30 25.6 29.3 35.7 35.4 29.5 29.2 22.3 17.8 12.4 21.030 < 40 32.5 34.6 43.0 43.8 38.8 37.2 31.2 25.4 18.0 29.640 < 50 40.0 43.3 48.9 47.8 43.8 43.0 38.1 32.6 24.2 37.1

50 < 60 45.9 47.4 52.7 51.3 48.9 47.0 42.2 38.5 31.0 43.260 < 70 51.7 50.9 56.9 55.0 54.0 50.6 47.4 44.5 39.3 49.570 < 80 56.5 53.9 63.0 60.3 56.2 54.4 53.1 49.7 48.5 55.480 < 90 59.4 57.0 63.9 63.2 59.0 60.1 58.7 60.9 60.3 60.790+ 67.7 65.2 64.9 64.8 67.3 67.9 65.8 70.6 72.3 66.8

Total 59.1 53.6 54.3 49.2 40.9 35.3 23.8 16.4 10.6 29.9


Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. On average, the typical cardholder would have to find an extra £42.89 each month to meet the increased minimum payment, up to a maximum (on average) of £100.93 in some of the lowest risk, highest utilisation segments, as per the following table: Monthly Additional Payment Needed to Achieve a 3% Minimum Payments for Those Currently Paying Less By Risk & Utilisation – Q2 2009

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 8.97 4.57 3.63 3.26 3.83 3.65 3.46 4.12 6.30 4.4710 < 20 14.09 8.54 8.34 7.70 8.89 9.24 8.52 10.84 13.13 10.1820 < 30 19.12 15.13 14.32 13.05 14.64 15.80 14.66 19.31 21.98 16.9330 < 40 22.38 20.42 20.96 18.21 20.80 23.66 22.14 28.77 31.96 24.3140 < 50 28.20 24.48 25.15 22.33 25.46 29.45 28.35 38.13 42.24 30.45

50 < 60 32.48 29.94 29.30 27.44 29.85 35.16 34.75 48.18 52.98 36.4760 < 70 37.51 32.51 32.34 30.49 32.12 42.61 41.21 56.23 62.23 41.2370 < 80 44.78 33.35 33.64 31.02 34.96 48.44 46.19 66.43 68.93 44.1780 < 90 48.41 35.54 35.39 31.98 42.84 57.85 54.55 85.03 84.57 49.2890+ 61.63 40.57 42.24 40.79 54.92 65.70 66.67 100.72 100.93 57.17

Total 55.97 36.78 35.81 31.40 37.97 43.45 38.19 53.12 48.81 42.89


Total



If the Minimum Payment Were Set at 4% If the minimum payment across the industry were set at 4%, 36.0% of accounts would be affected in some way. The pattern of customers currently paying less than 4% is consistent with the 3% analysis. Percentage of Accounts Paying Below 4% By Risk & Utilisation – Q2 2009

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 5.9 5.5 7.4 12.8 6.8 5.8 3.5 2.3 2.1 3.510 < 20 22.4 23.3 29.6 31.3 23.5 22.7 14.7 11.4 8.8 14.620 < 30 33.4 36.0 43.5 44.3 37.0 36.3 28.7 23.2 15.3 26.530 < 40 41.5 43.5 51.7 54.2 48.2 45.8 38.9 32.4 22.0 36.740 < 50 50.3 53.0 57.9 59.0 53.6 52.6 47.0 40.7 29.0 45.5

50 < 60 56.5 57.7 62.2 63.4 58.9 57.6 52.1 47.0 36.8 52.660 < 70 62.1 62.2 67.5 67.6 65.8 61.8 57.5 53.0 45.9 59.770 < 80 66.7 64.9 72.9 72.9 69.4 65.5 63.4 58.5 56.1 66.280 < 90 69.7 68.9 75.3 77.6 73.0 71.1 68.6 69.3 67.5 72.190+ 77.8 77.0 77.8 79.5 79.1 78.7 76.1 79.2 79.5 78.3

Total 68.8 64.1 64.6 60.5 49.7 42.7 29.0 20.1 12.7 36.0


Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. On average, the typical cardholder would have to find an extra £71.14 each month to meet the increased minimum payment, up to a maximum (on average) of £158.25 in some of the lowest risk, highest utilisation segments. However, there is an increasing impact among higher risk and utilisation customers, where the extra amount starts to approach an average of £100, and the impact also starts to spread into lower utilisation and lower risk segments, as per the following table. Monthly Additional Payment Needed to Achieve a 4% Minimum Payments for Those Currently Paying Less By Risk & Utilisation – Q2 2009

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 11.62 7.39 7.05 9.84 7.40 7.27 6.72 7.44 9.91 7.9810 < 20 20.22 15.58 16.65 16.24 17.27 17.71 16.61 18.93 21.97 18.5720 < 30 27.77 27.04 27.90 26.79 28.32 29.74 28.13 32.72 36.42 30.6030 < 40 33.95 35.56 39.20 36.87 39.51 43.15 42.27 47.87 52.02 43.3640 < 50 42.53 42.31 47.13 44.92 48.40 53.12 53.53 62.49 68.14 53.84

50 < 60 49.40 51.41 55.32 53.78 57.32 62.61 64.29 77.89 84.40 63.8560 < 70 56.99 55.91 60.06 59.73 61.67 73.67 75.04 91.32 99.27 71.6470 < 80 67.25 58.69 63.70 62.56 65.35 82.89 82.91 106.62 109.42 76.6080 < 90 72.36 62.27 65.70 63.89 74.98 95.37 95.06 131.02 131.76 82.7990+ 91.88 72.36 74.78 75.13 94.19 110.37 114.12 156.85 158.25 93.05

Total 83.13 64.92 64.89 60.10 67.08 73.18 66.69 81.26 74.98 71.14


Total



If the Minimum Payment Were Set at 5% If the minimum payment across the industry were set at 5%, 39.7% of accounts would be affected in some way. More than 50% of accounts greater than 60% utilised would be impacted across all risk segments, with a value of 5% causing additional payments for 85.1% of accounts in the highest utilisation band. Percentage of Accounts Paying Below 5% By Risk & Utilisation – Q2 2009

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 7.2 6.9 8.9 14.4 8.2 7.1 4.4 2.9 2.6 4.310 < 20 26.4 27.2 33.4 34.8 27.1 26.6 17.7 13.8 10.3 17.120 < 30 39.3 41.4 48.7 49.2 42.3 41.4 33.4 27.0 17.7 30.430 < 40 47.7 50.5 57.3 59.4 53.7 51.1 44.3 37.3 25.0 41.440 < 50 57.1 59.9 63.8 64.4 59.2 58.0 53.1 46.3 32.9 50.7

50 < 60 63.4 64.5 67.4 68.9 64.6 63.2 58.6 52.7 40.7 58.060 < 70 68.0 68.1 72.9 73.0 71.4 67.9 64.2 59.4 50.1 65.470 < 80 72.5 71.9 77.9 78.0 75.4 72.0 69.6 64.5 60.4 71.980 < 90 76.4 76.1 81.4 83.0 79.4 77.5 75.2 74.4 71.5 78.290+ 84.9 84.7 85.2 86.3 85.8 85.0 83.8 84.1 83.1 85.1

Total 75.3 71.0 70.5 65.6 54.6 47.2 32.8 22.7 14.3 39.7


Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. On average, the typical cardholder would have to find an extra £99.65 each month to meet the increased minimum payment, up to a maximum average of £218.27 in the lowest risk, highest utilisation segments. However, even the highest risk, highest utilisation customers are seeing average increases in excess of £100, as per the following table. Monthly Additional Payment Needed to Achieve a 5% Minimum Payments for Those Currently Paying Less By Risk & Utilisation – Q2 2009

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 14.39 9.92 10.23 10.38 10.68 10.55 9.72 10.57 13.10 11.2210 < 20 26.44 22.68 24.67 24.85 25.48 25.97 24.02 26.81 30.67 26.7420 < 30 36.66 38.14 41.00 40.73 41.65 43.39 41.33 46.53 50.58 44.1430 < 40 45.91 49.49 57.22 56.24 58.68 62.93 62.05 67.34 71.80 62.5940 < 50 57.36 59.62 68.57 68.29 71.64 77.68 78.29 87.23 93.29 77.51

50 < 60 66.77 72.51 81.66 81.65 84.98 91.48 93.51 108.08 116.82 92.0760 < 70 77.85 80.42 88.65 90.83 92.63 106.14 108.22 125.23 137.22 103.1970 < 80 90.91 83.73 94.41 95.88 97.76 118.17 119.98 147.12 152.32 110.4380 < 90 96.65 88.99 96.49 98.03 109.64 133.82 135.00 178.79 181.16 117.7990+ 122.01 103.23 107.67 111.46 134.09 155.46 159.03 214.81 218.27 129.46

Total 110.39 92.33 94.21 90.28 96.85 103.08 93.90 109.07 100.47 99.65


Total



If the Minimum Payment Were Set to Cover Interest and Fees plus 1% of the Balance If the minimum payment across the industry were set to cover interest and fees plus 1% of the balance, 19.3% of accounts would be affected in some way. Percentage of Accounts Paying Below Interest and Fees plus 1% of the Balance By Risk & Utilisation – Q2 2009

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 5.0 5.3 5.1 3.8 4.0 3.6 2.1 1.2 1.1 1.910 < 20 13.2 13.6 13.3 9.5 10.6 9.9 6.0 4.3 3.3 5.920 < 30 19.5 21.9 18.3 15.5 16.6 16.5 12.0 9.8 6.3 11.330 < 40 22.1 24.6 21.3 19.1 21.5 21.0 16.1 14.5 9.6 16.040 < 50 25.7 30.7 25.3 20.3 24.5 23.8 19.6 19.1 13.5 20.1

50 < 60 26.3 30.8 25.6 22.7 26.1 26.3 22.0 23.1 17.3 23.260 < 70 27.2 29.6 23.9 22.7 25.4 28.6 24.3 26.6 22.5 25.470 < 80 29.7 30.3 22.0 22.7 26.7 31.8 26.3 31.8 27.6 27.580 < 90 37.2 35.0 26.6 25.0 33.5 37.7 31.7 41.5 36.6 33.090+ 60.1 55.1 51.3 46.2 54.0 55.6 52.4 58.1 53.5 54.7

Total 48.0 41.1 33.1 25.9 25.8 23.0 13.9 10.6 6.1 19.3


Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. On average, the typical cardholder would have to find an extra £29.56 each month to meet the increased minimum payment, up to a maximum average of £57.24 in the lowest risk, highest utilisation segments. The maximum average among the highest risk, highest utilisation, customers is just below £40 per month. Monthly Additional Payment Needed to Achieve Interest and Fees plus 1% of the balance minimum Payments for Those Currently Paying Less By Risk & Utilisation – Q2 2009

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 9.98 8.87 8.46 6.99 5.99 6.68 6.92 7.52 8.46 7.4310 < 20 10.06 8.26 7.99 6.87 7.06 7.07 6.77 7.91 10.67 8.1120 < 30 12.18 12.56 12.12 10.74 10.42 11.26 10.10 12.39 15.29 11.9830 < 40 14.61 16.40 16.19 14.21 14.52 16.65 15.55 18.11 20.83 16.8340 < 50 18.37 17.74 19.08 17.04 17.60 20.63 19.77 23.89 26.79 20.89

50 < 60 20.59 21.85 22.93 21.12 22.10 24.72 24.41 30.08 32.82 25.2560 < 70 21.08 24.13 24.02 22.88 24.85 27.95 28.47 34.18 38.25 28.0770 < 80 22.51 23.55 24.88 23.99 26.13 31.46 33.46 40.14 41.68 30.0980 < 90 22.82 23.04 24.17 23.48 27.73 34.74 36.39 45.54 46.77 30.6890+ 38.98 28.76 29.25 29.04 34.34 41.00 43.45 57.33 57.24 36.89

Total 35.34 26.30 26.22 24.49 26.40 29.23 27.34 33.43 31.17 29.56


Total



Overall Number of Accounts Impacted by a Change to the Minimum Payment Amount During A Year Whilst the above tables look at the number of accounts impacted during each quarter, these figures will ignore other accounts impacted that made a minimum payment during the course of the year but in one or more of the other quarters. The overall number of distinct accounts impacted by each minimum payment scenario is summarised below: Number of Accounts Impacted in Different Minimum Payment Scenarios Minimum Payment Scenario

Number of Distinct Accounts Impacted

2007-2008*

2008-2009**

3%

30,451,207

26,031,569

4%

32,074,387

27,445,780

5%

32,971,593

28,257,670

Fees+interest+1%

27,010,156

22,878,598

* = August 2007 to July 2008 ** = August 2008 to July 2009 Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset


Balance Transfer Customers Accounts with balance transfers were more likely to pay only the minimum payment across all risk bands, albeit that the difference was more pronounced in the low-risk groups. In addition, if minimum payment amounts were to be increased those customers making the minimum payment because they are benefiting from a promotional rate would end up paying off their balances sooner, thereby reducing the financial benefit to them of having the promotional rate. This effect has not been quantified.


Financial Impact on Industry Accounts that consistently make minimum payments are more likely to charge-off than those accounts that pay off more than the minimum amount. The percentage of accounts that consistently make the minimum payment increases with risk. The potential impact on industry of regulating the minimum payment level is potentially the most significant of the four policy issues addressed in the consultation paper. Financial Impact on Industry on Increasing the Minimum Payment Minimum payment

£m - 2007-08

£m - 2008-09

Minimum payment of 3%

508

578


933

1016


1391

1492

Fees & charges +1%

311

343

The financial impact on the industry revenue increases by roughly £400-£450 million with each 1% increase in minimum payment required. The impact on industry would decrease significantly if the minimum payment setting was to be fees and interest charged in the cycle plus 1% of balances. The forecasted impact would have been higher in 2008 to 2009 due to more customers making payments below the minimum payment scenario levels during this period than 2007 to 2008. In addition, there would be significant one-off systems costs for moving to a ‘fees and interest charged plus 1% of balance’ scenario. These have not been costed.


Further Comments on the Consultation Paper In paragraph 3.6 BIS assert that a significant minority of consumers make only the minimum payment even after a 0% period has ended and therefore continue to pay off debt very slowly and at a high cost (though no evidence is presented to support this assertion). It is a simplification to suggest that because someone comes to the end of a promotional period that they can automatically afford to pay off more of their balance than before. There may be any number of good reasons why a consumer might continue to pay the minimum, such as it being all they can afford or that they are repaying more expensive debt elsewhere first. In paragraph 3.7 it is stated that recent reductions in the level of minimum payments leave customers paying back their balance over much longer periods than a few years ago. As stated previously, very few cardholders consistently make the minimum payment even over twelve months – just 3.1% in the year ending June 2009, a figure which falls to just 1.3% over 24 months. Therefore, we do not think this is a valid argument. Paragraph 3.11 states a Government objective that consumers are encouraged to make higher payments where they can so that credit and store card debts are repaid over a reasonable period. The important words here are “where they can” and “reasonable”, though it is industry’s view that the consumer is best placed to make these judgements through their knowledge of their own individual financial circumstances.


Policy Options The consumer research shows that there are no serious issues that changes to the current minimum payments regime would address. In particular, it is our firm belief that an increase in the minimum payment would not reduce financial difficulty but would rather exacerbate it. Although some customers that pay the minimum are likely to be in financial difficulty, the level of the minimum payment is unlikely to have contributed in any significant way to their over-indebtedness, which will have been the result of other factors. The causes of over-indebtedness are well documented in previous work commissioned by BIS. The credit card industry therefore believes that the way forward on minimum payments is to improve further the information provided to its customers, particularly to make sure that the 3% of customers who make minimum payments over an extended period (as well as the 97% that do not) all do really understand the impact this will have on their repayment period.


Setting a Recommended Minimum Payment We believe that BIS Option 3, the setting of a recommended minimum payment (in addition to the contractual minimum payment), would simply be confusing for consumers and be unworkable. One of the Government’s main objectives seems to be ensuring that consumers pay off their credit card debt (without regard for, and in isolation of, any other commitments) over what it regards as a reasonable timetable (36 months is mentioned in paragraph 3.23 of the consultation paper). This is rather than allowing consumers to make that choice dependent upon their wider circumstances, bearing in mind any debts they may hold elsewhere or other spending priorities. Our detailed concerns regarding this option are as follows: Consumers will simply be confused as to the difference between what would

become known as the Government’s recommended payment amount and the contractual minimum; why there should be two figures; and what the implications would be of paying either. Such a figure would potentially be irrelevant to habitual full payers but could also lure them away from full payment towards payment of the Government’s recommended amount

Consumers are already at significant risk of information overload. Introducing

another piece of (unnecessary) information and an accompanying explanation will simply contribute to and potentially exacerbate this problem

There is no evidence of any consumer demand for this information or how

consumers might react As Oxera sums it up, drawing upon the work of Professor Neil Stewart:

“Introducing some form of ‘recommended minimum’ payment could cause some cardholders currently paying amounts in excess of the recommendation to pay less. This potential ‘anchoring effect’ is recognised by BIS, along with the complexity of communicating the mechanics of the scheme to consumers”.


Increase the Minimum Payments BIS Option 4 is to increase the minimum payment, and suggests an alternative (in paragraph 3.30) of basing the level of the minimum payment on a maximum period over which the debt can be repaid. This would be a variable amount depending on the spend each month. This would effectively be the equivalent of turning a credit card into a form of personal loan with a payment mechanism, diminishing one of the key differentiating characteristics of credit cards i.e. their flexibility, that we believe consumers value. In paragraph 3.36 it is suggested that an increase in minimum payment might be limited to a defined subset of consumers who may be particularly affected by repaying the minimum each month, such as “those that hold small amounts of debt on higher cost credit cards” (though it is not discussed how “small amounts of debt” or “higher cost credit cards” might be identified). The following paragraph rightly points out the difficulties in identifying such groups of customers (including those who might drift in or drift out of the group) and any discrimination issues. More importantly, it is our view that this would likely create competition issues for those lenders whose cards and customers are caught by such definitions and those that are not. Industry believes that the evidence shows that the financial impact on a large number of consumers creates a significant risk that many will be tipped from a situation where they are managing their accounts within their means into deeper financial difficulties or indeed tipped into default. Given the magnitude of even the average increase in payment that would be required, it is difficult to see how even a staggered change would mitigate the impact for a large number of consumers rather than simply delay it. Furthermore, for consumers rationally paying the minimum, raising the minimum marginally would reduce the financial flexibility of the card and reduce the longer-term benefit of any promotional offer they were exploiting. As Oxera conclude:

“Increasing the required minimum payment may actually exacerbate financial difficulties for some cardholders, as recognised by BIS. Approximately 30% of cardholders in March and June 2009 paid less than 3% of their balances and so would be affected by an increase in the minimum payment to this level. As would be expected, high-risk and high-utilisation accounts are the greatest affected”.

“The survey evidence is consistent in showing that for those consumers who make minimum payments, an increase in the required rate of repayment would lead to difficulty. When asked whether the consumer would still be able to make minimum payments if the rate were doubled, 39% replied in the affirmative, but 10% said that they already incur difficulties in meeting the minimum payment, and a further 51% identified that they either ‘might’ or ‘would definitely’ find it difficult to meet the increased minimum repayment. While these figures are likely inflated by the economic downturn, they do suggest that there would be a significant number of people who would potentially be negatively affected.”


Regulating the Minimum Payment for New Accounts One option would be to set a statutory minimum payment for new accounts. However, we do not believe that this would be in consumers’ interests for the following reasons: It would reduce the flexibility of payment associated with credit cards that

cardholders value In effect, minimum payers would be prevented from taking up promotional offers

at lower rates if they could not afford the higher minimum i.e. the ‘payment shock’ still has an impact in this scenario

It would reduce the longer term benefits of switching as consumers would be

obliged to pay off their promotional balances at a faster rate The financial implications for the industry would still be so significant that, if the

cost could not be absorbed, the result would be to place upward pressure on interest rates and for the introduction of annual fees

In addition, it is apparent that regulating for a higher minimum payment would not just impact upon those making minimum payments, but on any cardholder who is not habitually paying in full. Preliminary findings from Professor Neil Stewart37 suggest that:

“Analysis of monthly statements from 126,000 cardholders reveals that higher minimum payments are associated with smaller repayments. Experimental evidence from a hypothetical repayment task supports a causal link between minimum payment and smaller repayments. Thus we caution against untested rises in minimum payment or the introduction of information about alternative repayment schedules to credit card statements”.

Industry believes that it would be a precipitate action to regulate against lenders’ ability to set minimum payment levels or, in a worst case, for increased minimum payments until the implications of Professor Stewart’s work is fully understood.

37 It is important to understand that Professor Stewart’s work is entirely independent of the industry. The industry has not funded or influenced Professor Stewart’s work in any way other than to provide him with raw data across a range of credit card issuers’ portfolios so that his work can be based upon the best possible empirical evidence.


Conclusions The consultation document sets out a number of options, which are set out below: 1. Do nothing beyond current legislative and regulatory activity 2. Improve information transparency 3. Set a recommended minimum payment 4. Increase the minimum payment The industry believes that the answer lies in Option 2, in that measures aimed at improving transparency around the impact of making minimum payments are the optimal solution, picking up on suggestions made by BIS and going further. Oxera specifically comment that

“It may be that improving information transparency would make more consumers aware of the detrimental impact of making repeated minimum payments, as well as potentially countering the ‘anchoring effect’ mentioned above. However, the provision of additional information would need to be done sensitively, since some studies have found that more information does not always lead consumers to make better decisions (i.e. consumers may be confused due to perceived information overload). This would require consumer testing and a clear analysis of the costs and benefits to the consumers.”


Proposal Summary The industry’s proposals for addressing Government’s concerns around ‘Minimum Payments’ are: Credit card lenders separately contact habitual minimum payers (definition to be

agreed, but to include those that are paying the minimum with no obvious good reason e.g. that they are benefiting from a promotional rate) every 6 months to remind them of the implications of their behaviour

That Government and industry review Professor Neil Stewart’s research in due

course to fully assess the implications of the findings. Indeed, one of Professor Stewart’s recommendations is that, before any changes to regulations are introduced, they should be empirically tested with pilot studies. This is because of the fact that changing minimum repayment levels affects all card holders, not simply those who make minimum repayments

Industry believes that these proposals address one of BIS’s central concerns – that there is a group of cardholders who could pay more than the minimum (and thus by definition are not in financial distress) but choose not to do so and therefore incur ‘unnecessary’ cost, by giving cardholders additional information to help them reach their own conclusion. We do not believe that it is advisable to go beyond the above measures aimed at improving transparency for the following reasons: The financial impact on consumers, particularly those who are currently

managing their debt carefully, making either the minimum payment or something close to the minimum payment, many of whom would be tipped into financial difficulties or delinquency

The financial impact on the industry would be the most dramatic of the four policy

issues and, if it could not be absorbed, would inevitably need to be passed on to consumers in some form

The setting of a statutory higher minimum repayment on new accounts removes

some of the flexibility of credit cards which we believe consumers value and could drive customers away from credit cards to other forms of credit, such as overdrafts, where there is no minimum payment; which do not offer Section 75 type protections; and which are only offered by retail banks, potentially making the mono-lines uncompetitive

The need to see and understand the ongoing work of Professor Stewart on the

psychology of payments within particular reference to the anchoring effects of showing a minimum payment on statements


6. Re-Pricing of Debt


Re-Pricing of Existing Debt Introduction The practice of risk-based pricing of credit card debt is one of the fundamentals governing the way credit cards work. The setting of an interest rate at the point of application is imperfect, based either mainly on external credit reference agency information (particularly for mono-line credit card lenders) or in combination with current account or other product information (particularly for high street banks). Re-pricing is required at some point, particularly if the risk profile of the cardholder changes. At the time of opening an account, a credit card lender will assess a customer’s individual likelihood of repaying and offer both a credit limit and interest rate tailored to their particular needs and ability to repay38. Over time, as the lender observes how a customer manages their credit card facility, the risk profile of the customer may change and interest rates may be adjusted in line with a changing risk profile. Risk-based pricing is familiar from other parts of the financial services industry. For example, in the case of motor insurance, different customer profiles attract different levels of risk with newly qualified young male drivers generally attracting higher premiums. So, over the period that a card is held, a credit card customer may experience a series of different life events during the period that they hold a credit card, such as moving from an extended period of higher education through to getting married and/or starting a family, where they may be taking on a wider range of borrowing. There may also be periods of significant income fluctuations through employment changes, where their use of credit could become more erratic and hence more ‘risky’. During these periods a credit card customer might also exhibit behaviour within the terms of their agreement that they might not regard as significant, for example using more of their credit limit; or making a number of minimum repayments, or they may belong to a group which may be more prone to become unemployed in the prevailing economic environment. Any of these may suggest to the lender that they have become more likely to default. This increased risk of default may lead to the upward re-pricing of a customer segment as a whole just as, in the case of motor insurance, a segment of customers (such as young male drivers) may find that premiums change if the behaviour of just some members of that group changes. Finally, in relation to portfolio pricing, if the lender’s funding (or other substantive) costs rise, it may pass on some or all of those increased costs to customers through increasing the interest rate for some or all of its portfolio of card products (and vice versa if costs fall), though this won’t be the only factor in pricing or re-pricing of risk.

38 Subject to the APR Advertising Regulations and the 66% rule


Risk-based pricing is the most efficient and effective form of pricing reflecting the costs to the lender of providing credit to cardholders. It reduces cross-subsidisation and encourages lenders to serve all segments of the population. Risk-based pricing also encourages the efficient use of the credit facility by customers. In theory, customers whose credit costs increase as a result of a deterioration in their risk profile spend less. As with the determination of a suitable credit limit, lenders base portfolio re-pricing decisions on credit and behavioural scoring models; they are not arbitrary decisions. Decisions are based on highly sophisticated models, developed by statisticians with considerable expertise and where such models must take account of a complex set of variables in order to reach a position around changes which may be necessary for issues to make for certain customers, along with the scale of such changes. Our consumer research shows that there is a high level of consumer awareness, both actual knowledge and/or intuitive understanding, that interest rates on credit cards might change during the lifetime of an agreement. When told that for most credit cards, the interest rate might change during the

time they had the card, 66% of all credit card holders (including those that had not been re-priced) said that they knew this already, with a further 23% saying that they did not know this but that it didn’t surprise them, a total of 89%. Just 11% of all credit card holders said that they did not know this and that it surprised them

Respondents felt that it is a core issue for credit card companies and that companies have the right to set the level, letting the market decide whether that rate is ‘fair’, and that the right to re-price is ‘part of the deal’ when taking out a credit card. However, there was also a strong desire for contract stability, and the notion of substantive notice and giving a ‘reasonable’ alternative was a strong theme. Whilst people felt that stability of contract would be ideal, current practice was largely accepted. So favoured policy solutions focused on good communications and alternative options for a customer who did not want to accept the price rise, with the existing opt-out seen as a positive. According to data provided by 13 credit card lenders accounting for approximately 96% of the market to The UK Cards Association, there were around 11,100 complaints (from a total of 30.2 million cardholders regarding risk-based re-pricing decisions between January and October 2009, accounting for 1.32% of the total complaints in that period. To make changes to current practice over and above improved communications and alternative options would have serious implications for all customers when risk is initially priced. In many cases (particularly for mono-line39 card issuers), only limited data is available at the point of the original application. Credit card lenders would need to exercise additional caution in pricing for all customers if risk-based pricing were to become a one-off exercise which, once done, could not be undone. This would mean interest rates would be generally higher to compensate.

39 Mono-line credit card issuers are those which issue only credit cards but do not offer a full banking service. They may also, occasionally, offer a limited range of other products, but rarely a current account.


The Government’s consultation paper recognises the case for risk-based re-pricing for new debts incurred by existing cardholders. However, Option 5 would prohibit the re-pricing of any existing debt and essentially gives a lender in a risk-based business only one chance to set a price for the life of a balance in a world where change is the norm and where they do not have perfect information to make the initial decision. But any change in the risk profile of a customer equally applies to all parts of an existing balance, the ‘old’ as much as the ‘new’. The inability to re-price such debt would have far-reaching consequences for the credit card industry and for all its customers. It could be expected to lead to increased caution in pricing of risk and so to higher costs for customers. It would also lead to extensive cross-subsidy between customers.


Overview of Recent Activity and Trends The UK Cards Association has previously collated statistics around re-pricing activity for 2008 which were reported verbally to the BIS Consumer Finance Forum in May 2009. This showed that 14 lenders had reported on their risk-based re-pricing activity in 2008. Of these, 3 had not done any re-pricing, whereas 11 had. 8 had provided detailed figures which, in aggregate, showed that 2.9 million accounts had been re-priced of which 1.8m (63%) had been re-priced upwards and the remainder, 1.1 million accounts (37%), re-priced down. Eleven credit card lenders subsequently reported on activity during the first four months of 2009, i.e. after the new Statement of Principles had come into effect at the beginning of the year. Three had not done any re-pricing, whereas 8 had, totalling 4.1 million accounts. Of these, data was available in respect of 3.1 million accounts, of which 1.4 million (45%) had been re-priced upwards and 1.7 million re-priced down (55%). At that time, ‘opt-out’ rates (i.e. to pay down the outstanding balance at the existing rate) ranged across credit card lenders from below 1% to 8%. Opt-out was being communicated via a mixture of letters and statement messaging. Consumers not taking up the option were thought to be not doing so for a variety of reasons, such as their perception of their ability (or not) to get (cheaper) credit elsewhere; to maintain their wider relationship with the lender; or taking up a different option such as simply stopping using the card and taking their balance to another lender (something that would be invisible to the original lender) etc. As part of the response to this consultation, credit card lenders40 have been asked to report on activity (covering the period January–October 2009). This shows that, over the course of the year, 10.6 million accounts were assessed for a re-price (i.e. almost 2% of accounts each month). Of these, 6.4 million (61%) were re-priced upwards, with the remaining 4.2 million (39%) seeing a reduction. In terms of the ‘opt-out’, the numbers over the broader January–October period are similar to the previously reported numbers (January-April), now ranging for different lenders from below 1% to a figure of almost 5%. (NB: these figures have changed compared to the data shared with the Government’s Consumer Finance Forum (CFF) in May 2009. It should be noted that re-pricing activity is particularly volatile. For example, one credit card lender undertook a significant downward (one-off) pricing exercise in February 2009, whilst a number of others suspended re-pricing activity in the early part of the year ahead of becoming compliant with the new principles agreed at the Credit Card Summit. It would appear that other lenders have undertaken similar activity from time to time during the course of the year).

40 Based on returns from 13 credit card issuers accounting for 96% of the market


In terms of consumers’ awareness of the opt-out option the findings of our consumer research are highly encouraging for something introduced comparatively recently: When told that when a credit card provider increases a customer’s interest rate

they must provide him or her with options, one of which is to close the account and repay the remaining balance at the existing rate of interest, 45% of all credit card holders said that they knew this already and a further 37% that they did not know this but were not surprised, a total of 82%. 18% said they did not know this and were surprised.

Our consumer research also sought to explore how consumers that had received a price increase had responded, including whether or not they had taken the opt-out option. Although a slightly higher number reported taking up the opt-out than has been reported by lenders, over half had taken some form of action in response to a rate increase. 47% of those who had had their interest rate increased did nothing in response.

16% stopped using the card and 9% complained to the credit card company. 11% took out or started using a different card. Interestingly, 6% reported that they agreed with the credit card company to pay off the existing balance at the existing rate and stop using the card i.e. as per the principles agreed following the credit card summit (but bearing in mind that the principles have only been in operation for eleven months when the question was asked, and the question asked about interest rate changes over the last two years)

While use of the opt-out is relatively small, it is still a new part of the landscape. Our research suggests that customers respond in a reasoned way to a risk-based re-pricing, considering what option (opt-out, ceasing to use the card, starting to use a different card) best suits their circumstances. Many clearly believe that continuing to use their existing card, on the basis of the revised risk pricing, represents their best way forward. This may, for example, reflect the value they place on other aspects of the card such as the credit limit, a rewards programme or other ancillary benefits. We therefore conclude that the consumer response to the principles and the options they now have is positive and encouraging. Ultimately it is down to the customer to judge what is best for them given their individual circumstances. However, what industry can demonstrate is a determination to continue to strive to ensure that the availability of the opt-out is clearly positioned and that it is well understood by customers. This is why additional improvements to explaining risk-based re-pricing and the options available to cardholders form part of the industry’s proposed consultation response in this area.


Existing Protections The Credit Card Summit – November 2008 The Government called a Credit Card Summit to address a number of issues where it had concerns. The Summit took place on 26 November 2008 and ultimately focussed on two main issues: Breathing Space The industry attendees at the Summit responded to calls for customers who are actively engaging in discussion with a Debt Advice Agency to be given a period of time to agree appropriate repayment arrangements. Timely implementation was essential and a series of meetings between The UK Cards Association’s members and a number of Debt Advice Agencies led to agreement around a set of definitions to underpin the broad commitment statement, creating clarity and ensuring that there was a level playing field for all stakeholders. Subsequently, attention also turned to the need to construct a similar process for consumers going through an assisted self-help route and this was also quickly delivered through dialogue with the advice sector. Whilst ‘breathing space’ is not specifically covered within the consultation it is, nonetheless, related to the broader Consumer White Paper. This provides an excellent example of the credit card industry responding positively to the needs of its customers in the economic downturn, working in collaboration with a range of stakeholders and delivering a timely solution. This experience demonstrates the strength of self-regulation over statutory intervention in delivering results quickly and effectively and would not be possible to achieve if requirements were put on a statutory basis. Risk-Based Re-Pricing Ministers were concerned that they were hearing of individual cases where interest rates had been raised significantly, in some cases being described as ‘almost doubling overnight’. They called for action to stamp out the worst examples and to present additional options and information for customers faced with a price increase. The industry rose to the challenge set for it by government, developing a set of principles around risk-based re-pricing. From the industry’s perspective, these principles included a number of significant commitments, addressing the series of concerns raised, including injecting some frequency restrictions on re-pricing decisions into the process and agreeing a set of circumstances where prices would not be increased where a customer was experiencing some difficulties in meeting their repayments. Providing commitments of this kind was seen as a strong positive in our qualitative research.


(It is interesting to contrast this with the position adopted in the US CARD Act, whereby one of the exemptions to a ban on the re-pricing of an outstanding balance on an account is where the account is at least 60 days in arrears, i.e. the concept is one of arrears being a justified reason to re-price, as opposed to being a reason to exclude such customers from such activity. Furthermore, this is also thought to reflect greater prevalence of re-pricing in the US and the practice known as ‘universal default’ i.e. that the price on an account can be influenced by missed payment on an account held somewhere else. This is not a feature of the UK market). Furthermore, responding positively to the call for customers to have an option where they do not wish to continue to operate the credit card at the new higher interest rate, the ‘opt-out’ was created, allowing a customer to exercise a choice that would be offered by all lenders to close the account and pay down the remaining balance over a reasonable period. Given that this self-regulation prohibits the re-pricing of customers in financial distress the likelihood of re-pricing contributing to over-indebtedness is reduced.


The ‘Statement of Principles’ agreed following the Credit Card Summit is set out below: Statement of Principles on Risk-Based Re-Pricing – December 2008 Following the Credit Card Summit in November 2008 the industry agreed a new set of principles to cover the circumstances, alternative options, frequency and transparency of an interest rate increase. The statement of principles read as follows: Where we increase a customer’s interest rate, we will provide him/her with options. These will

always include the option to close the account and repay the remaining balance at the existing rate of interest, within a reasonable period, having regard to the existing level of minimum payments and the customer’s financial situation. Where we offer alternative lending products, we may also provide the option to transfer the balance to such a product at the existing (or lower) interest rate.

We will not increase interest rates in the following circumstances:

o Where a customer has failed to make the minimum contractual payment requested on the last two or more consecutive monthly statements; or

o Where an agreed repayment plan is in place in respect of the account; or

o Where we have been formally notified by a not-for-profit debt advice agency that the customer is in serious discussion with it.

Provided a customer manages his/her account in accordance with the product’s terms and conditions we will not:

o Increase interest rates within the first twelve months of a customer having a credit/store card;

o Increase interest rates more often than six monthly beyond this period.

We will always give a customer at least 30 days notice of an increase in interest rates, so that the customer can make other arrangements, should they so wish.

If the customer asks, we will ensure that our staff are able to provide the customer with an explanation as to why an interest rate may have been increased.

Looking at the breadth of credit regulation in recent years, few initiatives have been given sufficient time to bed-in before results can be expected. However, our early evaluation of this particular initiative suggests that it is already meeting a consumer expectation and working for those consumers that, in particular, wish to take up the opt-out option. Consequently, we believe that improving the communication of the principles will serve to make them even more effective than they already are.


The Lending Code In addition to reinforcing the industry’s commitment to the Statement of Principles and improving consumers’ awareness and understanding, the Principles have already been incorporated into the Lending Code, which came into force in November 2009. In addition to establishing the Principles within the Code, other content sets out the further protections afforded to consumers around pricing matters, such as how consumers can find out further information on credit card interest rates and specific information on credit card promotional periods, as follows: Lending Code & Re-Pricing / Changes to Interest Rates Interest rates Subscribers should make current credit card interest rates available to customers via one or more of the following: • a telephone helpline; • a website; • notices in branches; or • by asking staff. Subscribers should inform customers about changes to the interest rates on their credit card in compliance with the relevant regulatory requirement applying to the subscriber’s credit card terms. Credit card promotional period If a credit card has an introductory promotional rate the expiry date of the introductory promotional offer should be shown on the front of the statement or in a separate, prominent personal notification to the customer. This should be given between four and eight weeks before the offer expires. It is acceptable to exceed the four or eight week period if the best way to provide information about the expiry of an introductory promotional rate is by a message in, or with, a monthly statement. This requirement does not apply where the customer is in breach of the terms and conditions of the account and the subscriber is concerned that giving the customer warning that the promotional period is about to end may result in abuse of the card, or where the account is not being used and the customer is not receiving a monthly statement. The Lending Code, the Lending Code Standards Board, and lenders’ robust complaints procedures ensure maximum consumer protection and transparency around what is expected of credit card lenders when dealing with their customers.


The US CARD Act The US CARD Act makes the following provisions in respect of re-pricing which cover the notice period of a price change and a ban on the re-pricing of an existing debt (subject to specific exemptions). ADVANCE NOTICE OF INCREASE IN INTEREST RATE REQUIRED.—In the case of any credit card account under an open end consumer credit plan, a creditor shall provide a written notice of an increase in an annual percentage rate (except in the case of an increase described in paragraph (1), (2), or (3) of section 171(b)) not later than 45 days prior to the effective date of the increase. IN GENERAL.—In the case of any credit card account under an open end consumer credit plan, no creditor may increase any annual percentage rate, fee, or finance charge applicable to any outstanding balance, except as permitted under subsection (b).

(b) EXCEPTIONS —The prohibition shall not apply to— (1) an increase in an annual percentage rate upon the expiration of a specified period of time, provided that—

(A) prior to commencement of that period, the creditor disclosed to the consumer, in a clear and conspicuous manner, the length of the period and the annual percentage rate that would apply after expiration of the period; (B) the increased annual percentage rate does not exceed the rate disclosed pursuant to subparagraph (A); and (C) the increased annual percentage rate is not applied to transactions that occurred prior to commencement of the period;

(2) an increase in a variable annual percentage rate in accordance with a credit card agreement that provides for changes in the rate according to operation of an index that is not under the control of the creditor and is available to the general public; (3) an increase due to the completion of a workout or temporary hardship arrangement by the obligor or the failure of the obligor to comply with the terms of a workout or temporary hardship arrangement, provided that—

(A) the annual percentage rate, fee, or finance charge applicable to a category of transactions following any such increase does not exceed the rate, fee, or finance charge that applied to that category of transactions prior to commencement of the arrangement; and (B) the creditor has provided the obligor, prior to the commencement of such arrangement, with clear and conspicuous disclosure of the terms of the arrangement (including any increases due to such completion or failure);

OR (4) an increase due solely to the fact that a minimum payment by the obligor has not been received by the creditor within 60 days after the due date for such payment, provided that the creditor shall—

(A) include, together with the notice of such increase required under section 127(i), a clear and conspicuous written statement of the reason for the increase and that the increase will terminate not later than 6 months after the date on which it is imposed, if the creditor receives the required minimum payments on time from the obligor during that period; and (B) terminate such increase not later than 6 months after the date on which it is imposed, if the creditor receives the required minimum payments on time during that period.


Current Prevalence The Argus dataset developed for this project covers the period July 2007 to July 2009 so earlier data are not available. Given this limited historical perspective it is therefore difficult to determine the extent to which these recent changes reflect changes in the overall financial services market rather than being particular to the credit card market. Data relates to all re-pricing decisions rather than just risk-based re-pricing. It is not possible to identify the underlying reason for a re-price from the Argus database. Where data are shown, but not sourced individually, they are taken directly from the Argus Credit Card Dataset41. The breakdown of accounts is as follows:

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 543 236 573 1,407 1,582 4,341 4,491 3,684 13,969 30,82510 < 20 91 35 84 238 278 622 668 665 1,870 4,55220 < 30 83 31 75 183 203 453 435 377 1,016 2,85730 < 40 87 30 73 165 175 374 303 250 623 2,08140 < 50 98 35 77 163 161 328 241 183 412 1,698

50 < 60 118 39 83 170 159 306 203 149 284 1,51160 < 70 150 45 100 192 175 301 179 126 207 1,47670 < 80 221 64 144 247 201 320 172 108 164 1,64180 < 90 401 108 228 391 258 380 180 104 145 2,19790+ 2,661 395 603 821 507 621 242 119 141 6,109

Total 4,454 1,018 2,041 3,976 3,701 8,046 7,115 5,766 18,832 54,946


Total


41 http://www.argusinformation.com/services/ukccps.htm


Number of Accounts with a Price Increase The percentage of accounts receiving a price increase fell at the start of 2009 and has since settled at around 1% of accounts per month, accounting for around 2% of balances. We suspect that this represents a much lower volume of accounts than many stakeholders might have assumed and shows that price changes are clearly targeted only at accounts where the change is seen to be justified and therefore necessary. Looking at Q2 2009, the table below shows that the percentage of accounts re-priced upwards varies across risk bands: Proportion of Accounts With an APR Increase By Risk and Original Retail APR – Q2 2009

Hi - 1 2 3 4 5 6 7 8 Low - 9

7.5 - 9.99 10.6 7.2 5.1 2.6 2.0 2.7 1.5 1.9 2.2 2.410 - 13.99 6.5 4.9 3.8 2.0 1.1 1.1 0.5 4.0 0.7 1.614 - 17.99 3.5 4.6 2.4 1.9 1.7 1.7 0.8 4.5 0.8 1.718 - 21.99 2.9 3.6 2.3 1.7 2.1 1.9 1.0 2.3 0.7 1.422 - 25.99 4.0 5.5 3.6 3.5 2.7 1.9 0.5 1.1 0.6 2.126 - 29.99 1.6 2.0 1.8 1.4 1.4 1.7 0.5 0.9 0.5 1.430+ 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.8 0.1

Total 2.9 3.9 2.5 2.0 1.8 1.7 0.8 3.2 0.8 1.6

Risk bandRetail APR, %

Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset According to our consumer research: 23% of credit card holders reported that they had had the interest rate on at least

one of their credit cards increased during the last two years. 11% regarded this at the time as fairly or very positive, 54% regarded it as fairly or very negative, with 35% regarding it neutrally


Types of Accounts Re-Priced Upwards The segments with proportionally higher numbers of price increases are high risk / high utilisation customers. This is in line with what one would expect to see as these will generally be risk-based decisions. Higher utilised customers (in each risk segment) show a significantly higher unit and charge-off rate than those with lower utilisation levels, where re-pricing aims to mitigate this risk. The following table also suggests that in addition to high risk, high utilisation customers, there were significant numbers of price increases in Q2 2009 applied to relatively low risk, low utilisation customers. This is, in part, due to the fact that the majority of credit card accounts are in this group. The evidence shows that higher risk accounts are proportionately more likely to receive an increase and that the increase is also likely to be higher. Distribution of Accounts Given a Price Increase Q2 2009 (%)

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 0.7 0.3 0.5 1.0 1.1 2.7 1.5 10.7 6.0 24.410 < 20 0.2 0.1 0.1 0.4 0.5 1.1 0.8 4.0 2.3 9.520 < 30 0.2 0.1 0.2 0.4 0.4 0.9 0.6 1.9 1.6 6.230 < 40 0.2 0.1 0.2 0.5 0.4 1.1 0.5 1.1 1.2 5.340 < 50 0.2 0.1 0.2 0.5 0.4 0.9 0.5 0.7 1.0 4.5

50 < 60 0.3 0.2 0.3 0.5 0.5 1.0 0.5 0.5 0.8 4.560 < 70 0.4 0.3 0.3 0.6 0.5 1.0 0.4 0.4 0.8 4.870 < 80 0.6 0.2 0.5 0.8 0.6 1.3 0.4 0.4 0.8 5.680 < 90 1.1 0.5 0.8 1.2 0.9 1.6 0.5 0.5 0.7 7.990+ 9.3 2.6 2.8 3.4 2.3 3.7 1.0 0.9 1.4 27.2

Total 13.1 4.5 6.0 9.3 7.5 15.4 6.6 21.0 16.6 100.0


Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. Though a higher percentage of increases are conducted on low utilisation accounts, the percentage of accounts receiving an increase by utilisation band increases as the utilisation level grows. In other words, accounts with a higher balance are more likely to receive an increase as credit card lenders’ price according to utilisation. Fewer lower risk accounts than the average are re-priced upwards, whilst more higher risk accounts than the average are re-priced upwards. In terms of the proportion of accounts by risk and utilisation that received a price increase in Q2 2009, the following table shows that 1.4% of accounts received a price increase in Q2 2009 (compared to 1.2% of accounts receiving a price decrease) with the likelihood of a price increasing by both risk and utilisation. The incidence of re-pricing among the ‘highest risk’ band (1) is slightly below the ‘high risk’ band (2). This is likely to be a consequence of the fact that some of these accounts may be on repayment programmes. More of the accounts in this category are likely to be delinquent than the norm, which, under the agreed Principles, means that they cannot be re-priced.


Further, lenders tend not to re-price the very highest risk customers because affordability checks are likely to reveal that these customers are more likely to default if the cost were greater (because they would have to pay a higher amount). This would clearly not be in the interest of the borrower or the lender. Proportion of Accounts Given a Price Increase by Segment – Q2 2009 (%)

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 0.9 1.0 0.7 0.5 0.6 0.5 0.3 2.2 0.3 0.610 < 20 1.4 1.9 1.2 1.4 1.3 1.4 0.9 4.7 0.9 1.620 < 30 1.6 2.5 1.9 1.5 1.4 1.6 1.1 3.9 1.2 1.730 < 40 1.6 2.4 2.2 2.1 1.9 2.2 1.4 3.4 1.5 2.040 < 50 1.8 3.2 2.5 2.2 1.8 2.2 1.5 2.9 1.9 2.1

50 < 60 2.0 3.6 3.1 2.3 2.3 2.5 1.8 2.4 2.3 2.360 < 70 2.0 4.4 2.7 2.6 2.3 2.7 1.8 2.5 2.8 2.570 < 80 2.2 3.0 2.8 2.6 2.2 3.0 1.7 2.8 3.6 2.680 < 90 2.1 3.6 2.7 2.4 2.6 3.3 2.2 3.5 3.9 2.890+ 2.7 5.2 3.5 3.2 3.5 4.6 3.1 5.5 7.4 3.4

Total 2.3 3.4 2.3 1.8 1.6 1.5 0.7 2.8 0.7 1.4


Total


In the main, higher risk and/or higher use, accounts are re-priced upwards. This is not surprising in that good status, higher utilised accounts are more likely to go into arrears in the following year than lower-utilised accounts. This reinforces the rationale behind risk-based pricing and demonstrates the effectiveness of credit scoring. This information is also usefully expressed in terms of the number of accounts that were re-priced upwards during Q2 2009, amounting to 772,000 accounts, as follows: Number of Accounts Given a Price Increase by Segment Q2 2009 (thousands)

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 5.0 2.3 3.8 7.4 8.8 20.6 11.8 82.7 46.2 188.710 < 20 1.3 0.6 1.0 3.4 3.7 8.8 6.0 31.0 17.5 73.320 < 30 1.4 0.8 1.4 2.8 2.8 7.3 4.6 14.6 12.5 48.130 < 40 1.4 0.7 1.6 3.5 3.4 8.2 4.2 8.4 9.6 41.040 < 50 1.8 1.1 1.9 3.5 2.8 7.1 3.5 5.3 7.7 34.8

50 < 60 2.3 1.4 2.6 3.9 3.7 7.5 3.6 3.5 6.4 34.960 < 70 3.0 2.0 2.7 5.0 4.1 8.0 3.1 3.2 5.9 36.970 < 80 4.8 1.9 4.0 6.4 4.5 9.7 2.9 3.1 5.9 43.280 < 90 8.5 3.9 6.2 9.6 6.6 12.7 4.0 3.7 5.7 60.890+ 71.7 20.4 21.2 26.1 17.5 28.8 7.6 6.6 10.5 210.3

Total 101.1 35.1 46.4 71.7 57.9 118.8 51.3 162.0 127.8 772.0


Total



Further, the higher the risk, the higher the average price increase; this ranges from around 3.1% for the lowest to 4.6% for the highest risk. Average Size of APR Increase by Risk Band – Q2 2009 (%)

4.64.3

4.54.2 4.1

3.93.7

3.5

3.1

0

1

2

3

4

5

6

7

Hi - 1 2 3 4 5 6 7 8 Low - 9

Risk band

AP

R in

crea

se,

%

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. Utilisation affects the average size of an increase, though not to any great degree, with the average across all utilisation segments being banded between 3% and 4.5%


Size of Price Increase The following table gives further insight into how low risk, low use customers are re-priced. Typically any increase they receive is much lower than for higher risk groups. When looking at the average APR increase relative to the current rate it can be seen that the largest increments tend to be associated with higher risk accounts and those with the lowest current APRs, albeit that the size of the increase is reasonably constant across the risk bands. For some of these customers the APR may double from around 7.5% to around 15%. However, within each risk band there are very few instances of re-pricing in double digit percentages. Most re-prices are concentrated in the 2% to 6% range, with the percentage of accounts receiving an increase being reasonably flat in this range also. Number of Accounts with a Price Increase - Q2 2009 (000s)

Price increase, % Very high High Medium Low Total

1 - 1.99 2.5 3.9 46.7 125.1 1782 - 3.99 33.8 27.8 91.1 102.6 2554 - 5.99 50.1 39.4 68.0 89.1 2476 - 7.99 5.2 4.3 16.1 8.7 348 - 9.99 9.3 5.9 22.5 12.0 50

10 - 11.99 0.1 0.1 1.1 3.7 512 - 13.99 0.1 * 0.3 0.8 114 - 15.99 0.1 * 0.5 0.4 116 - 17.99 0 0 0.2 0.2 018.00+ 0.1 0.1 0.4 0.4 1

Total accs 101 81 247 343 772

* = less than 0.05%

Risk profile

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset, In general, the higher the pre-increase APR, the lower the size of the increase. This changes slightly for the accounts which already have APRs of 30% or more, but this is only 0.1% of the total. These groups are likely to be very high risk accounts. Though a large percentage of re-pricing is targeted towards low-risk accounts with mid-range APRs, high-risk, low APR accounts are more likely to receive an increase as lenders adjust the under-pricing to reflect the risk of the customer Accounts with lower pre-increase APRs receive higher price increases as lenders look to appropriately price these accounts for risk, which is shown in the following table.


Average Amount of Price Increase for Accounts Given a Price Increase Q2 2009 by Risk and Original APR (%)

Hi - 1 2 3 4 5 6 7 8 Low - 9

7.5 - 9.99 6.8 5.9 5.7 6.0 7.1 6.5 5.5 7.1 7.6 6.610 - 13.99 5.4 5.0 5.2 4.9 5.2 5.0 4.2 4.3 4.4 4.714 - 17.99 5.0 4.7 4.9 4.4 4.2 3.8 3.4 3.4 2.5 3.718 - 21.99 4.5 4.0 4.3 3.7 3.5 3.2 3.0 2.4 2.1 3.122 - 25.99 3.4 3.2 3.5 3.4 3.3 3.5 3.7 3.3 3.6 3.426 - 29.99 4.8 4.8 4.6 4.7 4.8 4.8 4.6 4.5 5.6 4.830+ 0.0 0.0 0.0 7.1 0.0 7.1 7.1 7.1 7.1 7.1

Total 4.6 4.3 4.5 4.2 4.1 3.9 3.7 3.5 3.1 3.9

Risk bandRetail APR, %

Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. The following table shows the average rate increase in each of these cells. Average Amount of Price Increase Q2 2009 by Risk and Utilisation (%)

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 6.0 5.1 5.5 5.0 4.9 4.8 4.3 3.6 3.8 4.110 < 20 5.3 4.5 4.8 4.0 4.0 3.4 3.4 3.4 2.8 3.420 < 30 4.9 4.1 4.4 4.3 4.0 3.5 3.4 3.3 2.5 3.330 < 40 5.0 3.9 4.4 4.2 3.8 3.6 3.4 3.3 2.5 3.440 < 50 5.2 4.2 4.4 4.2 3.8 3.7 3.5 3.5 2.7 3.6

50 < 60 5.1 4.1 4.6 4.2 3.9 3.6 3.5 3.4 2.7 3.760 < 70 4.7 4.2 4.6 4.1 4.1 3.7 3.4 3.3 2.6 3.770 < 80 4.8 4.3 4.6 4.2 3.9 3.8 3.7 3.1 2.7 3.980 < 90 4.7 4.2 4.5 4.1 4.1 3.8 3.5 3.3 2.5 3.990+ 4.5 4.2 4.4 4.0 3.9 3.8 3.8 3.9 2.5 4.1

Total 4.6 4.3 4.5 4.2 4.1 3.9 3.7 3.5 3.1 3.9


Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. The general pattern of the data in the above table is as follows. The largest increases in APR by risk band are in the lowest utilisation group The pattern from ‘greater than 10%’ and ‘less than 90%’ utilisation is not clear cut Other than these two exceptions, the highest increases are generally in the

higher utilisation groups Generally, the lower the risk, the lower the price increase


On average, the cost to a typical consumer of a rate increase will be £84 per year. This ranges from less than £10 among low utilisation customers, up to £222 for some high utilisation customers. The relationship between risk and extra cost is not as clear, although generally the lowest risk group is affected by less than higher risk groups, as in the following table. Annual Cost to Accounts with a Price Increase Q2 2009 by Risk (£)

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 4 4 4 5 5 6 6 1 3 310 < 20 28 30 40 27 32 24 23 6 14 1420 < 30 44 55 57 48 52 46 35 14 24 3030 < 40 63 68 83 74 70 66 52 38 36 5340 < 50 88 87 97 93 95 89 76 53 53 75

50 < 60 94 125 142 111 120 98 91 78 57 9560 < 70 97 110 164 108 131 121 99 103 75 11170 < 80 117 127 157 129 135 144 136 117 97 13180 < 90 129 134 168 140 162 156 145 127 107 14590+ 164 172 175 162 166 182 189 222 126 171

Total 145 141 147 118 114 106 78 24 44 84


Total



Frequency and Timing of Rate Increases Price increases are relatively infrequent – almost 80% of accounts did not have a price increase in the two years between July 2007 and July 2009. 17% had one increase and only 3.5% had more than one price increase. Percentage of Accounts by Frequency of APR Increase July 2007 – July 2009

80

17

30 0 0 0

0

10

20

30

40

50

60

70

80

90

0 1 2 3 4 5 6

Frequency of price increase(s)

Pro

port

ion

of a

ccou

nts,

%

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. The proportions were almost identical for price decreases, with slightly more accounts (around 8%) having two or more decreases (see later section for more information on price decreases).


The percentage of accounts with an APR increase has fallen since the back end of 2007 and fluctuates between 0.5% and almost 2% of accounts in an given month. Percentage of Accounts with APR Increase

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0


Month

Per

cent

age

of a

ccou

nts

with

AP

R in

crea

se,

%

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. The proportion of accounts with an APR decrease is fairly consistent across the period at around 2% though subject to noticeable spikes as high as 6% thought to reflect one-off campaigns by individual issuers. Percentage of Accounts with APR Decrease

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0


Month

Per

cent

age

of a

ccou

nts

with

AP

R d

ecre

ase,

%



Most price increases are seen on accounts that have been open for at least 5 years, but note that this group is the largest single group. The group that had the highest proportion of price increases was those open between 24 – 36 months, followed by accounts open between 36 – 60 months, then 12 – 24 months. Percentage of Accounts with Price Increase by Months on Books

0.1 0.1

2.0

3.0

2.0

1.1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

<6 6 - <12 12 - <24 24 - <36 36 - <60 60+

Frequency of price increase(s)

Pro

port

ion

of a

ccou

nts,

%



Types of Accounts with Price Decreases Around 1.2% of accounts received a price decrease every month during 2008-09, or around 12% during the course of a year this compares to 1.4% receiving a price increase). The concern expressed in paragraph 5.20 of the consultation document that risk-based re-pricing is “only a one-way street” is contradicted by this evidence. This reduction in interest rates was greater than 10%, on average. Note that this amount includes promotional balances. The proportion of accounts by risk and utilisation is shown below and again shows that credit scoring is working with the likelihood of receiving a price decrease being greater among low risk, low utilisation accounts. Proportion of Accounts Given a Price Decrease by Segment (%) – Q2 2009 (%)

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 0.8 1.1 1.5 1.4 0.8 1.3 1.7 1.1 1.7 1.510 < 20 0.7 0.8 0.9 0.7 0.8 0.9 1.2 0.6 1.3 1.120 < 30 1.0 0.7 0.9 0.8 0.8 1.0 1.2 0.8 1.1 1.030 < 40 1.1 0.8 0.8 0.7 0.9 1.0 1.2 0.7 0.9 0.940 < 50 1.1 1.1 0.9 0.8 0.9 1.0 1.3 0.7 0.8 0.9

50 < 60 1.1 0.9 0.9 0.8 0.9 1.1 1.1 0.8 0.8 1.060 < 70 1.3 0.9 0.7 1.1 0.8 1.0 1.2 0.6 0.6 0.970 < 80 1.1 0.8 1.0 1.1 1.0 0.8 1.2 0.6 0.5 0.980 < 90 0.9 0.8 0.6 0.8 0.6 0.6 1.0 0.5 0.4 0.790+ 0.7 0.7 0.7 0.7 0.6 0.6 0.8 0.4 0.3 0.7

Total 0.8 0.9 1.0 1.0 0.8 1.1 1.5 1.0 1.5 1.2


Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. This information is also usefully expressed in terms of the number of accounts that were re-priced downwards during Q2 2009, amounting to around 700,000 accounts, as follows: Number of Accounts Given a Price Decrease By Segment – Q2 2009 (000s)

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 4.8 1.8 5.1 13.5 17.3 36.0 30.2 66.4 326.1 501.210 < 20 0.6 0.3 0.6 1.1 2.7 4.5 3.1 4.3 30.4 47.720 < 30 0.7 0.3 0.6 1.0 1.9 3.6 2.3 3.6 13.4 27.430 < 40 0.8 0.3 0.6 0.8 1.7 3.1 1.8 2.4 7.4 18.940 < 50 0.8 0.4 0.6 1.0 1.6 2.9 1.7 1.9 4.2 15.2

50 < 60 1.0 0.4 0.7 1.0 1.6 2.8 1.3 1.8 3.4 14.160 < 70 1.5 0.5 0.6 1.5 1.4 2.5 1.3 1.2 2.0 12.470 < 80 1.9 0.5 1.1 1.8 2.2 2.2 1.3 1.1 1.4 13.380 < 90 2.9 0.8 1.1 2.1 2.0 2.0 1.4 1.0 0.9 14.290+ 16.9 2.8 4.4 4.8 3.9 3.8 1.7 1.1 0.9 40.2

Total 31.9 7.9 15.5 28.5 36.4 63.4 46.1 84.8 390.1 704.6


Total



In terms of the average APR decrease by risk and utilisation, the breakdown is as follows. Again, the larger decreases tend to be associated with the lower risk customers. (This data excludes APR decreases for balances taking advantage of a promotional offer (defined as any decrease of more than 7%) and would have distorted the picture). Average APR Decrease by Risk and Utilisation (%) – Q2 2009, Excluding Promotional Balances

Hi - 1 2 3 4 5 6 7 8 Low - 9

< 10 1.6 1.7 1.5 2.0 1.8 2.4 2.1 2.7 3.2 2.710 < 20 2.3 1.9 2.5 2.2 2.3 2.5 2.4 2.8 3.0 2.720 < 30 2.6 3.3 2.6 2.3 2.2 2.2 2.4 2.5 2.9 2.630 < 40 2.3 2.2 2.4 2.0 2.4 2.3 2.5 2.6 2.8 2.540 < 50 2.2 1.9 2.6 2.1 2.3 2.1 2.3 2.9 2.7 2.4

50 < 60 2.3 1.7 2.2 2.2 1.7 2.3 2.4 2.9 2.8 2.460 < 70 2.9 2.0 2.6 1.9 2.1 2.5 2.6 2.7 3.0 2.570 < 80 2.7 2.4 2.3 2.0 2.0 2.2 2.6 2.7 3.1 2.480 < 90 2.5 3.0 2.7 1.8 2.1 2.2 2.2 3.2 2.7 2.390+ 2.5 2.1 2.5 2.0 1.8 2.1 2.3 3.2 3.3 2.3

Total 2.4 2.1 2.1 2.0 1.9 2.3 2.2 2.7 3.2 2.6


Total

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. According to our consumer research: 8% of credit card holders reported that they had had the interest rate on at least

one of their credit cards reduced during the last two years. 60% regarded this at the time as very or fairly positive; 9% regarded it as very or fairly negative, with 25% regarding it neutrally


Results of a Price Increase – the Consumer The evidence suggests that cardholders modify their spending and borrowing behaviour in response to a price rise. Upwardly re-priced accounts show faster account attrition, greater balance attrition and a spike in revolving balances following a re-price, but then faster attrition. Revolving balances tend to rise a little in the months following a re-price, but then fall to be the same as similar accounts that have not been re-priced. In part this will be because cardholders that have been re-priced upwards may be paying the same cash amount, but their balances will grow slightly faster as a result of them paying more interest. Indices of Revolving Balances Increase Q2 2008 Group vs Proxy Control

80

85

90

95

100

105

110

115

120

0 1 2 3 4 5 6 7 8 9 10 11


Inde

x

Proxy Control

Increase Group

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. In summary, if the approximately three quarters of a million accounts with a price increase in Q2 2009 are representative, more than three million people will be paying an extra £84 pounds (on average) a year. And those who are higher risk, will be paying £140 a year extra. 2.8% of accounts currently have an APR of more than 30%; of these, only 0.1% (1,200 individuals) were re-priced upwards. Although small, this group saw the highest increase in APR – 7.1%.


Results of a Price Increase – the Industry Account attrition (i.e. accounts that are closed) is higher for re-priced accounts in the months following a re-price, though this was less pronounced in 2008-09 compared to 2007-08. The same is true for balance attrition (compared to a proxy control group of otherwise similar accounts). This is further evidence that a proportion of consumers do respond to price increases and close the account that has been subject to a re-price. Account Survival for Q3 2007

70

75

80

85

90

95

100

105

110

0 1 2 3 4 5 6 7 8 9 10 11


Inde

x

Proxy Control

Increase Group



The account survival rates for accounts subject to a price increase and other outwardly similar accounts (based on a defined ‘proxy control group’, which is similar to the price increase group, where the only difference is the absence of a price increase not re-priced) are similar. Account Survival for Q2 2008

70

75

80

85

90

95

100

105

110

0 1 2 3 4 5 6 7 8 9 10 11


Inde

x

Proxy Control

Increase Group

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset The presence of a re-price does not materially change the probability of a charge-off of an account (again based on a defined ‘proxy control group’, which is similar to the price increase group, where the only difference is the absence of a price increase). Observed Charge-off Rate for Q2 2008

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

0 1 2 3 4 5 6 7 8 9 10 11


Cha

rge-

off

rate

, %

Increase Group

Proxy Control



As the above chart shows, the charge-off rate for customers who have received an increase in interest rate in comparison to the proxy control group is only slightly higher. Average Charge-Off amount for Q2 2008

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

1 2 3 4 5 6 7 8 9 10 11


Ave

rgae

cha

rge-

off

amou

nt,

£

Increase Group

Proxy Control

Source: Argus Information and Advisory Services, UK Cards Association Analytical Dataset. However, where charge-off does occur the amounts involved per account are around 6% higher (price increase 2007 - £2,800 vs £2,600; price increase 2008 - £3,800 versus £3,600), though this is to be expected if the account has been accruing interest at a higher rate. The implication of these two facts together is that accounts with a price increase are more likely to default, but it is important to note that it does not follow that the price increase is the cause of this. Indeed, it is the higher likelihood of default and the need to take action to address this that prompts re-pricing. Accounts that have price increases are typically higher risk and have borrowed a higher proportion of their limit. It is these characteristics that are responsible for the higher default rates. Accounts that are similar to those with a price increase, but where the interest rate is unchanged, have similar rates of default. Therefore, it is the higher risk and higher use that drive higher defaults. NB: it must also be noted that the increases in the recent past could partly be a consequence of the worsening economic situation. During 2008 and 2009, unemployment worsened substantially and, at the time of writing, the UK was in its deepest recession for 50 years. Bad debt on all forms of credit worsened during 2008 and most of 200942 (the one exception was that defaults on secured lending did not worsen in Q3 2009). In fact, the average retail APR overall remained at around 11.7% through the year up to June 2009, before dropping slightly to 11.0% in July 2009.

42 Bank of England (2009), Credit Conditions Survey, Q3, Bank of England, London.


Financial Impact on the Industry The removal of risk-based re-pricing would have a significant impact on the UK credit card industry’s revenue. The impact of a regulation to remove risk-based re-pricing increases on all balances would have been £279 million in 2008-09 with an impact of £323 million in 2007-08. Where re-pricing would be permitted for new balances only the impact on 2008-09 would have been £215 million and £228 million in 2007-08. Financial Impact on Industry of Restrictions on Re-Pricing of Existing Debt Re-pricing

£m – 2007-8

£m – 2008-09

No re-pricing on all balances

324

279

New balances only

229

216

In the face of such reductions in revenue, credit card lenders would be faced with a number of choices (which are not necessarily mutually exclusive), including: Absorbing some or all of the reduction in revenue Not undertaking risk-based reductions Recouping the revenue from cardholders by other means such as higher initial

rates of interest or annual fees. In effect, rates on new accounts or new balances would need to compensate for the inability to re-price existing debt, leading to higher prices than otherwise necessary

The choices available to lenders will depend on a complex mix of factors that need to be considered in order to determine the viability of a particular business model.


Policy Options Consideration of the BIS policy options needs to be set against the following background information on consumer attitudes derived from our consumer research. In general, instinctive positive reactions to changes suggested by Government are significantly modified and tempered once the potential implications for cardholders are outlined: When told that the Government was thinking of preventing credit card companies

from changing the interest rate, either up or down, on any outstanding balance, 60% of credit card holders thought that this was a good idea. 36% thought that this was a bad idea

Among those who thought that this was a good idea, when suggested that this

meant that credit card interest rates would generally be higher in future, 52% changed their minds and no longer thought it was a good idea. 43% thought that this was still a good idea. Overall, this meant that 26% thought it would be a good idea

Among those who thought that this was a good idea, when suggested that this

meant that credit cards might also come with an annual fee in future, 67% changed their minds and no longer thought it was a good idea. Overall, this meant that 17% thought it would be a good idea

Overall, industry’s concern is that limitations on the ability to re-price on outstanding debt would effectively mean that credit cards become a consecutive series of individually priced personal loans, with just one chance for the credit card lender to get the price right. This would be likely to result in rates being set higher at the outset of an agreement than necessary to compensate for the inability to re-price. Industry concerns are supported by the conclusions reached by Oxera as part of their economic impact analysis. Oxera conclude that:

“BIS recognises that there could be a number of implications of removing issuers’ ability to re-price existing debt. It would probably limit the availability of credit to high-risk customers (who would otherwise be most likely to be re-priced). If issuers knew that they could not impose a re-price, they would be less likely to offer credit in the first place. Issuers may also decide to extend smaller amounts of credit initially. If a cardholder’s riskiness changed (or had been estimated incorrectly), this strategy would minimise the amount of mis-priced debt that the issuer would be unable to re-price. As the cardholder’s behaviour became better known, the credit limit could be gradually increased.” “This strategy assumes, however, no restrictions would be placed on UCLI (and hence the ‘start low and grow’ approach). If issuers’ ability to increase credit limits were also to be restricted, this would make it even more likely that issuers would cease entirely the extension of credit to high-risk customers in the first place.”


“Furthermore, issuers would need to recover the losses resulting from the inability to re-price. This could be done in a number of ways, but one option would be to raise the initial interest rates and APRs applicable to new cards by an amount that would compensate them for the estimated losses to be incurred from not being able to re-price. This would result in an increase in cross-subsidisation, as some cardholders would have rates on existing debts that were higher than would be justified by risk-based pricing, and so would be cross-subsidising higher-risk cardholders. On the other hand, some cardholders would have rates lower than would be justified on risk-based grounds, which may encourage them to accumulate a higher balance than they otherwise would.” “…BIS’s rationale for proposing additional restrictions on issuers’ ability to re-price was based on a possible lack of justification for increases and concerns that re-pricing may contribute to financial difficulty among vulnerable consumers. Furthermore, BIS expressed concern that consumers may be unable to avoid increases.” “(We have) presented evidence suggesting that overall the amount of re-pricing (as measured by the share of accounts re-priced) is fairly low. Furthermore, this section has demonstrated limited support for the concern that there is any increase in charge-off rates following RBRP. Finally, while consumers have made limited use of the opt-out, survey data suggests that they are aware of the option. Data on attrition and switching rates indicates that consumers are able and willing to take action if they are dissatisfied with their cards.” “It is, however, the case that issuers’ credit scoring models are typically complex and that, as a result, re-pricing decisions may not appear to be directly related to changes in consumers’ risk profiles. This could suggest a role for increased information on how credit scores are determined and how re-pricing decisions are made. However, the benefits of additional information would need to be assessed first. Furthermore, the additional information would have to be provided in a clear and considered way that did not exacerbate ‘information overload’. Given the complexity of credit scoring and issuers’ re-pricing models, it would seem sensible to conduct a bespoke study on what elements of re-pricing decisions consumers would find most useful and how these points could best be communicated.”


Conclusions The consultation document sets out a number of options, which are set out below: 1. Maintain the Statement of Principles, if sufficient evidence shows that this has

removed consumer detriment in this area 2. Further measures to provide consumers with better information about risk-based

re-pricing decisions 3. Define the factors that it would be fair for lenders to take into account when

changing an individual’s price on grounds of risk 4. Limit the size and/or frequency of existing debt re-pricing 5. Prohibit re-pricing of existing debt The credit card industry believes that the ability to re-price on an open-ended credit agreement in effect defines the credit card product. The industry believes that customers understand and value the difference between a credit card and, say, a personal loan. The evidence we have gathered shows that the Statement of Principles agreed following the Credit Card Summit in November 2008 are working effectively and we believe that this will continue to improve as the Principles bed-in further. Consumers have a good awareness of the availability of the ‘opt-out’. The underlying positive impact of the principles should also not be underestimated, in terms of the fact that the industry now adheres to the agreed frequency restrictions and that many customers in difficulties (who might previously have seen their rate increased) will have been excluded from such activity as a direct result of the industry’s commitment. The industry believes that the way forward on re-pricing is to build on the Statement of Principles and to draw on some of the ideas presented by Government in the context of Options 1, 2, and 3 to that end. Option 5 would, by contrast, lead to fundamental changes in the industry which would not benefit credit card lenders or their customers. In terms of the question of limiting the size and/or frequency of existing debt re-pricing (Option 4), the Statement of Principles already contains some highly significant commitments that no price increase will be made in the first twelve months, nor more frequently than once every six months thereafter. Industry does not believe that any further restrictions on the frequency of re-pricing are in the best interests of customers or the industry, as to do so would adversely impact the credit card lenders’ ability to manage risk. In terms of the suggestion to limit the size of a re-price, this could, in effect, be a price control that interferes with the workings of the market and there are also concerns that such a move would be anti-competitive. Again, industry believes that such a requirement would adversely impact the credit card lenders’ ability to manage their risk.


In line with the industry’s long standing commitment to transparency, it is also recognised that we have an opportunity to make further tangible improvements in terms of explanations relating to risk-based re-pricing decisions. A new leaflet, ‘Risk-Based Pricing Explained’, could be developed and made available to help customers to better understand how such pricing works, why it is necessary and what options they have available to them. In developing such materials, it is essential that it is recognised that the associated processes are highly sophisticated and that generic explanations cannot therefore point to precise reasons for a decision relating to a particular customer’s account. A similar situation exists in respect of the industry’s explanation of credit scoring, where it has been necessary to find the balance between describing the factors and characteristics which are used, whilst also being mindful of the sophistication and complexity of the systems, the need to protect the commercial sensitivity / integrity of the models and to prevent the inadvertent provision of help to those intent on committing fraud. As another specific objective for the generic leaflet, industry also feels that there are opportunities to make it clearer to customers how the ‘opt-out’ actually works and how they will subsequently be expected to pay-down the balance at the original rate of interest, over a reasonable period, as opposed to immediately.


Proposal Summary The industry’s proposals for addressing Government’s concerns around the ‘Re-pricing of Existing Debt’ are summarised as:

1. Continuation of the existing Statement of Principles, as implemented by the industry on 1 January 2009

2. Develop a new generic leaflet – ‘Risk-based Pricing Explained’

3. A commitment to further promotion and explanation of the ‘opt-out’


7. Transparency & Simplicity


Transparency & Simplicity The UK credit card industry is committed to transparency and the implementation of improvements for customers. The industry is proud to have a strong record in delivering robust solutions over recent years through a forward looking attitude and a long standing willingness to embrace innovative opportunities for change, where these will provide tangible and sustainable value to its customers. The three main ideas put forward by BIS in this section of the consultation paper are as follows: An annual credit card statement A stakeholder card lending product A standardised labelling system Each of these options has clear attractions. But the credit card industry believes that each would merit considerable further research and analysis before legislative requirements were introduced.


Annual Credit Card Statement The idea of an annual credit card statement has clear attractions. It is possible, for example, that an annual credit card statement could provide an opportunity to address transparency concerns around the four main issues raised in the consultation paper. But the industry would be reluctant to introduce something without it having been subject to the most rigorous research with consumers. The provision of what would be yet more information to a cardholder about the card(s) in their wallet has to be useful and delivered intelligently, otherwise it will simply exacerbate the risk of information overload and provide no meaningful benefit. It would be wrong for legislation, or regulation, to specify an annual credit card statement without properly researching consumers’ views on what it should look like, what it should contain, and how it might be used. It is, of course, likely that customers may wish to see certain content that isn’t immediately apparent or obvious to the industry, input which would be invaluable in defining the real value of such a development. More broadly, industry already believes that much of the information that is legislated for in terms of consumer credit has been arrived at without a proper understanding of what consumers actually want or need, which serves to undermine credit card lenders’ own attempts to deliver the right information themselves, based on their understanding of their own customers. Research should firstly look at monthly credit card statements to gain an understanding of how they are used by consumers; what is good about them; and/or how they might be improved etc. However, as you would expect, most, if not all, credit card lenders will have already researched the design of their own unique monthly statements to a high level of detail in order to ensure that they meet the different needs of each lender’s customer base. Given the highly competitive nature of the UK credit card market and the constant quest for innovation and differentiation amongst lenders, had there been a demand from consumers for an annual credit card statement then it would have more than likely have been delivered already.


Stakeholder Card Lending Product There are clear merits in offering a basic ‘vanilla’ product for customers who have a need for such services – but not, of course, as a standard product for all customers. A number of credit card lenders already offer ‘simple’ products, as part of their portfolio. Uptake suggests that these will tend to be are generally ‘niche’, rather than mass market, products.


Standardised Labelling System The concept of a standard labelling system is one that has been put forward on a number of occasions in recent years. It is a concept that the industry would support – so long as a system can be developed that is consistent, reliable and not misleading to its customers. So far, none of the proposals advanced for standards labelling has presented a workable solution which adds tangible value to the industry or its customers. For example, similar ideas have previously been put forward from a variety of sources, such as: HM Treasury: CAT43 standard credit card (circa 2000) Hurlstons’: Responsible Lending Index Which?: Responsible Lending These initiatives were each not taken forward due to the myriad of different purposes that a credit card can be used for, ranging from a short-term borrowing tool to a simple card payment mechanism, and the fact that a cardholder may use it for different purposes at different times. Furthermore, each of these proposed initiatives were dependant on a high degree of subjectivity. This means that any given credit card might be good for the way in which one customer intends, or expects, to use their card, but unsuitable for another. Any system that is other than wholly objective and would deliver the same results, whatever criteria are used to assess products, simply stands to skew the market and become the key influence on product design as credit card lenders design products to top the table, rather than deliver the best outcome for consumers. For example, a credit card that allocates payments ‘low-to-high’, but offers a generously long promotional period at 0%, would clearly be highly attractive to certain customer groups, but not to others. One of the outcomes raised in the consultation paper is that consumers “would be able to choose more complex options but that the labelling system could ensure that they do so knowing the implications compared to cheaper and simpler alternatives”. It is not clear to us what this means, but it seems to ignore the APR as a means (albeit flawed) of comparing the price of credit products; the Summary Box; and the forthcoming SECCI (Standard European Consumer Credit Information form, strongly reminiscent of the Summary Box and a product of the Consumer Credit Directive). It also ignores the fact that: the press (including Which?) regularly provide ‘best buy’ information on credit

cards, should consumers require such advice the FSA’s plans for their ‘moneymadeclear’ credit card comparison website recommending a best buy credit card does not necessarily mean that the lender

will accept all applicants

43 Where CAT stands for Charges, Access and Terms


In summary, it is essential to recognise and acknowledge that the UK credit card market is highly competitive, as well as innovative, and that there is a need for very careful thought in order to fully evaluate a solution such as this and to understand where there may be risks in respect of a potential dilution of such a strong picture of competitiveness.


Proposal Summary In summary, the credit card industry welcomes the opportunity to discuss these ideas further with BIS. However, it is essential that previous work in these areas is fully assessed and that any subsequent recommendations are reached on the basis of solid evidence and rigorous research.


Appendices


Appendix 1 Key Information and Background Introduction The UK Cards Association is the leading trade association for the cards industry in the UK. The Association is the industry body of financial institutions who act as card issuers and/or acquirers in the UK card payments market. It is responsible for formulating and implementing policy on non-competitive aspects of card payments. The UK Cards Association was formed in April 2009 as the successor body to the APACS Card Payments Group. Under the APACS banner – the UK payments association – the group had a highly successful eighteen year history advancing a progressive agenda (most notably in areas such as transparency, data sharing, responsible lending, fraud prevention and through the introduction of chip and PIN). The UK Cards Association accounts for the majority of debit and credit cards issued in the UK, with members issuing in excess of 66 million credit cards and 76 million debit cards and covers the whole of the plastic card transactions acquiring market. The UK Cards Association membership as of January 2010 comprises the following institutions: Full Board Members American Express Services Europe Ltd Barclays Bank Plc Capital One Bank (Europe) Plc Clydesdale Bank Plc Co-operative Bank Plc Egg Banking Plc Elavon Financial Services Ltd

HSBC Bank Plc Lloyds TSB Bank Plc MBNA Europe Bank Ltd Nationwide Building Society The Royal Bank of Scotland Group Plc Santander UK plc Tesco Personal Finance Plc

Other Members AIB Group (UK) Plc Bank of Ireland Chelsea Building Society C Hoare & Co Coventry Building Society

Europe Arab Bank Plc Northern Bank Ltd Northern Rock Plc Standard Chartered (Jersey) Ltd Vanquis Bank Limited

Given the nature of the consultation, The UK Cards Association has circulated the documentation to; has consulted with; and has sought input from its Members. As BIS will appreciate, card portfolios will differ between issuers and we have therefore been keen to encourage our Members to respond individually to the consultation. However, it is also appropriate for us to provide an industry-level response focusing on comments that are common across the whole or a significant proportion of credit card products provided by our Members.


Since its inception in April 2009, The UK Cards Association has been keen to develop a progressive agenda for the card industry and to help deliver a world-class service to its customers. To some extent that agenda has been overtaken by the White Paper and this consultation. However, for the industry to be progressive it is vital that decisions requiring change or retaining the status quo are fully evidence based; are grounded in fact; and are not the result of assertion or supposition or of emotive or short term considerations – an obligation incumbent upon stakeholders and critics as much as the industry. This document therefore provides a huge amount of evidence about the credit card industry and how it operates, along with an analysis of the consequences of the various changes proposed by BIS and by the industry.


Contribution of the Credit Card Industry to the UK Economy In 2005 The UK Cards Association (then operating under the APACS banner) commissioned an independent study from economy.com (an independent economics consultancy, now part of Moody’s) entitled “Plastic Money: The Credit Card Industry’s contribution to the UK Economy”. We would expect the results, findings and conclusions to remain broadly unchanged. The report is attached as Appendix 6. The highlights of the report were as follows: The credit card industry directly and indirectly employs over 111,000 people in

the UK, providing jobs in communities around the country. It is a major contributor to aggregate GDP growth, whether via wages disbursed, productive business investment undertaken, or government taxes paid

Credit cards help smooth the boom-and-bust swings in the economy by

spreading out income gains and private consumption over time. This is true of all forms of credit, but plastic cards are the most liquid and therefore convenient form of borrowing

The liquidity and availability of credit provided by credit cards in the UK is worth

£22 billion of projected GDP growth over three years. Tightening up credit constraints would weigh disproportionately on lower income households and on those with limited access to credit

Credit cards reduce transaction and cash handling costs to both merchants and

cardholders, while at the same time offering convenience, security, dependability, and customisability. These features are either non-existent for other payment types, or are better realised in credit cards

Two case studies, tourism and e-commerce, demonstrate industries where these

qualitative benefits are most obviously realized. Both have been revolutionized by the creation and widespread adoption of credit cards

In retrospect, the conclusion of the report, replicated below, seems quite prescient in light of the current consultation:

“Credit cards — like any other form of financial instrument — will continue to have their advocates and their detractors, but they are unquestionably an intrinsic and indispensable part of the British financial landscape. They are the most flexible and liquid form of credit in widespread use and without the existence of credit…households would be forced to consume directly out of disposable income. This would aggravate the boom and bust cycle and reduce potential growth.”


“The industry is also a notable employer, in several cases in areas that have lost out through the dissolution or diminution of some other industry. We have identified ten communities where the credit card industry directly accounts for at least one in every 100 labour force jobs, and this does not include the people employed in the industry’s ancillary and subsidiary companies. The earnings and taxes paid by these corporations add to the bottom line of both households and government, at the local and national level. By investing in human and physical capital, these companies also boost economic growth, now and in the future.”

“Finally, individual cardholders and merchants reap the rewards of a range of time and money saving features, some of which are common to other types of payment, electronic or otherwise, and some of which are unique to credit cards. These include convenience, security, and flexibility, to name just a few.”

“This is not to say that cards do not have their costs — whether in the form of fraud or over-indebtedness. Moreover, there is room for improvement in the communication and marketing of credit card products and the sharing of credit information amongst lenders; this would help reduce the incidence of irresponsible borrowing and negligent lending, to the betterment of both creditors and borrowers. It is our belief, however, that the myriad benefits outweigh the costs and that the breadth and depth of these benefits should not be overlooked or marginalized in the ongoing credit card debate.”


Differing Business Models Within our diverse, large and economically important industry, the UK credit card market is comprised of a number of different types of credit card lender operating to different business models, susceptible in different degrees to any proposals for change. Credit card lenders can broadly be categorised as follows: Larger high street lenders typically providing credit cards to their existing retail

bank customer base with some penetration into non-retail bank customers such as HSBC, RBS etc

Smaller high street lenders such as National Australia Group, Co-operative Bank,

Bank of Ireland etc Mono-line credit card issuers principally providing credit cards (and limited other

products) to the mass market, attracting customers from the high street banks and customers new to credit cards, such as MBNA and Capital One etc, and who have considerably increased price competition in the market since their entry in to the UK in the mid-1990s

On-line only financial services providers such as Egg whose credit card operation

is more akin to a mono-line Three-party credit / charge card models such as American Express, Diners Club

and JCB where the card issuer is also the acquirer (as opposed to participants in four party card payment schemes such as Visa and MasterCard)

High-street affinity credit card providers who have emerged from the ex-store

card market or developing financial services on the back of their wider businesses, such as John Lewis Partnership (within HSBC); Tesco Bank, Sainsbury’s Bank (within Bank of Scotland) etc

Highly specialised lenders operating in the sub-prime / non-prime / home credit

type market such as Vanquis; SAV (within Bank of Scotland) etc With such a variety of models it is often difficult for the industry to achieve consensus on one-size-fits-all solutions, particularly those that affect the underlying construct of the business and that might have disproportionate impacts on different businesses.


Recent trends have been more towards consolidation of credit card lenders, with names such as those below having entered the market in the mid 90s to later leave or be taken over by larger players, reducing the choice for consumer: GE Capital The Associates People’s Bank Accucard Liverpool Victoria Beneficial Bank Morgan Stanley Goldfish HFC; and M&S Financial Services We believe that this is, in part, due to the high level of regulation in the UK credit card market and the difficulty in running a smaller scale credit card business profitably, and that this has now created a situation that makes it unattractive for new entrants to come into the market on any substantial scale. Indeed, PriceWaterhouseCoopers, in their annual Precious Plastic report for 2010, “expect to see an increase in portfolio sales as lenders seek to unlock liquidity and buyers return to the market, (taking advantage of) opportunities for investors to acquire assets at attractive discounts”.


Customer Satisfaction GfK monitor satisfaction levels within their long-running Financial Research Survey (FRS)44, the benchmark market research survey which informs the industry. Customer satisfaction with credit cards is monitored within the survey, giving the following results for respondents’ satisfaction with their main credit card: Satisfaction With Main Credit Card (%) Satisfaction % Extremely satisfied 15 Very satisfied 47 87 Fairly satisfied 25 Neither satisfied nor dissatisfied 8 8 Fairly dissatisfied 2 Very dissatisfied 1 4 Extremely dissatisfied 1 Don’t know 1

Source: GfK Financial Research Survey In the specific quantitative consumer research commissioned by The UK Cards Association from GfK to support this response45, respondents were taken through a series of questions relating to each of the four main issues raised as negatives about the credit card industry in the consultation – allocation of payments; re-pricing; credit limit increases (and decreases); and minimum payments, along with some of the Government’s proposals. At the end of the questionnaire respondents were asked, taking everything into account, how satisfied they were with their credit cards. Having had the four perceived downsides of credit cards discussed with them it would be no surprise to see satisfaction levels fall, which is indeed what happens, albeit to a very limited extent. Q: Taking everything into account, how satisfied are you with your credit card(s)? (Base: all credit card holders) Satisfaction % Extremely satisfied 6 Very satisfied 39 79 Fairly satisfied 34 Neither satisfied nor dissatisfied 13 13 Fairly dissatisfied 5 Very dissatisfied 2 8 Extremely dissatisfied 1 Don’t know 1

Source: GFk research for The UK Cards Association, December 2009

44 GfK’s Financial Research Survey (FRS™) is the definitive consumer-based monitor of the personal financial services sector. The FRS covers consumer behaviour in almost all personal finance sectors including: current accounts; payment cards; loans; general insurance; savings and investments; mortgages; life insurance; pensions; and health insurance. FRS is the largest and longest running survey of its kind, interviewing 60,000 GB consumers in the home or online every year. The questionnaire covers product holding; acquisition and usage behaviour; the value of holdings; and a wealth of demographic and attitudinal data. FRS is bought by almost all major financial organisations in the UK. 45 For details on methodology see Appendix 2


Overall, the FRS shows that 95% of card holders are not expressing any level of dissatisfaction, compared to 92% in our specific survey. Our qualitative research46 confirms these findings. A programme of depth interviews and deliberative group discussions examined each of the four main issues raised in the consultation and found that most consumers were largely satisfied with their credit cards on the basis that: The basic service provided by credit card companies is operationally competent; Delayed payment enables better management of bank balances; Credit cards provided statutory insurance (under Section 75 of the Consumer

Credit Act) and, in some cases, additional protections on products purchased; They are highly appropriate for the on-line environment, whilst also seen as being

secure; Credit card lenders offer effective customer service and are responsive when

problems occur; Cards provide a means for recreational spending; Rewards (where they apply) are appreciated; Most credit cards are free to use if paid off in full; The tracking of spending on credit card statements is more

recognisable/comprehensible than for, for example, current accounts. However, consumers recognise that there are some risks associated with credit cards such as: A temptation to overspend; The potential for financial mismanagement and consequent inflated debt; Residual worries over inappropriate credit being provided to ‘vulnerable’

consumers. The main objection consumers have is to the rate of interest charged on credit cards (which suggests that industry could do more to explain why APRs might appear high), but this is mitigated by the understanding that credit card companies are businesses and it is the price consumers pay for the facility. Consumers’ attitudes to the issues raised in the consultation were underpinned by a key attitudinal understanding that the relationship between consumers and credit card companies is one founded on what is ‘reasonable’, and that benefits and responsibilities apply to both parties.

46 For details on methodology see Appendix A


The consumer view on what is ‘reasonable’ is driven by their understanding that: Credit card companies are businesses whose objective is to make money; Credit cards are seen as a facility that is valued and that there is a cost to this; The use of credit is, in the final analysis, down to the consumer and people have

to be held responsible for their own actions (a point that was made time and again).

But in this relationship consumers believe that there should be a benchmark of reasonableness – for both the consumer and the provider. It is reasonable: That card users are expected to know what they are doing with their cards and

stand by their actions, though of course genuine slips / accidents will occur and these should be accommodated within the customer / provider relationship e.g. that long-standing customers would not expect to be penalised when they forget a payment;

That product information is clear and accessible, prioritised to tell the consumer

what the significant characteristics of the product are in a language they can understand; what the consequences are of the way in which they are currently using the cards; and the consequences in terms of charging, interest rates, balances and longevity, and credit rating;

That vulnerable people at lower economic levels receive a higher level of

protection / monitoring, which may involve restricting these people’s spending and that there should be demonstrable mechanisms in place to protect them (which we interpret as a desire for credit card companies to exhibit a degree of paternalism);

That credit card companies make money from providing customers with the

facility and service provided; That interest rates and charging reflect the high levels of convenience and

flexibility that credit (cards) provide; That even credit card companies are going to put profit-making at the heart of

their business and operations, but that this isn’t a problem so long as this is not grossly out of line with consumers interest and practices;

That credit card companies are prevented from making money through practices

that amount to sleight of hand or deceit.


Customer Complaints The fact that the issues identified in the consultation paper are not a major source of concern for credit card customers is also borne out by the experience that credit card lenders have from customer complaints. According to credit card lenders’ returns to The UK Cards Association47 a total of less than 5% of the complaints they receive are in relation to the following five subjects: Risk-based re-pricing Allocation of payments Unsolicited credit limit increases Credit limit decreases Minimum payments Of these, allocation of payments and credit limit decreases (not increases) accounted for more than three quarters of complaints in these areas. Credit limit decreases resulted in the highest proportion of complaints at a little fewer than 2% of the overall total. (In fact, there are 38 times as many complaints about unsolicited credit limit decreases as there are about unsolicited credit limit increases). The other 90% plus of complaints comprise interest and charges (around two thirds of the total – often related to default charges) and then operational issues (such as lost cards, ATMs not working, or fraud).

47 Data supplied by 13 issuers accounting for 96% of the market


Complaints to the Financial Ombudsman Service Paragraph 1.8 of the consultation paper comments upon the increased number of complaints received by FOS in relation to credit cards as proof that consumers feel they are not getting a fair deal. We believe that it is inappropriate to reach such a misleading conclusion without first seeking the information needed to reach it. Whilst FOS publish an annual report detailing the complaints they receive by subject it doesn’t contain such detail that might be useful here and or allow such conclusions to be drawn. Nevertheless, from our members’ anecdotal reporting of the cases that they experience being referred to FOS we have reason to believe that the bulk of these cases relate to the application of default fees on credit card accounts, consistent with FOS’s reported experience on current account charging, particularly in 2008. Our members also report a reduction in the number of complaints to FOS over re-pricing decisions since the new Principles (see section 7.3.1) were adopted in January 2009, though we do not have an overall industry aggregate picture. Aside from re-pricing FOS are not reporting any significant issues around unsolicited credit limit increases, minimum repayments or the allocation of payments i.e. those issues raised in the White Paper consultation. We would encourage BIS to request information and commentary from FOS on the breakdown of the credit card complaints that they receive beyond that reported in FOS’s annual report, as follows: Extract From Financial Ombudsman Service Annual Report 2008 / 2009 (page 35) The further substantial increase in the number of disputes involving credit cards reflects the fact that we have continued to receive a steady stream of complaints about so-called “default charges” – applied by credit-card companies where a customer pays late or misses a payment, and sometimes where a customer exceeds the credit limit on the card. No credit-card company has so far chosen to request a formal ombudsman decision on the merits of these cases. Instead, the companies have all preferred to settle the complaints informally by meeting their customers’ claims. In last year’s annual review we mentioned an emerging type of complaint, where credit card companies made substantial increases – sometimes by as much as ten percentage points – in the rate of interest charged on certain customers’ credit-card accounts. The companies said that this reflected a move to “risk-based pricing”. We have continued to receive complaints of this type this year, and it seemed to us that the issue was one that had wider significance both for consumers and for credit-card companies. We therefore raised the matter under the formal “wider-implications” procedure that we share with the Office of Fair Trading (OFT – the body that regulates consumer credit) and the Financial Services Authority (FSA). Having considered the matter, the OFT decided that it would not at this time pursue a regulatory solution to the issue. This meant we were able to continue our own investigations into the individual complaints that consumers had referred to us about rate changes already made. Separately, the government agreed a set of principles with credit-card companies about future rate changes. These principles took effect from 1 January 2009. As part of our investigation into these complaints, we issued questionnaires to the credit-card companies involved, to obtain information about – among other things – the actual assessments of risk that had been carried out in relation to these customers, and how the new rates had been calculated. Almost all the credit-card companies subsequently chose to settle the complaints that had been brought against them, rather than have our investigation continue. Complaints about disputed credit- and debit card transactions – made at retail outlets, cash machines or over the internet – continued to form a significant part of our workload during the year. In line with our experience in previous years, most complaints turned on practical issues to do with the particular case in hand, rather than on any complex technical issue.


Recent Legislative and Regulatory Activity and Context It is both necessary and useful to place the current consultation in context against the wider background of legislative and regulatory activity. PriceWaterhouseCoopers comment in their annual Precious Plastic report for 2010 that “the growing (regulatory) challenges are creating barriers to entry and placing such pressure on margins that the cumulative effect could be to reduce choice and increase costs for consumers”. With a noticeable increase in activity beginning in 2003, the consumer credit market – and credit cards in particular – have been the subject of intense legislative and regulatory intervention in recent years and have thus been operating in an environment of considerable uncertainty. Specifically there have been fundamental challenges to the credit card business model emanating from: The Treasury Select Committee enquiry into the transparency of credit card

charges, hearings held in July 2003 and October 2004 The Competition Commission enquiry into Store Cards in 200548 The OFT’s intervention regarding credit card default charges in 2006 The OFT’s investigation of interchange fees (ongoing) The OFT’s Credit Card Comparison study following the Which? super-complaint

in 2007 regarding the standardisation of interest rate calculation methodologies FSA / Competition Commission interventions on Payment Protection Insurance

from 2007 to date The Credit Card Summit of November 2008 (see chapter on re-pricing)

48 Not covered here but likely to be covered in the response from the Finance & Leasing Association


This activity has been accompanied by a raft of legislative, regulatory and self-regulatory measures including, but not limited to: The Consumer Credit Act revisions 200649 The Payment Services Directive 2007 (implemented in the UK in November

2009) Basle II capital adequacy requirements (see chapter on credit limit increases) Regulation 256050 The FSA’s Treating Customers Fairly (TCF) principles The Banking (and since November 2009, Lending Code), revised in 2003, 2005

and 2008 Revised data sharing guidelines Numerous APACS / UK Cards Association Guidelines (see later section) The FSA’s Moneymadeclear programme Further, these developments will soon to be followed by: The Consumer Credit Directive 2008 (for implementation in the UK during 2010) The OFT’s Irresponsible Lending Guideance The Financial Services Bill 2010, including new regulations banning unsolicited

credit card cheques The EU Guidelines on Responsible Lending

49 Consumer Credit Act 2006 The Consumer Credit Act 2006 (which was fully implemented on 1 October 2008) was aimed at establishing a fairer, clearer and more competitive market for consumer credit, updating consumer credit legislation that had been in place since the 1970s, and making it more relevant to today’s consumers. The Act was implemented in 3 phases: 6 April 2007: the remit of the Financial Ombudsman Service (FOS) was extended to cover

consumer credit and the Unfair Relationships Test was introduced for new agreements 6 April 2008: the Office of Fair Trading’s (OFT’s) new strengthened licensing regime was

introduced, the Consumer Credit Appeals Tribunal (for appeals against the OFT’s licensing decisions) was established, the financial limit (of £25,000) was removed so all new credit agreements (unless specifically exempt) are regulated, and the Unfair Relationships Test was extended to all existing credit agreements.

1 October 2008: a requirement for lenders to provide borrowers with much more information about their accounts on a regular basis, such as an annual statement and notices when consumers fall into arrears or incur a default sum was introduced, the OFT’s regulation was extended to credit information and debt administration services which means debt administration and credit information (repair) service providers need a consumer credit licence, and consumers can go to the courts asking for longer to pay back their loan (a time order) when they receive an arrears notice (prior to October, consumers could only seek a time order when they received a default notice)

50 Regulation 2560 - the regulation on bank charges for national and cross-border payments which regulates the price for a cross-border transaction to the same cost as that for a domestic transaction provided that the requirements of the CREDEURO convention have been met.


It will not prove beneficial to this consultation process to undertake a detailed analysis of the above measures with which BIS will already be familiar. Suffice to say that, in combination, the measures have ensured that responsible consumers have sufficient information available to them to make informed choices about their selection of consumer lending products, including credit cards. All the key areas of a lending product’s life cycle have been addressed i.e: Pre-sale, advertising and provision of information requirements Contractual, via presentation of key facts, responsible lending requirements and

cooling-off periods Post-contractual, via clarity and frequency of information provision and consumer

focused default management processes All of the above have been (or will be) developed, agreed and implemented and will provide the highest degree of protection available in Europe for the vast majority of UK consumers who act responsibly when managing their finances. The net result is that UK consumers already have the most beneficent regime of consumer protection in Europe enjoying exclusive major concessions such as Section 7551 of the CCA. Indeed, UK card lenders are at a considerable disadvantage when compared with their counterparts elsewhere in Europe due to the heavy burden of additional existing and forthcoming legislation and regulation. It should also be understood that the benefits of some of the above measures have not yet worked their way through the system, e.g. improved data sharing, which is the key to the industry’s ability to assess risk and affordability. A further step change improvement in data sharing could be achieved by the Government making available to the credit reference agencies data on financial commitments such as student loans, unpaid taxes, rent/council tax in arrears, unpaid utility bills and non-consensual data. That the industry has a consumer focused agenda cannot be in doubt when the extent of initiatives over the last decade is examined in detail. However, in general the net impact of these changes is either to generate additional cost for the industry or to reduce industry revenue.

51 When a is used to pay for goods or services between £100 and £30,000, Section 75 holds the credit card issuer ‘jointly and severally’ responsible for the purchase. This means that cardholders have the right to claim a refund from their credit card issuer if there is a problem with the goods or services they ordered


Impacts of Other Government Legislation and Activities Government also creates costs for the credit card industry through other legislative changes that may be driven by other policy objectives or, at the time, regarded as unrelated. For example: Changes to the bankruptcy laws in 2005 which led to a shift in consumer attitudes

to debt (including the removal of the stigma associated with bankruptcy) and increased activities from so-called IVA ‘factories’

Through not addressing issues of interpretation around the Consumer Credit Act despite requests from industry to do so, the Government has (inadvertently): Created markets that are being exploited by Claims Management Companies

(CMCs) on the back of default fees (and overdraft fees) Depressed the market for Payment Protection Insurance (PPI), potentially leaving

many consumers unprotected against unforeseen financial difficulties Allowed the unwarranted involvement of CMCs in disputes over the provisions of

Sections 77 & 78 of the Consumer Credit Act which lay down rules for the disclosure of documentation relating to financial agreements. This involvement has, in many cases, been encouraging consumers to challenge repayment of monies borrowed, and lent, in good faith; and

Expanded the application of Section 75 of the Consumer Credit Act to overseas

transactions, effectively meaning that credit card lenders in the UK are now the insurer of last resort for all transaction made by UK cardholders between £100 and £30,000 anywhere in the world


OFT Irresponsible Lending Guidance Paragraph 1.15 of the consultation paper refers to the OFT’s draft Guidance on Irresponsible Lending “which aims to ensure that lenders do not engage in irresponsible lending practices and that they provide affordable credit to consumers”. The guidance identifies types of behaviour that the OFT considers would constitute irresponsible lending. It is important to note that the draft OFT Irresponsible Lending Guidance currently available is only a draft and is undergoing its own review process. By taking counsel from a draft document, the Government is interfering with the correct and proper review of the draft document, making it far harder for stakeholders to lobby for changes if deemed appropriate. The Guidance is hugely relevant in the context of this consultation given that it covers many complementary issues and will potentially exacerbate the effect of any policy decisions. The UK Cards Association (along with other trade associations) has provided a detailed response to the OFT on the draft Irresponsible Lending Guidance. Fundamentally our main concerns around the OFT draft guidance at this stage are as follows: The guidance is effectively a new layer of regulation and has been drafted

without any attempt at an impact analysis or evidence that might provide an underlying justification for its content, which is largely subjective. Some view the Guidance as creating what is, in effect, legislation without due process or scrutiny

The guidance as drafted could have a significant detrimental effect on the UK

market and place UK lenders at a significant disadvantage compared to European counterparts

The guidance may also provide competitive advantage to overseas lenders

targeting the UK who are not bound by the same requirements There is a significant risk of market distortion that could restrict or limit lending or

lead to the withdrawal of products aimed at certain sectors of the population The guidance risks providing scope for interpretation increasing the risk of

vexatious and frivolous claims from consumers regarding the validity of their credit agreements, often encouraged by the activities of Claims Management Companies

The full UK Cards Association response to the OFT’s draft guidance is attached as Appendix 7.


Consumer Credit Directive Paragraph 1.16 of the consultation paper refers to the implementation of the Consumer Credit Directive by June 2010. With final regulations now not expected until the end of the first quarter of 2010 it is highly unlikely that any part of the credit industry can be compliant by the implementation date and that a phased or staggered implementation may be required. It is concerning that BIS are considering further regulation of credit cards through this consultation when it has proven so difficult to implement the Directive within the two years allowed. In its July 2009 White Paper ‘A Better Deal for Consumers’, the Government highlighted the core components of the CCD implementation to be: • A duty on the lender to provide adequate explanations about the credit on offer • An obligation on the lender to check creditworthiness before offering or increasing credit • A requirement to automatically disclose the identity of credit reference agencies holding information which has led to a consumer’s application for credit being rejected • A right for consumers to withdraw from a credit agreement within 14 days, without justification • Requirements for credit intermediaries to disclose fees they charge for arranging credit and to make clear whether they are tied to specific credit providers • A new right to make partial early repayment of credit (in addition to the existing right to repay early in full) • A new standardised pre-contractual information sheet enabling consumers to compare offers more easily • A requirement to comply with the findings of the OFT’s consultation on irresponsible lending, which has four principles: 1 appropriate business practices and procedures (e.g. lenders must assess the suitability of a product and the consumer’s ability to repay) 2 transparency in dealings (e.g. clear language, prominence of key terms) 3 proportionality (e.g. with respect to how lenders deal with arrears, defaults and forbearance) 4 fairness (e.g. with respect to not targeting consumers with inappropriate products or aggressive, deceptive, unfair or prejudicial behaviour) The key provisions of the Directive as far as they impact on credit cards, given our understanding of the likely implementation in the UK, are summarised as follows: Consumer Credit Directive – Key Provisions Article 4 – Standard Information to be included in Advertising Requirement for standard information to be provided by means of a representative example. Draft regulations (from BIS) have indicated a requirement for information in the representative example to be given ‘greater prominence’ in the advertisement than any other information relating to the cost of credit (though this does not reflect the Directive which requires the information to be provided in a ‘clear, concise and prominent way’) Article 5 – Pre-Contractual Information Introduces the concept of the SECCI (Standard European Consumer Credit Information) – which will potentially impact upon current use of the Summary Box and increase the risk of information overload. Potential requirement for a degree of personalisation to the pre-contract information which would introduce a two-stage process if the amount of credit is not known at the initial stage. Lenders must have the ability to show representative rates (in the case of risk-based pricing) and the provision of the credit limit at a later stage to facilitate continuance of a one-stage process. (continues over)


Article 5.6 – Adequate Explanations The Directive requires the provision of Adequate Explanations by creditors (and their intermediaries) in order to place the consumer in a position of assessing whether the proposed credit agreement is suitable for his needs / financial situation. UK regulations imply that under certain circumstances this must be provided orally. Industry’s view is that there is an inextricable linkage to the OFT’s Irresponsible Lending Guidance. The risk, given UK’s potential interpretation, is of information overload for the consumer and UK lenders / types of credit being disadvantaged as the UK appears to be going over and above Directive’s requirements. Article 8 - Creditworthiness The Directive requires that ‘before the conclusion of the credit agreement, the creditor assesses the consumer’s credit-worthiness on the basis of sufficient information, where appropriate obtained from the consumer and, where necessary, on the basis of a consultation of the relevant database.’ There is a clear interaction between Articles 8 and 5.6 with the OFT’s Irresponsible Lending Guidance proposals. Article 9 – Database Access Member States to ensure, in the case of cross-border credit, access for creditors from other member states to databases used for assessing the creditworthiness of consumers. Conditions for access shall be non-discriminatory. This may provide competitive advantage to lenders from other member states depending on how the ‘non-discriminatory’ requirement is interpreted. Article 10 – Information to be included in Credit Agreements Similar to existing requirements. Article 14 Right of Withdrawal A 14 calendar day period in which the consumer can withdraw from the credit agreement without giving any reason. In the case of cards, cancellation rights already exist, although the difficulty in compliance is in determining what must be included in the agreement in relation to the daily amount of interest. Article 15 – Linked Credit agreements Provision of rights for the consumer to pursue remedies against the creditor if satisfaction is not obtained pursuing the supplier of the goods/services. Seems to replicate, for other forms of credit, section 75 of the Consumer Credit Act 1974. Article 19 (and Annex 1) – Calculation of APRs Calculation as for UK but assumptions differ which are likely to increase the APR for all cards with an annual fee (even if the interest rate has not changed). Implications for charge cards.

There is an important concern within the industry that the outcome of this consultation stands to undermine the objectives of the Consumer Credit Directive (CCD). If the CCD is intended to encourage cross-border lending there are significant risks that: UK credit card lenders wishing to enter European markets from the UK will be

hindered by the more restricted nature of the products they can offer (unless they operate parallel systems)

That foreign credit card lenders will be able to target the UK without being subject

to the same restrictions or limitations on product design


UK credit card lenders might relocate to other members states in order to offer credit card products into the UK

PriceWaterhouseCoopers, in their annual Precious Plastic report for 2010, conclude that “the introduction of the Consumer Credit Directive…will bring fundamental change to the way credit is sold. The additional onus the regulation is likely to introduce, regarding the provision of pre-contractual information to customers, will challenge the future of face-to-face sales. For example, this may have particular impact on retailers’ ability to sell credit in-store”.


Industry Self-Regulated Improvements The industry is always looking to improve the way that it operates and interacts with and treats consumers and to respond positively to external concerns. The following initiatives, in chronological order, have been led through The UK Cards Association and its predecessor body, APACS Card Payments Group (CPG). These have been implemented in the UK credit card market either through industry led initiatives, or in response to concerns raised by stakeholders as part of the regular independent review of the Banking Code; at the Treasury Select Committee hearings of July 2003 and October 2004; as part of the development of the Consumer Credit Act 2006 and the Consumer Credit Directive 2008; and through ongoing regular dialogue with legislators, regulators, consumer groups and the media. The main areas that have been addressed by The UK Cards Association and its members have been: Best practice – addressing those business practices that critics viewed as

irresponsible or designed to mislead cardholders Improvements to transparency – a consumer armed with better information

and understanding of the product and its costs is a better and more informed borrower; and

Improvements to data sharing – to improve the quality of lending decisions The consistent aim has been to raise standards across the industry via self-regulation, in the form of codes of best practice and/or additions to the UK’s Banking Code (now The Lending Code as of November 2009), the industry’s voluntary code that sets standards of good practice. The Code itself has been the subject of regular independent review (in 2002, 2005 and 2008) with many of the measures below introduced between reviews. The following initiatives and changes are specifically of relevance: Estimated interest amount on statements showing how much interest a

cardholder would incur if they only made the minimum repayment on the due date, included in the Banking Code from January 2002

Improved detail on foreign exchange transactions showing the exchange rate

used and any associated fees, included in the Banking Code from September 2003

Information on the expiry of promotional rates, giving cardholders notice of when

a promotional rate will no longer apply to their outstanding balance, and replaced by the regular go-to rate, included in the Banking Code from January 2004

Voluntary introduction of the Summary Box version 1.0 (the UK equivalent of the

US’s Schumer Box, and approved by the OFT) to appear on all credit card marketing materials from March 2004


Publication of a report, “Are UK Households Over-Indebted?”, commissioned from economics consultancy Oxera by APACS, the British Bankers’ Association (BBA), the Consumer Credit Association (CCA) and the Finance & Leasing Association (FLA), providing a realistic assessment of the UK debt situation, critiquing economic literature, a range of existing studies on over-indebtedness and various statistical reports and databases, aimed at improving the understanding of the scale and causes of over-indebtedness

Implementation of version 2.0 of the Summary Box to reflect consumer reaction

to version 1.0, from December 2004, included in the Banking Code from March 2005

Adoption of best practice guidelines for credit card cheques covering the

information to accompany credit card cheques when they are sent out and screening of those to whom they are sent from March 2004, included in the Banking Code from March 2005

Adoption of best practice guidelines on credit limit increases covering how they

are applied and explained to cardholders from April 2004, included in the Banking Code from March 2005. Updated to a new version 2.0 in December 2005

Adoption of a health warning on all credit card statements advising cardholders

against making minimum repayments on a regular basis to be shown close to minimum repayment information, for compliance by the end of October 2004, and included in the Banking Code from March 2005

Following successful lobbying of the Office of Fair Trading (OFT) and other

parties by the credit card industry, re-convergence on a single method of calculating APRs (the Annual Percentage Rate of Charge) (following legal disagreement with the OFT) following publication of new Consumer Credit Act advertising regulations in October 2004. New Consumer Credit Act agreement regulations implemented May 2005

Introduction of a requirement to advise cardholders of where they can access

debt advice information on credit card statements (e.g. a telephone number), from the end of 2005

Introduction of a version of the Summary Box on credit card statements, from the

end of 2005 Launch of the www.choosingandusing.com website, an impartial guide to credit

cards and their features (intentionally not a best buy table) explaining to consumers all aspects of cards that were felt to be unclear or misleading by third parties, launched July 2005

Introduction of illustrative examples showing how much it would cost to pay off a

given level of debt, shown on credit card marketing materials in a common format for those that choose to use them, agreed June 2005. All but two of the thirteen major credit card lenders chose to implement illustrative examples

Introduction of guidelines on the direct sales of credit cards (i.e. third party sales

situations in shopping malls, airports, sports stadiums etc), agreed August 2005 for implementation by end 2005


New requirements on transparency of charges at ATMs implemented by LINK, the UK ATM network, from July 2005. LINK also commenced regular mystery shopping exercises to ensure compliance

Introduction of a version of the Summary Box for credit card cheques, from end

2006 Re-launch of an improved www.choosingandusing.com in May 2006, including

additional content on how interest is charged, recurring transactions, Card Protection Agencies, chip & PIN, ID fraud etc along with improved searchability and navigation

Standardisation of interest charging terminology for use in the Summary Box,

ensuring that common terminology was used by all credit card lenders Introduction of best practice guidelines for pre-paid card issuers, from September

2007 Introduction of a version of the Summary Box for pre-paid cards, from December

2007 Launch of www.retailersandcards.com website, an impartial guide to card

acceptance, Q1 2008 Introduction of an improved Version 3.0 of the Summary Box by June 2009 Engagement with the OFT and FSA in the development and introduction of an

impartial credit card comparison website, now part of the White paper proposals In addition, in the field of data sharing, The UK Cards Association members have made the following significant advances: Commitment across the industry to the sharing of full data on all credit card

accounts to the full extent allowed by law. As a result, full data sharing by all credit card lenders was in place by the end of 2005

Introduction of behavioural data sharing (BDS), resulting in the sharing of an

increased level of detail on credit card accounts (e.g. where cardholders are making minimum repayments; taking cash advances; how much they are repaying etc). Full sharing commenced in November 2008, with information now being shared on an estimated 70% of accounts


The US Credit Card Accountability, Responsibility and Disclosure (CARD) Act The consultation paper makes numerous references to the US CARD Act, the first US legislation to regulate credit cards in a generation. As such, it is the clearest sign of the US catching up with the UK, a market where consumers have traditionally had a high degree of legislative protection supplemented by a self-regulatory regime aimed at delivering additional benefits in the form of transparency, responsible lending and treating customers fairly. Whilst it is natural to want to understand what has been done in the US it is important to note that the two markets are not directly comparable and that provisions in the US do not necessarily translate into the UK, either in full or partially. As such, simply emulating the CARD Act in the UK could have different and more severe impacts on consumers in the UK than we see or predict in the US For example, the underlying legislative and self-regulatory regimes are fundamentally different. Whilst the US has developed its own regime over the years, we have seen layer upon layer of formal regulation both domestically in the UK and out of Europe, plus we have our own self-regulatory regime embodied, amongst others, in the Lending Code along with the Financial Ombudsman Service. Also, some of the key features or perceived mischiefs addressed in the US CARD Act are not features of the UK market, such as ‘universal default’ or applying a charge depending on the payment method used to settle a credit card bill. The history of regulatory intervention is different too. Whilst the Federal Reserve in the US have been fairly quiet, the European Commission, the Office of Fair Trading and the Competition Commission have all recently exercised their powers, impacting all the major revenue streams for UK lenders. This intervention has rendered the business model for a UK lender fundamentally different to that of their US counterparts, resulting in thinner profit margins in the UK and making the market much less attractive to providers of credit. There are key differences in the way the two industries operate that need to be understood, such as the availability and rules around the use of credit reference data; the ubiquity of FICO scoring in the US; transaction authorisation levels; sanctions for legal non-compliance; the way in which APRs are calculated; the level of multi-lateral interchange fees (much higher in the US than in the UK); and the activities of Claims Management Companies, to name but a few; The CARD Act is, without doubt, a technically complex piece of legislation, using terms that may have a different meaning in the UK or no meaning at all, and warrants a detailed forensic legal analysis. Added to this, it is not always clear what some of the provisions are intended to achieve or what the perceived mischief is that they are intended to address. There is also the fact that the speed with which the CARD Act was developed – and the consequent lost opportunity for detailed consideration – has increased the risk of serious unforeseen consequences, a message which we have repeatedly made to the UK Government;


It is our view that the US has embarked on a live experiment with their credit card industry, effectively redesigning the business model through regulation. Fundamentally we do not believe that the fact that the US has finally legislated on credit cards automatically means that a further round of regulation in the UK is either required or, indeed, would be beneficial for consumers.


Impact of the US CARD Act Although the US CARD Act does not come into effect until February 2010 the US credit card market is already beginning to experience change as credit card lenders react and prepare themselves for the new regulatory regime. A combination of the declining economic environment along with the new legislation is driving adjustment across the market, summarised as follows: Losses as a result of bad debt have increased while lenders have tried to pull

back on underwriting i.e. making less credit available Re-pricing actions and higher fees have become more prevalent to improve

revenue before the legislation comes into effect Both consumers and credit card lenders are shifting to different products and

payment tools These actions have manifested themselves in the following ways52: The industry growth rate (i.e. the proportion of new accounts per quarter as a

percentage of open accounts) has slowed from 1.62% in Q3 2008 to 1.21% in Q2 2009, suggesting a reduction in competition, or a rationing of credit

Total credit lines53 across the US industry have reduced by $1,032 billion, a fall of

16.9%, in the year to June 2009 Revolving balances have fallen from $988 billion in 2008 to $898 billion by June

2009, a fall of 9.0% Industry aggregate net purchase amounts54 have fallen by 12.4% in the year to

June 2009 Credit limits have been falling among existing accounts. The percentage of

accounts subject to a credit line decrease has increased by 36.4% in the year to June 2009, with an average decrease of $6,410

Re-pricing activity has increased, even among lower risk accounts. The

percentage of accounts that have been re-priced has increased by 180.4% in the year to June 2009, with an average increase of 6.1%. More accounts are priced above 18% APR, less at 0%

The percentage of balance transfers that involved a fee increased by 6.6% in the

year to June 2009 to around 87%. The fee as a percentage of the transaction amount increased by 49.0% in the year to June 2009 and now stands at around 2.7%

52 Source: Argus, unless otherwise stated 53 Source: Argus – total lines and outstanding for the industry is an aggregate of all issuers participating in the Argus US Credit Card payments Study grossed up to industry based on Nilson Report April 2009 for 2008 54 Source: Argus – purchase amount is based on issuers participating in the Argus US Credit Card Payments Study (not grossed up to Nilson reported values)


The percentage of accounts with an annual fee increased by 4.3% in the year to June 2009. The average annual fee per active account increased by 0.7% over the same period. The prevalence of annual fees is higher among higher risk accounts

During Q2 2008 some 1,060 million offers of credit cards were mailed to

consumers. In the same quarter in 2009 this number had fallen to 349 million. The mail volumes for premium cards have increased by 28% as credit card lenders focus on low risk customers to grow their businesses.

The distribution of new accounts in 2009 shows a significant skew towards low

risk accounts compared to 2008. However, despite the focus on lower risk accounts, the average credit line for new accounts has fallen from $6,425 to $6,127

The proportion of new accounts with a balance transfer that involved a fee has

risen by 23.1% in the year to June 2009. The amount of the fee has increased by 22.9% over the same period to 2.8%

The proportion of new accounts with an annual fee has risen by 14.7% in the

year to June 2009. The amount of the fee has increased by 13.2% over the same period. Annual fees are more likely on riskier accounts where around 50% of accounts involve a fee

The above information is taken from an analysis by Argus of the current US credit card market attached as Appendix 8.


The Industry Evidence Base The BIS consultation, quite rightly: Calls for proposals to be supported by robust evidence, and Acknowledges the vital role that evidence must play in the decision making

process if optimal outcomes are to be achieved To fulfil this requirement, the industry has engaged a number of internationally recognised external consultancies to provide authoritative input and comment on the options and proposals contained within the consultation. In summary, the following work has been commissioned in support of this response: Oxera Consulting – economic impact analysis (attached as Appendix 3) Argus Information & Advisory Services Ltd – detailed analysis of the UK

credit card market GfK NOP / GfK Financial – quantitative and qualitative consumer research

(attached as Appendices 3 and 4) Profiles of the consultancies and methodological information are contained in Appendix 2. The industry has also referred back to a report commissioned in 2005 from economy.com (now part of Moody’s) looking at the economic contribution of the credit industry to the UK economy and to the annual “Precious Plastic” report published by PriceWaterhouseCoopers. In addition, the industry has been supportive of independent academic research (through the provision of data), though it has not made any financial contribution to, the following: Professor Neil Stewart is a professor in psychology at the University of Warwick

who has been undertaking research into the behavioural psychology of consumers relating to the making of minimum repayments55

The UK Cards Association has also collected information from individual credit card issuers and drawn upon its own research and industry level management information (MI), including: Annual member returns to The UK Cards Association The Consumer Payments Survey (CPS), a continuous tracking market research

study commissioned by UK Payments on behalf of the UK payments industry including the Payments Council, the various clearing companies as well as The UK Cards Association

55 More information on Professor Stewart’s work can be found at http://www2.warwick.ac.uk/fac/sci/psych/research/nstewart/


The Government Evidence Base Overall, we have considered three documents: The White Paper The consultation paper The economic impact analysis The most striking thing about the White Paper and the consultation document is that the Government presents little, if any, evidence to support its case. This goes against the principles of better regulation established by the Better Regulation Task Force, particularly that relating to accountability. As a reminder, the five principles are that good regulation should be: Proportionate: Regulators should only intervene when necessary. Remedies

should be appropriate to the risk posed, and costs identified and minimised Accountable: Regulators must be able to justify decisions, and be subject to

public scrutiny Consistent: Government rules and standards must be joined up and

implemented fairly Transparent: Regulators should be open, and keep regulations simple and user

friendly Targeted: Regulation should be focused on the problem, and minimise side

effects It is particularly disappointing that BIS have not sought to refresh the definitive study undertaken by Professor Elaine Kempson of the Personal Finance Research Centre, University of Bristol, in support of the Over-Indebtedness Task Force in the early part of the decade. This work provided an informed evidence base on which to base policy priorities and decisions. It is also disappointing that the Government refers to, and gives credence to, potentially misleading data without openly questioning the impartiality of the underlying evidence base. In particular, we are concerned about the reliance upon provocative press releases from commercial organisations such as uSwitch (e.g. paragraph 10, paragraph 4.556) and moneysupermarket.com, most likely aimed at generating press coverage for these companies, increasing their profiles, and driving visits to their non-independent websites. The figures in these press releases rarely stand up to scrutiny57 and we would not regard them as evidence upon which any reliance should be placed, least of all for driving long term and rational Government policy and legislation.58

57 The UK Cards Association critique of the uSwitch press release on credit card cheques is a good example 58 For example, paragraph 4.5 of the consultation paper quotes uSwitch claiming that the average credit limit increase on an unsolicited basis is £1,538. The actual figure for any limit increase (including customer requested increases) during Q2 2008 was actually £879


This contrasts strongly with the BIS response to the annual Precious Plastic report published by PriceWaterhouseCoopers59 which we would regard as a professional, informed, impartial, considered and balanced assessment of the state of the industry. It was some surprise to industry that BIS saw a need to issue a press release commenting on the PWC report60 which contains a very important and relevant analysis.

59 http://www.pwc.co.uk/eng/publications/precious_plastic.html 60 http://nds.coi.gov.uk/content/detail.aspx?NewsAreaId=2&ReleaseID=408409&SubjectId=2


Further Comments on the Consultation Paper We would wish to draw particular attention to the following arising from our review of the consultation document, some of which are covered in more depth elsewhere in this response: Complexity and Capability Paragraph 14 of the executive summary to the consultation paper states that the complexity of credit and store cards can lead consumers into making poor choices and to incur greater debts and charges. It goes on to state a need for greater transparency. Credit cards are sophisticated products that offer a great deal of convenience and flexibility to consumers. The industry accepts that as a result of this credit cards are also, in some respects, complicated products and will always be prepared to listen to and, where justified, act upon calls for improvements in transparency. Nonetheless, it should be remembered that the features that make a credit card a sophisticated and flexible product have arisen from fierce competition between lenders in a highly competitive market. The Government should not, however, draw the illogical conclusion that it is complexity that leads consumers to make poor choices and to incur greater debts and charges. Aside from irresponsible borrowing, there is also the issue of financial capability, stated by Government in paragraph 10 of the executive summary to be low. If Government wants to ensure that consumers make better choices then the key is, surely, to address as a priority, financial irresponsibility and low levels of financial capability rather than to artificially constrain the operation of a competitive market. Irresponsible Borrowing In paragraph 4.8 of the consultation paper lists the following with respect to consumers: 30% of survey respondents agreed with the statement that “buying things on

credit does not feel like spending” 15% agreed with the statement that “I am impulsive and tend to buy things even

when I can’t really afford them” 11% agreed with the statement that “If I want something, I am prepared to buy it

on credit and think about how I will repay the money afterwards” 6% agreed with the statement that “If lenders offer me money I will take it” These are predominantly measures of consumers with an inclination to irresponsible borrowing (whilst also demonstrating that the silent majority of consumers are, indeed, responsible borrowers), and neither are they specific attitudes towards credit cards. The industry makes every attempt to identify such consumers – hence we see decline rates for credit card applications currently around 50%.


It is difficult to see how any of the measures proposed in the White Paper will necessarily address these fundamental attitudinal problems among these subsets of consumers. Constraining the industry will not constrain these individuals or alter their propensity to mismanage their finances. There is something deeper to be looked at here beyond the specifics of how credit cards are operated in order to prevent these minority groups of consumers becoming over-indebted. If over-indebtedness in the context of these attitudes is the major concern of Government – as we believe it should be – then time would be better spent addressing these errant behavioural patterns than making changes to credit card operations which are likely to disadvantage the silent, responsible majority. Instances of Unsustainable Debt Paragraph 1.5 quotes statistics about the levels of indebtedness, as seen by the Consumer Credit Counselling Service (CCCS). These figures are prefaced by terms such as “significant numbers” and “many consumers”, without any attempt to quantify. Whilst the industry has the greatest respect for the CCCS and the valuable work it undertakes, the figures presented will be representative of only a small percentage of the total UK credit card holder population. We agree that special consideration needs to be given to those who are unfortunate enough to need professional debt counselling and, indeed, that measures need to be taken to learn from their experiences such that we can try to prevent others from experiencing similar difficulties. This does not mean, however, that the overwhelming majority of consumers are both not in control financially and can not interface perfectly well with a competitive market that offers a good degree of choice. The overwhelming majority should not be disadvantaged by the imposition of one-size-fits-all solutions that could both reduce choice and increase prices. Difficulties Contacting Card Issuers In several places (e.g. paragraphs 4.8, 4.31 and 5.10) the consultation document refers to cardholders having difficulties contacting their credit card issuer. No evidence is presented to back-up this assertion. With card issuers’ contact details clearly presented on monthly statements and customer service telephone numbers on cards themselves we simply do not believe that, if a customer wants to contact their card issuer, they would find them unobtainable or difficult to contact.


Appendix 2 Consultancy Profiles & Methodologies The following section profiles the consultancies commissioned by The UK Cards Association and the methodological approach adopted by each of them. Oxera Oxera is one of Europe’s foremost independent economics consultancies.

Established in 1982, they have built a reputation for providing critical economic insight to an international list of clients including governments, regulators and major companies.

Oxera apply innovative business economics principles across sectors, spotting trends, analysing how markets develop and assessing the likely impact of these developments. Oxera focus on helping businesses shape their strategies and helping governments develop good public policy.

Oxera were been commissioned to undertake an economic impact analysis of the

BIS consultation paper and the proposals contained therein. Although paid for by the industry the Oxera report reflects their independent assessment of the economic basis for the proposals and their impact.


Argus Information & Advisory Services Overview Argus works with most of the major US and UK credit card issuers in providing credit card benchmarking, analytics and consulting support across the end-to-end lifecycle of cards management. Argus’ products and services assist financial institutions in making marketing and risk management decisions and they help institutions manage the trade-offs among price, product, risk, and customer behaviour along the customer lifecycle to increase profitability. As part of these services Argus receives from card issuers comprehensive, detailed account-level and longitudinal data covering some 75% of the UK credit card market and over 95% of US credit card accounts. It was the account-level data (limits, transactions, payments, balance tiers and interest rates etc) that was used in the account-level analysis contained in this response. Argus was selected by the largest US issuers to provide the analytical basis for their response to proposed changes in US credit card regulations in 2008/2009. Methodology Using the Argus UK issuer dataset, an analytical dataset covering the two years from 2007 to 2009 was created for the purposes of this analysis. Although the Argus UK dataset has issuer data from 2005, issuers joined the study progressively and so 2007 was selected as the starting point so as to provide the best possible coverage. The one significant UK issuer that does not subscribe to the Argus services provided data to Argus for their portfolio for the purposes of this exercise, to ensure the fullest possible coverage of the UK market within the time available. Risk Reporting Each issuer participating in Argus’s UK Credit Card Payments Study uses custom risk and behavioural scores. To fairly compare and benchmark performance by risk, Argus has developed standardised risk segments. Using historic data, Argus calculated unit loss rates for each issuer’s risk and/or behavioural scores. Unit loss rates are expressed as the expected probability that an account will charge-off or declare bankruptcy during the next twelve months. Argus assigned each account to one of nine loss rate categories. These standardised unit loss rates form the basis for much of the risk reporting in the analysis. Risk bands Argus Standardised Loss Rate Low – 9 0.00% - 0.49% 8 0.50% - 0.74% 7 0.75% - 0.99% 6 1.00% - 1.74% 5 1.75% - 2.49% 4 2.50% - 3.99% 3 4.00% - 5.99% 2 6.00% - 7.99% Hi – 1 8.00% or greater


Control Groups When increasing credit limits or increasing the interest rates for existing credit cardholders, some issuers define a control group — i.e. a group of cardholders that does not receive a credit limit or interest rate increase but has the same characteristics as those that do receive an increase. This allows an issuer to assess the impact of its policies by undertaking an analysis and comparing the behaviour of those that received an increase with those in the control group. In its dataset, Argus cannot observe this control group and therefore proxies it by identifying cardholders that have exactly the same characteristics as those that receive an increase (in credit limit or interest rate) apart from the fact that they did not receive an increase for at least three months following the increase. By definition, such a proxy control group will never be the same as the ‘real’ control group — for example, some members of the proxy control group may in fact have received an increase in the credit limit within the time period studied (although after the initial three months). The results of the proxy control group analysis should therefore be interpreted with care. Although it does not necessarily provide conclusive evidence, it does constitute useful indicative evidence. Where relevant, Oxera asked issuers whether they could confirm the results of the Argus analysis on the basis of their own internal analysis using control groups. This has been reported in the assessment.


GfK NOP / GfK Financial GfK NOP provides insight through cutting-edge quantitative and qualitative

research surveys. Their market research experts cover both UK and international markets, offering specialist knowledge and insight including a specialism within the financial sector through GfK Financial.

GfK Financial is the premier provider of market research to the global financial

services industry. GfK have expertise in the banking, investments and insurance sectors, as well as their trade and professional associations. GfK Financial offers global, end-to-end solutions based on a complete range of qualitative and quantitative methodologies and innovative techniques, together with leading-edge syndicated studies. GfK is particularly well-known for the Financial Research Survey (FRS™), the largest and longest running survey of its kind, interviewing 60,000 GB consumers in the home or online every year. The questionnaire covers product holding and acquisition, usage behaviour and a wealth of demographic and attitudinal data.

GfK NOP have undertaken both qualitative and quantitative consumer research,

supplemented by analysis of the long-standing Financial Research Survey (FRS). Ideally we would have chosen to conduct a full conjoint analysis research project to understand fully the trade-offs that might result from the changes proposed by BIS but unfortunately the limited time available did not allow for this.

The quantitative study involved 1937 telephone interviews with consumers over the weekends of 27-29 November and 4-6 December using two waves of GfK’s (weekly) Telebus telephone omnibus. The qualitative study involved a programme of twenty-two depth interviews together with four deliberative group discussions. This combination of techniques has the following advantages: Individual interviews give experience-based feedback on the reasons for using

card-based credit and consumer attitudes towards this, in terms of benefits and drawbacks. In these interviews we also assessed understanding of card-based credit and how this influences current choices and usage;

Deliberative group discussions allowed us to input balanced information points –

that were considered and weighed-up by consumers – providing the opportunity to get beyond knee-jerk reaction, to be debated and assessed in terms of advantages, drawbacks and consequences, both at a market and an individual level

credit and store cards review

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