About the white paper
Cardeo is transforming the UK credit card market for good. We’re a socially responsible fintech with an open banking app that helps credit cardholders manage their accounts better, pay down debt and save money.
Many people don’t realise how broken the UK credit card market is. How customers are paying over the odds while banks break the law to engage in data protectionism. This white paper lays bare the problems in the credit card market – and the surprisingly simple solutions for making it fairer for consumers.
The credit card market in the UK is broken, but with the right political determination and smart regulation that embraces open finance, it can be fixed.
Credit cards don’t work for most of the UK population. The interests of consumers looking for a flexible way to borrow are not aligned with those of an industry relying on people spending beyond their means.
Maintaining high levels of personal debt is good business for the credit card industry. Rising household debt – of which around 20% is consumer credit – has outstripped household income over the past 10 years in the UK.
“Customers battle a huge amount of artificial friction to access their data. Much of it is caused by providers breaking the law.”
The cost of living crisis is already fuelling higher consumer debt on credit cards. Borrowing jumped by double digits in 2022. Consumer credit interest rates in Britain have bucked the global trend and have gone up sharply. Since the Covid lockdowns, outstanding credit card balances have rocketed to nearly £65 billion.
The Financial Conduct Authority (FCA) wants to ensure that firms provide good outcomes for customers, with products and services offered meeting their needs and offering fair value. In the credit card market this is definitely not the case.
Customers struggle to manage their credit cards, battling a huge amount of artificial friction to access their data through open banking. Some of this is the lag between the rules and changing technology; much of it is caused by providers breaking the law.
As a result, most credit cardholders do not even know how much interest they are paying. Only a quarter understand when to make a repayment to avoid additional charges. Cumulative interest on credit cards generates more than £14 billion for providers.
Because customer data is not accessible, switching in this marketplace is low. The loyalty penalty for the 90% who stay with their current credit card provider is in reality an apathy penalty: these products are designed to foster an elevated level of personal debt. This is a feature not a bug. 80% of the revenue from consumer credit is interest paid by customers.
The future can be brighter for consumers, but only if major changes are implemented within the industry, including further regulatory intervention.
The legal framework is already partly in place but providers are often failing to comply with it, and common sense changes such as normalising access to key account data through open banking could dramatically improve customer outcomes. Vitally, cardholders should find their own information readily available in digital format, which is not the case today.
This is the shift we need to make: from apathy penalty to real customer fairness, enabled by data. To do this, Cardeo’s recommends:
Championing accessible customer data in the Consumer Credit Act review
Embedding the PSD2 data availability principle into the credit card market
Ensuring that the OBIE’s successor is properly accountable
Establishing an overarching regulator to assess open banking
Enforcing legally the electronic sharing of key account data
The UK’s credit card habit costs consumers a fortune
UK credit cards: a badly broken market
Britain’s growing credit card debt mountain is an outlier
Credit cards are by far the most common form of consumer credit in Britain. The reasons for their popularity are varied and range from allowing for a flexible borrowing option, to offering additional benefits such as loyalty points and cashback on purchases. Credit cards are a payment option for everyday spending, which is not true of most other consumer loan products.
The popularity of credit cards contributes to towering personal debt. As a percentage of disposable income, household debt was around 150% in 2022. Although slightly lower than its peak during the financial crisis of 2008, it has remained high in the UK over the past few years. This makes the UK an outlier. We have one of the highest levels of indebtedness in Europe, notably higher than France (~130%) and Germany (~100%).
This debt does not come cheap. At almost 24%, credit card annual percentage rates (APR) are the highest that they have been in years, putting even more pressure on consumers should the economic environment deteriorate. While interest rates on new consumer credit have been decreasing across Europe, they have gone up sharply in the UK.
"Outstanding credit card balances are nearly £65 billion – over £2,300 of credit card debt per UK household."
Even in the United States, renowned for its high level of personal debt and heavy use of credit cards, household debt has been decreasing steadily over the past 15 years from its peak at nearly 150% in 2008 to around 100%, according to the latest data available.
While other countries are regaining control of their personal debt, consumers remain trapped in reliance on credit cards in the UK. It has become acceptable to hold large revolving balances on credit cards, a habit driven by marketing pressure from providers looking to increase their loan portfolios. While credit card balances make up 2% of outstanding consumer credit balances in Germany, the figure in the UK is 35%.
To put a number on that amount of debt, outstanding credit card balances in the UK stand at nearly £65 billion. This figure has grown significantly since the Covid lockdowns and equates to over £2,300 of credit card debt per UK household. It is a regular, monthly, debt anchor on household finances across Britain. 14.5 million customers are paying an average of £975 in credit card interest every year.
The situation makes the UK one of the largest credit card markets in the world after North America and by far the largest in Europe - more than three times larger than France’s revolving loan market. And the UK credit card market is still growing, at an annual rate of more than 10%. This growth is expected to remain strong in the months to come as the cost-of-living pressures drive a significant rise in borrowing.
One of the factors that will ensure that growth continues is Britain’s changing attitude to physical money. Cash transactions have fallen steadily from over 50% of all payments in 2010 to only 17% in 2020, a trend that accelerated with the pandemic. As contactless payments have become more commonplace, UK consumers are paying more and more with cards – through both plastic and digital means. Contactless credit card transactions were more than 50% higher in May 2022 year-on-year. By 2031, it is expected that cash will account for only 6% of all payments made in the UK, raising profound policy questions for those grappling with the reality of a quasi-cashless society. Card payments have become the default payment choice, abetting the temptation to use credit over debit.
Inflation is fuelling the cost, and appeal, of credit cards
Inflation in Britain has reached levels not seen in decades, directly impacting the cost of living for the population. The Office for National Statistics (ONS) announced that the Consumer Prices Index has a 12-month growth rate of over 10% in November 2022 – the highest level since the 1980s, and one of the highest inflation rates in the G7.
The Bank of England has raised its main bank rate nine times in 2022 to 3.5%, the biggest set of increases since 1995. Economists expect the rates to continue to rise in the next few months as prices climb and the economy deteriorates materially. Most credit card APRs are variable and linked to the Bank of England base rate, meaning that standard interest rates are also going up.
The increased burden on consumers is showing. Almost 20% of UK credit card customers missed a credit card payment in the first half of 2022 due to the rising cost of living. When this happens, they incur overdue payment fees and interest charges while also damaging their credit scores.
The economic environment is expected to get worse before it gets better, driven by higher energy prices stemming from Russia’s invasion of Ukraine. The Bank of England believes that inflation will remain above 10% in 2023 before falling back but remaining above the 2% target until at least 2024.
“Credit card borrowing is rising at the fastest annual rate in decades, as consumers borrow more for everyday spending to counteract the effects of inflation.”
The rapid deterioration of the UK economy has had an acute impact on the personal finances of the population, as the cost of living has squeezed household budgets. Wage growth is barely half that of inflation. Credit card borrowing is rising at the fastest annual rate in decades, reflecting a worsening cost-of-living squeeze in which consumers borrow more for everyday spending to counteract the effects of inflation.
Recent Bank of England data highlighted that consumers in the UK took on a net additional £1.2 billion in consumer credit in November which is above the 12-month pre-pandemic average of £1 billion.26 This is a worrying trend that indicates that personal finances are deteriorating across the UK.
Cost of living pressures are expected to continue to drive a significant rise in UK credit card borrowing. Consumers will increasingly turn to credit, and credit cards, to bridge the gap between the decrease in real-term wages and their budget.
Providers lead cardholders into a high interest trap
Credit cards are an expensive and ineffective way to borrow for many people. But they are flexible. Credit cardholders are willing to pay more for the same item than people paying with cash or a debit card, as getting something now and paying later facilitates willingness to purchase.
As credit cardholders’ debt mounts up, it appears commendable that their card providers inform them about minimum payments. Minimum payments are designed to ensure that individuals pay down their debt over time. This runs contrary however to the intention of providers to keep customers in debt for an extended period, and the benefit of minimum payments to customers is far from clear cut.
“Making only the legal minimum repayments each month, it would take a cardholder over 25 years to repay in full a credit card on the average interest rate.”
If a credit cardholder were only to make the legal minimum repayments each month (1% of the outstanding balance), it would take them over 25 years to repay in full a credit card on the average interest rate. Persistent debt rules introduced by the FCA seek to compel providers to intervene where customers demonstrate consistent minimum repayment behaviour, but this only impacts around half of the UK population that is deemed to be in persistent credit card debt.
The main source of revenue from consumer credit – around 80% in the case of the UK – is the interest paid by consumers on their outstanding balances. Therefore, the higher the average annual percentage rate on this approximately £65 billion of outstanding credit card balances, the better for providers. The incentives are not aligned at all between credit card providers and those who use them.
Although scheduling minimum automatic repayments could be seen as a way of helping customers remember to repay their balances, it has an unintended psychological effect: drawing attention away from the card balance due. As a result, cardholders incur considerably more credit card interest than the late payment fees that they avoid. Some cardholders misunderstand the concept of minimum repayment amount, believing that it would allow them to repay their debt in a timely manner, or that it is a recommended repayment approach.
Around 40% of credit cardholders in the UK, roughly 14.5 million people, pay interest on their balances. Only a third of cardholders pay by automatic payment, and over the course of a typical year 75% of cardholders regularly make only the automatic minimum payments. They are barely reducing their balances while high interest is incurred.
Cardholders are damned if they switch, damned if they don’t
One answer for customers facing high levels of interest on their credit cards would be to switch to better value products. Given that credit cards are a highly regulated and standardised product, one might think that the industry would be commoditised, characterised by low-friction switching from one similar card to another. The characteristics of the UK credit card market should mean it is ripe for high levels of switching. But the credit card market is extremely inefficient and switching in the UK is very low, estimated to be between 3% and 14%.
“Switching is more expensive for consumers with high balances, and it is more likely that they will end up with lower levels of credit at a different provider.”
Credit cardholders do not tend to switch providers as switching costs are notably loftier among consumers with high balances. They are likely to end up with lower levels of credit, which imprisons cardholders with their current providers. Interest rates on new consumer credit have been going down steadily across the Euro area over the past 10 years, notably in France which is a sizable market when it comes to consumer credit. Yet in the UK, over the same period, they have gone up sharply. This is a deterrent: switching is harder and more expensive for consumers with high balances, and it is more likely that they will end up with lower levels of credit at a different provider.
Credit card providers incentivise customers with high balances to switch to their 0% balance transfers. The reason for this is simple: it is a well-established trap. Only half of credit cardholders with a 0% balance transfer deal repay the full amount of the balance transferred by the end of their promotional period. The remaining cardholders eventually pay a lot of interest on their balances.
As for debt consolidation products, credit cardholders do not tend to switch to them because they value the flexibility of their cards as well as the rewards that come with them. These rewards are not found in personal loans.
Another block to switching is the availability of data. The credit card market is opaque and conceals or makes hard to understand customer data that would be crucial to developing a repayment strategy or switching to an alternative form of finance. Lack of available data about their own finances prevents customers who need it the most from switching to a better product and effectively refinancing their personal debt. Clearly, that is not something that credit card companies want.
It’s a struggle to manage credit cards, despite open banking
The tragedy of being a credit cardholder in the UK is not just in being trapped incurring high interest on an insurmountable balance. Cardholders also find it hard to keep on top of their credit card accounts due to the challenges of managing multiple cards.
A typical credit cardholder in the UK owns multiple cards, with multiple payment dates and manual payments, often made using different apps. Automated repayments reduce late and missed payments, protect a user’s credit score and cut the overall debt load by incurring less interest over time – but a majority of consumers with more than one credit card do not have these set up.
“6 out of 10 cardholders do not know how much interest they are charged. Only a quarter understand when to make a repayment to avoid additional charges.”
Evidence suggests that card providers do not do enough to help their customers manage their accounts. 6 out of 10 credit cardholders do not know how much interest they are charged and only a quarter understand when they need to make a repayment to avoid additional charges.
There are about 53 million credit cards in the UK – almost 2 credit cards per household. 67% of these are active accounts, which means they have balances outstanding at the end of each statement period. Could the remaining third not be cancelled to make account management simpler? The reason that many cardholders don’t cancel even unused cards is that it may damage their chances of getting credit.
This is a typical personal finance conundrum. Lenders value consumers who manage multiple credit accounts. Cancelling a credit card increases a consumer’s overall credit utilisation - the proportion of available credit used. Although the total amount of borrowing may remain the same, by removing the headroom of a cancelled card, a cardholder’s utilisation is immediately increased, which can lower their credit score. There is an incentive for consumers to keep many cards with credit limits, which can encourage overspend.
Credit cardholders who miss payments are usually charged a late payment fee. Their credit scores end up damaged, and they are charged interest on their repayments.
Innovation like open banking can help consumers manage these forgotten credit cards as well as optimise the interest and charges they pay by facilitating the switch to better options with lower APRs. However, although there have been some significant achievements since the inception of open banking, like the 5 million user milestone, it has not realised its full potential. Significant changes to the retail banking landscape – including credit cards – have yet to materialise.
How the credit card market can be fixed
Despite all the challenges facing cardholders, the UK’s broken credit card market can be turned around. There is good reason to be confident of this because – surprisingly for what seems to be an intractable set of problems – the framework is largely in place already. What is required now is the political will to drive the changes through.
Build on the foundation of open banking
Open banking has enormous potential but has been only a mitigated success in the UK due to a lack of political will to use it as a pro-market, pro-competition and pro-consumer bulwark against monopoly providers and legacy banks.
“One of the underpinning premises of the open banking framework was to break up the hold that the incumbent banks have over their customers.”
Legislation that enabled open banking in the UK was enacted in 2017 when the revised European Union Payments Services Directive (PSD2) came into effect. More than five million people in the UK are now considered to be active users, which is one million more than in 2021. However, one of the underpinning premises of the open banking framework was to break up the hold that the incumbent banks have over their customers. Despite the plethora of new entrants, the market share that the larger banks have in current accounts and personal lending including credit cards has barely shifted.
Most importantly, the key consumer principle underpinning PSD2 – that if a customer can access their data electronically, it should be made available to a regulated TPP with their permission – applies regardless of the financial product. Yet the focus of the open banking regime until now has been on financial products offering the most limited available customer savings, not the greatest. Many firms are failing to comply with this principle of data access, and there is limited evidence of enforcement action against them.
As a result, awareness and uptake of open banking has been slower than expected. Nonetheless, it has the potential to transform customer outcomes in the credit card market and in the consumer finance landscape more broadly.
Bring customer and provider outcomes into alignment
“Using machine learning, lenders are beginning to build powerful credit risk models, and are able to offer better rates to more people.”
Open banking offers an opportunity to rethink income and affordability analysis. It can help lenders rely on customers’ actual transaction data rather than just backward facing credit scores. This would be an advantage to many. The average credit score in the UK is deemed to be “fair” which makes it nearly impossible to obtain a credit product with a traditional bank at a reasonable interest rate. Using technology such as machine learning, lenders are beginning to build powerful credit risk models fed by a fuller picture of customers’ finances, and therefore are able to offer better rates to more people.
Open banking also reduces risk for credit card providers, as they have real-time financial data that can provide a forward looking picture. It aligns outcomes between the consumer finance providers and their customers, allowing them to borrow what they should and much more in line with their personal financial situation.
In addition, open banking can lead to better credit card management and consumer debt management, notably through providing a clearer and more comprehensive picture of an individual’s financial position. This analysis can also lead to smart debt consolidation via products with lower APRs. That is not something that traditional credit card providers prioritise – they wish the payment tool and lending facility to be inexorably linked, and their customers locked in.
Enforce data sharing for today’s technology
Data ownership is a significant topic for UK consumers. Although increasingly confident to share personal data with regulated companies, the vast majority of the public wants more control over the information that is being shared. Furthermore, consumers view their personal information as an asset that can be used to negotiate better offers and prices much more than before.
The mandate is clear, and people wish to be back in control of their data. This was one of the premises of the open banking framework and the Payment Services Regulations 2017 (PSRs) at its inception.
However, not every company wants to give customers what they want if it goes against their business model. Credit card companies create a huge amount of artificial friction for customers to access their data. In turn this prevents customers from having the right information to be able to switch providers. Credit card providers are failing to comply with the regulatory requirements that are part of the PSR legislation.
In particular, credit card providers are breaking the law by preventing customers from accessing their own account information through an external company such as a financial technology company or another TPP.
Certain data about credit products has been defined in law as vitally essential for a customer to know. As such it is made available on every paper statement. This data allows customers to make informed repayment decisions, as well as to compare their current product with others more easily, in order to switch if desired. Today, however, the same legally required data is not made available in a standardised electronic format to customers. Those customers accessing their accounts in electronic form are not guaranteed to be able to see this data. This becomes even more illogical when we consider that most credit card companies encourage their customers to switch to paperless statements and to access their accounts online.
“More control over personal data would mean better possible customer outcomes by opening a wider range of tools for them to manage their money.
Nearly one in two adults in the UK does not feel confident in managing their money day to day. The cost-of-living crisis is likely to accentuate this sentiment of ill-being. More control over personal data would mean better possible customer outcomes by opening a wider range of tools for them to manage their money. There need to be fewer barriers to money management and product switching to achieve improved customer outcomes, and that will only be achieved by credit card providers complying with their regulatory requirements – in electronic form as well as on paper.
Give regulatory intervention teeth, in line with Consumer Duty
An insistence on comprehensive, enforced and technologically compliant data sharing is in perfect concert with the FCA’s own call for greater transparency, enhanced competition and improved financial inclusion in financial services. These priorities are reflected in the FCA’s business plan in 2022 and 2023. Notably, the regulator is committed to ensure that consumer credit markets work well.
“The FCA should have a closer look into the practices of credit card providers when it comes to enabling product switching.”
As well as statement data sharing practices, the FCA should have a closer look into the practices of credit card providers when it comes to enabling product switching. This requires a significant amount of effort from customers in order to first, access their own data, and second, to switch and refinance without having to go through a number of manual steps.
The FCA’s Consumer Duty objective will come into force in July 2023. A great number of these new rules target the credit card market, acknowledging the issues created by this most popular form of credit. Providers who do not comply will not be revealed; the FCA is the regulatory authority for PSD2 but enforcement action against providers is confidential.
The Consumer Duty’s focus on fighting back credit card providers that deter consumers from acting in their own best interests, notably by erecting barriers to exit, needs to be well thought out and comprehensive. It must consider all the barriers that are erected including those relating to data. Customer fairness is paramount for the FCA, therefore ensuring that credit card providers are fully complying and enabling customers to access the whole of their data would align with that stated goal.
Customers should be given the same right to receive their credit card summary box information via a nominated TPP as they already have to receive it directly from their credit card provider – and in the same way. That would lead to a significant leap in financial inclusion and greatly improve the consumer credit market, in line with the FCA’s stated objectives.
Make an open banking market that works for consumers
For open banking to work, data needs to be freely accessible. Not hoarded, as many credit card providers are guilty of doing. The incentives for providers to free up their customers’ data are minimal in the absence of prescriptive regulation and effective enforcement.
The successor body to the Open Banking Implementation Entity (OBIE) now faces a major test in whether a renewed open banking framework can enable consumers to wrest control of their data from their banks and card providers. The test is whether we will use the full potential of open banking, or if we continue with a half-baked solution that does not satisfy anybody except the defenders of the status quo and those who profit from poor customer outcomes.
There have been some recent positive changes in open banking. The FCA’s updated guidance on 90-day Strong Customer Authentication means that customers can now reauthorise connection to TPPs without having to log in their banking apps. This was a major point of friction for open banking technology providers as well as participants. But there is still a long way to go to get open banking working properly.
“Further improvements will come from initiatives that allow the sharing of customer data in secure and convenient ways.”
The FCA does recognise the signs that incumbent banks’ historic advantages are starting to slowly weaken. This is driven by digital innovation and changing consumer behaviour thanks to new entrants and fintech startups, but further improvements will come from initiatives that allow the sharing of customer data in secure and convenient ways. Open banking was designed to do this. Data is key to building repayment strategies and this is why it is being concealed by providers. Good customer outcomes come way after maximising the bottom line.
1. Champion accessible customer data in the Consumer Credit Act review
Use the Government’s forthcoming review of the Consumer Credit Act to introduce a new pillar for credit products – that customers’ data is their own and should be properly accessible. Regulations that govern consumer credit should make it easy for a customer to see, compare, and use their own data in an interchangeable way, regardless of product.
2. Embed the PSD2 data availability principle into the credit card market
Review the implementation of PSD2, five years on – focusing on the underlying principle that where data is made to a consumer in any channel, it should be made available to regulated TPPs with the customers’ permission. The compliance and success rate should be openly and easily measured so that improvements can be made and market participants held to account. This would stimulate new open banking use cases and improve customer outcomes.
3. Ensure that the OBIE’s successor is properly accountable
Make the successor body to OBIE accountable to Parliament, while retaining its independence. Political determination should be applied to ensuring the benefits of open banking accrue to consumers rather than the big banks by setting the direction of this body to target the most costly financial products that have the greatest capacity to boost household incomes.
4. Establish an overarching regulator to assess open banking
Use HM Treasury’s Future Regulatory Framework review to establish a single, accountable, and proactive regulator for all aspects of open banking, building on the success of the OBIE and Joint Regulatory Oversight Committee’s ongoing work and consultations. The FCA should regularly publish an assessment of compliance with PSD2 among credit card providers and make public its enforcement action with regard to open banking.
5. Enforce legally the electronic sharing of key account data
Legislate to force consumer credit providers to provide certain key data fields – known as summary box information – electronically. Information about consumer credit products should be made available to customers in a standardised electronic format – and to regulated TPPs with the customers’ permission.