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01/11/2004
Balance transfers cost lenders £1bn in 'lost' charges
Balance transfer offers are costing UK credit card issuers around £1 billion a year in lost revenue and are cannibalising margins, according to a study published today.
In the review, 'Precious Plastic 2005', PricewaterhouseCoopers (PwC) said that lenders may start to target higher risk applicants with standard single rate products as the 0% balance transfer products are being increasingly used by people hopping from one card to another to avoid interest-rate charges.
Lending to higher risk customers is still not well developed in the UK market and it is anticipated that the industry will increasingly focus on increasing penetration of the eight million adults in the UK that could be classified as "non-prime".
PwC partner Richard Thompson said: “There is a clear danger that issuers are growing a breed of so-called ‘rate tarts’ who will move perpetually from issuer to issuer to finance their debts at no cost.
"We anticipate that in future issuers are likely to become increasingly selective about which customers they offer balance transfers to and they will focus more heavily on customer retention. There is likely to be a targeted decline in the APRs charged to some borrowers to prevent other lenders from ‘cherry picking’ the most profitable customers.”
The study also found that new regulations concerning consumer credit could cause products using a risk-based pricing approach to "appear more expensive than before".
Under the new rules, issuers are only permitted to advertise rates for which a minimum of 66% of customers will qualify. PwC has said that there may be a shift in the market towards the promotion of single rate products – or lenders may be forced to switch higher risk applicants into alternative products to avoid having flagship products with high ‘typical’ rates.
PwC said that the number of adults holding a credit card will increase by a further 3-4 million or 10% over the next few years, which will partly be due to growth in non-prime lending. A third of the £180 billion of unsecured consumer debt in the UK is owed to credit cards and is growing faster than the rest of the consumer credit market.
Recent industry data shows that consumers now receive an average of 6.2 advertising mailings per week of which one in four is sent by the credit card industry.
(gmcg/sp)
In the review, 'Precious Plastic 2005', PricewaterhouseCoopers (PwC) said that lenders may start to target higher risk applicants with standard single rate products as the 0% balance transfer products are being increasingly used by people hopping from one card to another to avoid interest-rate charges.
Lending to higher risk customers is still not well developed in the UK market and it is anticipated that the industry will increasingly focus on increasing penetration of the eight million adults in the UK that could be classified as "non-prime".
PwC partner Richard Thompson said: “There is a clear danger that issuers are growing a breed of so-called ‘rate tarts’ who will move perpetually from issuer to issuer to finance their debts at no cost.
"We anticipate that in future issuers are likely to become increasingly selective about which customers they offer balance transfers to and they will focus more heavily on customer retention. There is likely to be a targeted decline in the APRs charged to some borrowers to prevent other lenders from ‘cherry picking’ the most profitable customers.”
The study also found that new regulations concerning consumer credit could cause products using a risk-based pricing approach to "appear more expensive than before".
Under the new rules, issuers are only permitted to advertise rates for which a minimum of 66% of customers will qualify. PwC has said that there may be a shift in the market towards the promotion of single rate products – or lenders may be forced to switch higher risk applicants into alternative products to avoid having flagship products with high ‘typical’ rates.
PwC said that the number of adults holding a credit card will increase by a further 3-4 million or 10% over the next few years, which will partly be due to growth in non-prime lending. A third of the £180 billion of unsecured consumer debt in the UK is owed to credit cards and is growing faster than the rest of the consumer credit market.
Recent industry data shows that consumers now receive an average of 6.2 advertising mailings per week of which one in four is sent by the credit card industry.
(gmcg/sp)
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