Tim Hogg

By Tim Hogg

Credit cards are complex, and we use them to meet different needs...

  • to borrow money,

  • to manage our monthly cashflow,

  • to protect large purchases,

  • to rebuild our credit score,

  • to earn rewards.

The Consumer Duty raises the bar for credit card providers to evidence that they are providing fair value, and that that consumers understand their communications. The industry has been working hard on both counts.

Over the last year we’ve advised a number of credit card providers, kicking the tyres on their homework.

  • We’ve seen good practice from providers really getting to grips with their business model and customer base.

  • We’ve also seen poor practice, where providers have been unwilling to look too closely at their current business model from a customer perspective.

  • Overall, our view is that the credit card market remains vulnerable to sweeping regulatory intervention.

Nevertheless, there are four things that providers can do to protect themselves against future interventions...

1. Be honest

Given the complexity of credit cards, it is not surprising that some consumers do not get the best out of their credit card. There are many scenarios in which customers could feel 'caught out' by their credit card. Poor customer outcomes are not as rare as we wish they were.

We’ve seen good practice, with some providers recognising that these poor outcomes occur. These providers are well-placed to identify these groups of customers and intervene to improve their outcomes. For example, we've seen some providers sending new targeted communications and removing certain fees and charges.

2. Think about usage behaviour

The first port of call for customer segmentation is often broad profiles based on demographics or wealth, rather than credit card usage.

We’ve good practice where providers analyse the profitability based on how customers use their credit card.

  • Who repays their balance transfer within the promotional period?

  • Who generates significant interchange revenue?

  • Who repeatedly withdraws cash?

These questions get to the heart of the business model.

3. Think like a competition economist

0% promotional periods are likely to result in economic cross-subsidies. Many of the customers who repay within the 0% period are likely to be loss-making, meaning that they are being cross-subsidised by those who take longer to repay.

Back in 2015, the FCA concluded that these cross-subsidies were pro-competitive. This conclusion may be revisited.

For example, in 2021 the FCA intervened to ban promotional discounts in motor and home insurance. This was because the nature of competition in these general insurance markets was not delivering good outcomes for many consumers.

So, if you are running the argument that your credit card pricing is pro-competitive, then get your ducks in a row. Gather the supporting evidence that competition is working well for the full range of your customers.

4. Think the unthinkable

We’ve seen poor practice, where providers are unwilling to explore whether different aspects of the product design and pricing is in the best interests of the customer. Often, the defence in these cases is that ‘this is a sector-wide issue – we cannot act alone’.

While this is certainly true in some cases (due to the competitive dynamics), we’ve also seen good practice where providers have found creative ways to deviate from the market-wide norms.

These providers are ensuring that they stand in good stead. They will be well-prepared should the regulator take action on market-wide issues, whilst also delivering better consumer outcomes.