Credit card market working well, but room for improvement

Posted: 30th November 2015

In the main, firms operating in this sector can take comfort from the FCA’s latest findings, although there is room for improvement. 

In this blog we highlight our reading of the key ‘take aways’ for firms and the actions they can take to support these customers, many of which are vulnerable, with ‘problem debt’. The prize for firms acting on the findings in the report is a reduction in stress and hardship for many of their customers as well as positively impacting the level of defaults and write offs.

FIRST THE FCA RESEARCH

There are about 30 million card holders in the UK with an estimated £61 billion of outstanding credit card balances. Quite a staggering amount which represents one of the largest areas of unsecured lending, representing a third of total unsecured borrowing in the UK.

Given this level of debt and with credit openly available to all, it is important that firms are designing products and the industry is operating in a way that helps consumers manage their use of credit ensuring good outcomes for consumers.

KEY FINDINGS FROM THE FCA INTERIM REVIEW

Ensuring fees and charges are clear

One interesting statistic from the consumer survey was that whilst consumers look at features they consider as important for their requirements and circumstances, consumers were neglecting features that were arguably more important given how customers actually use their credit card. For example, 82% did not select interest rate and 78% did not select Annual Percentage Rate (APR) as one of the most important features.

One common feature of credit card use is that customers pay more in debt service cost and take longer to pay off debt than they need to. Whilst one might argue this is customer choice, the debt becomes more expensive than it needs to be and increases the risk that it becomes problematic in the future. Whilst not perceived to be as important to customers, the industry must acknowledge the crucial impact fees and charges have on customers and position these clearly and transparently. The FCA found that fonts used for some documents are too small and at times illegible. Firms must ensure clarity and transparency of any Terms and Conditions documentation enabling customers to gain a full understanding of all legal obligations tied with their credit card as well as being fully aware of any consequences that will occur if consumers are unable to meet certain prescribed requirements.

Affordability and customers with persistently high levels of debt

The FCA found that 2 million people are in serious arrears or have defaulted. A further 2 million people have persistent levels of debt that some may be struggling to repay. A further 1.6 million people are repeatedly making minimum payments. 5 million customers, on current repayment patterns, and assuming no further borrowing, will take more than 10 years to pay off their balances. The FCA found that affordability assessments had room for improvement and stronger incentives were needed to help those with persistent debt, intervening earlier to reduce burdens before they become problematic. The remedies proposed by the FCA include;

• Firms sending reminders via text or email to ensure repayments are made on time
• Lower cost credit cards to those who appear to be building up problem debt therefore making repayments more affordable
• Contacting customers earlier on to establish whether they are in financial difficulties and deciding whether to exercise forbearance, giving customers additional time to pay off debts

Shopping around and switching

Another intriguing finding from the FCA market study explains how consumers find it difficult to compare credit card products and to determine the best deal for their circumstances. The FCA also found that some consumers with higher risk profiles are less willing to shop around for fear of affecting their credit record. They also may lack understanding of credit card terminology, such as knowing what APR is, impacting both their understanding of a key feature of a product whilst also impacting the use online comparison sites to search around for the best deals. Not only is it important for online comparison sites to ensure clarity and ease of use for their websites, it is also crucial for credit card providers to ensure customers are well-informed about its features and consequences. Credit card providers and price comparison websites both have an important role to play here to enhance transparency about products and their features.

SO WHAT NEXT?

The interim report highlights a market working well but where improvements could be made.  Firms should utilise the opportunity this report presents to consider current practices and benchmark themselves against the market findings ahead of the FCA’s findings and conclusions expected in Spring 2016.