The UK Retail Banking Market Outlook

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FINANCE

The European Savings and Investments Outlook Opportunities in the wake of a stock-market decline By Barbara Kubis-Labiak

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Barbara Kubis-Labiak Barbara has a BA (Hons) in Business and Management and is currently at the end of her MSc in International Finance degree. Barbara started her career working as an intern for the European Commission in Brussels, and then in 1999 she joined Datamonitor Financial Services department as an analyst. Barbara's work at Datamonitor involved various projects and reports, including the FinTab project, where she helped to develop an online data resource covering the insurance, banking, investments and payment cards sectors. Barbara also authored a number of reports: Retirement Provision in Germany 2001-2008, Retirement Provision in Germany 2002, European Mutual Funds 2001, UK Wealth Management, Distribution of life insurance and pensions in Europe 2002 and Central and Eastern European Life and Pensions 2002, as well as consultancy projects, for example Motor insurance distribution in central Europe, Competitors in occupational pensions in Germany, Bausparkassen in Germany and many others.

Copyright © 2004 Business Insights Ltd This Management Report is published by Business Insights Ltd. All rights reserved. Reproduction or redistribution of this Management Report in any form for any purpose is expressly prohibited without the prior consent of Business Insights Ltd. The views expressed in this Management Report are those of the publisher, not of Business Insights. Business Insights Ltd accepts no liability for the accuracy or completeness of the information, advice or comment contained in this Management Report nor for any actions taken in reliance thereon. While information, advice or comment is believed to be correct at the time of publication, no responsibility can be accepted by Business Insights Ltd for its completeness or accuracy. Printed and bound in Great Britain by MBA Group Limited, MBA House, Garman Road, London N17 0HW. www.mba-group.com

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Table of Contents The UK Retail Banking Market Outlook Competitive advantage through customer retention

Executive Summary

12

European retail banking comparison

12

Issues in personal lending

13

Issues in mortgages

14

Issues in plastic cards

15

Issues in deposit accounts

15

Chapter 1

Report Introduction

Report structure European retail banking statistics Issues in personal lending Issues in mortgages Issues in plastic cards Issues in deposits

Chapter 2

18 18 18 18 18 19 19

European Retail Banking Comparison

22

Introduction

22

European current account and deposit account markets Retail deposits Total retail deposits for major Western European markets Top five UK retail banks by total retail deposits Current accounts Total number of pay now cards in issue Top five UK retail banks by pay now cards in issue

23 23 23 24 24 25 25

European pay later cards markets

26

European mortgage lending markets

27

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European personal lending markets

27

Other European banking statistics Market capitalisation of major European banks in selected regions Total loans and advances to customers for leading European banks in selected regions

28 29

Competitor profiles HBOS Overview Operations Strengths Weaknesses Deutsche Bank Overview Operations Credit Agricole Overview Operations Dresdner Bank Overview Operations Capitalia Group Overview Operations Abbey Overview Operations Negative press Banco Popular Español Overview

30 30 30 31 32 33 34 34 35 36 36 37 38 38 39 40 40 41 42 42 44 45 46 46

Chapter 3

Issues in Personal Lending

29

50

Summary

50

Introduction

50

Market overview

51 52 52

Total consumer credit gross advances and outstanding balances Economic factors behind the growth Consumer credit market Consumer credit: outstanding balances Consumer credit outstanding balances by product Market share of outstanding balances in consumer credit by product Consumer credit: gross advances Market share of gross advances in consumer credit Unsecured personal loans Mortgage loans advanced for house purchase, remortgaging and further advances

53 53 54 55 56 56 57 57

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Secured loans

Value of private new car finance at the point of sale Value of private used car finance at the point of sale Retail finance: balances outstanding Retail finance outstanding balances by product Store cards Instalment credit Mail order credit Retail finance: gross advances Store cards Instalment credit Mail order credit

59 59 59 60 60 61 61 62 63 63 63 64 64 64 65 65

‘Overindebtedness’

65

Regulatory issues in the consumer credit market Consumer Credit Act Summary boxes Eradication of the use of the Rule of 78 Lenders’ view of the Rule of 78 reform Consumer Credit Directive

68 68 69 70 71 72

Conclusions

73

Competitors Market share of leading lenders – balances outstanding Market share of leading lenders - gross advances Pricing tactics Unsecured personal loan rates for leading UK loan providers The “big four” banks’ standard APRs for unsecured personal loans

73 74 76 76 77 79

Gross advances for secured and unsecured personal loans Credit cards Overdrafts Motor finance

Chapter 4

Issues in Mortgages

82

Summary

82

Introduction

83

Mortgage market size Mortgages – gross advances Gross advances and market share by category Remortgaging in recent years First-time buyers in the mortgage market Mortgage advances for first-time buyers and movers Average advance for first-time buyers and movers Average deposits required by a first-time buyer Percentage of loans for house purchase accounting for first-time buyers Average income multiples

83 83 84 85 86 86 87 87 88 88

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Arrears and repossessions

90

Mortgages market drivers Macroeconomic conditions House prices Falling interest rates Housing supply

91 91 91 92 93

Variable and fixed rate mortgages

94

Competitors in the mortgage market Gross advances Top 10 competitors in the UK mortgage market Top five competitors in the UK mortgage market – gross market lending Balances outstanding Top 10 competitors in the UK mortgage market Change in balances outstanding for top 10 lenders Change in balances outstanding for top 10 lenders Change in balances outstanding for top 10 lenders

96 96 96

The future Forecasted gross advances to 2008 Additional forecasts Nationwide’s house price forecasts by region

Chapter 5

Issues in Plastic Cards

97 97 98 99 99 100 100 101 102 103

106

Summary

106

Introduction

106

Market overview Market size

Drivers of the plastic card market Market segmentation Market infrastructure ATM cash withdrawal numbers by card type Number of PoS terminals and population per terminal Transaction numbers at PoS terminals by card type Plastic card fraud in the UK Chip and PIN technology Legislation - the EC Consumer Directive

107 107 107 108 108 109 109 111 112 112 113 113 114 114

Credit and charge cards Essential credit and charge card statistics Credit and charge card market drivers Market segmentation Credit and charge cards

115 115 117 117 117

Balances outstanding Essential UK payment card statistics Market drivers

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ATM cash withdrawal values by card type Gold and platinum cards Affinity and co-branded cards Business cards

118 118 119 120

Debit cards Market issues

121 122

Private label cards Essential private label card statistics Private label card drivers

123 123 124

Competitors Credit and charge card competitors Scheme market shares Visa and MasterCard American Express and Diners Club Credit card issuer market shares Competitor market share by balances outstanding Competitor developments Debit card competitors Scheme market shares

125 125 125 126 127 127 129 129 129 129

Conclusions

131

Future forecasts

132 133

Forecasted number of cards to 2007

Chapter 6

Issues in Deposit Accounts

136

Summary

136

Introduction

136

Deposits market Bank versus building society personal deposits

137 137

Product guarantees to win customers

139 142 143

Competitors Interest rate pricing

Chapter 7

Appendix

146

Definitions

146

Index

150

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List of Figures Figure 1.1: Figure 2.2: Figure 3.3: Figure 4.4: Figure 4.5: Figure 4.6: Figure 4.7:

Total retail deposits for major Western European markets, 1998—2002 12 Total retail deposits for major Western European markets, 1998—2002 23 Market share of outstanding balances in consumer credit by product, 2003e 55 Gross advances, 1998—2003 83 Average income multiples, 1998—2002 89 UK base rate, 1993—2004 93 Top five competitors in the UK mortgage market as per gross mortgage lending as at end of year 2002 97

List of Tables Table 2.1: Table 2.2: Table 2.3: Table 2.4: Table 2.5: Table 2.6: Table 2.7: Table 2.8: Table 2.9: Table 3.10: Table 3.11: Table 3.12: Table 3.13: Table 3.14: Table 3.15: Table 3.16: Table 3.17: Table 3.18: Table 3.19: Table 3.20: Table 3.21: Table 3.22: Table 3.23: Table 3.24: Table 4.25:

Total retail deposits for major Western European markets, 1998—2002 24 Top five UK retail banks by total retail deposits, 2002 24 Total number of pay now cards in issue for major Western European markets, 1998— 2002 25 Top five UK retail banks by pay now cards in issue 26 Total number of pay later cards in issue for major Western European countries, 1998—2002 26 Retail mortgage lending balances outstanding for major Western Europe markets, 1998—2002 27 Consumer credit balances outstanding for major European countries, 1998—2002 28 Market capitalisation of major European banks in selected regions, 2003 29 Total loans and advances to customers for leading European banks in selected regions, 2002 30 Total consumer credit gross advances and outstanding balances, 1994—2003e 52 Consumer credit outstanding balances by product, 1999—2003e 54 Market share of outstanding balances in consumer credit by product, 1999—2003e55 Consumer credit gross advances by product, 1999—2003e 56 Market share of gross advances in consumer credit, 1999—2003e 57 Mortgage loans advanced for house purchase, remortgaging and further advances, 1999—2003 H1 58 Gross advances for secured and unsecured personal loans, 1999—2003e 59 Value of motor finance arranged at the point of sale for private new car purchases by product, 1999—2003e 61 Value of motor finance arranged at the point of sale for private used car purchases by product, 1999—2003e 61 Retail finance outstanding balances by product, 1999—2003e 63 Retail finance gross advances by product, 1999—2003e 64 Estimated unsecured personal loan balances outstanding by competitor for leading UK loan providers, 2002 75 Estimated unsecured personal loan gross advances by competitor for leading UK loan providers, 2002 76 Unsecured personal loan rates for leading UK loan providers, Oct-02 to Oct-03 77 “Big four” banks’ standard APRs for unsecured personal loans, Oct-01 to Oct-03 79 Gross advances and market share by category, 1998—2003 84

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Table 4.26: Table 4.27: Table 4.28: Table 4.29: Table 4.30: Table 4.31: Table 4.32: Table 4.33: Table 4.34: Table 4.35: Table 4.36: Table 5.37: Table 5.38: Table 5.39: Table 5.40: Table 5.41: Table 5.42: Table 5.43: Table 5.44: Table 5.45: Table 5.46: Table 5.47: Table 5.48: Table 5.49: Table 5.50: Table 5.51: Table 5.52: Table 5.53: Table 5.54: Table 5.55: Table 5.56: Table 5.57: Table 5.58: Table 5.59: Table 5.60: Table 6.61: Table 6.62: Table 6.63: Table 6.64:

Average advance for first-time buyers and movers, 1998—2002 87 Percentage of loans for house purchase accounting for first-time buyers, August 2002—August 2003 88 Income multiples for first-time buyers and movers, 1998—2003 89 Mortgages in arrears, 1998—2002 91 Growth in average house prices per region, Q4 2002 to Q3 2003 92 UK base rate, 1993—2004 93 Top 10 competitors in the UK mortgage market as per gross mortgage lending as at end of year 2002 96 Top 10 competitors in the UK mortgage market as per total mortgage balances outstanding as at end of year 2002 98 Change in balances outstanding for top 10 lenders, 2001—2002 99 Forecasted gross advances, 2004f-2008f 101 Nationwide’s house price forecasts by region 103 UK payment card statistics, 1998—2002 108 Drivers of the plastic card market, 1998—2002 109 Number of payment cards, number of transactions and transaction values, by card type, 1998—2002 110 ATM numbers by location and population per ATM, 1998—2002 111 ATM cash withdrawal numbers by card type, 1998—2002 112 Number of PoS terminals & population per terminal, 1998—2002 112 Transaction numbers at PoS terminals by card type, 1998—2002 113 Credit and charge card statistics, 1998—2002 115 Credit and charge card market drivers, 1998—2002 117 ATM cash withdrawal values by card type, 1998—2002 118 Gold and platinum card statistics, 1998—2002 119 Affinity and co-branded card statistics, 1998—2002 120 Business card statistics, 1998—2002 121 Debit card statistics, 1998—2002 121 Private label card statistics, 1998—2002 123 Private label card drivers, 1998—2002 124 Visa and MasterCard statistics, 1998—2002e 126 American Express and Diners Club card numbers, 1998—2002e 127 Card numbers by credit card issuer, 1998—2002e 128 Issuer market share by card number, 1998e-2002e 128 Competitor market share by balances outstanding, 2002e 129 Debit card competitors by card numbers, 1998—2002 130 Transaction numbers and values by issuer, 1998—2002 130 Forecasted number of cards, 2003f- 2007f 133 Total UK personal deposits by holding institution, 1999—2003e 137 Weighted average interest rates on sight and time deposits offered to UK households versus base rates, January 2001 to February 2004 138 UK personal deposit accounts balances by competitor, 1998—2002 140 Market share of UK personal deposit account balances, 1998—2002 141

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Executive Summary

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Executive Summary European retail banking comparison Deposits are the largest sector of the European retail savings and investments market. Most countries in this sector experienced slow growth over the period 1998—2002, especially in the case of Italy, Germany and France. However, overall the growth was positive, especially in Spain and the UK. This can be explained by the slowdown of the global economy and a downturn in the stock markets, which, in turn, led to households increasing their precautionary savings. Figure 1.1: Total retail deposits for major Western European markets, 1998—2002 4,500 Retail deposits, €bn

4,000 3,500

UK

UK

3.000

Spain Italy

Spain

2,500 Italy

2.000 1.500

Germany

Germany

1,000 500

France

France

0 1998

1999

2000

Source: Datamonitor, central banks and industry associations

2001

2002

Business Insights

Negative publicity also occurred with the fine incurred by HBOS in January 2004 by financial regulators. The company was fined £1.25 million, after having failed to retain copies of customer identification on record. Such developments damage the public face of the company and it must work to market itself as a worthy institution in order to secure client loyalty.

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Issues in personal lending Thanks to low levels of interest rates, Britons have continued to pile on debt at a record pace in order to fund a house price and consumer-spending boom, despite the subdued global economy. Total outstanding consumer credit was estimated to pass the £175 billion mark by the end of 2003, registering an increase of 11.3% on the previous year’s levels and 51.2% growth since 1999. In terms of new business, the market was estimated to grow in 2003 by 7.2% on the previous year’s levels, overtaking the £200 billion mark for the first time. Credit cards were the strongest performing product in terms of balances outstanding, with a CAGR of 14.2% since 1999 against the background of overall market CAGR of 10.9%. Unsecured personal loans were not far behind in terms of five-year growth levels, with a CAGR of 13.8%. With many banks offering generous servicing and repayment terms for their undergraduate clients, overdrafts are increasingly becoming an important customer retention tool for many high street lenders. Traditionally, the used car finance market has been worth much more than its new counterpart, outstanding balances in the new car finance sector have shown a remarkable growth since 2000, highlighting the impact that the decreasing prices of new vehicles has had on this sector. When compared to the other forms of point of sale retail finance, store cards have appeared to perform relatively well since 2002, growing by 13.9% in terms of outstanding balances, and increasing their share of the retail finance market by 1.5%. However, it has to be noted that much of these gains have resulted from an inclusion of a new book into the membership of the Finance and Leasing Association (FLA), rather than an actual increase in outstanding balances.

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Issues in mortgages Total gross advances have jumped from £160.2 billion in 2001 to reach a record level of £218.6 billion in 2002. This implies a growth rate of 36.5% from 2001 to 2002, a rise of 2.9% over the previous period, where a growth rate of 33.6% was recorded. Data for the first three quarters of 2003 revealed that total gross advances are set to hit a new record. For instance, gross advances recorded for the third quarter of 2003 were 21.4% higher than those of 2002. September 2003 was the most buoyant month at gross advances of £25.4 billion, the highest amount ever recorded. Average deposits for first-time buyers in the UK have been growing at a compound annual growth rate of 22.5% for the last five years, whereas the London region has seen a growth of 24.6% during the same period. The biggest compound annual growth rate recorded was for the South West region, at 30.7%. Followed closely by the South East region at 27.1%. Average house prices in the UK have been rising at a compound annual growth rate of 13.6% throughout the period 1998 to 2002. Following the underlying trend in 2001, South West, Greater London and the South East regions have remained the hottest spots. The top 10 players, ranked by total mortgage balances outstanding, in the UK mortgage market has remained unchanged over the past four years. HBOS continues to enforce its dominance in the market with a share of 22.4% in 2002, a growth of 0.5% over its 2001 market share. Following the trend underlined in 2001, Abbey recorded a loss in share of total mortgage balances outstanding in 2002. The company’s share amounted to 11.9% in 2002, a fall of 0.5% from its 2001 share of 12.4%.

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Issues in plastic cards UK consumers are the greatest users of payment cards in Europe. Plastic cards have always been popular in the UK, originally as a payment and increasingly as a borrowing tool. Balances outstanding grew by 6.5% over 2002, 1.2% lower than over 2001. This lower growth rate reflects the educated UK consumer, as they seek lower APRs through holding additional cards, without actually growing their debts significantly. Credit card transaction numbers were approximately a third of debit transactions over 2002, down from 46.7% in 1998. This could be attributed to the increase in the type and number of retail outlets now accepting debit cards. There was a marginal decrease in the number of branch ATMs and an increase in the number of offsite ATMs. By the end of 2001, 36,666 ATM terminals were in operation, representing 1,628 people per terminal. Card fraud cost the UK £424.4 million in 2002, an increase of 3.2% on the 2001 figure of £411.3 million according to the Association for Payment Clearing Services (APACS). This is the smallest rise in several years and a drastic drop from the 30% growth that occurred over 2001. The UK retail banks are working hard on strategies to curb card fraud further in the next few years. The credit card market has defied all logic yet again, with the number of cards in issue increasing by 12.5%. Growth can be attributed to the array of teaser introductory and balance transfer rates.

Issues in deposit accounts Since 1999, total deposits have increased by an average 8.1% annually to reach an estimated £707.5 billion in 2003.

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Banks have subsequently increased their share of the deposit market from 78.5% in 1999 to 80.0% in 2003. Deposits held by banks in 2003 amounted to £566.2 billion. Compared to January 2001 base rates declined by 2.25 percentage points to just 3.75% at the end of 2003, followed by an increase by 0.25 percentage points to 4.00% in February 2004. Correspondingly interest rates offered on deposits have fallen substantially to reach an average of just 3.35% on time deposits and 2.05% for sight deposits. In terms of gross interest margins, sight deposit account providers have been increasingly squeezed by competition for balances and high interest rates offered by single channel players. In terms of personal deposit account balances, HBOS is the clear market leader and has maintained this dominant position since 1998, increasing balances by an average 11.5% annually.

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Chapter 1

Report Introduction

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Chapter 1

Report Introduction

Report structure This report is structured in a way that should make it easier for the reader to understand the main issues surrounding the UK banking sector, including some top level European data as a comparison included in Chapter 2 of this report. The remainder of the report focuses on the major sectors of the UK banking industry, including assessments of the personal lending, mortgages, plastic cards and deposits.

European retail banking statistics This chapter has been designed to provide readers with a valuable and comprehensive reference source for the size of various retail banking markets throughout Western Europe. It serves mainly as a comparison between the UK and other European countries, since this report is mainly UK focused. The second part of this chapter presents profiles of some of the top European banks offering insight into the major players’ strategies and company details.

Issues in personal lending This chapter analyses the current state of the consumer credit market. It details the market’s size, composition, historical trends, and the key economic and attitudinal factors driving the market. It is a vital chapter of this report since lending is the most important revenue stream within the banking sector.

Issues in mortgages This chapter analyses the mortgages sector within the banking industry, providing statistical data and analysis, as well as competitor information.

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Issues in plastic cards This chapter analyses market size statistics and discusses the issues thought to be most important by industry executives. The chapter begins with looking at the market as a whole, before going on to analyse the credit and charge, debit and private label markets in more detail.

Issues in deposits The UK deposits chapter provides an overview of the UK’s deposits market, providing relevant statistical data and key findings to help you assess the market size and future potential.

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Chapter 2

European Retail Banking Comparison

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Chapter 2

European Retail Banking Comparison

Introduction This chapter has been designed to give readers a valuable and comprehensive reference source for the size of various retail banking markets throughout Western Europe. It serves as an insightful comparison between the UK and other European countries. Sections are order by product market, as follows: Current accounts and deposit accounts; pay later cards; mortgage lending; personal lending.

The second part of this chapter analyses the profiles of major European banks, including Deutsche Bank, HBOS, Credit Agricole, Dresdner Bank, Capitalia Group, Abbey National, HSBC and Banco Popular Español.

The UK banking market’s position in Europe is expected to increase over the next three years. By 2007, the market is expected to account for just over 32% of the European market.

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European current account and deposit account markets Retail deposits European market data for retail deposits is based on the value of retail deposits held at the end of each year. This includes deposits held in savings accounts and current accounts. Data has been sourced from industry associations and central banks (with the exception of 2002 data that has been estimated based on industry projection). Competitor data is based on retail deposits at the end of 2002 (unless otherwise stated) and has been estimated based on primary research, banks’ annual reports and analyst presentations.

Total retail deposits for major Western European markets Deposits are the largest sector of the European retail savings and investments market. Most countries in this sector experienced slow growth over the period 1998—2002, especially in the case of Italy, Germany and France, however in overall the growth was positive, especially in Spain and the UK. This can be explained by the slowdown of the global economy and a downturn in the stock markets, which, in turn, led to households increasing their precautionary savings. Figure 2.2: Total retail deposits for major Western European markets, 1998—2002 4,500 Retail deposits, €bn

4,000 3,500

UK

UK

3.000

Spain Italy

Spain

2,500 Italy

2.000

Germany

1.500

Germany

1,000 500

France

France

0 1998

1999

2000

Source: Datamonitor, central banks and industry associations

2001

2002

Business Insights

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Table 2.1: Total retail deposits for major Western European markets, 1998—2002 Retail deposits, €bn

1998

1999

2000

2001

2002e CAGR 98-02e

France 695 721 721 757 782 3.0% Germany 1,141 1,250 1,222 1,303 1,363 4.5% Italy 365 351 340 360 354 -0.8% Spain 262 292 332 369 404 11.4% UK 653 778 845 906 986 10.8% Note: UK deposits exclude money held in national savings schemes. 2002 figures are estimates. Source: Datamonitor, central banks and industry associations

Business Insights

Top five UK retail banks by total retail deposits Halifax is the largest UK retail deposits bank, mainly due to the merger between Halifax and the Bank of Scotland in 2001, which created one of the largest banking institutions in the UK. Halifax still operates under its brand name ‘Halifax’, however the numbers for its retail deposits have increased greatly. Far behind Halifax, on the second position is Lloyds TSB, followed closely by Barclays and the Royal Bank of Scotland.

Table 2.2: Top five UK retail banks by total retail deposits, 2002 Position

Bank

Retail deposits, €bn

1 Halifax 201.2 2 Lloyds TSB 117.2 3 Barclays 114 4 Royal Bank of Scotland 111.5 5 Abbey National 90.7 Note: Figures include current account balances and all retail subsidiary undertakings in the UK, including wealth management operations. Business Insights

Source: Datamonitor, company accounts

Current accounts Current account market data and current account competitor data have been approximated based on the number of debit cards/pay now cards in issue. While this is clearly not ideal (as some bank customers may have more than one debit card issued to them and those with the most rudimentary basic bank accounts may have no debit card 24

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issued), it is the most reliable data source available considering that the majority of banks and banking industry associations do not report on the basis of active current account customers.

Total number of pay now cards in issue The following table shows a picture of how the current account market is structured across Europe, however it is important to look at the fact that the number of current accounts is also related to the population of a given country. For example, Germany has the largest number of current accounts but it also has the largest population of all countries analysed here. If we remember that the population of France is 61.2 million, Germany is 82.5 million, Italy is 57.9 million, Spain is 41.2 million and the UK is 58.9 million, we can conclude that Germany and the UK are the countries with the highest number of current accounts in proportion to the population, while France has the lowest.

Table 2.3: Total number of pay now cards in issue for major Western European markets, 1998—2002 Cards in issue, 000s France Germany Italy Spain UK Total of above

1998

1999

2000

2001

8,040 73,000 17,000 18,948 42,529 190,992

8,116 76,000 19,776 21,035 46,083 205,133

8,737 85,500 20,204 24,676 49,729 226,614

8,580 87,500 21,441 26,387 56,031 238,492

Source: Datamonitor Cards & Payments Database 2002

2002 CAGR 98-02 8,890 89,390 23,634 27,523 59,419 249,493

5.2% 5.2% 8.6% 9.8% 8.7% 6.9% Business Insights

Top five UK retail banks by pay now cards in issue Lloyds TSB clearly dominates the UK pay now cards in issue and therefore leads the market in terms of the number of current accounts. RBS is second, followed very closely by Barclays and HSBC.

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Table 2.4: Top five UK retail banks by pay now cards in issue Position

Bank cards in issue, 000s

1 2 3 4 5

LloydsTSB RBS (incl. Natwest) Barclays HSBC HBOS

10,339 8,794 7,883 6,026 4,516 Business Insights

Source: Datamonitor Cards & Payments Database 2002

European pay later cards markets The European pay later (credit) cards market data and competitor data presented in this section are based on the number of pay later cards in issue.

The UK has the highest number of pay later cards, a number that exceeds its population of 58.9 million, which is the best indicator of how popular pay later cards are in the UK. France accounts for only half of the UK numbers, followed by Spain and Germany. Pay later cards are definitely not a favourite in Germany, since with a population of 82.5 million there are only 20,888 pay later cards.

Table 2.5: Total number of pay later cards in issue for major Western European countries, 1998—2002 Cards in issue, 000s France Germany Italy Spain UK Total of above

1998

1999

2000

2001

23,523 15,238 8,612 15,383 41,569 115,068

24,794 16,509 10,570 17,710 44,871 125,641

29,206 17,849 13,141 19,513 50,852 142,988

31,571 19,278 15,929 22,371 56,316 158,578

Source: Datamonitor Cards & Payments Database 2002

2002 CAGR 98-02 33,902 20,800 18,261 25,229 63,350 175,451

9.6% 8.1% 20.7% 13.2% 11.1% 11.1% Business Insights

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European mortgage lending markets European retail mortgage market data has been sourced for central banks and industry associations and is based on balances outstanding. European mortgage competitor data has been estimated based on primary interviews, company accounts and analyst presentations.

The UK beats the rest in terms of mortgage balances outstanding, and this shows how much more advanced the UK mortgage market is in comparison to the rest of Europe. Germany is on the second position, but still quite behind the UK market. Italy and Spain are the smallest markets.

Table 2.6: Retail mortgage lending balances outstanding for major Western Europe markets, 1998—2002 €bn

1998

1999

2000

2001

France Germany Italy Spain UK

250.8 611.1 65.2 123.3 649

282.2 741.2 80.5 145.2 795.3

301.9 768.6 97 176.7 850

321.1 340.5 704.3 725.1 102.2 126.2 205.8 240.5 969.1 1,027.80

Source: Datamonitor, central banks and industry associations

2002 CAGR98-02 7.9% 4.4% 18.0% 18.2% 12.2% Business Insights

European personal lending markets European personal lending market data is based on total retail, non-mortgage lending outstanding balances and has been sourced from central banks, industry associations, primary interviews and internal models. For the competitor data section, non-mortgage figures were cut to show competitors’ outstanding unsecured personal loan balances at year-end 2002. These estimates are based on primary interviews, company accounts and analyst presentations.

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The UK and Germany are the countries with the highest consumer credit balances outstanding in Europe. However, the UK has exhibited a much faster growth of 13.5% compounded annually between 1998 and 2002, while the growth rate in Germany was rather stagnant.

France and Italy are the smallest markets for consumer credit, with Italy being the smaller of the two.

Table 2.7: Consumer credit balances outstanding for major European countries, 1998—2002 €bn

1998

1999

2000

2001

2002

France Germany Italy Spain UK

80.8 216.6 24.3 76.5 145.4

76.1 215.7 29.1 90.1 187

82.4 222.6 32.1 99.6 203.1

88.3 222.4 36.4 103.2 232.1

90.9 224.3 40.6 112.7 241.4

Source: Datamonitor, central banks and industry associations

CAGR 98-02 3.0% 0.9% 13.7% 10.2% 13.5% Business Insights

Other European banking statistics Table 2.8 indicates that the UK dominates Europe in terms of the market capitalisation of retail banks. The top four banks are UK banks, including HSBC, RBS, Barclays and HBOS, which supports the findings in the previous tables, that the UK is the most advanced retail banking market. France, Spain, and Germany have only got one or two representatives within the top 10.

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Market capitalisation of major European banks in selected regions Table 2.8: Market capitalisation of major European banks in selected regions, 2003 (16/05/2003) Bank HSBC RBS Barclays Bank HBOS BNP Paribas Lloyds TSB Banco Santander Central Hispano Deutsche Bank ING Group Banco Bilbao Vizcaya Argentaria Nordea San Paolo IMI KBC Abbey National Banco Popular

Region Local currency, m

€, m

Rank

UK UK UK UK France UK

76,302 46,633 27,816 27,496 38,729 23,926

108,723 66,447 39,635 39,179 38,729 34,092

1 2 3 4 5 6

Spain Germany Benelux

32,854 30,564 28,973

32,854 30,564 28,973

7 8 9

Spain Nordic Italy Benelux UK Spain

27,644 114,031 11,040 9,977 6,996 9,492

27,644 12,452 11,040 9,977 9,969 9,492

10 21 22 23 24 25 Business Insights

Source: Datamonitor, Financial Times 19/05/2003

Total loans and advances to customers for leading European banks in selected regions The following table offers a variation to the table above, here Germany is the leader in terms of loans and advances to customers. Together with UK banks they dominate the top five banks in terms of loans and advances.

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Table 2.9: Total loans and advances to customers for leading European banks in selected regions, 2002 Bank

Region Local currency

€, m

Rank

Sparkassen Gruppe* Germany 566,807 566,807 1 HypoVereinsbank Germany 409,938 409,938 2 HBOS UK 240,879 368,762 3 RBS UK 223,324 341,887 4 Barclays Bank UK 202,398 309,851 5 Banco Bilbao Vizcaya ArgentariaSpain 139,041 139,041 21 Danske Bank Group Nordic 948,346 127,742 22 Caisse d'Epargne** France 118,210 118,210 23 UniCredito Italiano Italy 113,824 113,824 24 KBC Benelux 98,775 98,775 25 Note: * 2001 figures used for Sparkassen Groupe. Sparkassen Group includes excludes banks belonging to local governments. **2001 figures used for Caisse d'Epargne as annual report not available until June 2003. Business Insights

Source: Datamonitor, company accounts

Competitor profiles This section presents profiles of the major European banks, including Deutsche Bank, HBOS, Credit Agricole, Dresdner Bank, Capitalia Group, Abbey National and Banco Popular Español.

HBOS Overview HBOS was formed in May 2001 through the merger of Halifax and the Bank of Scotland. The two banks continue to operate as separate authorised institutions and trade under their brand names.

Bank of Scotland was established in 1695. The company has made some significant mergers, including with the Glasgow-based Union Bank of Scotland in 1955, and with the British Linen Bank in 1971. In 1995, a majority stake was acquired in the Bank of Western Australia, extending the bank's international role. In 2000, the bank began 30

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merger talks with the UK's second largest mortgage lender and major high street bank, Abbey National. However, the talks ended in 2001 following intervention by Lloyds TSB. The company continued to pursue a merger, and in May 2001 announced its agreement to a £28 billion merger with Halifax to create HBOS.

Continuing the business banking focus, HBOS moved in May 2002 to significantly expand its commercial insurance product range available to business customers by offering them a tailored service proposition to meet their specific day-to-day requirements. The new operation provided an extensive range of commercial insurance solutions to Bank of Scotland business banking customers, providing products under the Bank of Scotland brand.

In June 2003, the company announced a joint venture with leading insurer Direct Line, to expand its presence in the motor insurance market, and diversify its business operations.

Operations HBOS provides personal and business financial services throughout the UK. It is the largest home mortgage lender in the UK, based primarily on the fact that Halifax, one of the groups, which merged to create HBOS, focuses its activities on home mortgages, liquid savings and retail banking.

HBOS is comprised of several divisions covering such areas of finance as personal banking, providing retail customers with consumer products and services through branches, telephone banking and over the Internet. The group also provides businessbanking services; services for small and medium-sized enterprises and corporate banking for larger businesses, which require customised financial services.

In addition, HBOS offers its customers a range of online access options. At Halifax, these include current and savings accounts, Web Saver savings management, credit cards, foreign exchange ordering, Holiday Money, and share dealing through Halifax 31

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Share Dealing. The Bank of Scotland offers personal Internet banking and business Internet banking, encompassing a similar range of account access and manipulation options.

Strengths Diverse products with effective access: extensive product offering and multiple distribution channels offer a combination of excellent growth prospects, through providing customer choice in terms of both product offerings and company access abilities. Since the merger, HBOS has implemented an aggressive pricing policy and delivered a competitive product range. Its distribution network has been enhanced through the introduction of options for Internet-based access. The company has also acquired almost a quarter of all new credit card insurance and over one million new current accounts in the UK; retail banking: HBOS' Retail Banking division witnessed a 24% increase in profits before tax in the first half of fiscal 2003, and analysts forecast that the division is firmly on track to exceed its full year sales targets. These results were spurred by the success of new credit card and new bank account take up. In the first six months of fiscal 2003, 600,000 new bank accounts were established and 500,000 new credit card accounts. These increases allowed the company to expand at the expense of its competitors. Another period of extraordinary growth has seen HBOS retail mortgage brands achieve a 25% market share. The company's five mortgage brands; Halifax; Bank of Scotland; the Mortgage Business; Birmingham Midshires and Intelligent Finance are a key strategic advantage in a competitive marketplace. This allows the group to trade effectively through all channels across the complete range of mortgage segments; new business launches: during fiscal 2002, the group launched HBOS Treasury Services, which combined the treasury businesses of Halifax and the Bank of Scotland. This marked the continued integration of the two firms. Within the insurance sector HBOS also embarked upon a joint venture with Direct Line in fiscal 2003. The insurer will focus on higher premium and non-standard motor insurance and may also target the small and commercial fleet market. These launches position 32

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the group to take advantage of the fastest growing market sectors within the banking realm.

Weaknesses Overly exposed to a heavily indebted household sector: while household indebtedness is undoubtedly high, so is the level of household assets. As a result the aggregate debt-to-asset ratio of the household sector remains around its long-run average it is accepted that there are a material number of households with considerable debts and few assets. The main risk to HBOS is on unsecured lending and the company has responded by raising lending limits in November 2003, amid fears of the risks associated with borrowing; exposure to corporate banking in the UK and saturation of target markets: HBOS is highly exposed to the corporate banking market in the UK, as approximately 85% of its corporate banking activities are located here, compared to 6% in the United States, 6% in mainland Europe, 2% in Australia, and 1% in the rest of the world. The group is also implementing a policy to launch new initiatives in areas of the world that are supposed to have a stable political, economic and legal environment. These areas should to become too saturated in the coming years as similar companies practice the same policy; decline in brand integrity: proposals by HBOS to move the branch currently operating in its headquarters building in the Mound in Edinburgh had crystallised opposition to what critics believe is the downgrading of the Scottish part of the merged organisation. The company's chairman also admitted in 2004 that the merger of Halifax and Royal Bank of Scotland has been far from smooth. Negative publicity also occurred with the fine incurred by HBOS in January 2004 by financial regulators. The company was fined £1.25 million, after having failed to retain copies of customer identification on record. Such developments damage the public face of the company and it must work to market itself as a worthy institution in order to secure client loyalty.

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Deutsche Bank Overview The bank was granted a banking license in 1870. The direct aim of the bank was to challenge the domination of British banks, which continued to control the financing of German foreign trade. Following the formation of the Federal Republic (West Germany), the bank was able to re-group in two stages. In 1952, an interim solution was reached, with Rheinisch-Westfälische Bank being set up in Düsseldorf, Süddeutsche Bank in Frankfurt and Munich, and Norddeutsche Bank in Hamburg. In 1957 the three merged to form Deutsche Bank once again.

Deutsche Bank continued to grow during the late 1990s, through both organic growth and acquisitions. Purchases instrumental in broadening the company's product and services offerings included Crédit Lyonnais Belgium (1998) and Bankers Trust Corporation (1999). Important acquisitions in 2000 included Prudential UK Institutional Asset Management business, First Australian Property Group Holdings, National Discount Brokers Group, and National Discount Brokers Group.

In January 2002, the organisation again restructured, creating three groups: corporate and investment bank, corporate investments, and private clients and asset management, each headed by distinct operating committees.

In September 2003, the bank agreed to sell to GE Capital, its U.S. leasing business. In line with its divestiture policy for listed companies, the bank sold its 9.3% stake in Deutsche Borse in 2003.

Deutsche Bank is now one of the largest financial and banking institutions in Germany and Europe, covering a full range of corporate and investment banking, private clients and asset management products and services. For the fiscal year ended December 2002, the company generated revenues of €57.9 billion. The company operates out of over 1,700 facilities in over 75 countries around the world, of which over 60% are in

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Germany, and has over 1,200 fully consolidated subsidiaries. Deutsche Bank is headquartered in Frankfurt, Germany.

Operations The bank operates primarily in Europe, with an especially strong presence in its domestic German market and also a significant presence in the UK. In addition, the company is represented in Italy, Spain, Belgium, and Poland with its own branch networks. The company is organised into three groups; the corporate and investment bank group, the private clients and asset management group and corporate investments. Within these groups, the company has seven core businesses. The global markets business comprises various trading, sales and research in foreign exchange, government, agency and investment grade debt, emerging markets, exchange-traded, OTC and credit derivatives,

commodities,

structured transactions,

money markets,

repo

and

securitisation. Global equities comprises of cash equities, research, sales and trading, equity derivatives structuring and trading as well as equity prime services.

The fifth business unit is private and business clients, serving 12.5 million retail and small business clients in important European countries. This unit has a particular focus on the German market. The company also offers a private wealth management business.

In terms of future merger and acquisition activity, it seems the company is guarded about this issue. However, Josef Ackermann, Deutsche Banks' chief executive, has previously been quoted to say that profits would need to rise first before a merger could be considered. The bank is confident that earnings for 2004 will be on target despite continuing uncertainty in the global economy. Deutsche Bank and Dresdner Bank abandoned plans for what would have been one of the biggest banking mergers in history in April 2000.

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Credit Agricole Overview Credit Agricole started operating with limited funds to provide short-term personal loans to the agricultural sector. The company's business expanded in 1906 to provide long-term loans to farm cooperatives. A 1920 law gave the company a central structure, assisting the company to put finishing touches to its three-tier structure at the local, regional and national levels. The company's services expanded quickly following World War I. Credit Agricole started offering investment and lending services by providing educational lessons to rural people on how to prepare financial plans and manage their cash and savings. The company expanded its services to towns and cities. The company began to offer mortgages for main residences in rural areas, allowing more homes to be built in the countryside. In 1991, Credit Agricole became a fully-fledged universal bank when the French government removed all of its socio-professional and geographic restrictions on lending.

By 1991, the company had expanded into all facets of life and non-life insurance business including medical insurance. To provide these services, the company created Predica, which has now become France's second largest life insurance company and the largest bank affiliated insurer.

The company merged with Indosuez Asset Management and Segaspar in 1996 to create Credit Agricole Indosuez Asset Management Firm, which is an international and wholesale banking firm. A few days later, however, Credit Agricole responded by increasing its holding in Lyonnais from 10.5% to 12.17% on the open market, sparking once more speculation of a prolonged takeover battle. In mid-December, Credit Agricole launched a friendly €19.5 billion takeover bid for Lyonnais. The bid was accepted by Lyonnais' board, but then had to go for approval from the shareholders and employees of both banks. It also sparked the rumour that BNP Paribas was considering a counter-bid.

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The Highest Administrative Court in France confirmed Credit Agricole's merger with Crédit Lyonnais in May 2003. The merger enabled both companies to fulfil their ambitions of becoming leaders in banking, in Europe and in the world. The deal satisfied concerns of the French authorities that either of the French banks would be acquired by a foreign company.

Credit Agricole has over a 25% share of the huge French domestic market, as well as considerable international presence.

Operations The company has a decentralised operating structure and serves more than 16 million customers. Its client base includes households, self-employed citizens, companies and the local government. The company also offers asset management and private banking services in France and Europe.

The overall banking income of the company for the fiscal year ended December 2002 was €5,329 million, a decline of 19.2% over the previous year. The primary reason for the decline was the slow movement in the stock market, the economic crisis and expenses related to the deconsolidation of Banco Bisel operations.

Credit Agricole is the largest banking company in France in terms of market share, earnings and total capital. The company conducts business in nearly 60 countries across the world. The bank's primary subsidiaries include Credit Agricole Indosuez, Predica and Pacifica that provide a wide range of services in corporate banking, asset management and capital markets.

The company's French Retail Banking segment provides retail-banking services for over 16 million customers through its vast network of nearly 7,500 branches, and a decentralised organisation.

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The company's Asset Management, Insurance and Private Banking segment provides life insurance and disability insurance to individual customers through its CA Asset Management business. The segment provides services through its subsidiaries, Predca (life insurance), Pacifia (property and casualty insurance) and Credit Agricole Indosuez (private banking).

Through its International Retail Banking segment, the company offers leasing and consumer credit services to its customers. This segment focuses on providing services outside France. Subsidiaries involved in this business are Banca Intensa (Italy), Lukas (Poland) and Banco Espirito Santo (Portugal).

The Proprietary Asset Management and Other Activities segment manages assets and liabilities for its own group of companies. Apart from asset and liability management, the segment also looks into miscellaneous activities related to logistics and property management.

Dresdner Bank Overview Dresdner Bank was established in 1872 in Dresden. For a short space of time, the company shrank from a reasonably sized company to three smaller ones. The bank was split into three in 1952: Rhein-Main Bank, Hamburger Kreditbank, and Rhein-Ruhr Bank. This was not to last though, as in 1957 the three were reunited to form the present Dresdner Bank. The bank became dominant in the financing of export and import transactions, and as such, showed signs of expanding beyond the reaches of Germany through ventures into foreign markets.

In 1974, the bank combined with several European and South American banks to establish the Euro-Latin American Bank in London, which financed development projects in Latin America.

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Dresdner further evolved globally when it merged with Allianz in 2001, to create one of Europe's largest bancassurance firms. The new group will concentrate on the three core business activities of insurance, asset management and banking. With a combined base of more than 20 million clients in Germany, Allianz and Dresdner Bank expanded their market position.

2002 was a bad year for Dresdner. Its parent, Allianz struggled for profitability in the banking arm and subsequently instigated a rigorous cost-cutting plan intended to achieve savings of €700 million a year. Over 3,000 positions were eliminated, a thousand of which came from Dresdner Kleinwort's 8,000 strong workforce. The bank said that by the end of 2003 it intended to shed 11,000 jobs.

Dresdner is Germany's third-largest bank, in terms of revenue, with some 1,400 branches and 50,000 employees in more than 70 countries. For the fiscal year 2002, the company's sales were €11.2 billion.

Following 18 months of losses, Dresdner Bank announced in May 2004 that it had returned to profit. According to its owners Allianz, Dresdner contributed an operating result of around €170 million to the Allianz banking segment. In Q1 2003, the company made a loss of €353 million.

Operations Dresdner provides lending services, securities and commodities brokerage and investment banking services. The bank has global operations and subsidiaries worldwide. It is one of the current leaders in European Asset Management, with volume of assets under management of around €220 billion. Dresdner offers a wide range of financial services. It provides retail banking, asset management, commercial banking and investment banking services, and has global operations and subsidiaries worldwide. The company has a customer-base of around 6.5 million private customers throughout the group.

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Dresdner has four investment functions, which enhance the company's global reach. These all come under the umbrella of Dresdner Bank's investment division, Dresdner Kleinwort Wasserstein. Close co-operation with banks such as the Banque Nationale de Paris, has further strengthened Dresdner Bank's international presence.

Dresdner has a number of subsidiaries, which offer a wide range of financial services on a global basis. It also provides a variety of management services including currency management, investment management and interest rate management.

Another area that demonstrates its global reach is Asset Management. This covers all services in the areas of institutional asset management, mutual fund and retirement provision business. In addition, the company's Investment Banking division provides products and services worldwide under the brand name Dresdner Kleinwort Wasserstein.

Capitalia Group Overview The Capitalia Group was formed as a result of the 1991 merger of three Italian banks: the original Banca di Roma, Cassa di Risparmio di Roma and Banco di Santo Spirito. Within the group are Banca di Roma (with a network of branches in central Italy), BIPOP-Carire (with presence in northern Italy), Banco di Sicilia, MCC (providing investment banking services) and Fineco (providing asset management and insurance services). Banca di Roma was formed in 1880. The bank expanded internationally before the First World War, establishing operations in Spain, Turkey and the Middle East.

Throughout the 1960s and 1970s, the bank spent a lot of time rebuilding its foreign businesses, which had been destroyed as a result of the World War. In 1999, the Dutch bank ABN Amro bought a 9% stake in the company. One year later, Banca di Roma announced an Internet banking venture with Telecom Italia. 40

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The bank successfully completed negotiations to acquire Bipop-Carire, the northern Italy based bank in 2002. Banca di Roma, encouraged by the Italian central bank, had been keen on taking a stronger position in the lucrative north Italian marketplace, in an attempt to improve margins at the bank, currently Italy's least profitable major financial institution. Following the completion of this deal the group adopted the Capitalia name.

The company turned around its operations during fiscal 2003 when it registered profits after making losses in the previous year.

The Capitalia Group is now the fourth largest banking group in Italy. It is a banking holding company and controls the majority of the group's assets and functions. Capitalia recorded revenues of €4.8 billion during fiscal year 2003, an increase of 7.8% over 2002.

Operations Capitalia is a universal banking group. The principal activities of the group include retail and corporate banking, asset management, securities brokerage and trading, as well as investment and merchant banking, structured finance, industrial and development credit, insurance and leasing.

Capitalia caters to its clients through its branch network across Italy. The company has 30% of its branches based in northern Italy, mainly in Lombardy, 30% in central regions and 40% in the south. The company has approximately 4.5 million customers.

Capitalia also offers its financial products and services through an international branch network, through its foreign representative offices and subsidiaries and its Luxembourg subsidiary (BRINT). The group operates in capital markets, with activities including structuring, underwriting, distribution and trading of debt instruments, foreign exchange and derivatives. It also participates in the Italian market for the placement of corporate debt and equity securities.

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Abbey Overview The Abbey National Building Society was formed in 1944, after the merger of the Abbey Road Building Society and the National Building Society. In 1987, Abbey National became the first building society to offer its customers own-branded life products by linking up with life company Friends Provident. This line of business grew further when the company severed links with Friends Provident, and bought Scottish Mutual.

Since its 1989 conversion to plc status, Abbey National had almost doubled its customer base from eight million to over 15 million by 2000.

In 1995, the company moved into the consumer finance market with the purchase of First National Finance.

In 1999, it launched its first digital television banking service on Sky Digital's interactive Open channel. This enabled customers to view its complete mortgage and savings account range, request product information and arrange a call back from a financial adviser.

Also in 1999, the company launched its Euro business, to respond to the advent of European Monetary Union. In connection with this, it also developed its Wholesale Banking operation to take advantage of increased European commercial finance opportunities. To this end it acquired Porterbrook, from Stagecoach, in April 2000.

In 2001, Lloyd TSB made an aggressive £19 billion bid for Abbey National, the Bank of Scotland then followed suit, offering £27 billion. However, the Bank of Scotland merger was quickly abandoned and in July 2001, regulators blocked the Lloyds TSB takeover.

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In September 2002, it announced it was putting its finance house subsidiary, First National, up for sale, in a deal expected to net the bank up to £800 million. The sale enabled it to demonstrate its determination to refocus on core retail banking operations.

In October 2002, the bank announced that it was engaged in takeover talks with the Bank of Ireland, which proposed the creation of one merged entity, headquartered in Dublin, with its primary stock market listing in London. Although the Irish bank stressed that talks were at an early stage, a merger between the two banks would have created the twelfth-largest bank in Europe, worth $21 billion. However, two days later, Abbey rejected further talks with Bank of Ireland, claiming that its offer undervalued the UK's second largest mortgage lender. Also in October 2002 Abbey signed a deal with Prudential. The agreement with Prudential allowed Abbey to distribute the formers' with-profits bond product, for an initial four-year period that began in 2003. The two companies also signed a preliminary agreement whereby Prudential agreed to distribute Abbey's life protection products.

In late October, Abbey had to decide whether to accept a bid from Lloyds TSB that was some way off its original valuation of its consumer credit business, First National. Selling it would boost Abbey's cash reserves without deterring potential suitors, but the bank would have to accept £200 million less than it had hoped for.

In late November, the outlook looked bleak for the company, and it warned investors it would report its first ever loss in 2003, slash its dividend, and make substantial writedowns on its wholesale banking business.

In December 2003, in order to simplify its range of accounts and services it took its lowest paying savings account, Instant Saver (0.30% AER), off sale on December 1. Existing Instant Saver customers could either keep their account open or switch to an alternative, which paid a better rate of interest.

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Operations Based in London, Abbey National has now over 700 branches around the UK, and over 3,100 ATMs. It also has addition operations in France and Italy. In fiscal 2002, the company generated revenues of £3,500 million. It is a diversified banking group, with three separate divisions: retail banking, wealth management and long term savings, and wholesale banking.

The company's retail banking division provides mortgages, savings products, personal bank accounts, travellers' checks, foreign currency and general insurance. It also offers a financial planning service, including Abbey National Life-branded life assurance and investment products. In addition it also offers unit trust products from Abbey National Unit Trust Managers, and ISAs.

The wealth management and long-term savings division brings together Abbey National's domestic and overseas life assurance businesses, wealth management businesses, fund management and specialised lending operations. The division is structured to give the greatest possible flexibility to build growth. It is comprised of Abbey National for Intermediaries, Abbey National Investments, Wealth Management Operations, International Sales, Cahoot and First National.

Its wholesale banking division is focused on growing businesses where it has clear sustainable competitive advantage, delivering solutions and creating value for the group by working closely with Abbey National's retail, life and wealth management businesses.

Abbey National's Wholesale Bank, Abbey National Treasury Services plc (ANTS) is a significant participant and recognised expert in select wholesale banking markets worldwide. ANTS comprises of a structured corporate banking business (including its asset financing, commercial lending operations, a risk management business and securities financing activities), an asset management and risk transfer business and the group's treasury. As the group's treasury, ANTS provides liquidity, funding, capital management and risk management services to the group. 44

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Abbey National plc is the UK's number two mortgage lender and is involved in retail, business and wholesale banking, as well as wealth management, financial planning, consumer lending, and share dealing. It also operates online services, such as Internet bank and credit card provider Cahoot. In addition, the company sells life insurance and pension products through subsidiaries Scottish Mutual Assurance and Abbey National Life.

Abbey recently sold off part of its corporate lending arm as part of a bid to cut its heavy annual losses. The firm said it had sold its block discounting operations to The Funding Corporation (TFC) in a £43 million deal. The group is currently undergoing a massive shake-up after a foray into corporate banking led to a £984 million annual loss for 2002. As part of the overhaul, launched last year, the group changed its name from Abbey National, announced jobs cuts and announced it would be focusing on high street banking services.

Negative press The Abbey re-branding cost the company over £11 million in 2003. It has since been hit with a record £2.3 million fine for inadequate anti-money-laundering controls by the UK's financial watchdog. The penalty was the highest fine imposed by the Financial Services Authority for money-laundering related failures and second in all FSA fines only to the £4 million given to CSFB last year for tax-related failings.

In April 2004, shareholders in Abbey National publicly talked of their dissatisfaction of the firm's performance and rebranding at its annual meeting. This followed an announcement by Abbey that admitted its profits would be lower than expected in its core high street banking business. Abbey added that it had returned to profit in the first quarter of 2004, compared to a £686 million loss over 2003. Abbey’s rebranding has been criticised, particularly the new logo, despite research that showed the old logo was not proving popular with much of the UK population.

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Banco Popular Español Overview Banco Popular Español is the third largest multi-bank holding company and finance group in Spain. The group also operates several finance, portfolio and financial service companies. In 2003, the company generated revenues of €2,439 million, which was an 11.2% improvement over the previous year.

The group's bank division comprises five regional banks in Spain (Bancos de Andalucia, Castilla, Credito Balear, Galicia and Vasconia), a bank in France (Banco Popular Comercial), a bank specialising in mortgage financing (Banco Popular Hipotecario), and a bank servicing the agribusiness market (Popular Rabobank). The company is headquartered in Madrid, Spain.

Banco Popular offers commercial and retail banking services through multiple distribution channels including over 2,279 branches, 3,321 ATMs, Internet banking and cards.

The company places a strong emphasis on its customer operations. It had 5.3 million customers by the end of 2003, a 13% increase over the previous year. The bank has extensive international operations with a strong presence in France and the Americas and has representative offices in Germany, Switzerland, Belgium, Morocco, Venezuela and UK.

The Group has a special Internet banking site called bancopopular-e.com which offers a decent range of financial services including asset management, mutual funds and pension funds management, venture capital and securities and brokerage services.

Banco Popular Español operates in the banking sector of Europe. This Group offers a broad range of banking products including personal and corporate banking services to individual and corporate customers.

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Banco Popular Español is Spain's third largest bank in terms of the total assets accounting for €64,913 million and customer-base of 5.3 million in 2003. The bank has return on equity of around 25% indicating a strong revenue performance and operational efficiency. Furthermore, during 2003, the company expanded its operations by increasing its branches and customer-base, which helped in improving its total assets under management by 25% over 2002. The company has planned on a growth strategy to be implemented during 2004 to 2006, which will help in further penetrating the Spanish and Portuguese commercial banking market. The trends in the Spanish insurance industry are highly favourable for growing its joint venture business with Allianz Group, while its plans to utilise Global PAYplus for its payment systems will help in reducing operational costs and improving fee revenues.

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Chapter 3

Issues in Personal Lending

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Chapter 3

Issues in Personal Lending

Summary Thanks to low levels of interest rates, Britons have continued to pile on debt at a record pace in order to fund the house price and consumer-spending boom, despite the subdued global economy. Total outstanding consumer credit was estimated to pass the £175 billion mark by the end of 2003, registering an 11.3% increase on the previous year’s levels and 51.2% growth since 1999. In terms of new business, the market is estimated to grow by 7.2% on the previous year’s levels, overtaking the £200 billion mark for the first time. Credit cards were the strongest performing product in terms of balances outstanding, with a CAGR of 14.2% since 1999 against the background of overall market CAGR of 10.9%. Unsecured personal loans were not far behind in terms of five-year growth levels, with a CAGR of 13.8% Traditionally, the used car finance market has been worth much more than its new counterpart, outstanding balances in the new car finance sector have shown a remarkable growth since 2000, highlighting the impact that the decreasing prices of new vehicles have had on this sector. When compared to the other forms of point of sale retail finance, store cards have appeared to perform relatively well since 2002, growing by 13.9% in terms of outstanding balances and increasing their share of the retail finance market by 1.5%. However, it has to be noted that much of these gains have resulted from an inclusion of a new book into the membership of the FLA, rather than an actual increase in outstanding balances.

Introduction Customer loans are the primary source of revenue for the UK retail banks, accounting for around 60% of the total market value. The consumer credit market has defied

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expectations and produced another record year in 2003. Stable levels of unemployment, unstoppable house prices and low base rates have continued to push consumer spending upwards at levels previously thought unsustainable. However, the market is facing a range of issues at present. The problem with the increasing value of personal debt in the UK, whether real or perceived, continues to hit the headlines and the lending industry has found itself under the spotlight from governmental committees and consumer organisations in the run up to the review of the UK’s consumer credit regulations. This chapter provides an overview of the UK market for unsecured personal loans in the context of the consumer credit market as a whole. Notes on the sizing methodology used: this chapter sizes the consumer credit market and its sectors from 1999 to 2003e in terms of gross advances (new business) and balances outstanding. It uses a range of data sources, including the Bank of England, British Bankers Association (BBA), the Finance and Leasing Association (FLA) and Association for Payment Clearing Services (APACS) among others. The section, which examines retail finance, including the performance of store cards and instalment credit, draws on the monthly data from the Finance and Leasing Association.

Market overview Thanks to the lowest level of interest rates in recent years, Britons have continued to pile on debt at a record pace in order to fund the house price and consumer-spending boom, despite the subdued global economy.

Table 3.10 demonstrates the performance of the consumer credit market as a whole since 1994.

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Total consumer credit gross advances and outstanding balances Table 3.10: Total consumer credit gross advances and outstanding balances, 1994—2003e £m Gross advances Balances outstanding £m Gross advances Balances outstanding

1994

1995

1996

1997

75,037 58,056

89,113 68,203

103,215 77,481

116,080 88,082

1999

2000

2001

2002

147,013 116,155

158,710 128,041

175,056 141,720

193,877 157,755

1998 CAGR 94-98 133,710 102,222

15.5% 15.2%

2003e CAGR 99-03e 207,803 175,649

9.0% 11.0%

Source: Datamonitor analysis of ONS, BBA, Finance and Leasing Association, Bank of England and APACS data. Business Insights

Total outstanding consumer credit is estimated to pass the £175 billion mark by the end of 2003, registering an 11.3% increase on the previous year’s levels and 51.2% growth since 1999. In terms of new business, the market is estimated to grow by 7.2% on the previous year’s levels, overtaking the £200 billion mark for the first time. Though the compound annual growth of the consumer credit market is below the levels of five years ago, it is still estimated have reached 9% in terms of advances and 11% in terms of balances outstanding in 2003.

Economic factors behind the growth Although UK economic growth levels have remained below those expected by the Government, in a global comparison, the UK economy has performed relatively well. According to the International Monetary Fund, recent indicators such as business surveys and retail sales indicate an improved outlook for the UK after deterioration in the first half of 2003 when investment, private consumption and external demand all slowed. The low base rate policy advocated by the Bank of England in recent years has so far proved beneficial at keeping GDP growth relatively stable; despite fairly slow rates of economic growth in recent years, the UK labour market has remained pliant. Consumer credit growth has benefited greatly from the current low unemployment levels. According to the official figures, the unemployment

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claimant count in August 2003 was at its lowest level since 1975, amounting to just 930,800. This has encouraged many consumers to pile on debt without particular worries about future difficulties with repayments; in July 2003 the Bank of England made a decision to lower the UK’s base interest rate down to 3.5%, its lowest level for a generation ,citing slow economic growth and the strength of the pound as the reasons for the cut. Consumers took advantage of the highly competitive borrowing rates offered by customer-hungry lenders to take on record levels of household debt. However, a number of factors were firmly pointing to an imminent base rate rise in October 2003 and February 2004. The Bank of England duly complied, reversing its four-year old policy and raising the base rate by 0.25% on both occasions. While the rise itself is unlikely to plunge the householders into debt chaos, it suggests a policy of future base rate rises, as the Bank of England attempts to put brakes on consumer borrowing; despite the continuing conflicting forecasts, the UK housing market has continued to grow, providing an attractive opportunity for many consumers to cash in on the growing equity in their homes.

Consumer credit market Against the background of strong overall growth in the consumer credit market, some products have fared better than others. This section examines outstanding balances and gross advances in the consumer credit market for unsecured personal loans, credit cards, overdrafts, point of sale motor finance and point of sale retail finance.

Consumer credit: outstanding balances The following table demonstrates the growth of individual product categories in terms of outstanding balances in the consumer credit market since 1999.

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Consumer credit outstanding balances by product Table 3.11: Consumer credit outstanding balances by product, 1999—2003e £m

1999

2000

2001

2002

33,117 16,945 12,827 5,346 47,920

38,702 16,576 12,265 5,729 54,770

42,802 16,972 10,965 6,788 64,193

48,248 18,311 11,022 7,378 72,796

56,392 19,167 11,868 7,933 80,289

14.2% 3.1% -1.9% 10.4% 13.8%

Consumer credit total 116,155

128,041

141,720

157,755

175,649

10.9%

Credit cards Motor finance Retail finance Overdrafts Unsecured personal loans

2003e CAGR 99-03e

Source: Datamonitor analysis of ONS, BBA, Finance and Leasing Association, Bank of England and APACS data. Business Insights

Credit cards were the strongest performing product in terms of growth in balances outstanding, with a CAGR of 14.2% since 1999 against the background of overall market CAGR of 10.9%.

Unsecured personal loans were not far behind in terms of five-year growth levels, with a CAGR of 13.8%. This product continues to dominate the market, in terms of the number of balances outstanding, which were estimated to exceed £80 billion by the end of 2003.

Overdrafts, though marginalised in terms of their market share, have shown strong growth levels, registering a CAGR of 10.4%. Point of sale finance continued to lag behind the market leaders: despite outstanding balances in retail finance increasing since 2002, this product category registered a negative five-year growth rate of 1.9%, while motor finance has done marginally better with a CAGR of 3.1%.

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Market share of outstanding balances in consumer credit by product Table 3.12: Market share of outstanding balances in consumer credit by product, 1999—2003e Market share, % Credit cards Motor finance Retail finance Overdrafts Unsecured personal loans

1999

2000

2001

2002

2003e

28.5% 14.6% 11.0% 4.6% 41.3%

30.2% 12.9% 9.6% 4.5% 42.8%

30.2% 12.0% 7.7% 4.8% 45.3%

30.6% 11.6% 7.0% 4.7% 46.1%

32.1% 10.9% 6.8% 4.5% 45.7%

Source: Datamonitor analysis of ONS, BBA, Finance and Leasing Association, Bank of England and APACS data. Business Insights

Figure 3.3: Market share of outstanding balances in consumer credit by product, 2003e

Credit cards 32.1% Unsecured personal loans 46.1%

Motor finance 10.9% Overdrafts 4.5%

Retail finance 6.8%

Market share of outstanding balances in consumer credit by product in 2003

Source: Datamonitor analysis of ONS, BBA, Finance and Leasing Association, Bank of England and APACS data. Business Insights

Credit cards were the only product category to increase their market share since 2002 against a backdrop of an expanding market, gaining 1.5% and controlling just over a third of the market in 2003. Unsecured personal loans, despite still accounting for the biggest share of the market, have actually shown a marginal decrease of 0.4% in their

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market share since 2002. Motor finance, retail finance and overdrafts have all lost out on their respective shares of the market since 2002.

Consumer credit: gross advances Table 3.13: Consumer credit gross advances by product, 1999—2003e £m

1999

2000

2001

2002

70,378 11,127 14,941 6,217 44,350

78,807 9,683 14,190 6,669 49,362

85,636 10,544 13,031 10,296 55,549

96,300 11,742 13,201 12,214 60,420

109,453 12,668 14,333 13,402 57,947

11.7% 3.3% -1.0% 21.2% 6.9%

Consumer credit total 147,013

158,710

175,056

193,877

207,803

9.0%

Credit cards Motor finance Retail finance Overdrafts Unsecured personal loans

2003e CAGR 99-03e

Source: Datamonitor analysis of ONS, BBA, Finance and Leasing Association, Bank of England and APACS data. Business Insights

Credit cards had an exceptional year in terms of gross advances in 2003, growing by 13.7% since 2002 and registering a five-year growth of 11.7%. Overdrafts experienced the strongest five-year growth, registering an impressive CAGR of 21.2% and gross advances in unsecured personal loans have fallen for the first time since 1999, decreasing by 4% since 2002 and bringing five-year growth levels down to 6.9%. Gross advances in the point of sale retail and motor finance sectors closely mirror the picture in outstanding balances, although both categories have grown by 9% and 8% respectively since 2002, they remain far behind other products in terms of five-year growth rates.

Market share of gross advances in consumer credit Credit cards have experienced the biggest increase in their market share since 2002 – this product category’s hold on the market increased by 3%, leaving it in a dominant position. Unsecured personal loans’ market share has fallen for the first time since 1999, mirroring the situation in outstanding balances. It decreased by 3.3% since 2002, falling below 30% for the first time since 1999. Point of sale retail and motor finance and overdrafts have all increased their market share since 2002, albeit only marginally. 56

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Nevertheless, these product categories remain on the periphery of the consumer credit market in terms of new business.

Table 3.14: Market share of gross advances in consumer credit, 1999—2003e Market share, % Credit cards Motor finance Retail finance Overdrafts Unsecured personal lending

1999

2000

2001

2002

2003e

47.9% 7.6% 10.2% 4.2% 30.2%

49.7% 6.1% 8.9% 4.2% 31.1%

48.9% 6.0% 7.4% 5.9% 31.7%

49.7% 6.1% 6.8% 6.3% 31.2%

52.7% 6.1% 6.9% 6.4% 27.9%

Source: Datamonitor analysis of ONS, BBA, Finance and Leasing Association, Bank of England and APACS data. Business Insights

Unsecured personal loans As previously highlighted, the growth of unsecured personal loans over the past 18 months has been slower than in previous years. While this product still dominates outstanding balances in the consumer credit market, gross advances tell a very different story, suggesting that the success of unsecured personal loans as a credit product has already reached its peak. This is because, firstly, the remortgaging market exploded in 2003, fuelled by the strength of the housing market, increased competition in the mortgage market and increased consumer awareness, and secondly, the secured personal loans market grew rapidly in 2003. As a result of these factors, the unsecured personal loans market, already highly competitive and existing on very low margins, has found itself being squeezed on both fronts.

Mortgage loans advanced for house purchase, remortgaging and further advances One of the features of the UK mortgage market in recent years has been the remarkable growth in remortgaging. As the following table demonstrates, in the first half of 2003 gross advances on loans for remortgaging surpassed gross advances on loans for house purchase by almost £9 billion.

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Table 3.15: Mortgage loans advanced for house purchase, remortgaging and further advances, 1999—2003 H1 £ billion

1999

2000

2001

2002

2003 H1

Loans for house purchase Loans for remortgaging Loans for further advances

81.8 27.9 4.6

79.1 34 6.8

100.1 50 10.2

119.8 83.5 15.3

50.5 59.3 10.8

114.3

119.9

160.3

218.6

120.6

Total gross advances

Business Insights

Source: Datamonitor, Council of Mortgage Lenders

There are three key reasons for this explosion: Increased competition in the remortgaging market and better rates; home owners cashing in on the increased equity held in their homes; increasing financial awareness among consumers.

Unusual personal loan requests In terms of personal loans, Lloyds TSB recently revealed the most unusual requests for a personal loan. Requests to borrow money to buy a tiger, build a robot and bake the biggest cake in the world were among the loan applications. Other loans were requested to purchase a dress belonging to the Spice Girls, and to make an online bid to date a famous footballer. Someone else asked for cash to remove a rat's nest from a motorbike engine. Other unusual requests included a loan application to get onto the waiting list for cryogenic freezing, and a 40-year-old man requested a loan to meet Mickey Mouse in America. Tony Gibbons, director of Lloyds TSB Personal Loans, said: "While the British might be renowned for being reserved, our records prove we still have our fair share of eccentrics."

The top three reasons for taking out a loan remain: holidays, cars and home improvements.

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Secured loans The table below demonstrates the expansion in the gross advances for secured personal loans since 1999. While five years ago, new business in this product category stood at just 10% of the new business in unsecured loans, it has registered a five-year compound annual growth of 56.1% since then.

Gross advances for secured and unsecured personal loans Table 3.16: Gross advances for secured and unsecured personal loans, 1999— 2003e £m

1999

2000

2001

2002

Secured personal loans 4,800 Unsecured personal loans 44,350

6,400 49,362

9,800 55,549

18,600 60,420

2003e CAGR 99-03e 28,500 57,947

56.1% 6.9%

Source: Datamonitor analysis of ONS, BBA, Finance and Leasing Association, Bank of England, CML and APACS data. Business Insights

It is evident from Table 3.16 that secured personal loans have only significantly taken off in terms of new business since 2001/2002, mirroring the spectacular rises in house prices in the UK. Their growth has also been influenced by a number of other factors, including increased competition, relative competitiveness of secured loans, growth of sub-prime sector (many secured loan providers have aimed for the non-standard or sub-prime customer segment and the growth of this segment in recent years has resulted in a greater competitive presence from secured loans) and growth in debt consolidation loans.

Credit cards Credit cards had an exceptional year in 2003, both in terms of advances and outstanding balances, increasing their market share on both fronts. Growing competition in the sector, coupled with aggressive promotional techniques, contributed to this success and continues to spur the market on in 2004. Non-cardholders are being bombarded by direct mail solicitations, offering interest-free promotions on balance transfers and new purchases, loyalty schemes and free gifts. 59

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The current situation has its origins in the early 1990s, when U.S. monolines, such as MBNA, Capital One and Advanta, entered the UK market. They proved an important catalyst in altering the pricing structure and upping consumers’ desire to use revolving credit. US credit card companies have successfully decommoditised the credit card market by combining airline and point awards, affinity and co-branding, and other incentives to promote credit card spending, and this trend has quickly caught on in the UK.

Barclaycard’s controversial ‘interest-free for life’ balance transfers and Marks & Spencer’s &More credit/loyalty scheme are only some of the more tempting options available to today’s credit card customers. These marketing techniques, however, mask the fact that credit cards remain one of the most expensive ways to borrow.

Overdrafts Though still dwarfed by competing products in terms of their share of the market, overdrafts have shown very strong growth levels over the past five years. This reflects the simplicity and wide availability of overdrafts as a credit product, as well as the increasing number of customers being granted this particular form of credit by their banks. Another strong factor in the overdraft’s healthy growth is the UK’s everincreasing student population and their widespread use of low-interest overdraft facilities, extending to thousands of pounds. With many banks offering generous servicing and repayment terms for their undergraduate clients, overdrafts are increasingly becoming an important customer retention tool for many high street lenders.

Motor finance Following the market downturn a couple of years ago, point of sale motor finance experienced another year of growth in 2003, albeit at much steadier levels than was the case in 2002. Table 3.17 illustrates the performance of outstanding balances in this sector, split by new and used car finance.

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Value of private new car finance at the point of sale Table 3.17: Value of motor finance arranged at the point of sale for private new car purchases by product, 1999—2003e £m

1999

2000

2001

2002

2003e CAGR 99-03e

Hire Purchase PCP Personal loans (PoS) Leasing

3,167 1,651 66 51

2,928 1,491 51 64

3,825 1,730 83 52

4,155 2,033 140 92

4,366 2,038 270 146

8.4% 5.4% 42.2% 30.0%

Total

4,935

4,534

5,690

6,420

6,820

8.4%

Source: Datamonitor analysis of ONS, BBA, Finance and Leasing Association, Bank of England, CML and APACS data. Business Insights

While, traditionally, the used car finance market has been worth much more than its new counterpart, outstanding balances in the new car finance sector have shown a remarkable growth since 2000, highlighting the impact that the decreasing prices of new vehicles have had on this sector. Used car finance has been much more steady in its growth levels – the falling value of used vehicles is partly to blame, as well as the increasing number of people opting for a new vehicle, thanks to greater affordability.

Value of private used car finance at the point of sale

Table 3.18: Value of motor finance arranged at the point of sale for private used car purchases by product, 1999—2003e £m

1999

2000

2001

2002

2003e CAGR 99-03e

Hire Purchase PCP Personal loans (PoS) Leasing

5,403 510 278 1

4,517 389 241 2

4,237 355 260 2

4,496 449 372 5

4,890 511 436 11

-2.5% 0.1% 11.9% 83.9%

Total

6,192

5,149

4,854

5,322

5,849

-1.4%

Source: Datamonitor analysis of ONS, BBA, Finance and Leasing Association, Bank of England, CML and APACS data. Business Insights

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Hire purchase agreements are still the dominant product within the new car finance market, showing strong growth levels over the last five years and mirroring the growth of the market as a whole. Its advantages as a uncomplicated way of financing a new vehicle have clearly made this product a market winner over recent years, with a market share of 64.7% in 2003. Personal contract plans’ growth has slowed right down in 2003, gaining just 0.3% on the previous year’s levels. Personal loans arranged at the point of sale and leasing remain marginalised in the new car finance market. Point of sale car loans have suffered greatly at the hand of unsecured personal loans, marketed especially for car buyers by companies such as Alliance & Leicester, while the success of leasing as a method of car finance has so far been largely limited to the fleet sector.

Despite the negative five-year growth of 2.5%, hire purchase still controls 84.5% of the market, highlighting the lack of real point of sale alternatives for used car buyers. Personal contract plans (PCPs) are not normally associated with used car credit and this product has remained on the periphery of the used car finance market, although it has registered marginal growth since 2002. However, PCPs do seem ideal for the niche market of high value (prestige) used vehicles and any future growth of this product looks likely to come from this area.

Retail finance: balances outstanding The decline of point of sale retail finance over recent years highlights the severe competitive pressure this product category has come under from other forms of consumer credit.

It is worth remembering when examining the performance of store cards and store instalment credit in terms of outstanding balances and gross advances that the historical FLA data on which this analysis is based has been adjusted upwards following an inclusion of a new book into the FLA membership.

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Retail finance outstanding balances by product Table 3.19: Retail finance outstanding balances by product, 1999—2003e £m

1999

2000

2001

2002

2003e CAGR 99-03e

Store cards Instalment credit Mail order credit

2,760 4,366 5,701

2,637 4,139 5,489

2,655 3,446 4,864

2,768 3,364 4,889

3,154 3,450 5,264

3.4% -5.7% -2.0%

12,827

12,265

10,965

11,022

11,868

-1.9%

Total

Source: Datamonitor analysis of ONS, BBA, Finance and Leasing Association, Bank of England, CML and APACS data. Business Insights

Store cards When compared to the other forms of point of sale retail finance, store cards have appeared to perform relatively well since 2002, growing by 13.9% in terms outstanding balances, and increasing their share of the retail finance market by 1.5%. However, it has to be noted that much of these gains have resulted from an inclusion of a new book into the membership of the FLA, rather than an actual increase in outstanding balances.

In fact, store cards have suffered badly from the increasing competition in the consumer credit market over the recent years. Credit cards, in particular, have emerged as a much cheaper and more popular borrowing option, and the incentives offered by store card providers, such as discounts on purchases and interest-free repayment periods, have failed to attract customers in sufficient numbers to withstand the competition.

Instalment credit Instalment credit growth levels in terms of outstanding balances have declined at a steady pace over the last five years, reflecting a similar situation in the market share of this product. Increased competition from other forms of consumer borrowing, such as personal loans and credit cards, has been instrumental in this demise.

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In addition, not unlike personal contract plans in motor finance, instalment credit has in the past benefited greatly from the retailers’ ability to offer 0% interest rate finance options in order to boost sales figures, particularly during sales and festive periods. However, the recent buoyant performance of the retail sector has removed such need from the retailers’ finance providers, resulting in the decrease in the customers’ take up of this form of borrowing.

Mail order credit Mail order credit has fared slightly better in terms of outstanding balances than instalment credit, growing by 3.4% since 2002 and consolidating its position as the leader in point of sale retail finance. However, this product category has also suffered from the outside competition. Many direct credit providers have been increasingly focusing on the non-standard or sub-prime market – the traditional cornerstone of mail order business. This attention has resulted in a dramatic increase in the number of options open to non-standard borrowers and the decline of the popularity of the traditional mail order method.

Retail finance: gross advances Table 3.20: Retail finance gross advances by product, 1999—2003e £m

1999

2000

2001

2002

2003e CAGR 99-03e

Store cards Instalment credit Mail order credit

4,917 3,417 6,607

4,634 3,281 6,275

4,507 2,816 5,708

4,807 2,834 5,560

5,412 2,884 6,037

2.4% -4.2% -2.2%

14,941

14,190

13,031

13,201

14,333

-1.0%

Total

Source: Datamonitor analysis of ONS, BBA, Finance and Leasing Association, Bank of England, CML and APACS data. Business Insights

Store cards In terms of new business, the growth of store cards seems to present a very different picture to the rest of the market, increasing by 12.6% since 2002. Again, these figures 64

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cannot be taken at their face value due to the adjustments in the FLA’s data. However, the market share of store cards in the point of sale retail finance market has been rising steadily since 2000 to reach 37.8% in 2003, demonstrating that, despite bad publicity and uncompetitive rates, this product still manages to attract customers.

Instalment credit The growth in new business in instalment credit reflects the situation in outstanding balances – this form of credit has been experiencing a steady decline over the past five years, and its market share has shrunk to 20.1% in 2003. The factors that have had a detrimental impact on the performance of outstanding balances in this product category include external competition, bad publicity and high retail sales figures. These factors have also affected new business in this sector.

Mail order credit New business in mail order credit experienced something of a minor revival in 2002, reversing the trend of a steady decline since 1999. Despite this, gross advances in this product category still experienced negative growth rate of 2.2% over the last five years and its market share has remained static and under pressure from the gains made by store cards. Again, external competition has impacted strongly on the growth of new business in this area, offering customers plenty of more convenient, more attractive and cheaper ways to borrow.

‘Overindebtedness’ The problem of personal indebtedness in the UK has been a controversial and widely debated issue for the credit industry, consumer organisations and the Government since October 2000, when The Task Force on Overindebtedness was established. Britons have borrowed record amounts in recent months and research from the Financial Services Authority suggests that as many as 6.1 million households now face moderate difficulties paying their current credit and other commitments. 65

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There is no generally accepted definition of overindebtedness in economic literature. Generally speaking, this term refers to a situation where a household is unable to repay consumer credit or mortgage debts.

Favourable economic conditions, such as low unemployment rates, low interest rates and soaring house prices, have all influenced the rise of the consumer debt mountain. In particular, the Bank of England’s policy of cutting down base interest rates to their lowest level for half a century, designed to stimulate uncertain economic growth, encouraged people to keep spending their money rather than saving it. While certain sections of the population have found themselves in a relatively affluent situation as a result of the aforementioned factors, the culture of debt appears to have taken hold of the entire nation.

It is yet uncertain how the student loan generation, where individual debts of over £10,000 even before the start of professional careers are not uncommon, are going to fare once they become fully-fledged members of the debt-addicted society. It is, however, likely that the levels of individual consumer debt could be much higher in the future.

While it is unarguable that the levels of household debt have been increasingly rapidly over the past 10 years, the level of overindebtedness has proved very hard to measure, leading to the continuing disagreements about its exact extent among UK households. Recent figures from the Credit Services Association revealed that the level of arrears being passed to debt collection firms has soared 70% since 2001, highlighting the increasing difficulties British households experience with repaying their debt. Interestingly, much of the growth in consumer credit, according to the CSA, has been in the prime market, whereas lending to the sub-prime market has remained relatively stable. This fact underlines the argument that even more affluent sections of consumers are not immune to excessive debt problems.

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Another indicator of the growing problem of personal debt in the UK is the marked growth in personal insolvency procedures such as bankruptcy. According to figures from the Department of Trade and Industry, the number of personal insolvencies increased by 25% between 1997 and 2002.

The UK’s Consumer Advice Bureau (CAB) is now dealing with well over a million new debt enquiries per year. Consumer credit enquiries, in particular, have risen by 55% since 1997/1998, and now form nearly two-thirds of all new enquiries about debt made to the CAB. The last significant increase in CAB debt enquiries took place during the early 1990s and was a direct result of a deep economic recession.

As previously mentioned, the consumer credit boom is strongly associated with current favourable economic conditions. However, while fears about the economy are often grounded in the memory of the previous recession, the current economic climate is significantly different from that of the early 1990s.

While economic conditions are more benign this time around, consumer credit is significantly higher. There is a suspicion that even a relatively insignificant worsening of the economic environment could hit those who have been less prudent in their borrowing or in their lending practices hard.

Consumer education, or the lack of it, is often blamed for the apparent short-sightedness Britons seem to display in their borrowing habits. According to a survey conducted by Yorkshire Bank, for example, 60% of people underestimate the impact a rate change would have on their mortgage. In fact, a 1% rise in base rates could result in an average homeowner seeing increases of around £50 a month.

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Regulatory issues in the consumer credit market Consumer Credit Act Despite the explosion of consumer credit choice and debt, the UK’s consumer credit laws have remained unaltered for more than 30 years. Within the increasingly competitive market, credit products have become more innovative and lenders are finding the technical requirements of the existing regulations unwieldy.

The proposed overhaul of the Consumer Credit Act is primarily designed to enable lenders to provide straightforward, consumer friendly credit information, and address the explosion of small credit offerings and unscrupulous lenders charging excessive rates.

The Consumer Credit White Paper published by the DTI in December 2003 outlines planned reforms in detail, following a long period of consultation and an ongoing investigation into the credit industry by the Parliamentary Treasury Select Committee. The White Paper sets out Government’s policies including measures to strengthen the rules governing credit licences, putting debt management companies and rogue moneylenders under closer scrutiny as well as giving the Office of Fair Trading the power to fine moneylenders, conduct surprise raids on debt companies, and moneylenders will have to provide standard information when advertising financial products so consumers can compare like-for-like and find the best deal. The White Paper also recommends that small print will have to be enlarged and fairer rules will have to be established for people who pay back loans early. Around 70% of all personal loans are settled early but often under the weight of heavy charges.

One of the main purposes of the new consumer credit regulations is to cut down on the number of unscrupulous lenders. As a result of investigations by the Government’s Committee on Public Accounts, the Office of Fair Trading (OFT) came under fire for failing to prevent people with a criminal past from setting up business as a lender or a debt collector. 68

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The UK debt consolidation industry came under the OFT’s spotlight in July 2003, following concerns that consumers do not understand how secured loans work in practice. The OFT has been examining whether lenders are being responsible in their dealings with borrowers, as well as investigating advertising and marketing practices of some debt consolidation firms.

The well-documented Treasury Select Committee’s inquiry into the rates charged by the major credit card providers has been evolving since July 2003. The giants of the credit card industry, including Barclaycard, HBOS, Lloyds TSB, RBS Group and MBNA, have come under repeated fire from MPs and the media over their lending practices.

The investigation was later widened to include store cards, when MPs’ attention was drawn to the rates charged by GE Capital, a provider of 50% of UK store cards. GE Capital last reduced its APRs in April 1999, while the Bank of England base rate has halved since then.

GE Capital argued that store card providers could only link APRs to the base rate if consumers were to borrow more on store cards (£300 average balance). The company also stated that store cards offered choice for consumers, as well as the benefits of 10% discount on the initial purchase and 56 days of interest free period.

Aside from the agreement on ‘summary boxes’ which are discussed below, the investigation has led to the announcement from the OFT of an informal fact-finding review into store cards, specifically focusing on the following areas: application of competition law, marketing and sales practices, transparency issues and interest rates.

Summary boxes In September 2003, under pressure from the Treasury Select Committee and with the backing of the Prime Minister, several big lenders, including Barclaycard, agreed to print so-called ‘honesty boxes’ on all their marketing material and application forms from

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March 2004. The boxes set out interest rates, penalty charges, the length of the interest free period and any other fees consumers will have to pay.

While all of the major lenders have welcomed the proposals, such initiatives could prove problematic for lenders such as Barclaycard, who operate a risk-based pricing policy, meaning they could end up with as many as 18 different interest rates in the box.

Perhaps the most important change anticipated to be outlined in the White Paper is the review of the early settlement charges by lenders, otherwise known as the Rule of 78.

Eradication of the use of the Rule of 78 Rule of 78 is a method used by some lenders to calculate early repayment costs. It works out how much interest a customer should have paid at any time during the repayment period of a loan. Under Rule of 78 customers pay more interest in the beginning of a loan.

Number 78 is based on the 12 months of a one-year period. When the 12 months are added together (12+11+10+9+8+7+6+5+4+3+2+1) you get 78. This means that if a customer has a loan to be repaid in one-year, the lender will expects the customer to pay 12/78ths of the interest in the first month and 11/78ths in the second, continuing like this until the final month.

According to the Department of Trade and Industry, about 70% of people who take out a personal loan will repay it early, yet 95% of lenders levy a charge of either one or two months’ interest. The new regulations will dispose of the existing method of calculating interest in favour of the ‘fairer and more accurate’ actuarial method, while also capping interest penalties at one month.

However, the new proposals have met with mixed reaction both from the FLA and the consumer organisations. In the view of consumer organisations, the DTI has missed an

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opportunity to abolish fees completely by allowing lenders to carry on charging penalties. Lenders will also be allowed to defer the loan settlement date for 28 days, effectively giving them the option of charging an additional month’s interest.

The FLA, in contrast, has likened the DTI’s approach to the issue to that of ‘taking a sledgehammer to a nut’. According to Martin Hall, Director General of the FLA, the new rules will drive up the average cost of loans by forcing lenders to change their system.

The potential cost of new IT systems, brochures, training and increased transparency for FLA members is alleged to be around £128 million. This figure contrasts sharply with the Government’s estimation that the total cost of new Consumer Credit Act implementation for the lending sector should be less than £1million.

In addition, the FLA expressed doubts about the DTI’s assumed figure of 70% for early loan settlements. According to the FLA’s own calculations, around 24% of consumer credit agreements and 18% of unsecured personal loans are paid off early. New regulations, therefore, would mostly benefit consumers taking out longer-term loans (five years or more), which equate to a mere 4% of total consumer credit agreements.

Lenders’ view of the Rule of 78 reform The majority of industry sources interviewed as part of the primary research element of this report regard the future altercations of Rule of 78 as a largely positive development, which is likely to result in greater consumer awareness. Lenders who already have a more progressive charging structure expressed hope that the new regulations will give them a competitive edge and result in extra new business.

However, according to some credit providers, the review of Rule of 78 “will significantly erode profitability of the product since more and more customers are choosing to settle early”. There may also be a gradual upwards correction of APRs, as lenders seek to recover the losses arising from the changes. In addition, the review of 71

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the Rule is expected to alter the balance between fixed-term and revolving lending, making the fixed-term option less profitable.

A number of lenders expressed concern over the potential cost of the implementation of the reform, which was identified by some lenders to be somewhere in the region of £100 million. This would result in many players adjusting their rates accordingly to retain their profit margins or introducing other revenue streams, such as fixed penalties for early settlement.

Consumer Credit Directive In 2002 the European Commission adopted a proposal for a new directive on consumer credit. The existing EU-wide rules have not kept pace with the evolution in this sector and have largely been overtaken by national regulations. The absence of common rules has reduced cross-border transactions and led to differences in consumer protection in member states.

Some of the main elements of the proposal for a new consumer credit directive include harmonised rules, enlargement of the scope (the new directive will cover all consumer credit, including mortgage-backed consumer credit, but excluding mortgages), improved transparency and comparability, consumer disclosure (borrowers will be obliged to disclose all relevant information when asked by the lender, while the lenders must assess the borrower’s ability to repay before granting new credit) and rights of withdrawal (consumers will have the right to withdraw within 14 days, free of charge and without justification).

However, a number of studies have since concluded that the new regulations will not only fail to achieve these objectives, if implemented, but will also result in negative implications for the UK consumer credit market. In particular, a study carried out by the Oxford Economic Research Associates (OXERA) concluded in July 2003 that the new directive would result in a direct increase in the cost of providing credit, a reduction in the availability of credit, and a significant welfare loss to consumers (all users of credit 72

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would end up paying a higher rate of interest in order to cover the costs resulting from the directive).

Consequently, the proposed draft of the directive was rejected by the European Parliament Legal Affairs Committee in September 2003. At the time of writing, the exact proposed changes to the directive are still under discussion.

Conclusions Over the period 2004 to 2008, the UK financial industry faces the task of implementing more than 14 EU legislative measures. In addition, the current review of the domestic regulations will add to what the FSA calls ‘implementation pressure peaks’ in 2004 and 2006, resulting in ‘looming bottlenecks’. The cost of implementation will certainly put stress on many lenders. It, however, remains largely uncertain whether it will have a similar effect on the competitive dynamics of the industry. And, while in principle consumers are set to benefit, in practice many regulatory changes have so far tended to prove the law of unintended consequences.

Competitors The rising number of competitors has made the unsecured personal loans market increasingly tough over the recent years

Over the years the ‘big four’ banks (Barclays, Lloyds TSB, HSBC and Royal Bank of Scotland/Natwest) have dominated the unsecured personal loan market as a result of their existing large customer base and widespread branch network. Although, traditionally, this group has remained the least competitive in terms of prices, it has been able to enjoy the largest share of the market.

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The unsecured personal loan market has exhibited an impressive growth over the past five years and one reason for this growth has been the increasing number of players competing for the customers’ attention. Since 1998 the market has witnessed a number of notable new entrants, such as U.S. card companies MBNA and American Express, new Internet banks such as Egg, Smile and Cahoot, and a number of brand extenders such as Tesco Personal Finance and the AA Financial Services.

More recently, a number of new affinity partnerships have entered the market, offering products such as Manchester United personal loans, as the lenders are looking for new ways to attract customers to their products. According to interview, the market, despite seemingly reaching saturation point, still appears to offer room for new players. But, while prerequisites such as competitive pricing and existing large customer base can offer great advantages in getting a foothold in the market, narrow margins make shortterm profit difficult to achieve. In the words of one industry source: “If you are a new entrant with set up costs that offers a very low rate, it is going to be a long time before you make any money in the current market”.

Market share of leading lenders – balances outstanding Despite the increasing competitive pressure from the crowd of lenders, big banks continued to dominate the unsecured personal loans market in 2002 in terms of outstanding balances. The following figure shows the top five leading lenders’ market share of the total UK unsecured personal loans balances outstanding at December 2002.

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Table 3.21: Estimated unsecured personal loan balances outstanding by competitor for leading UK loan providers, 2002 Balances outstanding, £bn Lloyds TSB Barclays Bank Natwest Bank Halifax Bank of Scotland Others

Market share, %

Relative market share, %

7.4 7 4.5 3.2 3

10.2% 9.6% 6.2% 4.4% 4.1%

106.3% 94.1% 61.1% 43.4% 40.1%

47.7

65.5%

Market total 72.8 100.0% Note: Barclays Bank includes Barclays Retail Banking Division and Barclaycard personal balances. Source: Datamonitor estimates based on annual reports, analyst presentations, industry interviews and consumer surveys. Datamonitor analysis of ONS, BBA, Finance and Leasing Association, Bank of England and APACS data. Business Insights

Lloyds TSB and Barclays dominate the market in terms of outstanding balances, with Lloyds (10.2%) overtaking Barclays (9.6%) to become the leading lender. Natwest has remained a clear third in the market, although its share of outstanding balances decreased from 7.1% in 2001 to 6.2% in 2002. A number of lenders with market share of around 4% are challenging existing market leaders, including Halifax and Bank of Scotland.

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Market share of leading lenders - gross advances Table 3.22: Estimated unsecured personal loan gross advances by competitor for leading UK loan providers, 2002 Gross advances, £bn Lloyds TSB Barclays Bank Natwest Bank Halifax HSBC Bank Others

Market share, % Relative market share, %

6.1 5.8 3.7 2.9 2.3 18.5

10.2% 9.6% 6.2% 4.8% 3.9% 30.5%

106.3% 94.1% 61.1% 47.4% 38.2%

Market total 60.4 100.0% Note: Barclays Bank includes Barclays Retail Banking Division and Barclaycard personal advances. Source: Datamonitor estimates based on annual reports, analyst presentations, industry interviews and consumer surveys. Datamonitor analysis of ONS, BBA, Finance and Leasing Association, Bank of England and APACS data. Business Insights

Lloyds TSB and Barclays are the clear market leaders in terms of the unsecured personal loans gross advances, with 10.2% and 9.6% of market respectively. Natwest has remained the third biggest lender in terms of new business with 6.2% of the market (down from 7.1% in 2001). Halifax and HSBC, with market share of around 4%, are just behind the leaders in terms of gross advances.

Pricing tactics Price is often the most visible difference between unsecured personal loans. Most customers will claim that price is a key factor in their choice of a loan and most providers agree that price is the key product differentiator available to them. In order to improve their customer acquisition strategy, UK lenders have established a range of pricing strategies and techniques.

The lucrative personal lending market, traditionally the realm of the main high street banks, has attracted many new competitors in recent years. Many of these entrants have sought to compete and win business by offering loan rates that were either the most

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competitive or among the most competitive rates in the market. As a result, existing lenders in the market have also been pushed to lower their rates in order to remain competitive.

Throughout this section pricing data for £5,000 loans is provided, which are typically used as comparators in media best-buy tables.

Unsecured personal loan rates for leading UK loan providers Table 3.23: Unsecured personal loan rates for leading UK loan providers, Oct02 to Oct-03 %

Oct-02

Oct-03

Change Oct-02 to Oct-03

Royal Bank of Scotland 16.7 12.9 -3.8 Barclays Bank 15.9 9.9 -6 Lloyds TSB 15.9 7.9 -8 HSBC 13.9 13.9 0 Yorkshire Bank 13.9 9.9 -4 Natwest 12.9 12.9 0 Woolwich 12.4 11.9 -0.5 MBNA 11.9 11.9 0 Halifax 11.9 10.9 -1 Birmingham Midshires 11.4 10.9 -0.5 Bank of Scotland 10.9 10.9 0 Egg 10.7 7.9 -2.8 RAC 9.9 10.7 0.8 Marks & Spencer 9.9 9.9 0 Virgin Money 9.7 11.9 2.2 Co-Operative 9.7 8.7 -1 First Direct 9.4 11.9 2.5 Alliance & Leicester 8.9 7.4 -1.5 Abbey 8.8 9.3 0.5 AA 8.8 6.9 -1.9 American Express 8.5 8.7 0.2 Intelligent Finance 8.3 8.3 0 Tesco 8.3 7.6 -0.7 Sainsbury's Bank 8.2 6.9 -1.3 Direct Line 8.2 6.7 -1.5 Lombard Direct 8.2 6.6 -1.6 Nationwide 7.9 6.7 -1.2 Northern Rock 7.1 6.2 -0.9 Note: Unsecured personal loans interest rate is based on the standard APR for a £5,000 loan. Business Insights

Source: Datamonitor, Moneyfacts

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Interest rates have a direct impact on how cheaply lenders can price their loans. Consequently, as Bank of England base rates have fallen, so have the average interest rates on unsecured personal loans.

In October 2003, 10 leading lenders were offering typical APRs below 8%, compared with just two in October 2002 and none in 2001. Similarly, there were no lenders offering typical APRs above 13% in October 2003, compared with six providers in 2001 and five providers in 2002.

Lower value loans are generally more expensive to provide and with intensifying competition, only some lenders are prepared to sufficiently cut their rates and accept lower profit margins.

In order to attract the price sensitive customer segment, lenders need to offer highly competitive rates. With the significant competitive advantage that an existing customer base can offer, some new entrants in the market have attempted to build one quickly through the use of low introductory offers and by sacrificing short-term profit goals.

Mid-pricing subsequently represents a trade off between the acquisition of price sensitive customers and the acquisition of a high-profit-creating ‘lazy price taker’. However, such lack of a tactical positioning strategy could have a detrimental effect upon a lender’s growth rates.

In contrast to the lenders targeting the price sensitive customer segment, the big banks have traditionally charged well above average market APRs, despite becoming increasingly uncompetitive as the base rates have fallen. This strategy has suggested that such lenders view price as an important variable in their customer acquisition strategy and instead, variables such as brand or access to the large customer base take priority.

However, over the last year the market has witnessed considerable decreases in the interest rates charged by some of the big banks. This suggests that high price acquisition 78

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strategy has proved less than successful in an increasingly competitive market environment and these lenders have finally bowed to market pressure. Table 3.24 demonstrates the fluctuation in the interest rates charged by the ‘big four’ banks over the last two years.

The “big four” banks’ standard APRs for unsecured personal loans Table 3.24: “Big four” banks’ standard APRs for unsecured personal loans, Oct-01 to Oct-03 %

RBS

Lloyds TSB

HSBC

Barclays

Oct-01 15.7 15.9 13.9 15.9 Jan-02 15.9 15.9 13.9 15.9 Apr-02 16.7 15.9 13.9 15.9 Jul-02 16.7 15.9 13.9 15.9 Oct-02 16.7 15.9 13.9 15.9 Jan-03 16.7 15.9 13.9 11.9 Apr-03 16.7 7.9 13.9 11.9 Jul-03 16.7 7.9 13.9 12.9 Oct-03 12.9 7.9 13.9 9.9 Note: Unsecured personal loans interest rate is based on the standard APR for a £5,000 loan. “Big four”: Barclays, Lloyds TSB, HSBC and Royal Bank of Scotland. Business Insights

Source: Datamonitor analysis of Moneyfacts data

The leading high street names have been forced to rethink their loan pricing strategy over the last year. At the time of writing, Lloyds TSB was offering an APR of 8.9% on a £5,000 unsecured personal loan – a difference of 7% on its previous year’s rate (November 2002). Similarly, Barclays has lowered its standard loan rate from 15.9% to 9.9%, and RBS has cut its rate by 3.6% over the same period of time.

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Chapter 4

Issues in Mortgages

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Chapter 4

Issues in Mortgages

Summary Total gross advances jumped from £160.2 billion in 2001 to reach a record level of £218.6 billion in 2002. This equates to a growth rate of 36.5% from 2001 to 2002, a rise of 2.9% over the previous period, where a growth rate of 33.6% was recorded. Data for the first three quarters of 2003 revealed that total gross advances are set to hit a new record. For instance, gross advances recorded for the third quarter of 2003 are 21.4% higher than those of 2002. September 2003 was the most buoyant month at gross advances of £25.4 billion, the highest amount ever recorded. Average deposits for first-time buyers in the UK have been growing at a compound annual growth rate of 22.5% for the last five years, whereas the London region has seen a growth of 24.6% during the same period. The biggest compound annual growth rate recorded was for the South West region, at 30.7%, followed closely by the South East region at 27.1%. Average house prices in the UK rose at a compound annual growth rate of 13.6% throughout the period 1998 to 2002. Following the underlying trend in 2001, South West, Greater London and the South East regions have remained the hottest spots. The top 10 players, ranked by total mortgage balances outstanding, in the UK mortgage market remained unchanged for the year 2002. HBOS continues to enforce its dominance in the market with a share of 22.4%, a growth of 0.5% over its 2001 market share. Following the trend underlined in 2001, Abbey recorded a loss in share of total mortgage balances outstanding in 2002. The company’s share amounted to 11.9% in 2002, a fall of 0.5% from its 2001 share of 12.4%.

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Introduction This chapter presents the UK mortgage market, focusing on the historical and current data on the UK mortgage market. The data is provided for a five-year period from 1998 to 2002 and for the year 2003, where available. This chapter considers the following issues: UK mortgage market size, major trends and issues, regulatory issues and overview of some of the niche segments.

Mortgage market size The trend in total gross advances over the past few years has pointed towards an increase in borrowings. The years 2002 to 2003 were no exception with the buoyancy of the mortgage market being even greater than before. Total gross advances have jumped from £160.2 billion to reach a record level of £218.6 billion in 2002. This implies a growth rate of 36.5% from 2001 to 2002, a rise of 2.9% over the previous period, where a growth rate of 33.6% was recorded.

Mortgages – gross advances Figure 4.4: Gross advances, 1998—2003

Gross advances, ,£bn

250 200

Other

150

Remortgaging

100 House purchase

50 0 1998

1999

2000

2001

2002

Business Insights

Source: Datamonitor, CML

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Data for the first three quarters of 2003 revealed that total gross advances are set to hit a new record. For instance, gross advances recorded for the third quarter of 2003 was £74.2 billion, 21.4% higher than that of 2002. September 2003 was the most buoyant month at gross advances of £25.4 billion, the highest amount ever recorded at the time of writing.

Gross advances and market share by category Table 4.25: Gross advances and market share by category, 1998—2003 1998 89.4 63.5 22.9 3

1999 114.6 81.6 28.2 4.9

2000 119.9 79.4 34.1 6.4

Total gross advances £bn 2002

2003

change (+/-)

Q1 Q2 Q3

42.8 53.9 61.1

56.4 64.4 74.2

31.7 19.5 21.4

Remortgaging £m

2002

2003

16,500 18,800 21,300 13.6%

27,300 31,300 31,500 7.8%

Total gross advances House purchase Remortgaging Other

Q1 Q2 Q3 CAGR

Source: Datamonitor, CML (Council of Mortgage Lenders)

2001 160.2 100.2 50.2 9.8

2002 218.6 118.2 80.6 19.8

CAGR 25.1% 16.8% 37.0% 60.3%

Business Insights

Figure 4.4 and Table 4.25 highlight the growing importance of remortgaging in the mortgage market. In 1998, remortgaging accounted for only a quarter of total gross advances. However, since the year 2000, remortgaging has been eating constantly into the ‘house purchase’ market share. Although ‘house purchase’ is still the main component of the mortgage market, the trend shows that remortgaging is catching up. Market share for remortgaging accounted for 36.9% in 2002. Consequently, the share of ‘house purchase’ has dropped dramatically from 71.0% in 1998 to 54.1% in 2002.

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Remortgaging in recent years Many factors have played a role in encouraging increasing numbers of homeowners to remortgage, including mounting house prices, resulting in property owners experiencing a consequent rise in the value of their property. The last couple of years have seen a consequent boom in the house market that has been stimulated by a number of drivers such as low interest rates, a low unemployment rate and good overall economic conditions. Competition was also an important factor, with the mortgage market being as buoyant as ever, lenders have been competing to try to gain new customers. The competitive rates offered by the different lenders have encouraged homeowners to switch providers, particularly those who had taken on their mortgage several years ago before interest rates started to fall.

Other factors that influence remortgaging include little or no extra cost in procedures, with some lenders making the remortgaging process easier for borrowers by taking charge of some of the procedures, such as the legal aspect of moving the mortgage. Buy-to-let investment is another factor, the buy-to-let market has fuelled remortgaging as an increasing number of homeowners are looking at investing in a second property and more individuals are being forced to rent due to unaffordable house prices. Also, with an increase in customer awareness (the UK media has helped in creating customer awareness about remortgaging) and overseas property investment, the increased popularity of purchasing properties abroad has also resulted in heightened consumer interest in remortgaging.

There was a noticeable fall in remortgaging growth rates during 2003, although absolute total gross advances for remortgaging are still on the rise. Remortgaging increased at a compound annual growth rate of 7.8% for the first three quarters of 2003, compared to 13.6% for first three quarters of 2002.

There are a number of potential factors that could account for a decrease in the growth of remortgaging. These include early redemption costs, consumer confidence, and expectations in a rise in interest rates. Because of the expectations about significant rises 85

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in the UK base rate, consumers are becoming cautious about remortgaging. Another factor is customer retention strategies, as more consumers are remortgaging and transferring their mortgage to a different provider offering a better deal, mortgage providers are being forced to look at various strategies to prevent customers from switching.

First-time buyers in the mortgage market First-time buyers (FTBs) have an important part to play in the property market. They contribute in rejuvenating and smoothing the ‘property ladder’ process. By entering the market, they allow previous first-time buyers to sell their starter home and move to a bigger one. Similarly, other existing homeowners are allowed to move up the property ladder. If the number of first-time buyers entering the property market continues to fall, then it could have serious consequences for the growth of the mortgage market.

However, the growth of the buy-to-let sector has determined that the effect has not yet been felt on the mortgage market. Given that first-time buyers are finding it more and more difficult to get on the property ladder and are being forced to rent, buy-to-let has become an attractive investment for individuals. Hence, buy-to-let has contributed in keeping the mortgage market growing.

Mortgage advances for first-time buyers and movers Table 4.26 represents the average mortgage advance for FTBs and movers (also known as ‘former owner occupiers’), highlighting that the average advance for both groups has risen constantly for the past five years. This is easily understandable since the average advance is directly related to house prices.

As house prices have been increasing for the past five years, the average advance has also been increasing, since individuals will normally require bigger mortgages with higher house prices.

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The average advance for FTBs has been increasing at a faster rate than that of movers, at compound annual growth rates of 12.1% and 8.1% respectively. For instance, average advances for first-time buyers witnessed a major increase of 19.8% from 2001 to 2002 as compared to a small increase of 5.4% for movers over the same period. Average advances for first-time buyers and movers stood at £80,306 and £88,707 respectively for the year 2002.

Average advance for first-time buyers and movers Table 4.26: Average advance for first-time buyers and movers, 1998—2002 £

1998

1999

2000

2001

2002

Average advance to first-time buyers 50,921 Average advance to movers 64,918

57,383 71,717

60,451 78,590

67,037 84,181

80,306 88,707 Business Insights

Source: Datamonitor, CML

FTBs are the biggest victims of the floating state of the housing market. With escalating house prices, they are finding it more and more difficult to get on the property ladder. With average deposits continuously on the rise, FTBs are being forced to save more for a deposit. Hence, they are being forced to wait longer to enter the property market.

Average deposits required by a first-time buyer Average deposits for first-time buyers have increased throughout the UK, with noticeable disparities among the different regions that are related to the differences in house prices among these regions. The highest average deposit required by a first-time buyer in 2002 was for the London region at £40,140. The average deposit for a firsttime buyer in the UK has been growing at a compound annual growth rate of 22.5% for the last five years, whereas the London region has seen a growth of 24.6% during the same period.

The situation for first-time buyers is getting worse. The percentage of loans for firsttime house purchases has fallen dramatically over the last 24 months or so. The biggest

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fall recorded was between December 2002 and January 2004 when the proportion plunged from 44% to 27%. A possible explanation for this huge drop could be accounted for by the fact that prospective first-time buyers tend to be less active in the first month of the year, after the end of year festivities.

Percentage of loans for house purchase accounting for first-time buyers Table 4.27: Percentage of loans for house purchase accounting for first-time buyers, August 2002—August 2003 2002

Aug 40%

Sept 43%

Oct 45%

Nov 45%

Dec 44%

2003

Jan 30%

Feb 33%

Mar 29%

Apr 30%

May 30%

2003

Sept 28%

Oct 28%

Nov 27%

Dec 27%

2004

Jan 27%

June 29%

July 30%

Aug 26%

Business Insights

Source: Datamonitor, CML

Average income multiples First-time buyers are pushing themselves to the limit. In August 2003, FTBs borrowed on average 2.95 times their salary. There is growing concern about the effect of a possible rise in interest rates on FTBs who are overstretching themselves. As speculation about a rise in interest rates in the very near future are becoming more prominent, there is serious concern about FTBs being badly hit and not being able to meet their mortgage repayments.

Over the last five years, average income multiples have increased for both first-time buyers and movers at compound annual growth rates of 2.6% and 3.0% respectively. However, from 2001 to 2002, average income multiples for first-time buyers increased faster than those of movers, at a rate of 6% and 4% respectively. In 2002, first-time buyers and movers were borrowing on average 2.64 and 2.5 times their salary

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respectively. This highlights that FTBs are ready to stretch themselves in order to get on the property ladder.

Table 4.28: Income multiples for first-time buyers and movers, 1998—2003

First-time buyers Movers

1998

1999

2000

2001

2002 CAGR

2.38 2.22

2.41 2.29

2.42 2.37

2.49 2.4

2.64 2.5

2.6% 3.0%

2003 Jan Feb Mar Apr May June Jul Aug First-time buyers 2.62 2.6 2.62 2.61 2.64 2.69 2.85 2.95 Notes: ‘Income multiples’ was previously referred as ‘Advance to income’. Business Insights

Source: Datamonitor, CML

Figure 4.5: Average income multiples, 1998—2002 Ave. income multiples

2.7 2.6 2.5 2.4 2.3 2.2 2.1 2 1998

1999

2000

2001

2002

First-time Buyers Movers

Business Insights

Source: Datamonitor, CML

Controversy rages over whether FTBs are overstretching themselves with lenders relaxing their criteria and allowing FTBs to borrow larger income multiples. For instance, The MarketPlace offers up to five times a customer’s salary to customers

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earning more than £20,000. This is a big change from traditional income multiples of 33.25.

Arrears and repossessions The number of properties taken in possession by mortgage lenders is falling. From a total of 33,870 properties that were repossessed in 1998, the figure has fallen by 65% to reach 11,970. Over recent years, lenders have argued that much more is being done to help customers in keeping up with repayments.

For instance, lenders have been encouraging borrowers to take mortgage payment protection insurance (MPPI) to protect their properties from being repossessed if they run into financial difficulties. The fact that interest rates have fallen and lenders are offering more competitive rates has also contributed to borrowers being able to keep up with repayments. Moreover, flexible mortgages, which allow borrowers to make underand over-payments and take payment holidays, have also played an important role in reducing the number of repossessed properties.

The number of mortgages in arrears is decreasing too. This is particularly encouraging since it shows that borrowers have a better control of their finances. With lower interest rates, customers find it easier to maintain mortgage repayments.

However, the question that needs consideration is: what will be the effect if interest rates increase significantly, as many market analysts are forecasting? In November 2003, the Bank of England increased the base rate by 0.25 percentage points to reach 3.75%, the first increase in four years, followed by a further increase by 0.25 percentage points in February 2004, reaching 4.00%. In May 2004, the rate increased again by 0.25 percentage points to 4.25%. According to mortgage lenders, the recent increases are not expected to have a significant effect on homeowners’ wallets but even further increases would certainly have an impact.

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During the past two to three years, a fall in interest rates and increased confidence of borrowers have led to a rise in both secured and unsecured lending. With greater household debts than before, it is expected that the coming years will witness an increase in mortgage in arrears and repossessions.

Table 4.29: Mortgages in arrears, 1998—2002 1998

1999

2000

2001

2002

Mortgages 3-6 months in arrears 129,090 Mortgages 6-12 months in arrears 74,040 Mortgages more than 12 months in 34,880 arrears

96,680 57,110 29,520

95,260 47,820 20,810

81,340 43,130 19,710

66,560 34,030 16,480

Business Insights

Source: Datamonitor, CML

Mortgages market drivers Macroeconomic conditions Unemployment has stayed at a stable low level of 5.0%i and as return from other investment products has fallen, investors have switched to property investment, which has become a safer alternative to the other investment vehicles. However, 2003 demonstrated that the stock market is picking up again, implying that the future growth of the buy-to-let sector might slow down.

House prices Although a number of commentators predicted that house prices would decrease in 2002, this has not been the case. Average house prices have in fact continued to increase in 2002 - rising at a compound annual growth rate of 13.6% between 1998 and 2002.

i

October 2003

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Following the underlying trend in 2001, South West, Greater London and the South East regions have remained the hottest spots. These regions have witnessed the greatest increase in average house prices for the past five years at compounded annual growth rates of 18.8%, 18.2% and 17.0% respectively.

Table 4.30: Growth in average house prices per region, Q4 2002 to Q3 2003

Growth rate

North Yorkshire & North Humberside West 22.34% 20.86% 16.04%

Wales Scotland

West Midlands

15.59%

15.47%

12.54%

Growth rate

East Northern East Anglia Ireland Midlands 10.96% 9.43% 9.04%

Greater London 4.99%

South West 4.28%

South East 3.65% Business Insights

Source: Datamonitor, analysis of Halifax Data

Scotland and Northern Ireland are the regions that have been less affected by the increase in average house prices. These regions have seen their average house prices increase at a low compound annual growth rate of 4.2% and 6.9% respectively, well below the national compound annual growth rate. In the North, average house prices have increased at a compound annual growth rate 9.4%, again below the national average. The North is set to witness the fastest growth in house prices in 2004.

However, things are changing. House prices in the South East, Greater London and the South West regions are reaching their peak having experienced spectacular rises. Consequently, growth in house prices for these hot spots is going to slow down significantly. Regions, which in 2002 and 2003 recorded a slow growth rate, are set to become the new hot spots and will reduce the disparities in regions.

Falling interest rates In July 2003, the Bank of England cut the base rate to a low level of 3.5% to strengthen the economy. This has fuelled the housing market as cost of borrowing has decreased, raising the concern that individuals are saddling themselves with unaffordable debts.

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However, as mentioned earlier in this report, the base rate was revised upwards in November 2003 by 0.25 percentage points to reach 3.75%, in February 2004 by further 0.25 percentage points to reach 4.00% and recently in May, by 0.25 percentage points up to 4.25%. If significant rises in the base rate happen in the months to come, as expected, then borrowings are expected to decrease in 2004.

Table 4.31: UK base rate, 1993—2004 1994 1995 1996 1997 1998 1999

2000

2001 2002 Jul-03

Nov-03 Feb-04 May-04

6.25% 6.5% 6.0% 7.25% 6.25% 5.50% 6.00% 4.00% 4.00% 3.50%

3.75% 4.00%

4.25%

Business Insights

Source: Datamonitor, Halifax

Figure 4.6: UK base rate, 1993—2004 1997

8.00% 1995

UK base rate, in per cent

7.00% 6.00% 5.00%

1999

1993 1994

1996

1998

2000

2001

May-04 Nov-03

4.00% 2002

3.00%

Jul-03

Feb-04

2.00% 1.00% 0.00% Business Insights

Source: Datamonitor, Halifax

Housing supply Another factor that has been driving the current property market is the shortage in the housing supply in the UK that has been caused mainly by a low level of new housing stock annually. With the strong demand in the housing market and supply lagging behind, it is no wonder that average house prices have been increasing. Unfortunately, little has been done in the previous years and inadequate housing supplies still remains a

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critical and unresolved issue, although commentators have been criticising the housing level for some time. For instance, house building fell by 0.8% in 2002.

House building levels have been quite erratic for well over a decade, as demonstrated below. House building fell at a compound annual rate of 9.2% between 1990 and 2002. From 198,074 houses completed in the financial year 1990/1991, the level dropped to 175,608 in the financial year 2001/2002.

A limited supply of new dwellings means that the existing stock of dwellings is getting older. A large proportion of the existing dwelling stock in England, around 40%, was built before 1945. This is a matter for concern, in terms of the cost of re-structuring and renovating older properties.

It is high time for the government to commit itself seriously to solving this critical issue. Although the recent initiatives such as future housing developments in the Thames area are a positive step, much still has to be done. It is a fact that the construction process takes time but there are new building types such as the ‘timber frame’ or ‘steel frame’ that can accelerate the process. With the timber frame and steel frame constructions, the walls are hammered together in frames and then hoisted into place. It is much faster than the traditional brick and block method and the quality is comparable.

The chancellor Gordon Brown recently commented that the reform of the UK housing market was vital to “tackle potential inflammatory pressures in housing, and potential bottlenecks in the supply of side of the economy”. As a result, more public and brownfield land should be freed up for building new homes.

Variable and fixed rate mortgages The UK mortgage market is split between two types of mortgage – variable rate mortgages and fixed-term mortgages. However, for the past four years the market has 94

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been dominated by variable rate mortgages, due to the lower costs involved and the relative freedom offered by such mortgages. With the high competitiveness of the mortgage market, low interest rates and the increasing trend in remortgaging, variable rate loans are highly preferred by customers. While fixed rate mortgages offer peace of mind to customers and help them in budgeting their mortgage repayment, customers are tied to them for a certain period of time, otherwise early redemption charges apply.

Data from the CML shows that variable rate mortgage loans are, by far, preferred by homeowners to fixed rate loans. In 1998, the mortgage market was split equally between these two types of mortgage. However, since 2000, more than 70% of mortgages are variable. With stable economic conditions and confidence that interest rates were going to stay at a low level, customer take-ups for such loans have shot up. In 2002, variable rate mortgages accounted for a high 73%.

The major disadvantage that has played against fixed rate loans is the pricing factor. By definition, variable rate loans are fast to reflect cuts in base rate. As such, fixed rate loans tend to be generally more expensive than variable rate loans. This is the case because they provide an additional degree of security for consumers – they know that the rate they pay on their mortgage is not going to go up. Even now they are still attractive, since analysts are expecting further increases in the base interest rate, which might reach a neutral level of 5.00% by end of 2004.

The disparity in the penetration of long-term fixed rate and variable rate mortgages is the result of household preferences and the way in which mortgage lending is funded in the UK.

UK households tend to move home relatively often and to remortgage regularly even if they are not moving home. They are therefore familiar with shopping around for the best mortgage deal and seem to prefer this to committing themselves to a long-term and often more expensive fixed rate product.

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Competitors in the mortgage market Gross advances In 2002, gross advances for residential mortgages reached a phenomenal £219 billion. Table 4.32 displays data on how gross mortgage lending was shared among the 10 largest mortgage lenders in the UK for the year 2002.

Top 10 competitors in the UK mortgage market Table 4.32: Top 10 competitors in the UK mortgage market as per gross mortgage lending as at end of year 2002 Top 10 lenders

£billion

Estimated market share

HBOS 56.8 26.0% Abbey 22.8 10.4% Barclays 21.3 9.8% Lloyds TSB 19 8.7% Nationwide BS 17.4 8.0% The Royal Bank of Scotland* 13.5 6.2% Northern Rock 10.5 4.8% HSBC Bank 9.4 4.3% Alliance & Leicester 6.4 2.9% Britannia BS* 4.3 2.0% Note: * Best estimates from Thedata Ltd. Figures are shown on a financial services basis and at calendar year 2002. Exception: Nationwide BS – April 2003. Figures include all loans drawn down in the year whether subsequently securitised or not. Business Insights

Source: Datamonitor, CML, Thedata Ltd

With £56.8 billion advanced to mortgage customers, HBOS occupied 26% of the UK mortgage market in 2002. Its nearest competitor, Abbey, realised £22.8 billion in gross advances in 2002, corresponding to only 40% of HBOS’ gross advances for the same period. Abbey’s gross advances in 2002 represented 10.4% of the UK mortgage market. Barclays, ranked third, was the only other lender with gross advances exceeding £20 billion.

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Top five competitors in the UK mortgage market – gross market lending Figure 4.7: Top five competitors in the UK mortgage market as per gross mortgage lending as at end of year 2002

HBOS 26.0%

Others 37.1%

Abbey 10.4%

Nationwide BS 8.0%

Lloyds TSB 8.7%

Barclays 9.8%

Business Insights

Source: Datamonitor, CML, Thedata Ltd

Balances outstanding Total balances outstanding for the UK mortgage market in 2002 increased by 14% over the previous year, from £591 billion to £671 billion.

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Top 10 competitors in the UK mortgage market Table 4.33: Top 10 competitors in the UK mortgage market as per total mortgage balances outstanding as at end of year 2002 Top 30 lenders

£ billion

Estimated market share

HBOS 150 22.40% Abbey 80.1 11.90% Lloyds TSB 62.5 9.30% Barclays 57.7 8.60% Nationwide BS 57.2 8.50% The Royal Bank of Scotland 42.1 6.30% Northern Rock 30 4.50% Alliance & Leicester 23.6 3.50% HSBC Bank 20.3 3.00% Bradford & Bingley 16.8 2.50% Notes: Figures are shown on a financial services basis and at calendar year 2002. Exception: Nationwide BS – April 2003. Figures include all loans drawn down in the year whether subsequently securitised or not. Business Insights

Source: Datamonitor, CML, Thedata Ltd

The top 10 players in the UK mortgage market based on total mortgages outstanding remained unchanged in 2002. HBOS continued to enforce its dominance in the market with a share of 22.4%, a growth of 0.5% over its 2001 market share. Its balances outstanding have increased by 16% from £129.3 billion to £150 billion in 2002. HBOS’ market share is nearly twice as much as its nearest competitor Abbey.

Following the trend of the year 2001, Abbey recorded a loss in market share in 2002. The company’s share amounted to 11.9% in 2002, a fall of 0.5% from its 2001 share of 12.4%. It was believed that the bank’s decision to reduce exposure to certain high-risk market segments had affected its position in the mortgage market.

As explained in more detail in the Abbey case study, starting on page Error! Bookmark not defined., Abbey launched a new rebranding campaign in the view of revitalising its business in 2004. In September 2003, Abbey National was rebranded Abbey and adopted a ‘new approach to banking’. 2004 will be crucial for Abbey, as the company will be fixed on the results of its new strategy. The company unveiled a £686 million

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($1.3 billion) pre-tax loss for 2003, its second straight year of major losses. Following the loss of £984 million after entering the corporate banking market, the firm sold its block discounting operations in March 2004 to The Funding Corporation (TFC) in a £43 million deal.

Change in balances outstanding for top 10 lenders Apart from Abbey, three top 10 lenders, Lloyds TSB, Alliance & Leicester and Bradford & Bingley, slightly lost market share in 2002.

Change in balances outstanding for top 10 lenders Table 4.34: Change in balances outstanding for top 10 lenders, 2001—2002 Balances outstanding, £bn

2001

2002 Growth 2001—2002

HBOS Abbey Lloyds TSB Barclays Nationwide BS The Royal Bank of Scotland Northern Rock Alliance & Leicester HSBC Bank Bradford & Bingley

129.3 73.3 56.6 51 49.1 37 22.6 22 16.7 16.1

150 80.1 62.5 57.7 57.2 42.1 30 23.6 20.3 16.8

16.0% 9.3% 10.4% 13.1% 16.5% 13.8% 32.8% 7.4% 21.6% 4.4% Business Insights

Source: Datamonitor, CML

Of those top 10 lenders that witnessed an increase in share of balances outstanding, Northern Rock stands out as enjoying the largest increase. In 2001, Northern Rock recorded a 0.9% increase. In 2002, its share rose from 3.8% to 4.5%, an increase of 0.7%. Its ‘Together’ mortgage products have mainly contributed to the success of Northern Rock.

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Change in balances outstanding for top 10 lenders Table 4.34 gives an overview of the growth in balances outstanding for the top 10 lenders from 2001 to 2002. As expected, Northern Rock enjoyed the highest growth in balances outstanding in this period, with a significant increase of 32.8%.

Analysis of market shares in terms of gross advances and total mortgage balances outstanding showed that, for the majority of lenders, market share under gross advances are higher than under total mortgage balances outstanding. For instance, HBOS occupied 26% of share of gross advances in 2002, about 4% higher than its share of total mortgage balances outstanding. On the other hand, Abbey and Alliance & Leicester are among those lenders where the opposite applies. Abbey and Alliance & Leicester occupy 11.9% and 3.5% share of the mortgage market respectively under total mortgage balances outstanding, compared to 10.4% and 2.9% respectively in terms of gross advances.

In terms of ranking, there is little variance among the top 10, since ‘gross advances’ is a subset of total mortgage balances outstanding. Generally, the bigger the gross advances, the bigger the total mortgage balances outstanding will tend to be.

The future This scenario is based on the assumption that the market will continue to grow but at a more realistic rate. Hence, gross advances continue to increase but at a slower pace than the current market. It is predicted that gross advances could reach £293.6 billion in 2004 and continue to grow at a compound annual rate of 4.6% to reach a total of around £350.8 billion in 2008.

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Forecasted gross advances to 2008 Table 4.35: Forecasted gross advances, 2004f-2008f

Gross advances (£m)

2004f

2005f

2006f

2007f

2008f

293,589

311,724

323,158

338,444

350,798

CAGR 2004f-2008f 4.60% Business Insights

Source: Datamonitor

The basic assumptions considered in this forecasted scenario are listed below: House prices continue to rise but at a slower rate – customers continue to be squeezed by rising house prices and first-time buyers continue to account for a low percentage of the market. With falling demand, growth in house prices decreases slowly. However, with the prevailing good economic conditions, upward pressure on house prices still remains; interest rates increase but still remain relatively low – following the rise in base rate in November 2003, the Bank of England increases interest rates further in order to control spiralling consumer spending. In 2004, base rate stands at 4.25% and witnesses small increases to reach 5.00% in 2008. However, the relatively low interest rates still encourage consumers to take out mortgage products or remortgage; GDP increases steadily – the UK economy grows steadily around 2.5%, representing an improvement over the past few years. The UK manufacturing sector picks up and customers’ confidence is boosted; unemployment decreases – the trend in unemployment continues to exert an upward pressure on the market as more customers are able to take out mortgage products; stock market recovers – the market has started to pick up again in 2003 after the end of the Iraq war. The years 2004 to 2008 consolidate the stock market and investors readjust their portfolios to concentrate on stock market investments.

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However, although property investment is still included in their portfolio as a safety measure, property investment still witnesses a slight fall; changes in stamp duty threshold are introduced – the government reviews the threshold in late 2004 but does not index the changes to house prices. A slight increase on the market is noted; competition intensifies – given the high profitability of the mortgage market, more lenders enter the market. Bigger lenders extend their product range to include profitable niche products. Merger and acquisition activity continues to take place in order to increase customer base. With increasing competition, mortgage offerings are more competitive, encouraging customer take-ups. a change in homeowners’ lifestyle – increases in house prices have brought about a change in consumer behaviour. With an increase in property values and low interest rates, homeowners are being encouraged to withdraw equity from their home in order to finance other expenditure, thus exerting an upward pressure on the market.

Additional forecasts Around the time of publishing this report, Nationwide reported its forecasts for house price growth in 2004, and according to some, this report is likely impose more pressure on the Bank of England to further increase the interest rates. The key finding that should be noted was that Nationwide expected house prices to rise by 15% over the year rather than by the 9% it estimated at the beginning of the year.

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Nationwide’s house price forecasts by region Table 4.36: Nationwide’s house price forecasts by region Region North of England Wales North West Yorks&Humberside N. Ireland Scotland UK East Midlands East Anglia West Midlands Outer S.East South West Outer London London

New forecast 24% 23% 21% 17% 16% 15% 15% 14% 14% 14% 13% 13% 10% 10%

Old forecast 12% 9% 11% 12% 11% 9% 9% 9% 7% 9% 8% 10% 6% 6% Business Insights

Source: BBC, Nationwide

The above table shows that prices are increasing the most in affordable areas outside London, and the South East region is experiencing the lowest growth. According to Nationwide, the prices have risen by more than 36% in Wales over the last year and by more than 33% in the North. Nationwide also concludes that “the slowdown in growth in London prices can be attributed to the decrease in financial sector employment, as well as the downward trend in expectations of future price growth”.

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Chapter 5

Issues in Plastic Cards

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Chapter 5

Issues in Plastic Cards

Summary UK consumers are the greatest users of payment cards in Europe. Plastic cards have always been popular in the UK, originally as a payment tool and increasingly as a borrowing tool. Balances outstanding grew by 6.5% over 2002, 1.2% lower than during 2001. This lower growth rate reflects the educated UK consumer, as they seek lower APRs through holding additional cards, without actually growing their debts significantly. Credit card transaction numbers were approximately a third of debit transactions over 2002, down from 46.7% in 1998. This could be attributed to the fact that there has been an increase in the type of retail outlet that accepts debit cards. There was a marginal decrease in the number of branch ATMs and an increase in the number of offsite ATMs. By the end of 2001, 36,666 ATM terminals were in operation in the UK, representing 1,628 people per terminal. Card fraud cost the UK £424.4 million in 2002 – an increase of 3.2% on the 2001 figure of £411.3 million according to the Association for Payment Clearing Services (APACS). This is the smallest rise in several years, and a drastic drop from the 30% growth that occurred in 2001. The credit card market has defied all logic yet again, with the number of cards in issue increasing by 12.5%. Growth can be attributed to the array of teaser introductory and balance transfer rates.

Introduction This chapter begins by presenting an overview of the UK plastic card market. Firstly considering the size of the market, this chapter progresses to look at the market drivers before general market issues are discussed. The chapter is split between credit cards

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(gold and platinum, affinity and co-branded, business cards), debit cards and private label cards.

Market overview Market size UK consumers are the greatest users of payment cards in Europe. Plastic cards have always been popular in the UK, originally as a payment tool and increasingly as a borrowing tool. Furthermore, the gap looks set to widen as the UK card providers increasingly choose to mirror U.S. practices in order to encourage further growth.

This fact is supported by Credit Card Research Group (CCRG), who stated at the end of 2001 that 52% of UK adults owned a credit card and 84% had a debit card. This puts the UK ahead of the rest of Europe, making it the most developed card market in Europe and the second in the world after the United States. Within continental Europe, the study found that spending on credit and debit cards stands on average for just 9.6% of GDP, compared to 20.3% in the UK.

Balances outstanding Balances outstanding grew by 6.5% over 2002, 1.2% lower than over 2001. This lower growth rate reflects financially aware UK consumers, as they seek lower APRs through holding additional cards, without actually growing their debts significantly.

The increase in transaction numbers of 9.3% over 2002, and transaction values by 11.0% illustrates the growing comfort of using plastic as a method of payment amongst UK consumers.

With repeated reports in the press of higher consumer spending, these numbers are not surprising. High levels of consumer spending, as reported by the Office of National

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Statistics (ONS), can be attributed to the following factors: GDP growth has been robust, unemployment levels are low, resulting in a lower propensity to save, Bank of England base interest rates have remained low in the last couple of years, inflated house prices have left consumers more confident about their future.

Essential UK payment card statistics Table 5.37: UK payment card statistics, 1998—2002 1998

1999

2000

2001

2002

CAGR 1998—2002

Total number of cards, 104,444 111,791 121,882 132,221 144,780 8.5% 000s Total balances 26,130 29,647 41,119 44,319 49,697 15.9% outstanding, £m Total number 4,351 5,035 5,503 6,199 6,776 10.4% of transactions, m Total value of 199,105 237,074 266,197 312,112 346,371 13.5% transactions, £m Note: Figure for 2002 balances outstanding is from the Bank of England. (See Appendix for inflation-adjusted figures). 2000 and 2001 figures for transaction values differ from 2002 report due to restated figures released by APACS since publication. Source: Number of cards, transactions and transaction values for credit, debit and charge, 1998—2002, APACS Plastic Cards Review 2003. Private label balances outstanding 1998—2002, Finance & Leasing Association 2003. Credit and charge balances outstanding, Bank of England. Business Insights

Market drivers In line with innovative methods of customer acquisition, card numbers have grown, with the number of cards in issue and frequency of use the primary market drivers. While consumers are becoming more familiar with plastic, they are increasingly using it as a convenience tool for smaller value transactions. Therefore, although card numbers and frequency of card use have grown, average transaction values have fallen.

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Drivers of the plastic card market Table 5.38: Drivers of the plastic card market, 1998—2002 1998

1999

2000

2001

2002

Total number of cards, 104,444 000s Frequency, tx/yr/card 42 Average transaction 45.8 value, £

111,791

121,882

132,221

144,780

8.5%

45 47.1

45 48.4

47 50.3

47 51.1

3.0% 2.8%

Source: Datamonitor analysis of APACS Plastic Cards review 2003.

CAGR 1998—2002

Business Insights

Market segmentation It is becoming increasingly apparent that private label cards’ lack of appeal is starting to show. Probably due to the limited number of outlets per card and their unattractive higher borrowing rates, private label cards play a small role in terms of transaction numbers. With their business model increasingly under pressure, the market players should seek alternative marketing methods to encourage private label transactions.

The lack of specific benefits of the store card is causing numbers to plateau, while the increasing rewards accruable on credit cards have contributed to the increase in the number of credit cards in issue. Debit card numbers have also increased, as consumers replace cash and checks with plastic for everyday transactions.

The consensus among industry experts was that debit and credit could continue to coexist. Built for different purposes, debit cards are a convenient replacement for cash and checks, and credit cards have become a commoditised, easily available borrowing tool.

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Table 5.39: Number of payment cards, number of transactions and transaction values, by card type, 1998—2002 1998

1999

2000

2001

2002

41,622 42,528 20,294

44,986 46,082 20,723

50,993 49,729 21,160

56,316 54,305 21,600

63,350 59,419 22,010

11.1% 8.7% 2.1%

104,444

111,791

121,882

132,221

144,780

8.5%

1,362 2,918 71

1,489 3,466 80

1,619 3,808 76

1,745 4,381 73

1,883 4,820 73

8.4% 13.4% 0.8%

Total transaction numbers4,351

5,035

5,503

6,199

6,776

11.7%

75,306 118,925 4,874

88,084 144,073 4,917

99,996 161,567 4,634

110,547 197,181 4,384

121,265 220,691 4,415

12.6% 16.7% -2.4%

199,105

237,074

266,197

312,112

346,371

14.8%

000s Credit & charge cards Debit cards Store cards Total m Credit & charge cards Debit cards Store cards

£m Credit & charge cards Debit cards Store cards Total value of transactions

CAGR 1998—2002

Source: 1998—2002 figures credit, charge and debit, APACS Plastic Cards review 2003. Private label, Finance & Leasing Association. Business Insights

Credit card transaction numbers contributed to approximately a third of debit transactions over 2002, a decrease from 46.7% in 1998. This could be attributed to the fact that there has been an increase in the type of retail outlet that accepts debit cards.

UK spending on debit cards has always been considerably more than on credit cards, but it can be said that the gap between them is widening. This does necessitate some explanation, as the number of credit and debit cards is roughly equal.

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Market infrastructure Table 5.40: ATM numbers by location and population per ATM, 1998—2002

Branch ATM Offsite ATM Total ATMS Population per ATM

1998

1999

2000

2001

2002

18,810 5,764 24,574 2,409

19,772 7,607 27,379 2,166

19,151 15,188 34,339 1,733

19,145 17,521 36,666 1,628

n/a n/a n/a n/a

CAGR 1998—2002 0.6% 44.9% 14.3% -12.2%

Note: Figures do not include building societies. Source: Number of ATMs, APACS Plastic Cards review 2002. Population, Datamonitor Macroeconomic database Business Insights

There was a marginal decrease in the number of branch ATMs and an increase in the number of offsite ATMs. By the end of 2001, 36,666 ATM terminals were in operation, representing 1,628 people per terminal. It is interesting to note that the population per ATM has decreased. With more ATMs in remote and convenient locations, the increase in ATM terminals has led to a lower number of people per ATM.

There have been a greater number of debit card withdrawals from cash machines. Specifically, the number of debit card cash withdrawals over 2002 grew by 33.8% and values by 34.0%. The increase in the number and values of withdrawals is probably due to the increase in the number of convenient and remote ATM terminals, which accesses a wider proportion of the population.

Cash withdrawals on credit and charge cards are increasing in number and value, but still represent a very small proportion of the cash withdrawal market. This is probably due to the fact that the cost of withdrawing money on a credit card is much higher than borrowing at the PoS, as interest is paid from the day money is drawn, and, in any case, many customers do not remember their PIN numbers.

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ATM cash withdrawal numbers by card type Table 5.41: ATM cash withdrawal numbers by card type, 1998—2002 £m

1998

1999

2000

2001

2002

CAGR 1998—2002

Credit & charge card withdrawals Debit card withdrawals

46

49

53

52

55

4.6%

1,151

1,366

1,423

1,625

1,757

11.2%

Total withdrawals

1,197

1,415

1,476

1,677

1,812

10.9% Business Insights

Source: 1998—2002 figures, APACS Plastic Cards review 2003

The number of people per PoS terminal is decreasing: where there were 97 people per terminal in 1998, there were 77 people per terminal in 2001, a decrease of 20%.

Reflecting on the number of acceptance outlets, the increase in terminals can be credited to the fact that more outlets than ever accept cards. One driver of growth has been a rise in the number of mobile terminals, as used by some restaurant and taxi drivers. However, growth seems to be levelling off as the number of terminals nears saturation.

Number of PoS terminals and population per terminal Table 5.42: Number of PoS terminals & population per terminal, 1998—2002

Number of PoS terminals, 000s Population per terminal

1998

1999

2000

2001

2002

610

700

735

772

CAGR 1998—2002 n/a 8.2%

97.1

84.7

81

77.3

n/a

-7.3%

Source: Source: Population, Datamonitor Macroeconomic database. Number of terminals, APACS Plastic Cards review 2002 Business Insights

Although customers are using their debit card more for larger transactions, it seems that credit cards are still the preferred choice for substantial purchases. Although all payment types are increasing in terms of average transaction values, credit is showing the

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strongest growth. The greater increase for credit cards, particularly over 2002, can be attributed to strong competition in the market as players battle for market share.

Transaction numbers at PoS terminals by card type Table 5.43: Transaction numbers at PoS terminals by card type, 1998—2002 m

1998

1999

2000

2001

2002

Credit & charge card withdrawals Debit card withdrawals

1,224

1,345

1,451

1,561

1,687

8.4%

1,736

2,062

2,337

2,696

2,994

14.6%

Total withdrawals

2,960

3,407

3,788

4,257

4,681

12.1%

Source: 1998—2002, Datamonitor analysis of APACS Plastic Cards review 2003.

CAGR 1998—2002

Business Insights

Plastic card fraud in the UK Card fraud cost the UK £424.4 milliohm in 2002, an increase of 3.2% on the 2001 figure of £411.3 million according to the Association for Payment Clearing Services (APACS). This is the smallest rise in several years and a drastic drop from the 30% growth that occurred over 2001. Most types of fraud are continuing to grow, with counterfeit and lost/stolen cards making up the greatest proportion of total card fraud. However, these types of fraud actually decreased over 2002, indicating that fraud may be migrating to card-not-present, mail and application fraud, which all grew considerably over 2002. (See Chapter 7 for definitions of the various types of fraud).

Perhaps due to the ease with which fraudsters can get hold of people’s identities, debit card fraud grew by an astounding 41.3% over 2002. Credit card fraud grew by 27.3% and charge card fraud by 22.9%. Overall, growth in card fraud is a worrying factor worldwide, and steps are being taken in the UK to combat this threat through the chip and PIN program.

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Chip and PIN technology More than £1 million worth of card fraud is committed every day in the UK that translates to one fraudulent transaction every eight seconds.

In an attempt to enhance card security, in February 2002 the UK banking industry began pressing ahead with its fraud-fighting program to ensure that by 2005 all UK face-toface credit and debit card transactions would be authorised by the customer keying in their PIN at the PoS rather than by signing a receipt. The introduction of the PIN system, to be used with secure chip cards, is the most revolutionary change ever for the card payment system and has been labelled the biggest change since decimalisation.

Built to identify whether the card is genuine and the cardholder is the true owner, chip cards are highly secure. The advent of chip and PIN technology is expected to lead to at least a 50% reduction in counterfeit and lost and stolen card fraud.

To ensure chip cards are recognised and accepted in all countries where card payments are made, cards in the UK are being built to an international specification set by the international card schemes and known as Europay, MasterCard and Visa (EMV). The UK is the first country to introduce chips on cards, which meet the new global standard.

Legislation - the EC Consumer Directive The Consumer Credit Directive aims to create an environment where consumers are sufficiently protected throughout the EU, so that they can carry out cross-border transactions with confidence. Since the original directive was passed in 1987, the consumer credit market has changed significantly. There is also evidence that more needs to be done to encourage the provision of consumer credit across national borders.

Following a major review of the legislation by the Commission, and public consultation, a proposal for a revised directive was adopted in September 2002.

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The entire lending industry will be affected by any ruling on this directive. With decisions expected at year-end 2004, the major impact on card issuers will be: Prohibition from using information from the electoral roll for marketing or any other purpose apart from fraud and risk assessment; a need to link interest rates to another index, for example, the Bank of England base rate; all card agreements will have to be re-signed following any ruling by the EC, to ensure that consumers are aware of the new rule; credit card issuers will no longer be able to increase credit limits without the resigning of current lending agreements.

Credit and charge cards A credit card is the only form of payment card that offers a revolving line of credit in addition to its function as a means of electronic payment. In contrast, charge cards as offered by American Express must be paid off monthly.

Essential credit and charge card statistics Table 5.44: Credit and charge card statistics, 1998—2002

Total number of cards, 000s Total balances outstanding, £m Total number of transactions, m Total value of transactions, £m

1998

1999

2000

2001

2002

41,569

44,871

50,852

56,316

CAGR 1998—2002 63,350 11.1%

23,252

26,887

38,482

41,760

47,200

19.4%

1,362

1,490

1,618

1,745

1,883

8.1%

75,305

88,083

99,996

110,547

121,265

11.2%

Source: 1998—2002 figures, Datamonitor analysis of APACS Plastic Cards review 2003, Bank of England. Business Insights

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The credit card market has defied all logic yet again, with the number of cards in issue increasing by 12.5%. Growth can be attributed to the wide range of introductory promotions and balance transfer rates, encouraging consumers to hold more than one card, as well as the entry of certain players into the non-standard and sub-prime markets. There have also been moves to widen the acceptance of credit cards, with a focus on lower value transaction areas such as fast food restaurants, tube stations and taxis.

Competition between credit card issuers has intensified and is apparent through the arrival of introductory offers. The inevitable has now happened and the frequency of use per card has fallen, given that more people are holding second or additional cards. The decline in frequency of use is also a reflection of stronger competition from a broader range of competing sources. Consumers can now choose to use balance transfer offers to hold off payments, use loyalty associated cards for balances that can be paid off monthly, and cards with low APRs for revolving balances.

Given that growth in card numbers has not resulted in an equal growth rate for frequency of use and average transaction values, credit card issuers will have to find alternative ways of encouraging market growth. The combination of chip technology and possible restrictions on interchange levels may lead to the reappearance of annual fees, which may in turn lead to consumers’ cutting down the number of cards held. The challenge for the card issuers is then ensuring that the consumer holds on to their card rather than their competitors.

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Credit and charge card market drivers Table 5.45: Credit and charge card market drivers, 1998—2002

Total number of cards, 000s Frequency, tx/yr/card Average transaction value, £m

1998

1999

2000

2001

41,569

44,871

50,852

56,316

33 55.29

33 59.12

32 61.8

31 63.35

Source: 1998—2002 figures, APACS Plastic Cards review 2003

2002

CAGR 1998—2002 63,350 11.1% 30 64.4

-2.4% 2.9%

Business Insights

Market segmentation Credit and charge cards Credit card numbers grew by 13.7% and charge remained broadly flat over 2002. The demise of the charge card has been consistent over the last five years. The primary attraction of the charge card was the benefits that it offered, such as air miles. With credit cards now offering not only air miles, but also loyalty rewards for supermarkets, cashback and the ability to choose the most pertinent reward scheme, it seems the charge card’s only appeal would be the privilege associated with such cards.

This is probably due to the fact that charge cards are often owned by the more affluent, who use their card as a status symbol. Therefore they use the card more frequently and for higher values, as they have the money to do so.

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ATM cash withdrawal values by card type Table 5.46: ATM cash withdrawal values by card type, 1998—2002 1998

1999

2000

2001

2002

38,299 3,270 41,569

41,424 3,447 44,871

47,080 3,772 50,852

51,701 4,426 56,127

58,794 4,311 63,105

11.3% 7.2% 12.0%

Number of transactions, m Credit 1,185 Charge 177 Total 1,362

1,301 189 1,490

1,413 205 1,618

1,504 241 1,745

1,647 236 1,883

8.6% 7.5% 8.1%

Value of transactions, £m Credit 60,243 Charge 15,062 Total 75,305

70,378 17,705 88,083

78,807 21,189 99,996

85,636 24,911 110,547

96,353 24,912 121,265

12.5% 13.4% 11.2%

Number of cards, 000s Credit Charge Total

Source: 1998—2002 figures, APACS Plastic Cards review 2003

CAGR 1998—2002

Business Insights

Gold and platinum cards Gold and platinum card numbers increased over 2002 by 7.6%. Driven by growth in platinum rather than gold, this area of cards represented 28.5% of the total cards market in 2002, compared to 29.8% over 2001. In previous years, it has been noted that the criteria for such premium cards have remained stable or even been lowered, resulting in the gold and platinum card becoming a mass-market product.

So while income levels have been increasing, the income levels required for gold cards have not. Also, platinum cards are taking up an increasing proportion of the premium card market. This can be explained by the fact that although traditional issuers have maintained this card for prestigious clientele, the monolines have used it as a marketing tool and boosted the number of platinum credit cards in issue considerably.

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Table 5.47: Gold and platinum card statistics, 1998—2002 1998

1999

2000

2001

Total number of cards, 000s Gold credit 3,579 Gold charge 576 Platinum credit 389 Total 4,544

4,494 585 1,845 6,924

11,817 609 2,864 15,290

11,331 959 4,431 16,721

9,680 643 7,675 17,998

28.2% 2.8% 110.8% 41.1%

124 51 72 247

364 54 93 511

355 67 126 548

336 58 201 595

28.0% 4.8% 117.4% 34.5%

8,626 4,453 4,662 17,741

22,413 4,949 6,636 33,998

22,076 6,098 8,897 37,071

21,866 5,386 13,973 41,225

26.8% 7.2% 115.1% 32.9%

Total number of transactions, m Gold credit 125 Gold charge 48 Platinum credit 9 Total 182 Total value of transactions, £m Gold credit 8,470 Gold charge 4,082 Platinum credit 653 Total 13,205

2002CAGR 1998—2002

Source: 1998—2002 figures, APACS Plastic Cards review 2003.

Business Insights

Affinity and co-branded cards There are no affinity or co-branded charge cards as such, and therefore charge cards are not covered in this section.

There were nearly 1.5 million co-branded cards in issue by the end of 2002. The cobranded and affinity card markets have negative CAGRs, illustrating their declining existence as part of the UK card market. Affinity cards fell 5.6% over 2002.

Affinity cards were used less frequently than the average usage level for credit cards, but for a fractionally higher transaction value. Conversely, co-branded cards were used more frequently, with average transaction values amounting to £54.30.

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Table 5.48: Affinity and co-branded card statistics, 1998—2002 1998

1999

2000

2001

2002

Total number of cards, 000s Co-brand credit 1,821 Affinity credit 3,303 Total 5,124

2,024 2,954 4,978

1,952 2,729 4,681

1,141 2,301 3,442

1,454 2,173 3,627

-5.5% -9.9% -10.0%

102 75 177

111 58 169

39 51 90

43 46 89

-15.2% -16.1% -20.5%

4,910 4,428 9,338

5,631 3,252 8,883

2,081 2,816 4,897

2,336 2,749 5,085

-12.0% -12.8% -18.3%

Total number of transactions, m Co-brand credit 83 Affinity credit 93 Total 176 Total value of transactions, £m Co-brand credit 3,896 Affinity credit 4,765 Total 8,661

CAGR 1998—2002

Source: 1998—2002 figures, APACS Plastic Cards review 2003.

Business Insights

Business cards Total business card numbers grew by 170% over 2002, compared to a fall of 25% over 2001. This is due to the economic environment that caused many businesses to reevaluate their staff numbers and expenses, causing a reduction in the number of new cards issued over 2001. Transaction numbers and values also reflect the same trend as stock markets have plunged and uncertainty regarding the future of western economies continues to suppress business spending. The surge in business card statistics this year can be attributed to increasing confidence about economic recovery.

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Table 5.49: Business card statistics, 1998—2002 1998

1999

2000

2001

2002

CAGR 98-02

Total number of cards, 000s Business credit 27 Business charge 788 Total 815

45 953 998

32 1,124 1,156

24 1,311 1,335

65 1,385 1,450

24.6% 15.1% 13.3%

Total number of transactions, m Business credit 1 Business charge 56 Total 57

2 66 68

2 77 79

2 87 89

3 91 94

31.6% 12.8% 11.2%

195 4,779 4,974

83 6,087 6,170

57 7,264 7,321

251 7,778 8,029

26.8% 19.9% 17.3%

Total value of transactions, £m Business credit 97 Business charge 3,761 Total 3,858

Business Insights

Source: 1998—2002 figures, APACS Plastic Cards review 2003.

Debit cards Card numbers grew by 9.4% over 2002, compared to 9.2% over 2001. With a 10.0% rise in transaction numbers, and an 11.9% increase in transaction values, the debit card continues to show strong growth. This growth can be credited to the increasing comfort consumers have with using plastic as a direct replacement for cash.

Table 5.50: Debit card statistics, 1998—2002 1998

1999

2000

2001

2002

Total number of cards, 42,528 000s Total number of 2,918 transactions, m Total value of 118,925 transactions, £m

46,082

49,729

54,305

59,419

8.7%

3,466

3,808

4,381

4,820

13.4%

144,885

161,567

197,181

220,691

15.3%

Source: 1998—2002 figures, APACS Plastic Cards review 2003

CAGR 1998—2002

Business Insights

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Driven primarily by the number of cards between 1998 and 2000, the market is also now driven by the frequency of use of the debit card. Although total transaction values grew by 11.9%, average transaction values have fallen over 2002 as consumers are increasingly becoming comfortable with using their card for smaller values. The decrease in the tendency for retailers to impose a minimum spend for processing debit transactions has also contributed to increase use of the card.

The debit card market has grown 8.7% compound year on year and certainly has more room for growth, as experts claim that 76% of all transactions are still made with cash. There was a consensus that while credit tends to balloon during the good times, debit is resistant to such fluctuations in the economic cycle.

Market issues Chip migration - the migration to chip will not have significant effects on the debit issuers, as consumers are already aware of the existence of the PIN due to ATM withdrawals (even if many do not remember them at present). Debit issuers will have to face the logistics of educating point of sale staff, although this presents a smaller obstacle to successful chip migration; the move to Maestro is a building block to an open market: in an attempt to create a clearly recognisable brand for domestic and international use, the Switch scheme announced in August 2002 that it will license the Maestro brand to replace Switch. Maestro is the world's leading debit brand and is owned by MasterCard. Maestro cards are already accepted at over six million locations across the globe and over 790,000 ATMs worldwide. By mid-2007, the Switch brand will have been replaced with Maestro. Using the Maestro license, the move will be slow as the Switch logo is moved from the front of current Switch cards to the back and then phased out of shops before disappearing completely.

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Private label cards As the private label card continues to plateau, the need to rejuvenate this type of payment card becomes more apparent. There are high prospects for multiple retailer arrangements but the onslaught of the Nectar scheme has led to an infringement on existing networks such as Duet.

For instance, the Nectar scheme offers the ability to collect loyalty points through purchases at different outlets. The Duet scheme, although primarily a payment scheme, does offer discount vouchers, which are received monthly with statements as a reward for spending on the card. However, the Duet scheme is currently quite limited as to places of use, while the Nectar scheme crosses the clothing, fuel, food and (with the help of the Barclaycard Visa logo) almost any other market.

Another defining factor of the private label card is its APR. Again, using the Duet scheme as an example, the rate of 30% offered to new joiners is a drastic jump from even the higher end of credit card APRs. As a result, card numbers continue to remain flat, as do transaction numbers, values and balances outstanding.

Essential private label card statistics Table 5.51: Private label card statistics, 1998—2002

Total number of cards, 000s Total balances outstanding, £m Total number of transactions, m Total value of transactions, £m

1998

1999

2000

2001

2002

CAGR 1998—2002

20,294

20,723

21,160

21,600

22,010

2.1%

2,878

2,760

2,637

2,559

2,497

-3.5%

71

80

76

73

73

-3.0%

4,874

4,917

4,634

4,384

4,415

-3.5%

Source: Balances outstanding and transaction values 1998—2002, Finance & Leasing Association 2002. Number of cards and number of transactions 1998—2002 figures, APACS Plastic Cards Review 2003. Business Insights

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Private label card drivers Card numbers are driving the market, but with transaction values and frequency of use decreasing, there is little scope for growth within traditional boundaries of private label cards.

Table 5.52: Private label card drivers, 1998—2002 1998

1999

2000

2001

2002

Total number of cards, 20,294 000s Average transaction values 68.6 Frequency of 3.5 use tx/ year/ card

20,723

21,160

21,600

22,010

2.1%

61.5 3.9

61 3.6

60.1 3.4

60.5 3.3

-3.1% -1.3%

Source: 1998—2002, Finance & Leasing Association 2002.

CAGR 1998—2002

Business Insights

With credit cards offering attractive teaser rates, it seems that store cards are not such an appealing proposition for customers. Some experts believe the lower interest rate environment has affected the market, pressuring the private label card APR’s and portraying them to be less than competitive. Expectations have changed because of what is going on in the credit market, but private label interest rates have hardly changed. Others believe that private label cardholders are not bothered with APRs as they use these accounts for smaller balances.

There also exists a threat from imminent decisions made around the EU Consumer Directive. Retailers will be affected as it becomes more difficult to sell insurance at PoS. With reference to store cards, the sales of creditor insurance on such cards will be impacted, so some organisations will not be able to sell insurance products in store.

The threat from credit cards is levelling off as consolidation takes its toll on the market and aggressive strategies involving 0% APRs, which the card issuers use as customer acquisition tools can be seen as a self-destruction tool. Credit issuers are effectively

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destroying their own margins and so the threat from this market can be seen to have peaked.

Store card issuers do not rely on high proportions of revolvers, but use their scale to drive profit. Industry executives reported that, with consumers generally revolving balances three months out of the year, their advantage lies in the extent of their customer behaviour management and seasonal fluctuations in retail shopping. There is also a dependence on the fact that customers like to be affiliated with high-profile retail brands and receive preferred customer offers and status.

Competitors Credit and charge card competitors Scheme market shares Although broadly equal in terms on transaction frequencies, MasterCard and Visa vary markedly in their card numbers and subsequent transaction volumes.

Visa has approximately double the market share of MasterCard in terms of card numbers, leading to the lower proportion of transaction volumes and transaction values. MasterCard has also been superseded by Visa over 2002 in average transaction values, which is surprising, as it has previously enjoyed dominance in this area.

There may be hope for MasterCard in the future, however, as the scheme recently overtook Visa in the U.S. in terms of credit card numbers. The historical step ahead of Visa was attributed to enhanced technological capabilities, the building of acceptance levels, the offering of customised payment solutions and the ‘Priceless’ advertising campaign.

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Visa and MasterCard Table 5.53: Visa and MasterCard statistics, 1998—2002e 1998

1999

2000

2001

2002

14,749 25,018

15,240 27,806

16,383 32,545

18,079 36,018

19,203 41,784

6.8% 13.7%

Total Transaction Volumes m MasterCard 468 Visa 826

504 917

526 1,024

569 1,096

582 1,222

5.6% 10.3%

Frequency of Transactions, tx/yr/card MasterCard 32 33 Visa 33 33

32 31

32 31

30 29

-1.3% -3.0%

Number of cards 000s MasterCard Visa

CAGR 1998—2002

Transaction values, £m MasterCard 25,447 Visa 43,105

28,638 51,557

31,772 58,883

35,139 64,776

36,678 74,096

9.6% 14.5%

Average Transaction Values, £ MasterCard 54.4 Visa 52.2

56.8 56.2

60.4 57.5

61.7 58.2

63 60.6

3.8% 3.8%

Source: Datamonitor, APACS Plastic Cards Review 2003.

Business Insights

After years of stagnating at about one million travel and entertainment cards, Amex launched revolving credit cards with cash-back, which have increased its market share. Diners Club also launched revolving credit cards in February 2002. However, this does not seem to have boosted card numbers and even though the Diners Club card was the first charge card on the market, Diners remains a marginal player with around 0.3 million cards in issue.

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American Express and Diners Club Table 5.54: American Express and Diners Club card numbers, 1998—2002e 000s

1998

1999

2000

2001

2002e

Amex Diners Club

1,550 305

1,630 310

1,750 315

1,899 320

2,041 322

Source: Datamonitor, APACS Plastic Cards review 2003.

CAGR 1998—2002e 7.1% 1.4% Business Insights

Credit card issuer market shares The overall number of credit cards in the market grew by 13.7% over 2002, yet the total market was split between fewer issuers as the market continues to consolidate.

The gap between the top five players has certainly narrowed; in 2001 there was a difference of 5,230,000 cards between the market leader and fifth player. The difference between the first and fifth market player in 2002 was 3,331,000.

The big five banks held 63% of the market in 2002, down from 66.4% in 2001 and are seemingly losing market share. With competition eroding their margins, and pending legislation potentially altering the entire landscape and fee structures, the credit card models of these players is under pressure.

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Table 5.55: Card numbers by credit card issuer, 1998—2002e 000s

1998e

1999e

2000e

2001e

2002e

CAGR 1998e-2002e

Barclaycard RBS/Natwest Lloyds-TSB MBNA HBoS Other

9,336 6,650 5,775 2,200 2,437 1,088

9,600 7,300 5,820 2,500 2,600 1,040

10,100 8,000 5,900 3,100 3,518 1,302

10,400 8,200 6,000 4,200 5,170 657

9,700 8,500 6,700 6,450* 6,369 2,833

1.0% 6.3% 3.8% 30.9% 27.2% 27.0%

Total 36,719 39,624 45,050 50,371 58,794 n/a *Note: includes Alliance & Leicester portfolio. Figures for HBoS prior to 2001 are the sum of individual figures estimated for Halifax and Bank of Scotland, and have been included for comparative purposes. Business Insights

Source: Datamonitor issuer research.

Table 5.56: Issuer market share by card number, 1998e-2002e

Barclaycard RBS/Natwest Lloyds-TSB MBNA HBoS Other

1998e

1999e

2000e

2001e

2002e

25.4% 18.1% 15.7% 6.0% n/a 9.6%

24.2% 18.4% 14.7% 6.3% n/a 9.2%

22.4% 17.8% 13.1% 6.9% n/a 10.7%

20.6% 16.3% 11.9% 8.3% 10.3% 1.3%

16.5% 14.5% 11.4% 11.0% 10.8% 4.8% Business Insights

Source: Datamonitor issuer research.

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Competitor market share by balances outstanding Table 5.57: Competitor market share by balances outstanding, 2002e Balances Outstanding, £m

Market Share %

8,744 8,321 6,500 4,900 3,900 2,480

18.5% 17.6% 13.8% 10.4% 8.3% 5.3%

47,200

100.0%

RBS/Natwest MBNA Barclaycard Lloyds TSB HBoS Other Total

Source: Datamonitor issuer research, Bank of England.

Business Insights

Competitor developments Consolidation played a large part in changes to market share in 2002. Barclaycard bought Providian, MBNA acquired Alliance & Leicester’s portfolio and HSBC announced its intentions to buy HFC Bank, the UK business of Household International. MBNA’s acquisition shook the industry the most, as the monoline had moved from fifth to second place in terms of balances outstanding, more than doubling its market share in this area.

Debit card competitors This section analyses competitor market shares and outlines some of the issues facing the debit market.

Scheme market shares In previous years, Switch and Visa Delta clearly dominated, but in 2002 it is becoming apparent that the market is starting to even out. Solo and Visa Electron have much higher compound annual growth rates, but were launched much later than Visa Delta and Switch. Despite double-digit growth, Solo and Visa Electron still account for a very small part of the debit market.

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Table 5.58: Debit card competitors by card numbers, 1998—2002 1998

1999

2000

2001

2002

Visa Delta Visa Electron Switch Solo

17,438 3,300 18,415 3,376

18,662 4,374 18,694 4,353

20,316 5,104 19,199 5,110

21,515 5,737 21,088 5,965

CAGR 1998—2002 23,346 7.6% 6,061 16.4% 22,799 5.5% 7,213 20.9%

Total debit cards

42,529

46,083

49,729

54,305

59,419

8.7% Business Insights

Source: 1998—2002, APACS Plastic Cards review 2003.

As debit becomes the replacement for cash, it is natural that these substitutes will be for smaller and smaller amounts. It is expected that transaction values for all debit issuers will fall in the coming years. Visa Delta and Switch have remained broadly flat in terms of average transaction values.

Table 5.59: Transaction numbers and values by issuer, 1998—2002 1998

1999

2000

2001

2002

Visa Delta Number of transactions, m 1,249 Value of transactions, £m 51,230

1,459 61,041

1,604 69,805

1,884 85,198

2,021 93,746

12.8% 16.3%

Visa Electron Number of transactions, m 112 Value of transactions, £m 7,383

140 7,263

164 9,153

229 14,519

273 15,166

24.9% 19.7%

Switch Number of transactions, m 1,495 Value of transactions, £m 56,656

1,700 64,493

1,831 72,002

2,001 84,209

2,219 96,385

10.4% 14.2%

Solo Number of transactions, m 61 Value of transactions, £m 3,656

167 9,088

208 10,607

267 13,255

307 15,394

49.8% 43.2%

Source: 1998—2002, APACS Plastic Cards review 2003.

CAGR 1998—2002

Business Insights

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As a result of the increase in acceptance of debit cards, their frequency of use has ballooned. With Switch’s pending move to Maestro, the market could see debit’s lead over credit cards in the UK increase, as acceptance increases further. In August of 2002, Switch announced that 15 million of its 22 million Switch cards would migrate to MasterCard's debit brand, Maestro, with the remaining seven million issued by HBoS migrating to Visa Electron. The transition increases Visa's share of UK debit cards to around 63%. Solo is to be kept as a separate brand, although the processing of both Switch and Solo card transactions is to be undertaken by MasterCard's EPS-Net and it seems likely that the Solo brand will be absorbed into Maestro at a later date. The future of debit will be influenced by the cessation of cheque guarantee card issuance, and the phasing out of the cheque. Culturally this could be challenging, as the elderly population are more inclined to pay by this method. Retailer and bank commitment to the phasing out of this method of payment will accelerate its decline, to the benefit of debit.

Conclusions Primarily driven by the number of cards in issue, the UK plastic card market has grown considerably over the last year. Debit and credit cards continue to dominate the industry, with private label cards representing a much smaller share of the market. What is interesting is the blurring of boundaries between the different segments of the market, as players seek to capture and sustain market shares. Credit has adopted reward schemes an association idea that stemmed from the private labels. Debit cards are adopting the Maestro sign in order to widen acceptance terminals, becoming a card with increased convenience and functionality and replacing cash at an accelerated rate. Private labels are adopting the Visa and MasterCard schemes, thereby narrowing the gap between them and credit cards.

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With innovation in the credit industry comparatively low, a vast majority of players have jumped on the introductory rate bandwagon and caused a sharp increase in card numbers. This business model is potentially jeopardised by the decrease in interchange, the pending EC Consumer Directive ruling, chip technology expenses and uncertainty surrounding the economy.

Future forecasts Under this scenario, it is forecastedii that the number of cards will reach 98.2 million by 2007, compared to 58.8 million for 2002. Assumptions related to the forecasts for the number of cards include: Population - obviously the number of cards will be directly affected by the population. As population trends continue as they have done in the past, there will be no significant effect on the number of cards in issue; penetration of the UK market - UK issuers follow the practices of U.S. players and seek growth aggressively from the sub-prime and non-standard customer segments. This pace of growth will continue through to the end of 2004 after which growth starts to dip. This dip will be caused by saturation of this market segment and fears over bad debts; interchange levels - following a ruling by the OFT at the end of 2003 on the MIF for MasterCard, interchange levels will be reduced by a third from 1.1% gradually over the next four years. Issuers will be able to reassess their cost structures in a structured manner, thereby not affecting charges on credit cards. There will be no impact on card numbers as a result;

ii

Datamonitor scenario

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TLFeBOOK

multiple card holding - the current availability of deals in the form of introductory and balance transfer offers will start to fall. Consumers will see less sense in holding additional cards after this point. Factors driving the decrease in the number of deals include increased consolidation over the next few years, falls in the level of interchange revenue to fund such offers to 2006, a ruling by the EC in 2005 and the cost of chip and PIN to 2005 and beyond. The result will be a decrease in the growth of the number of cards held from 2005.

Forecasted number of cards to 2007 Table 5.60: Forecasted number of cards, 2003f- 2007f 000s Neutral

2002

2003f

2004f

2005f

2006f

2007f CAGR 2003f-2007f

58,794 65,555 73,422 81,865 90,052 98,157 10.6% Business Insights

Source: Datamonitor

Forecasting the future of the credit card market is always difficult due to varied opinions. In particular, it is economic and regulatory uncertainty that hinders a more accurate forecast. The future of the UK economy is indeterminate and it is not sure what the OFT will rule against MasterCard or whether Visa’s interchange levels will be affected as well, and to what extent. Changes to the EC Consumer Credit Directive have been proposed but nothing has yet been finalised.

Directly affecting affordability of borrowing and comfort with credit, the future of card numbers in the UK will increase to around 98 million cards by 2007. Number of transactions will hit 3.3 billion and transaction values will reach 142.5 billion by 2007.

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Chapter 6

Issues in Deposit Accounts

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Chapter 6

Issues in Deposit Accounts

Summary Since 1999, total deposits have increased by an average 8.1% annually to reach an estimated £707.5 billion in 2003. Banks have increased their share of the deposit market from 78.5% in 1999 to 80.0% in 2003. Deposits held by banks in 2003 amounted to £566.2 billion. Compared to January 2001 base rates have declined by 2.25 percentage points to just 3.75% at the end of 2003, followed by an increase by 0.25 percentage points to 4.00% in February 2004. Correspondingly interest rates offered on deposits have fallen substantially to reach an average of just 3.35% on time deposits and 2.05% for sight deposits. In terms of gross interest margins, sight deposit account providers have been increasingly squeezed by competition for balances and high interest rates offered by single channel players. In terms of personal deposit account balances, HBOS is the clear market leader and has maintained this dominant position since 1998, increasing balances by an average 11.5% annually.

Introduction This chapter presents a detailed overview of the market for deposits. It begins by segmenting deposit balances in the UK between banks and building societies before looking at the development of interest margins over the past five years. Additionally, there is analysis of the competitive dynamics of the sector to determine how individual players have fared over the past few years.

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TLFeBOOK

Deposits market UK personal deposits have experienced strong growth over the past five years. Since 1999, total deposits have increased by an average 8.1% annually to reach an estimated £707.5 billion in 2003.

The biggest winners in terms of deposits over this five-year period are the banks. Between 1999 and 2003 personal deposits held at banks grew at an average annual rate of 8.6% and increased by 39.2% in absolute terms. In comparison, building society deposits grew at a slower 6.2% on average per year, increasing by 27.1% in absolute terms over the period.

Banks have thus increased their share of the deposit market from 78.5% in 1999 to 80.0% in 2003. Deposits held by banks in 2003 amounted to £566.2 billion.

Bank versus building society personal deposits Table 6.61: Total UK personal deposits by holding institution, 1999—2003e £bn

1999

2000

2001

2002

2003e

CAGR

Bank deposits 406.8 Deposits at building societies111.2

444.0 109.2

478.6 123.0

515.9 135.0

566.2 141.3

8.6% 6.2%

Total deposits

553.2

601.6

651.0

707.5

8.1%

518.0

Business Insights

Source: Datamonitor, ONS

Over the past few years base rates have continually been reduced, which is good news for borrowers but bad news for savers. Compared to January 2001 base rates have declined by 2.25 percentage points to just 3.75% at the end of 2003, followed by an increase by 0.25 percentage points to 4.00% in February 2004 and a further rise in May 2004 to 4.25%. Correspondingly, interest rates offered on deposits have fallen substantially to reach an average of just 3.35% on time deposits and 2.05% for sight

137

TLFeBOOK

deposits. With interest rates at this level, real returns achieved by savers are minimal after the effects of tax and inflation, at approximately 2.5% (RPIX) at the end of 2003.

Table 6.62: Weighted average interest rates on sight and time deposits offered to UK households versus base rates, January 2001 to February 2004 %

Base rates Weighted average interest on household time deposits

Jan 2001 Jan 2002 Jan 2003 Feb Mar Apr May Jun Jul Aug Sep Oct Nov 2003 Feb 2004

6.00 4.00 4.00 3.75 3.75 3.75 3.75 3.75 3.50 3.50 3.50 3.50 3.75 4.00

5.56 4.19 3.68 3.66 3.54 3.56 3.53 3.53 3.47 3.41 3.44 3.42 3.43 3.35

Weighted average interest on household sight deposits 3.11 1.71 1.90 1.89 1.81 1.79 1.78 1.79 1.71 1.61 1.62 1.61 1.63 2.05 Business Insights

Source: Datamonitor, Bank of England

There are some exceptions to this, particularly in the case of new entrants into the deposit market and the Internet banks, where deposit providers are offering significantly higher interest rates than the industry average. ING’s instant access savings account for example pays 4.30%, while Hampshire Trust offers a notice account paying 4.40% as at January 2004.

In terms of gross interest margins, sight deposit account providers have been increasingly squeezed by competition for balances and high interest rates offered by single channel players. In January 2001 providers offered an average of 3.11% on household sight deposits at a time when base rates were at 6.0% leaving a gross interest margin of 2.89%. Since then, margins have been declining such that in 2003 margins fell below 2.0%. The lowest point for providers was in July 2003, when the average interest

138

TLFeBOOK

margin amounted to just 1.79%, although this picked up slightly at the end of the year to return to over 2.0%.

Although interest rates have tended to correlate with changes in the base rate, the industry is continually criticised for the slow pace of certain players in reacting to such changes. By delaying the change for a week or even a couple of days, players are able to create additional profits by increasing the margin between borrowing and lending. According to figures from accountants Numerica, this timing mechanism can bring in extra profits of £4 million per day.

By reducing savings rates before mortgage and credit card rates, banks and building societies are also benefiting from a process called ‘gapping’. According to estimations institutions make about £70,000 on every £1 billion of savings if the gap lasts 10 days.

Competitors In terms of personal deposit account balances, HBOS is the clear market leader and has maintained this dominant position since 1998, increasing balances by an average 11.5% annually. In 1998, the provider held balances of £85 billion, equivalent to a 17.6% share of the market. By 2002, HBOS had increased its share to just over one-fifth, amounting to £131.4 billion.

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Table 6.63: UK personal deposit accounts balances by competitor, 1998— 2002 £bn

1998

1999

2000

2001

2002

Halifax/HBOS Lloyds TSB Barclays Royal Bank of Scotland Abbey National Nationwide* HSBC Bank

85.0 53.3 32.7 32.5 44.9 33.0 34.1

87.9 58.0 34.6 38.6 49.7 37.4 41.3

89.8 63.8 38.9 63.8 51.3 41.6 45.3

123.0 69.6 67.8 68.5 57.4 49.7 50.7

131.4 76.5 74.5 72.8 59.3 55.5 54.8

CAGR 1998—2002 11.5% 9.5% 22.8% 22.3% 7.2% 13.8% 12.6%

Total of the above

315.5

347.5

394.5

486.7

524.8

13.6%

Other

168.5

170.5

158.7

114.9

126.2

-7.0%

484

518

553.2

601.6

651

7.7%

Total market

Note: N.B. Nationwide’s financial year runs from April to April. Figures for 2002 therefore relate to the year ending April 2002. Personal deposit balances for year ending April 2003 are £60.9bn, placing it above Abbey National Source: Datamonitor estimates based on company accounts

Business Insights

HBOS closest rival in this business remains Lloyds TSB, which in 2002 accounted for an 11.8% (£76.5 billion) share of total deposit balances. Lloyds has succeeded in growing its deposit balances by a significant 9.5% on average per year.

However, these players are currently being faced with a significant threat in the form of Barclays, which has been fast increasing its market share since 2000. Between 2000 and 2001 the bank’s personal deposit balances increased by 74.3% to £67.8 billion, taking its share of the market from 7.0% to 11.3%. Barclays’ share increased even further in 2002 to 11.4%, giving the bank a greater share than RBS for the first time since 1998.

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Table 6.64: Market share of UK personal deposit account balances, 1998— 2002 %

1998

1999

2000

2001

2002

Halifax/HBOS 17.6% Lloyds TSB 11.0% Barclays 6.8% Royal Bank of Scotland 6.7% Abbey National 9.3% Nationwide* 6.8% HSBC Bank 7.0%

17.0% 11.2% 6.7% 7.5% 9.6% 7.2% 8.0%

16.2% 11.5% 7.0% 11.5% 9.3% 7.5% 8.2%

20.4% 11.6% 11.3% 11.4% 9.5% 8.3% 8.4%

20.2% 11.8% 11.4% 11.2% 9.1% 8.5% 8.4%

2.6% 0.7% 4.7% 4.5% -0.2% 1.7% 1.4%

Total of above Other

65.2% 34.8%

67.1% 32.9%

71.3% 28.7%

80.9% 19.1%

80.6% 19.4%

15.4% -15.4%

100.0%

100.0%

100.0%

100.0%

100.0%

0.0%

Total market

Source: Datamonitor estimates based on company accounts

Change 2002 vs. 1998

Business Insights

With an 8.5% share of the UK personal deposit market in 2002, Nationwide is comfortably ahead of its fellow building societies. Since 1998, the provider has succeeded in increasing its deposit balances by an average of 13.8% annually to reach £55.5 billion as at April 2002. As at April 2003, this figure had increased further to £60.9 billion.

Over the five-year period between 1998 and 2002, the deposit market in the UK has become increasingly dominated by the top players. In particular the top five players accounted for almost two thirds of the market in 2002 compared to 1998, when they held a 51.7% share.

The players present in the top five have also undergone some significant shifts. HBOS, Lloyds TSB and Abbey have remained in the top five since 1998. However Nationwide and HSBC also occupied positions in this group in 1998, but have since been replaced by Barclays and RBS.

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Much of the increase in concentration is due to consolidation in the industry. RBS for example acquired Natwest, the eighth biggest player in 1999. Barclays acquired Woolwich, the eleventh biggest player in 1999 and Halifax acquired Bank of Scotland, the ninth biggest player in 2000.

Although the concentration of the market among the top 10 players is now greater than in 1998, the deposit market experienced a slight fragmentation in 2002. Compared to 2001, the share of the top five players fell by 0.5 percentage points in 2002, while the share of the top 10 players fell by 0.3 percentage points.

Interest rate pricing Despite the advantages that can be offered by traditional savings providers, there is no doubt that consumers can achieve a better rate on their instant access savings by choosing accounts with remote distribution. None of the top 10 interest paying instant access accounts offer consumers the opportunity to conduct their banking via a branch. The vast majority of these accounts are available in either single channel form, via the Internet, or dual channel with both Internet and either telephone or postal banking. Halifax’s Web Saver is the only account to offer banking via WAP telephone.

In January 2004, ING led the market with rates of 4.30% AER, with other Internet-only banks such as Northern Rock and Cahoot also occupying the top 10. However, the presence of players such as Coventry Building Society, Citibank, Abbey and Halifax shows that even the high street players can offer top rates by offering remote accounts.

Analysis of the top 10 notice accounts shows that the top paying account offers only 4.40% AER for providing a full one-year’s notice, while ING Direct offers 4.30% AER on an instant access account.

The other disadvantage is that none of the top 10 notice accounts offer access to the account via the Internet.

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Increased press coverage has raised the awareness of the public with regard to the best possible rates available for their savings and as a result, providers have felt the need to raise their game to compete for balances. This has led to an increase in the number of innovative features added to savings accounts in order to boost the opportunities for savers.

Product guarantees to win customers With interest rates so low, 2003 saw the development of so-called tracker products, which offer guarantees that the interest paid on accounts will move in line with base rates. Such products now dominate the top 10 best-buy tables (for example Coventry Building Society guarantees that the rate will be at least equal to the Bank of England base rate until the end of September 2004).

According to industry experts, customers like the guarantee that rates will move in line with base rates. With guarantees customers are able to gain both a good and consistent rate, which is particularly important considering that providers in the best buy tables change so frequently and top rates are often “here today, gone tomorrow”.

Introductory bonuses are also used to help boost the rate. The Northern Rock and Abbey instant access online accounts both offer introductory bonuses of 0.45% and 0.5% respectively for the first six months the account is open.

Other methods used include offering higher rates in return for meeting strict conditions. Halifax, Barclays and Lloyds TSB have all launched products that will pay high rates but in the case of Halifax and Barclays, customers can only make limited withdrawals per year, while for Lloyds TSB’s top rate on the Plus current account customers must pay in a minimum of £2,000 per month.

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Chapter 7

Appendix

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Chapter 7

Appendix

Definitions Affinity Card: a payment card issued in partnership with a particular organisation. The card issuer makes a donation to the partner organisation every time the card is used.

APACS (Association for Payment Clearing Services) manages the main networks that allow UK banks and building societies to exchange payments on behalf of their customers.

ATM only card: an ATM only card allows customers to withdraw money from automated teller machines. It cannot be used to make payments.

Average transaction value: this is equal to the total value of transactions divided by the total number of transactions.

AVS: Address Verification System is used on card-not-present transactions to help verify that the person is the cardholder by checking the cardholder’s billing address and CVV number.

Balances outstanding: all money owed to a card issuer at a given point in time. This includes the value of transactions made within that month, which will be paid upon receipt of the bill.

‘Big five’: Barclays, Lloyds TSB, Royal Bank of Scotland, HBoS and HSBC.

Co-branded card: a partnership card issued between a bank and another organisation. The card is jointly managed by both organisations and profits are split.

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Credit card: a revolving credit card provides consumers with access to a line of credit. Consumers make payments using their card and receive a bill at the end of the billing cycle. The card issuer usually demands a minimum payment against the outstanding balance, but beyond this the customer can choose how much of the bill he wishes to repay, up to and including 100% of the balance outstanding. Any balances, which are not repaid within the interest free period offered by the card, incur interest at the rate advertised by the card issuer. A revolving credit card may or may not be linked to a customer’s bank account.

CAGR: CAGR stands for compound annual growth rate and is used to give an indication of year on year growth in a market. It is calculated using the formula:

(last value in series/first value in series)^(1/(number of years in series - 1)) – 1.

Charge card: a charge card allows customers to defer the costs of purchases made on the card until the end of the payment cycle. At this point the cardholder has a fixed period during which to settle the bill in full. A charge card account is not directly linked to a customer’s current account, although as with most cards it is possible to link the two by means of a direct debit payment.

Counterfeit fraud: a counterfeit card is either one that has been printed, embossed or encoded without permission from the issuer, or one that has been validly issued and then altered or re-coded. Most cases of counterfeit fraud involve skimming, a process where the genuine data on a card’s magnetic stripe is electronically copied on to another, without the legitimate cardholder’s knowledge. Skimming normally occurs at retail outlets - particularly bars, restaurants and petrol stations - where a corrupt employee skims a customer’s card before handing it back, then sells the information on higher up the criminal ladder where counterfeit cards are made. In other cases, the details obtained by skimming are used to carry out fraudulent card-not-present transactions. Often the cardholder is unaware of the fraud until a statement arrives showing purchases they did not make. 147

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CVV: (card verification value) can help with card-not-present fraud. It can be found on the back of cards and verifies the card number and the CVV number batch.

Debit card: a debit card allows customers to pay for purchases using a plastic card. The money is then drawn directly from the customer’s current account to pay the merchant. Customers verify payments either by signing a receipt or by entering a personal identification number (PIN). A debit card does not offer access to a line of revolving credit and is always linked to a customer’s current account.

EPurse: an ePurse or electronic purse is a smart card on to which money is pre-loaded. The card is then used to make small value payments for which the customer does not have to sign an authorisation form. Each time the card is used, the value of the transaction is deducted from the total stored on the chip. When the pre-loaded amount is exhausted the card can be re-loaded with more money.

FLA: the Finance & Leasing Association is the major UK industry body for asset finance, consumer finance and motor finance sectors.

Fraudulent use of card details (Card-not-present fraud), also known as fraud on phone, mail order or Internet transactions: this type of fraud occurs when neither the card nor its holder is present at the point-of-sale, as happens in telephone, fax, mail order and Internet transactions. This crime involves using fraudulently obtained card details to make a purchase. Usually the details are taken from discarded receipts or copied down without the cardholder’s knowledge. As with counterfeit fraud, the legitimate cardholder may not be aware of the fraud until a statement is received.

Frequency of use: this is equal to the total number of transactions divided by the total number of cards.

Identity theft: there are two categories of identity theft. Application fraud: application fraud involves criminals using stolen or false documents to open an account in someone 148

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else’s name. Criminals may try to steal documents such as utility bills and bank statements to build up useable information. Alternatively, they may use counterfeited documents for identification purposes. Account take-over: criminals try to take over another person’s account, first by gathering information about the intended victim. The criminal then contacts the card issuer, masquerading as the genuine cardholder, to ask that mail be redirected to a new address. The criminal then reports the card lost and asks for a replacement to be sent.

Lost or stolen card fraud: most fraud on lost or stolen cards takes place at retail outlets before the cardholder has reported the loss. In other cases, the card details from lost and stolen cards are used to make fraudulent card-not-present transactions.

Mail non-receipt fraud: this is when fraudsters intercept mail in order to use card details before they reach their rightful owners.

Non-standard: an individual who is systematically refused credit from mainstream lenders (banks, building societies or finance houses) whatever the size or nature of their application.

OFT: the OFT (Office of Fair Trading) is an independent organisation that plays a leading role in promoting and protecting consumer interests throughout the UK, while ensuring that businesses are fair and competitive.

POS terminal: Point-of-sale terminal. An electronic terminal, which allows merchants to accept card payments

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Prepaid card: a card that cardholders can load up and then only spend the amount that is loaded on the card. This type of card is primarily aimed at teenagers for use on the Internet.

tx/yr/card: transactions per card per year.

Index debit, 15, 19, 24, 106, 107, 108, 109, 110, 111, 112, 113, 114, 121, 122, 129, 130, 131, 147, 148

Abbey National, 22, 24, 29, 30, 31, 42, 44, 45, 98, 140, 141 affinity, 60, 74, 107, 119

debt, 13, 33, 35, 41, 50, 51, 53, 59, 66, 67, 68, 69

APR, 77, 79, 123, 124

deposits, 12, 14, 15, 16, 18, 19, 23, 24, 82, 87, 136, 137, 138

ATM, 15, 106, 111, 112, 118, 122, 146 Banco Popular Español, 22, 30, 46

Deutsche Bank, 22, 29, 30, 34, 35 Bank of Scotland, 24, 30, 31, 32, 33, 42, 73, 75, 77, 96, 98, 99, 128, 140, 141, 142, 146

Dresdner Bank, 22, 30, 35, 38, 39, 40

Barclays, 24, 25, 26, 28, 29, 30, 73, 75, 76, 77, 79, 96, 98, 99, 140, 141, 142, 143, 146

Europe, 15, 18, 22, 25, 27, 28, 33, 34, 35, 37, 39, 43, 46, 106, 107

base rate, 52, 53, 69, 86, 90, 92, 93, 95, 101, 115, 139, 143

European Commission, ii fraud, 15, 106, 113, 114, 115, 147, 148, 149

Capitalia Group, 22, 30, 40, 41 Germany, ii competition, 16, 57, 58, 59, 63, 64, 65, 69, 78, 102, 113, 116, 127, 136, 138

HBOS, 14, 16, 22, 26, 28, 29, 30, 31, 32, 33, 69, 82, 96, 98, 99, 100, 136, 139, 140, 141

consumer, 13, 15, 18, 28, 31, 38, 42, 43, 45, 50, 51, 52, 53, 55, 56, 57, 62, 63, 65, 66, 67, 68, 70, 71, 72, 75, 76, 85, 101, 102, 106, 107, 114, 116, 148, 149

homeowners, 85, 86, 90, 95, 102 HSBC, 22, 25, 26, 28, 29, 73, 76, 77, 79, 96, 98, 99, 129, 140, 141, 146

Credit Agricole, 22, 30, 36, 37, 38 interest rates, 13, 16, 50, 51, 66, 69, 70, 78, 85, 88, 90, 91, 92, 95, 101, 102, 108, 115, 124, 136, 137, 138, 139, 143

credit card, 15, 32, 45, 60, 69, 106, 107, 111, 115, 116, 123, 125, 127, 128, 133, 139, 147

Internet, 31, 32, 40, 45, 46, 74, 138, 142, 148, 150

customer, 12, 13, 32, 33, 39, 42, 46, 47, 53, 59, 60, 73, 74, 76, 78, 85, 86, 89, 95, 102, 108, 114, 125, 132, 147, 148

marketing, 60, 69, 109, 115, 118

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mortgages, 14, 18, 31, 36, 44, 72, 86, 90, 94, 95, 96, 98

retail banking, 12, 18, 22, 28, 31, 32, 39, 43, 44, 46

motor finance, 53, 54, 56, 60, 61, 64, 148

retail finance, 13, 50, 51, 53, 54, 56, 62, 63, 64, 65

outstanding balances, 13, 27, 50, 52, 53, 54, 55, 56, 57, 59, 60, 61, 62, 63, 64, 65, 74, 75

secured personal loans, 57, 59

overdrafts, 53, 56, 60

store card, 63, 69, 109

personal lending, 13, 18, 22, 27, 57, 76

student, 60, 66

plastic cards, 15, 18, 19

UK, 1, ii

price, 13, 50, 51, 76, 78, 102, 103

unemployment, 51, 52, 66, 85, 101, 108

pricing, 32, 60, 70, 74, 76, 77, 78, 79, 95, 142

unsecured personal loans, 51, 53, 56, 57, 59, 62, 71, 73, 74, 76, 78, 79

private label, 19, 107, 109, 123, 124, 131 wealth management, 24, 35, 44, 45

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