Loyalty is key to credit share

To stand out in the crowded credit card market, companies need to excel in at least one area: client service, interest rates or loyalty schemes

According to the recent UK Credit Card Market Report by consumer information company Claritas UK, loyalty is a major issue for traditional credit card companies.

Although the overall market is growing – up 13 per cent in 1998 to 40 million cards in circulation – credit card companies are finding it increasingly difficult to compete in the face of stiff competition from major US issuers and new UK entrants such as supermarkets.

Traditional high-street bank credit card holders have held them for an average of seven to 11 years and these cards appear to have a strong position in the market. Barclaycard, for example, has the largest market share, with about 19 per cent of consumers holding a Barclaycard as their main credit card.

However, the rate of growth in Barclaycard holders has slowed by eight per cent, which gives a clearer picture of what is happening in the market.

The survey shows more respondents have switched from Barclaycard to another card (as their main card) than have gone to Barclaycard. Traditional high-street banks are still leading the market in terms of market share but growth is decreasing.

While new US and UK credit cards have a relatively small market share, they are experiencing high levels of growth. Capital One leads the pack with a growth rate of about 43 per cent, followed by Sainsbury’s and Tesco, with 37 per cent and 36 per cent respectively, and Goldfish on 13 per cent.

According to the report, the new credit cards’ success stems from two distinct propositions.

Capital One, Advanta and People’s Bank have heavily marketed themselves using attractive low teaser interest rates and balance transfer facilities. Some 96 per cent, 94 per cent and 95 per cent of their card holders respectively say low interest rates attracted them to the brand.

This low interest proposition has attracted card holders who do not pay off their balance each month and therefore pay interest. For example, only 11 per cent of Capital One card holders always pay their balance, while 32 per cent never do. These card holders also have the lowest monthly spend, with the vast majority spending less than £100 a month.

Customers who do not clear their balance are very profitable for credit card companies. But the inherent problem with attracting this type of card holder is that, having been attracted by a low interest rate, they are easily tempted to switch when offered a lower one. This occurs particularly when interest rates go up after the initial “honeymoon period”.

The market is becoming increasingly crowded as more cards enter on the low interest ticket. Providian and Morgan Stanley Dean Witter are just two of the new arrivals.

In an already mature market such as the UK, new players will struggle to compete at the commodity-based end as saturation point approaches.

The recent news that Bank One is divesting its UK credit card operation to Morgan Stanley Dean Witter – following the difficulties faced by First USA (Bank One’s credit card-issuing subsidiary in the US) – suggests companies need to do more than simply offer low interest rates.

They could, for example, impose tougher penalties on customers who move their business when the low introductory rate ends. Or they could increase fees for late payment and exceeding the credit limit.

Trading on a different proposition, the supermarket credit card Goldfish and Alliance & Leicester have primarily marketed themselves through loyalty schemes. Sixty to 80 per cent of their card holders cite the loyalty reward scheme as the main feature that attracted them.

The vast majority of these card holders always pay off their balance. In the case of Goldfish, 77 per cent do so every month.

Loyalty-led card holders spend the most money. Compared with other card holders, a far higher proportion of these customers spend more than £500 a month.

This suggests they use their card a lot in order to maximise their rewards.

The commoditisation of the market makes product differentiation increasingly important and e-brands such as Egg, Smile and Marbles have stolen a march by being the first brands to build their offers around the growth in shopping on the Internet.

The report suggests the acquisition of new customers has been key to the success of new credit card issuers and that price – both the annual fee and interest rate – is the main incentive for switching cards.

But long-term success tends to stem from building customer loyalty. Only time will tell whether the price or loyalty proposition prove the most successful.

Factfile is edited by Julia Day. Claritas data applications consultant Lee Witherel contributed

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