London: British consumers face higher rates and fees on credit cards as lenders battle rising bad debts, funding constraints and reduced appetite for borrowing, accountants PricewaterhouseCoopers (PwC) said on Monday.
These changes, combined with rising regulatory and government scrutiny, would shake up the market and prove the current model based on fee-free credit cards was unsustainable, PwC said in an annual report on consumer credit.
“Lenders will be unable or unwilling to increase supply sufficiently to match demand. This will leave consumers surprised at both the cost of credit and the difficulty in gaining access to it,” PwC partner Richard Thompson said.
Britain, the only country in Europe with more credit cards than people, has seen borrowing drop 3% in the past year as consumers cut back and banks tighten the purse strings.
But lenders have still been left with rising bad debts.
Impaired loans hit 6% of outstanding balances and could rise to 9% by the end of 2010, PwC said.
“This would have enormous implications for the profitability of credit cards in the UK market. Large-scale change within the sector over the next few years is inevitable,” Thompson said.
PwC predicted lenders would scrap current business models — built on free credit cards but costly borrowing — predicting premium customers would see higher standard fees, while marginal spenders will have pay to hold even a basic card.
Internet bank Egg, owned by US bank Citigroup, has already introduced a one pound monthly fee for inactivity.
Lenders will also reposition cards, tapping innovations such as pre-paid cards, contactless payment, and even payments by mobile phone, PwC said.
Barclaycard has said technology it is looking at includes “contactless” cards, and its chief executive has warned changes to the industry could see plastic cards thrown onto the scrapheap in as little as three years.
Credit card providers are also facing increased scrutiny from competition authorities, regulators and a government probe into credit and store cards looking at issues including higher minimum payments to get balances paid off more quickly and a ban on unsolicited increases to credit limits.
Based on discussions with issuers grappling with the US Credit Card Act, PwC said the outcome would be higher costs.
“With the UK credit card business model already under significant pressure, any further measures to restrict issuers could increase the cost of credit cards to consumers and reduce their availability to certain segments of the market,” it said.
PwC said it expected changes would also result in an increase in portfolio sales, as lenders try to unlock liquidity and buyers return to the market, lured by potentially attractive discounts.
The government has said it wants to see more competition in retail banking and would be expected to support new lenders.
PwC said regulators had reported a number of applications for new banking licenses.