The Competition Commission said there was evidence that the store card market was uncompetitive, with interest rates up to 20% higher than they should be.

Full Report:

The Competition Commission (CC) has provisionally concluded that there is an adverse effect on competition in connection with the supply of consumer credit through store cards and associated insurance in the UK. It has estimated that in broad terms, store card APRs are on average some 10 to 20 per cent higher across the store card market as a whole than they would have been had they reflected providers’ costs, including the cost of capital. The detriment to cardholders in terms of the excess prices paid for credit and insurance is in the region of £80 million to £100 million a year.

CC Deputy Chairman Christopher Clarke, who is chairing the inquiry, said:

We have provisionally concluded that there are features of the store card market that effectively insulate retailers and consumer credit providers from competitive pressures, notably from credit cards and store branded credit cards. There is therefore little competitive pressure either on APRs or insurance. Retailers’ primary concern is to avoid having an APR on their store card which is above those of other store cards. At the same time, consumers’ sensitivity to APR levels and other charges is low. Taken together, this results in store cardholders who take up credit, and associated insurance, paying more than they would in a fully competitive market.

Potentially significant changes in the store card market are underway, maybe to some extent as a result of this inquiry. Almost immediately before we finalized our provisional findings, one major provider told us of further initiatives to lower APRs. However, we do not expect that in the next 12 to 24 months or so, these will be sufficient to remedy the adverse effect on competition. We must therefore now look to put in place measures that will bring about greater competition in this important market.

The CC concluded there are two relevant economic markets: an ‘upstream’ market, where providers compete for retailers’ store card contracts; and a ‘downstream’ market for the supply of credit and insurance through store cards to retailers’ customers.

In contrast to the downstream market, the CC concluded that the upstream market was competitive and displayed no features that prevent, restrict or distort competition. In particular, it found that there were no discernible barriers to entry into the market by financial institutions with an established reputation and the requisite in-house or outsourced capacity. While it identified some remaining hurdles for providers aiming to tender for an existing contract on its expiry, relating to informational asymmetries and the hand-over of portfolios, it decided that these could be surmounted and had been successfully cleared in many cases.

It found that there had been a shift in the balance of negotiating power from the store card providers to the retailers, but that the additional benefits they had gained were not being passed on to consumers.
The CC identified some 70 retailers operating store card services-mostly department stores and clothing retailers-mainly provided by six store card issuers: Arg Card Services, Creation Financial Services, General Electric Consumer Finance UK (GECF), HSBC Group, Ikano Financial Services and Style Financial Services.

At the end of 2004, there were almost 14 million active store card accounts, with outstanding balances of about £2,500 million. As at mid-August 2005, most store card programmes had APRs clustered around 30 per cent and the CC found that there was little competitive pressure on them. However, the CC found that there were a few retailers which had store card programmes with APRs significantly below that level and that providers were prepared to accommodate requests for such programmes when contracts come up for re-tender.

The CC found that some 57 per cent of store cardholders who used their card in a particular month took on interest-bearing credit. The remaining 43 per cent settled their balance in full and did not incur interest changes. The CC noted that most of those who generally incured interest on their accounts also had access to other sources of credit.
Although the numbers of active accounts have been declining, the CC considered that store cards would continue to be important for some time to come-for retailers as one of their marketing tools and for the providers of store cards as a route to market for their financial products.

The CC’s investigation, which is based on data relating to the period from 1999 to 2003, (supplemented by later information for 2004 and 2005), has focused on the functioning of the market as a whole rather than on the conduct of individual companies.

Provisional findings
After careful consideration of the large amount of evidence from retailers, store card providers, government bodies, consumer organizations and trade associations, as well as the data gathered by consumer surveys, the CC has provisionally found that there is a combination of features which prevent, restrict or distort competition in the markets for the supply of consumer credit through store cards and associated insurance:

(a) providers and retailers structure the store card offer in such a way that many store cardholders take out such cards to obtain the retail benefits they offer rather than the credit available on them;
(b) most retailers offering store cards do not exert competitive pressure on APRs;
(c) most retailers’ customers do not exert competitive pressure on store card APRs (either at the take up stage or when they take credit) because their sensitivity to them is low;
(d) most retailers offering store cards do not exert competitive pressure on the level of, or the provider’s policy in relation to, the levying of late payment fees;
(e) most retailers’ customers do not exert competitive pressure on the level of late payment fees levied on store cards;
(f) many store card credit providers combine different insurance products into packages (that is, payment protection insurance offered with purchase and/or price protection insurance) which they sell in association with store cards;
(g) most retailers offering store cards do not exert competitive pressure on providers to lower their insurance premiums to cardholders, or to offer the components of PPI separately;
(h) most retailers’ customers do not exert competitive pressure on store card insurance premiums because their sensitivity to the price of store card insurance cover is low and they have a poor understanding of the terms of the cover they are purchasing; and
(i) most store card credit providers do not provide adequate information on customers’ monthly statements about APRs, late payment fees or insurance charges or how these contribute to the current and ongoing costs of revolving credit on their store cards.

Remedies
In the light of these provisional findings, the CC has identified in its remedies notice (also published today) the measures it is currently considering as possible remedies for the adverse effect on competition it has identified and the consequent detrimental effects on customers. It is inviting comments on the following possible remedies:

(a) Full information on statements-measures to ensure that all store card customers are consistently well placed to take informed decisions regarding use of store card credit and the extent of their store-card related insurance.

(b) APR warning notice on store card statements-to ensure that all store card customers are consistently well placed to take informed decisions regarding use of store card credit and to give retailers an incentive to negotiate lower APRs with providers in order to avoid any adverse reputational effects of a warning notice.

(c) Provide and prominently display facility to pay outstanding balances by direct debit-measures which aim to reduce the proportion of cardholders revolving credit inadvertently or through inertia as a result of a lack of awareness of APRs and payment terms.

(d) Separate offer of payment, purchase and price protection insurance-measures which aim to provide greater choice for customers in selecting insurance products to match their needs and which would enable them to compare each element of the insurance package with competitor offerings. And a requirement that, if providers offer ‘packages’ of two or more elements of payment, purchase and price protection insurance, they should offer each element separately.

The provisional findings report and Remedies Notice are available on the CC web site:

http://www.competition-commission.org.uk/