UK banks are losing over £1 billion a year on 0% cards. Are these deals in danger, or can we remain 'rate tarts'?
According to a new report from accountancy firm PricewaterhouseCoopers (PwC), British credit-card issuers are losing more than a billion pounds a year by offering 0% and low-rate deals to new cardholders. Ah, diddums!
'Rate tarts' savvy customers who perpetually surf their debts between introductory interest-free deals are increasing lenders' costs and trimming the banks' profits. PwC warns that card issuers need to concentrate on retaining profitable customers, rather than offering juicy deals to a growing breed of interest-free addicts.
PwC warns that canny rate surfers may kill the golden goose, leading to companies withdrawing 0% offers in favour of reducing the rates paid by their most valuable existing cardholders. According to one source, 0% deals cost lenders about £200 a time. Another report estimates that roughly a sixth of the UK's total card debt (£10 billion out of £57 billion) is on 0% or discounted-rate plastic.
In addition, there is more doom and gloom on the horizon for card companies, with the Office of Fair Trading launching an investigation into late-payment fines and other penalties, plus two enquiries into the store-card market. It's about time, too!
However, I don't see an end to the 0% merry-go-round. The credit-card market is a volume-driven business, which means that lenders tend to focus on driving up card numbers, without worrying too much about profitability. What's more, only about half of 0% customers move their debt to another card once their interest-free deal is up, which means that millions end up paying interest at standard rates.
Also, one of my industry contacts told me earlier today that the 0% card is a 'prime acquisition product' that, when backed by a respected brand and quality customer service, leads to long-term and profitable customer relationships. In other words, customers may start off by using and abusing 0% rates, but many stay and buy other valuable products - what the industry calls 'cross-selling'.
Furthermore, companies who voluntarily withdraw from the 0% game also risk losing market share. Barclaycard's reluctance to introduce any 0% deals saw the market share of the UK's most widely held card fall from a quarter (25%) in 1998 to a sixth (16%) last year.
My industry insider ended by saying, "Don't feel sorry for these lenders they aren't suffering!" After all, with standard rates averaging 15% a year, they are making ten percentage points over the Bank of England's base rate, currently 4.75%!
For the record, I'm awaiting my seventeenth and eighteenth 0% cards. On this basis, I suspect that I'm one of Britain's biggest rate tarts. Only thirty-four cards to go and I'll have a full deck!
More: Check out the fantastic 0% plastic in our Credit Card centre.
