The research* from the independent market analyst has revealed that despite the huge potential market open to contactless payments the economic downturn has delayed issuers other than Barclaycard from investing in the technology as they just haven’t been able to spend money on it. Meanwhile many retailers are not sure yet if contactless is worth the investment.

Gilles Ubaghs, financial analyst at Datamonitor said: “Retailers could likely find the cash if they were convinced it was worthwhile, but many don’t seem sure there is any real point.  Essentially it is a catch 22 as many consumers aren’t interested in having a contactless payment card when there are still so few places to use it and retailers don’t want to install the technology as so few people have a card.”

However, Datamonitor does believe that there are promising long term signs that the technology could take off but it won’t be as soon as many analysts predict. 

Mr Ubaghs continued “Although contactless payments have been around for nearly 10 years, Barclaycard and London’s Oyster travel card remain the only two high profile companies to offer contactless cards.  Investment by other issuers is needed, not only in the technology itself but in educating consumers as well.  Consumers will need to be convinced that it is worth their while to use the new technology”

“Importantly, for consumers to be sold on using contactless payments retailers and issuers will need to work together and as this is yet to happen on a large scale. It will be a good deal of time before we’re able to walk into any shop and buy a chocolate bar in the same way as London commuters tap their Oyster cards.”

This equates to a £3.1 billion decline in 2010, following on from the record £7.8 billion drop in 2009. While the market will return to growth in 2011, it will remain relatively mild and some way off from the peak of £121.4 billion in credit card transactions in 2008.

The research also finds that the number of cards in issue fell by 10% in 2009, a drop of over 6 million cards from 2008, as issuers aggressively acted to reduce the number of dormant accounts.

Gilles Ubaghs, financial services analyst at Datamonitor comments: ”For card issuers, curtailing the number of dormant accounts strongly reduces exposure to risk, particularly as consumers fall into economic hardship and in many instances rely on credit to get them through.

“Datamonitor estimates that there are still 15.2 million dormant accounts in circulation and issuers will be acutely aware of the potential risk with these, however, they need to be careful not to cut too hard as this could seriously limit potential growth.”

Outstanding balances are also declining, which is a mixed blessing according to Gilles: “Whilst lower outstanding balances give card issuers greater liquidity and less exposure to risk they will severely limit future income potential from customers’ revolving balances.”

Datamonitor also identified a stable decline in transaction values, impacting on revenue – during most months in 2009 these were down between £1bn – £1.5bn compared to the equivalent month in 2008.

Gilles adds: “This decline in transaction values is problematic for card issuers, but is not as severe as was initially feared at the beginning of 2009. While falling transaction values will impact issuer revenues, falling balances (and hence lower exposure to risk) alongside potentially stabilizing levels of write-offs mean that they should be better placed to handle this.”

Gilles concludes: “Although credit cards have seen a strong decline as a result of the recession, it is worth remembering that compared to other forms of consumer credit their decline has been more moderate and stable.

“Although the overall sums involved in the credit card market are much greater than for other forms of credit, the overall level of decline in year-on-year quarterly growth reached a low of -8.5% in Q1 2009. However during this same time period, unsecured personal loans dropped by 30.1% and motor finance loans fell by 22.2%.”

Two thirds of Australian consumers are reducing their level of debt

As Australia enters recession and unemployment rises, one of the most noticeable effects among consumers has been an increased wariness of debt. In the Datamonitor survey, 67% of respondents agreed or strongly agreed that they are actively reducing their overall level of debt. This reverses several decades of increased debt for Australian consumers. According to figures from the Australian Bureau of Statistics, the average ratio of debt to disposable income for Australian households rose from 87% in March 1999 to 160% in March 2008. The current global economic crisis has acted as an eye-opener for heavily leveraged Australian consumers, with a significant proportion worrying about their ability to maintain their standard of living. In the survey, 23% of respondents deemed it quite or very unlikely that they would be able to maintain their standard of living over the next 12 months.

Many Australians have turned to debit cards to avoid debt

Many consumers have been reducing their reliance on debt by using payment methods other than credit cards. The Datamonitor survey shows that 53% of respondents agree or strongly agree that they are using their debit card more than their credit card in order to avoid debt. Mortgages remain the largest cause of debt for Australian consumers, but are not as easy to affect as credit card decisions. Many Australians also take advantage of the interest-free period on their credit cards. In the Datamonitor survey, 40% of credit card holders never pay interest on their credit card, while a further 17% only rarely pay interest. On the other hand, 17% of cardholders report paying interest virtually every month, with a further 13% paying interest frequently. The proportion paying interest has remained relatively stable over the last 12 months, showing that some consumers have found it hard to reduce their use of credit cards.

Credit card fees have become the prime driver of card choice

Australian consumers have also become more focused on reducing the fees they pay on their cards. When asked what features would be appealing when taking out a new card, 64% of consumers nominated lower fees as the most important feature. A lower interest rate was nominated as the most important feature by 17% of respondents, while better rewards was deemed most important by 7% of respondents. These results show that consumers have become more conscious about the costs of credit cards and how to minimize them. The current economic climate and lack of consumer confidence signals harder times for the credit card industry. The lower usage of credit cards, the repayment of debt in general, and consumer preference for low-fee cards all suggest that credit card companies will see their revenues and margins put under pressure.

Credit card market shrinking as debit card market grows

The growth in the payment card market is coming from the debit card sector. Datamonitor forecasts the value of transactions on debit cards to increase by 14% in 2008 to reach £438 billion in 2008 compared to £383 billion in 2007. Meanwhile, the value of transactions on credit cards is expected to decline by 1.1% during 2008, in comparison with 2007. These forecasts are backed up by data from the industry that the value of debit card spending was up 11.5% during the first half of the year while credit card spending had fallen 0.5%.

“The fall in the value of credit card transactions reflect the fact that consumers are less confident about spending on credit and also are spending less on large items, such as white goods” comments Andrew Fabricius, Financial Services analyst at Datamonitor, and author of the report. “Particularly with less people moving home, there has been less demand for goods such as household appliances and furnishings, which typically might be purchased with a credit card”. Fabricius added that credit cards remain popular for shopping online, as consumers believed they offered better protection. This has been particularly brought to light this year with the collapse of several airlines, when some consumers have been left out of pocket.

Consumers find debit cards increasingly attractive

Meanwhile, consumers are spending more on debit cards and less with cash. Consumers have been increasingly encouraged to purchase lower value items with debit cards, with advertising campaigns from major schemes such as MasterCard persuading consumers that it is acceptable to use a card instead of cash for smaller purchases.

In particular, consumers benefit from not having to worry about carrying cash for smaller purchases or having the correct change to hand.

The advent of “tap and go” payment cards is likely to further encourage the use of cards for smaller value payments in the future, although this is still in the early stages of being rolled out across the UK. At the moment the low level of infrastructure in place to accept the contactless cards means that there are few places outside London where they can be used.

Growth forecast for all sectors

Datamonitor expects there to be strong growth in the payment card market in the next five years. The total value of transactions by payment card is expected to reach £747 billion by 2012, an increase of 26% on the 2008 figure. This will be driven by strong growth in the debit card sector, in which transaction values are set to increase by a third over the next five years.

While the value of credit card spending in the UK is expected to fall in 2008, Datamonitor forecasts this to grow by 8% to £130 billion by 2012.

“Despite the strong growth in card use, we are still a long way from having a cashless society” commented Andrew Fabricius on the strong projected growth of payment card use in the UK.

Over a quarter of Australians refuse to arrange finances online

Australian consumers are divided regarding online financial services. On one hand, there is a sizeable proportion that would never consider using the internet for financial services: Datamonitor’s survey found that 27% would never arrange any financial product online. This group is generally distrusting of online services in general, and thus difficult to recruit to the internet, and providers of online financial services may be well served to focus their efforts on other customer segments. On the other hand, there is a reverse group that is very positive about the possibilities afforded by the internet. Sixteen percent of respondents in the Datamonitor survey – corresponding to 2.5 million Australian consumers – would like to arrange every financial product online.

The attitude towards using the internet corresponds closely with age, with a sharp drop off at 45, after which age consumers are much less likely to be positive towards online financial services. However, once consumers have tried online banking, they are generally very happy with it, Mr. Ingemarsson says. “In the survey internet banking was the most highly regarded aspect of banking, with 52% of respondents ‘very satisfied’ with the internet banking service of their transaction account.”

Security remains the major issue for prospective online consumers

Security is and has always been the major issue preventing consumers from using online financial services. Despite the introduction of more comprehensive security measures such as two factor authentication by the banks, there is still a significant proportion of consumers that does not use internet banking due to concerns about security. Actual fraud volumes for online banking are very low compared to total transaction volumes in Australia and most institutions will reimburse customers should fraud occur. It is perceived security rather than actual security that is the matter at hand, Mr. Ingemarsson says. “Recent security initiatives by the major Australian banks, such as educating customers about security and offering subsidized antivirus software recognize the importance of the public relations aspect of this issue.

“Many current security initiatives are as much intended for consumers to feel safe as for conferring meaningful real security advantages,” he says.

Online financial services will continue growing strongly

There is a wide range of factors which indicate that the internet will continue to grow in importance for financial services, from short term developments to long term demographic shifts. In the short term, increasing broadband penetration will be the prime driver of increasing uptake of online financial services. Broadband access is a strong predictor of online banking usage and recent years have seen broadband access increasing in Australia, surpassing dial-up connections in frequency. In the 2007 financial year, 64% of Australian households had internet connections, with 69% of those being broadband connections. In the medium term, effects such as customer satisfaction and word-of-mouth will play a larger role, Mr. Ingemarsson says. “For most banking customers, the internet channel has a number of clear benefits, and online banking customers are more likely to recommend the service to others.

“Demographic changes will drive online financial services uptake in the long term. The younger generations, financial consumers of tomorrow, are much more positive about using the internet for financial affairs. In the long term this will provide online financial services with a slow but steady boost as younger generations supplant elder ones as the banks’ core customers,” he says.

By comparison, even Norway, which has the second highest number of cards per adult, lags some distance behind the UK with 2.3 cards per adult. Germany has 1.6 payment cards per adult, and France has just one per adult, on average.

The fact that there are so many more payment cards per head in the UK is indicative of differing consumer habits between European countries, comments Andrew Fabricius, Datamonitor financial services analyst and author of the report. “In the UK consumers use debit cards for day-to-day spending much like their European counterparts, but are increasingly using credit cards as borrowing tools, applying for new credit cards to transfer an outstanding balance and to take advantage of interest free offers. In most other countries, consumers do not view credit cards as a borrowing tool and as a result they are not so popular,” he says.

Credit cards most popular in the UK

More notable is the extremely high number of credit cards** per adult in the UK. At the end of 2006 the average adult had 1.4 credit cards, twice that of the next most penetrated market, which is Norway, with 0.7 cards per adult. In Spain there are just 0.4 cards per person, and in Germany, where credit products are very unpopular, the figure is as low as 0.06, or approximately just one card for every sixteen adults.

Growth in credit cards forecast

However, a slowdown is afoot. In terms of total card numbers, the UK credit card market is predicted to grow at an average annual growth rate of just 0.2%, the slowest growth rate in the region. By contrast, several other markets, especially those with underdeveloped credit card markets will see significant growth. In particular, the number of cards in Germany is expected to grow at average annual rate of 26% to 2011, and France at 21%, Mr. Fabricius says. “These markets will see significant growth as consumers become more accustomed to the flexibility that credit cards can offer.

“Nonetheless, the UK is expected to remain the biggest market in terms of cards per person for the foreseeable future,” he says.

Petter Ingemarsson, Financial Services Analyst at Datamonitor, comments “Most Australians are financially savvy, but a minority are tempted by the easy availability of credit.”

Some credit card customers are prone to overspending

Although most Australians use their credit cards prudently and responsibly, almost a quarter of respondents in the Datamonitor survey admit to sometimes using their card to purchase items they can’t afford. As consumer credit has become easily available, and as credit card limits have risen over the last few years, some are concerned that consumers are being tempted to overspend, with January often the month when customers face the results of this on their bills following Christmas shopping sprees. When asked how respondents felt about their credit limit, eight percent of Australian credit card customers in the survey thought their credit limit was too high because it tempts them to overspend. Australian credit card providers thus need to be careful selecting who to offer credit, and be transparent in communicating associated costs.

Most Australians use cards primarily as payment tools

The majority of Australians use cards as payment tools rather than as instruments to borrow money. Most cards offer interest free periods and the opportunity to avoid paying interest on purchases made. In the Datamonitor survey, 39% of credit card customers never pay interest on their credit cards, and a further 18% only pay interest rarely. However, a significant proportion regularly revolve their credit card balance, as 18% of consumers report paying interest every month. Over nine percent of surveyed Australian credit card customers only manage the minimum required payment each month, corresponding to one million Australians. These are the customers that are more likely to have problems managing their credit card debt.

Credit card fees drives choice of provider

When asked for the most appealing factors when choosing a new card, over 86% of Australian credit card customers questioned in the survey mentioned lower fees. Only 47% mentioned an attractive reward program as a factor when choosing a new card, while 54% mentioned attractive interest rates. Over the last few years, Australian credit card reward programs have become less generous, and as a result, customers have become more mindful of credit card fees. In the survey, 43% of credit card customers feel that their reward program fails to make up for the annual fee on their card. In contrast, only 20% feel that their reward program does make up for the annual credit card fee. Low fee cards are thus expected to continue to play an important role in the Australian card market.