Credit card market ‘broken’ with as little as three per cent of customers switching, but could open banking provide a solution?
The UK’s credit card market is “broken” with as few as three per cent of customers changing providers despite the hefty costs that consumers face, a new report shows.
According to fintech firm Cardeo, the UK is the European country most reliant on credit card spending with 35 per cent of consumer credit in credit cards. In contrast credit cards make up 11 per cent of French consumer credit and a tiny two per cent of Germany’s.
In the UK, the average rate for a credit card in 2022 hit 30.4 per cent, its highest level since 2006.
Yet despite these costs, Cardeo’s figures suggest that the level of switching between credit card providers could be as low as three per cent per year as customers often do not know how much they are paying or are not aware of cheaper options.
“This (switching) is clearly something that credit card companies either want to do little to encourage,” Cardeo chief executive and ex-Labour MP Gavin Shuker said.
But Shuker argued that open banking could provide a route to fix the issue. Open banking would enable customers to find more products suited to their needs which could help to reduce their debt.
“Innovations like open banking can help customers manage these forgotten credit cards as well as optimise the interest and charges they pay by facilitating the switch to better options with lower APRs”.
However, Shuker said open banking had not yet realised its “full potential” pointing out that there have yet to be “significant changes to the retail banking landscape”.
The need to reform the sector is growing in the face of the cost of living crisis. As many as 14m customers are paying up to £1,000 in interest every year, the report suggests.
This number is only likely to grow as the cost of living crisis forces people to put off debt repayments in order to pay everyday bills.
“The credit card poverty trap is catching more people as they struggle with the rising cost of living”, Shuker said.
The news comes after regulators set out a new roadmap for open banking in an attempt to further competition in the retail banking sector.
Launched in 2017, open banking attempts to boost competition by forcing high street lenders to open customers’ data to trusted third-party firms.
Earlier this week a new long-term regulatory framework will be established to secure the “existing achievements” of open banking and “unlock its future potential”.
Policymakers are concerned that competition in the banking sector, whether it be credit card provision or savings products, does not work as it should.
In recent weeks, banks have been in the crosshairs of lawmakers as the interest rates on savings products have remained low in spite of rising interest rates