Credit card company profits tumble from £2bn to £1.2bn

Aggregate profits in the UK credit card market, which until recently was one of the most profitable markets, fell to £1.2bn in 2006, a fall of 43% from 2005.

A study from Lafferty Group shows rising bad debts and increased regulation have contributed to the annual profit per card falling from £27 in 2005 to £16 in 2006. This puts the UK in the bottom third of credit markets worldwide based on profitability.

Top of the global league is Saudi Arabia where profit per card is £45, and in the United States which has a similar amount of consumer indebtedness to the UK, the amount is £24.

“Interest rate charges are low by historical standards having fallen due to competition, lending outstanding on credit cards has declined, while at the same time there has been a rapid rise in bad debts. The combination of these factors has had a most severe impact on profitability,” commented Steven Letch, Senior Researcher at Lafferty Group’s World Cards Intelligence research unit.

Lafferty predict that profits will fall to about 1 billion pounds this year, before recovering in 2008.

Lafferty said aggregate credit card bad debts jumped by a third last year to 3.3 billion pounds and are forecast to rise again in 2007. All the major banks, including Barclays and Lloyds TSB, were hit by a sharp rise in bad debts on their credit cards last year with consumers struggling to pay off big debts as household finances were squeezed, prompting speculation some could introduce annual charges.

In recent months credit card companies have been trying to claw back lost profits by increasing the interest rate, reducing loyalty rewards and in some cases introducing annual fees. Co-operative Bank has announced it will charge £2 a month for its Platinum Visa card and Lloyds TSB has introduced a £35 annual fee for customers who do not use their card frequently.