New research finds UK store cards losing out to credit cards in today’s market.

The research shows that over the past four years, store card sales have suffered from increasing competition from credit and debit cards and a more financially aware British public. The image of store cards has been dented by adverse publicity surrounding their high rates of interest compared to other forms of consumer credit. Although penetration of store cards is fairly high, their frequency of use rate is not. Three quarters of store card accounts are either dormant or are not being used to their full potential, research from Mintel shows.

Research questioning 2,020 adults finds 30% of consumers owning a store card, which equates to some 14m people. By comparison to other forms of credit, usage of store cards is fairly infrequent. The average frequency of use per person per year for store cards is just three times, far lower than for debit and credit cards, at 52 and 26 times respectively (purchases only).

Some 14% of store card holders claim to have only used their store card once and a further 20% have hardly ever used their card. The largest group, with 37%, are those who use their card sometimes, but not on every occasion they purchase goods from the store. In contrast, just 25% of cardholders claim to use their store card every time they purchase goods from a participating store. It seems that a significant proportion of people will open an account solely to take advantage of a special purchase discount and then never use the card again.

“The key challenge for store card providers is to maintain the proportion of current cardholders and to increase usage, by offering the right incentives and making the cardholder feel special” comments Sarah Hitchcock, Financial Consultant.

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Market saturation

New store card lending in 2002 is estimated to be in the region of £4.9bn (US$7.6bn), which represents a decline of 9% from 1998, but is a slight increase on 2001. However, the increase in 2002 is expected to be as a result of the strong growth in retail sales and total consumer credit, and is unlikely to indicate the start of a recovery.

Mintel expects gross lending on store cards to remain relatively static over the next four years. Gross lending on store cards is forecast to fall by 2% from 2002 to £4.8bn in 2006, at current prices. When the effects of inflation are taken into consideration, this represents a more severe decline of 12% in real terms.

Furthermore, although the number of store cards has more than doubled in ten years to an estimated 26m in 2002, penetration of store cards, in their present form at least, has almost reached saturation point. Mintel forecasts that the number of store cards in issue will experience a much slower rate of growth over the next five years as compared to the substantial annual increases witnessed in the 1990s. In total, there will be some 27.4m cards in 2006, representing an increase of just 5% from 2002.

“Retailers launching store cards for the first time may find it hard to win new business, other than perhaps from people who already own a card with another retailer and thus are already won over to the idea,” comments Hitchcock.

One of the key disadvantages of store cards is the fact that store card annual percentage rates (APRs) are, on average, still high in comparison to the alternatives. Many store card providers have so far shown a reluctance to cut their rates, which has prompted a considerable amount of criticism from consumer groups and the media. The average APR on a store card is currently more than six times the bank base rate, while the average APR on a standard credit card for purchases is just four times.

Special offers prompt takeup

Multiple card ownership is fairly common. Half of all cardholders own at least two cards and one in six own at least four cards. Approximately half of the store card holders questioned felt that the most important factor that influenced their decision to open a card account was the ability to take advantage of a special introductory offer or discount (51%). Making up the other top five factors were the convenience of owning a store card (34%), the ability to buy now and pay later (21%), being eligible for frequent and exclusive offers (21%) and because it was recommended by a sales assistant (17%).

In terms of repayment behaviour, some 57% of store card holders claim to always pay back the whole of their balance to avoid interest charges. A further 14% usually pay back the balance, but sometimes pay interest. The remaining 25% ‘often’, ‘usually’ or ‘always’ have to pay interest on the outstanding debt. Of these, only a small minority claim to have difficulty in meeting the repayments. Women, younger consumers and Ds and Es show the highest propensity towards borrowing on their store cards.

Debenhams and M&S are the most popular store cards

The Debenhams and M&S cards are the most widely held store cards in the UK. Some 11% of the adult population hold a Debenhams’ branded card and 10% hold an M&S card, according to Mintel’s consumer research. Bhs and The John Lewis Partnership – which owns the John Lewis chain of department stores and Waitrose supermarkets – are in joint third place with 4%. Argos and House of Fraser each have a take-up rate of 3%. Others have 2% or less.