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OFT refers store cards to Competition Commission

47/04    18 March 2004

The OFT has referred the supply of store card services to the Competition Commission following a study into the £4.8 billion sector. This is the first market investigation reference to the Competition Commission under the Enterprise Act.

Download Store cards pdf file (618 kb)

The OFT store cards study, launched in response to questions raised by the Treasury Select Committee, has concluded that there are features of the sector, both in the supply of store card credit to consumers and in the supply of store card services to retailers, that appear to prevent, restrict or distort competition.

There is a lack of transparency for consumers in the way store cards are offered and used.  Most store cards have an APR of around 10 percentage points above those available with credit cards, and there are questions whether these rates are disciplined by competitive pressure. The gap between rates on store card borrowing and credit card borrowing may be more than can be explained by additional costs or the value of other benefits to store card holders.

Although the OFT had received few consumer complaints, the study raises concerns that consumers find it difficult to assess the costs and benefits of using store cards.  There is a lack of transparency at all stages of the process of providing consumer credit through store cards – before signing, at point of sale and post-contract. The lack of clarity on the costs of using a store card combined with difficulty in assessing the value of benefits offered with store cards may restrict or distort competition by making it difficult for consumers to compare alternative forms of payment.

For example, during the mystery shopping exercise carried out as part of the study, the OFT found that only 23 per cent of shoppers were offered the opportunity to take the application form away with them. Of the remainder, three quarters had the request to do so refused. Also, information on the interest rate was not available in about a third of cases and 40 per cent of the mystery shoppers felt that the information provided was inadequate.

The need for greater transparency of key financial information in credit agreements generally is being addressed by the Department of Trade and Industry in the context of its proposed Consumer Credit Act reforms and to a degree by the industry itself. The CC investigation will be able to take into account these reform initiatives. The OFT believes, moreover, that there are particular transparency issues specific to the provision of consumer credit through store cards.

In addition to the problems connected with the supply of store cards to consumers, the OFT also has concerns with the supply of store card services to retailers – specifically the ability of new store card providers to enter the market or of existing providers to expand market share. The reasons may include:

• significant costs for retailers wishing to switch to another provider
• duration of existing contracts – some of which are over 10 years
• widespread use of exclusivity terms.

Announcing the conclusions John Vickers, OFT Chairman, said:

'Our study has concluded that there are serious questions regarding competition in the supply of store card services to retailers and in the supply of store card credit to consumers. The Competition Commission will now investigate further and can then decide on any necessary remedies.'

The OFT will also run a consumer education campaign later in the year to raise awareness of store card issues such as interest rates, minimum payments and signing up to agreements. Some key consumer advice is below.

CONSUMER ADVICE

• Before signing up for a store card, consider your options – do you have alternative forms of credit available and would they better suit your needs?
• Check what the APR on the store card is – especially if you don't plan to pay off your balance every month; a high APR could outweigh the benefits of an initial discount.
• Don't sign anything until you've considered it carefully – take the form away with you to consider if you're uncertain.

Separately the OFT has made a number of recommendations to Government in the context of the Consumer Credit Act reform and to the credit industry to improve transparency including the following:

• clear and precise pre-contractual information should be given in the form of a summary box, prominently displayed, before any agreement is signed
• a summary box should also appear on the agreement itself and a scaled down version should appear on monthly statements
• the summary box used for monthly statements should make clear the implications of making only minimum payments
• agreements and marketing literature should include a statutory wealth warning to highlight the implications of making only minimum payments or missing payments
• a separate signature should be required for payment protection insurance and it should be cancellable at any time.

FACTS AND FIGURES

• 30 per cent of adults hold a store card, 51 per of adults hold a credit card and 58 per cent hold debit cards.
• Store cards account for around 2.5 per cent of total consumer credit lending, compared with over 60 per cent through credit cards.
• New store card lending was about £4.8 billion in 2002 out of a total consumer credit lending of about £194 billion.
• There are 22.85 million active store cards and 18.6 million accounts.
• 10 per cent of store card holders do not have a credit card.
• 62 per cent of store card holders pay off their balance in full every month.

NOTES

1. The store cards study was launched in September 2003 (see press release 120/03).

2.  As part of the study the OFT commissioned a mystery shopping exercise which comprised 763 mystery shopping visits across Great Britain covering all the main retailers who operate a store card scheme. More information on the mystery shopping exercise and results is available in Annexe B of the report.

3. The OFT also commissioned a consumer survey of a representative sample of 550 consumers. More information on the consumer survey and results can be found in Annexe C of the report.

4. The study was carried out under Section 5 of the Enterprise Act 2002, which came into force on 20 June 2003, which gives the OFT powers to investigate whether markets are working well for consumers. Where the OFT finds there are features of a market that prevent, restrict or distort competition in connection with the supply of services, it can refer these services to the Competition Commission for further investigation. Where the CC identifies one or more adverse effects on competition it may impose remedies to mitigate or prevent the adverse effects on competition or any detrimental effect on customers caused by these adverse effects.

5. See terms of reference to the CC.

6. Separate from the study into store cards, the OFT also commissioned research into consumers' information needs in choosing a credit card. This was published on 16 March 2004 (see press release 45/04)

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