Examination of Witnesses (Questions 220
TUESDAY 14 MAY 2002
220. Can the four of you send us details of
how you actually in an institutional way follow up on converting
them to full accounts?
(Mr Ellwood) In terms of marketing, there is going
to be a huge mailing campaign. We are working with the Department
of Work and Pensionsmany banks are also doing that. That
will notify 16 million benefit recipients about these changes
and it will also publicise the basic bank account. That will be
another major form of communication in this potential market.
221. May I ask Mr Barrett about his branches
in Scotland and business customers? It was brought to my attention
that Barclays had sent what business representatives described
as a curt letter asking medium-sized businesses with turnovers
between £500,000 and £10 million to take their business
elsewhere because it was not an area which was profitable for
Barclays and they wished to concentrate on the larger business
sector. Was that not an own-goal?
(Mr Barrett) We have a very, very small niche business
in this market in Scotland. We only have four branches there.
Coincident with the retirement of a relationship manager, he wrote
out to his clients. I would have wished we had written the letter
differently. In effect we have a certain business model in our
relationship coverage style that we are putting in across the
country. In this particular case, we did not have enough critical
mass apparently. We have 540,000 business customers and this was
222. Although customers may be small, there
is a better way of treating business customers.
(Mr Barrett) There was an offer to help them for three
months to find alternative banking arrangements. It is that we
cannot be all things to all people everywhere and we do have pretty
extensive business, in fact it is bothering the Competition Commission.
223. It is nice to be nice to customers.
(Mr Barrett) Of course it is. If they were handled
curtly, then I will deal with that.
224. Can we come to credit cards? The four of
you have a 61 per cent share of the market on credit cards. Between
you, you have 28 million credit cards out there in the UK. According
to our information you collect about £3 billion in interest
charges. Cruickshank describes that situation as you enjoying
market power. Let us look and see whether that is true and whether
you are enjoying market power. Base rates of four per cent. The
Barclaycard Classic has an interest rate of 14.9 per cent, the
NatWest basic credit card 17.4 per cent, Lloyds Asset 17.9 per
cent, HSBC standard credit card 18.9 per cent. Why is it that
your interest rates on your credit cards are about four or five
times base rate? What justifies that?
(Mr Goodwin) If you look at the United States you
will see a similar if not higher relationship. The interest rate
on credit cards is essentially to address two issues. One is the
cost of the funds, that is the amount lent; the other is the credit
cost, the bad debt cost. Across the personal lending spectrum,
credit card lending would carry with it the highest risk. It is
revolving unsecured credit. It is not typically a medium people
use to borrow long-term. It is for shorter term borrowing. It
makes it a very risky type of lending. If you look across the
30 or 40 providers in the UK, you will find, with one or two exceptions
associated with people looking to enter the market, the rates
are all much of a muchness.
225. You are saying credit card borrowing is
a risky business for you.
(Mr Goodwin) Yes.
226. So why do you pump out so much literature
which goes through people's letterboxes demanding that they take
out even more of these things? Why are you asking for more when
you say it is a risky business.
(Mr Goodwin) It is not to say it is an unacceptable
risk. It is a risk that comes at a price and that is why it is
priced at the level it is priced at. A large proportion of the
interest rate is attached to the credit cost.
227. I have had three this week. It is terrible.
(Mr Barrett) Competition is alive and well.
228. It is a risky business but you really want
it; competition for yet more risky business.
(Mr Ellwood) The competition really is working if
you look at an organisation like MBNA who now have about seven
per cent of the credit card market from a standing start just
a few years ago of absolutely zero. It is really beginning to
move and people are now moving supplier quite significantly. During
the course of last year we attracted about 200,000 plus card customers
from other suppliers and lost about the same to different suppliers.
It really is beginning to move to a much greater extent than has
ever been the case before.
229. Does anybody else want to comment on your
four or five multiple on base rate?
(Mr Goodwin) It is about four per cent multiple on
(Mr Dalton) The credit card market, as witnessed by
the amount of literature you are getting, is a pretty competitive
place; 30 or 40 issuers. The Consumer Association told the Committee
when it appeared that 97 per cent of the people found it easy
to switch and that they thought switching was pretty easy. If
you look at that and say the interest rate is 19 per cent, you
have to ask why. It turns out that for consumers the interest
rate is something like seventh or eighth in terms of what is important
in a card. What is important is the availability of the credit.
What is important is no fee on the card. What is important is
good service when you lose your card and no hidden charges. The
rate itself is not the end of it. If you look at some of the people
who are charging very low rates on the surface, they also have
a lot of fees, things like £20 for this, £20 for that,
£15 for this, £15 for that. Like everything else, when
you look at a product, you have to add it all up and see which
is best. The rate itself does not necessarily mean the best deal.
(Mr Goodwin) The other issue is that the majority
of customers do not borrow on their credit card.
230. But at any given time there is about £30
billion of outstanding debt which you are earning interest on.
Between you, you are picking up about £3 billion a year interest
on credit cards.
(Mr Ellwood) The level of competition has created
a lot of innovation, partly for the reason you mentioned about
interest rates. There are products in the marketplace now with
no interest-free period for those people who simply want to borrow
on a credit card. The rate of interest on one of those is certainly
less than 12 per cent. Competition in the market has created that
level of innovation which is good for the consumer.
231. Mr Barrett, you wanted to come in on credit
(Mr Barrett) The point has been made. It is a highly
contested market. It is a very good business, if you do it very,
very well. It is very punishing, if you do not. There have been
dramatic cases in the last 12 months with banks flat on their
back in North America because they got the credit wrong on their
credit card business. It is high volume low margin business. If
you look at the profitability per card in a card base such as
ours which is about eight or nine million cardholders, the profitability
for cards is quite low. If you get the unit cost down and your
productivity up, your fraud under controlalthough that
is a growing issueand your credit risk is reasonablegenerally
reasonable would be four to five per centif you are doing
it well you lose four to five per cent on loan losses, it costs
you about five per cent to fund them, that is ten per cent off
the top, then you have the operating expense of running the machinery
to do the authorisations and payments and collections. It still
can be a very profitable business if run at scale and run well.
Therefore, absolutely, I am aggressive in trying to get more clients.
I had 760,000 new ones last year, helped by our sponsorship of
232. I assume it must be a very profitable business
otherwise you would not all be making such an effort to get even
more of it.
(Mr Barrett) Correct.
233. Just exploring some of the market power
comments which Cruickshank makes, let me look at the intercharge
system. You charge retailers 1.1 per cent on average for credit
card use. Cruickshank works out that you are earning intercharge
fees from the retailers between you of £700 million a year.
What cost is that covering? Are you not making some profit on
(Mr Goodwin) It goes towards the interest-free credit
which people get; the interest-free period on their card.
234. Why does the retailer pick up some of that
(Mr Goodwin) The interchange helps the retailer to
sell. I suspect that without credit cards the retailer would sell
considerably less product than he would sell with credit cards.
It also protects the retailer in terms of getting the payment.
The retailer does not take any credit risk on the payment, it
is the card scheme which does that. From the customer's point
of view of the interchange, the customer also picks up some of
the Sale of Goods Act responsibilities and if the goods turn out
not to be of merchantable quality it is the credit card company
which puts the customer right. A lot goes on in and around the
interchange. The single biggest thing would be the interest-free
period which encourages many people to buy. That is the rationale
for the retailer picking that up.
235. Does anyone else what to comment on your
(Mr Barrett) The credit card business of card issuance
and merchant acquiring business is really a partnership between
the retailing community and the banking community to provide spending
power in a safe and secure way. Their element of the cycle covers
the expenses we have in signing up merchants and merchant authorisation
and in collection and distribution of the payments for ourselves
and for other banks. That is where the cost comes from.
236. Are you satisfied that the encouragement
to consume, which you say is the justification for it, more than
offsets the cost to the retailer? The British Retail Consortium
tells us that retailers can pay up to 4.5 per cent of their turnover
paying you for the use of credit cards.
(Mr Barrett) I would not know. Maybe if they have
an Amex card or something, but certainly not with Barclaycard
they would not. If you could give me their name, I will lobby
them to shift. Really retailers are business people. Would you
prefer something for nothing? Of course you would. It does not
surprise me that retailers would rather have one per cent off
the cost of their credit card purchases but at the moment people
sign up for that. It used to be much higher. It has dropped like
a stone. The average used to be about 2.5 per cent and certain
card providersnot in the UK I might addwere charging
as high as four per cent to retailers. What happened there was
that the retailers refused to accept their cards because the merchant
discount was too high. Now that it has fallen to about one per
cent, certainly most of our retailers accept it. They would rather
have it for nothing, but so would we all.
(Mr Dalton) If interchange disappearedI do
not know the number but you said it was £700 milliononly
one of three groups could take the £700 million hit: it will
either be the bank staff, in terms of reductions in people or
costs, or it would be the shareholders including those with their
shares in pension funds, or the customers.
(Mr Ellwood) Many merchants require this now and it
is perfectly true that over the last few years competition has
actually brought that merchant service charge down. It is now
more competitive than it has been before.
237. I want to move on to transparency. Would
the customers actually understand what they are signing up to
when they take out one of your cards? One of the three I received
this week was Barclaycard. The front page of the offer is absolutely
plastered with 2.9 per cent APR. This is what is supposed to induce
me into the card. I have to go into a lot of very small print
on the back, very, very small print, to find out that a little
time after I take out the card I shall actually be on 16.9 per
cent APR. The Banking Code, as I understand it, has encouraged
you all to print your APRs on statements with a view to helping
the customers understand where they are and what they are incurring
in terms of the cost. Is that right? Is that what the Banking
(Mr Ellwood) Correct; yes.
238. The problem with that is that even when
you have your APR printed, the customer still does not know what
costs they are going to incur. Some work was done on this in November
of last year and the examples we have before us take credit cards
which each of you were then issuing all at the same APR, 18.9
per cent in this case. They ran through a sequence of purchasing
and repaying and they purchased exactly the same amount on each
of the cards, they repaid exactly the same amount, all at the
same time, on cards which each of you operate, all at 18.9 per
cent APR. In the case of the HSBC card the customer was paying
£5.50 interest. In the case of Barclaycard it was £5.79
interest. In the case of an RBS platinum card it was £7.13
interest. In the case of a Lloyds TSB Asset Advance card £7.48
interest. Same APR, same amount of purchase, same time of repayment,
a 36 per cent spread in the interest. How do you account for that?
(Mr Goodwin) There are several product features other
than APR. On a credit card. one of the variables is the length
of the interest-free period and that differs from product to product.
The length of the period over which you would be paying interest
could be different. I have not seen the detail of the analysis
you have but that is one of the key variables. To alight on APR
as the single means of comparing products is a bit like comparing
the purchase of a new car on fuel consumption. It is a relevant
statistic and it is a relevant piece of information, but it is
only one of the relevant pieces of information. Credit cards have
a number of different pieces of functionality. Some cards offer
air miles, for example, as inducements. In comparing them it is
not sufficient to look at the APR.
239. But you are all promoting your credit cards
and the one thing you use to promote them is the APR.
(Mr Goodwin) No, that is not true.