Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 220 - 239)



  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 Pensions—many 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 three.

  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.

Mr Plaskitt

  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 base rate.
  (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 card growth.
  (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 control—although that is a growing issue—and your credit risk is reasonable—generally reasonable would be four to five per cent—if 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 the Premiership.

  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 that?
  (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 bill?
  (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 intercharge fees?
  (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 providers—not in the UK I might add—were 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 disappeared—I do not know the number but you said it was £700 million—only 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 Code says?
  (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.

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