Select Committee on Treasury First Report


4 Store Cards

Background

110. Following concern expressed by consumer organisations, and further research, we decided that our inquiry—initially confined to credit cards—should be widened to examine the transparency of store card charges. We took evidence from the leading provider of store cards (GE Consumer Finance), some individual stores involved and the Finance and Leasing Association (FLA, the relevant trade association).

111. Store cards are payment cards issued by certain chains of shops or department stores. Unlike credit cards, store cards can typically only be used in the store or chain of stores by which they have been issued, although some store cards allow customers to obtain cash advances. The FLA told us that there are around 21.6 million store cards in issue in the UK and around £4.8 billion was spent on them in 2002.[217] Mintel estimate that around 14 million people (around 30% of the adult population) in the UK own at least one store card.[218] Most store cards typically charge far higher rates of interest than do credit cards. The average interest rate on a store card is in the region of 27% APR, with many charging between 28% APR and 32.5% APR. This compares with an average credit card interest rate from the major banks of 15% APR. Many store card issuers partner external finance companies to provide their card. GE Consumer Finance is the largest of these, with around 50% of the store card market; other major players include Creation Financial Services, IKANO Financial Services and HFC Bank (part of HSBC).

Transparency

112. The FLA told us that "our members provide transparent and open consumer information in respect of APRs".[219] GE told us that APRs "are stated in bold on the front of each application form and included in the second copy of Terms and Conditions which accompany the welcome pack and the card".[220]

113. We examined marketing material for several store cards, and also the provisions for informing the customer of the interest rate. On the GE Consumer Finance application form, the APR was shown in bold text 2mm high towards the bottom of the application form. The application form was typically filled in by the store member of staff with the customer only being asked to sign the form. The customer received the store card through the post, attached to a 'card-carrier' together with a glossy leaflet and a booklet of terms and conditions in small print. The APR was not stated on the letter to which the card was attached, with the glossy booklet stating that "interest would be charged at the current rate". The customer would need to delve into the depths of the small print booklet to discover the interest rate they were being charged. A leaflet was available in House of Fraser advertising details of the store card, but this did not mention the interest rate applicable. Mr Seamus Smith, for GE, defended the leaflet, telling us that it "classed as a simple form of credit advertisement" and GE were "not permitted under the [Consumer Credit] Act currently to put the APR details on that"; the in-store leaflet from Arcadia, on the other hand, included details of the APR; Mr Smith described this as "an intermediate form of credit advertisement and it is permissible to put the APR on".[221]

114. We asked the DTI how stores were able to get away with only issuing a leaflet to advertise their store card without showing the APR. Mr Rees, for the DTI, told us that the "rules which govern advertising at the moment were pretty poor" and that part of the forthcoming White Paper would aim to "simplify" the regulations and make them "easier to enforce".[222] We also examined a statement sent by one of the stores in the Arcadia group. This did not make any reference anywhere to the interest rate that would be charged on the debt outstanding or the amount of interest that would be charged if the customer only made the minimum repayment. To date there has been in some cases a cosy arrangement between the store card providers and the stores involved to prevent customers from gaining the full facts about their cards. The fact that this has been legal serves only to underline the urgency of reforming existing consumer credit legislation.

115. At the hearing on 14 July, we asked GE if they would consider introducing a Summary Box into the marketing material. Mr Smith subsequently wrote to us saying that GE were "fully supportive of the adoption of a [Summary] box to improve clarity for customers".[223] The proposals were discussed by the FLA and they wrote to us in September outlining proposals for a Summary Box that would be included "in any advertising or promotional material advertising store cards"; FLA members agreed to comply "as soon as possible and no later than 31 March 2004".[224] Mr Brad Cooper, the CEO for GE Consumer Finance UK, wrote to us in September saying that the Summary Box was "already in place in some of our retailers and will be rolled out to the others commencing November 2003".[225] In a further letter in November he confirmed that GE had reinforced their staff training programme, placed the Summary Box in point of sale literature in every store and introduced a 'no-quibble' guarantee under which customers could cancel their agreement at any time within 60 days at no cost.[226] While store cards may offer some benefits to consumers in terms of discounts, customers need to be aware of the extremely high interest rates charged. Some progress has now been made in improving transparency, but further work remains to be done, in particular concerning the size of the print giving the APR (which should be minimum 18pt in all literature) and the provision of further information on monthly statements, especially the interest rate that applies.

Interest rates

116. We sought to examine why store cards typically charge much higher interest rates than credit cards—up to eight times the Bank of England base rate. GE Consumer Finance told us that "funding costs"—the costs to GE of financing the money lent on to customers—were only 15% of their total costs, with marketing and other operating costs, bad debt provisions and payments to the retailer accounting for the other 85%. They also explained that "the amount of debt a customer has on one of our cards is significantly less than they have on a credit card";[227] the typical balance of a customer who paid interest was £328.[228]

117. GE Consumer Finance charge interest rates between 28% APR and 32.5% APR. Store cards marketed by Creation Financial Services charge 30.7% APR. Some store cards do have lower rates, with the Marks and Spencer card having a rate of 18.9% APR and John Lewis a rate of 13.0% APR. When asked when they last reduced the rate on their store card, GE told us that this was in April 1999. Since then, the base rate has reduced overall by 1.5 percentage points and the average interest rate on credit cards has fallen by 5 percentage points (from 20% APR to 15% APR), but the store card rate not at all. The difference between the rate on which a typical customer could borrow using a store card is now significantly higher than that on a credit card. GE told us that "they serve a very competitive market" and that "the competition sits in the consumer's wallet" implying that consumers decide whether to borrow money on the store card or on their credit card.[229]

118. Available information suggests that GE might be making almost twice the level of profit as a proportion of transactions compared with the market-leading credit card supplier. This could be for one of a variety of possible reasons:

  • GE are an extremely efficient and well-run company;
  • the store card market as a whole is significantly less competitive than the credit card market;
  • GE is able to exploit consumers' lack of understanding of the real price of its products.

Only when sufficient transparency exists so that customers are properly aware of the interest rates charged will it be clear that GE makes its profits from being an efficient and well run firm. Mr Cooper wrote to us saying that GE's store card products represented "good value for our customers when the whole program, cost and benefit, is taken into account. The customer weighs the substantial benefit (discounts, invitations etc.) with the cost (typically 2.2% monthly interest) to determine if they use our products and how quickly they pay it off."[230] We note that 2.2% monthly interest is equivalent to around 29% APR.

119. GE Consumer Finance has around 45% to 50% of the store card market and we were concerned that its large presence in the market may have restricted competition. When asked what proportion of a market a firm would have to have before the OFT had concerns about a dominant position, Mr Vickers told us that this involved "defining the relevant market, looking at market shares, but there is not a market share that determines the question of dominance".[231] Defining the relevant market involves considering which products are the "competing alternatives". For example, the OFT would need to come to a judgement as to whether the store card market was separate from the credit card market. Following our hearing on 9 September, the OFT formally announced that it was launching a preliminary examination of the store card market.[232]

120. Store cards charge much higher rates of interest even than credit cards. Although in part this may flow from a pricing model which places all the costs of the operation on the minority who pay interest, there is also evidence to suggest that competition is not working properly. For competition to function effectively, consumers need to have reliable and clear information about both the benefits and costs of the product. We therefore strongly welcome the OFT's decision to undertake a preliminary examination of the store card market, and will follow developments with a close interest.

Retailers' responsibility

121. We took evidence from the individual retailers to ascertain what responsibility they accepted for the price of their store cards, their operation and how they deal with their customers who may get into debt. Mr Wayment told us that House of Fraser's policy on this was managed "through our specialist provider, GE".[233] Arcadia indicated that they did not provide any information to their typically younger consumers concerning the consequences of getting into debt, with Mr Budge telling us that they "work with GE on it" but "pass over matters in terms of financial services".[234] Following the meeting Arcadia wrote to us to say that "through GE we do take cases of financial difficulty very seriously…we monitor their policies and procedures…to ensure they operate appropriately".[235]

122. We also questioned retailers as to what input they have into the running of the store card operation and how much control they exercise over the interest rates charged. We thought that as retailers they would ensure that the merchandise and services supplied in their stores was of sufficient quality and represented a good deal for their customers. Arcadia told us that "the quality of the store card programme hinges on the benefits we are able to offer to our customers. Arcadia works with GE to ensure quality in the same way as it would deal with any other major supplier"; they also told us that they "monitor the level of interest rates in the context of the overall store card product on a regular basis" but that "GE have ultimate control over interest rates charged".[236] House of Fraser told us that "GE earns money from the charges levied upon the customer for the various financial services it provides, including all interest charges. House of Fraser benefits from the increased trade from those loyal customers due to affinity with the brand". They also told us that "House of Fraser does not control the APR".[237]

123. We find it astonishing that stores should allow a product—i.e. store cards— to be supplied in their shops where they claim they have no control over the price (in this case, the interest rate). Retailers generally claim that the goods they supply are of high quality, representing good value for their customers. In not applying these principles to financial services offered in their name they are being inconsistent and letting their customers down.

Point of sale practices

124. We sent researchers to stores to examine point of sale practices. At stores operated by both Arcadia and House of Fraser staff refused to allow a copy of the application form to be taken away, saying that this was not standard practice. We questioned representatives from House of Fraser and Arcadia about this. Mr Wayment, for House of Fraser, and Mr Budge, for Arcadia, both claimed that the reason customers were unable to take the form away from the store was to do with the Consumer Credit Act.[238] However, later on at the same hearing Mr Smith, for GE, confirmed that there was nothing in law that prevented GE from changing its practice to allow a customer to take away the application form.[239] Mr Rees of the DTI also confirmed that "the law is quite clear: [consumers] can take away the material".[240]

125. GE wrote to us following the session saying that they currently had "a comprehensive training programme in place to ensure that store staff are properly trained in our point of sale processes and are fully briefed on the key features of our store cards". GE were also "updating their training processes to ensure that all store staff are fully aware of the applicable APR, and…ensuring that store staff will, if requested, allow customers to take copies of the application forms out of the stores".[241] It is extraordinary and indefensible that stores should have stated that it was against the provisions of the Consumer Credit Act to let customers take details of the terms and conditions of their store card out of the shops so that they were able to make an informed choice in a less pressurised environment. We welcome confirmation from GE and the stores involved that they will no longer seek to prevent customers exercising their legal right to take away copies of the application form.

Conversion of store cards to credit cards

126. The market for store cards has been static in recent years, despite the large overall growth in consumer credit. Marks & Spencer (one of the most popular store cards) has been in the process of transferring the majority of its customers to a credit card. As part of this process the APR has been reduced from 18.9% to 14.9%. GE Consumer Finance have also been writing to some holders of the Debenhams store card, offering to convert them to a credit card charging 16.9% APR, compared to the rate on the store card of 28% APR. These cards offer similar benefits to store cards, such as loyalty points and discounts but charge much lower rates of interest.

127. In respect of the Marks & Spencer transfer operation, the OFT intervened on the grounds that the operation involved issuing unsolicited credit. Marks and Spencer complied with the request by only activating the new cards when a phone call has been received from the customer. They told us that "they had always intended to send out the majority of cards" in this way and they "agreed with the OFT that they would require all of the cards to have this telephone activation sticker and would add a sentence to the letter accompanying the card confirming that it is the customer's choice to accept the new card".[242] We also had some concerns regarding responsible lending in the light of reports that credit limits were being increased by large amounts. One trading standards officer reported to us that his credit limit had been increased from £1,000 to £10,000, with the new figure representing a quarter of his gross income. Marks and Spencer told us that they used "credit scoring technology and experienced people to set prudent and appropriate credit limits for each individual customer". They also told us that "the average credit limit on our store card account is around £800. On the credit card the average limit will be £3,600. This figure compares to an industry average of £4,400".[243]

128. While lower prices for consumers can be a welcome result of the conversion of a store card to a credit card, it is essential that any transition process is carried out responsibly and transparently. The cards should not be activated without the explicit consent of the customer. The terms and conditions of the new product should be clearly stated. Consumers should not be offered increases in credit limits without the appropriate checks, and firms should limit the size of any increase initially with the consumer left to request any future increases.


217   Ev 188 Back

218   Mintel, Store Cards - UK - October 2002, see www.mintel.co.uk Back

219   Ev 190 (para 38) Back

220   Ev 201 (para 4.6) Back

221   Q 545 Back

222   Q 786 Back

223   Ev 205 Back

224   Ev 192 Back

225   Ev 206 Back

226   Ev 207 Back

227   Q 485 Back

228   Ev 201 (para 4.3) Back

229   Q 451, Q 537 Back

230   Ev 207 Back

231   Q 771 Back

232   OFT press release 120/03 OFT launches store cards study, 17 September 2003 Back

233   Q 565 Back

234   Q 558 Back

235   Ev 128 Back

236   Ev 129 Back

237   Ev 213 Back

238   Q 498, Q 519 Back

239   Q 526 Back

240   Q 784 Back

241   Ev 205 Back

242   Ev 229 Back

243   Ev 228 Back


 
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Prepared 18 December 2003