Americans unleash a credit card war

RBS Advanta has parked its tanks in Britain.
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The Independent Online
"WHAT have I done so far today? I've started a credit card war, that's what." John Mullady's Valentine's Day greeting was not one to leave UK banks in the most amorous of moods last Wednesday.

Over the next month, the former Vietnam tank commander, now the managing director of RBS Advanta, will fire off 2 million mailshots in an attempt to poach customers of Barclaycard, TSB Trustcard and Access in the biggest foreign foray into a vastly profitable UK market.

RBS Advanta's 15.9 per cent rate undercuts top rivals by up to 7.5 percentage points, and storecards by even more. "Millions of people are paying too much interest on their credit cards," the literature screams. What is more, the card is directly linked to base rates and comes free, without the pounds 10 to pounds 12 annual fees that turn off many.

Pennsylvania-based Advanta is the11th largest card issuer in the US, with 7.2 million card holders and $10bn of advances from its brief 10- year existence.

UK consumers spent pounds 41bn and borrowed pounds 11.7bn on credit cards in 1995, and RBS Advanta is aiming for 10 per cent of that action over the next five years.

It is not the first US interloper, nor will it be the last. Chase Manhattan Bank led the way in 1987 with a low-cost card, followed by General Motors and MBNA in 1993. PeoplesBank and GE Capital, part of the giant General Electric, are soon expected to follow suit.

However, this is the first time that an invader has linked with a big UK bank - the Royal Bank of Scotland - to break the inertia that still sees Barclay- card dominate, with 9 million of the UK's 28 million credit cards 30 years after it launched the first card here.

"So far the attack has not been by instantly recognisable names, so it'll be interesting to see what happens now with an established bank coming in like this," says Peter Toeman, banking analyst at broker Hoare Govett.

To date, Chase has sold out to Alliance & Leicester; GM has peaked at around 500,000 cards; while Save & Prosper, the UK low-cost pioneer, has only 200,000 after nine years.

But RBS's Direct Line telephone-based operation has shaken up UK insurance. And with a pedigree like that, plus a pounds 10m launch budget, "RBS Advanta is here to stay," Mr Mullady says.

The passage so far has hardly been smooth. The firm has been test marketing since October, to 200,000 people in all. The launch was planned for Burns Night in January, but in November it was hit by a writ from Barclaycard, alleging trade mark infringement over use of its name in a table of card charges.

A High Court judge threw the case out at the end of January, too late for Burns, so Valentine's Day became the new launch date.

Credit cards have been huge profit earners for the banks and Barclaycard is the most aggressive of all. It spends pounds 10m a year on card promotion alone, fronted by Rowan Atkinson's bumbling 007 antics on TV.

Analysts find it tough to fathom how much the card companies make. Barclays used to report Barclaycard profits in the 1980s but no longer does so after the controversy it generated.

Most others followed suit, save Lloyds TSB, which declared operating income of pounds 182m on Friday from card services - an operation with one-third of Barclaycard's turnover.

To make a conservative estimate of Barclays' profits, if just one-quarter of the pounds 13.7bn of purchases on Barclaycard in 1994 were not paid off immediately, that would mean pounds 3.4bn gathering interest at 16 per cent above bank base rates, giving pounds 544m of net interest income.

Barclays says only half its costs are interest - pounds 204m at a 6 per cent base rate - so deducting that leaves profits of around pounds 336m. Adding the one per cent of purchases received on average as fees from shops, pounds 137m, gives a profit of more than pounds 470m.

Barclaycard has now given up its legal battle with RBS Advanta, but came back fighting last week, pointing to RBS's "hidden charges" - pounds 10 for late payment or exceeding credit limits. It also highlighted its own free insurance and international rescue benefits, as splashed on TV. "We think customers pay a competitive price and receive a range of benefits they appreciate," a Barclays spokeswoman said.

Mr Mullady admits his card may not be for everyone. RBS Advanta is aiming for borrowers, most of whom pay on time and hardly ever need the extras.

The card is not the cheapest: RBS's existing Mastercard charges only 14.5 per cent and Save & Prosper 14.6 per cent. The latter has an annual fee, however, while RBS has no initial interest-free period: in market testing, both were found to be strong turn-offs. "Most banks don't know what their customers want. All those other services bump up the cost of the card. The good customer also pays for the bad," Mr Mullady says.

"We don't want to get into a mud-slinging contest with Barclaycard, as it doesn't do any good. They should talk to their customers, as we have."

The American experience also offers a warning: 10 years ago the top 10 issuers were all mainstream banks. Now, however, charges are lower and five of the league leaders are non-banks or card specialists like Advanta.

In the meantime, the game of hardball goes on. Mr Mullady is threatening Barclaycard with libel action over its "hidden charge" claims: the pounds 10 penalties are displayed prominently in its terms and conditions, he says.