Barclaycard forced to cut rates as market share falls

BARCLAYCARD, the UK's biggest credit-card provider, is cutting its main interest rate to under 20 per cent for the first time in a move that reflects the increasing damage inflicted on its business by low-cost competitors.

The wholly-owned subsidiary of the Barclays group said it would cut its headline annual rate of interest to 19.9 per cent, a 3 per cent drop from its level six months ago.

The company is also launching a package of added benefits, including savings of up to 30 per cent on home phone calls, and a free extended warranty for household appliances bought with its card. It is also launching a Platinum card offering enhanced benefits for high earning customers.

The move drew immediate attacks from its competitors, which have continually savaged Barclaycard for making excessive profits and charging an annual interest rate of more than 22 per cent.

Low-cost competitors, many of them new entrants to the market from the United States, have succeeded in capturing an increasing share of the booming market by offering interest rates of a fraction of Barclaycard's.Competitors such as Capital One, a US credit-card issuer, are now offering rates as low as 11.9 per cent. Rivals such as RBS Advanta, a joint venture between Royal Bank of Scotland and the credit-card issuer Advanta, are also luring customers away. They offer to take on Barclaycard debts at a starting rate of just 6.9 per cent.

The move represents a dramatic reversal of strategy for Barclaycard. Until recently its managers have resisted cutting rates, arguing that customers would be attracted by added extras such as warranties.

In the City the strategy is widely perceived to have failed. Barclaycard's market share, which stood at 32 per cent two years ago, has now shrunk to around 28 per cent.

The company has still grown its business because the market for cards is expanding by 15 to 20 per cent a year. But last September it announced it was slashing 1,100 jobs, out of a staff of 5,000, because of new technology and the need to cut costs.

John Eaton, managing director of Barclaycard, said: "I would accept the point that people have challenged us on value. I don't generally believe businesses should build their strategies around market share alone, but we did of course take that into account. We are not going to be seen in the same light as the other traditional banks." He said the bank was also cutting out hidden charges such as penalties for late payment and exceeding card credit limits.

The City yesterday said the move had been forced on Barclaycard by the competition. Inigo Edsberg, a senior analyst at WestLB Panmure, said: "This is purely a defensive move. And ultimately the profitability of Barclaycard will fall, as it should do because it is far too profitable."

Competitors were quick to strike back. Mark Austin, marketing manager of RBS Advanta, said: "While we welcome Barclaycard's attempt to keep pace with other issuers by chipping away at their rate, consumers shouldn't have to wait. Millions can still reduce their bill by around two thirds, simply by switching cards."