Credit card companies find game is changing: Roger Trapp reports on how the big operators are hoping to trump their rivals

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The Independent Online
THERE have been many battles in the comparatively short life of the charge and credit card business but few as fierce, brutal or expensive as the one for the US government's travel account.

After years of trying, American Express has wrested control of the world's largest commercial charge card account from the rival Diners Club International - but only by paying the US administration an dollars 18m sweetener.

The deal - which will involve the replacement of cards for 900,000 federal employees in the US and around the world from the end of next month - is clearly one of a kind. But it is also a sign of how vicious competition has become in the world's plastic money business.

On this side of the Atlantic, Barclaycard, for instance, is busy trying to encourage its customers to give up carrying other credit cards by offering to take over their existing balances and pay them up to pounds 50. It is also accusing Save & Prosper of launching cards at low interest rates and then planning to raise them once they have become established in the market.

Meanwhile, everybody is braced for the arrival of new players, chiefly from the US. MBNA, a banking group little known in the UK, is already setting up an operation employing 800 people in Chester.

It is expected to move into the market for affinity cards - which enable groups ranging from small clubs to charities to benefit every time a holder uses their card - as it has already built up a reputation in this field in the US.

Similarly, the trend towards 'co-branding', already popular in the US, is expected to grow. Deals like the one in which Diners Club has linked up with British Airways in a move calculated to appeal to its core market of business travellers seem set to flourish.

Perhaps more significant, though, are moves by companies that are neither banks nor established credit or charge card operators.

Last year General Motors teamed up with MasterCard to offer a card that enables users to qualify for a dollars 500 discount on a GM car if they charge dollars 10,000 in a single transaction. With 7 million cards in circulation already, it is understood to be eyeing other markets, notably Britain. Few doubt that Ford will be far behind. Utility companies, such as AT&T and General Electric, are also expanding in this area.

It is a lot of activity in a market that was supposed to be depressed as a result of the recession. Indeed, many commentators have held the sector at least partly responsible for the length of the downturn because of the heavy debt burden it helped to create for many people.

Not surprisingly, people such as Barclaycard's managing director, Bob Potts, play this down, suggesting that large mortgages combined with high interest rates have had a bigger role. And they insist that they are seeing a return towards the spending levels of the late 1980s.

The difference this time, though, is that the market is more fragmented. Until a Monopolies and Mergers Commission report in the late 1980s identified a price cartel, there was in effect only one competitor to Barclaycard - Access. Since then, a number of other players have entered the market, offering a wide range of interest rates.

Even so, the 8.8 million holders of Barclaycard's Visa and MasterCard cards last year spent pounds 11.74bn, 9 per cent more than the year before and pounds 2.5bn more than the 9 million holders did in 1989. The much smaller Diners Club, which has only 300,000 holders in the UK out of a worldwide total of 7 million, saw billings jump 20 per cent to pounds 1.5bn.

'The credit card market will continue to grow, but slower than the debit card market,' Mr Potts says. This is largely because, while the market for Switch, Connect and the rest is relatively untapped, most credit card growth is at the expense of other players.

Part of the reason for this is the decision by most of the banks in recent years to join the charge card operators in imposing annual fees. As John Petersen, UK head of public affairs for Amex - which, like Diners, has always charged for the right to hold a card - points out, this led people with more than one card to review the contents of their wallets.

'There may be more cards in issue, but the number per individual may have dropped,' he says.

But just as members of the public are reviewing their card holding, so are the operators reviewing their policies on dispensing them.

In particular, Amex, which offers the Optima credit card to holders of any of its charge cards, admits that it is shifting from the more egalitarian policy developed over the past decade.

While dramatic cuts in the charges made to merchants are making the charge card more widely available than before - in garden centres and off-licences rather than just high-class hotels and ritzy shops - Amex is tightening up on card holders.

About 6 per cent of personal card holders have been 'involuntarily cancelled' in the past year, Mr Petersen says. The result is 'fewer but much better' card holders, suggesting something of a return to the old 'by recommendation only' customer.

Furthermore, Amex and its rivals in the credit and charge card markets are making strenuous efforts to retain these valued users through loyalty bonuses - dividend points systems that can be used to obtain ever better goods and services and constantly improving customer service.

But to do this, they are having to make themselves more efficient, as Barclaycard's Mr Potts admits. In other words, there are likely to be more job cuts such as the 400 announced by his company at the end of September.

It might seem odd that a business that in recent years has built a reputation for swingeing charges on outlets and customers alike is suddenly extolling the virtues of looking after its cardholders.

But a welter of market research surveys and claims that criticisms will be dealt with otherwise suggest it is serious.

Nowhere is this more true than in the battle for the one sector that is generally agreed to be growing - the corporate card.

In these straitened times, companies are proving particularly susceptible to the operators' sales pitch, extolling the virtues of being able to manage and accurately track their staff's expenditure on travel and entertainment. While this reduces the employee's opportunities for fiddling or padding expenses, it does avoid the need for him or her to 'subsidise' the employer by bills before being reimbursed.

Amex says the corporate side is its fastest-growing sector in a business that last year saw 34 million card holders throughout the world spend more than dollars 117m. It has just published a report showing that British companies recognised they had to travel to win business but had to control the cost of it.

Despite being the organisation that started the business in 1950, Diners has until lately had a low profile and is making a particular effort to develop a market it sees as its own.

Curt Ludwigson, president of Diners Club Europe, believes such measures as extending the qualifying period for the dividend system from one year to three, lengthening the payment period from 30 to 45 days and introducing toll-free telephone numbers will be what he calls a 'differentiator'.

But in today's highly competitive market one can never tell. He suggests, for instance, that the dollars 20 a card 'conversion fee' that Amex is giving the US government to cover its costs in converting from Diners could prove uneconomic. It might, he says, encourage other organisations to seek similar deals, but insists that his own company's inducements are sustainable.

'Of course, there's a cost to us,' he says. 'But we took a sharp pencil to it. We're in the service business. You have to deliver on one side to expect to gain on the other.'

The inevitable conclusion, though, is that all this competition will sooner or later drive one or more cards out of business. The good times for the customer are unlikely to last forever.

(Photograph omitted)

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