Profits Sparse for Europe's Card Issuers

LONDON -- Politicians, holding that stratospheric interest rates on credit cards are hurting the economy, are pushing for new laws to protect consumers. But bankers say profits on their plastic products are slim or non-existent.

Yes, you've probably heard this story before. The difference is that the battle is now taking place in many European countries.

Earnings Show Weakness

Increasing competition and consumer protection regulations are among factors that are putting a cap on profits in Europe's car industry, which has revenues of more than $5 billion a year, analysts say.

There is even a similar type of government pressure on the card business as in the United States, where card issuers have just escaped an attempt to introduce a cap on interest rates.

In Britain, regulators are proposing to force banks to keep unsolicited increases in card spending limits to the rate of inflation.

This follows lobbying by consumer protection agencies. They say the British card issuers have been forcing unwary customers into "debt traps" by encouraging overborrowing.

U.S. Rates Relatively Low

And compared with some European countries, U.S. banks' credit card rates seem downright cheap. With annual percentage rates on cards approaching 30%, Britain has among the highest rates anywhere. The prime rate in the United Kingdom is just 10.5%.

Despite these high rates, many European card issuers are beginning to struggle, observers said. "The card business is still a good one but I think only banks with a customer base of about five million card holders will be viable in the future," says Robin Stainer, an executive with the Andersen Financial Consulting Group.

Even big issuers say they have been hurting. Britain's Barclays PLC holds that, despite a current annual percentage rate of 27.8% on its Visa and MasterCard brands, much of the profitability has gone out of the business.

Fees Being Introduced

The bank, with eight million cards outstanding, says that it has been losing money on the business. Helped by the introduction of annual fees as well as tougher credit risk control, profits are now recovering, a Barclays spokeswoman says.

"Competition is rising while the basic cost of funding is about half of our [annual percentage rate] even though unsecured card lending has a higher degree of risk than other forms of loans," the spokewoman explained. "We've had rising overheads from fraud and bad debts, like the rest of the industry."

Cards are also seen as a money-losing prospect in France, where debit plastic rather than credit cards dominate the market. One reason is that French retailers got together in 1990 and successfully sued Cartes Bancaire, an association of bank card issuers, to force fees down.

Mr. Stainer predicts that as Europe launches its much-vaunted single market in financial services in 1993, many small banks will effectively have to leave the card business.

Peter Hirsch, an analyst at Battelle Europe, a leading think tank, also contends that Europe's card markets, while slated to grow explosively in coming years, face formidable hurdles.

Increasing competition in European financial services will lead to an expansion in the number of card issuers and card programs of all types, Mr. Hirsch says.

"This will in turn lead to lower prices and profitability and far greater product and market development."

Large Increase Foreseen

Battelle research indicates some 200 million payment cards are in circulation in Europe, including 36 million bank-issued credit cards and 34 million retailer-issued cards.

These are expected to increase by 60%, to about 110 million, by 1995 as they are widely adopted throughout Europe.

Mr. Hirsch predicts that as these cards grow, the main regulations governing their use will come from the European Commission, the Brussels-based executive body for the European Community, particularly as the single market approaches.

Indicating the way that banking will tend to become standardized, the community already is moving to have a common way of calculating annual percentage rates across the 12 member states to protect consumers. Eventually, the community wants to see a common card that can be used across Europe, regardless of who the bank issuer is.

Equal Opportunity

A borderless financial Europe also promises to undermine the cozy near-monopoly arrangements in various countries, giving way to the level playing field in the community's financial services in 12 months, analysts say.

A study prepared for the European Community's watchdog agencies by accounting firm Price Waterhouse shows there are major disparities in the costs of credit cards products across Europe.

The research compares prices of specific services in each nation with the average for the four countries where the costs are lowest. The assumption is that competitive forces in a single market will tend to push down prices towards the lowest prevailing level.

In Belgium, for example, the cost of credit cards is 79% above the average of the four lowest European Community states while in France it is 30% below. Italy ranks as the nation where a credit card holder is really gouged - at 89% above the average.

Credit cards have so far made little impact in Germany, where the banks have concentrated on charge cards where balances are paid in full every month. Foreign banks, including Citicorp's KKB Bank unit in Germany, are keen to introduce U.S.-style revolving credit cards there.

Patrick Frazier, a director of Davis International Banking Consultants, believes that German financial services, while due to be much more competitive, could prove Europe's most profitable for card issuers.

"Fees are still high, there's no extended credit and consequently little in the way of bad debts and banks earn good fees from retailers," he says.

But elsewhere in Europe, banks in more mature markets have been cutting the price of cards and other services to keep or expand market share, industry experts point out.

Skeptical About Companions

The industry's groans that profit just isn't being made any more don't wash with Jeremy Mitchell, a British consumer policy adviser.

He believes bank customers as well as regulators like the European Commission have to be on guard against the industry's drive to make more earnings from their basic consumer business.

After taking on massive exposure to LDC bad debts, many banks have badly over-reached themselves in corporate lending and are looking to retail banking to redress the balance, he said.

"It is a new phenomenon that retail banking, which used to be the low status, neglected arm of banking, is now the cornerstone of profitability," Mr. Mitchell said.

Comparison with Store Cards

Davis' Mr. Frazier believes that cards are a field "where a certain amount of regulatory oversight would be useful," pointing to the annual percentage rates of up to 40% charged on some retailer-issued credit cards in Britain.

At Battelle, Mr. Hirsch reckons the card issuers should start to get their act together to defend against likely stricter card and related regulations across the EC.

"The [European] card industry has to date not shown itself as well organized or coherent in its lobbying of the EC Commission as other interest groups such as consumers and retailers," he says.

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