Pricing for profit
The U.K Credit Card Industry in the late 1980s (A)
In the mid 1980s, the credit card business provided significant profits for the retail banking industry in the United Kingdom (U.K) the bulk of these profits came from two sources interest charged to card holders on unpaid balances and fees paid by the retailers that honoured the cards.
Mr peter Ellwood, chief executive of Barclaycard, the credit card of Barclays Bank, said, ” I think it is quite possible the pricing of credit cards in the U.K may well have to change, and this may indeed mean that some form of charge may have to be introduced within the next year or so”
A credit card is a plastic card issued by a retail bank ( called an issuing bank) to a customer (card holder) whenever a card holder obtains a cash advance the issuing bank always charging interest even when the previous balance has been fully paid , the issuing banks are free to set the term of the card each bank sets a credit limit for each of its cash holder as well as the rate of interest for all outstanding balances the bank also sets a grace period for the payment of the monthly bills typically about a 25-days, with this grace period a card holder get a 255 days of interest free money by always paying the monthly balance.
Credit cards provide the card holders with two main benefits; they provide a mechanism for the cash free purchasing of goods and services including purchases by telephone and provide a source of easy credit.
Credit Card History
Thirty two years later the flat bush national bank became the first bank to issue a credit card, in 1981 the Franklin National Bank became the first bank to issue credits cards to non-customer, in following years over a hundred banks issued cards but many cards failed due to an inability to covered transaction cost. Finally in 1966 bank of America became the first bank to license its cards the bank Americard (later card visa) to other banks. This was the formal beginning of the multi-bank credit card network.
In the mind 1960s merchants started accept cards from different banks. However, they were prohibited by NBI and ICA from carrying cards from both systems, during the 5-years of delayed entry it did not appeared that Barclay’s credit cards operations were profitable; some U.S banks still had unprofitable credit Card operations as well.
Credit Card Industry
The credit cards industry has five types of participants, the card holder, merchants, issuing banks; merchants acquired banks and card associations.
1. Card Holders
During the 1980s credit card usage increase by virtually all measures the number of cards issued by average transaction per card and the average outstanding balance per card, the rate of growth in credit card credit 19.1% per year was comparable to the rate of growth in total consumer credit 17.6% per year.
2. Merchant Acquire
The merchants acquired banks are central to the U.K credit card system on the one side of the system they reimburse the merchant or the value or the goods charged by card holders and on the other side they collect the card holder payments from the issuing banks, for each type of transaction they collect a fee from the merchant. They collect the merchant service charge (MSC) usually a fixed percentage of the merchant monthly transaction volume and from the issuing banks, collects a domestic interchange fee (DIF). In the Visa Card system Barclay was the sole merchant acquire year operating throughout the U.K until March 1989.
The number of merchants accepting the visa or access cards double between 1980 and 1988, virtually all of the merchants accepted both cards each merchant negotiate the MSC rate with the merchant acquire for the credit card. For merchant using Barclay as the merchant acquire the rate typically has the ranged from 1.22 to 3.22 percent for transaction volume depending upon the business of the merchant.
4. Issuing Banks
Although the any bank becomes the issuer of the credit cards by joining one of the card association the market was dominated by the large banks, Barclay, Lloyds, NatWest and Midland issues 72 percent of the outstanding cards. Issuing bank paid the merchant acquired banks for their clearing service to DIF.
5. Card Associations
The two major s cards associations Visa and Access do not issue credit cards than selves rather they hold the trade mark rights to the Visa and Access names. The card association also provides authorization and international interchange services. Through the authorization services issuing bank can track credit card usage and minimize credit card fraud.
Credit card Profitability
Issuing banks try to capture profits in two ways. Their primary source of income is interest on credit card debt. The secondary source of income is the MSC income from the merchants. The major cost associated with this income is the fee levelled by the merchant acquirer, namely the DIF rate or the JCCC costs.
Barclays was a leader in technology in the 1950s and 1960s.It was the first British bank to use a computer in its accounting, the first to use cash machines, and the first to issue credit cards.Additionally, it was a leader in developing international branches, a process which was started before the start of the First World War.
In 1970s, Lloyds installed a common, computerized accounting system for all its branches, the first British bank to do so. In 1979 Lloyds became the first clearing bank to offer home loans, previously the exclusive province of building societies.
Midland expanded little during the 1940s and 1950s.during this time, midland found that it was lagging behind its major competitors in establishing and overseas presence. To remedy this fact; it made several acquisitions, the largest one being the 1981 purchase of 57 percent share for $820 million in Crocker national bank.
In 1968, the national provincial bank and the Westminster bank merged to form the national Westminster bank(NATWEST)this policy did not include a prohibition against mergers, but no one expected two of the largest banks to be allowed to merge.
Credit Card Alternatives
Various products duplicate credit card functions. The cashless transaction function could be obtained through the use of debit cards. Debit cards were almost identical to credit cards; expect that cardholder’s could not obtain credit. A purchase by debit card resulted in a withdrawal against the cardholder’s bank account.
Store cards were another form of credit card, but these were limited to use at the stores that is issued them.
By 1989 there were several trends in the credit card business that were of concern to the large U.K banks. The cost of money was rising more of the larger banks were becoming merchant acquirers. The increasing proportion of cardholders becoming full payers was an additional concern. The introduction of annual fees by a major bank would not be a minor pricing decision. In the near the larger banks had to decide whether or not to make a similar change in the pricing structure of their credit cards. More broadly, they had to figure out how, if possible, to maintain the profitability of the credit card industry.