Plastic living on borrowed time

Not very long ago, readers were treated to the curious spectacle of Barclays’ retail banking chief primly reproving his peers (though not his bosses, presumably) for unleashing an irresponsible credit boom.

The thrust of Frederic Nze’s polemic was against direct marketing campaigns indiscriminately offering cheap, promotional credit to those who cannot afford the repayments once a more realistic interest rate kicks in. While Nze may be right to condemn this blight, there are other aspects of consumer finance which deserve an even meaner score on the tally sheet. Among them is the still popular store card, now the subject of an investigation by the Office of Fair Trading.

Apart from their usurious interest rates – capable of topping 30 per cent a year – store cards are remarkable for another feature: their ability to defy the laws of economic gravity. How is it that, despite the widely perceived phenomenon of plunging bank rates, store cards have managed to cling to a tariff barely changed since 1999 – when the Bank of England’s base rate was about seven per cent?

One, technical, explanation for this may be the quasi-monopolistic role of GE Consumer Finance, which seems to supply well over 50 per cent of UK store cards. Yet such profiteering, if that’s what it is, could not have been sustained without the near universal enthusiasm of retailers for the store card as a marketing tool and cash cow, nor without an imperviousness on the part of consumers to the ordinary facts of economic life.

The signs are that this never-never world is about to implode upon itself (though not on account of an “informal” OFT investigation). The trend is downwards: at &£4.9bn in 2002, store card lending has contracted nine per cent since 1998; while as a percentage of total consumer lending it dropped from four per cent to 2.6 per cent during the same period. Retailers, sensing that consumers are less gullible than they used to be, have modified their behaviour accordingly. Some are offering a much more competitive rate of interest; indeed, John Lewis Partnership has long since declined to take a profit on its store card, using it purely as a promotional tool. Others, like Marks & Spencer, see the store card as obsolescent, and are replacing it with a realistically priced credit card.

Bad publicity will have played a part in this transformation, but the advent of Nectar should not be underestimated. Nectar, now one year old, has proved surprisingly successful as a co-operative loyalty device; and is almost certainly cheaper to participate in than a standalone card scheme.

Legislative changes, such as those being mulled in Brussels, may eventually curtail retailers’ unbridled enthusiasm for the store card. Long before that, however, they would be advised to jettison altogether what is fast becoming a discredited marketing tool. If they value their brands, that is.

News Analysis, page 19

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