Why should consumers subscribe to store cards with an annual percentage rate (APR) of 30 per cent when the Bank of England base rate is 3.5 per cent?
That is the question troubling the Treasury Select Committee, which last week pushed Office of Fair Trading director-general John Vickers to launch an informal investigation into store cards and the marketing practices used to encourage consumers to sign up to them. In particular, the position of GE Consumer Finance, a supplier of store cards to such high street names as Debenhams, House of Fraser and Top Shop, is to be investigated.
Estimated by the Select Committee to have between a 50 and 70 per cent share of the store card market, GE charges between 26 and 31.9 APR depending on the store card on offer and the method of payment. The finance company last changed its interest rates in 1999, when the Bank of England’s base rate was about seven per cent.
Consumer groups say that the informal investigation is long overdue. Store card interest rates, they maintain, are too high – on average six times the Bank of England base rate – as issuers have failed to reflect falling interest rates, unlike other forms of borrowing such as credit cards and bank loans.
They are also concerned about the marketing practices used to entice consumers to sign up to the cards. Methods including discounts of ten per cent, financial incentives for sales assistants and restrictions on taking away the application literature to peruse at leisure, are all to come under scrutiny.
Frances Harrison, head of policy research at the National Consumer Council, says: “The sort of credit that is supplied in shops is on the spot and consumers are unlikely to look at the terms and conditions.” She adds that insufficient training also means staff “aren’t able to give a full explanation or an illustration of how costs mount up.”
Consumer groups are lobbying for “honesty boxes” to be included in the literature given to prospective card holders, which clearly set out the APR and any other charges that are incurred, and contain comparisons with other forms of credit products. The credit card industry is already considering introducing these honesty boxes.
Michael Naylor, a senior researcher for Which? magazine, says: “Hopefully, if the information is made clearer, customers won’t take the cards out.”
In the UK, 14 million adults own a store card (source: Mintel), with half of these owning at least two cards. Although the number of cards in circulation has more than doubled in ten years to reach 26 million, bad publicity over interest rates has meant that some consumers are turning away from store cards in favour of other forms of borrowing. According to figures from Mintel, new store card lending was in the region of &£4.9bn in 2002, down nine per cent from 1998, but up slightly on 2001 due to a strong growth in retail sales.
Furthermore, new lending via store cards as a percentage of consumer credit – including personal loans, credit cards, overdrafts and hire purchase agreements – has dropped from four per cent in 1998 to 2.6 per cent in 2002.
But this has not stopped the finance companies and retailers from making large profits from store cards.
According to Mintel the specialist finance companies control 74 per cent of the market, by number of cards in circulation, with the rest controlled by retailers such as Marks & Spencer.
For 2002 GE declared a &£90m profit from its store card operation on revenues of &£2bn across a base of 10 million active customers, according to evidence given to the Select Committee.
GE says that it is “happy to assist” the OFT, but claims that its store cards account for only one per cent of consumer credit advances for 2001 and argues that consumers have other forms of borrowing available to them if they choose. However, many of GE’s retail partners, including Arcadia, Comet, House of Fraser and Laura Ashley, refuse to comment on the OFT investigation.
GE says that comparisons between store cards and other credit products based on APR is “misunderstanding” the way in which consumers use store cards. It claims that its store card customers who pay interest typically hold balances of &£328 – six times less than other forms of credit borrowing.
It also says it is developing a leaflet summarising the costs of store cards to be made available at point of sale and which will carry an “honesty box”.
But other players in the market offer interest rates that are lower than some credit cards, such as John Lewis, which operates a store card with a 13 per cent APR, and Marks & Spencer, with an 18.9 per cent APR on its store card.
John Lewis Partnership head of business development Caspar Woolley says: “I think consumers are becoming more savvy and are deciding whether they want to pay a particular APR, abandon the store card or just use it intelligently, taking advantage of the offers and then paying it off at the end of the month.”
The John Lewis store card business is non-profitable and the partnership is now considering the introduction of a credit card. M&S is launching its own credit card with an APR of 14.9 per cent in October, in response to a decline in the use of its store card following the recent acceptance of credit cards in its stores. A new loyalty scheme will also be launched whereby customers can collect points on both types of card.
An M&S spokesman says most of its store card holders will be upgraded to credit cards: “As a business we are evolving to become a credit card provider as opposed to a store card provider.”
Although M&S’s decision was taken primarily for business reasons, other factors, such as the bad publicity over store cards and the rise in popularity of the Nectar loyalty scheme, which celebrates its first anniversary this week but has no plans to offer credit facilities, may have played a part.
Whether or not the OFT imposes new rules, such as the introduction of honesty boxes or a capped APR, the store card market may face further regulation. The European Commission is introducing a Consumer Credit Directive aimed at harmonising lending practices across Europe.
However, one fact is certain: unless store card interest rates are made clearer to consumers, the bad publicity surrounding the sector will not disappear and retailers run the risk of damaging their brands in the long term.