US credit card company Bank One’s appointment of a chief executive to head its European operations signals a new urgency in the aggressive American invasion of UK banking (MW May 13).
As James Corcoran, previously managing director of global sales of Citigroup, takes up his post at Bank One’s European headquarters in Cardiff and prepares to hire a further 1,000 staff, rival Capital One is seeking a head of European marketing.
But observers question whether the cut-price card operators can succeed in making money in the UK, and wonder whether, on the contrary, they will precipitate a downward spiral of discounting which will severely affect their profits.
Two other US banking giants – Providian Financial and Morgan Stanley Dean Witter (through its Discover brand) – are also poised to launch credit cards in the UK.
The US operators which have launched here already have undoubtedly made an impact. In the five years since US banks HFC and MBNA first offered UK credit cards, market leader Barclaycard’s share has dived from 33 per cent share to 24 per cent. Both US banks now have a 5.3 per cent share of the UK credit card market, according to research company Datamonitor.
In addition to first-entrant advantages, HFC and MBNA’s success can largely be put down to a focus on affinity cards, a sub-sector of the market which Julie Cunningham, analyst for cards and payment at Datamonitor, says has long been underserved by UK card issuers.
Since then, other US credit card operators, specialising in own-branded credit cards, have set up shop in the UK. These include Advanta (now owned by Royal Bank of Scotland), Capital One, People’s Bank of Connecticut and, last November, Bank One.
But many obser-vers question their success to date, and the banks themselves will reveal little about their UK operations for “commercial reasons”.
After three years in the UK, People’s Bank has still only managed to get a 0.4 per cent share of the UK credit card market, while Capital One has achieved only 1.1 per cent over the same period, according to Datamonitor.
People’s Bank claims that it has just moved into the black, while Capital One will give no financial information. It is still too early to assess Bank One’s UK performance.
The US entrants aim to gain market share by undercutting UK credit card operators. Broadly speaking, they offer a combination of low APRs (annual percentage rates) – typically about 14 per cent compared with 19 per cent among UK issuers – with no annual fee; the option to transfer debts from other credit cards at low interest; and six-month introductory rates of about seven per cent.
Ford Ennals, group marketing director of Lloyds TSB, says: “I believe the US companies’ strategies can succeed in getting market share in the short term, but they can’t be making a profit. They won’t succeed as businesses in the long term.”
Nick Cobban, director of Credit Card Research Group, agrees: “The costs of operating a credit card make it unrealistic to expect average credit card rates to fall much below 19 per cent.” Capital One charges an APR of 11.9 per cent on its standard card, while Providian will be offering 13.9 per cent. But at more profitable interest rates the US credit card operators risk losing customers.
One reason cited for People’s Bank’s small market share is that, after an introductory six-month rate of 6.9 per cent on its standard credit card, the APR rises to 17.9 per cent.
But some observers believe there are other reasons why the new wave of US card operators is better equipped to succeed in the UK market than People’s Bank.
Tim Lewis, marketing director of credit cards at Royal Bank of Scotland, comments: “The likes of Bank One and Capital One have armies of credit analysts, so they don’t get saddled with bad debt. They have sophisticated data mining techniques for effective market segmentation and a strong financial base, and this enables them to spend more on advertising and withstand initial losses.”
However, Richard Lovely, senior vice-president of Bank One International, says: “At about 13 per cent [Providian will charge 13.9] it will be difficult to make any money on a credit card business – but not impossible.” Bank One’s standard credit card, which will charge 16.9 per cent, has the highest interest rate of the new US entrants.
With such a precarious outlook, you could be forgiven for wondering what the US banks are hoping to achieve.
Matthew Bedford, banking consultant with Datamonitor, believes to a large degree, the US companies are fighting for the same customers – those 20 per cent of the population who are guided by price rather than apathy and ignorance. “Many are likely to defect to the next US bank when the introductory rate expires or the APR rises,” he says.
Alistaire Whitmore, director of financial services at Mori, reckons the US operators are using credit cards as a springboard into the UK financial services market: “A lot of companies use cards as a recruitment platform, most obviously to cross-sell loans, which is broadly the same target market.”
Bank One’s Lovely confirms he plans to cross sell customers a range of new products later in the year, but will give no further details.
Capital One, which has scrapped its 6.9 per cent introductory offer, also says it will introduce a range of non-credit card financial products, believed to include mobile phones, while People’s Bank will offer its first loans this summer. Meanwhile, Providian and Discover can draw on the broad product portfolios of their parent companies in the US.
But US banks have had mixed fortunes in cross-selling in the UK. Capital One has already offered and withdrawn a loan, although it insists the “experiment” was a success, while observers say MBNA’s saving and loan products, launched 18 months ago, have failed to make much of an impact. One explanation for the perceived failure of these products – the banks will give no financial details about them – could be in their branding.
Lloyds TSB’s Ennals says: “The US banks are not in the business of image, they are driven purely by price and marketed through direct mail. This has made them commodities rather than brands.”
This lack of brand loyalty could seriously limit the potential for cross-selling non-credit card products. Bank One’s Lovely acknowledges the need for a strong brand for long-term success and is considering using TV advertising for the first time.
Given the poor reputation of our domestic financial services companies, building a strong brand may not be such a tall order for the US invaders.