Why the banks fear clampdown on plastic

Regulators and MPs line up to curtail easy profits made from credit card lending

The days of credit card companies racking up heady profits with the same carefree ease that consumers have been stacking debt on their cards may be coming to an end. The termination of this phenomenon could be as nasty as some of the swingeing penalties card providers themselves levy on customers who breach their multiplicity of terms and conditions.

The days of credit card companies racking up heady profits with the same carefree ease that consumers have been stacking debt on their cards may be coming to an end. The termination of this phenomenon could be as nasty as some of the swingeing penalties card providers themselves levy on customers who breach their multiplicity of terms and conditions.

Indeed, within a matter of weeks, providers of the store cards section of the market could find themselves the subject of a full-scale Competition Commission investigation into their industry.

The OFT is due to report its findings on store cards, where interest rates of 30 per cent or more are not uncommon. While the body could give the sector a clean bill of health, it is looking quite likely that it will instead declare it needs to have a closer look into the industry or to hand the whole thing over to the Commission.

That unpleasant development for the industry will be followed by a report from the Treasury Select Committee, which has hauled a series of bigwigs from the banking world before it in the past year to investigate whether there is proper transparency and competition in the credit card market.

It was in that high-profile forum that Matt Barrett, the chief executive of Barclays, remarked that he did not borrow on his credit card because it was too expensive and advised his four children to do the same.

With analysts predicting the big four banks - Lloyds TSB, Barclays, Royal Bank of Scotland and HSBC- to have made £50,000 in profits for every minute of last year, and with credit cards accounting for a substantial slice of that, it is easy to see Mr Barrett's point.

Credit card companies have undoubtedly benefited from consumers' willingness to take on unprecedented levels of debt. According to Apacs, the banks' trade body, Britons carried out five billion transactions on their plastic, worth a total of £230bn, last year. While debit cards played a significant part, the majority of transactions were on credit cards and, as the table shows, the amount of debt which is not paid off for three months has more than doubled in the past 10 years.

The proportion that proceeds from credit cards contribute to banks' profits is also climbing. UBS predicts cards will account for 9.8 per cent of profits next year, compared with 8.3 per cent in 2001.

Given that overall profits are at record highs in this bank reporting season, the focus is firmly on whether the lucrative arena of credit cards is functioning competitively, or whether the banks are profiteering.

Consumer groups - not surprisingly - take the view that credit cards in their worst forms are little better than legalised usury. Ashleye Sharpe, head of money research at Which?, said: "Some of the biggest providers have some of the highest annual percentage rates (APRs), so it is not competitive."

Nick Lord, head of money advice at the Citizens Advice Bureau, said: "The fact that interest rates, which average about 15 per cent, are so high compared to the Bank of England's base rate, and to other forms of unsecured lending, suggests competitive forces are not performing."

It might, therefore, be hard to see how the OFT and the Treasury Select Committee could do anything other than recommend a wide-ranging crackdown on the rules governing credit cards - even, possibly, calling for a windfall tax on companies which have for years rakedin bumper profits.

Of course, the charge that a lack of proper competition allows providers to make excess profits is hotly denied by the banks. David Gagie, managing director of consumer lending at Lloyds, which has more than seven million credit card holders, said: "The industry is ferociously competitive. If you are working in it, you do not get a moment's peace - you are constantly in competition with each other and that is how it should be."

It is certainly true that Britain's major banks are up against ever-increasing numbers of rivals in the credit card market, both foreign players including giants such as MBNA and Capital One of the US, and relatively new domestic players such as Egg.

This is feeding through into shrinking margins. UBS calculated credit card providers had to shave the cost of their products by 22 basis points last November compared with the average for 2003, and most analysts expect the downwards trend to continue.

Banks and other credit card providers are also bowing to consumer pressure to make their offers more transparent, with most undertaking to introduce summary boxes giving clear details of their terms and conditions by 1 March.

Yet these trends are not nearly dramatic enough, according to consumer groups, who say the massive array of products on the market has less to do with offering consumers choice and more to do with adding mind-bendingly complex details which will catch them out.

While banks vigorously deny this, it was Mr Barrett who rather let the side down, again at his nightmare appearance at the Treasury Select Committee, when he was unable to answer simple questions about how much Barclays' 0 Per Cent Forever card would actually cost.

A key problem, critics say, is that current regulations do not force providers to disclose enough, either about their tactics, or about the true risks their customers are taking on.

Most agree that banks have a right to offer customers different products, according to their financial means and their credit history. This is even though the system inevitably means those on low incomes receive the worst terms and have to subsidise the eye-catching 0 per cent offers usually reserved for wealthier customers.

Further uncertainty surrounds whether some sections of the population are coming under increasing strain over lending, as banks do not have to disclose to credit rating agencies how many customers are making only minimum repayments or, indeed, whether a customer has a card with them at all.

TEN DEADLY SINS

Annual percentage rates are calculated in no fewer than 10 ways, according to the Consumers' Association. This means that two cards with the same headline APR can in fact be 70 per cent different in their true cost.

Credit card holders often pay a different rate of interest on the balance they transfer compared with the sum they then spend on purchases. Often, any money paid off is directed by the card company to the debt on the lower rate.

Some providers start charging interest the minute a purchase is made, rather than from when it appears on the bill. This is despite retailers usually not billing the card company until a few days after the transaction.

Interest-free periods are not always what they seem. Some companies stipulate a customer must have paid off their entire bill for two consecutive months to benefit from not paying interest. Under this scenario, someone could spend just £10 in one month and pay off £5 of it, carrying £5 on to the next month. They might make a much more substantial purchase the following month, but pay it well within the normal interest-free period. However, some card companies would charge interest on the purchase - which could run into thousands of pounds - simply because they did not pay off the £10 in full from the first month.

Some providers time special offers or competitions with notification that terms and conditions are changing.

It used to be the case that payments which arrived a couple of days late were not penalised. Increasingly, card companies are introducing penalties of, say, £25, the moment the deadline passes.

Savvy consumers think they can churn their outstanding debt from one good deal to another. But providers frequently take a dim view of customers who have applied for large numbers of cards.

Minimum repayment rates have been halved in the past couple of years to about 2 per cent of an outstanding balance. While that might be popular, in effect it can lead to a customer paying off no more than the interest.

Also popular is where the provider automatically raises the amount of credit available on a card, but this can lead to people getting into escalating amounts of debt.

So-called cheques from the card provider made out to their customer have become a familiar marketing technique but, in reality, if they are "cashed in", their rate of repayment is often very high.