Charge! Europeans were wary of credit cards--until U.S. banks began streaming across the Atlantic to convince them of the joys of wielding plastic.
(FORTUNE Magazine) – Americans don't know jack about soccer, right? It was bad enough when the Germans crushed the U.S. team in the opening round of the World Cup in Paris without raising a sweat, but when the Yanks got thrashed by the Iranians too, well, case closed. So, who would have guessed the origin of those plump envelopes dropping through British mailboxes earlier this year? The envelopes contained a really fantastic chance to attend the World Cup final match and get a low 6.9% interest rate on a MasterCard until April 1999. And--surprise!--they were coming not from Britain's Barclays Bank or even the French bank Credit Lyonnaise. No, the offers arrived from a bank with headquarters all the way across the Atlantic--Capital One in Glen Allen, Va.
The mailing was just the latest skirmish in a full-scale U.S. invasion of Europe's credit card business--an invasion that has already seen the intruders gather a huge chunk of territory. While Americans may have a lot to learn about soccer, U.S. banks are teaching their European cousins some painful lessons in the marketing of consumer credit. And for the American institutions, the push comes none too soon. With credit card growth leveling off in the U.S. and American consumers surfing among low-ball teaser rates, U.S. lenders see Europe as a way to jump-start growth.
First stop for most U.S. lenders has been Britain, which has had a credit card culture since the 1960s and is the one market most like the U.S. in terms of regulation and consumer acceptance of revolving credit. With outstanding credit card debt of $21 billion, Britain is the single-largest market in Europe. Big British banks like Barclays still dominate, but over the past few years U.S. credit card issuers, including industry heavyweights Citibank and American Express, have stolen away a lot of business and already control 7% of the market.
Now these U.S. financial giants are plunging into the relatively virgin territory of Continental Europe, where credit cards represent only about 15% of the total plastic in circulation. (Europeans prefer debit cards that automatically draw funds from a person's checking account.) To understand why they're drooling, consider this statistic: According to Visa International, Continental Europe, with a population of 300 million-plus, has just $6 billion in outstanding credit card debt, compared with over $240 billion in the U.S.
The Americans have adopted two basic strategies that have allowed them to gain a beachhead in the important British market. One strategy is to issue a co-branded affinity card with an existing institution, like Burberrys or the Royal College of Surgeons. These cards charge high interest rates but attract customers with rewards and lots of service. The other approach, popularized by Capital One, heads for the other end of the market by offering rates far below the established competition's. "The Americans have brought new skills to the arena, and their success has surprised some of the large British banks," said Steve Worthington, a professor of finance at Staffordshire University in Britain. "When these companies first arrived, many people thought they wouldn't last very long. Well, it's clear that they're here to stay."
When MBNA, the Wilmington, Del., bank specializing in affinity credit cards, arrived in Britain in 1994, the market was controlled by a handful of large British banks. Typically, these banks offered their customers credit cards that charged 22% interest and a hefty annual fee. Initially, MBNA adopted fairly modest plans to reach $1 billion in receivables by the year 2000. Instead, the business prospered faster than anyone had hoped. It now has two million customers with more than $3 billion in outstanding loans. "We thought we could bring in some marketing innovation that would convince people to borrow on credit cards more than they had in the past," says Bruce L. Hammonds, MBNA's chief operating officer. Result: The bank's outstanding loans in Britain have soared 56% over the past year. Even better, Hammonds says that because of stricter bankruptcy laws in the U.K., losses were only about half as great as in the U.S.
To some, such as Capital One CEO Nigel Morris, an Englishman who emigrated to the U.S., it was British arrogance that made the market ripe for a raid from the American market. "It was very similar to the U.S. where you had large, branch-based banks charging very high rates in an undifferentiated way and believing that their brand would allow them to hold on to their customers," Morris says. Capital One responded by adopting a strategy similar to its successful practice in the U.S.: Use mathematical models to identify high-spending cardholders who tend not to pay off their balance every month and cherry-pick their rival's customers. The company doesn't disclose card numbers for Britain, but says it is growing by about 10,000 cards a day outside the U.S., a tally which also includes numbers from a Canadian operation.
The hallmark of companies like Capital One, familiar to virtually every American with a mailbox, is an offer for a low-interest-rate credit card for nine months or a year, known as a teaser rate, with the hope that a borrower will switch a large existing balance from a rival institution. "The teaser rate is a product we've been doing for seven years, we know the economics of it and can make good returns," says Capital One's Morris. "But to the uninitiated who don't know how to do the product, it can be treacherous." Among the risks: Users might not bring a big balance with them when they switch to your card--or they only keep your card until the low rate runs out and then switch to a competitor offering a similar deal.
HFC International, a U.S. consumer-loan company that has operated a bank in Britain since 1973, took another approach. In 1994 it entered the British credit card market with a Visa card jointly issued with General Motors, promising holders a savings of up to $4,000 on the price of a new car. More than 500,000 people obtained the GM cards.
HFC then leveraged its expertise by forming a joint venture with British Gas to issue a credit card called the Goldfish, which offers rebates on utility bills. Backed by a formidable marketing campaign, Goldfish was a huge success and last year reached 700,000 customers, including 18% of all new accounts in Britain. "The competition has had to sit up and take notice of Goldfish's success," says Martin Rutland, who devised Goldfish's marketing strategy for HFC. Rutland says the Goldfish card is used two to three times more often than the industry average and has racked up about $580 million in outstanding loans.
Britain's big banks have slowly begun to respond to the U.S. invaders. Barclays, the industry leader with ten million cards outstanding, actually saw its market share shrink from 33% of credit cards two years ago to around 29% today. Alarmed, Barclays has started offering a reduction in the annual interest rate, to 16.9% from the normal 22.2%, for clients who spend more than $825 a month. It also offers rewards, such as products from a catalog, but still charges an annual fee. "We have to keep an eye on price, but we're not in it to fight on price," says Steve Williams, Barclays card's director for Europe, who adds that he is more concerned about the success of affinity card issuers.
Barclays has publicly tut-tutted about the ethics of companies that attract borrowers with low teaser rates and then ratchet up interest rates after the first year. But is the consumer really better off paying 22% a year interest to Barclays instead of 7%, even for a short period, to an American bank? "Barclays should think about whether the amounts of money they are making on their interest rates can allow them to put their heads on the pillow at night," says Capital One's Morris.
For Barclays and some of the other established British players such as NatWest, the impact of the American invasion has been softened by the fact that the overall British market is growing at 15% a year. "The Americans have a wonderful chance to succeed because most incumbents don't actually see their business declining, they just see it growing less fast," says Jo Owens, who follows retail banking at Andersen Consulting in London. "Everyone is happy. It's just that ten years down the road they may very well suddenly find they've got a bunch of major competitors who seem to be way ahead of them."
The British market accounts for three-fourths of credit card borrowing in Europe, which underscores just how undeveloped the Continent is. Strangely enough, most Europeans already have a Visa or a MasterCard in their wallets, but unlike the American versions, virtually all European banks issue only a debit card whose balance is deducted from a checking account at the end of every month. The bank benefits only from a small transaction fee, rather than the robust 18% to 22% interest rate on the outstanding balance. While a small number of Europeans carry credit cards, they tend to be issued by finance companies like Cetelem in France and not by banks.
Some blame that gap on past experience: The Germans are frequently said to be averse to credit because of lingering memories of hyperinflation, while French banks got singed by unprofitable credit card ventures in the 1980s. What's amazing is that the big European banks continue to ignore the market despite the eye-catching contribution credit card lending makes to the bottom line of big U.S. banks. Germany's Deutsche Bank, for example, explains that borrowers prefer to use lower interest loans on checking accounts, and so the bank just doesn't issue credit cards. "Because we started in this way, the consumer doesn't accept any other way," spokesman Ronald Weichert says. That may explain, in part, why Deutsche Bank reported a return on equity of 6.4% in 1997, while MBNA achieved closer to 35%.
Belying the European banks' claim that their customers have a cultural aversion to credit on plastic, Citibank has managed to carve out a thriving business in Continental Europe. While Citibank doesn't release statistics, the market research firm Lafferty Publications estimates that as of last December, Citibank had about 1.34 million cards in Germany, Belgium, Spain, and Greece, making it Europe's eighth-largest card issuer. "The big European banks have an established branch network, but credit cards are not a business you sell through branches. You need to use direct mail, and the Europeans don't know how to do it," says Charles del Porto, Citibank's former marketing director for credit cards in Europe. "Once you put a credit card with revolving credit in the customer's hands, he uses the card. Europeans like to use credit cards every bit as much as Americans. The rest is just a cliche." While he declines to give concrete numbers, del Porto says Citibank's outstanding credit card balances rose "an absolutely amazing" 50% in 1997.
Another entrant into the revolving credit business in Europe is American Express, which is expanding from the Green, Gold, and Platinum cards, which have to be paid off monthly, to a new Blue card with a revolving balance, designed especially for young upscale customers. It began test-marketing in Germany and two Italian cities last year and launched the card nationally in Britain this spring. "We think we're on the cusp of something quite big," says John A. Crewe, president of Amex's international marketing and product development. "European countries have gone from cash to checks to debit, skipping revolving credit. Continental European banks have missed a big profit opportunity."
But American companies like Citibank and American Express face some major barriers. Europe, after all, has a much heavier regulatory climate than the United States or Britain. In France, for example, you can't just get a credit card in the mail: You have to proceed to your local post office and produce four different pieces of identification. In Germany, American Express has been hauled into court for its Membership Rewards program, an alleged violation of a law banning businesses from offering prizes or premiums of any kind. The case is scheduled to go to Germany's Supreme Court in September.
But also ganging up on the new American entrants are the established European banks, which control the issuance of Visa and MasterCard cards through their local bank associations. With their business riding on loans and checking accounts, they're not keen to push expansion of Visa and MasterCard into shops and supermarkets. In France, for example, the French Visa association has prohibited co-branding cards. "The rule is aimed right at us, and there is not a thing we can do about it," says MBNA's Hammonds. The French also set a maximum interest rate around 17%. "The French card business loses a lot of money because they charge less than a 1% fee to the merchant, low fees on the card, and people don't borrow money. It's the world's only cartel set up to protect a loss-making business," says Amex's Crewe.
Ironically, Barclays Bank, which is viewed as the old establishment in Britain, is in the vanguard of attempts to penetrate the Continent using marketing techniques pioneered by American banks. Barclays has 330,000 cardholders in Germany and has started offering cards in France, where it is touting great, 24-hour-a-day service to a populace inured to the rudeness of big banks. "I think we, along with Citibank, have shown that there is a demand for credit card products in Germany," says Barclays' Steve Williams. "But it's proved to be very, very difficult." One early setback: An idea to use teaser rates similar to those deployed by Capital One in Britain was shot down because of yet another German law--this one banning discounts.
MBNA and others are studying ways to crack the Continental market with marketing that sings the praises of revolving credit and with partnerships that provide access to customers. In Spain, Citibank is sending customer representatives to big corporations in an effort to enroll white-collar workers en masse in its Visa card program, while they sit at their desks. The results have been encouraging: 115,000 new customers, only 5% of whom bank at Citibank.
It's clearly going to take a number of years to develop the Continent as a market for American-style credit cards, but like Big Macs and Cokes, this latest U.S. inroad into European culture seems impossible to slow down. The only real question is whether European lenders will wake up to changing market tastes and offer their own alternatives or let the American and British banks carve up the market by themselves.