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MAY 20TH 2010

1. Why had the UK credit card industry been so profitable in the 1980s? Which factors were the greatest threats to continued profitability?
The reason why the credit card industry was so profitable in the 1980’s was because the market acquired a few conditions to become so.Analyzing Porter’s Five Forces of this industry, we can find that, during this decade, Suppliers (in this case Issuing Banks and Merchant Acquirers) had a high power of negotiation, since the market was dominated by only 4 issuing banks. Barclays, Lloyds, NatWest, and Midland, issued 72 percent of the outstanding cards within the United Kingdom. Furthermore, there were only two merchant acquirersoperating within the UK: Barclays, that operated through the visa card system and JCCC (Joint Credit Card Company) that did its job through the Access system. Therefore, it was quite difficult for buyers to switch from one supplier to another because they could only have one credit card and there was no mechanism for the transfer of an outstanding balance from an existing credit card to a newcard.
The Threat of Substitutes was low as well. Products like debit card, American Express or Dinners and Store cards, didn’t represent a big threat during the 80s. Debit card, was probably the biggest threat, nonetheless, it was introduced in the late 80s by Barclays which was at the same time the biggest credit card supplier. By 1989, 11,9 million debit cards were in circulation, less halfof the credit cards that where in circulation in 1988.
The size of the market was also a key factor that influenced directly on the profits of the industry. It was a growing market where for example from 1984 to 1988, the total Transaction Volume of credit cards in the UK went from 7,403m to 17,811m pounds. Also, the Credit Cards in Circulation experimented high growth going from 16,902.000 to24,628.000 in the same period time.
So, taking into account the points explained above, rivalry among banks was not aggressive at all. Moreover, pricing among competitors was civilized; from ’84 to ’88, the monthly interest rate from Credit Cards issued in the UK remained in a 25 basis points range going from 1.75 to 2 percent. However, due to the attractiveness of this market, conditions werechanging at the end of the decade. New players were entering the market and margins were squeezing as the cost of life and the number of full payers increased.

2. Should the industry move to a pricing structure with annual fees?
The industry should move to a pricing structure with annual fees, due to the different changes that both the agents of the market and the context wereexperimenting. On one hand, in 1989 the cost of money was rising, which leads to narrow profit margins for issuing banks as costs increase and interest rates remained unchanged (at least in the short run). On the other hand, the increasing proportion of cardholders becoming full payers was slashing profits for Issuing banks because this type of customers were literally taking credits at a 0% interest rate,so banks’ income had to be affected. About 46% of Barclaycard customers had become full payers, up from 27 percent in 1987, whereas for Lloyds, the full payer percentage had risen to 37 percent. According to Barclaycard CEO, Peter Ellwood credit card “is probably the most under-priced product in the British financial services market at the present time”. So, the idea of adding an annual feedidn’t seem so crazy for suppliers, but it was definitely going to be a big change for card holders.
Analyzing Porter’s Five forces mentioned earlier in this paper for the Credit Card industry, it can be found that key factors that secured the profitability of the industry were now in danger. The power of suppliers was now decreasing because of the entrance of smaller banks to the UK market....
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