Strategy: The U.K. credit card industry in the late 1980?s

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1. Why had the UK credit card industry been so profitable in the 1980s? Which factors were the greatest threats to continued profitability?
At the beginning of the credit card history in the UK there was only one player, Barclays Bank, which started operating the card business in 1966. It didn’t seem a profitable business at the beginning but the major banks were concerned that due to the use of the credit card, the logo of Barclay was appearing everywhere. The main sources of income in the credit card business were the interest paid on debt by the cardholders and the MSC income from the merchants. It also provided a free publicity for the Banks, creating awareness of its presence in different businesses and stores.
The advantages for the usage of the credit card are numerous. For the cardholders it was a source of flexible credit, and for the full payers it represented a credit of 55 days free of interest. It also made easier purchase through cashless transactions (promoting instantaneous purchase decisions), benefiting the merchants with an increase in their sales. For the merchants it also represented a reduction in the costs associated with the handling of cash. All these factors lead to an increase in usage of credit cards in the 80’s (growth of 19.1% per year); it increased the number of card issued, the number of transactions and the average outstanding debt. By 1988 38% of the UK population had a credit card, representing 6% of consumer spending. With the four biggest banks in the UK (Barclays, Lloyds, Midland and Natwest) controlling the market at both sides (being issuing banks and Merchant Acquirer), the business was very attractive.
However the attractiveness of the market (in terms of growth and profitability) and the low barriers to entry became a threat to these major players. Comparing the cards in circulation for these four banks, in 1984 they controlled 81.4% of the total number but by 1988 the number decreased to 73.5% (a 9.8% decline). Comparing the debt outstanding and the number of transactions, the decrease from their share was around 7%. The banks were suffering competition not only from small banks, but from big stores providing their own credit cards, and by the threat of American Express and Dinners Club entering the market.

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...t is important to take into account some issues about customers and competitors. The switching cost of a credit card makes the business demand relatively inelastic. Variations in the order of 20 to 30 basis points would not make a cardholder to switch. About competitors’ reaction, the history shows that the banks in the UK follow the trends, and would not get involved in a war price. Exhibit 3 from the case shows that the competitors follow the first mover usually within a period of 2 months. The fact that the major competitors in the credit card business are the main banks makes the multi-market contact needs to be considered.
Other issues that the banks might want to consider, are the forecasts of the economy (especially inflation rates) and the consideration of a possible reaction of the Monopolies and Mergers Commission. The inflation would influence the rates and the Commission might influence the value of the fees.

Harvard Case: The U.K. Credit Card Industry in the late 1980’s (A)
Brandenburger, A.M. and B.J. Nalebuff, ‘The Right Game: Use Game Theory to Shape Strategy,’ HBR July-Aug. 1995
‘What is Strategy?, HBR, Nov.-Dec. 1996

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