Toppling King Barclaycard

PICTURE the scene. It is the summer of 1966. Bobby Moore holds the World Cup aloft. The Beatles' Eleanor Rigby is topping the charts. And on billboards across the country appears a dolly bird with a curious plastic rectangle sticking out of her bikini bottom. The credit card has arrived in Britain, freshly imported from America.

More specifically, the Barclaycard has arrived. For the first time shoppers can pay for goods and services using Barclays Bank's blue and gold card, and need to come up with the money only at the end of each month (borrowing for longer periods would not become possible until 1967).

Some critics say the idea will never catch on, but it is an immediate success. Within a year a million customers are signed up and 30,000 shops and restaurants are equipped with 'flip-flap' machines to process transactions. The swiping technology familiar today would have to wait another three decades.

Amazingly, it took competing banks 12 years to come up with a rival product, the Access card - by which time Barclaycard had an unassailable lead. A series of celebrities puffed the product, most memorably Alan Whicker - then regarded as the personification of well-travelled sophistication and financial savvy.

In a more humorous vein came Dudley Moore, Rowan Atkinson and Angus Deayton. New customers signed up in droves. Even today, Barclaycard has more UK cardholders than any other bank. More than 15,000 new cards are issued each day.

In the time it takes to read this sentence, another 136 transactions will have been conducted using a Barclaycard. Laid out side by side, Barclaycards currently in circulation would cover 792 football pitches, according to the company website.

As sponsor of the Premiership, the brand has been relentlessly hammered into the nation's consciousness. When MPs on the Treasury Select Committee berated the industry last year it was Barclays' chief Matt Barrett who took most of the flak.

New cards on the block

Yet Barclays' dominance will probably soon be over. Upstart rival Egg is for sale, and the disposal seems likely to alter the balance of power in the industry. After 38 years Barclaycard is finally to be toppled from its number one perch.

Reliable numbers are difficult to come by in an industry that jealously guards information. But Egg has three million customers, a market share of more than 5%. Any of the three leading contenders to buy it - Royal Bank of Scotland, Lloyds TSB and US group MBNA - would overtake or at least match Barclaycard in terms of market share should they succeed. But one of the most interesting aspects of the affair is how willingly Barclays is surrendering its crown. Senior executives at the bank have quietly let it be known that they have no interest in Egg.

The focus at Barclaycard's Northampton headquarters has shifted away from UK credit cards. Now the primary ambition of chief executive Gary Hoffman is to build an overseas credit card business. In recent years Barclaycard has - through acquisitions, joint ventures and start-ups - opened for business in South Africa, Spain, Germany, Ireland and Portugal. Hoffman also has his sights on the US.

Even in the UK, Barclaycard is diversifying, moving away from the traditional plastic card. It has started to offer ordinary loans and is also considering moving into other forms of credit including car finance. 'They're out to eat our lunch,' Hoffman said of his competitors when facing MPs last November. Yet he does not seem desperate to hang on to his dinner plate. The thinking is plain: the UK credit card industry may be getting too competitive. There are richer pickings elsewhere.

It is not a sentiment the Prudential, which is busy trying winkle out the maximum price for its 79% Egg stake, wants voiced in the City. The official line is that Egg in the UK is not only a money machine, but has tremendous prospects.

Certainly it has been successful in building a large base of young, affluent and computer-savvy customers. They like the edgy ads. They love some of the introductory offers, especially the interest-free initial terms. But there are some doubts about Egg's prospects.

Bearish reservations

It is not clear how the carefully nurtured image - pro-consumer, anti-established banks - would be carried on if Egg were taken over by a mainstream bank. And doubts remain about the loyalty of Egg cardholders once their interest-free period expires. Egg proudly points to its 85% retention rate. But the sceptics are not entirely convinced that a bank that owes its success to the disloyalty of its customers to their previous banks can rely on their continued loyalty.

After all, say the cynics, Egg's APR is now 13.9%, only one percentage point cheaper than the 14.9% demanded by Barclaycard and other mainstream banks. It is hardly the most compelling price advantage.

Mark Thomas, banks analyst with Fox-Pitt Kelton, has been a leading sceptic on Egg's business model, pointing out that the Pru has had to shoulder losses and start-up costs of £450m to get to this position and that of all the credit card companies Egg is most vulnerable to an increase in customer defaults.

There are other credit card bears among the banks. Adam Applegarth, chief executive of Northern Rock, baled out of the industry last year, selling the bank's credit card arm to the Co-operative Bank. It didn't have critical mass, he says, and the margins were getting increasingly fine.

With interest rates rising, the prospects don't look so good, especially for those aggressively seeking new business. Some players are not providing prudently for future defaulters, he says, without naming names. 'They will get caught as rates rise. They are bound to be.'

As Morgan Stanley and Goldman Sachs, advisers respectively to Pru and Egg, seek a top price for the business, they will hope those sentiments are not too widely held.