Select Committee on Treasury Written Evidence


31.  Memorandum submitted by GE Consumer Finance UK

1.  INTRODUCTION

  1.1  GE Consumer Finance (GECF) welcomes this opportunity to submit evidence to the Treasury Select Committee with respect to its inquiry into the transparency and clarity of credit card charges.

  1.2  GECF is part of General Electric (GE), a global technology, services and financial services company. Founded by Thomas Edison in 1892, over the years GE's activities have diversified significantly to include wind energy, medical systems, railway engines, power stations, plastics, aircraft engines and financial services. The company's finance activities include leasing, real estate finance, commercial lending, as well as consumer finance including auto finance, mortgages, etc. The company is one of only seven worldwide to have a AAA rating.

  1.3  In the UK, GECF was established in 1990 with the acquisition of the Burton Group Financial Services, which operated card programmes for a number of UK retailers. Since then, GECF has come to be a prominent employer in Leeds, with around 1,500 employees on three sites.

  1.4  In responding to this inquiry, GECF is aware that the original stimulus came from an earlier investigation of the Committee and that in reflecting this, the terms of reference for the inquiry are framed to cover credit card charges. However, evidence that the Committee has taken to date has caused it to broaden the scope of the inquiry to include storecards and, as one of the providers of storecards in the UK, GECF is pleased to assist the Committee in its study. Please refer to Appendix 1 for GECF's full list of retailers and associated APRs.

  1.5  At the outset GECF believes it is important to clarify the nature and purpose of the store card product. GECF is aware of widespread misapprehension as to why customers take out store cards, why retailers want them and the benefits to each.

  1.6  Consequently, the submission begins by exploring the nature of the store card product, its usage and adoption. The submission then goes on to explore the level of indebtedness in relation to our cards, and how we attempt to deal with the problems which arise. The particular issues relating to clarity and transparency of charges are interspersed, as appropriate.

  1.7  We end this submission by putting forward some industry-wide initiatives which, we believe, may help to further enhance clarity and transparency.

2.  THE STORECARD PRODUCT

  2.1  In the UK GECF's primary business is as a supplier of storecards provided via retail stores. The Company is regulated by the Financial Services Authority and holds a Consumer Credit Licence issued by the Office of Fair Trading. The Company is also a member of the Finance and Leasing Association (FLA).

  2.2  GECF is one of a number of companies in the UK operating as a storecard provider to the retail sector. In addition, some retailers (eg Marks and Spencer) have chosen in-house operations to run their own storecard schemes.

What storecards are not:

  2.3  In discussing the nature and use of storecards, it is perhaps instructive first to set out what a storecard is not.

  Storecards are not:

    —  intended or used primarily as a tool to provide a means for long-term, sustained high balance borrowing. Across our entire customer base the average balance is £135. Typical balances of around £328 generate monthly interest costs of around £7 for each customer paying interest;

    —  intended to provide an "easy credit" vehicle for those who cannot borrow elsewhere. Around one in five of those who apply for our products are turned down as a result of our rigorous scoring mechanisms that establish the customer's ability to take on credit.

  2.4  GECF argues that it is misleading to make comparisons between storecards and credit cards (or other forms of personal credit) on any one particular aspect—such as APR. Rather each option should be judged as a whole and on its own merits.

  2.5  Certainly, the fact that total borrowing on GE storecards has not grown since 1998 demonstrates both that GECF has not participated significantly in the UK "credit explosion" and that customers (as opposed to wider audiences) understand the nature of the products.

What Storecards are:

  2.6  GECF operate storecard programmes with the intention of providing retailer enhancements as much as consumer lending vehicles. They exist to create a bond between customers and retail outlets, advantageous to both sides.

  2.7  A storecard is a restricted form of payment allowing customers the use of the product commonly only in a single store or retail chain.

Why customers have store cards

  2.8  Customers primarily hold storecards to enjoy a closer relationship with the retailer or brand of their choice and to gain access to a number of retail benefits.

  2.9  The storecards provide a modest spending account for in-store purchases—typically used in the £30-£300 range.

  2.10  A number of cards offer an initial discount on purchases of 10%, providing an immediate benefit to customers. The average consumer will use the storecard typically just four times a year. Customers also benefit from a wide range of other exclusive benefits such as:

    —  invitations to special events;

    —  sale previews;

    —  cardholder discounts;

    —  loyalty rewards and discounts;

    —  discounted rates on services such as restaurants and clothing alterations; and

    —  third party offers and on-going communication from the retailer about new lines, products and services.

  2.11  GECF commissions research on customers' attitudes to cards, their likes and dislikes on shopping practices generally. This research confirms that customers' primary motivation for taking out storecards is to gain access to retail discounts and the benefits of a closer relationship with their chosen retail brand.

Why retailers operate storecards

  2.12  Retailers primarily operate storecards to build stronger relationships with their customers, increase loyalty and drive repeat sales.

  2.13  Retailers make considerable use of the communications channel the programmes provide to promote new goods and services. They also make use of the insight into purchase behaviour obtained from the card to design their own merchandising and promotions. They will offer selected discounts, and event invitations, based on the data they gather from the card.

  2.14  The availability of credit also helps grow sales. Estimates of the impact vary, but sales may be around 8-10% higher than they would be otherwise. The importance of this has diminished as other forms of consumer credit, such as credit cards, have become more widespread.

  2.15  A decade or so ago most retailers bore the administrative and balance sheet costs of running their own schemes. They then found it made more sense to enable third parties to operate their schemes thus utilising somebody else's resources and dedicated expertise to operate the schemes.

3.  HOW THE PRODUCT WORKS IN-STORE

  3.1  Having selected items they wish to purchase, the customer approaches the till and will be asked if they wish to pay by cash, debit or credit card or storecard. If they do not have a storecard, they may be asked if they would like to apply for one. If they say they would, the process is as follows.

    —  Having explained the product, an application form is filled in and signed by the customer. This form contains detailed terms and conditions. It clearly states the APR and that customers are entering into a Credit Agreement regulated by the Consumer Credit Act.

    —  Customers are required to produce proof of identification. They also confirm that they are over 18, resident in the UK for the last 12 months and that they or their partner are in paid employment for more than 16 hours per week.

    —  Customers' applications are referred to a credit reference agency electronically, and this information along with GECF's own creditworthiness (scorecards) determines our lending decision.

    —  The customer is informed of the decision to accept or reject the application. At this point around one in five customers are turned down. Where applications are declined, customers are provided with a leaflet explaining GECF's process, and how they can find out more about the decision using the services of companies such as Experian.

    —  If the customer is accepted, he or she is given a copy of the terms and conditions to take away which specify the APR.

    —  Within 7-10 days the customer receives their card along with a further copy of the terms and conditions, and a welcome pack explaining in more detail the nature of the product and their obligations.

HELPING THE CUSTOMER MAKE AN INFORMED CHOICE

  3.2  GE Consumer Finance has a number of processes in place to ensure that the account opening process is monitored in store and that customers are given every opportunity to make an informed choice at point of sale:

    —  The Company has 35 people in the field working directly with retail clients, to manage the programme in store, develop training programmes and ensure compliant processes. Their frequent store visits provide an opportunity to observe implementation of processes first hand.

    —  Some £250,000 is invested annually in the production of training materials.

    —  In addition, we provide resources to train in-store.

    —  There is a script for store staff, trained in by GE and the retailer's own managers, which describes the nature and conditions of that retailer's card programme, and ensures they can answer any questions the customers wish to ask.

    —  Furthermore, before being able to open the accounts, sales staff are required to have been trained in, and be familiar with, a credit operations manual.

    —  Applicants are given the customer service hotline number which lets them call to ask any further questions they may have.

    —  GECF commissions customer research to establish their views on the account opening process. The results from Q1 2003 show:

      —  That 55% of customers were very satisfied and 37% quite satisfied with the account opening process.

      —  That 86% of customers could not identify any ways to improve the account opening process

      —  That 90% of customers agree or strongly agree with the statement "all my questions were answered" at Point-of-Sale (POS).

  3.3  At the point of sale, the customer has a wide choice of payment methods open to them. Cash, debit card, credit card and store card can be chosen. In those retailers that operate a storecard, around 25% of shoppers will choose to use that payment method. Indeed information collated at POS shows that nearly 60% of customers possess a credit card and therefore, have optional ways of paying for purchases.

4.  THE PROFILE OF A STORECARD ACCOUNT

  4.1  As previously articulated, unlike the credit card, a storecard is not—nor is it recommended as being—used primarily as a borrowing tool. The product is quite different from credit cards for which applicants fill in more detailed forms allowing them to benefit from using credit cards in tens of thousands of places worldwide. In turn, credit cards exhibit much larger average balances and undergo much more frequent use.

  4.2  By contrast the storecard is an affinity card that rewards shoppers for loyalty through discounts and special offers. Hence, the storecard is intended to be simple and transparent, even for those with limited experience of banking or borrowing. As such:

    —  It can usually only be used in the retail chain where it was opened.

    —  There is no risk-based pricing—the product is priced at one rate for a population of typically small balances users.

    —  There is an easy exit from the agreement. Customers can terminate the agreement at any time and without penalty by paying off any balance. Moreover, they will retain any benefits already accrued such as a first purchase discount or any other additional retail benefits.

    —  It cannot be used abroad.

    —  The cards do not permit balance transfers from other finance providers.

  4.3  Naturally, millions of storecard holders use their cards in different ways. However, that the manner of which it is used matches the intention of this product can be evidenced through an analysis of the characteristics of the cardholder base.

    —  A significant portion never use it to borrow at all; the average customer will use it just four times a year.

    —  The average balance is £135 across all holders of storecards.

    —  The average balance is £328 across those accounts which paid interest in any month.

    —  The average monthly interest payment is £7 amongst those accounts paying interest.

Interest rates and APRs

  4.4  The company's approach to both interest charges and fees is fair and transparent. If customers settle in full by the due date they will pay no interest on purchases. If they don't settle in full they will be charged interest from the date the purchase registers on the account. Over 45% of customers never pay interest.

  4.5  This information on interest charging is referenced significantly within the welcome pack and the due date for payment is marked clearly on statements.

  4.6  Both APRs—the standard and that for direct debit customers—are stated in bold on the front of each application form and included in the second copy of Terms and Conditions which accompany the welcome pack and new card.

  4.7  GECF calculates the APRs in accordance with the Consumer Credit Act.

  4.8  The costs of operating the storecard programme are large and comparable with credit cards. We maintain large call centres to open new accounts and manage customer service calls; mail over 70 million statements and marketing communications; and provide marketing and analysis teams to work for our retail clients.

  4.9  Conversely—and in contrast to credit cards—given the very limited credit lines that are offered, storecards are typically used for small purchases and to obtain discounts, benefits or loyalty points.

  4.10  Given the fixed nature and size of the costs relative to the small balances, the level of APR charged is conditional for the business model to operate successfully. Funding costs may well have declined in recent years—yet they represent a small proportion of overall costs. Moreover, postage costs, wage related costs, and other costs have continued to grow despite endeavours to operate at the lowest cost.

  4.11  APR is not a significant concern for customers nor plays a major part in their decision to open a storecard account. At 29.9% APR, for example, the typical monthly interest payment is £7 and analysis of any complaints received demonstrates that just 0.7% relate to APRs.

Fees

  4.12  Storecards have no annual fee.

  4.13  Customers who continue to run their accounts in accordance with the credit agreement will never be charged a fee and indeed in the last two years only 4% of our customers have ever had a fee charged.

  4.14  Of those fees that the Company does charge, the vast majority relate to late payment. However, in circumstances where GECF would initially apply a late fee, the Company's practice is first to provide adequate notice through a letter and/or a phone call to inform the customer of the proposed charge.

  4.15  GECF has rules in place to ensure customers with low balances are not charged disproportionate fees.

  4.16  GECF believes these practices minimise the customer's risk of incurring charges due to forgetfulness or simple lack of awareness of their obligations under the terms and conditions. In this way the Company strives to avoid small balances mounting due to fee charging.

  4.17  At £18 per charging letter, the purpose of fees is to cover the costs incurred.

5.  INDEBTEDNESS AND THE STORECARD

  5.1  The typical credit line and outstanding balance for a storecard account is minimal and we estimate storecard debt represents only around 2% of all household unsecured debt. Independent research from Datamonitor estimates consumer credit gross advances and outstanding balances during the period 1998-2002—please refer to tables below. This data supports our view that storecard balances represent a small part of overall UK household unsecured borrowing.

Table 1

CONSUMER CREDIT GROSS ADVANCES BY PRODUCT, 1998-2002


£m
1998
1999
2000
2001
2002
CAGR*
98-02

Credit cards
60,243
70,378
78,807
85,636
96,353
12.5%
PoS Motor finance
10,766
11,127
9,683
10,544
11,742
2.2%
PoS Retail finance
14,354
14,941
14,190
12,908
12,574
-3.3%
of which:
—Store cards
4,874
4,917
4,634
4,384
4,415
-2.4%
—Store instalment credit
3,188
3,417
3,281
2,816
2,599
-5.0%
—Mail order
6,292
6,607
6,275
5,708
5,560
-3.0%
Overdrafts
5,716
6,255
6,614
10,304
11,532
19.2%
Unsecured personal loans
42,631
44,314
49,418
55,710
61,530
9.6%
Secured loans
3,000
4,900
6,300
10,500
15,300
50.3%
Consumer credit total
136,710
151,915
165,012
185,602
209,031
11.2%


  Source: Datamonitor analysis of ONS, BBA, Finance and Leasing Association, Bank of England and APACS data.

  * CAGR stands for compound annual growth rate and is used by Datamonitor to give an indication of year on year growth in a market.

Table 2

CONSUMER CREDIT OUTSTANDING BALANCES BY PRODUCT, 1998-2002


£m
1998
1999
2000
2001
2002
CAGR
98-02

Credit cards
23,252
33,118
38,702
42,802
47,200
19.4%
Motor finance
15,287
16,945
16,575
16,972
18,300
4.6%
Retail finance
11,698
12,827
12,265
10,869
9,952
-4.0%
Overdrafts
5,071
5,346
5,729
6,788
7,266
9.4%
Unsecured personal loans
46,914
47,454
54,158
63,726
72,925
11.7%
Secured loans
na
na
na
na
na
na
Consumer credit total
102,222
115,690
127,429
141,157
155,643
11.1%


  Source: Datamonitor analysis of ONS, BBA, Finance and Leasing Association, Bank of England and APACS data.

  * CAGR stands for compound annual growth rate and is used by Datamonitor to give an indication of year on year growth in a market.

  5.2  With reference to over indebtedness:

    —  GECF's own practice is to be extremely cautious in granting credit.

    —  The card is not given out indiscriminately: those with a history of frequently applying for credit elsewhere, or who have poor credit history, are simply denied a card. For instance the Company considers the number of times a customer has applied for credit elsewhere when making lending decisions.

    —  Opening credit limits are set to minimise risk to the consumer. For example, whilst the Company's average account limit is £460, in a youth-orientated fashion clothing chain the opening credit limit granted is on average £180.

    —  A substantial number of customers never receive an increase in their credit limit from that low opening base, and any increases are usually small. In the fashion clothing chain, average credit limits for longstanding accounts rise to only £207—ie it rises by only £27 over the lifetime of the account.

    —  Around one in five of applicants are turned down as credit information indicates they would probably not be able to maintain the credit.

    —  Anybody who is not in regular paid work—or whose partner is not in work—is rejected.

    —  In all cases if a customer falls behind by more than 30 days their ability to spend on the card is suspended.

    —  Each month the Company monitors every one of its active customers for any signs of financial pressure. Looking at data from a variety of financial sources accumulated by the Credit Bureau, we can identify emerging signs of financial difficulty and where necessary we will take a measured and appropriate course of action.

  5.3  However, as with any form of borrowing, some households get into financial difficulty. GECF supports around 39,000 cases of financial difficulty per year, through the Company's Financial Solution team, from a customer base of some 10 million active accounts. Analysis shows that almost 80% of these cases are due to a change in personal circumstances such as death of a spouse or unemployment.

  5.4  Households experiencing financial difficulties typically have an outstanding balance on a storecard of £500. Their storecard debts are a very small portion of their total debts, which tend to range from £10,000-£20,000.

  5.5  In all cases, the Company's procedure is as follows:

    —  Interest charges are suspended at once.

    —  The Company carries out, by phone, a sensitive and thorough "fact find" on the customer's situation.

    —  Based on the data revealed a new lower monthly repayment that would clear the customer's balance over a prolonged period will be proposed. The minimum monthly repayment is £1 per month.

    —  All borrowing rights on the card—and any card GECF operates—are cancelled to prevent the customer from compounding their problem.

    —  GECF actively promotes the use of free debt advice organisations such as CCCS and CAB in collections correspondence.

    —  In addition, the CAB has developed and delivered to all GECF staff in the Financial Solutions team in Leeds a "benefits awareness" training programme.

  5.6  Given that storecard debt accounts for only a small part of the overall "household debt" in the UK, GECF's approach will only ever be part of the solution. However, GECF was instrumental in the formation of the debt counselling charity Consumer Credit Counselling Service (CCCS). Malcolm Hurlston and then GE employee Vic Ware OBE established CCCS in 1992. Since CCCS's inception, GECF has given over £1.5 million in donations and transaction charges and today the charity helps over 100,000 customers each year.

  5.7  If a customer becomes a client of CCCS all interest, fees and collections activity is suspended and a percentage payment made to CCCS for all payments made by the customer.

  5.8  GECF was a founding contributor to the DTI-sponsored National Debt Line.

6.  GECF'S PROPOSALS

  6.1  GECF believes that, whilst customers must take personal responsibility for their financial management, the Company is nevertheless part of a large and increasingly sophisticated industry and one which can inadvertently allow some consumers to enter into unwise borrowing.

  6.2  However, GECF's practices seek to ensure transparency, clarity and fairness in all operations and dealings with customers. Indeed, we will support any initiative that aims to reduce "small print" and ultimately help simplify and clarify customer understanding of any financial agreement they enter into.

  6.3  GECF believes there are further initiatives which, if implemented industry-wide, could help to further clarify financial products in consumers' minds and assist them in financial education. From GECF's perspective the following areas should be considered:

Product

  Establish a common approach to calculating when interest is charged and agree a standard way of explaining this to the customer in simple terms.

Consumer education

  Implementing practical initiatives to help consumers to make informed decisions about their finances.

Credit limit setting

  Automatic referral to the Credit Bureau before credit limits are increased, in line with the report from the Over Indebtedness Task Force.

  Greater reciprocity of credit information sharing to ensure all lenders have best available information on which to make credit decisions:

    —  Across the financial services industry, including for example bank overdraft information.

    —  With Government, including access to Student Loan information.

Credit counselling

  Requirement that all fee based credit-counselling services make clear that customers have access to free alternatives.

Fees

  Requirement to provide adequate written notice to customers of any intention to charge a fee.



 
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