TIME EUROPE
JANUARY 17, 2000 VOL. 155 NO. 2
Debt Easy
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Card providers offer a multitude of other come-ons. Morgan Stanley, for instance, has a Platinum card which returns up to 1% cash-back on purchases. Others give cardholders frequent-flier points--the chance to earn free airline trips based on card usage. Another popular enticement is the chance to help a favorite organization via affinity cards, such as those for Manchester United Football Club, the WorldWide Fund for Nature, the Royal Geographical Society or the National Asthma Campaign. From the cardholder's point of view, however, goodwill can take a long time to show up: a recent look at an affinity program run by the Bank of Scotland in conjunction with the Guide Dogs for the Blind Association found that a cardholder wanting to generate a donation of about $40 during the initial 20-month period would need to spend about $11,510 using the card.
As any economist knows, all incentives must be paid for--so users should keep an eye on the fine print of the contract. With Morgan Stanley's Platinum card, for example, there is a fee of about $24 on top of interest if minimum payments are late, and the same for exceeding the credit limit.
The problem for the U.K. and U.S. companies now targeting Continental Europe is that attitudes to debt are much more cautious, and rules vary on what is permitted. In Germany, for example, card promotions can face legal problems, as American Express found when a court ruled it couldn't advertise its frequent-flier-points incentive program. France has strict rules on how people are signed up, requires a credit check on applicants, and puts a cap on how much interest rates may rise in any year. Jean-Claude Nasse, assistant director of the Association of French Finance Companies--which represents about half the country's credit businesses--says: "In France, as in other Latin countries, the government just could not keep itself from getting involved in this activity, and so our business is regulated much more than it is in the U.S. or the U.K." There has also been "an active effort in France by consumer groups to depict revolving credit as too easy to obtain and dangerous to the consumer."
Jean-Marc Granier, of the Ministry of Economy's consumer unit, says most French people with credit cards prefer to pay via direct debit cards, but will use credit to exploit promotions and incentives. That's bad news for the providers because the users are not building up their debt. Another indicator of the French wariness of plastic is the average per capita use of checks: in 1996 it was 85, compared to 45 in Britain, 11 in Italy, 9 in Germany and 5 in the Netherlands.
Germans have even deeper dread of debt than the French. Steve Worthington, professor of marketing of financial services at England's Staffordshire University, says Germans tend to tie any credit to their regular bank check account. "I think they have a psychological scar about debt from the Weimar Republic days, and they are very wary of what they perceive as the American credit card." Providers in Germany also face competition from the "Dispo," or disposition, whereby banks allow overdrafts up to 11%--high, but a lot lower than for revolving credit. The standard is to allow customers up to thrice monthly income.
Barclays Bank has distributed just 900,000 cards in Germany since 1991. Amex spokesman Jim Tobin says, "Germany is behind the rest of Europe, but young people are beginning to understand credit." His company is pushing its Blue card, targeted at the 23-35 age group, with an advertising blitz on television and in magazines.
In Italy, resistance to debt is also strong. There were only 8.7 million charge cards and 2.4 million credit cards in circulation at the end of 1998, about one card for every five Italians. The average Italian charge card user makes about 10 transactions a year--more than the seven annual transactions made by Italian credit card users, but still only a sixth of the use of charge cards in the U.K. While younger people are adapting--and affinity charge cards with football clubs like Fiorentina, Parma, Lazio and Roma are a big success--many older Italians still prefer "real" money to plastic. "I'd feel I didn't have things quite under control and that I could end up owing loads of money, even if I didn't spend that much," says Luigi Mastrofini, a 53-year-old barber in central Rome. Others may be concerned that credit cards leave a trail which the tax man might follow; cash doesn't.
Despite these barriers, card companies have been making inroads, and many are planning campaigns using telemarketing, direct marketing and the Internet. MBNA's chief operating officer, Bruce L. Hammonds, envisages potential customers being able to log on to a central MBNA website, enter their country of origin, then learn about credit cards geared for their own conditions and regulations. In France, in September 1998, Barclaycard mailed credit card offers to 5 million households, selecting them after market tests.
As personal debt takes new forms, many European countries are updating their laws and increasing services to those who fall too far into it. In Germany, the Institute for Financial Services, a privately funded think tank, estimates that, for all their caution, about 2.6 million German households are "overextended." Severe bankruptcy laws were softened early last year with "consumer insolvency" legislation aiming to give hopelessly indebted people a fresh start--if they live seven years at subsistence level and can convince their creditors they have done their all to repay. A study in Cologne showed the cause cited most by debtors for their woes was job loss (20%), followed by reduced income, legal or financial inexperience, divorce and a failed attempt to start a business.
In France, a Commission for Overindebtedness has since 1990 been seeking solutions to the most serious cases, ranging from rescheduling repayments to bankruptcy. By the end of July 1999, it had examined a total of 800,000 cases. "You could say that in a nation of 60 million consumers, 800,000 cries for help isn't too bad," says the Ministry of Economy's Granier. "But those cases not accepted by the Commission--or never presented--darken the picture."
While U.S. and U.K. credit card firms predict a greater willingness by Europeans to go into debt, local lenders who had the field to themselves for years are not putting out the welcome mat. In France, for example, domestic finance and credit groups are struggling to hold the market dominance they established back when French banks regarded consumer credit as slumming. That is clearly no longer the case, and banks have forged partnerships with finance companies--such as the Banques Populaires with Cetelem or Crédit Agricole's with Sofinco--to gain a foothold in France's tight market.
"Perhaps it is the inexplicably combative Gallic spirit, but there is an unreasonable, almost illogical level of competition between credit and finance companies," says the Association of French Finance Companies' Nasse. "Businesses are fighting tooth and nail for a limited number of clients." And this has led them to look outside. Cetelem and Sofinco, for example, have launched credit card services into neighboring markets including Italy, Spain, and even the crowded British market.
As the battle heats up, credit is both revolving and evolving. There are pitfalls, the prime one being borrowing more than income justifies. Consumers should also beware the lures of low initial interest rates and promotions, and remember that a sudden change in circumstances--such as job loss--could leave them out on a debt limb. For the judicious, however, credit makes it easier to manage one's own finances. Even Frances Walker, whose charity helps debtors who get in too deep, says credit "empowers people and enables them to do things." And those lenders eager to see debt revolve might bear in mind that a certain saying about merit also applies to money: Give credit where credit's due.
Reported by Bruce Crumley/Paris, Helen Gibson and Jennie James/London, Martin Penner/Rome and Steve Zwick/Düsseldorf
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