The Road to Virtual? : Plastic cards’ 50 year journey in the UK

Remember the simple days of Access (your flexible friend) and Barclaycard? Not really so long ago, but the broad-scale launch of the two rival credit cards which started in the Swinging 60’s heralded a whole new era of new spending horizons and headlong leaps into the uncharted murky waters of personal debt. A new era of consumer finance was born.

(Of course, plastic cards were already on the scene: Diners Club being the first in 1962 closely followed by American Express in 1963 although as fee-based charge cards, aimed at the more affluent, business traveller market, these had a much lower, less mainstream profile)

Barclaycard, which could justifiably claim to be the UK’s earliest Fintech pioneer, launched the first credit card seen in the UK in 1966. It wasn’t until 1972 that NatWest, Midland Bank (as was) and Lloyds Bank managed to respond to this threat and retaliated with their own joint card: Access.  (The Joint Credit Card Company also included the Commercial Bank of Scotland and Ulster Bank, Northern Bank and Bank of Ireland).

It’s amusing to look back at the naivety of the earliest adverts for these cards which, alongside their major educational challenge of presenting an alternative payment option to consumers, also serve as a social commentary on fashion, lifestyle and reflect the infancy of the advertising industry at that time. Perhaps the most enduring statement was the timeless choice of David Bowie.
Card compare

(1967: source: Barclays Archives)    (1972/3: source UK Cards Association)

Two camps: one card per issuer. Simple.

Barclaycard can also boast that, in 1973, it was the first to issue credit cards to women in their own name!

The establishment of Visa in 1977, and franchising of the Visa brand, expanded the number of banks able to issue cards and, thereby, an exponential increase in card usage opportunities.

Customers were freely given credit cards with little or no protocols of creditworthiness in place, credit limits stretched generously to accommodate well intentioned spending habits, allowing plenty of room for growth, resulting in an inexorable credit bulge – a casualty of intentions falling short of reality.

But Pandora’s Box had been opened: the thirst for credit eagerly serviced, the opportunities for increasing market share identified and the scrabble for customer loyalty (and spend) began.

Original battle lines were re-drawn and duality was introduced in the 1980’s: issuers could issue both Access and Visa cards to their punch-drunk customers. The domestic Access consortium broke up, to be replaced by MasterCard, bringing an international usage dimension to match that of Visa. Cards now could truly be considered international payment methods and so started the gradual erosion (and demise) of travellers cheques and eurocheques as the mainstream payment facilitator abroad.

Consumer aspirations, affinities and social status were acknowledged and feted by the introduction of segmented card products and marketing strategies: Barclaycard was the first to target the B2B market with a company card (1977) American Express launched the first UK Gold Card in 1981 (?), one step ahead of Barclaycard and MasterCard.  The desire to claim the high ground – and the highest spending, highest status cardholders – meant that Gold was not to be enough – enter Platinum and ultimately, Black, cards over the years to come.

Running to keep up with the need for faster, efficient payment processes at point of sale, technology companies introduced electronic pos terminals in the 80’s: from that point on, the familiar carbon faced receipts and zip zap machines started to gather dust, making occasional appearances when  the telephone lines went down and technology failed.

But recognising a moral responsibility to not encourage high levels of debt and for customers who wanted the growing convenience of plastic payments without the risk of open ended credit, major banks followed the lead of Barclays who, in 1987 were the first UK bank to issue a debit card (Connect) within the Visa Delta franchise, followed a year later by a consortium of Midland (as was), NatWest and RBS introducing the Switch card (to be rebranded as Maestro 16 years later in 2004).

So by the late 1980’s all banks provided their customers with a debit card facility which had multi-functionality – as a payment card in its own right, an ATM card (usable in the, by now, ubiquitous networks across the UK) and cheque guarantee card.

With cards now established as the payment channel of choice and a payment infrastructure in place due to technological innovations, UK consumer spend was seen as an attractive market opportunity for new card issuers and the early 1990’s saw an exponential growth in the number, and range, of non-financial institutions (e.g. retail chains, affinity groups) and U.S based card issuers targeting a lucrative share of this spending activity.

But the tide was turning against the use of credit cards – and the high tolls exacted on the cost of extended borrowings; consumers reconnected with the discipline of only spending what they could afford, and by 1995, debit card usage volumes outstripped credit cards for the first time.

Alongside this behavioural shift toward debit cards was a decision of major credit card issuers to introduce annual fees; not surprisingly this initiative encouraged consumers to rationalise and reduce the number of cards held.

Further discipline and controls were introduced to allow lower income/higher risk consumers the benefits of plastic functionality with controls in place to prevent unsanctioned spending; the Visa Electron card (1996) and a year later, Solo (by the Switch consortium) was introduced as an entry level, pre-authorised spending facility.

But bubbling away in the background were developments and trials which, whilst in some cases too far ahead of the game for consumer adoption, were starting to draw back the curtain on things to come, a way of life which, 20 years on, would become the norm in today’s world of 2016.

There were several drivers: perhaps the most compelling was (and still is today, albeit with different and more complex challenges) fraud prevention and control. The introduction of Chip & PIN (designed as a NextGen major fraud prevention phase in card technology), rolled out from 2003, constituted a sea-change in educating consumer behaviour, likened by commentators as a change greater than that required by decimalisation. The refinement of adding a second tier of security (a unique chip security code) to replace the magnetic strip in 2009 (a response to magstripe skimming) had more implications for retailers P.O.S. technology than customers themselves.

And the key facilitator was the growth and impact of the internet. It is hard for us to believe that the internet did not exist before 1991. Perhaps it is harder to comprehend the rapid growth and development of this industry prior to 1991 without the internet!

With the internet now established as a global facilitating presence, a new generation of card issuers emerged in 1999 and early Naughties, such as Egg, Smile, Marbles, offering low/no cost and no frills credit cards, tuning into a what was, by now, a largely conservative and jaded consumer market.

The online phenomenon (which accounted for 100 million card payments in 2001, only five years after the set-up of Amazon and E-Bay) changed the face of consumer purchasing for ever and set in motion a whole new set of parameters, challenges and opportunities and it was the technology companies not the financial sector, who were best equipped to identify potential applications which would open up new payment possibilities undreamt of at that time.Card Journey (1)

Although consumers may not have been ready to envisage a world without cash in the mid 80’s (some readers might recall the inauspicious trialling of the electronic purse product, Mondex, in Swindon in 1995 and Barclaycard’s chip card trials in 1997) the cashless society started its invasion by stealth: the Oyster card was introduced in 2003 and Barclays trialled its first contactless cards in London in 2007 for low cost transactions. Contactless payment had taken off, starting to spread virally and was here to stay. Cash, the clock is ticking!

From those early trials the opportunities for contactless applications, the technology to expand upon basic functionality and build card acceptance and payment devices paired with mobile phone technology, has been swiftly seized upon by Google (GooglePay) and Apple (ApplePay) to name but two of the early adopters who have transcended plastic from the physical to the virtual world.

The playing field has become a digital blend of smart technology, online applications and functionality, blurring traditional payment channels and relationships.   More than ever before, technology has the ability to drive innovation but until recently, players have been shackled by regulatory chains. Card Journey (2_

With the recent relaxation of licence requirements, for the first time small, nimble Intech companies are now free to bring their propositions to market, characterised by their online delivery channels.  There is no doubt that they have the potential to change the face of the personal banking and payments scene in the UK.

Even accepting that consumer habits are changing across the board,  it is likely that the core target market for this new approach to personal financial management will be the 10.9 million 18-30 years olds (Source: Office of National Statistics projected universe), and the 1.5 million millennials (16-17) year olds new banking entrants in the near future.

Even so, it seems unlikely that each of the new, aspiring players will survive over the next five years. The survivors will be those who have the funding, the stamina and an ability to attract a critical mass of customers.  But whilst current focus is on the undoubted capabilities and seeming attractiveness of their NewGen offers, one has to ask:

How will traditional banks respond?

The fundamental positioning platforms of the new generation of Intech providers demonstrate that they have been conceived of consumers’ underlying distrust, disillusionment and disappointment with established banking institutions.  But these banks still account for the major market share of UK banking customers and are likely to continue to do so.   Saddled with a major cost base of retail networks and ageing I.T. infrastructures, banks will need to implement major strategic change management programmes whilst managing the relationships of customers not within scope of this ‘new way’, typically older and possibly less profitable.

Undoubtedly, a major PR initiative on behalf of the established banking industry is needed to reverse the lack of trust and cynicism which has pervaded the banking culture.

But it is unlikely that banks will allow new entrants to cherry pick their identified target clients without a fight, and their response shouldn’t be underestimated, whether this is through in-house development or acquisition of Intech firms.

How will consumers respond?

There is an implicit assumption that younger consumers are ‘switched on’ enough to switch to/start with a NEWGEN banking offer; taking into consideration the fact that there will be some experimentation and possibly dual account holding, it will be a while before the dust settles enough for new players to really assess their success.

Certainly the new players must be feeling the pressure of intense inter-gang rivalry.

Whatever the outcome, it seems that the options available to individual consumers and, online merchants have become disaggregated, commoditised and probably cheaper.

The fact is that, despite the growth in online sales, statistics from the UK Card Association show that in value terms, online card expenditure accounted for 22.4% of all sales (a slight increase from 21.1% in 2014). Within the retail sector, online purchases accounted for only 13% sales volume in 2015.  So even with payment wallets (Apple/Google) obviating the need for cards, the majority of payments are still over the counter (OTC) card based.

With the world changing so fast, it is possible in 20 years’ time, we will look back at the time when the physical plastic card ceased to exist.

But not yet.