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Change on the cards for an industry in the doldrums.

Change on the cards for an industry in the doldrums

It is not easy to shed a tear for credit-card companies, but their industry has been in the doldrums since 2005 - the year that marked the abrupt end of growth of between 5% and 10% in both the number of cards in circulation and the value and volume of card transactions carried out.

The problems started before the recession, but have been aggravated by the credit crunch. Last year saw a 3% drop in the level of credit-card borrowing in the UK, an 8% fall in the number of cards in circulation and a rise in bad debts.

In the June 2010 issue of The Banker, Pratt explains that it is difficult to pinpoint any single reason for the market's stagnation, but a wave of publicity surrounding suicides of people who had borrowed too much on their credit cards evidently did not help. Nor, says the author, did the admission by the then-chairman of Barclays, Matt Barrett, that he would never borrow on Barclaycard because it was too expensive.

Pratt reports that large-scale change in the industry is inevitable. This will most likely see the reinvention of the credit card as primarily a convenient way of paying for things, rather than a tool for consumer borrowing. The result should be a less risky business model, particularly in the current credit-averse consumer climate. Credit-card companies also need to persuade customers to use their plastic instead of cash and cheques.

Cost-cutting may also have a role to play in restoring the credit-card industry to health. Information-technology giant Hewlett-Packard provides a classic example of what can be achieved by cutting costs dramatically, standardising large-scale purchases, focusing sharply on areas of potential growth and introducing a 'brutalising culture of accountability for every penny in and out'.

Hardy reveals, in the April 2010 edition of Forbes, that the Hewlett-Packard has achieved annualised growth of 7% over the last five years - a growth rate that the credit-card companies would die for. When Mark Hurd took over as chief executive in 2005, the company's revenues were $80 billion - a figure that had barely changed over the four years since the company had merged with Compaq Computers. In 2009 they reached €115 billion. Around two-thirds of Hewlett Packard's growth is from mergers and acquisitions, a quarter from winning business from rivals and 10% from 'big new ideas'.

Hardy points out that Hurd has introduced 'ruthless efficiency' at the top, by 'packing the board with more Midwesterners than Silicon Valley insiders, and adding a lot more hard-core business types than engineers and inventors'. They have streamlined processes, reduced sales training, cut back on research and development, slashed the number of data centres from 85 to six and cut the workforce by 10%.

But there has been a price to pay for these reductions. Employee morale is low. The company consistently ranks lower than its main competitors on internet sites where employees speak out about their working conditions. 'Common complaints,' says Hardy, 'concern overwork, favouritism and managers looking over their shoulders in fear of not meeting Hurd's inexorable goals.'

The chief executive knows about the problem. He apparently believes that morale will rise again as employees become accustomed to the new ways of doing things. But that seems like a bit of a gamble. Countless examples from other industries demonstrate that rebuilding enthusiasm and commitment is a long and arduous process. When staff become disaffected, there is no quick fix.