Sunday, August 10, 2008

American-style credit ensnares consumers overseas

...."I owe my soul to the company store!"

Sunday, August 10, 2008

ISTANBUL: In Turkey, where borrowing money was until very recently a family affair, being in debt carried a fearful stigma. Some here even likened it to the disgrace that drives people to commit the honor killings that still occur in parts of this society.

"People who would kill their sisters or daughters for bringing shame on the family would do anything to avoid being labeled a debtor," said Nazim Kaya, the president of Consumers Union, an advocacy group that helps those who fall into debt.

But in a cultural shift that has swept aside centuries of tradition, credit cards have become commonplace here. Only three decades ago, Turkey had fewer than 10,000 cards; today it has more than 38 million.

As the American blessing of credit cards became widespread, so did the American curse of debt. Outstanding card debt here ballooned to nearly $18 billion last year, six times the level five years earlier. Default rates spiked and consumer groups protested sky-high interest charges. Newspapers were filled with stories of desperate card holders killing themselves or others.

In 2006, a fierce outcry prompted Turkey to pass a law clamping down on credit card marketers.

"We did not listen to our ancestors' proverb," Kaya said. " 'Stretch your leg only as far as your blanket.' "

Few American exports have proved as popular as credit cards. In just a generation, they have gone from a totem of Western affluence to an everyday accessory in Brazil, Mexico, India, China, South Korea and elsewhere. More than two-thirds of the world's 3.67 billion payment cards circulate outside of the United States.

This global shopping spree has turned Visa and MasterCard into Wall Street wonders: Visa completed the largest stock offering in American history in March, and MasterCard's shares have risen almost 500 percent since going public in 2006.

Their real opportunities for higher profits lie abroad. The card issuers make their money by collecting a fee on each card and a tiny percentage on purchases. (Banks primarily make their profit by charging interest.) In Asia, Latin America and Central Europe, card transaction volume is rising 20 percent to 30 percent a year, more than twice the growth rate in the United States.

But when credit cards are handed out to unsophisticated consumers — as they often are in shopping malls, factories and university campuses in middle-income developing countries — they can pile up debts that can take years to pay off, if they ever are.

In South Korea, for instance, a surge of defaults in 2003 set off a national crisis. Now industry experts say they see similar dangers in rapidly growing markets like Turkey and China, where there are more than 100 million cards.

While acknowledging the risks, many here argue that the advantages of credit cards outweigh their dangers.

Like cellphones, they hasten economic development. They offer convenience to people who might never have had a bank account but whose rising incomes give them the power to buy motorcycles, refrigerators and stereos. By registering transactions, they also shrink the size of the black-market economy, allowing governments to collect taxes they might have missed.

The business is lucrative for Turkish banks: Profit per card is higher here than in America. That has made the banks attractive to foreign investors.

"This is a society that has transformed itself," said Suzan Sabanci Dincer, scion of one of Turkey's wealthiest families and the chairwoman of Akbank, a large card issuer here. In 2006, Citigroup bought 20 percent of Akbank — drawn partly, she said, by its credit card franchise.

Yet, Turkey — with its stumbles and its tentative recovery — offers a cautionary tale.

At the upscale Akmerkez mall in Istanbul, the siren call of credit is everywhere. Advertisements posted in the doorways of stores promise bonus points if shoppers pay with a preferred card. Big-ticket items like refrigerators can be paid for over several months, provided the purchase is made with plastic.

Turkey's two biggest card issuers, Yapi Kredi and Garanti, have branches in the shopping mall, with agents busily processing applications. In the anything-goes era before the 2006 law, banks handed out applications to families as they shopped. Cards were issued with only cursory credit checks.

That is how Halim Uzel got his first taste of American-style credit. In 1999, two salesmen from a Turkish bank turned up on the floor of the textile factory where he worked, hawking cards. He showed them identification and his cellphone, filled out a one-page form, and in three weeks received a Visa and a MasterCard in the mail.

By 2001, Uzel was deep in debt. Earning the equivalent of $4,360 a year, he had nearly $6,000 in unpaid balances on five credit cards. Seven years later, after borrowing from family, friends and even his boss to meet payments, he finally paid off his cards.

"My best years as a young man have been wasted," said Uzel, 32, fingering a set of worry beads. "I haven't had a social life for 10 years. I've given the last penny in my pocket to the banks."

Turkish bankers acknowledge there were excesses, but they chalk it up to the times. "Some banks may have gone too far," said Mehmet Sezgin, the general manager of the card business at Turkey's second-largest issuer, Garanti. "We were coming out of a crisis in 2001."

Turkey's economy had nearly collapsed. Banks' main business of lending to the state was no longer profitable, so they focused on consumer lending. Because many Turks did not have bank accounts, the fastest way to build business was to hand out credit cards.

Until then, lending in Turkey had been confined primarily to families. Consumer loans were too expensive or too hard to get, said Ahmet Faruk Aysan, a professor of economics at Bosporus University in Istanbul.

The first card, from Diners Club, turned up in Turkey in 1968, followed by American Express. Visa's arrival accelerated things, by helping set up a system for card payments among banks.

Sezgin opened an office for MasterCard in Istanbul in 1993. In the early days, he said, Visa and MasterCard were featured prominently on the cards. Now, banks here drive the market, and their brand names are most prominent.

With loyalty programs and cards tailored to every demographic group, Turkey's market is a model for foreigners. UniCredit of Italy owns a stake in Yapi Kredi and has used its card expertise in other countries. And Sabanci says Akbank and Citigroup are talking about marketing a joint card.

For Turkey or any fast-growing market, the chilling example of a credit culture run amok is South Korea. Frenzied competition in a deregulated market led to the issuance of 148 million credit cards in a country of 49 million people.

Korean banks and industrial conglomerates showered consumers, even high school students, with free, unsolicited cards. They put little effort into credit checks and competed to offer ever bigger cash advances.

As consumers took advances on new cards to pay old ones, debt ballooned. In 2003, with default rates soaring to 28 percent, the industry collapsed. The government had to intervene to rescue issuers; the largest was taken over by banks.

Korea's default rate plummeted. Issuers began sharing data about customers and importing Western credit-rating firms' methods for vetting applicants.

"They learned a big lesson," said Park Chang-gyun, a business professor at Chung-Ang University, referring to credit card companies. "They no longer chase blindly after market share."

In Turkey, change was prompted by a grim statistic. From 2003 to 2006, consumer groups said, 41 people died because of credit card debt, either through suicide or homicide.

In one widely publicized case, a 37-year-old policeman shot himself in the head on an Istanbul street after friends tried to wrest the gun from him. He was depressed over $40,000 in debts.

Turkey's 2006 law capped the monthly interest charged by banks. (Because of inflation, annual rates once topped 100 percent.) The law tied credit limits to a user's income, doubled minimum payments and stiffened credit checks.

Analysts say it has curbed the worst excesses. The amount of credit card debt in default declined to 6.3 percent in March, from a peak of 8 percent in early 2006, according to the Turkish central bank. While that is not excessive by world standards, it is higher than the 5.17 percent rate in the United States.

"You still don't have the kinds of credit information in Turkey that you have in the States," said David Robertson, publisher of the Nilson Report, which tracks the industry. "So you're not going to be able to ratchet down the level of bad credit like you can here."

After six years of torrid growth, Turkey's economy is cooling and political instability is deepening. With double-digit inflation and interest rates at 16.75 percent, maximum monthly interest charges on cards remain high.

"This is a very volatile place," said Ali Ertenu, a banker who used to work for Yapi Kredi. "With a global downturn, there could be trouble ahead for credit card customers."

Two years after the reforms, thoughts of suicide still occur to Nazli, a 26-year-old woman struggling to pay off charges her father accumulated on 10 credit cards. (To protect her family's reputation, she will not say how much the debts are, or give her last name.)

Nazli negotiated repayment schedules with the banks. But after she missed a payment, one bank charged interest for the entire repayment period, erasing the progress she had made. "The more you try to pay it back, the bigger the amount grows," she said.

Until that burden is lifted, Nazli cannot even think of being married or taking a vacation. "More than the fear of losing our property would be the shame, in front of our neighbors, of having a collection agent show up on our doorstep," she said.

For Uzel, climbing out of debt was less about saving his name than reclaiming his life.

Until 2005, he kept his head above water by taking cash advances on one card to pay the minimum on the other cards. But then Uzel married, which meant paying for a party for his bride's family.

"I was still trying to have a normal life," he said, as his 3-year-old daughter wriggled on his lap.

Uzel finally paid off the banks in April with a loan from his brother-in-law. But a collection agency recently called, demanding $1,058 for unpaid electricity bills.

The long ordeal strained his marriage and made him the butt of his friends' jokes. He says he is partly to blame, and swears that from now on, will only use cash.

But Nazim Kaya, the consumer advocate, said American-style credit is here to stay. "We can't blame American hegemony for this," he said. "We should learn to use credit cards properly."

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