TIME: Almanac 1993/TIME Almanac 1993.iso/time/070191/0701200.000

Text File | 1992-08-28 | 9.8 KB | 201 lines

                                                                                BUSINESS, Page 50

FINANCIAL SERVICES

Charge It Your Way


Credit-card users finally get a break, as fierce competition
spurs a free-for-all of innovative services and jazzy incentives

By JANICE CASTRO -- With reporting by Gisela Bolte/Washington and
Jane Van Tassel/New York


    Ka-chunk! Ka-chunk! Every day more than 200 million
credit cards slide in and out of charge machines across the U.S.
Ka-chunk! Americans used plastic to charge $480 billion last
year, at a rate of about $1 million a minute. The typical
American charge customer carries nine cards and owes more than
$2,000 on them. Despite interest rates averaging close to 19%,
many cardholders are blase about paying hundreds of dollars a
year in interest, plus an annual fee for the privilege of doing
so.

    No wonder the competition for these docile consumers is
growing far tougher. Powerful new players are entering the
business, and the result is some welcome relief for the
consumer. Card issuers are changing the rules as they go,
cutting prices, waiving fees and offering an inventive array of
new services. "The heat is on in the credit-card industry," says
Robert McKinley, publisher of Bankcard Update, an industry
newsletter. "Nonbanks are finally putting pressure on the banks
to lower their rates."

    In just four years, Sears has recruited 38 million
customers for its all-purpose Discover credit card. Sears
charges no fee, and refunds as much as 1% of all purchases at
the end of the year; customers have collected $100 million in
these reimbursements so far. When AT&T introduced its Universal
card last year, promising 10% discounts on long-distance calls
and no fee for life to anyone who signed up the first year, 10
million consumers called to ask for Ma Bell's special Visas and
MasterCards. Last week Ford began offering no-fee Visas and
MasterCards carrying the company's blue-and-white oval. Chrysler
is preparing to offer its own brand of cards.

    The new issuers covet the rich profits that can be reaped
from installment credit. Banks that issue general-use credit
cards, like the 420 million Visa and MasterCards in circulation
worldwide, have been borrowing funds in the U.S. at 9% to 10%
interest and loaning those funds out on plastic at as much as
22%. For banks stuck with Third World loans and rancid real
estate, that spells salvation. At the 10 largest banks in the
business, which hold 48% of all outstanding card debt, credit
cards account for 25% of profits. Citibank, the largest issuer,
cleared $610 million in profits on its Visa and MasterCard
operations last year, according to Spencer Nilson, editor of The
Nilson Report, an industry newsletter. Even though some 6,000
financial institutions issue cards, the business had nearly been
impervious to price competition. Consumers who will shop around
for value on everything from groceries to autos have been
sluggish when it comes to seeking better deals on credit-card
costs.

    Now they're getting smarter. Loaded down with $226 billion
in high-interest revolving-credit debt, up from $55 billion in
1980, Americans are beginning to think twice before they pull
out the plastic. Easy credit is no longer enough to attract
them.

    As the competition heats up and the growth of charge
volume slows, issuers of credit cards are trying to stand out
from the crowd by offering better service. They began years ago
with such offerings as travel discounts and so-called affinity
cards, which feature the logos of sports teams or donate a
portion of every charge to charity. Some banks offer programs
similar to Citibank's Citidollars plan, under which cardholders
earn discount points that can be applied to goods in a
mail-order catalog. "Trouble is, the product selection is
generally limited and the discounts insignificant," says
Bankcard Update's McKinley. "The idea of these enhancements is
to create marketing value, not real value. The enhancements
attract consumers, but most consumers don't use them."

    American Express has been a leader in developing new
services that customers never knew they needed. After the
company introduced free insurance for rental cars nationwide in
1987, the benefit was copied by MasterCard and Visa. Banks also
followed American Express in offering such features as
extended-warranty protection on products purchased with their
cards and access to hot tickets for cultural events.

    American Express follows a strategy that is notably
different from its bank-card brethren. Since it issues mostly
charge cards (meaning accounts are paid up every month) rather
than credit cards, American Express reaps little in profits from
interest charges on outstanding balances. The company relies on
relatively high annual fees ($55 for the Green Card) and vender
payments on purchases (3.5% on most restaurant bills, almost
twice what Visa and MasterCard charge). With just 37 million
cards in circulation, Amex is a niche player compared with mass
marketers Visa (257 million) and MasterCard (163 million).

    Nestled in that niche, however, is a big-spending
consumer. On average, American Express customers charge $4,266
per card every year, vs. $1,577 among bankcard holders. Three
years ago, protecting its flank, American Express introduced the
Optima revolving-credit card for established customers, pegging
the interest rate at about 16% to keep its flock from straying
to higher-priced cards. "We are not interested in having
everyone carry our card," says Kenneth Chenault, president of
the company's consumer-credit-card division. "My objective is
to go after the most profitable charge customers and keep them
happy."

    To meet that goal, American Express constantly raises the
competitive stakes. Example: Global Assist, a free, 24-hour
worldwide hot line that helps card members with medical and
legal emergencies. Michael Nolan, 29, a salesman from New
Jersey, was vacationing on Saint Martin last June, when he
collapsed from an unidentified illness. Alerted by his family,
Global Assist arranged a long-distance diagnosis by U.S. medical
specialists and airlifted the comatose Nolan home just in time
for a lifesaving liver transplant.

    As major companies enter the card business, usually by
buying their own banks, they tout fresh features to set them
apart. Last month new-player AT&T startled the competition with
a plan to intercede with credit bureaus on behalf of its charge
customers. Consumers have long complained that the industry
disseminates inaccurate and damaging information about them,
then is inexcusably slow to correct mistakes. AT&T, which wields
considerable clout as a leading buyer of credit reports,
persuaded the three major credit bureaus -- Equifax, TRW and
Trans Union -- to set up toll-free numbers for Universal
customers and card applicants who want to dispute their records.
Says Paul Kahn, president of AT&T's card division: "We've really
shaken up some of the very fat, complacent banks in this
business. Ultimately, I think consumers are getting a better
deal with our product and with a lot of products that are
starting to come out."

    Another new type of benefit seeks to help two-income
families to save time. Citibank Visa and MasterCards now offer
the price-protection feature. If customers buy a product with
the card, then find it elsewhere at a cheaper price, Citibank
will refund the difference. The customer, though, must provide
proof within 60 days that the lower price was advertised in
print. Citibank's cards also cover damage and loss.

    A popular feature started by bankcard issuers like
Citibank is the airline-affiliated card, which gives one
frequent-flyer-mile credit for each dollar charged. Starting
next week, American Express will mimic that idea, adding its own
twist. Unlike most bankcards, which generally restrict the
program to one airline, American Express will allow cardholders
to allocate their miles to any combination of 31 airlines,
including United, Delta, Northwest and Continental. One catch:
cardholders must charge at least $5,000 a year to participate.
Explains Chenault: "The American Express card will serve as a
kind of wild card for a variety of frequent-flyer programs."

    The intensifying competition is squeezing profit margins
on cards. Services such as Global Assist, the warranty programs
and frequent-flyer benefits are more costly to provide than the
old-time discounts were.

    To boost the volume of business, issuers are trying to
persuade American consumers to charge everything from groceries
and fast-food to telephone calls and health care. Currently
13.5% of U.S. consumer spending is paid via plastic; most of the
rest is dispensed through cash and checks. Says Keith Kendrick,
senior vice president of marketing for MasterCard: "Though
people have talked for a long time about the cashless society,
we are by no means all the way there."

    Technology is speeding that transformation. Advanced
instant-verification devices are shaving the time it takes to
use a card to nearly equal that of a cash transaction. AT&T
cardholders can now use Universal in thousands of new pay phones
that take only plastic: a practice that helps lock in
long-distance business for the firm.

    Greater use of charge cards naturally stimulates spending,
since cash at hand is not an issue. Fast-food customers, for
example, spend twice as much on average when they use a credit
card. Supermarkets report an even bigger increase. Families
trying to adopt more sensible spending habits will soon be
fighting temptation at every turn. In fact, if the card
companies prove adept in meeting their goals, they may persuade
Americans to loosen up on their wallets and give new meaning to
the term cashless society.