Financial Services: Charge It Your Way

By Janice Castro

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.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Steve Hart

CAPTION: NO CAPTION

With reporting by Gisela Bolte/Washington and Jane Van Tassel/New York