The War Of The Plastic

What a nice gift. Citibank, the nation's largest bank and top credit-card issuer, on Apr. 1 announced a new program to refund the difference if cardholders charge an item and later find it costs less elsewhere. But this "price protection" plan is more than just goodwill toward holders of Citi's 30 million cards. It's the latest sign of bad times ahead for issuers in the once-lush world of credit cards.

Last year, American Telephone & Telegraph Co. crashed the party with its own Visas and MasterCards--offered to charter cardholders with no annual fee as long as they use the card. The banks took the hint. Last fall, the Visa and MasterCard organizations they control moved to block other outsiders from following AT&T. So, by January, when Sears, Roebuck & Co. tried to float Visa plastic, it was stopped cold.

FADING RAY OF LIGHT. Nor is the friction limited to old-line banks and the new wave of issuers. Merchants, the crucial connection between card issuers and the consumer, have been getting edgy. American Express Co., the king of charge cards, in March was faced with a revolt by Boston restaurateurs protesting the high fees they pay to honor AmEx plastic.

Add it up, and all the competition figures to be a boon to consumers. But bankers, worried about so much else these days, now have one more reason to fret. For the banks, suffering from sour real estate and buyout loans, have been depending on credit cards as the sole ray of light in a dreary season. Consider Citibank's situation: Its consumer bank relied on credit card operations for some 60% of last year's $ 1 billion profit. "This is a life-and-death struggle," says Washington (D. C.) bank consultant Edward E. Furash. "The banks can't afford to lose this war."

No question, credit cards grew robustly through the 1980s. By last year, annual billings totaled $ 366 billion. But the fact is that such a rich market inevitably attracts new players. And they're formidable. Since 1986, the market share of such intruders as AT&T has almost tripled, to 16% of Visa and MasterCard receivables (chart). And, ominously, consumers' wallets may at last be stuffed with too many credit cards. According to a survey by Atlanta-based consultant Bruce Brittain, 21% of cardholders plan to drop at least one card soon. If so, that'll only sharpen the rivalry and put more pressure on banks'


Small wonder bankers are clawing back with legal and regulatory challenges to the interlopers' Visa and MasterCard privileges. The banks complain that, unlike them, their competitors needn't meet federal capital requirements. Says Alex W. Hart, chief executive of MasterCard International Inc.: "All we want is a level playing field."

Visa and MasterCard franchises are boons to issuers: More merchants take these cards than any others. Franchisees are supposed to be limited to banks, but AT&T and its cohorts get around that by buying into or signing contracts with small banks. Many of these institutions end up doing little more than serving as a conduit for the new players.

The fiercest battle is raging around Sears' attempt to issue Visa cards through a failed Utah thrift that it bought from the U. S. Resolution Trust Corp. MountainWest Savings & Loan had an ongoing Visa membership. When Sears took over, Visa wouldn't fill its order for new cards. Sears got a federal judge's O. K. to go forward, but an appeal is now pending. The Justice Dept. confirms that it's studying the Sears controversy. Whether it will intervene remains a big question mark.

Visa says a 1989 bylaw forbids membership by other existing card companies. Prime suspects: American Express and Sears, whose Discover is the nation's third-largest card. "Why should we allow a major competitor to issue Visa cards?" asks David R. Brancoli, spokesman for Visa USA Inc. The banks' worst nightmare is that Sears will win in court and convert all of its 38 million Discover cards to Visa. Sears argues that credit cards are a public convenience that can't be reined in by a private body such as Visa.

If battling that massive merchant weren't enough, the banks must also contend with AT&T. The telecommunications titan's Universal plate, introduced last spring, quickly vaulted AT&T into the top ranks of the nation's issuers. It racked up $ 4.4 billion in charges (table). "We'll be No. 3 by next year, maybe No. 2," boasts Paul Kahn, head of AT&T's cards. Even better yet, he expects the cards to be profitable sometime next year.

AT&T's sales gimmicks are eye-catching. Yearly interest rates run a full percentage point below the 19.8% often charged by Citi and its brethren. Citi and other banks argue AT&T's link to Georgia's Universal Bank requires AT&T to be regulated as if it were a bank.

Visa and MasterCard also are fighting back by tightening standards for new issuers. Visa now won't allow entities that aren't banks to hold more than 25% of Visa receivables. That means the interlopers' pet banks must hold them, yet they lack the capital to stand behind a mammoth loan portfolio.

For big banks, the main trouble is that AT&T, Prudential, John Hancock, Ford, and others have already crossed the moat and crashed the gate. Visa is examining whether to make the new rules retroactive. But that maneuver could raise antitrust issues, contends Anita Boomstein, a lawyer with New York's Hughes, Hubbard & Reed, who has fought banks on this turf.

PAPERWORK. That leaves the banks with such margin-squeezing come-ons as Citi's "price protection" program to lure and keep cardholders. How the strategy

will fare has yet to be shown. Citi admits few cardholders use similar gimmicks. A cardholder who buys a toaster and--whoops--finds a cheaper one over the weekend must, within 60 days, submit to Citi a store receipt, credit-card receipt, and a copy of a print ad documenting the bargain missed. That's a lot of paperwork for, perhaps, a small sum.

With such troubles from without, the issuers hardly need troubles from within. But that's what AmEx has got with the New England restaurateurs who want it to lower the 3.25% charge it levies on every meal paid for with its cards. While AmEx is willing to slice off a bit, it says it can't go much lower. One disgruntled owner, Lydia Shire of Boston's Biba, dropped American Express on Apr. 1.

Eventually, all the rough knocks in the credit-card biz will send some players to the sidelines. And that, in turn, should halt the fearful squeeze on margins. But right now, it's too bad for the bankers because an end to the season of fear is nowhere in sight.

         1990 U.S. billings (billions of dollars)
      AMERICAN EXPRESS           $88.3
      CITIBANK                    40.3
      SEARS DISCOVER              19.4
      SEARS ROEBUCK               16.8
      FIRST CHICAGO               13.0
      CHASE MANHATTAN             11.4
      MBNA*                       11.0
      BANK OF AMERICA             10.4
      J.C. PENNEY                  8.7
      AT&T UNIVERSAL              4.4
       *Formerly a unit of MNC Financial Inc.
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