The Perils Of Plastic

It's getting tougher for credit-card issuers to turn a profit

After getting a couple of low-rate credit-card offers each week for months, Saundra Williams decided last fall to see if she could do better than the 18.5% annual interest rate on her cards. When she called to bargain, she thought she was doing well when Citibank promptly offered her a menu of fixed or variable rates, including a nifty 10.9%. But Bank of America did even better, slashing her rate to 9.9% and hiking her credit line to boot. "I was astounded at all of the options they offered me," says Williams, an assistant professor at North Carolina State University in Raleigh. "I never heard of negotiating a rate."

Negotiate with a credit-card company? It would have been unthinkable a few years ago. But it's happening. For many of the players in the industry, times are tough. Now that they've saturated the American public with plastic, they're finding it hard to expand. As more and more customers pay off balances each month--"freeloading" in industry parlance--card companies are working harder than ever before to squeeze out a buck.

BARGAIN RATES. But even though overall profits are recovering a bit as bank efforts to regain customers make headway (chart), card issuers still have a hard row to hoe. Credit-card and revolving debt totals $589 billion but has grown little over the past few years. And Visa International and MasterCard International are fighting an $8.1 billion antitrust suit by Wal-Mart Stores Inc. and other retailers, accusing them of forcing stores to accept their high-cost debit cards. "The game is tougher now than it was 5 years ago, 10 years ago," says David R. Alvarez, president of the credit-card business for eighth-ranked Providian Financial Corp.

For some customers, the industry's woes are just fine, thank you. They mean easier credit, high loan limits, and bargain rates that fly in the face of the Fed's tightfistedness. With so many lenders tripping over themselves to help Americans go into hock, it's no wonder that, as of 1998, some 68% of American families were packing credit cards, according to the latest Federal Reserve figures.

Still, plenty of cardholders are paying though the nose. Miss a payment by a few days? You could be slapped with a $29 late charge, up from an average of $13 just three years ago. And, to drive home the point, your interest rate could be jacked up as an added penalty, perhaps to as high as 30%. Don't use the card much? You might see an inactivity fee and then get tagged with a closing fee if you cut the card up. "We call it a `fee frenzy,"' says Robert B. McKinley, chief executive of Inc., an industry tracking service. But such soak-the-customer tactics can backfire. First USA, which now boasts some 50 million customers, has lost millions of them in the last two years, cutting its total outstanding card loans by 1%, to $69.4 billion last year. Bank officials blame consumer anger over such practices as ratcheting up loan rates above 19%, from introductory 3.9% rates, if the borrower paid late just twice in six months. "We lost many of our best customers," William P. Boardman, vice-chairman of First USA parent Bank One Corp, told analysts on Jan. 11.

While First USA officials vow to treat customers better, the fallout of its actions could be far-reaching. Bank One's stock has plunged from above $63 a share last spring to under $30 now. Its CEO quit, and the bank is a subject of takeover speculation. "It's a real challenge to turn this organization around," says David Hochstim, an analyst with Bear, Stearns & Co.

First USA's woes will give a boost to its rivals. Weakened, it won't flood mailboxes with low-rate offers at anywhere near last year's pace. It even expects to keep its total of card loans in the market flat or let them shrink as much as 5%, so the competition could carve up an additional $3 billion or so in business. "They'll be much more inwardly focused," says Moshe A. Orenbuch, an analyst with Donaldson, Lufkin & Jenrette Inc. "The intensity of the competition in the industry will decline."

But card companies must still scramble for growth. For some, gains will come from customers that rivals shun, so-called subprime or nonprime clientele. These folks have blemishes on their records--missed payments, even bankruptcies--or lack long credit histories.

INVITATION ONLY. Providian, a hard-charging San Francisco card issuer, finds gold in the nonprime market. It has signed up so many cardholders in the last year that it posted a stunning 66.4% rise in loans outstanding, to $18.71 billion--the biggest gain among the top 10 issuers tracked by The Nilson Report. Net income grew 86%, to $550.3 million, as the bank signed up 4.5 million new customers, boosting the total above 11 million, with nearly 30% in the nonprime category.

Of course, smudged credit records do mean it might cost you to get Providian plastic. It levies a steep 23.9% rate on its lower-end customers. Providian pays too--for betting on borrowers others won't touch. Its loss rates are a bit higher than industry norms of about 5.51%, though the rate dropped from 7.58% at the end of 1998 to 6.78% in last year's closing quarter. Its delinquency rate, which tracks borrowers who are at least two payments behind, is nearer industry norms, of just under 5%, at about 5.66% as of yearend 1999.

Many players are pursuing wealthy customers just as feverishly. American Express is offering the Centurion charge card--which must be paid off monthly--to holders of its high-end Platinum card. The jet-black Centurion, offered by invitation only, carries a whopping $1,000 annual fee. That gets you upgrades on the Concorde and a personal counselor for travel needs. And you get special privileges at Neiman Marcus and Saks Fifth Avenue, with such amenities as private shopping hours. AmEx officials won't say how many of these cards--which they call a "niche product"--they expect to sell.

PROMPT BOOMERS. AmEx is seeking a broader audience with its four-month-old Blue credit card. It has an introductory 0% rate for six months, a regular rate of just 9.99%, and no annual fee. AmEx equips Blue with computer chips aimed at helping do business online. Alfred F. Kelly Jr., president of AmEx's consumer card service group, says its core market is younger people who want to "feel secure in shopping both the physical world and the interactive world."

Winning younger folks may be crucial, since baby boomers are getting to be a headache for card issuers. Boomers pay off their credit-card balances monthly and jump fast to lower-rate cards. The share of cardholders who pay off their balances in full each month has risen from 29% in 1991 to 44% in 1999, says "They are getting less dependent on revolving credit," adds The Nilson Report President David Robertson. "The demographics are completely against the industry."

For all the players, the newest frontier is the Internet. Already, some operators offer low card rates not available by mail. Still others are pioneering credit lines available exclusively for Internet shopping, such as Citigroup's ClickCredit service. In just three months, Citi has signed up 80,000 customers. "We are very busy exploring the medium," says A. Sami Siddiqui, chief of the North America cards unit of Citigroup.

As the growth game toughens, card companies will tap every potential vein. Some are even looking abroad, building operations in Canada, Ireland, and Britain. But wherever they go, they'll have to avoid carrying some of the baggage they've picked up lately. Unhappy customers would rather switch than fight.

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