Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!news.media.mit.edu!americast.com!americast.com!usa-post Newsgroups: usa-today.bonus,americast.usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Wed, Sep 9 1992 Date: Wed, 9 Sep 92 04:29:47 EDT Message-ID: 09-09 0000 BONUS: Corporations issue credit cards USA TODAY Update Sept. 9, 1992 Source: USA TODAY:Gannett National Information Network Pity the poor banks. As if they didn't have enough problems surviving the biggest bank bust since the Great Depression, now they have to fend off hordes of invaders trying to steal their most profitable business: credit cards. WHO ARE THESE INVADERS? The nation's largest companies - Sears, AT&T, General Electric, and now General Motors. GM, the USA's largest company, is roaring into the credit-card industry today with the launch of its MasterCard, complete with a $70 million ad campaign. It promises to be a heavy hitter. In addition to no annual fee and a low interest rate, the card will offer a rebate equal to 5% of card purchases for all GM cars and trucks. WHAT HAVE THESE COMPANIES DONE TO CREDIT-CARD COMPETITION? The rush to steal credit-card business from banks has sparked a revolution in the card industry. Before the revolution, consumers had little choice in credit cards: They came with an annual fee, a high interest rate and nothing else. Those days are gone, replaced by a world of lower rates, no annual fee and freebies - in GM's case, impressive rebates on cars. WHY ARE THESE COMPANIES NOW INVOLVED IN CONSUMER LENDING? These companies have built their businesses on tools, telephones, toasters and trucks but have suddenly become the nation's consumer lenders, because, as bank robber Willie Sutton observed, that's where the money is. Despite falling interest rates, credit cards still produce handsome returns. And, as Sears and AT&T have already discovered, a successful credit card also provides marketing muscle for a company's other products and services. WHEN DID THIS TREND START? Sears started the revolution in 1986 by launching the Discover card. The retailing behemoth entered the market the hard way, bypassing the MasterCard and Visa networks and creating its own system for paying merchants and billing customers. The biggest shock to the credit-card industry: Sears charged no annual fee except in two states - at that time, a heresy akin to giving money away. Wall Street initially dismissed Sears' $300 million investment as folly. But today, Sears' Greenwood Trust has more credit-card accounts than any other bank. The card became profitable in 1990. WHAT COMPANIES WERE NEXT TO ISSUE CARDS? In 1990, AT&T stormed into the industry. AT&T's Visa and MasterCard promised consumers discounts on long-distance calls, an attractive interest rate set at 8.9 percentage points above the prime rate and no annual fee for life for those who signed up in the first year. In less than three months, AT&T grabbed 1 million accounts. Today, there are 9.9 million accounts, making AT&T the fifth-largest credit-card issuer by number of accounts. The card vaulted to profitability in June. WHO ELSE IS JOINING IN? This month, GM and GE, the nation's fifth-largest company, are charging into the credit-card arena. GE's card, launched last week, carries a variable interest rate - currently 18.4% - and a $25 annual fee. It gives cardholders attractive rebates on products and services offered by 23 companies. GM is holding a press conference today for its card. GM and GE aren't just copying Sears and AT&T, although they can't have overlooked the success of their cards. WHY THE BIG RUSH TO ISSUE CREDIT CARDS? Profit. At a time when corporate earnings are under pressure, few companies can overlook the fact that credit-card lending can be very profitable. Last year, consumers charged $725 billion in goods and services on major cards around the world and $371 billion in the USA, according to Credit Card News. U.S. credit-card receivables, the amount consumers carry as unpaid balances, totaled $181.2 billion at the end of last year. HOW MUCH WILL CARD ISSUERS EARN? Card issuers say they earn far less than the average 18.4% they charge consumers. After all, issuers point out, the money they lend costs about 4% per year. The cost of servicing the accounts is equal to about 4 percentage points of the interest issuers receive. Besides, they say, 29% of card users pay no interest because they pay their balance every month. And issuers have to write off about 6% of card balances every year because of default and fraud. WHERE DO THEY MAKE MONEY? But card issuers aren't hurting. They also make money on annual fees and late charges - and the transaction fees they charge merchants that accept their cards. Also, lenders typically need to invest capital equal to a fraction of what they lend - about $6.83 for every $100 in loans. Industry experts say a credit-card lender's annual return on equity can run 20% to 45% or more. WHAT OTHER REASONS ARE THERE? Marketing. Part of AT&T's motivation to start a card was to protect its main business, long-distance telephone calling. AT&T's Calling Card, a long-distance telephone charge card, was getting crowded out of customers' wallets by the abundance of other credit and debit cards they carry. Combining the Calling Card with a general-purpose credit card kept AT&T's card in consumers' wallets because it cut down wallet clutter - an industry buzzword. WILL IT HELP THE COMPANIES' BIG PRODUCTS? GM's card may have more value marketing cars than producing income, says James Daly, editor of Credit Card News. It will be issued by Household Bank in Prospect Heights, Ill. Typically, the issuing bank gets most of the income from a credit card that bears a corporate name. "GM will get some of the card's income, but the main benefit will be marketing," Daly says. And, Daly notes, the card's rebate toward GM cars and trucks won't cost much. The average credit-card user charges about $2,500 a year, so the average rebate from a GM card would be $125 a year. Nevertheless, if GM manages accounts well, it could be a plus with customers. WILL THESE COMPANIES BENEFIT FROM NAME RECOGNITION? Also, when customers pull out a Universal or Discover card, they see the AT&T or Sears logo. That's a huge benefit, analysts say. "It's the Indy 500 syndrome," says credit-card consultant Joseph Wallace. "When you see those racing cars fly by with a corporate logo, you say, `Oh, yeah, Firestone.' " WHO WILL BE HURT THE MOST BY THESE NEW VENTURES? So far, the biggest losers are banks, which have relied on credit cards to provide much-needed profits. When banks cut rates and drop annual fees on their cards, they're cutting their profits. And corporate cards, like the AT&T Universal, have taken many of the banks' best customers. That leaves banks with a disproportionate share of deadbeats. Citicorp, for example, saw its write-offs jump from 4.7% of balances in 1990 to 6.3% last year. WHO STANDS TO GAIN? Consumers are the big winners, particularly those with sterling credit records. True, the average credit-card rate, as measured by Bank Rate Monitor, has inched down only to 18.4% today from 18.9% last year. But the average masks the fact that good customers are getting great deals because they are the cream corporate-card issuers are trying to skim from banks. So banks are fighting to keep them. HOW WILL THE BANKS COUNTER THIS CHALLENGE? Citibank, the banking industry's largest card issuer, announced a program recently that gives a 15.9% rate to customers who always pay their bills on time. Most Citibank customers pay 19.8%. And Wachovia, which competes hard on interest rates, now offers a 9.4% rate. And about 20% of card issuers will waive annual fees for customers who charge a minimum amount each year or for customers who have other accounts with the bank. Bank of New York, for example, waives the fee on its regular credit card for customers who charge more than $2,400 a year. It waives the fee on its gold card for those who charge more than $4,000 a year. ARE THERE OTHER DEALS TO BE FOUND? But those are the official deals. Unofficially, many banks are cutting fees and rates for good customers who simply complain. Bill Sproul, a registered nurse in St. Petersburg, Fla., was unhappy with the rate on his credit card and threatened to switch. The bank whacked his rate from 18% to 8.9%. Says Sproul: "I was appalled at how easy it was." Bonus Editor: Martin Baucom. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM