Wachovia Corp. has upped the ante in the credit card pricing game with its Prime for Life card, which offers customers a permanent prime interest rate.
While industry observers don't expect the new product to have the same effect as AT&T Universal's no-fee-for-life shocker, it will no doubt raise the stakes for issuers, forcing them to address consumers' growing concerns about rising prices.
"This type of offer takes the teaser rate to a new level," said Robert B. McKinley, president of RAM Research, a card tracking firm in Frederick, Md. "This product will have impact on other issuers."
Cynthia A. Graham, president of Barnett Card Services Corp., Jacksonville, Fla., thinks it will raise some eyebrows. "It's an attractive rate," she said, "but it doesn't scare me to death."
One reason issuers may not be quaking in their swivel chairs is the $88 fee that accompanies the low rate.
There are two choices for consumers - they can opt for Prime for Life and pay the $88 fee up front or they can chose the Prime Rebate plan, which initially offers Wachovia's prime plus 3.9% rate with a $28 fee. If at the end of the year, the customer would have benefited more from the prime interest rate, Wachovia will rebate the difference, minus the $60 between the products' annual fees.
According to RAM Research, customers with average daily balances of $1,000 would pay $178 for the year in fees and interest, with an effective interest rate of 17.80%, but a cardholder with a $3,000 balance would pay an effective interest rate of only 11.93%.
Mr. McKinley said the average cardholder balance is $1,711, which puts the effective interest rate at 14.08% - still under the industry average of 17.5%.
Beverly B. Wells, president of Atlanta-based Wachovia Bank Card Services, said that three years ago a program with such a high fee would not have worked. Although Wachovia is "bucking the no-fee trend," she said, the industry has strived to educate consumers to look at the total value of a card, "to do the math."
Wachovia says the consumer who carries an average yearly balance of $2,200 can save $110 in one year and $550 in five years with the Prime for Life card, which is now at 9%, compared to a no-fee card with a 17.99% interest rate. The calculation includes the prime card's $88 annual fee.
Ms. Wells said she expects the card to appeal to selective consumers but doesn't expect a dramatic industry reaction.
"This is most attractive for the highest balance accounts which all of us love," she said. "I don't think everyone's going to roll over and hand them to Wachovia. There will be a competitive response."
Ms. Wells said she is more concerned that consumers may be confused by competitors' teaser rates and "wake up and find they're in a very high interest rate because they didn't take action after the teaser period."
She said the Prime for Life program is a more direct proposition that must be explained initially, but there are no surprises a few months later. "Even with a First USA card that comes in below prime for the first six months, after two years (with Prime for Life) you still save," said Ms. Wells.
Still, George McCane, spokesman for First USA Inc. in Dallas, said that fees "generally depress response rates and result in higher attrition rates over time."
Other bankers think the education component will be a difficult hurdle for Wachovia to overcome. Response rates drop when consumers are offered even modest choices.
"In our solicitations we have seen - the simpler the better in terms of what you send to the customer," said Fred Mannausau, chief financial officer, Chase Bank Card Services.
"Wachovia will face the customer having to figure out whether that fee is better for them. I don't think they'll take the time out to do the arithmetic." Mr. Mannausau said Chase maintains that the no fee product with a low teaser rate is "the winning combination."
But bankers will take a wait-and-see attitude. "Typically what we do is observe a new product and if we feel the need, we'll do a test that replicates the features and benefits of the competitor's product," said Mr. McCane. "It's not a static market and as a result, we are always in a mode of learning about the consumer and the environment in which we're operating."
