GE Capital Corp. is taking a very public thumping for its decision to slap a $25 annual fee on credit card customers who regularly pay off their balances. But consumer backlash notwithstanding, other card issuers are likely to follow suit.
The move, jeered in the media as anti-consumer, was cheered in financial circles as a savvy way to extract some income from "convenience users" - the roughly 20% of cardholders who pay off their bills every month.
"The rest of the industry is glad that GE made the first move," said Robert B. McKinley, president of RAM Research Group, Frederick, Md. "A disproportionate number of aging baby boomers are migrating to convenience use."
Even some who have vigorously denounced the plan acknowledged that serving this group of consumers is a costly proposition.
Ruth Susswein, president of Bankcard Holders of America, McLean, Va., calculated that GE makes $318 off the typical "revolver" - as cardholders who carry a balance are known - but loses $30 on convenience users.
Still, she lamented, "Cardholders can't get it right. They incur penalty fees if they step out of line and another fee even if they do everything right."
Certainly, GE's move touched a nerve with consumer advocates. U.S.A. Today kicked off the frenzy Tuesday when it broke the story that some GE Rewards cards will carry the fee starting in December. Convenience users would then receive a lower interest rate: 11.9%, versus 17.15% now.
After the story broke, other newspapers, radio, and television stations piled on. The Washington Post, for instance, followed a Wednesday news account with a Thursday essay that dripped with sarcasm. The lesson, according to the Post: "On time is bad. Late is good."
The last time a move by a financial company grabbed so much bad press was in April, when First National Bank of Chicago introduced checking accounts that charged customers up to $3 for using bank tellers. Later, the bank mounted a partial retreat, slashing the fees in half and dropping them altogether for some accounts.
But GE says it will stand its ground.
"This is a modest fee to offset operating and administrative costs associated with our rewards program," said Neil McGarity, a spokesman for GE Capital. GE said it will waive the fee if the cardholder begins carrying a balance and incurs $25 or more in interest charges during the year.
And the company certainly seems to have some support from other large card issuers.
"GE's decision makes a lot of sense and is very rational," said Peter Frank, an MBNA Corp spokesman. "I hope the market accepts the position that GE has taken. We are currently evaluating our strategies. "
Consumer advocates, however, said socking convenience users with fees would take away the incentive for paying off bills each month.
Ms. Susswein said that lowering interest rates for these customers is pointless. "Reduced interest rates are useless for someone who pays their balance off each month," she pointed out. "In a time when there are rising delinquencies and rising charges, consumers are being encouraged to carry more debt."
Fees and penalties for card accounts are commonplace, but most are aimed at the small percentage of customers who pay late or exceed their credit limits. But targeting cardholders at the other end of the spectrum is a new approach.
"Some issuers have pursued a variation of this strategy," but nothing as prominent as GE, said K. Shelley Porges, chief executive of Porges/Hudson Marketing in San Francisco. In the future, she said, issuers probably will selectively test their cardholders' payment behavior and penalize chronic convenience users.
But if lenders take that tack, they can look forward to a fight from consumer advocates.
"I believe that banks are making money hand over fist, despite what their figures say," said Edward Mierzwinski of U.S. Public Interest Research Group. "GE is making a big mistake by telling their most significant customers that they are going to charge them more."
