Card Switching Means Business For New Issuers

More than ever, Americans are shopping around for the best credit card deals.

Bombarded by advertisements touting no annual fees, reduced interest rates, and card enhancements, consumers are learning more about the cards they carry. And strapped for cash during a recession, they are eager to avoid unnecessary charges.

As a result, they are increasingly cutting up the cards already in their wallets in favor of ones with better terms, say industry observers. This lack of loyalty is enabling nonbank companies to enter and prosper in what is essentially a saturated market.

"The marketplace as a whole isn't growing much, but cardholders are opening accounts at a record pace," said Stephen Szekely of Payment Systems Inc., a Tampa research firm. "Consumers are swapping out."

Nonbank Encouragement

That is good news for companies like Ameritech and Ford Motor Co. that are following American Telephone & Telegraph Co. into the bank card business. These corporations aim to steal market share, rather than to break new ground.

Indeed, most creditworthy consumers have their fair share of cards. Americans carry 980 million credit cards, 267 million of which are MasterCard and Visa cards, according to RAM Research U.S.A., Frederick, Md. That translates into 8.7 credit cards per household, up from 4.6 just five years ago.

During the 1990s, the number of MasterCard and Visa cards in the United States will grow at an average annual rate of 6.3 million, predicts H. Spencer Nilson in his newsletter, The Nilson Report, published in Los Angeles. But only 1.2 million people who have never had a bank card will join the market each year.

The challenge for new issuers, therefore, is to get their cards into burgeoning wallets. "There are a lot of households out there people can pick off," said Bruce Brittain, an Atlanta-based researcher who tracks credit card trends. "It's a war of attrition."

Spoils for the Victors

For nonbanks, the spoils of that war can be particularly rich. Observers say that by stealing market share rather than expanding the market, new card competitors may avoid some credit risks associated with new accounts. Furthermore, the threshold for success may be considerably lower at AT&T and Ford than it is at a bank.

"A return of $ 1 per account is not enough for a bank; but for a new entrant, it may be enough," Mr. Szekely said. "For these companies, there are other benefits associated with having a card out there."

Even if AT&T's Universal card does not greatly increase interest income and fee income for the giant telecommunications concern, it is helping put long-distance calling cards into the hands of millions of consumers. As such, it contributes directly to AT&T's core business.

Because big card issuers do not reveal attrition rates, it is difficult to estimate how many people have switched cards in the past year. But observers suggest card swapping is on the rise. As one indication, consumers have a bigger appetite for information on rates and fees.

RAM Research's Robert B. Mckinley, publisher of a monthly newsletter that tracks card rates and fees, said his subscriber base has doubled over the past two years. And BankCard Holders of America, Herndon, Va., handles as many as 1,000 requests a week for information on low-interest rate and no-fee cards - up from just 300 or 400 one year ago, said Elgie Holstein, director of the consumer advocacy group.

"A few years ago, the education was not there," Mr. McKinley said.

Marketwise Shoppers Sought

A smart shopper is just what the latest entrants in the card business want. Companies like AT&T, Ford, and Sears Roebuck & Co. - which is currently in court fighting for the right to issue a no-fee Visa card - have set out to offer better deals than traditional issuers. And they have piqued consumer interest with intensive marketing campaigns.

The "free for life" promise that AT&T made to charter holders of its Universal card, more than a year ago, remains the best example of how a nonbank can touch off a price-war in what was once a relatively stable market. Consumer response to the offer was so positive that many big credit card banks - including Citicorp Chase Manhattan Corp., First Chicago Corp., and Banc One Corp. - began waiving some card fees.

Now, American Express Co. is helping to raise consumer awareness about annual percentage rates. It has begun to push its revolving card, Optima, with full-page ads asking consumers: "Why pay Visa or MasterCard over 19% a year when you have a smarter option with Optima at 16.25%?" And Ford received a bevy of publicity in June when it unveiled a free MasterCard or Visa card at an introductory interest rate of 15.9%.

An Earful for the Public

"What issuers face is a public that is going to be hearing more about opportunities to switch cards and save money, not necessarily from the traditional card groups, but from the new competitors," Mr. Holstein said.

"American Express, Sears - if it prevails - and, of course, AT&T, are showing a willingness to go toe-to-toe on a pricing basis."

There are rumblings of a credit card rate war on the horizon, with the new, nonbank competitors leading the way. "It is the next frontier," said Anne Moore, president of Synergistics Research Corp., Atlanta. "Consumers are becoming much more aware of rates - and it's something that banks have never played up before."

Midsize Contenders

A handful of midsize bank issuers, including National Westminter Bank U.S.A. and Wachovia Corp. have joined the rate fray. Most of the largest bank players, however, continue to rely on newfangled enhancements to help them compete.

Citicorp's price-protection plan, which guarantees its cardholders the lowest price on most of the items they buy, is intended to keep customers loyal.

For some issuers, such tactics are preventing rapid attrition, Mr. Holstein said. Also working in many banks' favor is the confusion that many consumers still feel when they view the credit card market.

"Most consumers have outstanding balances and they are ignorant about how to switch those balances from one card to another," he said. But that could change as people become more knowledgable about the cards they carry.

The issuers who are most at risk are the smaller ones, Mr. Brittain points out. "They don't have a big marketing budget and they have not yet accepted the fact that they are threatened by the new issuer," he said.

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