The following is excerpted from a Salomon Brothers report, "Credit Cards -- Are Diminishing Profits Inevitable?" It was written by analysts Samuel G. Liss and Mary A. Rhei and published in July.

Revolving consumer debt -- a proxy for credit card spending -- is accelerating, even while other Federal Reserve data imply that the consumer base is deleveraging.

We believe that judgments on consumer debt trends often are misleading, given the frequent exclusion of home mortgage debt from calculations. Convenience and relatively short-term cash flow needs drive credit card usage.

Credit cards historically have not played a significant debt-consolidation role, although we sense that this may be changing. Increased penetration of credit cards at convenience points of sale -- such as food outlets, gas stations, and the health-care sector -- offers ample fuel for receivables growth. Regardless of source, however, it is clear that cumulative credit card purchases still total well below 20% of total U.S. consumer consumption.

Fragmented Market

The card marketplace (charge, revolving credit, and debit) continues to be fragmented and has started a renewed growth mode.

The overall marketplace stands to benefit from continued penetration by revolving and debit card issuers into convenience payment channels. Annual consumer payments to federal, state, and local agencies -- such as the U.S. Postal Service -- represent an extraordinary untapped arena.

Annual growth for credit card receivables had been 10% to 15% in 1988-90. It contracted to 6% in 1991 and reaccelerated to 8% to 10% in 1992. The contraction in 1991 appears to have directly reflected the economic environment and dropoff in consumer confidence.

Co-Branded Efforts

Segmentation-marketing efforts intensified in 1992, and cobranded efforts -- including AT&T, regional telephone companies, and automobile/truck manufacturers -- are generating account-acquisition success. Strategic objectives differ among these sponsors, which is one issue that drives the intensified competition. Another result to note is the share boost won by MasterCard, relative to Visa, given its acceptance of cobranding efforts.

We expect credit card receivable-balance growth to continue to reflect shifting consumer behavior, perhaps impeding easy translation from industrywide, or even company-specific, transaction volume growth to receivables growth. Part of this forecasting challenge is anticipating further shifts in consumer payment behavior as well as spending patterns.

Even so, we expect overall receivables growth to return to a 10%-plus rate in 1993. We expect double-digit receivables growth through at least 1995.

One unknown is the impact of consumer tax rates, which, when translated into impeded income growth, can dampen consumption. This has been noticeable in the several weeks since the Clinton administration put forward its proposals.

Growth Hard to Forecast

Consumers' sensitivity to finance charges, which has been raised by predatory marketing activities, has promoted a pronounced shift in marketing strategy by revolving card issuers. The mix of lower and teaser finance charge rates with a nominal or no annual membership fee, combined with aggressive marketing for balance transfers, has made specific company receivables growth forecasting more difficult.

We are apprehensive about the extraordinary asset growth fueled by balance transfers, primarily because those particular card members present a much larger principal risk and reliance upon existing credit assessment.

This contrasts with a more traditional 24-month to 36-month seasoning process. We are unsure whether these strongly perceived credits will exhibit anticipated usage behavior. For now, however, it is clear that asset growth and net interest spread are accelerated materially with successful balance-transfer marketing.

Growth potential for individual issuers relies on the acquisition and retention of active customers. Yield, fees, volume, and usage all drive the consolidated revenue growth generated from credit card consumer accounts.

Market-share shifts that are occurring reflect on the aggressive marketing techniques and consumer sensitivity to a wider array of variables than historically has been considered.

Membership fee and credit line are no longer the sole critical consumer-motivating variables.

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