Citicorp, the nation's largest bank card issuer, said last week in a regulatory filing that it would eliminate the annual fee on half its accounts.

Four million of Citibank's 20 million customers already do not pay an annual fee, and the bank is notifying another seven million classic- and preferred-card holders that their fees will be eliminated.

In an interview with American Banker, executive vice president James L. Bailey, the head of North American consumer banking, denied that the step represented a radical departure in philosophy.

But industry's expert Donald J. Auriemma, president of Auriemma Consulting Group 19, called it "dramatic news, because Citibank has always espoused the necessity and logic of a fee."

Moreover, the Securities and Exchange Commission Form 8-K, in which the change was disclosed, is by definition reserved for "extraordinary transactions." It is required whenever something of immediate importance occurs, between a company's annual and quarterly reports.

According to analysts at Sanford C. Bernstein & Co., Citicorp is forgoing $100 million of revenue. Mr. Bailey said some of that would be recouped as the economy improves and credit volume increases.

The bank's affinity card accounts and some Choice card accounts, will still have annual fees.

The SEC filing also indicated a change in the minimum required monthly payment on outstanding balances on all accounts, Choice and affinity cards included. It will be a forty-eighth of the balance instead of a thirty-second, and higher late fees will be imposed.

Q.: Does eliminating the annual fee on all of the preferred and classic cards reflect a change of philosophy for Citicorp?

BAILEY: No. We have been doing this for about six months, so in my opinion there is not a lot of news here. Citibank has been a leader in this business, trying to deliver credit card values to our members for years.

You have to define value as benefits divided by price and this is just a continuation of that. For example, we offer 24-hour customer service, Citi dollars [bonuses that can be applied to purchases], price protection, the [American Airlines] Advantage card, extended warranty, and much more.

The reason we did this is to deliver more and better value, and to grow our market share.

Q.: Why make such a move now?

BAILEY: A number of factors influenced our decision to go ahead at this time. We believe the economy is improving. Credit card sales per account are increasing. For November and December, sales are up 20% to 30% from last year.

Consumer credit is growing again, which leads to more balances per card member and higher revenue.

Our funding costs are down 10% year to year, and we expect a decline next year, too.

Citicorp's writeoffs are down 15%. Our loss rate in the third quarter, as reported in our 10-Q, was 5%. A year ago it was about 6.2%.

Control programs have substantially reduced our fraud from higher than the industry average to about half the industry average.

The net of all of these factors is that the bottom-line impact won't be very great. These kinds of improvements provide an opportunity to give value back to our customers and grow our share.

I see this as an offensive move.

Q.: Is Citibank hoping to stem the tide of attrition or attract new customers with an annual fee waiver?

BAILEY: I'd say the bank is aiming primarily for the latter, but we will also accomplish the first. We've cut our attrition this year by 30% to 40%, so I believe that we can reach out and attract more customers.

Q.: Annual fees have traditionally been an important source of income to card issuers. How will Citibank make up the shortfall?

BAILEY: The factors I mentioned earlier - sales increasing, credit growing, funding costs declining, and so on - will help the bank. These conditions will allow us to be more aggressive in acquiring new members.

We believe the business will recoup the bottom line of this move and go forward.

Q.: Will Choice customers and affinity cardholders also see their fees disappear eventually?

BAILEY: There are a lot of Choice customers that don't have an annual fee today. It is a highly price-competitive brand, with lower fees and interest rates for very creditworthy people.

Regarding the cobranded cards, I don't think anyone in America is not willing to pay $50 for their Citibank Advantage card. We don't have any intention of eliminating those fees right now.

Q.: Roughly what percentage of Citicorp's customers send just the minimum payment each month?

BAILEY: Not a large percentage. I see the lowering of the minimum payment a very consumer friendly. It allows a consumer to pay a little less and maintain a good credit bureau record. So I think this is a benefit for the consumer because it gives them more options.

Q.: In a speech at the American Bankers Association bank card conference in September, Richard Srednicki, the general manager of your Visa and Master-Card programs, said Citibank intended to reduce its cost base by $100 million. How will you do that?

BAILEY: We are currently in a total quality management program, which we believe will eliminate costs in various categories.

Q.: How does this program work?

BAILEY: We've been working on it for about two years. It is typical of how we do things. We believe that our people, working in a total quality management environment, can cut $100 million in costs over the next two or three years.

Q.: Are outside consultants coming in to evaluate different aspects of the business?

BAILEY: We are using General Systems Co., which has helped Toyota for the last 30 years. But this is about our people working together in teams to identify costs. Citibank employees know our costs better than the consultants. Even though General Systems is helping us, it is fundamentally our people who are doing it.

Q.: In the same speech, Mr. Srednicki also mentioned a Booz, Allen & Hamilton Inc. study, commisioned by Citibank, that found the bank lags behind the industry in cost of funds and credit losses. Why is that?

BAILEY: We have always had higher credit writeoffs, and we have never said that we wanted to be the lowest in the industry.

The way we have built this business is by being aggressive in the marketplace. We have always had a higher risk profile, but we have also had a higher profit profile. The study found that we have the lowest operating costs in the industry.

Q.: How does Citicorp plan to improve credit quality? BAILEY: We probably have the most extensive data base in the industry. We are trying to maximize return, not have the lowest losses. We've said that for some time, and so far I think we have been able to prove that.

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