Consumers Say They'll Switch, But Do They?

Credit card circles are abuzz with talk of the well-publicized, low-price strategy of some banks and nonbank competitors like AT&T and American Express, which has increased pressure to build market share by reducing prices.

Consumers are fueling the fight as well. In the 1991 consumer survey conducted for the American Banker by the Gallup Organization, 55% of 500 consumers said they would switch credit cards for a two-percentage-point cut in their annual interest rate.

About four in 10, or 38%, say they would dump their current cards for a one-point reduction.

The greater response to the two-point rate cut is statistically significant. Gallup posed the questions to two separate groups of about 500 consumers each - one was asked about a two-point drop, the other a single point.

But despite consumers' apparent desire for lower interest rates, bankers are skeptical that many would follow through.

"The fact is they don't act on what they say," said Peter B. Davidson, senior vice president of CoreStates Financial Corp., Wilmington, Del.

But consumers are becoming more sensitive to interest rate pricing, said Robert Marshall, president of the card division for Colonial National Bank, Horsham, Penn. He noted that in focus groups sponsored by his bank during the past two years, consumers show more awareness of what they are paying on their credit cards. Consumers are asked what cards they have and what rate they pay.

"It's a reality check," he said. Recently, "people are much closer to the actual rate than they used to be. They have a greater awareness. Maybe there is an underlying change."

Bankers Are Skeptical

Nevertheless, most bankers don't think customers are going to dump their cards for a rate cut of only one or two points. In fact, some bankers quote their own customer surveys that indicate a deeper cut, perhaps 3%, is what would jolt consumers from their complacency.

"To think 1% will move market share is an absolute fantasy," said Don Auriemma, president of Auriemma Consulting Group Inc., Garden City, N.Y.

Consumer advocates disagreed. "My gut feeling is people would move, but a lower rate hasn't yet been tested in a nationwide marketing thrust," said Elgie Holstein, executive director of Bankcard Holders of America, a nonprofit consumer advocacy organization that provides lists of low-rate issuers in response to consumer requests.

"We'll be truly satisfied there's a competitive marketplace when people don't have to write to us to find out where lower rates are offered." he said. "But for now, no big player is offering these lower rates."

Difference in Perception

The high-rate banks have several reasons to keep rates high, said Mr. Auriemma. The first, he said, is consumers' self-perceptions that they are "convenience" users of credit cards, not "revolvers." A convenience user pays off his balance every month, a revolver carries one. "Seven out of ten [consumers] revolve," he said. "One out of ten admits it."

The second big factor in the high-rate banks' holding on to customers is their visibility and image. "It's a hell of a lot more complicated than just rate," said Mr. Marshall.

He pointed out the "household name" stature of the big players who dominate the credit card market. According to Faulkner & Gray's 1990 Card Industry Directory, the top 25 bank card issuers control 73% of the market in terms of receivables.

Most consumers want to have their card with a company they know, said Mr. Marshall, even though a switch to a smaller issuer, like Colonial, might mean a drop in rate. For example, Colonial charges a 17.5% annual percentage rate on both standard and Gold cards, compared with 19.8% for most major issuers.

"But unless we tell [them] everything about us, a number of people will be reluctant" to take a card from Colonial, said Mr. Marshall. "They'll say, |I've never heard of these guys.'"

The big issuers also have an advantage in retaining card accounts if the customer has other relationships with the bank. Customers "like being able to go into a branch if they have a problem with their card account," said Jeff Slawsky, a vice president for Marine Midland Bank, Buffalo, N.Y.

Furthermore, customers have tremendous loyalty to the issuer that gave them their first piece of plastic. In focus groups conducted by the bank, consumers demonstrated great reluctance to give up that one card given to them 21 years ago, said Mr. Marshall.

Cardholders also show tremendous loyalty to affinity cards or cards with special features like earning frequent flyer miles for every purchase made on the card. These people are highly unlikely to switch for a lower rate, said Mr. Marshall.

A new pricing trend may also get customers to stay put. Many banks have moved from fixed to variable rate pricing tied to prime. Thus, as the prime has moved down to 8.5%, so have their rates.

For example, most Corestates' cardholders pay only 17.3% on revolving charges, compared with 18.8% about a year ago.

So far, however, the lower rates are only attracting certain price-sensitive consumers who carry big balances and so are still profitable even at a much lower annual percentage rate, said Marine Midland's Mr. Slawsky.

Low Rate Successful

Marine Midland Bank solicited 600,000 credit card users earlier this year with a card charging 14.9% and a $35 annual fee.

Marine Midland's strategy is to target people with more than one card carrying a balance and get them to consolidate their balances.

To keep profitability of the card portfolio high, banks are loathe to drop their credit card rates. "I'd expect credit card banks to resist cutting finance charges as long as they could," said William Adcock, chairman of Atlanta-based Synergistics Research Corp., a consulting company that specializes in credit cards.

And some of the nonbank competition that may have triggered the new price consciousness among consumers appear to be adjusting their interest rates - upward.

American Express will change its formula for Optima cardholders in October from prime plus 6.75% to prime plus 7.75%.

Further, while AT&T has dropped its rate on cards held by charter Universal members to 17.4%, new card holders pay 18.9%.

Perhaps adding to the argument that consumers are not driven by interest rate alone, Universal is still adding accounts at a good clip. Its goal is to add 2.3 million accounts this year to its first year's base of 6.6 million and a spokesman said Universal is "tracking on target" with 11 million cards in circulation.

Universal's appeal may be in its phone-calling feature: charter members and most new members get a 10% discount on long-distance phone charges.

Meanwhile, the rise of gold cards may also play into consumers' desire to pay less on higher balances. The gold card has become almost "a mass market product" said CoreStates' Mr. Davidson, since the customer only has to qualify for a $5,000 credit line.

Gold cards typically carry balances of more than $2,000, twice the standard card's average. And most banks, while charging a higher fee for the gold, usually give a lower rate, often as much as three to five percentage points below their standard rate.

Most bankers believe that cardholders are lured by the prestige of a gold card and enhancements such as travel discounts and insurance coverage. But price may also be an issue.

"Clearly, gold cards were built with lower rates," said Jerry Craft, executive vice president of Wachovia Card Services, Winston-Salem, N.C. "That may be some of the incentive."

Meanwhile, bankers predicted that interest rate pricing will continue to be something they will test in increasing numbers as competition for market share increases and they fine-tune their market research techniques.

"We're more sophisticated in our techniques of finding out what customers make you money and get more of them," said Mr. Davidson. "There was a day when all we wanted were good credit risks. Now sophisticated data base management exists and you can look at that stuff and change prices with parts of the portfolio based on profitability."

PHOTO : A 2-Point Rate Drop Could Really Move the Market Source: American Banker/Gallup 1991 Consumer Survey

Ms. Libbey is a freelance writer based in Albuquerque, N.M.

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