fees just as issuers are getting more serious about them. The tension has sent some issuers scrambling to find unobtrusive fees, or at least ones that would be unlikely to raise major objections. Other banks are simply flying in the face of popular sentiment. "We are beginning to see some movement back toward annual fees," said Peter Davidson, executive vice president of Speer & Associates, an Atlanta consulting firm. "We're also seeing significant increases in late, over- the-limit, and other fees." Mr. Davidson noted the irony in the outrage being expressed toward credit card fees juxtaposed with the high losses and other factors prompting banks to charge more. "The trend toward higher card fees will continue despite the pressure from regulators and public interest groups," Mr. Davidson predicted. On one hand are the newspaper editorials, state and federal legislative proposals, and consumer group studies that seem to build a growing case against card fees. But more compelling to bankers, Mr. Davidson said, is an economic case: Shareholders are demanding more value, and fees can bring it. "Issuers will continue to raise the nuisance and penalty fees" because of these pressures, said Mr. Davidson, who spoke last week at a Faulkner & Gray-sponsored credit card conference. "The politicians will continue to use the credit card industry as a target, as Jimmy Carter did" in the late 1970s. Mr. Davidson traced public indignation over fees to the time when President Carter's criticisms of excessive credit "branded cards as something negative." The rising interest rates of the Carter years "destroyed profitability" for the industry, he said. Gold and airline-rewards cards had a positive effect on banks' ability to charge fees - consumers felt they were getting something extra that they were willing to pay for. But otherwise, Mr. Davidson said, "the world changed" when AT&T Universal Card Services made its "no fee for life" commitment in 1990. "Many issuers celebrated at the time," Mr. Davidson said, because they thought convenience users, people who paid their bills on time and produced little if any interest income, would leave and swamp the new entrant. But the AT&T card's popularity "led to a flurry of copycats and handicapped other issuers" that were charging fees. "All of a sudden, anyone with annual fees saw attrition skyrocket. Public interest in card pricing went up." Nowadays, the pendulum seems to be swinging in the opposite direction, particularly as card issuers experiment with ways to reward good customers and penalize others. Some issuers are imposing fees on inactive accounts, trying to drive out dormant customers and occasional users. "Fees will disappear on high-profit revolvers, while there will be more fees on higher-risk customers and low-volume convenience users," Mr. Davidson predicted. "Some of this may lead to local regulation - you may see a state or two cap late fees - but nothing on the federal level." Mr. Davidson also predicted that low-use and convenience customers would migrate to debit cards and that the number of debit cards would equal the number of credit cards by 2005. Leigh A. Smith, vice president of data products at SMR Research Corp., Hackettstown, N.J., said the industry needs to present a more forceful case to justify fees and explain why transactors should pay their share. "The free lunch really should end," Mr. Smith said. "A $25 annual fee is not much to ask for the right to use someone else's money for 30 days. Why can't the credit card industry explain this to the media or the public?" Peter L. Williamson, president of Card Enhancement Services LLC of Stamford, Conn., said issuers are "struggling with ways" to impose annual fees. He said 23% of cardholders pay them. The average annual fee is about $17, he said. But the climate is changing. The record three billion credit card solicitations that issuers mailed in 1997 indicates their rabid search for creditworthy revolvers, who are "increasingly difficult to attract and very difficult to retain," Mr. Williamson said. "Consumers have become very adept at playing the game (of transferring balances to cards with low teaser rates), and they do it many times with the precision of a metronome. It is incredible how savvy they are." Mr. Williamson suggested focusing on four types of money-losing customers: inactive accounts, convenience users, low-balance holders or occasional revolvers, and high-risk revolvers. "Issuers are going to take charge of unprofitable accounts," he said. Strategies could include imposing fees that would be easily defensible, such as for speaking to a live customer service representative more than once a month. Or customers could be asked to "pay to stay," preserving their credit lines even when they use the card rarely. "As long as people are getting these no-fee teaser offers, it's very hard to come out with something that is a(n annual) fee," Mr. Williamson said. Thus, issuers must get creative. A "convenience" fee - comparable to an automated teller machine surcharge - could be imposed on accounts that do not pay finance charges, on the rationale that such charges are smaller and easier to digest than a single annual sum. Issuers also could try to convert customers to premium products that bring in annual fees, like the MasterCard World Card and Visa Signature card. "I hope these products are not cheapened by competitors who introduce them without annual fees," Mr. Williamson said. "That happened with gold and platinum, and it will happen with these." As margins in the card industry continue to narrow, Mr. Williamson predicted issuers would find acceptable ways to surcharge. "How long can we as an industry continue to give away our product for free?" he said. "These unprofitable accounts are going to have to pay fees."

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