The General Accounting Office has concluded that the credit card industry is competitive but needs to be monitored to ensure that the level of competitiveness is sustained.

In a report that was almost two years in the making, the congressional agency said the industry "meets the standard criteria for competitiveness in terms of its number of card issuers and lack of [market] concentration."

Some industry participants feared that the report would be critical of card interest rates and issuers' profits, and perhaps lead to regulation of pricing practices.

'Clean Bill of Health'

The GAO found "no compelling evidence" to either confirm or reject the theory that interest rates have stayed relatively high through "tacit coordination" among leading banks.

Charlotte Rush, MasterCard International's Washington-based vice president of public affairs and government relations, said the report gave the industry "a clean bill of health, which is significant, because [the GAO] was under a lot of pressure to find fault."

The 64-page report, dated April 28, had a tortured history. It was requested in May 1992, shortly after the death of legislation that would have put a cap on interest rates. The congressmen initiating the study were Charles E. Schumer of New York, Joseph P. Kennedy 2d of Massachusetts, and Esteban E. Torres of California, all Democrats; and Republicans Alfred A. McCandless of California and Jim Leach of Iowa.

Hearing Canceled

By September 1992, the GAO had compiled publicly available information about the industry and prepared testimony for an October hearing.

As a result of confusion or poor communication, the analysis was less complete than the lawmakers had expected. For instance, public policy options were not included.

The 1992 hearing was canceled and the GAO continued its research.

Some observers' said the reason for the delay was that the GAO did not provide a platform for consumer-disclosure legislation that Rep. Schumer sponsored. Aides to the congressmen who requested the report said publication of the final report is unlikely to lead to a rescheduling of the canceled hearing.

Concerns 'Corrected'

There is little difference, however, between the September 1992 findings and the final version of the report, which includes data through October 1993. Neither the earlier testimony nor the completed report delivered an indictment against the credit card industry.

James L. Bothwell, the GAO's director of financial institutions and markets issues, said: "During the period of time that the report was commissioned and the time it was completed, many of the concerns that prompted it were corrected." That was mainly because the entry of nonbank competitors introduced the concept of tiered pricing, with interest rates and fees tailored for different groups of cardholders.

Focus on Pricing

The GAO's principal. task was to explore whether there is adequate price competition. Lawmakers voiced concern that despite wide fluctuations in banks' costs of funds, credit card interest rates remained in the 18%-20% range for years.

Some analysts and legislators argued that the credit card industry's stable prices and high earnings may have resulted from price fixing or "tacit coordination."

The GAO reported that the average credit card interest rate fell from 17.76% in 1992 to 16.83% in 1993.

In addition to recommending that the industry be monitored, GAO also suggested that the Federal Reserve incorporate additional information on credit card interest rates in its annual report to ConFess on banking profitability. This information should assess the extent to which cardholders are benefiting from lower interest rates and how these rates affect issuers' earnings.

Currently, the Federal Reserve collects information on a voluntary basis from the largest issuers, requesting their most common interest rates. With the advent of tiered pricing, this method of data gathering does not reflect how the industry has changed over the past two years.

'Have to Make a Judgment'

While the GAO did not view tiered pricing as a negative development, it did point out that all cardholders may not be benefiting equally from lower interest rates.

"Issuers have to make a judgment regarding a customer's creditworthiness," said Mr. Bothwell. "Maybe only the best customers are getting the lower rates, [Which means] that less creditworthy consumers are being shut out of the lower-priced cards."

Mr. Bothwell said this pricing strategy is not unfair to consumers, but it does represent a segmentation of the market based on varying risk levels.

"It is important to know that this is going on," he said, referring to how recent developments in the industry need to be monitored.

RAM Research Corp. of Frederick, Md., which contributed information to the report, said in the May edition of its CardTrak newsletter that "close monitoring of the industry is warranted because the recent competition among issuers could lessen if congressional, media, and public scrutiny of the industry's pricing practices subsides."

Rep. Schumer was the only congressman to issue an official statement regarding the GAO report. He said it "supports what I have been saying all along: Consumers can drive credit card interest rates down - they just need information so they can comparison-shop."

However, Rep. Schumer criticized Congress' auditing arm for not answering the "central question" of why credit card interest rates are unresponsive to drops in other interest rates.

"Despite years of falling interest rates on everything from the prime to home mortgages, the average credit card rate hardly budged," Rep. Schumer said. "Now, with interest rates on the rise, we see credit card rates rising immediately."

While the GAO report offers two explanations for this phenomenon, it does not conclusively confirm or reject any one answer about the stability of credit card rates over a 20-year period.

Two explanations for the stability are that credit card lending is unlike other consumer lending because it is unsecured and, therefore, riskier, and that funding costs are only a small part of total credit card overhead.

'Couldn't Reach a Bottom Line'

Mr. Bothwell acknowledged that such pricing stability is viewed by some as evidence of a few influential companies' calling the tune, but he said the report "couldn't reach a bottom line on pricing behavior.

"We couldn't judge which of the two issues affecting credit card interest rates was the dominant factor," the GAO official said. But he noted that the GAO is not an investigative agency and does not have the tools to prove wrongdoing.

A Visa spokesman, who called the report a "nonevent" because it did not reveal anything new about the credit card industry, said that determining a customer's risk factor plays a large role in setting prices.

"To try to judge this industry by interest rates and to judge pricing by cost of funds is not to understand this industry," he said, adding that unsecured lending involves higher servicing costs.

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