A law of diminishing returns is taking hold in the credit card business because of intense competition and a shrinking pool of top prospects for low-rate credit cards, an industry researcher said.

"It will be difficult to sustain the same kinds of growth patterns over time," Stephen M. Szekely, vice president of Payment Systems Inc. of Tampa, said at a conference sponsored by the research firm in New York last week.

But Mr. Szekely said the general-purpose card business will not wither away. Growth will still be robust over the next five years, he said, but will fall short of the 100% growth over the last five years.

"We may see 50% to 75%," he said, "which is still pretty good for a business that a lot of people on the outside 'were willing to write off as mature."

Nowhere to Go But Up

Assessing macroeconomic and demographic factors, including the age of households and the fact that recent increases in consumer spending spilled over into credit card volume, Mr. Szekely said, "It can only go up from here - barring a major economic disaster."

He added that aggressive card issuers who want to enter the low-rate market can set their sights on households that are building balances for the first time.

Or, to a lesser degree, marketers can target several other categories of prospects. For example:

* Households that carry high balances but have ignored low-rate offers, or did not qualify earlier.

* Households that carry moderate balances on their credit cards.

* Low-balance "trophy hunters," who are intent on finding low-rate cards even though they don't take full advantage.

* High-balance households that have switched once and are looking to do it again.

Customers generally like the consistent, variable-rate pricing that low-rate issuers have employed.

"Consumers are not looking for the lowest teaser, but the lowest total rate down the road," Mr. Szekley said.

Competing on Rate

Even if the prime rate increases, he said, consumers will be attracted to variable-rate pricing. "The margin, not the prime [or base rate], is their concern."

Rate competition works for a number of reasons, Mr. Szekely pointed out, including the surprise value of low rates, broader appeal, better targeting, preapprovals, consistent credit limits, larger number of issuers reinforcing the message, and balance consolidation.

Issuers have to weigh the risks of losses as their portfolios grow, he warned. "You have to be careful about being lulled into complacency during growth environments."

Better risk assessment tools, the purging effects of the recession, and incentives for all high-balance households will preclude heavy losses, Mr. Szekely added.

Diversification Factor

Not everyone will succeed, however. "Four out of five will keep losses down, but someone will get burnt," he said. "I think rate competition will be a sustainable source of competitive advantage."

Low-rate card issuers such as First USA Bank, Signet Bank, and Advanta Corp. had banner years in 1993, Mr. Szekely noted, because they did more than one thing well. None fit easily into just one of the speciality categories, such as mass-market, cobranding, or affinity.

"You can't say any one of these card issuers falls into any one of these categories," Mr. Szekely said.

Top performers in. the industry did well because they incurred expense to aggressively market their products, and were willing to take some risks, he said. "Organizations that have invested have done better than those who have not. This transcends rates and other strategies."

As issuers weigh their strategic choices, consumers are primed for the taking.

"I think there's evidence in the market that it's 98% supply-driven, and it's the message, not necessarily the product, that consumers are interested in," said Allen R. DeCotiis, president and chief executive of Payment Systems.

For that reason, issuers should not tighten the reins on credit as the economy improves.

Has Done 'Quite Well'

"We have faced perhaps the most difficult period in the credit card market, and we have done quite well," Mr. DeCotiis said.

Credit cards are the most popular source of short-term financing, making up 39% of installment credit in 1993, total receivables at an estimated $225 billion.

Annual bank card receivables growth declined each year, from 20% in 1988 to 8% in 1992, before rebounding to 15% last year, PSI said.

The resurgent growth is sustainable, Mr. DeCotiis said, because consumers will spend more even as demographic shifts take place. "Now is the time to bombard the market," Mr. DeCotiis said.

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