Cards and Politics, 2004

  The presidential election of 2004 promises to be one of the tightest contests since ... well, since 2000, when the U.S. Supreme Court stepped in to name George W. Bush winner of Florida's electoral votes, which made him president.
  Political experts have said the election this year is virtually a dead heat between the Texan Republican and his Democratic Party challenger, U.S. Sen. John Kerry of Massachusetts.
  The card industry has been taking sides in the contest, donating huge sums to many candidates on both sides of the political aisle. In general, though, major financial institutions have played it safe and primarily support Republicans, the party that controls the White House and holds a majority of seats in both the Senate and House of Representatives. Corporate donors typically give in order to have a say in pending legislation and other issues affecting their business.
  By August, Bush led Kerry in total contributions, $243.6 million to $229.4 million, according to the Center for Responsive Politics. (Both Bush and Kerry can receive $74.6 million in government funding for the general election.) The 2004 race will be the most expensive in history with contributions climbing over $500 million with two months still to go in the campaign, the Center found.
  During the 2004 election cycle, Capital One Financial Corp., the McLean, Va.-based card issuer and consumer lender, had donated 63% of its $319,776 in contributions to Republicans as of August, according to the Center. American Express Co. gave 54% of its $371,699 to Republicans, while Metris Cos. Inc. divvied up 59% of its $47,250 to the GOP. Republicans also received 62% of the $47,665 donated by Greenwood Village, Colo.-based processor First Data Corp.
  The Center is a Washington, D.C.-based non-partisan, not-for-profit that tracks campaign spending and builds its spending reports from filings with the Federal Election Commission. To find all the donations from a single company, the Center combines giving from a company's political action committee (PAC) and giving by individuals that list the firm as their employer.
  Financial institutions are among the top 100 contributors in the current campaign, including Citigroup Inc., Morgan Stanley, parent of the Discover card, Bank of America Corp. and J.P. Morgan Chase & Co., according to the Center. However, the banks tend to keep their cards close to their vests, declining to disclose whether they donate to influence legislation specific to payments or for any of the myriad other financial issues in Washington that affect them.
  Many of the financial companies with large retail operations typically prefer to spread their money pretty evenly between Democrats and Republicans. As of July 5, Citigroup had split its $1.7 million right down the middle, while Chase gave 52% of its $1.3 million to Democrats. BofA gave 55% of its $1.0 million to Republicans, according to the Center.
  One exception is MBNA Corp., long a leading card-industry giver and a proud Republican. The Wilmington, Del.-based monoline donated $1.3 million to candidates by the end of August, with 73% going to the GOP.
  Despite the donations, card-industry issues have been sparse this year.
  The broader banking industry was successful in its support of the reauthorization of the Fair Credit Reporting Act (FCRA), the 1970 law setting oversight of privacy and accuracy in consumer credit reports. Credit card companies favored a federal approach instead of a patchwork of state laws due to the expense of following 50 individual sets of rules and regulations.
  Congress passed the reauthorization known as the Fair and Accurate Credit Transactions Act of 2003, or FACT Act, and Bush signed it last December. Under the law, the national credit- reporting agencies beginning this December must provide to consumers, upon request, a free copy of their credit report once every 12 months.
  Bankruptcy reform has been the major industry bill for nearly a decade but it appears to have gone by the wayside this year. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2003 would require a means test for filers to determine if it's best to file a Chapter 7 bankruptcy and absolve themselves of virtually all their debt.
  Instead, more filers would be shifted into Chapter 13 bankruptcy and enrolled in a debt-management plan where they pay a portion of their debts. A filer would also be required to attend debt-management counseling. Bush has pledged to sign a bankruptcy bill.
  The American Bankers Association has supported the bill. Card issuers are important members of the ABA. The Washington, D.C.-based trade organization donated $1.1 million to Congressional candidates by July, with 63% of that going to Republicans. The ABA doesn't donate to presidential candidates, says a spokesperson.
  The bankruptcy bill passed both houses of Congress but became stuck in conference committee, where staff are wrangling over a compromise. Experts say the chances of the measure being passed this late in an election year are near zero.
  That left card honchos with one success to their name and another measure mired in the swamps of Foggy Bottom. It seemed like the 2004 election was shaping up as a non-event for the card industry.
  Then, lantern-jawed Kerry threw a hand grenade into the debate in late August, proposing new rules for lenders. Kerry proposed that credit card issuers be required to inform cardholders prior to any interest-rate increase on their accounts. There would be a ceiling on the increases as well, though Kerry didn't specify a figure.
  Card issuers would be banned from raising the rates of cardholders with good payment records based on a missed or disputed payment involving a different company. The proposal also would require issuers to obtain approval from cardholders before charging overlimit fees on authorized transactions.
  Finally, credit card lenders would have to post prominently on each cardholder's monthly bill a box listing how long it would take the consumer to pay off his entire debt if he only made the required minimum payment. The Comptroller of the Currency, who argued that federal regulators, not state legislators, had authority over nationally chartered banks, shot down a similar proposal in California in 2002.
  A Kerry official vowed that would change if the senator were elected. Gary Gensler, an advisor to the Kerry campaign and a former official in the U.S. Treasury Department of President Bill Clinton, said that Kerry would appoint a Comptroller who would allow the California plan to be enacted. The appointment of John D. Hawke Jr., the current comptroller, expires this month, and Hawke has said he'll retire.
  Kerry also went after several other lender groups, including mortgage firms and payday lenders, in his proposals.
  Tapping Consumer Sentiment
  Issuers contacted by CCM declined to respond publicly to Kerry's proposals, but the ABA spokesperson says that several of Kerry's ideas had already been proposed and rejected by legislators. Creating a calculation box would present a costly addition to issuers' systems, and that cost would be passed on to cardholders, according to the spokesperson. Bottom line, consumers are best served by competition in the marketplace, and Kerry's proposals don't take into account the risk that lenders must take on to do business, according to the ABA.
  Kerry's proposals draw upon a rising tide of anger against lenders and card issuers in particular ("The Ugly Issuer," September). Consumers are bitter over rising fees, ubiquitous direct-mail card solicitations, and perceived service reductions by issuers. Meanwhile, issuers posted a healthy after-tax profit rate of 2.53% in 2003, up from 1.99% in 2002, according to CCM calculations.
  The activists have numbers to back up their charges. The average late fee was $35.21 in the first quarter, compared to $31.26 in 2002, according to Synovate MailMonitor, the Chicago-based firm that analyzes card solicitations. Fee revenue has become increasingly important, with issuers garnering $7.3 billion in late fees in 2002, up from $1.7 billion in 1996, according to Demos, a consumer group.
  The industry's omnipresence may be a factor. There were 1.2 billion charge and credit cards circulating in the U.S. in 2003, about four for every American. Railing against the industry are activist groups from coast to coast, including New York-based Demos and Consumer Action in San Francisco.
  Hot Topic
  Kerry's proposals will resonate with some voters because late fees are a hot topic now, says Michael Auriemma, president of Auriemma Consulting Group Inc. in Westbury, N.Y. But significantly more cardholders are affected by the interest they pay on their card balance every month, and "interest rates have fallen through the floor," notes Auriemma.
  Synovate found that the mean single go-to interest rate in card solicitations was 9.66% in the first quarter, compared to 12.65% in 2003. Competition for new cardholders has driven issuers to lower introductory interest rates on cards to almost 0% in the last two years.
  This lower cost of funds is one of the positive aspects of the credit card business that the politicians may not be considering, says Auriemma. True, the intricacies of risk-based pricing are complicated and get lost during a heated presidential campaign, he says. Still, "the industry needs to do a better job of telling that story," says Auriemma.
  In response to Kerry's proposals, the Bush campaign called the senator a hypocrite and "the number one Senate recipient of banker donations over the past 15 years."
  But Kerry and the Democrats may have successfully played upon the assumption by many voters that Bush is closely allied with big money, including financial institutions. And the fact is that campaign contributions this summer provide backing to that belief.
  Bush has been the top choice of bankers, with contributors categorized in the Finance/Insurance/Real Estate sector donating $29.3 million to his campaign through Aug. 18, the Center for Responsive Politics found. The Finance sector includes such lenders as credit unions, savings and loans, commercial banks and credit companies, an industry group that best tracks the card industry. The Center breaks the country's economic interests into 13 sectors, including defense, construction, health, lawyers, and other. The finance industry was Bush's top donor group.
  In contrast, Kerry contributors classified in Finance donated $9.2 million to his campaign by Aug. 18, making it his second-largest donor group, the Center reported. The largest sector for Kerry was Other, giving $18.4 million.
  Finance/Credit companies, a subset of the Finance sector, lean strongly to Republicans in their giving (chart, page 20). In the 2000 election, Finance/ Credit donated a total of $9.7 million to Congressional candidates; 69% went to Republicans. In the mid-term 2002 cycle, Republicans received 63% of the $7.4 million donated. In the current cycle, Republican candidates had received 62% of the $4.7 million in contributions as of July 5 from Finance/Credit companies.
  Larry Noble, the Center's executive director, says contributors give both to further their bills and to fight proposals that may hurt their business. "It's often as important to stop legislation as to get legislation passed," says Noble. Contributors "fight back with contributions and lobbying (against) any perceived attempt to establish regulation."
  Politically Active
  One firm that won't stop fighting is MBNA. It has been an Olympic-caliber donor for the last decade, leading the Center's Finance/Insurance/Real Estate sector. During that time, MBNA favored Republicans with 73% to 90% of its money during each two-year cycle. MBNA didn't respond to requests to discuss its political giving.
  In the 2002 cycle, MBNA donated a total of $1.5 million, besting AmEx with its $801,000 contribution, Cap One with $445,485, and Visa International with $409,420. In the 2000 cycle, MBNA donated $3.7 million, easily topping the $873,858 given by No. 2 donor AmEx.
  Since 1994, MBNA has been the leading donor in each cycle among finance and credit companies with the exception of the 1996 cycle when Beneficial Management Corp. topped the list. And Beneficial barely won that contest, donating $874,719 while MBNA gave $834,605.
  It could be that MBNA will reduce its giving this year because of the departure last December of Charles M. Cawley, the firm's co-founder and chief executive. Cawley is big Bush backer, having already generated over $200,000 in contributions to the president by mid-August. That puts Cawley in the prestigious Ranger club, trumping those in the Bush Pioneer group that have raised $100,000 for the president.
  Cawley left the MBNA board in December after a battle over compensation for senior executives, according to a March story in The New York Times. MBNA veteran Bruce Hammonds was named MBNA's CEO while Cawley was named senior advisor, serving until next summer. Of course, once an executive leaves a firm, his ability to raise money may be diminished, says Noble.
  Contributions from companies like MBNA could also be impacted by the 2002 campaign-finance reform measure known as McCain-Feingold, named after its chief Senate sponsors-John McCain, R-Ariz., and Russell Feingold, D-Wis. One portion of the law bans so-called soft money donations directly from a corporation, notes Noble.
  The Money Still Flows
  Instead, companies seeking to contribute to a federal candidate must donate through PACs, through individual donations from executives and employees, or through independent political groups called 527s.
  Apparently, that hasn't stopped MBNA. Its corporate PAC had donated $536,950 to candidates by Aug. 25, with 70% going to Republicans, according to the Center. That's close to the $579,000 the MBNA PAC gave during the entire 2000 cycle.
  What began as a relatively quiet campaign for cards is shaping up as a barnburner. If Bush is re-elected, will Republicans put a full court press on bankruptcy legislation? Or will a victorious Kerry follow through on his pledge to change issuer procedures? One thing is clear with American politics-you pays your money and you takes your chances.