Short Stick
From the February 2003 Issue of CardTrak
      O nce upon a time consumers carried a "big stick" to fight unfair credit card business practices. It was called a "class action lawsuit." Screwing over a few cardholders could result in a big penalty for a credit card issuer. One disgruntled cardholder could file a lawsuit and then request the lawsuit be certified as a class action to represent all other affected cardholders. A dispute over a $20 or $30 fee could easily turn into a $20 million or $30 million lawsuit. In most cases, credit card issuers would settle the lawsuit before trial to reduce legal defense fees, and to avoid paying much larger damages.

The "big stick" worked since, in most cases, it put an end to the disputed business practice, and made credit card issuers think twice about adopting some sharp business practices (a/k/a gotchas). However the big stick was also a "golden goose" for trial lawyers. While affected cardholders might get a $5, $10, or a $20 settlement from the lawsuit, trial lawyers representing the cardholders would reap millions of dollars in fees. Cardholders got even, but trial lawyers got rich. The big stick really amounted to "green mail," an easy way to legally extort millions of dollars from credit card issuers. During the 1990s, suing credit card issuers became an industry.

However, in the end, cardholders got the short end of stick. The costs of these class action lawsuits were eventually passed on the cardholder in the form of other fees or higher interest rates.

Three years ago credit card issuers decided to fight back. Slowly, but surely, all of the nation's leading issuers of credit cards whittled down the "big stick" to a "toothpick."

This was accomplished by amending cardholder agreements with arbitration clauses that prohibit class actions. Under binding arbitration, all parties must agree to abide by the decision instead of going to court. Consumers not only give up their right to a trial by judge or jury, but also any rights of appeal. They also give up, most importantly, the right to band together or form a class action against the other party. As a result, going after a credit card issuer for screwing you over is an exercise in futility. The costs of litigating a small claim, in both money and time, far exceed the usual $20 to $200 dispute.

The fairness of the new credit card arbitration clauses were recently tested in court.

California's Second District Court of Appeals ruled last month that the Federal Arbitration Act preempts provisions of the California Unfair Practices Act. The California case resulted from an action taken by a Discover cardholder who claimed that Discover breached its cardholder agreement by imposing a late fee on payments that were received on the due date, but after an undisclosed 1 p.m. cut-off time. The cardholder attempted to make it a class arbitration but was eventually turned down by the state court. Also, the U.S. Supreme Court recently agreed to hear an appeal by Green Tree Financial of a ruling by the South Carolina Supreme Court. The South Carolina Supreme Court upheld a $27 million class arbitration award against Green Tree. But the company says it arbitration agreement specifically prohibits a class action and should therefore be nullified.

For now, it appears the arbitration strategy is effective in stopping the "green mail" lawsuits against credit card companies.

The big question is: Will credit card issuers pass on the cost savings to cardholder or will they pocket it and behave with impunity ?

Most likely cardholders will get the short end of the stick . . . they usually do.

CREDIT BUREAU LAWSUIT
TransUnion and Equifax have agreed to reach a settlement in a class-action lawsuit involving bankruptcy notations made in consumer credit files. Experian has already finalized a settlement. The lawsuit grew from South Carolina case wherein a consumer was unable to get a car loan because of a bankruptcy notation in his credit file. The man had co-signed a loan for his son-in-law, who later filed for bankruptcy. The case was heard on January 17th, at which time Experian offered its settlement. U.S. District Judge Margaret Seymour has set a preliminary settlement conference for mid-February.

CAMPUS PROMOTION
A campus promotion for a Bank One credit card has resulted in the University of Louisville imposing a ban on all credit card solicitors. Reportedly, Philadelphia-based FrontLine Event Marketing handed out racially offensive and explicit T-shirts as part of its promotion to get students to sign-up for a Bank One card. According to the Associated Press, the shirts showed a caricature of a voluptuous black woman, a Bank One logo, and "10 Reasons Why Beer is Better than a Black Man." FrontLine says the shirts came from the two unauthorized workers who were hired by an independent contractor. Bank One has terminated its relationship with FrontLine over the incident. Bank One has been booted off the University of Louisville campus. However, the university said its five-year, $1.9 million agreement with Bank One was about to expire, and university officials had already decided to stop on-campus solicitation in their next contract.

AMEX REWARDS
The American Express introduction of the new "Green" and "Gold" rewards cards in late September has paid off in spades during the last three months of 2002. AmEx reported this month that it added 300,000 new cards between the card launch and the end of 2002. AmEx's U.S. gross dollar volume soared in 4Q/02 by nearly 13%, and credit card loans increased by more than 7%. In September, AmEx launched the "Rewards Green," "Rewards Gold," "Preferred Rewards Green," and "Preferred Rewards Gold" cards which have the "Membership Rewards" program as a core feature. The cards carry annual fees ranging from $65 to $130.

GET THE GOLD
MasterCard and Pizza Hut have teamed to offer the "Get the Gold" sweepstakes. The contest offers consumers a chance to take home the grand prize of $25,000 in gold coins or a first prize of a $10,000 "MasterCard Gift Card." Customers will be automatically entered for a chance to win every time they use a MasterCard card to purchase a "Stuffed Crust GOLD Pizza" or any other Pizza Hut pizza until March 9. The winners will be selected on or about March 31st. Pizza Hut has 7,000 locations in the USA. This is one of the first promotions Pizza Hut has done with MasterCard.

CHOICE TRIPLE MILES
Choice Hotels International is launching a triple miles promotion for Feb 15th thru Apr 30th for members of American Airlines "AAdvantage," Delta Air Lines "SkyMiles," Northwest Airlines "WorldPerks," United "Mileage Plus," US Airways "Dividend Miles," and, Southwest Airlines "Rapid Rewards."

BLUE MUSIC
American Express and VH1 have jointly launched "Blue For Save The Music," a new program to restore music education programs in America's public schools. AmEx, which has pledged $1 million to the program, will launch the yearlong effort in conjunction with this year's GRAMMY Awards taking place on February 23rd. AmEx will sponsor a star-studded "GRAMMY Viewing Benefit Event" at The Theater in Madison Square Garden on GRAMMY night. Tickets for the benefit will be available first to "Blue" customers beginning mid February, with proceeds donated to "Blue For Save the Music." Following the GRAMMY Awards ceremony, musical instruments and memorabilia used by awards show performers will be for sale via an Internet auction. Proceeds from the auction will be donated to music education programs through "Blue For Save The Music" and the "GRAMMY Foundation."

TRAVELOCITY BONUS
MasterCard and Travelocity have teamed to offer travelers a $250 "MasterCard Gift Card" for booking a cruise with a MasterCard by the end of February. Consumers can cruise throughout 2003 to a variety of destinations, including Alaska, the Caribbean, Europe, Panama Canal, Mexico, Hawaii, Canada, New England, Asia and the South Pacific.

PAYMAXX CARD
Payroll processor, PayMaxx, has teamed with Bank One to re-launch a VISA debit card in April. The "PayMaxx PayCard," enables employers to directly deposit funds into the employee's PayCard account each payday and is targeted at unbanked employees. PayMaxx previously offered a VISA debit card through BankTennessee in 2001. PayMaxx says its research shows that employees in high turnover industries often find obstacles to cashing their payroll checks and managing their funds. The payroll company says it will target hospitality, manufacturing, fast food, and trucking industries for the debit card product. VISA estimates that 12-15 million households, or 20% of the U.S. population, do not have a traditional banking relationship.

AMSOUTH PAYROLL CARD
Alabama-based AmSouth Bank has introduced the "VISA Payroll Card" to companies in Tennessee, Alabama, Florida, Mississippi, Louisiana and Georgia. Employees using the "Payroll Card" will receive a monthly statement of activity on the card, can obtain balance information free at any AmSouth ATM or by calling a toll-free number, and will receive a personal transaction register for tracking use between statements.

SCAM BUSTERS
The Federal Trade Commission has secured $1.4 million from two firms engaged in an advance-fee credit card scheme. The case, brought through the FTC's April 2002 "Dialing for Deception" law enforcement sweep, targeted defendants who allegedly placed ads in magazines or mailed postcards to consumers to pitch advance-fee credit cards to prospective buyers deceptively. As a result, the FTC filed a complaint against Thomas Gregg Holloway, First Freedom Financial Corporation, and Southern Telmark Corporation. According to the Commission, since at least 1996, the defendants used advertisements in magazines and on postcards to deceptively pitch consumers an unsecured credit card in return for a fee averaging between $79 and $229. The FTC alleges that when consumers responded to the ads by calling a toll-free number, the defendants offered either a Visa or MasterCard credit card with no security deposit, regardless of the consumers' credit history. The defendants allegedly said the application fee was a one-time processing fee. The FTC alleges that none of the consumers received the promised card after paying the fee.

The FTC also recently announced that Canadian-Based Icon America d/b/a Sierra Enterprises has been ordered to pay $25,000 to settle charges of offering fraudulent credit card protection insurance. According to the FTC's complaint, the defendants used telemarketing to sell credit card loss protection to consumers for prices ranging from $299 to $369. Using scare tactics, the defendants allegedly claimed that consumers' credit card numbers were available on the Internet and accessible to criminals, and that the consumers would be held liable for any unauthorized charges, if anyone gained access to this information.

ONLINE BILL PAYMENT
A new study on Bank of America's unprecedented decision last year to eliminate its $5.95 per month online bill payment fee has produced a significant spike in bill pay penetration within BofA's online banking customer base and has attracted a new customer group to the service. The research by Compete reveals that the new pricing had the greatest appeal to a new demographic segment: customers who signed up since free service began tended to be younger (7% higher composition of 18-to-34 year-olds), and had a lower income (5% higher concentration in the under $60,000 annual income category) than prior OBP customers. Furthermore, the free service also attracted consumers with a markedly different banking profile: new BofA online bill pay customers were more interested in credit card products and less interested in investing and lending products than existing OBP customers. They also showed a higher propensity to research service offerings on competitive bank sites compared to existing OBP customers. The free service also stimulated online bill pay penetration, but not overall online banking customer growth: BofA averaged just 6% monthly online banking customer growth from April to December (following the May elimination of fees) versus 8% growth from January to April.

PHONE CARDS 2008
The U.S. prepaid calling card industry will grow at a 9.7% compound annual growth rate, to reach $6.4 billion by 2008. According to a new research report from ATLANTIC-ACM, gross margins for service providers have stabilized, with nearly 44% of phone card providers achieving gross margins (on sales) of 25% or higher. Retail breakage (the amount of unused time on a prepaid card when it expires or is discarded) has declined from 12%, on average, in 1998 to 10% in 2002 ATLANTIC-ACM also found that 74% of service providers expect to add POS activation features by 2005. Sixty-nine percent of service providers expect to include foreign-language options on their prepaid card offerings by 2005.