D-DAY
From the July 2002 Issue of CardTrak
      In less than twelve months, D-Day will hit the payment card industry as a major debit card trial gets underway. April 28, 2003 will mark the beginning of the process to end a six-year dispute between merchants and banks over the use of debit cards as credit cards. While the implications for banks reach into the billions of dollars, there are also significant implications for consumers. Merchants contend that VISA and MasterCard conspired to monopolize the debit card market, forcing them to accept debit cards that are processed in a similar way and nearly at the same cost as credit cards.

Many consumers do not realize they can use their VISA or MasterCard-branded debit card the same way as they use their credit card. When it comes to debit cards, many consumers believe you must use a PIN or personal identification number to make a purchase with a debit card. However you can decide at the cash register if you want to use your PIN or just want to sign for a purchase like a credit card. Many banks offer rewards and prizes to customers who sign for purchases rather than using a PIN. In fact, many major banks penalize customers for using a PIN to make purchases by charging a per transaction fee that can range up to $1.50 per transaction.

Merchants want to take the option away from consumers and force them to use their PIN for debit card purchases. Ironically, the vast majority of merchants in the U.S. are not equipped to handle PIN transactions.

If merchants win there is a very good chance that consumers will end up paying more to use their debit cards, and may lose all the goodies currently associated with such cards.

The class-action lawsuit, filed in October 1996, by Wal-Mart, The Limited, Sears Roebuck, Safeway, Circuit City, the National Retail Federation, the International Mass Retail Association, and the Food Marketing Institute, and 13 other large and small retailers, charges VISA and MasterCard with violating U.S. antitrust law. About 4 million merchants are covered under the class action status of the litigation. Constantine & Partners, lead counsel for the merchants, says the trial is stacked against the card associations since many of the key legal issues were decided last October in the U.S. Government's antitrust litigation against VISA and MasterCard. If the merchants prevail, VISA and MasterCard will face significant class damages of approximately $13-$15 billion, which could be tripled under antitrust laws. VISA and MasterCard insist the class action status of the lawsuit is an abuse of the system and may unfairly force them to seek a settlement.
I-GAMBLING
Last month, the New York Attorney General announced that Citibank has agreed to block online gambling transactions with its credit cards. Under the agreement, Citibank will block transactions that are identified by transaction code as casinos and Web sites as online gambling. Bank of America, Fleet, Direct Merchants Bank, MBNA, and Chase Manhattan Bank have already begun blocking such transactions. While there have been several law enforcement actions combating online casinos in New York, the Attorney General's agreement with Citibank is the first case to address financial entities that process gambling transactions. In 1999, the Attorney General won a lawsuit charging that an Antigua-based casino that accepted bets from New York residents had violated New York's gambling laws.

Citibank's decision to block online gambling transactions was called "politically motivated" by the head of the largest online gambling firm. London-based Sportingbet.com Plc's CEO says Citibank's decision is linked to New York's plans to build a new gambling center closer to home. Last month, Sportingbet Plc launched a major campaign in the USA to promote government regulation of the online gambling industry. The firm has nearly 400,000 customers in the USA and estimates it could generate US$11 million per year in new tax revenue if online gaming was legalized. Sportingbet.com says 30% of its American customers use credit cards to place bets on its Web site. To further its plans in the USA, the firm has taken out full page advertisements in The Washington Post and The Washington Times, hired D.C. lobbyist Greenberg Traurig, and, has scheduled meetings with various Congressmen.

Meanwhile, a new study found that Internet gambling companies could see their growth potential cut in half over the next year as major credit card issuers refuse to accept online gambling transactions. The Bear Stearns study projects that growth rates in the industry could be sliced next year, from 43% to 20%, or to roughly $4.2 billion in total industry-wide revenues. Bear Stearns concludes that credit card transactions are the life blood of Internet gambling and without them it will force such firms to shift to international markets and may possibly set off a wave of consolidation.
SUMMER CHARGING
Credit card volume during the summer vacation period may be sluggish if consumer spending continues to weaken. During the first quarter, card volume was down 5% as Americans charged $319.2 billion to their bank credit cards compared to $336.1 billion for 1Q/01. Government figures released in June indicate consumer spending or retail sales dipped by 90 basis points during May. The surprise news pushed the stock market down by more than 1%. Auto sales and gas sales were off significantly, while other retail sales weakened slightly in May. Consumers have been driving the recovery from last year's recession and analysts are concerned they may be pulling back just as the summer vacation period gets underway. While credit card volume has been growing at a slower pace this year, credit card debt is growing at about half of the pace of 2001. During April, revolving credit, 90% of which is credit card debt, grew at an annual rate of 7.0% compared to 14.2% for April 2001. On an actual dollar basis, Americans added $4.2 billion to revolving credit in April 2002 compared to $9.4 billion one year ago.

PERSONALIZED REWARDS
Diners Club has introduced the Personalized Rewards program for cardholders with more than 100,000 points, about 20% of its portfolio. Some of the most recent unique redemptions include a Celestron Nexstar GPS Telescope;-Brookstone Massage Chair; Sony Plasma TV; Shimino Calcuta Fish & Reel; and a Professional Portrait. Diners Club also offers the flexible option to redeem points for more than just airline miles. Issued in more than 200 countries and 54 local currencies, Diners Club serves more than 8 million Cardmembers worldwide who, in 2001, charged more than $31 billion.

LATE PAYERS
Credit card delinquency is running about 30% above last year levels, but has stabilized in the first three months of this year according to data gathered by the American Bankers Association. Based on the number of credit card accounts past due during the first quarter, delinquency remained at 3.88%, the same as 4Q/01, but significantly higher than the 2.99% rate for the first quarter of 2001. Based on dollars past due, the ABA found a 17 bps decline, from 4.67% for 4Q/01 to 4.50% for 1Q/02. Over the past 12 months, delinquency based on past due dollars has risen from 4.13% to 4.50%.

NO PAYERS
Charge-offs among the top ten issuers of VISA and MasterCards increased by slightly more than 22% during the first quarter compared to 1Q/01. Providian and Citigroup continued to report the largest jump in losses, while Bank One/First USA and Fleet reported decreasing charge-offs over the past twelve months. Discover and American Express also posted significantly higher losses during 1Q/02, surging 35.5% and 27.4%, respectively. American Express' charge-off rate increased from 5.1% one year ago to 6.5% for 1Q/02. For the fiscal quarter ending Feb 28, 2002, Discover reported a charge-off rate of 6.49% compared to 4.79% for fiscal 1Q/01. Among the top ten VISA and MasterCard issuers, the average for the first quarter came in at 7.30% compared to 5.98% one year ago. If Discover and AmEx are included, the average for the top issuers would be 7.17% for 1Q/02 compared to 5.81% for 1Q/01.

CARD APRS
The gap between the cost of funds and interest revenues continues to widen for credit card issuers this year. Meanwhile, average credit card interest rates have edged upward by 20 bps since the start of this year. In June, Discover reported that its interest rate spread widened 123 basis points for the second fiscal quarter compared to 2Q/01, driven by a decline in cost of funds. Other top issuers are expected to report similar gains when second quarter reports come out this month. The Feds have not adjusted rates since December and the prime rate remains at 4.75%

MASTERCARD CHANGES
MasterCard International has converted into a private share corporation in conjunction with its merger with Europay International. MasterCard will now disclose detailed information about its business via quarterly and annual financial reports with the SEC. Europay has been a long-standing strategic ally in Europe for MasterCard. The Europe Region will continue to be based in Waterloo, Belgium. Dr. Peter Hoch, Europay's chief executive, has become president of MasterCard's Europe Region. MasterCard's other regions, Asia/Pacific, Latin America/Caribbean, South Asia/Middle East/Africa and North America will continue to maintain their regional boards. MasterCard says the restructuring will provide full globalization of MasterCard's processing functions with significant economies of scale. The integration also provides the opportunity for the Europe Region to benefit from MasterCard's global expertise in brand building such as its "Priceless" advertising campaign, now seen in 45 languages and in 90 countries. MasterCard says its European customers will also benefit from the delivery of enhanced customized relationship management and consulting services

MARKET JITTERS
Since the first of this year, the CardWeb.com 100 Index has fallen 22%, but top credit card specialists MBNA, Capital One, and American Express have held up surprisingly well. Capital One is off its 52-week high by only 16%, while MBNA and AmEx are only down 18%. Sub-prime issuers continue to be pounded though. Providian is off 92%, while CompuCredit has slid 57%, and Metris is down 80%. There is also concern that corporate dishonesty may dampen consumer sentiment which could drive down consumer spending, the key driver of economic recovery. The CardWeb.com 100 stock index, launched January 1st, tracks the stocks of 100 highly focused credit card companies, card processors, card manufacturers, and other card-related businesses. The index is available through the CardData financial surveillance service.