American credit cardholders have put the nation's #2 credit card issuer on the run. Bank One's First USA credit card unit revealed this month that it will not grow as fast, and will not produce as much profit as anticipated for the rest of this year. The news has already sent shock waves through the industry and the stock market. First USA says the credit card business is not what it used to be. The revelations of credit card troubles among the nation's second largest issuer truly represents a watershed event in the credit card industry. The issuer has effectively surrendered to consumers and has signaled other issuers it is no longer participating in cut-throat competition. Other major bank issuers such as Citibank, Chase, Bank of America and Fleet are facing the same issues as First USA. Non-bank players MBNA, Capital One, Providian and Household have already made the adjustments necessary to sustain growth in a very saturated and very mature industry. MBNA remains the affinity card king, while Capital One and Providian have focused on the sub-prime and super-prime segments. Household made sweeping changes earlier this year by revising the pricing of its largest portfolio segment, the 'GM MasterCard', and by entering the sub-prime market. Meanwhile, other major bank players remain mired in a rate war for the mass market. Battling with teaser rates and single digit, fixed, go-to rates in the main stream credit card market in the U.S. has driven the commoditization of consumer bank credit card products. The Internet will only accelerate this reality. In an effort to maintain yields, First USA has added balance transfer fees, foreign transaction surcharges, and hair trigger late fees over the past year. This week First USA admitted its aggressive policies have aggravated attrition. While consumers have won the battle they have lost the war. As other major bank issuers retrench and given the concentration of market power, the elimination of the interest-free grace period is not far off.
Compounding First USA's problem is a rising tide of negative publicity. In a blistering expose` of First USA's credit card practices, most notably its late fee policies and fixed rate marketing, ABC Television's Niteline program aired a program August 31st that documented real life examples of First USA cardholders who fell victim to First USA's pricing policies. The segment was followed by a heated debate between a First USA executive and a representative of the Public Interest Research Group, a consumer advocacy concern. The segment, produced by ABC's Dallas affiliate WFAA, followed a four month investigation, and revealed that the federal government's Office of the Comptroller and Currency agency has received more than 2,800 complaints regarding Bank One/First USA's credit card practices since the first of this year. This compares to a total of 2,500 complaints received for the other nine largest issuers, combined. Throughout the program First USA struggled to defend itself. During the WFAA piece an embarrassed First USA executive could not define a fixed rate. Later a First USA representative tried to dominate the opening of the debate segment with a prepared statement which blamed its Phoenix payments processor for the problems. The FUSA representative also attempted to minimize the cardholder problems, citing the size of the issuer's cardholder base compared to the number of OCC complaints filed. Niteline closed the program by encouraging viewers to post complaints about First USA through a message board on Niteline's website.
Meanwhile another bad boy of the industry, Providian, continues to face cardholder and shareholder lawsuits over its credit card practices. Last month, Providian Financial released a report showing that its processing centers have been given a clean bill of health by an outside auditor. The card issuer says that Ernst & Young has completed its study of key aspects of Providian's six payment processing operations. In June, Providian hired E&Y to examine whether Providian is crediting payments to customers' accounts on the date they are received. After performing test procedures at each processing site, four of which are operated by outside vendors, E&Y reported that it "found no evidence that Providian or any of its vendors were intentionally withholding payments." Most of the cardholder lawsuits focus on Providian's late fee policies. On July 22 Providian reported it discovered a computer glitch which improperly delayed the posting of payments received on weekends. The issuer is in the process of refunding nearly $20 million in late payment penalties improperly charged. Providian also announced late last month it will establish a pay-by-phone service in September to enable cardholders to "avoid the uncertainties and possibilities of delay associated with paying by mail." Providian also pledged during August to extend its enhanced customer satisfaction program for another 90 days.
OUCH!
For the second time in two months, The Federal Open Market Committee voted to raise its target for the federal funds rate by 25 basis points to 5-1/4 percent. The Federal Reserve Board of Governors also approved a 25 basis point increase in the discount rate to 4-3/4 percent. Both actions mean higher credit card rates for consumers as the prime interest rate has now been pushed to 8.25%. More than 80% of bank credit cards in the U.S. carry a variable rate structure, with most based on the prime rate. About half of nation's issuers adjust rates monthly, while the other half adjust quarterly. This means many cardholders will see last month's rate hike in their September statements while others will see it in their October statements (if their issuer adjusts quarterly). The rate increase will generate nearly $1 billion in additional interest charges over the next twelve months. Combined with June's rate adjustment, consumers will shell out nearly $2 billion more in interest charges between now and next summer. For the average household, carrying $6,300 in card debt, a 25 basis point increase in the prime rate will raise annual interest costs by $16 or about $1.25 per month. Some cardholders escaped the June increase since it came after the cut-off date for many issuers who adjust rates quarterly. For example, Citibank/AT&T Universal and MBNA cardholders did not get hit yet for the June increase. However, the latest increase comes well ahead of the next quarter, so for these cardholders a 50 basis point jump in their interest rate awaits them in October. Currently, interest rates for bank credit cards (VISA, MasterCard, Discover and American Express) stands at 17.27% compared to 17.11% in May and 17.54%, one year ago. The rate decline from one year ago was driven by competition, especially among issuers offering low, fixed interest rates. The rate increase since May is directly related to the Fed action in regard to short-term interest rates. As of mid-year, American consumers have racked up $454 billion in bank credit card debt and $97 billion in retail (store, gas, etc ) credit card debt.
YOUNGER OUCH!
Gen X-ers carry $2,021 in credit card debt and are the most leveraged age group of American consumers. The figures comes from new research conducted by Scudder Kemper Investments. The study also showed that 46% of Gen X-ers are very concerned about credit card debt. According to the survey, 62% of both Gen-Xers (ages 22-33) and Baby Boomers (ages 34-52) admit carrying credit-card debt. Less than half of Swings (ages 53-65) and less than one-third of WWII-ers (ages 66-up) report carrying any credit card debt. Actual credit card debt levels Baby Boomers - $1,998; Swings - $1,366; and WWII-ers - $549. Fully 48% of Gen-Xers, say paying off and reducing debt is one of their most important saving and investment goals, second only to retirement. This compares with 40% of BabyBoomers, 26% of Swings and 14% of WWII-ers. While Gen-Xers and Boomers carry close to the same amount of credit card debt, there appears to be a distinct difference in the psychological burden or anxiety that this engenders. In particular, Generation X-ers appear to be more concerned about debt 46% of Gen-Xers report that credit card debt "concerns them a lot." This compares with only 37% of Baby Boomers, 28% of Swings and just 15% of WWII-ers. The 'Generations @ The Millennium' study was based on 3,000 survey responses.
Meanwhile college students will be bombarded this fall with the question "Are You Credit Wise?". The United States Student Association and MasterCard International recently announced a joint program to begin student-to-student personal finance training on college campuses. The effort seeks to engage USSA's three million members to become student-teachers and guide their peers in understanding key financial concepts. USSA and MasterCard will make personal finance materials available at the primary sources for information on campus such as student newspapers, at registration, on the Internet, and in the dorms. Among the materials to be distributed are handouts designed to increase awareness of core financial concepts. MasterCard and USSA have also produced protective credit card covers that bear specific do's and don'ts about credit card use and responsible spending. The materials direct students to creditalk.com, a MasterCard website designed to assist college-aged credit card users with tools that help them manage finances and avoid debt. The United States Student Association is the country's oldest and largest national student organization. Founded in 1947, USSA is the only national student organization in Washington, DC, that can claim to represent all students and is the student voice on Capitol Hill, in the White House, and in the Department of Education. USSA tracks and lobbies federal legislation and policy. USSA also organizes students across the country to participate in the political process through Students Vote campaigns, letter-writing, and testifying in Congressional hearings. For more information on the college credit card program visit www.creditalk.com.
CASH OUCH !
Where can you borrow $100 for an effective, annualized interest rate of 260%? Try your bank credit card ! Credit card cash advance fees are soaring. Five years ago most card issuers charged a cash advance fee of 2.0% with a $2.00 minimum. They also capped the special fee at $10.00. Now the fees have a higher minimum and no maximum. Additionally most issuers now charge a higher interest rate for cash advances compared to the rate for purchases. For example Bank of America now charges a $20.00 minimum fee for cash advances made at other than an ATM or with a convenience check. Borrow $100 off your BofA card and you will be charged $20.00 and daily interest at the rate of 21.49% per annum. Since cash advance fees are considered interest this means you'll pay an annualized interest rate of 261.49%. Take a smaller cash advance and the annualized interest rate could soar to 1000%. Other issuers have established higher minimums too. Wells Fargo and First USA now levy a $10.00 minimum cash advance fee. If you need cash think twice about using your credit card. The best way to get cash is to use an ATM/debit card at your bank's ATM.
WHAT THE BIG GUNS CHARGE FOR CASH ISSUER CASH APR CASH ADVANCE FEE
Citibank 19.99% 3.0% with a $5.00 minimum Bank One/First USA 19.99% 2.0% with a $10.00 minimum MBNA 17.65% 2.0% with a $2.00 minimum Discover 20.99% 2.5% with a $3.00 minimum Chase 19.55% 3.0% with a $5.00 minimum Bank of America 21.49% 3.0% with a $20.00 minimum; ($2.00 minimum for ATM or check access) Capital One 19.80% 2.5% with a $2.50 minimum Household Bank 19.99% 2.5% with a $2.50 minimum Fleet 21.99% 4.0% with a $5.00 minimum Providian 23.99% 5.0% with a $3.00 minimum
REAL GEEK CARD
MBNA and The Linux Fund have teamed up to offer the 'LinuxFund.org MasterCard'. The Linux Fund is a non-profit, Oregon-based corporation that provides a means of channeling money to support Linux development. The new credit card features the popular Linux penquin mascot. The Linux Fund expects to offer the new card in Canada, the UK and Western Europe by January. As part of the early promotion, MBNA/Linux is offering a free $15 Linux Fund T-shirt for every new account that is used at least once for a purchase or cash advance. MBNA is offering a 4-month 3.9% intro rate for balance transfers and cash advances. The go-to rate and the rate for purchases is a fixed 12.99%. The no-fee card is available as a 'Preferred MasterCard' or as a 'Platinum Plus MasterCard'. Under terms of the affinity agreement The Linux Fund earns a fee for each new account and a portion of transaction fee revenues.
GIANT VISA DIES
After floundering among three issuers the 'Giant Food VISA' card will finally rest in peace. The mid-Atlantic grocery chain announced that its co-branded credit card program will close down at the end of September. Giant says First USA, the card's current issuer, made the decision to end the program. First USA is notifying cardholders this month and offering to switch them to other First USA cards. The card has a colorful history. Buffalo, NY-based M&T Bank launched the program in early 1996, offering cardholders an unlimited 3% rebate on Giant Food purchases and an unlimited 1% rebate on other purchases. By October of 1996 M&T wanted to terminate the program after realizing heavy losses, in excess of $1 million per month. By the end of 1996 Giant and M&T ended up fighting in federal court over the program. By February of 1997 Chevy Chase Bank took over and re-launched the program, capping annual rewards and increasing the basic card pricing. Chevy Chase was later acquired by First USA, which further reduced the rebates to a maximum of 1%. Giant said yesterday it will mail out final rebate certificates to cardholders in October and November.
CARD SCAM
The FTC and its enforcement partners shut down a number of scams during August involving the payment of an advance fee for a VISA or MasterCard. The Federal Trade Commission, state Attorneys General from six states and state banking officials were involved in 'OPERATION ADVANCE FEE LOAN'. The latest crackdown on telemarketing companies and individuals allegedly engaging in advance fee loan scams netted eight cases filed and/or settled by the Commission, and ten cases filed by state Attorney Generals, including three cease and desist orders issued by state banking officials. The latest sweep also included the participation of Canadian law enforcement authorities who have taken criminal actions against more than 120 Canadian advance fee loan scam operators who prey on American citizens. In all of the FTC cases announced, the defendants were charged with violating the FTC Act and the Telemarketing Sales Rule by misrepresenting that consumers would receive a credit card for an advance fee; by charging a fee in advance of consumers receiving the promised credit card; and in two of the cases, misrepresenting that consumers would receive a refund of their fee if they did not get the promised credit card. In conjunction with the announcement the FTC and the state Attorneys General joined with their education campaign partners to issue tips and warnings to consumers. The FTC says it is also alerting commercial mail receiving agents that they may be involved in a fraudulent scheme when they are asked by a mailbox holder to forward large volumes of mail to other addresses within the U.S. or to other countries. Additionally, the FTC says it is writing to more than 7,500 publishers of classified ads through the country to encourage them to warn their readers that ads promising loans or extensions of credit are likely to be scams. Some of the operations snagged include American Consumer Membership Services, Inc. which allegedly charged $69 in advance for credit cards; 1263523 Ontario, Inc. which allegedly charged a $159 advance fee; Modern Credit Financial Services, Inc. which allegedly charged $89 in advance for VISA and MasterCard credit cards; and Credit National, Inc. which allegedly charged $28 for credit cards.
SPEEDPASS MILESTONE
Mobil announced this month that it has passed the three million users milestone with its 'Speedpass' automatic payment system. Mobil reached the milestone within two years. The company said that 'Speedpass' users purchase gasoline at Mobil an average of one time more per month than non-'Speedpass' users. To celebrate the program's success, Mobil recognized Yvonne and Allen Idzenga of Gouverneur, New York, as the three millionth 'Speedpass' enrollees. The couple received $1,000 to be used for gasoline purchases along with other gifts of appreciation from the company. Mobil was the first to adapt the RF-based technology to enable consumers in making retail purchases. More than 3,800 Mobil stations are now participating in the 'Speedpass' program in the United States. The payment program, which is free, utilizes a miniature radio transponder attached to a key chain or affixed to a vehicle's rear window.
SAVINGS CARD
Principal Bank, a member of the Principal Financial Group, introduced a reward credit card program to encourage personal savings. The 'Principal Bank VISA' credit card enables cardholders to earn cash rewards and then apply them towards various financial products from the Principal Financial Group. The 'Principal Classic VISA' card offers a 0.75% cash reward on all purchases while the 'Principal Platinum VISA' offers a 1.25% cash reward on all purchases. Redemption options include mutual funds; deposit accounts; variable annuity contracts; variable life policies; and loans. Principal is offering the card with a prime +6% interest rate and no-annual-fee. Principal Bank also offers services including free electronic bill pay; free Internet access to accounts; free checking and savings accounts; no ATM fees; and no transaction fees. Principal Bank is a virtual bank and operates under a federal charter, approved by the OTS in the spring of 1998. The bank currently has more than 4,000 customer accounts and $50 million in assets.
