Credit Card Come-Ons
Forbes, Liz Moyer, 11.01.05
It's that time of year again, when credit card companies offer up a dizzying selection of gimmicks to get consumers to pull out the plastic during the all important holiday-purchasing season--just as interest rates are starting to creep back up, along with the size of the average household debt.
This year's top picks include cards that help consumers save money by linking purchases to savings accounts, cards that offer bigger travel and cash back incentives or no-fee frills, and cards that promise greater convenience with a relatively new-fangled payment technology that cuts seconds off transaction times.
Billions of dollars in potential fees are at stake, including fees consumers never see--those that banks charge to merchants for processing the cards' transactions.
Last year, consumers racked up just over $100 billion on credit, debit and store cards during the period between Thanksgiving and Christmas, or about 49% of all holiday purchases, according to Cardweb.com. It's a safe bet a lot of that money was carried over, plus interest, to subsequent months.
The U.S. Public Interest Research Group (U.S. PIRG) has found the average credit card account balance to be roughly $8,600. No matter. Last year, Black Friday, or the day after Thanksgiving, accounted for 11% of the total card transactions. That is expected to rise this year along with the overall use of cards in lieu of cash. Citigroup (nyse: C - news - people ), JPMorgan Chase (nyse: JPM - news - people ) and Bank of America (nyse: BAC - news - people ) plus independent card firms like Capital One, have an overwhelming share of the market for card issuance under the MasterCard and Visa logos.
In addition to interest rates, late fees, annual fees and other charges on cardholders, the banks rack up fees from 1% to 3% on merchants for processing the transactions. Last year, these so-called interchange fees totaled $25 billion.
So it's obvious they'd want to encourage consumers to use plastic more often, thus increasing the size of the balances carried over (and thus the income from interest every month) and transaction volumes in the system that generate more merchant fees.
In recent weeks, American Express (nyse: AXP - news - people ) and Bank of America rolled out cards promising customers the ability to put money away in savings accounts every time they buy something. HSBC Holdings' (nyse: HBC - news - people ) U.S. banking operations reissued all of its debit cards equipped with a new chip that allows consumers to just wave the card past a reader to have the transaction registered--no signature, no PIN required.
Last week, JPMorgan Chase issued similarly equipped credit cards to its customers on the East Coast. Citigroup also has a series of speed-pass type cards and offers them as keychain fobs.
The banks want consumers to use these cards--both the savings rewards products and the speed-pass technology cards--for everything from big-ticket items to mundane everyday purchases--in fact they are emphasizing the latter in their marketing materials.
They say the cards make life easier for consumers and for merchants (by clearing out long lines of holiday shoppers faster.) "Customers are already moving from cash to plastic, and this is a way to make the transaction easier," says Tom O'Donnell, senior vice president of Chase Card Services.
But as in a lot of things, consumer advocates point out that the devil is in the details. American Express' savings card, for example, puts 1% of purchases into an insured savings account, with a $25 starter deposit as motivation from day one. But the annual rate is 12.74% to 14.74% and jumps to 28.74% under certain conditions. There is a $29 late payment fee and the $35 annual membership fee kicks in after one year.
U.S. PIRG points out that it would take $3,500 charged annually to just make up the annual fee, and that assumes the cardholder pays it off on time every month. "If you carry over balances and pay interest, here is a simple fact: No rewards card compensates for 12% to 25% APR interest," says PIRG's consumer program director, Ed Mierzwinski. Meanwhile the speed-pass technology on debit cards, especially, exposes consumers to greater risk.
Because it requires neither a PIN nor a signature, these debit cards bring a higher risk of fraud, for starters. Moreover, consumers can be more exposed to having their checking balances wiped out because laws regarding debit transactions are not as strict as those governing credit card transactions. (The electronic transfer rules put more of the burden of reporting possible fraud on the consumer, compared to the truth-in-lending rules governing credit cards.) Many banks offer to make debit customers whole, but that is beside the point, Mierzwinski said. "A bank can freeze your credit card account, and you still have a checking account. But if a bank freezes your checking account, you risk bounced checks and declined transactions," he says.
If they get their way, a Southern California group, led by the lead plaintiff in a suit against MasterCard and Visa over the merchant fees, will convince consumers to keep the plastic in their wallets this coming Black Friday and use cash or checks instead. The informal group is calling it "A day without credit cards--a day with cash."
It's not clear how widespread the idea will catch on, but it's hard to believe there will be any mad rush to use checks at the point of purchase this season. Mierzwinski offers an alternative idea: "I just don't shop that day."
[source: Forbes]
