Watch your wallet. The plastic pushers are on the prowl.
Financial and retail behemoths, led by Citicorp, Sears and American Express, are stuffing mailboxes and flooding the airwaves with sales spiels for their credit cards.
Driven by brisk consumer credit spending and fat profit margins, the card merchants are spending hundreds of millions of dollars to persuade consumers to take their card and use it.
But beneath the glib television ads and the enticing direct-mail appeals lies a quiet, long-term strategy that promises to change the structure of American consumer finance. The three giants are becoming, in effect, nationwide banks built on plastic.
Bought Small Banks
"It's their way of getting into interstate banking by first getting their card in your pocket," said John H. Bennett, chief of marketing for Visa International, bank-card firm. "It's national banking via plastic instead of bricks and mortar."
Sears has bought small banks in California, Delaware and South Dakota and will begin offering savings and credit services to its 57 million card holders. Citicorp, already the nation's largest banking company, is spreading nationwide through acquisitions and mass credit card giveaways.
And American Express, through its Shearson Lehman Bros. brokerage offices and its Delaware bank, soon will be able to provide its upscale card customers with nearly all the traditional services of a bank.
Federal law bars banks from operating across state lines. But a 50-year-old loophole allows banks and other financial institutions to offer limited consumer banking services nationwide. Citicorp, Sears and American Express are exploiting gaps in the law to establish multibillion-dollar interstate networks that are banks in everything but name.
While Congress debates proposals to close the loophole, the credit card game has become picking off the most credit-worthy and highest-volume customers from the competition, while further sharpening marketing tools to identify potential new card-carriers.
One card-company executive calls the increasingly sophisticated credit and consumer analysis "peeling the onion."
Thus, American Express mails Ivy League seniors a green card pitch ending "Don't leave college without it," and Citicorp markets its Preferred Visa card to well-heeled young professionals as "The card to end all cards."
Sears, Roebuck & Co. is pursuing a wholesale strategy to move its massive middle-American card base from housewares to individual retirement accounts.
Standard bank cards are being sold with "enhancements" such as free travel insurance, discounts on long-distance telephone service, national access to cash machines and computerized comparison shopping. The premium cards offer higher credit limits and such perks as guest membership in country clubs, limousine service and rewards for heavy spending akin to those given by airlines to frequent fliers.
Once the consumer's wallet is pried open, the idea is to sell as many additional financial services as possible--from money-market accounts to discount brokerage to insurance. The ultimate aim, the card issuers say, is to enable Americans to carry their bank in their hip pocket.
The three big firms come to the arena from different core businesses: Sears from retailing, Citicorp from banking and American Express from charge cards. But through acquisitions and aggressive diversification, the three companies are bearing down on the American consumer with very similar packages of financial services. All are built on a 3 3/8-by-2 1/8-inch piece of plastic.
With an estimated 708 million credit cards already in Americans' hands, why are the card dealers so hard at work?
Industry executives and analysts say the card wars are heating up in part because today's interest rate structure yields unusually high profits. Banks pay between 8% and 9% for funds, while credit card interest charges average 19.4%. The more a bank can lend out on a 10% "spread," the blacker the bottom line.
Just a few years ago credit card operations were money losers for banks. Money was expensive while credit card interest rates were kept low by state laws. Consumer credit was deliberately squeezed down by Federal Reserve Board policy. Losses from fraud and bad debts were mounting because banks lacked the sophisticated credit analysis tools they've since developed.
"Two or three years ago these credit card businesses were terribly under water," said Frank Partel, an American Express executive vice president. "What's happened since is that state interest rate ceilings have been lifted and the cost of funds has declined dramatically.
"That's brought more players into the game, thus you're seeing a flurry of marketing in your mailbox."
Partel's comments lead to the second key reason for the push in plastic. The credit card market is already nearly saturated, so the effort now is to steal market share from the other guy.
"They're not trying to get new people, they're trying to get you away from somebody else," said H. Spencer Nilson, a Santa Monica analyst who tracks the credit card industry. "They're trying to hit different sectors of the market with specialized appeals."
That helps explain why one Los Angeles woman receives three or four preapproved bank card applications each week sent by banks from Delaware to Washington. One offers a $5,000 credit limit, one charges no annual fee, one gives bonuses for big spending. She's shopping around for the best deal.
Other consumers are less discriminating. A Port Chester, N.Y., man simply signed the applications and sent them in. He quickly found himself with four bank cards and $6,000 in debt at interest rates between 18% and 21%.
"He called in the other day and said he had owed all this money and had just lost his job," said Marla Kaplan, associate director of Bankcard Holders of America, a Washington-based consumer organization. "I suggested he go to a credit counseling service and they recommended bankruptcy.
"The trouble is these banks don't talk to each other about who they're going to solicit. So the consumer gets all these preapproved applications and think they're gifts from God. They get bombarded and start borrowing more and more, and there's a change in the financial situation and they're in trouble."
Citicorp, with about 14 million cards in circulation, is the biggest bank credit card issuer in the country and the most prolific mail solicitor. It owns Diners Club and Carte Blanche, the premium travel and entertainment cards, as well as its own Choice card. It also sponsors about 7.4 million MasterCard and Visa cards.
More than 140 million Americans carry one or both of the bank cards, which are issued and administered by banks across the country. The MasterCard and Visa names are licensed to banks for a fee by MasterCard International and Visa International, which are in essence credit card marketing cooperatives funded by banks. Each firm will spend about $25 million this year to advertise its plastic products, industry analysts said.
Individual banks--led by Citicorp--will spend much more.
Citicorp's stated strategy is to take on American Express in the business travel field and every other bank in the country in the bank card arena. It will spend an estimated $150 million to $200 million this year to convince consumers that "the bank makes the difference."
"This push has been going on for the last four years, with exceptionally heavy mailings in 1984 and 1985," said Ira Rimerman, chairman of Citibank's bank card division. "We're going after new consumer families who we think are credit-worthy, and we're taking share away from other issuers.
"We're also out to get the consumer to 'trade up' to our Preferred Visa card by offering services and features that the consumer perceives to be valuable."
In addition to mailbox-stuffing, Citicorp for the first time is running a nationwide television ad campaign. One spot features Shirley Simmons, mother of fitness pitchman Richard Simmons, peddling a stationary bicycle her son bought her through a Citicorp credit card promotion. Another commercial has James Doohan, who played Scotty on the TV series "Star Trek," beaming up his garage door with a new electric opener bought the same way.
Citicorp this spring also launched a "new" Diners Club card in an effort to wake up that card's 5 million somnolent customers. The reformulated card is aimed directly at corporate travelers, offering airport limousines, hotel suites at single-room prices, office services for traveling executives and health-club privileges in cities across the country.
James Emshoff, former marketing director at Campbell's Soup, recently was given the job of revitalizing Diners Club. He acknowledges that the division probably will lose money for a year or two, but said Citicorp can be very patient when it thinks it has a potential money maker.
"Before we made this announcement, Diners was in a position to be a casualty in the credit card battle. Now we've got a chance to carve our own niche. This area is going to be very interesting over the next four or five years," Emshoff said.
American Express, the acknowledged industry pacesetter, is not sitting still. With 14.7 million card holders, it dominates the lucrative travel and entertainment field. Its envied card base is composed of Americans who earn, spend and travel far more than average.
The firm is adding 2 million new card holders a year and showing annual earnings increases of 20%, according to Jerry Welsh, American Express' worldwide marketing chief.
The fast-talking Tennessean, a former professor of Russian language and literature, said the company has targeted recent college graduates and young professionals for its most intense marketing efforts. Along the way, he said, the company has learned something surprising about "yuppies"--young urban professionals.
"As we developed our 'Interesting Lives' campaign, we stumbled upon a lot of unexpected things about young people. They're more diverse, energetic and public-spirited than the yuppie myth would have you believe. We're going to lead a campaign to abolish the ugly yuppie stereotype of a bunch of baby-boomers sitting around choking on their frivolous creature comforts."
One TV spot features an unpretentious young assistant district attorney taking his crusty father out to lunch with his new American Express card.
American Express also is pursuing a "trade-up" strategy to move selected green card holders into its "prestige" gold and platinum cards. About 3.3 million card holders have already signed up for gold cards, despite the $65 annual fee (the standard card fee is $45), and a select few--those who charged $10,000 or more last year on their cards--are being asked to shell out $250 a year for platinum plastic. It's too early to tell whether this crowd will find the status is worth the price.
The wild card in the deck is Sears' new Discover card, unveiled in April and set for test marketing in Atlanta this fall. Everyone in the credit card business is paying attention. You don't ignore a whale in your swimming pool.
"These are smart people," said Welsh of American Express. "We have a lot of respect for Sears. You've got to respect a company that has an account relationship with 40% of American households.
"People said Sears couldn't sell insurance. They said Sears couldn't open financial service centers. The challenge of their Discover card is to build a base of service establishments that accept it, and that's not an inconsequential problem."
The Discover card will tie together a range of financial services offered through the Sears Financial Network, including insurance, brokerage and money-market accounts. It also will provide conventional bank card capabilities, according to Edward A. Brennan, president and chief operating officer.
More Accept Card
Brennan announced late last month that American Airlines, Budget Rent-a-Car, Denny's Restaurants and Hospital Corp. of America have agreed to accept the card and that a major hotel chain soon will follow. The card also will grant electronic access to savings and investment accounts offered though Sears-owned banks across the nation.
"Most importantly, the Discover card will provide a special opportunity for customers to build their savings," Brennan said. "They will have access to the new family savings account. This will provide a tiered interest rate structure that will increase with the account's balance."
Sears' move into the credit card business illustrates the further blurring of the definition of banking since deregulation swept through the financial industry beginning in 1980. It also offers evidence that in the money business, as in many others, there ultimately isn't room for more than a handful of players to compete nationwide.
"Sears' entry concerns us and pleases us both," said Bennett of Visa. "They're formidable. But they have to be. This is a formidable business." THE GROWING U.S. CREDIT CARD DEBT Year-end balances on commercial bank, retail, and gasoline credit cards. Does not include bank cards issued by savings and loans and credit unions, and balances due in less than 30 days. Source: Federal Reserve Board TOP 10 ISSUERS
Issuers In millions of cards 1. Sears Stores 56.66 2. AT&T; Telephone 55.00 3. Montgomery Ward Stores 32.00 4. J.C. Penney Stores 25.67 5. Shell Oil 15.42 6. American Express 14.70 7. Amoco Oil 14.51 8. Texaco Oil 14.02 9. Citicorp 13.58 10. Exxon Oil 12.66
HIGHEST DOLLAR VOLUME
Issuer 1984 transactions in billions 1. American Express $38.20 2. Citicorp * 14.16 3. Sears Stores 13.60 4. Montgomery Ward Stores 7.42 5. Bank of America 6.26 6. J.C. Penney Stores 5.89 7. AT&T; Telephone 5.80 8. Shell Oil 3.75 9. First of Chicago Bank 3.30 10. Amoco Oil 3.23
Issuer Number of transactions in millions 1. American Express 461 2. Sears Stores 365 3. Citicorp * 360 4. AT&T; Telephone 323 5. Montgomery Ward Stores 204 6. Shell Oil 197 7. Amoco Oil 186 8. Texaco Oil 179 9. J.C. Penney Stores 165 10. Exxon Oil 162
*Citicorp includes Visa, MasterCard, Diners, Carte Blanche, Choice and Private Label. Source: The Nilson Report