The credit-card business used to be a nice, easy way for lenders to earn profits. No longer. The industry has become fiercely competitive and increasingly controversial. More and more players are trying to steal customers from their rivals by offering everything from memberships in private clubs and sweepstakes prizes to cut-rate interest rates. At the same time, the public is complaining about the high interest rates that come with their cards, and politicians are threatening banks and credit-card companies with restrictive legislation.
A new tempest arose in the industry last week when American Express, which already has 17 million U.S. cardholders, unveiled a new card called Optima. To the chagrin of competitors, Amex is charging users of the Optima card an interest rate of only 13.5% on their outstanding balances, far below the 18% to 22% that is typically charged by major banks and department stores. Though Optima will be available only to established American Express cardholders with good payment records, credit-card experts say it could draw a significant amount of business away from banks. John Pollock, editor of the Bank Credit Card Observer, an industry newsletter, predicted that Optima will unleash a "Boston Tea Party of consumers dumping expensive cards and moving to cards with lower rates."
Up until now, the credit-card lenders have had fairly well-defined turfs. On one side are the so-called travel-and-entertainment cards, including American Express and Diners Club. Customers who use these cards are expected to pay for their purchases within 30 days. No interest is charged, but penalties are assessed if payments are excessively late. On the other side are Visa and MasterCard. These cards are administered by national companies but issued through individual banks. Customers may make minimum monthly payments, but steep interest rates, determined by the banks, are charged on outstanding balances.
By introducing its new card, American Express has dramatically changed the terms of the competition and thrown the industry into a tizzy. Reason: while charging its lower interest rate, Optima will operate exactly like a bank Visa card or MasterCard. The banks are outraged by this intrusion into their domain, and the competitive battle promises to get nasty. Last week C.T. Russell, president of Visa, sent an urgent Mailgram to banks that issue his company's cards. Wrote Russell: "You might call ((American Express Chairman James)) Robinson and voice your displeasure over his decision to enter one of your most profitable lines of service. Second, you may wish to rethink your position in offering American Express products." That was a not so subtle suggestion that banks stop selling American Express traveler's checks, among other Amex services.
Banks may also face formidable new competition from retailers, who have traditionally issued cards only for use in their own stores. Two years ago, Sears introduced its Discover card, which can be used in 550,000 stores, hotels, gas stations and other outlets nationwide. Already 12 million customers carry the Discover card, which could become the model for other entrants into the credit-card fray.