Credit Cards Are Everywhere in Plastic Society--and More Are Coming

You can’t leave home without them.

Everybody’s wallet bulges with the plastic rectangles that Americans used last year to charge nearly $390 billion worth of goods and services, from food to clothes to gasoline to theater tickets. Even prostitutes accept credit cards.

“Everyone can or must use a card,” said Alex Hart, president of New York-based MasterCard International Inc. the nation’s third-largest credit card company. “It’s almost impossible to rent a car or cash a check without a credit card.”

There’s no doubt: America has become a plastic society.

On average, each household qualified to carry a general-purpose credit card (Visa, MasterCard, American Express, Discover or Diners Club) has at least three such cards.

Add in the cards issued by retailers, oil companies and long-distance telephone services, and the typical American is carrying around an average of eight credit cards, according to H. Spencer Nilson, publisher of the Nilson Report, a newsletter that covers the credit-card industry.

And more are on the way. Despite the dominance by the Big Three--Visa, MasterCard and American Express--other players are looking to get into the lucrative American credit-card market.

JCB, Japan’s largest bank-related credit-card company, has made arrangements for its card to be accepted in the United States, and American Telephone & Telegraph Co. hinted in May that it might convert its long-distance calling cards into general-purpose credit cards.

They would join another relatively new competitor, Sears, Roebuck & Co., whose Discover card has been on the market for three years.

Seeking New Uses

At the same time the credit-card companies are fighting among themselves for more ways to hold onto their customers while finding new ways for people to use the cards.

“The card pollution shows no sign of abating anytime soon,” said John Love, publisher of Credit Card News, a Chicago-based newsletter. “There is no question that there is a battle for wallet space. It is intense and will get even greater.”

All this leaves some industry observers wondering about saturation of the market.

“Does the world need another credit card?” Blair Shick asks rhetorically. He is a consultant at Arthur D. Little, a Cambridge, Mass.-based research firm.

In the long run, analysts predict an industry shakeout that could greatly reduce the amount of plastic Americans will need to carry around.

Some future-thinkers in the industry even see advances in electronics technology paving the way for a single device that consumers could use to do everything from taking money out of the bank to paying for the groceries.

But most experts think it’s unlikely that Americans will readily give up their plastic.

“What is technically possible is not what is culturally desired,” Love said. “It’s taken a long while to amass those cards, and it will take a long while to get them out” of the wallet. Americans, especially baby boomers, are accustomed to the idea of credit, particularly flexible credit, and are paying for more items with plastic.

Visa and MasterCard, which are issued by banks, allow consumers to pay off their purchases over time. The banks that issue the cards typically charge an annual fee as well as an interest rate on the unpaid balance. Those rates usually are several points above the prime lending rate--making credit cards highly profitable businesses for banks.

Sears’ Discover card is a bank card, does not charge an annual fee and offers small rebates on purchases. Holders of American Express and Diners Club cards, which carry higher annual fees than bank cards, are required to pay off their balances each month but offer users a variety of other services, such as travel insurance. American Express also issues the Optima bank card.

“It’s nice to have one card, perhaps a travel and entertainment card where you pay off the balance every month, but it’s also nice to have a low-interest card, where you can put purchases you can’t pay off right away,” said John Pollock, editor and publisher of Bank Credit Card Observer, a New Jersey-based industry newsletter.

Any new entrants into the credit-card derby will have to prove that they can offer something that the existing card companies do not, according to Michael Goldstein, an analyst at Sanford C. Bernstein, a New York investment management and research firm.

Need Something Special

Without enough differentiation to make it special, or a large base of merchants that accept it, a new card has a hard time gaining broad customer popularity, as illustrated by the experience of Citicorp’s short-lived Choice card.

Choice, a bank card that did not charge an annual fee and paid rebates to users, was launched by the big New York bank in the early 1980s in the Baltimore-Washington area. But it failed to assemble a broad enough network of merchants that accepted it, and Citicorp decided in 1987 to convert the 3.2 million Choice cards to Visa cards.

“We needed broader acceptance to make it appeal to more members,” said Jim Bailey, Citibank’s group executive in charge of MasterCard and Visa business in the United States. “We decided to improve that card by giving it a broader acceptance, making it part of the Visa network.”

“It’s tough sledding in this market,” said Edwin M. Cooperman, president of American Express Travel Related Services-North America, which oversees American Express’s card business. “It’s one thing to come in and offer a card. It’s another thing to make money.”

That will be the challenge facing JCB and AT&T; if they decide to enter the U.S. credit-card business on a broad scale.

JCB recently signed an agreement with Bank of America that will allow Japanese tourists and business travelers visiting the United States to use the JCB cards--with a logo of red, green and blue stripes enclosed in a black border--at Bank of America’s network of more than 60,000 merchants nationwide.

“Although their merchant base is in Asia and the Pacific, they are increasingly signing merchants in the United States,” said MasterCard’s Hart. “They will be a factor in the market.”

AT&T;’s possible entry is even more interesting. The big telephone company is thinking about converting its 40 million phone cards into general-purpose credit cards, a move that could send many in the industry scrambling because of AT&T;’s sheer size and technological expertise.

AT&T; has not disclosed any details about its plans, but some industry experts say they believe that the giant telephone company will put out the cards in conjunction with a bank that issues Visa or MasterCard cards.

For AT&T; to gain a market niche, it will have to win customers who already carry one of the existing general-purpose credit cards, experts say. Besides, “you don’t have to carry a telephone card to use it,” Goldstein said.

Problems With Discover

One recent newcomer to the credit-card fray that has found it tough going is Sears’ Discover card, which was launched in 1986 and rang up pretax losses of more than $400 million in its first two years, apparently because it signed up more non-paying customers than Sears thought possible.

“Discover has given away the card; it has a very low merchant base; (Sears has) spent hundreds of millions of dollars,” Cooperman said. “The jury is still out.”

About one-quarter of Discover’s business is coming from use at Sears stores, according to Shick, too high a percentage if the company really hopes to make Discover a general-purpose card. “Discover hasn’t been terribly exciting,” he said.

But that may be changing. Discover tripled its earnings in the first quarter of this year to $20.1 million from $6.1 million a year ago. Montgomery Securities analyst Ed Weller forecasts that Discover will earn $50 million in 1989, up from $19 million in 1988.

Love, encouraged by Discover’s $6 billion in charge volume last year, said he no longer is skeptical about the ability of the card to survive. “It’s the turnaround story this year,” he said. “I think it’s over the hump. I think it will be around.”

Nevertheless, Discover’s start-up problems indicate how tough and competitive the credit-card business can be, and for that reason many experts foresee a two-tiered shakeout ahead in the increasingly overcrowded field.

The big banks, which are the main issuers of bank cards, are getting bigger and swallowing the credit-card operations of smaller banks. At the same time, general-purpose credit cards are steadily taking business away from retail and oil-company cards.

The nation’s top 10 banks now account for 37% of the nearly 200 million Visa and MasterCard cards in the United States, up from 32% only a few years ago, according to Nilson.

Meanwhile, consumers in this decade have been charging 16% more each year on their general-purpose cards, while choosing to ring up fewer purchases on their retail and oil-company cards.

Fifteen percent of department store sales are now charged on general credit cards, up from 8% to 10% five years ago, according to a report by Sanford C. Bernstein. And general credit cards are now used for 6% of all gas-station purchases, up from 1% five years ago.

The card companies are moving to expand their business still further by offering customers more outlets where their cards can be used. The companies have their eye on the $2.9 trillion worth of U.S. transactions that still take place with cash and checks. Bradford Morgan, executive vice president of Visa USA, calls that “almost virgin territory.”

Eye Fast-Food Area

The desire to tap some of that potential is one reason why American Express, Visa and MasterCard all have been exploring the $65 billion fast-food market, where 99% of the transactions still are done in cash, despite some limited experiments in paying for burgers, shakes and fries with plastic.

Visa has done test-marketing with Arby’s and Wendy’s outlets, using a system that speeds up the card-verification process, and now is conducting tests with McDonald’s. MasterCard executives have said the company plans to begin a test-marketing program with a fast-food chain by the end of the year, and even American Express, whose card is more often associated with the power lunch, has begun a test with Domino’s Pizza in lower Manhattan.

“We’ve learned that prestige comes from having the card, not from where the card can be used,” said American Express’s Cooperman.

While finding new markets for card use, card issuers also are working to add new users and keep existing customers by offering more services--such as buyer protection and travel-assistance options--to specific segments of the population.

“Standard plastic will not sell any more,” Love said.

American Express, for example, has introduced a host of new services in the last few years, such as Buyers Assurance (to replace lost or stolen merchandise), Buyers Protection (a warranty plan) and the Optima credit card, and has made efforts to market its card better to such segments of the population as working women, college students and senior citizens.

For instance, the American Express card’s Global Assist feature, which provides a toll-free phone number to guide travelers to local sources of medical and legal assistance, is provided to all cardholders but was developed with older vacationers in mind.

American Express also will invest an estimated $100 million over the next few years on a processing-system overhaul that it calls Project Genesis. The new system will vastly expand the card operation’s capacity to store and analyze individual data about American Express cardholders, so that more customized services can be targeted directly at them.

With a nod to the world of marketing, bank-card issuers also have tried to create unique identities for their MasterCard and Visa cards by forging alliances with charities, airlines and others to offer “affinity cards.”

Over the past few years, more than 3,000 affinity-card programs have sprung up, offering MasterCard and Visa cards with links to organizations ranging from the Sierra Club to sports teams. There’s even an Elvis Presley bank card. The organizations receive a small percentage of the sales charged on the cards.

There also are “co-branded” cards, jointly issued by banks and major airlines, whose holders can get frequent-flier miles based on the amount of purchases they charge to the cards. And in another twist, Limited Inc., the Columbus, Ohio-based women’s clothing chain, recently received approval to form a credit-card bank that will allow it to issue MasterCard and Visa cards carrying a Limited logo.

In the future, some in the industry see the piece of plastic in your wallet developing into a powerful tool with which people can pay for virtually any product or service. And even as credit-card companies want to make cash and checks extinct, advances in technology could one day make the credit card--at least as we know it--a thing of the past.

The “smart card”-- a piece of plastic with a computer chip in it--is expected to take over the functions of a credit card someday as well as act as a debit card, with which consumers could pay for purchases and have the amount automatically deducted from their bank accounts.

“Smart cards are coming,” said Darold Hoops, senior vice president of electronic-services management at MasterCard International. “It’s only a matter of when.”