Magazine article American Banker

Rate Hikes Pose a Dilemma for Card Issuers

Magazine article American Banker

Rate Hikes Pose a Dilemma for Card Issuers

Article excerpt

Credit cards are one of banking's most profitable businesses, earning 10% of the industry's record $43.4 billion in profits for 1993, while making up only 5% of its assets.

But across the industry, there is concern that juicy profits of the past may diminish as interest rates continue to rise and the cost of funds creeps up. As a result of the rate hike, consumers may use their cards less, pay off their balances, and continue to shop for the best deals.

Since 1992, most banks have switched to variable interest rates, giving the banks the option to raise credit card interest as the prime goes up, from 6% over the past two years to 7.25% today. Experts say this will keep profit ratios - running about 2.2% of outstandings after tax - at the same level.

But as formula increases go into effect, no one knows how the consumer will react.

'Consumer Backlash'

"Everyone is in a wait-and-see mode, but there will be consumer backlash," predicted Robert B. McKinley, president of RAM Research Corp. in Frederick, Md.

Part of the problem, noted Anne Morgan Moore, president of Synergistics Research Corp., Atlanta, is that many consumers believed they had a fixed-rate card. "Now that rates are going up, consumers are becoming aware they have a variable rate," she said.

Although many consumers have researched the market, discovering good deals, many consumers have not. "This could set off the second wave of rate shopping," warned Mr. McKinley.

Marc Altman, senior vice president of marketing and sales, First of America Bank Corp., said that rates would have to increase significantly to provoke the public.

Mr. McKinley disagreed. "Issuets would love to see consumers swallow this increase. I don't think that's going to happen."

A saturated market makes for cutthroat competition. In the past, banks were creating market share, today they're stealing it. …

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