Magazine article American Banker

Another Good Year Is Expected for Bank Credit Cards, Although Prices Are under Pressure and Losses Are Up

Magazine article American Banker

Another Good Year Is Expected for Bank Credit Cards, Although Prices Are under Pressure and Losses Are Up

Article excerpt

NEW YORK -- The outlook for bank credit cards in the upcoming year is good, but the business will probably be tougher to manage than in 1985.

After two years of significant growth, industry observers say new business from creditworthy cardholders will be difficult to find, intensifying competition among card issuers. So some analysts expect many banks to cut prices by reducing or eliminating annual fees or by lowering interest rates, which will reduce profitability.

And higher credit losses will also put pressure on profits in the card business, which has been enjoying a return of more than 5% on assets -- very high for banking.

"It's my belief that the industry will continue to enjoy good profitability,"

said Joel P. Friedman, a partner at Arthur Andersen & Co. in San Francisco who follows the credit card business. "On the other hand, I am very skeptical that the industry can sustain the level of profits they enjoyed in 1985."

Banks are being pressured to lower interest rates by competing card issuers and by legislators, who have been castigating banks for excessively high credit card rates. Lower rates go directly to the bottom line in the form of lower profits.

Some banking companies -- such as the Manufacturers Hanover Trust Co., New York, one of the nation's biggest issuers of bank credit cards; State Street Bank and Trust Co., and the Bank of New England, both of Boston; Maryland National Corp., Baltimore; and Valley National Bank, Phoenix -- already lowered their rates in 1985.

And financial institutions just getting into the business, such as the Society for Savings in Hartford, Conn., and Apple Bank for Savings in New York City, have been offering lower than usual rates to break into the market.

Meanwhile, bills have been introduced in Congress to cap credit card rates.

Interest rate regulation is anathema to credit card bankers, who were burned badly in the early '80s. The credit card business was awash in red ink then as state usury laws kept card rates below what banks paid to fund their portfolios.

While politicians are trying to pressure banks to lower their rates, bankers have made little response to politicians' charges. Some bankers dismiss the criticism as election-year rhetoric, while other are trying to avoid the issue entirely.

"The problem is that most banks are earning a handsome return, and the only way they can respond to public pressure is to cut rates, and that goes right to the bottom line," Mr. …

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