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States Attract Banks With Card Deregulation

October 14, 1990

ATLANTA (AP) _ In the great chase to attract jobs, state after state banked on deregulation during the 1980s to bring credit card issuers to their doors.

South Dakota acted first, attracting the plum of the industry, Citibank, in 1980. Delaware followed quickly, and 18 other states have since removed their ceilings on rates or fees as they scrambled to create cozy environments for credit card issuers.

But critics question whether the state legislatures in their rush to deregulate plastic have trampled over consumers by allowing the banks to charge high interest rates and the now-prevalent annual fees.

″There’s no question in our minds that one of the reasons the states are taking these actions is to lure bank card operations from other states with the promise that these card operations will be able to charge any rates and fees they choose,″ said Elgie Holstein, director of Bankcard Holders of America, a Herndon, Va.-based consumer group.

″From that standpoint, there has been throughout the 1980s a continuing willingness by state policy makers to look the other way as rates go higher,″ he said.

Holstein said that prior to 1980, there were virtually no annual fees for credit card users. Now, they’re commonplace and cost anywhere from a few dollars a year to an average of $34 for premium ″gold″ cards.

Credit card interest rates also have remained consistently high in recent years - hovering around 19 percent on average - regardless of changing economic conditions.

″When there’s been periods of rate decline, credit card rates remain stubbornly high,″ said Robert K. Heady, publisher of Bank Rate Monitor in North Palm Beach, Fla.

For example, he noted, rates for certficiates of deposit fell 1.66 percentage points since April 1989, while at the same time credit card rates rose an average of two-thirds of a point.

Nonetheless, state officials say deregulation has proven itself to be a solid means of attracting jobs. And the bank industry maintains deregulation has benefited consumers by increasing competition among card issuers and widening access to credit.

South Dakota and Delaware, by acting early in passing attractive legislation, have won a solid hold as the premier host states for credit card business and continue to dominate the field.

A ripple has been created in Georgia recently by the success of American Telephone & Telegraph Co.’s Universal Card, which was introduced last spring and already has 2.7 million cardholders. The card is issued by the Universal Bank, a subsidiary of Columbus, Ga.-based Synovus Financial Corp.

Credit card banks such as Universal, which deal exclusively in bankcards, are sometimes called ″non-banks″ and are not subject to all the regulations as full-service institutions.

″They’re not street-front operations. They’re strictly second-floor operations,″ said Robert Moler, deputy commissioner of the Georgia Department of Banking and Finance.

Non-banks have become more prevalent since the wave of credit card deregulation that began a decade ago when South Dakota changed its laws to attract Citibank’s credit card operation from New York.

That move came in the wake of a 1978 U.S. Supreme Court decision that said banks must adhere to the credit card interest rate limits of their home state. Some banks then sought to locate in states with unlimited rates structures so they could ″export″ those rates.

″The whole concept really comes down to jobs,″ said Steve Szekely of Payment Systems Inc. of Tampa, Fla., a industry research organization. ″When the banks started making moves, the states had to relax (interest rate) restrictions to keep the jobs.″

Richard Duncan, state banking director in South Dakota, said Citibank and the eight other credit card issuers who have moved to his state since 1980 have had a significant impact on the economy there.

″What it’s done for the state is bring in employment and revenue that I’m sure has exceeded what was anticipated,″ Duncan said.

Citibank employs 2,000 people in South Dakota and pumps in more than $20 million a year through the state franchise tax. ″In a state the size of South Dakota, which only has about 700,000 people, that makes a difference,″ Duncan said.

Still, consumer groups say the job impact from the average issuer - much smaller than the Citibanks of the world - does not justify the higher rates and fees that accompany deregulation.

The credit card business is extremely capital intensive and generally does not require a large work force, said Holstein, of the Bankcard Holders. ″You’re getting a handful of jobs but millions of dollars extra (are) paid by consumers,″ he said.

But Virginia Stafford, spokeswoman for the Washington-based American Bankers Association, said deregulation has increased access to credit by putting more players in the market and making banks more competitive.

″The bank card business is a volume kind of business,″ she said. ″It’s allowed consumers to have access to credit cards that they ordinarily wouldn’t have access to locally.″

Without deregulation, credit cards may have become available mainly to wealthy customers, considered safe risks by the banks, she said.

Standardized disclosure requirements, in place since last year, also have provided consumers with more information about the cards so that they may shop around for the best deal, Ms. Stafford added.

South Dakota’s Duncan maintains that competition from the growing field of card issuers has helped keep rates from getting out of hand.

″You can get credit cards from a barrage of sources,″ he said. ″The price may be a little higher but I think people are willing to pay a little more to get the convenience.″

Moler, of the Georgia banking department, said the credit card banks, because of their narrow focus, escape some of the regulations applied to full service banks, such as being tested for how well they serve the needs of a community. But the banks’ activities are restricted to issuing cards.

AT&T spokesman Bruce Reid said his company put in more than two years of research before deciding on the Georgia bank to unveil the Universal card. ″Georgia laws are very favorable, as they would be in South Dakota and Delaware. The regulatory climate . . . was what we were looking for,″ he said.

The Universal Card’s temporary offer of a lifetime ban on annual fees, and the ability to use the card as an AT&T calling card has contributed to its success, analysts say.

But it also prompted some banks who issue MasterCard and Visa, including Citibank parent Citicorp and Chase Manhattan Corp., to file complaints with the federal government that the Universal ″non-bank″ had an unfair advantage because of its telephone tie-in.

End Adv Sunday, Oct. 14

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