- The Washington Times - Monday, May 11, 2009

Prabhudev Konana traveled to Paris in December and used his Citigroup Inc. credit card to pay for hotel and restaurant bills. When he got home to Austin, Texas, he was upset to see two currency exchange rates for charges made the same day, and one was 3.6 percent higher than the other.

He e-mailed Citigroup to complain. “The response was, ‘Go read your contract,’” says Mr. Konana, 47, a professor at the University of Texas’ McCombs School of Business. “The arrogance was just unbelievable.”

When the bank then increased the interest rate on his card to 20 percent from 13 percent, “they lost me as a customer.”

Citigroup, Bank of America Corp. and the rest of the top seven U.S. card issuers together raked in more than $27 billion in operating profit from credit cards in 2007, according to Bloomberg data. Now they’re mostly earning customer outrage.

Banks are cutting credit lines and raising fees — and are reluctant to pass along the Federal Reserve interest-rate cuts meant to boost the sagging economy. President Obama, who met with card executives at the White House on April 23, says customers deserve protection from unfair practices.

Citigroup won’t comment on specific customers, spokesman Samuel Wang says.

Banks need healthy credit card earnings because they can no longer rely on profits from trading the exotic securities that brought the market to the abyss. Now, they are squandering customer loyalty and curtailing lending, which will hurt them in the long run, says Robert Hammer, chief executive officer of California-based credit card advisory firm R.K. Hammer Investment Bankers.

The retreat occurring in credit cards is like nothing Mr. Hammer has seen in his 30-year banking career, he said.

“They are shooting themselves in both feet,” he continued. “They are saying, ‘We aren’t going to take risk.’”

The banks say they need the higher fees and interest rates. The industry absorbed about $55 billion in credit card defaults last year, up from $43 billion in 2007, Mr. Hammer says. The bad debts may reach $65 billion this year, he says.

Card lending is unsecured, meaning the bank doesn’t have any collateral to claim when loans go bad. “The industry is taking massive losses on consumer credit across the board,” Kenneth Lewis, chief executive of Bank of America, said on April 8. “Banks in the industry are just trying to protect those assets.”

Credit cards became a cornerstone of U.S. banking in recent years, offering steady income to counter volatility in trading and investment banking. JPMorgan Chase & Co.’s card unit contributed about 22 percent of total bank revenue in the past three years. Citigroup’s card revenue in 2008 was $20 billion.

Now, that bounty is threatened. Cardholders like Mr. Konana are fuming partly because of the billions the government has poured into the banks in the past year. In December, the Fed asked for public comments on rule changes to address unfair card practices — and got more than 60,000 e-mails.

The Fed rules, which will restrict sudden changes in interest rates, for example, are set to go into effect on July 1, 2010. Democrats in Congress are pushing legislation to move up the changes and add more consumer protections.

A Moody’s Investors Service estimate of credit card charge-offs, or debt that issuers deem uncollectible, jumped to an annualized rate of 8.8 percent in February, the highest in 20 years of data. That may rise to 10.5 percent by mid-2010, especially if the U.S. unemployment rate continues its rapid climb, Moody’s analyst Will Black says.

“This recession is so big that it’s affecting issuers and cardholders on a scale not seen before,” he added.

Earlier in the decade, a booming economy kept loan losses in check, and banks perfected teaser rates and other marketing tricks. From 2000 to 2008, Americans got 44 billion pieces of mail pitching credit cards, according to the Direct Marketing Association in New York.

Issuers have developed new models to calculate the fees, interest rates and rules they need to cover the bad debts of those who don’t keep up, said David Robertson, publisher of the Nilson Report, an industry newsletter based out of California. For example, if a customer starts charging groceries on a credit card when he hasn’t before, he may be flagged for having financial difficulties, and the terms on the card may change, Mr. Robertson says.

The average annual percentage rate offered to new card customers in the U.S. was 14.2 percent in April, up from 13.8 percent a year earlier, according to IndexCreditCards.com, which surveys the industry to track rates.

Banks increased interest rates even as the cost of their funds fell, says Justin McHenry, president of IndexCreditCards.com in Cleveland.

Banks can borrow at interest rates that are almost as low as Treasury yields because of new Federal Deposit Insurance Corp. guarantees. A program announced in March lets investors borrow from the government to buy asset-backed bonds, including securities based on credit card debt.

The banks may be doing what they have to do in a recession, says Emily Peters, an analyst at Credit.com in San Francisco. Still, they will pay a price in restrictions and decreased customer loyalty, she says.

“This is a fight for survival,” Ms. Peters says. “But how long can it go on as a sustainable business model?”

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