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Consumer Reports

Credit card hawkers work hard to stand out in a crowd | (KRT) A card that will pay for an appliance and a cup of coffee. A watch that will pay for gasoline. A cell phone that will pay for tacos.

The plain-vanilla world of credit cards and debit cards is changing as card issuers, banks and retailers battle for wallet space. They are offering innovations in shape, size, technology and use to attract consumers.

With more than 6,000 financial institutions issuing credit cards in the United States, industry analysts say, companies have to work hard to stand out in a crowd.

"There was a time when you had just a Visa or a MasterCard," said David Robertson, publisher of The Nilson Report, a consumer payments newsletter. "At best you had gold cards and platinum cards.

"Now you have mini cards, see-through cards and cards that are attached to the key chain. In the next five years, there will be millions of cards with little microchips on them."

Even though cards appear ubiquitous - and there are an estimated 785 million cards in use in the United States - checks and cash are still the dominant forms of payment.

Paper-based payments were used to pay for 63 percent of Americans' personal consumption expenditures in 2001 totaling $3.4 trillion, according to The Nilson Report. Card-based systems, on the other hand, accounted for only half as many transactions.

The trend favors plastic: Cards are projected to capture a 47 percent share in payment systems by 2010. And even as card issuers vie with each other, they are collectively chipping away at the paper-based system.

Breaking out credit cards from total revenue at financial services companies can be difficult. But since credit-card interest rates are the highest outside of the so-called subprime sector, which includes pawnshops, it is evident that cards are a highly profitable business segment.

At Chicago-based Bank One Corp., the third largest bank-card issuer, cards accounted for more than 30 percent of the company's first-quarter net income. Bank One issues more than 1,200 different types of cards.

For the issuers, the easiest innovations come in the form of partnerships among big brands. Take Bank One, Visa USA and Starbucks Coffee Co.

They plan a fourth-quarter launch for a card that will combine a Bank One credit card and a prepaid Starbucks card. Thus, a consumer could use it to buy a high-definition television on credit, then pick up a frothy latte by drawing down on the cash value loaded on the same card.

The lure for consumers: a reward program that would transfer 1 percent of the total value of the credit card purchases to the Starbucks end of the card.

In other words, no airline miles, but perhaps a month's worth of mochas.

"Customers who are frequent Starbucks visitors and frequent credit card users are going to have a substantial number of visits covered," said Brad Stevens, director of marketing at Starbucks Interactive, a division of Starbucks Coffee.

Bank of America Corp. is taking a different route to set itself apart. It has begun offering a mini card, half the size of the industry standard.

Discover Financial Services is opting for a novel shape. It is providing a key-chain-like-card that can be whipped out like a pocketknife from inside the key chain itself.

Meanwhile, card providers are exploring new applications for plastic as well.

MasterCard International is offering a number of products for specialized purposes, such as cards to handle relocation expenses or travel per diem costs. Another MasterCard offering allows companies to issue a card specifically for certain corporate projects, allowing employers and employees to track expenses without laboring over receipts.

Rival Visa USA is providing a reloadable card for child-support payments and, for teenagers, a prepaid card on which parents can set spending limits.

"We also have reward programs where consumers move more of the recurring bill payments - like rent, utility payments and insurance - onto their Visa cards and earn rewards," said Kenny Thomas, a spokesman for Visa.

But where card companies tout convenience, consumer advocates see trouble for a public already awash in cards - and card debt.

According to, an industry data provider, the average U.S. household has 4.8 bank credit cards and 1.9 debit cards. American consumers have nearly $1.74 trillion in debt, excluding home mortgages.

"It is interesting to see card companies coming out with different shapes on credit cards," said Gail Hillebrand from Consumers Union. "A beautiful shape is nice but it not as good as low interest rates. The competition in appearance should be matched by competition on interest rates."


Industry analysts say the biggest changes are yet to come in the form of what are referred to as "contactless" payments or "proximity payments."

Issuers are building chips onto cards so that consumers do not even have to swipe their cards to make a purchase. They just the tap the card on a special reader and a radio signal sets off the transaction. MasterCard, J.P. Morgan Chase & Co., Citigroup Inc. and MBNA Corp. are piloting these "PayPass" cards in Orlando, Fla.

"We needs innovations like this," said Sridhar Chityala, senior vice president for e-business at Chase Cardmember Services. "You cannot saturate the industry with the same products and the same offers."

Even companies outside the financial-services industry are using or experimenting with mobile and wireless payments for use outside their own businesses.

In December, Irving-based ExxonMobil Corp. partnered with Timex Corp. to sell nearly 4,000 watches equipped with radio frequency transponders, much like the oil giant's Speedpass key-fob system. But the watches can be used not only at company gas stations, but at select McDonald's Corp. locations.

Nokia Oyj, the Finnish cell phone company with U.S. headquarters in Irving, Texas, conducted pilot programs using cell phones to pay for tacos and fried chicken. The company says it is still committed to the idea, but it is looking for good partners to get the project off the ground off again.

"It is going to take another two years for wireless to gain its true potential," said Chityala.

Industry analysts say the driving force in these experiments by non-financial companies is the reduction in transaction time, particularly at quick-service restaurants where speed is money.

As for banks and card issuers, mobile and wireless payment options would crack open new markets that are still cash-driven, such as movie theaters, video rental shops and corporate cafeterias.

"The biggest opportunity for card companies is in their ability to replace cash payment with card payments," said Ariana-Michele Moore, a research analyst with Celent Communications, a Boston-based research firm. "That has a lot of potential. Consumers don't like to scrounge around for pennies."

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© 2003, Distributed by Knight Ridder/Tribune Information Services