Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, March 1, 1992 TAG: 9202280421
SECTION: BUSINESS PAGE: C-3 EDITION: METRO
SOURCE: MAG POFF
DATELINE: LENGTH: Long
State legislators have approved a bill deregulating the industry. It is before the governor for final action.
While consumers worried about the grace period, bankers said two other aspects of deregulation are more important to Virginia's share of the credit card industry:
More work - and probably more jobs - for Virginia's credit card processing centers, such as Dominion Bank's operation on Airport Road. Because Virginia is one of only 14 regulated states, bankers say, potential new business is driven into nearby states such as Delaware and Georgia that have no regulations.
Removing the cap on the amount banks can charge people who don't pay their monthly credit card bills on time.
Current state law limits the late fee to 5 percent of the minimum payment due, an amount bankers say is not enough either to cover the cost of collecting overdue bills or to prod customers to pay.
Consider that the average outstanding balance for people who revolve their credit is nearly $1,200, and the minimum payment generally ranges from 2 to 3 1/2 percent, according to Thomas Conn, who is in charge of consumer lending for Dominion Bank.
Someone with $1,200 on the account would owe $36 for the month at a 3 percent minimum payment. But if the consumer didn't pay on time, the 5 percent penalty on the $36 would be a mere $1.80.
"That's not enough penalty to create an incentive for people to pay on time," noted Walter Ayers, executive director of the Virginia Bankers Association.
Nationally, Ayers said, delinquent card holders are charged a flat fee that averages $8, more of a spur to pay up.
David Hunt, a senior vice president at Signet Bank in Richmond, said the cap on the late fee is the outstanding example of the inflexibility that keeps credit card business out of Virginia.
Ayers said the Virginia law was the factor that drove NationsBank to locate its processing center in Delaware, a deregulated state.
And it's widely known that Signet Bank recently lost its bid for business that would have created 500 or more new jobs at its processing center in Richmond.
Hunt said proposed deals come up all the time. Large banks such as Signet, he explained, are seeking credit card portfolios from other banks and non-bank companies that are getting into the credit card business, such as General Motors and AT&T.
Virginia is considered an attractive state because of its good labor force, Hunt said, but "the laws don't match up quite as well." When it comes to bidding on business, he said, Virginia is at a disadvantage compared to the 36 states without regulations on credit cards.
Conn said Dominion Bank handles the credit card business for 39 smaller banks.
"It means jobs" in Roanoke, Conn said. "There are jobs here because we do that work." Because the work is integrated with Dominion's own work, he could not say how many jobs. About 180 people work at Dominion's credit card center.
Although nothing is pending now, Conn said Dominion has failed in the past to win credit card business it wanted to service. "We would like to see a situation where we can compete with everyone."
About 2,100 people are employed at bank card processing centers in Virginia, Ayers said. The business lost by Signet, he said, would have created 1,000 more jobs within three years. "There is no way to bid under the Virginia statute and ever hope to win."
And, Ayers said, he fears that existing credit card business will "slowly but surely migrate to free-market states."
To abate consumer fears, Ayers said removing the legal requirement of a grace period would not necessarily result in such a loss to customers. More likely is that Virginia banks would issue two types of cards: one with a grace period and one without it but with a lower interest rate on the finance charge.
Figuring that the grace period inflates the interest rate by 3 points, Ayers said a bank might offer a choice of cards at 16 percent with a grace period and at 13 percent without.
Only seven states mandate a 25-day grace period like Virginia's, Ayers said. Another seven have a 10-day period.
A 1991 study by the Federal Reserve Bank reported that 159 card issuers have grace periods, according to Ayers, although most are in deregulated states. Only eight smaller issuers fail to grant a free period.
"It's not the Virginia law that brings us a free period," Ayers said. "It's the law of the marketplace."
In fact, the issue is academic for most customers, Ayers said. That's the two-thirds of card holders who don't generally pay their entire bills and, therefore, already pay interest on all charges as they are made.
Those people, he added, would be better off with a lower rate and no grace period. Only the one-third of card holders who pay off their balances in full each month benefit from 25 days without interest.
Another fact to consider, Hunt said, is that 70 percent of the cards carried by Virginians are issued by banks operating in free-market states. But 98 percent of all cards carry a grace period because "people like the idea," he said.
Conn, too, predicted that nothing much would change with the free period if Virginia deregulates.
Competition is intense nationwide among banks and other issuers for credit card business, Conn said.
"We're not looking at changing anything," Conn said of the grace period. "For a bank just to eliminate the free period would be tantamount to suicide."
Mag Poff covers banking, personal finance, real estate and advertising for the Roanoke Times & World-News.
by CNB