
                         Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: TUESDAY, September 14, 1993                   TAG: 9309140067
SECTION: BUSINESS                    PAGE: B6   EDITION: METRO 
SOURCE: The Baltimore Sun
DATELINE: NEW YORK                                LENGTH: Medium

LITTLE LOW-COST CREDIT CARDS STARTING TO SPOOK GOLIATHS

First came micro-breweries, which made inroads into the beer market by selling small batches of premium beer. Now come "micro-issuers" - small credit card companies in small towns that are nipping at the heels of big banks by offering low rates to top customers.

Led by Simmon's Bank of Pine Bluff, Ark., which charges customers just 8 percent on their balances, low-rate credit cards have become one of the industry's fastest-growing segments.

Their secret: Eschew costly advertising blitzes, cut overhead to a bare minimum and limit business to customers with the best credit records.

"The big issuers are smarting from these micro-issuers. They not only are losing market share, but they're having to cut rates to their best customers," said Robert B. McKinley, president of RAM Research Corp. in Frederick, Md., which tracks the credit card industry nationwide.

Industry leader Citibank, for example, saw its outstanding balances grow 1.4 percent the first six months of this year. On average, the top 10 credit card issuers grew 5.5 percent last year.

Simmon's Bank saw its accounts surge 47 percent from January to June. Low-rate issuers as a whole saw an 8.9 percent jump.

In response to the challenge, the big issuers are tucking in their rates and offering more services. Citibank has offered a promotional 9.9 percent interest rate and started a two-tiered rate system, with preferred customers paying 15.4 percent and regular customers paying 19.8 percent.

Most small issuers court people with good credit ratings, which leaves the big issuers with lower-grade debt, said Robert W. Johnson, a researcher at Purdue University's Credit Research Center.

"The small ones are skimming the cream off the top. It's potentially harmful to the big banks," he said.

But the big banks continue to make profits on credit cards, mainly because they have been able to borrow money for 4 percent from the government and for even less from their customers, who typically receive less than 3 percent interest on their savings accounts.

By lending money at 17 percent, the bigger card issuers have been able to make a handsome profit, Johnson said, though 4.2 percent of their card holders pay late and 5 percent don't pay at all.

The smaller issuers can get away with the lower rates because their customers pay more punctually. Just 0.4 percent of Simmon's cardholders, for example, pay late, while 1.3 percent fail to pay.

However, Ram Research Corp. said Simmon's Bank has temporarily halted issuing cards nationally.

by CNB