Sears Seeks to Issue No-Fee Card

VISA and MasterCard - already reeling from the introduction of the Universal Card last summer by American Telephone & Telegraph Company - are suddenly facing a new and potentially more serious challenge: Sears Roebuck & Co., the largest retailer in the United States, plans to issue a new no-fee Visa card. If Sears is able to do so, despite legal objections from Visa USA Inc., the credit card industry could be blasted wide open for other nonbanking institutions to issue their own Visa cards, industry experts say. For example, General Motors Corporation has already indicated its interest in issuing a Visa card.

``If Sears goes ahead with its no-fee card, there could be an initial gain for consumers,'' says Kurt Peters, editor of Credit Card News, a trade publication in Chicago. But the move, he adds, ``will probably help hasten the consolidation of the credit card industry.'' And a few years from now, ``consumers might wind up paying even more on their cards'' to a few well-to-do industrial or nonbanking companies.

Sears is no Johnny-come-lately to the credit card business. It is the nation's largest issuer of consumer plastic - with some 110 million cards outstanding, says David Robertson, vice president of Nilson Report, a trade publication in Santa Monica, Calif. Traditional bank card issuers are clearly threatened by the possibility that merchandisers such as Sears will want to muscle in on their business, he says.

The reason, says Mr. Robertson, is because of the major distinction between a bank card issuer and a retailer such as Sears. A bank can only offer a line of credit plus limited services, such as insurance. A retailer could not only offer the credit line, but arrange special financing on the retailer's merchandise, thus giving the card an edge with price-conscious consumers. Further, most banks would be hardpressed to offer a no-fee card, given overhead costs.

Sears is already ``top gun'' among credit card issuers, with its own Sears charge card (70 million cards) and its general purpose Discover Card (38 million cards). In addition, Sears, through a subsidiary, issues 2 million or so private label cards for various merchandisers and airlines.

Sears plans to issue its new no-fee ``Prime Option'' Visa Card in March, says James Flynn, of Dean Witter & Co., a Sears subsidiary. The initial target: some 6.5 million consumers. The card will be issued by Mountain-West Financial, a savings institution that Sears bought last year from the Resolution Trust Corporation.

Last month Sears filed suit in federal court in Salt Lake City alleging that Visa membership prohibitions discriminated against Sears. A hearing is expected this Thursday.

`SEARS is a master of the credit card business,'' Mr. Flynn says. Industry analysts say that the retail giant's overall credit card business is among the most profitable parts of the company - far ahead of the sagging retail division.

A number of bank credit card companies were unable to block AT&T from issuing its Universal credit card last spring. AT&T's new card has proven very successful, in terms of marketing. So far, it has garnered slightly under 5 million accounts, with 7.6 million cards outstanding.

What is especially galling to bank card issuers is that Sears - now eager to issue its own Visa card - has been unwilling to accept Visa or MasterCards in its stores. When Sears launched its Discover Card in 1985, that move was seen by others as a way of not only competing with Visa and MasterCard, but allowing Sears to lock those cards out of its retail units. Start-up costs for the Discover Card were substantial: some $400 million, according to Robertson. But despite initial losses, the card has been profitable for the past three years, according to Flynn.

The credit card industry is currently posting flat growth, says Robertson. There are 221 million Visa and MasterCards outstanding in the US; 133 million are Visa cards, 88 million MasterCards. Another 27 million cards have been issued in the US by American Express. And there are an estimated 700 million or so additional retail cards outstanding, issued by various merchants and service station operators.

Given such massive consumer saturation, the industry has found it increasingly difficult to market new cards; most credit-worthy consumers already carry plastic of one type or other. Moreover, while defaults have been inching upward during the recession, consumers have been reluctant to take on much new debt.