Connecticut is doing something heretical, and residents are enjoying themselves immensely. Banks are having (gasp!) credit card wars. Credit card rates are the one area of consumer lending that has largely escaped the competition that deregulation brought to the banking industry.
For several years, banks have been stealing each other's customers through competitive rates on mortgages, individual retirement accounts, money markets, NOW accounts, and other services. But credit card rates have stayed stubbornly high. Today they average 18.8 percent.
Connecticut is breaking the mold. Since June 1, at least seven banks in the state have dropped their rates on credit cards from 18 percent to as low as 10.9 percent. Their aim, says Claire Anthony, marketing director at Connecticut Bank & Trust, the state's largest bank and the one that sparked the wars by dropping its rates to 11.75 percent, is to recapture the customers that have flocked to New York banks for their credit cards.
About 30 percent of Connecticut residents get their Visas and MasterCards from big banks in New York and other money centers, she says.
Credit cards are little gold mines for banks. The banks' cost of money (savings account rates, for instance) has fallen sharply. But the rates banks charge their customers on credit cards has remained high. That boosts a bank's spread, or profit.
So Connecticut Bank & Trust decided to win back this profitable business from its New York rivals. It could do so, Ms. Anthony says, because ``the interest rate market happens to be low right now, and that makes having specials like this more affordable.''
Besides that, she says, people make a majority of their credit card purchases in the summer, when they are shopping for back-to-school items. CBT figured that if it could lock customers in just before summertime, they would continue to use ``our piece of plastic instead of other people's plastic, and [we'd] also get some new cards.''
CBT says it's getting 4,000 calls a day. Phone lines are jammed from 8 a.m. until 10 p.m. It didn't take long for other banks to fall into line.
Meanwhile, the Connecticut legislature enacted, effective June 5, a 15 percent ceiling on credit card rates, one of the lowest usury caps in the country. The legislature figures Connecticut consumers will save $17 million a year in interest payments under the new law.
Now other banks in other states are fidgeting on the sidelines. Will bank wars break out all over the country, and will the money center banks in particular have to lower their rates?
Ken Herz, a vice-president at New York's Chemical Bank, whose credit cards carry a 19.5 percent interest charge, doesn't think so. ``We don't see [the wars] as a competitive threat,'' he says.
He points out that the Connecticut specials are temporary; the longest one lasts until Dec. 31, and then the rates are expected to rise to the 15 percent state cap.
``The dollars involved [from a lower rate for six months] don't add up to the annual fee incurred by changing cards,'' he says.
About half of all card users pay off their bills before they incur any interest. But if a bank with millions of cards drops its rate just 1 percent, it would lose millions of dollars. One would have to attract a lot of new customers to make up for lost revenues.
Mr. Herz's assessment seems to have been borne out by Manufacturers Hanover Trust in New York: When it lowered its rate to 17.8 percent last fall, none of the other money center banks responded.
Others say that the dam is cracked, and it's only a matter of time before it bursts.
``No national bank can turn its back on a financial market as big as Connecticut,'' says Elgie Holstein, associate director of the Bankcard Holders of America, a consumer interest group. ``In order to keep competitive there, these money center banks are going to come under increasing pressure -- particularly if other states take similar action -- to drop their interest rates.''
And that's where the politicians come in. Most states have usury laws, but the limits range to upward of 30 percent.
At least five states -- New York, California, New Jersey, Louisiana, and Ohio -- are considering capping interest rates or requiring banks to have full ``disclosure'' (details on rates, yearly fees, etc.) in their direct mailings.
Washington, Arkansas, Connecticut, and Texas already have such legislation, and Wisconsin's disclosure law will go into effect Jan. 1.
The concern is that banks, faced with usury caps, will move their credit card operations elsewhere. That's what Citibank did a few years ago, and what Bank of Boston threatened to do last year.
But Anthony says that Connecticut Bank & Trust, for its part, is not thinking about moving. The difference between the Citibank case and her bank's case is that interest rates have fallen far enough to give banks a cushion. She adds that the bank will not rule out a move, should the economic scene change.
Moreover, there's a risk to such actions, says Mr. Holstein: ``This economic blackmail game that plays one state against another ultimately leads to national regulation,'' he says.
Credit card bills languished on Capitol Hill all fall and winter, but are beginning to show signs of life. A disclosure bill could pass this year, says Julius Genachowski, a staff aide to Rep. Charles E. Schumer (D) of New York, who has introduced both a disclosure and a usury cap bill in the House.
Bills in the House and the Senate that would make a federal cap on credit card rates ``aren't going anywhere'' right now, he says.
But if Connecticut's case is any example, banks may choose to lower their rates without legislation. Over at Connecticut Bank & Trust, you can't even get an anecdote out of the people answering the credit card hot line.
``I'm sorry,'' one operator said politely when this reporter called. ``We're too busy to take the time to think of anything amusing.''