Now It's the No-Credit Card

MasterCard and Visa bitterly fight the plastic money war

It looks and feels like a credit card, and it can ring up purchases as easily. But MasterCard II, which was introduced last week, is not the same as familiar plastic money. With a normal credit card, the bill for a shopping spree may not arrive for weeks. But with MasterCard II, which bankers call a debit card, payment takes place instantly. A computer deducts funds from the shopper's bank account and transfers them into that of the store or restaurant where purchases have been made. Cardholders may carry either the regular MasterCard, MasterCard II, or both.

MasterCard II is another salvo in the continuing battle between Interbank Card Association, whose 11,000 members are the financial institutions, primarily banks, that issue MasterCard, and rival Visa International, which has about 11,500 members. MasterCard (formerly Master Charge) and Visa are each carried by more than 60 million people in the U.S., but the tide of success is running with Visa. Five years ago, approximately 6 million more people carried Master Charge than Visa, then called BankAmericard. Through shrewd marketing, and a court ruling that allowed banks to issue both cards, Visa now leads.

Seven months ago, Russell Hogg (rhymes with vogue), 50, became president of MasterCard, and set out to take back leadership in bank credit cards. A craggy onetime FBI agent with executive experience at American Express and American Airlines, Hogg promptly fired eight top officials and laid plans for a host of new products. The debit card is soon to be followed by a Japanese MasterCard and traveler's checks.

MasterCard will have to struggle. Five years ago, Visa introduced the first debit card, and last November it branched into traveler's checks. The checks have gained ground rapidly against the long-dominant American Express, partly because of the prominence of the Visa name. This year Visa expects to capture more than 10% of the market worldwide. Moreover, many bankers and merchants think that while MasterCard may carry clout, as its ads used to proclaim, Visa carries class. The name Visa seems to spell easy access, a door-opener around the world. Says one New York banker: "MasterCard is taken more as a card for blue-collar people."

Yet both cards face serious troubles. In the past, most profits have come from consumers who only paid interest on their bills rather than settling them in full each month. But when interest rates soared last spring, banks lost money on their card business. Indeed, Jack Cox, publisher of a newsletter about bank cards, estimates that U.S. banks lost at least $250 million on credit card operations in the first half of 1980.

Then came the Carter Administration's credit squeeze in March. Many people simply stopped using their cards, and some people even sent them to the White House as a symbol of swearing off demon plastic. MasterCard use fell 8.4% during the first quarter of the year, and from March to July Americans decreased their consumer debt by about $6 billion.

Visa and MasterCard users will now have to pay more for using plastic. The main advantage of Visa and MasterCard over other cards is that they were issued for free, but now many U.S. banks are charging an average of $12 a year for the plastic-packing privilege. Banks may be moving their operations to states where they can charge higher interest. Pending approval, New York's Citibank will transfer its entire service on 5 million credit cards to Sioux Falls, S. Dak. The reason: New York limits interest rates for consumer loans to 18% for the first $500 and 12% thereafter. South Dakota has no limits. Plainly, it is becoming more expensive simply to say "Charge it."

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