Are banks and retailers giving credit where credit isn't due

0 Comments | Insight on the News, Jan 15, 1996 | by Betsy Pisik

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Retailers eyeing the potential for profits and promotional value have mounted a campaign to break the "cash or credit" financial monopoly at many stores. They hope to convince Americans that "prepaid cards," which resemble credit cards in appearance only, are just as convenient.

Most people are familiar with prepaid phone cards -- consumers who buy the cards pay in advance for long-distance calls. (Europeans have used "smart" cards, or cards with microchips, at pay phones for years.) Mobil Corp. recently took the concept one step further by launching its prepaid gasoline card. Drivers can purchase the card in denominations of up to $100, or they can call an 800 number (strategically placed just above the pumps) to order pre-paids with their credit cards.

Other companies should be quick to follow, in part to take advantage of prepaid cards' promotional value. John Elder, a spokesman for Matrix long-distance service in Hurst, Texas, says that the cards offer companies the opportunity to get their names "out in front of everybody." Firms rarely profit directly from the sale of the cards he points out. Instead, the companies rely on the cards to advertise their products.

Some stores are issuing (or giving away) store-labeled phone cards in an effort to encourage their use. On the day after Thanksgiving, traditionally the busiest shopping day of the year, Mervyn's department stores, a nationwide chain, handed out Joe Montana prepaid calling cards to the first 700 customers to visit its stores.

Ray Hill, vice president of marketing at Interactive Works in Overland Park, Kansas, says some stores, including Sears and Kmart, lure customers to the checkout counters with promises of "prepaid discounts" when the customers use privatized phone cards issued by the store.

Despite all this emphasis on plastic, U.S. consumers still make more than 80 percent of purchases with cash, according to Fred Winkler, senior vice president and head of card products at First Union Corp. in Charlotte, N.C. Even if people do succumb to the lures of plastic, he send, most transactions are worth less than $10, making it difficult for prepaids to break into the card market.

Indeed, consumers seem wary of prepaid cards. But because handling cash usually requires about 3 to 7 percent of a store's operating budget -- significantly higher than the cost of plastic -- retailers will continue to offer incentives to consider plastic over paper.