FOOL ON THE HILL
An Investment Opinion

Reveling in Bank One's Struggles

By Bill Mann (TMF Otter)
August 27, 1999

As a consumer, I can't help but revel in the news that came out of Bank One this week -- well, parts of it anyway.

Certainly I don't like to see shareholders get waxed to the tune of $15 billion in market cap losses. That's a lot of cabbage. That's more money than you would find if you searched every couch and car seat in the country for loose change. I'll bet that's even more than Bill Gates has in his wallet RIGHT NOW!

Fifteen billion dollars. Gone. Erased.

If you missed the story, Bank One (NYSE: ONE) put out a warning that it would miss consensus earnings estimates for the year by over 7%. The company estimated that it would earn about $3.60 per share, well below the $3.92 expected by analysts. The culprit is Bank One's credit card division, First USA, which is the largest Visa issuer in the country. Bank One listed several reasons for the tremendous reduction in earnings, but I want to focus on two of them: a decrease in the amount of money held outstanding by Bank One's credit card customers, and attrition caused by aggressive fee policies enacted by the company.

These two items warm my heart, for although they are only components of a larger problem facing Bank One and the entire credit card industry, the mere fact that Bank One mentioned them says something about how Americans are handling their finances.

In response, several of the largest credit card companies were punished on Wednesday, including Capital One (NYSE: COF), Providian (NYSE: PVN), Household International (NYSE: HI), and MBNA (NYSE: KRB).

Dare I say that there is an extremely Foolish angle in all this?

You betcha.

You see, The Motley Fool is not just about intelligent investing. Rather, the Fool espouses a holistic approach to finances: that you should control them, not let them control you. This means alleviating consumer debt such as credit card balances before making the jump into equities. So, when the largest credit card company has a 3.7% decrease ($14 billion) in total outstanding balances from its credit card customers, it's a sign of hope that the country is getting just a little more Foolish.

But, aah, you say, "Could it be that this company's balance drop is not a sign of lower dependence on credit but on increased competition?" Why, of course it could, dear Fool. In fact, Bank One's press release spoke of overall slowing of growth in the credit card industry as well as an increase in competition. But, as the next point will demonstrate, Foolish trends in consumer credit can take place even in the absence of elimination of debt.

One of the issues that Bank One specifically pointed to was its increasingly aggressive policy toward fees. For example, Bank One implemented a policy of socking its credit card customers with a fee if their payment was even one day late. Bank One admitted that this policy had angered a large number of its customers, and that they had rescinded that policy and refunded the fee to customers who complained. Still, some customers canceled their accounts and took their business elsewhere.

And the chorus sings: "Hallelujah! Fool on!"

We have witnessed in the past few years an explosion of consumer fees, be they hidden or not. In my experience the most egregious offenders have been credit card companies, cable companies, rental agencies, airlines, banks, and brokerages. Still, wherever I look it seems some other company is trying to sock me with some additional charge, in many cases relating to core services that it is supposed to provide.

There also seems to be an inverse correlation between the number of fees and the level of customer service. For heaven's sake, I'm not sure what it would take to get an airline to blush anymore.

All of these things make us, the consumers, feel helpless. How does one go about pushing for improvements in service when the companies neither seem to listen or care?

Well, Bank One is listening now.

You don't think that it hurts a company when you take your business elsewhere? Bank One's major push now is to retain customers, since it is a truism among all industries that it is more expensive to attract a new customer than to maintain an existing one. For this factor to be specifically mentioned means that thousands of customers expressed their displeasure, and a fair number of them took their business elsewhere as a direct result. This was a tremendous shot across Bank One's bow, a collective scream from its customers that they will respond to the company's fee policy as best they can: with their feet.

This is capitalism at its best. A company has an obligation to provide a service in exchange for its customers' dollars, while the customer has an obligation to pay fair value for the services he/she receives. Most importantly, both parties understand that it is a transaction undertaken by their own free will. Customers always have the choice to not do business with any particular company, and vice versa. Bank One seems to have forgotten this fact, and the exodus of its credit card customers should help to give it some clarity.

I should note that I hold no ill will towards Bank One. In fact, I find it quite admirable that its management was so forthcoming in discussing internal challenges and mistakes they have made. A company that is willing to claim its failures as openly as it does its successes is one worth looking at from an investing perspective. As a Fool, however, it will remain my task and duty to speak of the havoc unmanaged credit card debt can wreak upon your financial future. As such, I view a slowdown in the credit card business as very good news.

Also See:
The Bank One Press Release
The Motley Fool's Credit and Debt Area
The Foolish Credit Calculator