Key Federal shifting credit card unit to Delaware Official blames Md. restrictions

November 16, 1993|By David Conn | David Conn,Staff Writer

Key Federal Savings Bank of Owings Mills, frustrated by the Maryland legislature, has decided to set up its credit card arm in Delaware, where laws are less restrictive.

The company is one of the last Maryland banks that has its credit card operations in the state. It employs 105 people at its processing center in Havre de Grace, fewer than 10 of which will be shifted to Delaware after Key's purchase of the Rehoboth Beach branch of the failed John Hanson Savings Bank, according to Robert M. Bouza, the Key Federal senior vice president who runs the card operation.

But the rest of those jobs could follow eventually. "If I'm successful [in Delaware], how long am I going to stay here?" Mr. Bouza asked. "How long will I leave the operation split up?"

Key Federal for several years has asked the General Assembly for permission to lift restrictions on certain fees. The company also has been looking to expand, Mr. Bouza said, so when the opportunity to buy the John Hanson branch arose, he decided to move the credit card division to Rehoboth Beach.

The main factor behind the decision, he said, was that the company has been losing business to competitors in its niche of the credit card industry, namely secured cards. Secured card customers are required to establish a savings account at Key Federal in roughly the same amount as their line of credit.

Secured cards, along with providing the convenience of a credit card,allow customers to establish or rebuild their credit history.

Key Federal is the largest and one of the oldest issuers of such cards, with $37 million in secured deposits, and a total of $50 million in credit lines in 55,000 accounts. The company has 22,000 traditional cardholder accounts. Less than 5 percent of its customers live in Maryland.

Despite the security of the customer's savings deposit, Key's 21.99 annual interest rate is among the highest in the industry. "The reason we have a high rate is because the Maryland legislature doesn't permit a number of ancillary fees, except for a late fee," Mr. Bouza explained.

"Each month we're losing more and more market share, we're opening fewer accounts," he said. "I couldn't just sit here and watch as we lost market share."

Key Federal for the last few years has asked the General Assembly for permission to charge customers a $15 penalty if they exceed their credit limit by 5 percent or more. The company also wanted the right to reduce the interest it pays on the secured deposits from the current minimum of 4 percent to prevailing market rates.

Once the move to Delaware is made in January, the company will lower its rate to 18.9 percent and begin charging the $15 penalty.

"We presented our case and they decided not to entertain that legislation," Mr. Bouza said of the General Assembly. "Maryland may have the distinction of having no credit card issuers left, and nobody cares" from which state their credit card is issued.

Several Maryland banks still issue credit cards, but most use subsidiaries that are based out of state. The General Assembly's decision to impose a credit card interest-rate cap drove most of Maryland's biggest card issuers to Delaware about a dozen years ago.

Sen. Thomas P. O'Reilly, who chairs the Senate Finance Committee that considered the Key Federal bills, said the panel rejected them partly because they could have hurt some of the least savvy consumers. "They wanted customers to somehow keep a precise accounting of how much they charged, and if they misstepped by more than 5 percent," they'd get charged the $15 fee.

"Customers who have poor or no credit generally are not sophisticated consumers," he said. "Do we have a responsibility to avoid setting traps for the unwary? I think we do."

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