By Liz Morris

Online payment company PayPal is beta testing a new PayPal Virtual Debit Card that allows its users to disguise their debit or credit card numbers behind temporary card numbers that the virtual card creates.  PayPal members supply their real financial information to PayPal, which in turn generates one-time-only numbers that can be used for individual online transactions, with the one-time-only numbers being tied back to the real credit card numbers of the buyer.

Virtual credit card numbers are nothing new; Citi and Discover credit card holders already have the option to use them. PayPal’s offering would widen the number of credit card customers able to use such a service, as it is not tied to a particular credit card or debit card issuer.

For more on how virtual credit cards work, see our December, 2005 report Using Virtual Credit Cards in the Fight Against Identity Theft.

By Justin McHenry

Along with its earnings release last week, investment banking firm Morgan Stanley announced that its Discover unit would be spun off into its own public company.  With the spinoff to be completed by the third quarter of 2007, all four of the major credit card companies–Visa, MasterCard, American Express and Discover–will be open to public investors by the end of next year. American Express has long been a public company, MasterCard had its IPO this year and now Visa and Discover will follow suit in 2007. (Technically, Discover was already part of a public company in Morgan Stanley, but the spinoff will allow investors to buy into just the credit card business.)

Morgan Stanley CEO John Mack had committed to Discover as a part of the firm upon taking the top job in 2005, but says with Morgan Stanley back on firmer footing, the spinoff offers better shareholder value than is possible by keeping Discover in the fold.

By Liz Morris

The evolution of cell phones as payment vehicles may be taking another step forward with a trial slated to begin soon in New York City. Local residents who currently hold a Citi credit card equipped with MasterCard’s PayPass contactless technology and who also are Cingular wireless customers are eligible to receive a Nokia cell phone that uses Near Field Communication (NFC) technology to transmit credit card information to PayPass card readers. During the three to six-month trial, chosen participants can pass the phones in front of PayPass readers to make payments without ever pulling out their credit cards.

MasterCard has set up a Web site about the trial at https://www.mastercard.com/us/paypass/mobile/. An animation at the site gives an example of the technology in use. A man talking on his cell phone in a convenient store carries his purchase to the checkout. He briefly stops talking, waves his phone in front of the reader, then resumes talking on the phone while walking out.

The site also offers a form for eligible particpants to request inclusion in the New York City trial. Deadline is December 20.

The stated goal of the trial is to see whether paying by phone speeds transactions and increases customer convenience. An unstated goal may also be to assess the technology’s functionality as well as its safety. As a nod to people’s potential safety concerns, participants will be permitted to enable the PayPass functionality only at the point of sale and to disable it otherwise.

NXP Semiconductors, formerly Philips Semiconductors, developed the NFC technology and chips used in the trial’s mobile phones.

By Justin McHenry

A new Small Business Administration study has found that small business loans of under $100,000 are on the rise, and that more than 70% of such loans are via business’ credit cards. However, and perhaps surprisingly, while the number of these small loans increased 25 percent between June 2004 and June 2005, the total amount of dollars loaned increased only about 1.9%.  So, while more small businesses are carrying debt, especially on credit cards, the majority are carrying smaller amounts of debt than in the past.

The Small Business Administration’s Office of Advocacy offers the study of what it terms small business lending (loans of under $1 million) and micro business lending (loans of under $100,000) each year.  The full 120-page report just released is available at http://www.sba.gov/advo/research/sbl_05study.pdf.

By Justin McHenry

Visa USA announced this week that it will use both rewards and punishment in an attempt to get merchants to be more vigilant about securing cardholder data. Visa will offer $20 million in financial incentives and also use various sanctions to increase merchant compliance with the Payment Card Industry Data Security Standard.

The program is targeting the acquirers of the largest 1,200 merchants, all of which process more than one million Visa transactions a year and combined account for about two-thirds of Visa’s U.S. transaction volume. To qualify for a one-time incentive payment, acquirers must be in full compliance with the security standard by March 31, 2007. Acquirers whose merchants are compliant after the March deadline but before August 31, 2007 will receive a smaller one-time payment.

If that carrot isn’t enough motivation, fines of up to $25,000 per month could be levied by Visa for those who don’t comply with the security standards.

A number of security compromises, in which credit card data of thousands of customers was stolen or made vulnerable, have spurred the major credit card networks to pressure merchants to follow stricter procedures to ensure that data is not stored after transactions are completed. MasterCard announced a similar program earlier in 2006.

By Justin McHenry

Atlanta-based SunTrust Banks will begin issuing credit cards to its customers through a partnership with First National of Nebraska’s InfiCorp Holdings unit beginning early next year, when its current agreement with MBNA runs out.  Like Wachovia before it, SunTrust seems to prefer not having a rival issue its credit cards—a situation that occurred this year after Bank of America completed its acquisition of MBNA.

SunTrust agreement with MBNA, under which MBNA purchased SunTrust’s consumer credit card portfolio and marketed personal card products and services to the bank’s customers, began in 1999 and ends in January.

By Seth Harbison

Continued good news for holders of variable-rate credit cards, as the Federal Reserve Board’s Open Market Committee voted yesterday to hold the line on interest rates. This was the fourth straight meeting of the Committee in which rates were left unchanged. (It was also the fourth meeting in a row in which Committee member Jeffrey M. Lacker differed with his colleagues; Lacker preferred another quarter-point hike.)

While the Committee’s statement left open the option of increases in the future, the overall tone seemed to suggest that the economy is progressing slowly and steadily, just as Federal Reserve Chairman Ben Bernanke would prefer. In fact, the Committee’s statement says the “economy seems likely to expand at a moderate pace on balance over coming quarters.”

Most credit cards charge interest on a variable-rate basis, meaning that a card’s interest rate rises and falls based on benchmark rates such as the Prime Rate, which itself rises and falls with the federal funds rate that the Open Market Committee sets. So, when rates are steady, consumers who aren’t paying attention to the Federal Reserve don’t get a nasty surprise in their credit card statements.

It’s all about the rewards. At least that’s what we at IndexCreditCards.com have concluded in naming the top 10 new credit cards for the year 2006. In creating the list, we looked at the strength of new card offers, each card’s breadth of appeal (how large an audience a card might command), and which of the newest cards received the most click-throughs from IndexCreditCards.com visitors. The top ten include:

1. Saks World Elite MasterCard – For the first time, Saks’ customers were able to choose a credit card that could be used anywhere, allowing them rebates of up to 6% on Saks purchases and also 1% rebates on purchases anywhere else.

2. ESPN Total Access Visa Card – Cardholders earn points for sports memorabilia, apparel and tickets. For the true ESPN junkie, however, there is the chance to use points to attend ESPN’s ESPY Awards, tour the ESPN studios, attend the Winter X Games and for other ESPN “experiences.”

3. Chase Home Improvement Rewards Visa – Allows cardholders to earn 3% rebates on home improvement purchases, plus 1% rebates everywhere else. In addition, the card also pays out one point for every dollar in interest paid–a rarity, especially in combination with other card rewards.

4. Best Buy Reward Zone MasterCard – Best Buy took their in-store-only rewards card, beefed up the rewards and created a card that could be used (and rewarded) outside the store. Rewards include 4% back on Best Buy purchases and 1% elsewhere.

5. Enlightenment Card – Unusual rewards program offers points toward yoga classes, spiritual retreats, meditation aids and other “enlightening” rewards.

6. Bank of America MLB Extra Bases Credit Card – Bank of America revamped the rewards program for its Major League Baseball credit cards, increasing the number of unique “experiences” available, from throwing out the first pitch at a game to watching batting practice from the field at the All-Star Game.

7. GM Flexible Earnings Card – The knock on the previous version of the GM credit card was that points could only be used toward GM vehicles, and would otherwise be forfeited. The new version of this card gives cardholders the flexibility to choose between vehicle discounts or cash back.

8. Borders 3.2.1 Visa – While this card offers a fairly standard rewards program, in which points equate to gift cards toward Borders purchases or other rewards, it does offer double rewards points on gas, restaurant and grocery purchases, making point accumulation quicker than with similar cards.

9. BP Visa Rewards – Gas rewards are nothing new, but BP makes an enticing offer in an attempt to increase customer loyalty. Although the initial period in which cardholders earn 10% rebates on BP gas is short (two billing periods), afterwards BP is still offering 5% rebates on BP purchases, 2% rebates at restaurants and 1% back everywhere else.

10. Home Depot Rewards MasterCard – While not a particularly unique rewards offering, this card qualifies as one of the best purely because Home Depot did not previously offer a card that could be used both in-store and out. This one offers two points per dollar at Home Depot and one point per dollar everywhere else, with points used toward Home Depot gift cards as well as other merchandise and travel rewards.

“Reward credit cards are a win-win for both cardholders and the credit card companies, so it’s no surprise that our list focuses on the many new offerings in this area,” says Justin McHenry, Research Director for IndexCreditCards.com. “Most card companies have given up competing on interest rates and are now focused on building loyalty through cards that give consumers a little something back. Whether it’s cash, merchandise or the possibility of unique ‘experiences,’ the credit cards on this list are representative of the fact that today there exists a credit card related to just about every consumer interest.”

In addition to naming the top new credit cards of 2006, IndexCreditCards.com singled out other developments worthy of mention this year:

• MasterCard restructured and became a public company in 2006, receiving an influx of cash to help it compete with Visa and also offer some protection from lawsuits pending against it.

• Merchant groups raised a stink about the interchange fees they are charged by Visa and MasterCard, claiming the card companies are exploiting a monopoly. While Visa and MasterCard say merchants want the convenience of accepting credit cards without paying the price, lawmakers on Capitol Hill seemed sympathetic to merchants’ claims. Whether this dispute will be resolved amicably or via a legislative battle remains to be seen.

• Radio frequency identification (RFID) credit cards, which allow for quicker transactions by requiring the cards to pass before a special reader instead of being swiped, got a wide rollout in 2006. However, security experts questioned whether the cards make it easier for thieves to steal credit card information.

• Bank of America’s partnership with Caremark on a credit card that rewards customers for making prescription drug purchase decisions that Caremark approves of could be a wave of the future.

• Competition in small business credit cards heated up this year, with Discover entering the market and a greater number of choices being offered overall. American Express’ SimplyCash business card was the most generous of the new offers, with 5% cash rebates on gas, office supplies and wireless charges, and 1% rebates elsewhere, with no cap on the total amount earned.

• Finally, after 50 years, Waffle House began accepting credit cards. “We wanted to make sure credit cards were here to stay,” joked Waffle House Vice President Walt Ehmer.

By Liz Morris

Pacific Gas & Electric, which provides natural gas and electric service to over 15 million people in California, announced last week that it will now accept Visa credit card and debit card payments for its bills. By doing so, it becomes the largest utility to accept Visa. In the beginning of the 18-month pilot program, PG&E will accept credit card payments over the phone, with the intention to expand payment options to the Internet in 2007. If consumer interest is sufficient, PG&E will continue the credit card option permanently.

There will be no service fee for paying by Visa during the 18-month trial period; no word on whether that will change if the option becomes permanent. Other utilities that accept credit cards often pass through the charges that credit card companies charge them for accepting transactions. Those charges generally equal one to two percent of the total bill, although the utilities may structure their fees differently.

According to Visa, over 3,500 utilities across the United States accept Visa credit and debit cards. Visa cardholders paid $103 billion in household bills with Visa debit and credit cards for the year ending September 30, a 22.5 percent increase. Visa’s volume in the utilities segment increased approximately 40 percent during the same period.

By Justin McHenry

MasterCard prevailed yesterday in its lawsuit against the Fédération Internationale de Football Association (FIFA), the governing body of the World Cup soccer tournament, to force FIFA to honor the contract which gave MasterCard exclusive sponsorship rights to the 2010 and 2014 World Cups. FIFA had signed a new sponsorship deal with Visa despite MasterCard’s claim that it had the right to continue its sponsorship, and had informed FIFA that it would do so.

U.S. District Judge Loretta A. Preska issued a 125-page ruling saying that FIFA had reneged on its deal and that “MasterCard’s loss of the next FIFA World Cup sponsorship would be, in its now-famous words, ‘Priceless’” (a reference to MasterCard’s well-known advertising campaign).

FIFA says it will appeal the decision.