The Federal Reserve yesterday ordered Citicorp to terminate immediately certain features of its Choice Card. The multipurpose credit card, the successor to the NAC charge card, was introduced to the Washington-Baltimore area Sept. 16.
Suspended are the check authorization and Purchase Plus Plan features. The first allows cardholders to cash personal checks at all stores displaying an identifying decal. The second permits the holder to set aside funds for future use and earn 8 percent compounded interest on the balance.
In a letter to Citicorp, the Fed said that the "purposeful laying away of funds" could not be regarded as within the scope of credit card activities for which Citicorp had received approval. The check authorization feature was suspended because Citicorp did not obtain prior permission from the board.
Citicorp issued a statement yesterday saying it believes the card uses are "entirely legal and consistent with regulatory precedent." The company said it would try to convince the Fed that the card has a district consumer benefit. Meanwhile, it will change its advertising.
At issue is the question of whether the funds sent to Citicorp Financial Inc., a nonbanking subsidiary of Citicorp, should be considered bank deposits and therefore subject to banking regulations on reserves and interest ceilings. The Fed has decided CFI does not have the right to set aside these funds on which customers can draw, because they are not subject to reserve requirements and they pay higher interest than can banks on similar accounts.
This feature of the Choice Card appears to be modeled on cash management accounts, a type of money market mutual fund offered by brokerage firms. Indeed, the Investment Company Institute, the trade association for mutual funds, complained about Choice Card recently to the Securities and Exchange Commission. Beneath the legalese was the fear that big companies like Citicorp could become competitors of mutual funds.
The 150,000 Choice Card holders in the area may continue to use its other features, which include rebates on purchases, loans, toll-free balance inquiries and cash advances.