(FORTUNE Magazine) – REMEMBER the fellow in The Graduate who whispered to Dustin Hoffman that plastic was the wave of the future? Corporate planners have bought the idea. Some giant American companies are betting that plastic, the kind people carry in their wallets, is about to become the ultimate strategic weapon. The biggest believer appears to be John Reed, 45, who became chief executive of Citicorp last September. Reed has a full arsenal of cards at his disposal and, according to card- industry tracker Spencer Nilson, probably spent $150 million to $200 million last year to promote them. Some of the money went into nationwide marketing of MasterCard and Visa, both owned by bank cooperatives and also issued by thousands of other U.S. banks. But Citicorp really shelled it out for some of the proprietary cards in its silos. These include such familiar names as Diners Club and Carte Blanche--used mostly for travel and in restaurants--and a new advanced weapon, the Choice card, that is already held by a million Americans. Though little known outside states where the card is marketed--and Citi's home state of New York isn't one of them--Choice has the competition's radar blipping. Reed's moves are part of his strategy to make Citi the first and foremost nationwide bank. Other card players have different goals, but all are trying to figure ways to reach the right consumers or investors, to persuade them to use their cards to do more things, or to cross-sell other products or services. Banks and nonbanks are doling out money for hardware and software so they can defend their positions, or advance them, as the nation moves to electronically based payment systems. The upshot is that plastic is about to become a battleground in a fight for turf. Plastic may not prove as powerful as Reed and others hope, but it can be immensely profitable. At the moment, credit cards are a bright spot for beleaguered banks. Banks charge annual interest rates of anywhere from 13% to 22% for unpaid balances on Visa and MasterCards they issue--vs. 10.75% on loans made at the prime rate--plus an average annual fee of $17 per card. Banks also do a nice business processing credit transactions for merchants, traditionally those near their home turf, usually raking off 2% to 3.5% of total charges; they typically pass along 1.5 percentage points to the bank that issued the card. American Express gets most of its card revenues by processing every single American Express receipt itself, a paperwork feat for which it charges merchants 3% to 5% of billings. Its annual card fees--$35 for the green card, $65 for the gold--comfortably exceed $650 million. Rodney Schwartz, a security analyst at PaineWebber, estimates that American Express netted $252 million from the card business in 1984, 42% of total corporate profits. WITH 15 MILLION U.S. cardholders, American Express virtually owns the so- called travel and entertainment market. But it frets about Citi, which is spending heavily to steal business for Diners Club, and about some other powerhouses that are experimenting with card tricks. Among these is Sears Roebuck, with 60 million cards. How long, the card watchers wonder, will Sears be content to let its cards languish out there, underutilized, equipped only to make a Sears purchase? How long before Sears develops a multiple warhead? Sears won't comment about its plans, nor will Citicorp. But it is a safe bet that none of the cardplayers feel secure. The sheer might of the competition is not the only worry. Deregulation of banking is sure to make doing business tougher; any company with lots of cardholders and processing power is a potential threat; and technology could dramatically alter the way payments are made. Banks are promoters of debit cards, but they have mixed feelings about the trend toward electronic debiting in retail stores--paying for purchases with almost instantaneous withdrawals from bank accounts (see box). As a system of payment, bankers prefer debit cards to checks, which are generally unprofitable to process. But what if debit cards begin to take the place of credit cards? This not only would threaten those profitable credit card loans, it would reduce what merchants pay banks for processing card purchases. In fact, a couple of pioneering retailers, Mobil Oil and Publix Super Markets in Florida, have invested in the hardware and software necessary to accept debit cards and, for providing the systems, are charging some banks to make the transactions. With fast-moving technologies and deregulation blurring everybody's vision of the financial future, practically any articulate seer's scenarios seem plausible. Not to react seems unthinkable, so all the participants are doing something, often at great cost. It may be decades before the corporate winners are known, but in the meantime the battle should benefit every card-carrying consumer. REED is counting on his portfolio of plastic to establish a strong national consumer franchise for Citicorp. The plan is to place millions of cards bearing Citi's name in the hands of consumers all over the U.S. and then to cross-sell those cardholders mortgages, student loans, credit life insurance, and maybe even stocks and bonds. More important, Reed also aims to attract deposits this way, particularly CDs and money market accounts, by offering attractive rates or services. In short, Reed will use cards to help him make an end run around federal restrictions on interstate banking--by setting up a national banking network through the mail. To attract rich customers, Citi has been spending much of its money lately promoting ''prestige'' cards. It has embarked on a huge campaign to issue Visa's Premier card, which Citibank calls Preferred Visa. And in the last two years Citi has poured at least $70 million into Diners Club, a weakling in the travel and entertainment (T&E) market when it was acquired in 1981 and probably still a money loser in the U.S. The push to resuscitate the card began in earnest in 1983, directed by Richard S. Braddock, 43, Citicorp's top card executive. Until he joined the bank in the mid-1970s, Braddock had been a marketing man at General Foods, but Diners is not a piece of cake. Citicorp's first task is to unsell consumers on the American Express card, which got its grip on the T&E market by convincing people that they can't leave home without it. Citi may have underestimated the difficulty of building up a base of cardholders and establishments willing to accept the card. It's a slow, expensive, brick-by-brick sort of task: consumers don't want a card if it isn't widely accepted by merchants, and merchants don't want to bother accepting a card that doesn't bring with it a lot of affluent card carriers. Though Diners is outnumbered two million to 15 million by American Express in the U.S., the numbers look better abroad, where Diners has three million cardholders to American Express's five million. Until recently the Diners operations outside the U.S. were owned by franchisees, a different one in each country. For the last couple of years Citicorp has been busily buying those franchises. But almost nobody thinks Diners can catch American Express. Citi's solution to the almost Sisyphean task at hand has been to buy its way in the market, using every marketing trick in the book. Last year Citi began a direct-mail blitz for Diners, soliciting thousands of ''preferred customers''--business travelers whose names Citi probably bought from the rosters of airline frequent-flier programs. ''Frankly, Citicorp Diner's Club wants your business, and we're willing to work for it!'' the mailer began. But preferred customers who read on found that Citi wasn't just willing to work for their business, it was willing to pay for it. Citi offered all sorts of lavish incentives along with the card, among them a credit toward the first $25 in charges, free Citicorp traveler's checks, and a round-trip ticket on American Airlines to anywhere in the U.S., including Hawaii, or to the Virgin Islands, for a mere $175. Those kinds of incentives have doubtless produced results, though one wonders what will happen if the incentives are no longer offered when the card comes up for renewal at $45 a year, $10 more than American Express's green. Citi hopes to pick up cardholders faster by going after corporate customers, who would furnish Diners cards to their executives in bulk. Citi kicked off its ad campaign last year using the tag line ''Citicorp Diners Club . . . when you mean business.'' The ads and TV spots featured four companies that used Diners as their corporate T&E card. Top officers of two of them--United Technologies and Corning Glass Works--are directors of Citicorp. THE CORPORATE MARKET is also the segment that American Express has been planning to cultivate next, and the clash promises to be lively. American Express has surprised everyone, including American Express, with its success at expanding its cardholder base in other areas. The man who deserves most of the credit is Louis V. Gerstner, 42, chairman of the executive committee at American Express and head of the subsidiary that operates the card and travel services. When Gerstner arrived in 1978 from McKinsey & Co., the management consulting firm, security analysts were saying that American Express's card business had reached maturity. The cards, they reasoned, were already in the hands of practically all the traveling executives who needed them, and they were accepted by most airlines, car-rental companies, hotels, and good restaurants. Since then, Gerstner has managed to keep earnings in the card business growing at an annual average rate of 25%, compounded. He discovered women, raising the proportion of female card members to 29% of the total from 16% four years ago, and he began adding graduating college students to the card- member base. He also went after retail stores, not previously hustled, and got merchants from Saks Fifth Avenue to the Gap to accept the card. The trade-off for taking on new groups of cardholders was that the green card lost some of the cachet that went with a more exclusive approach. Gerstner, who believes that snob appeal sells, pushed the gold card hard to hold customers who otherwise might have been lured away by the Visa Premier card or MasterCard's gold model. Last year he introduced the platinum card, available only to people who have charged more than $10,000 on their American Express cards in the past year. So far it turns out that 50,000 of these big spenders are willing to fork over $250 to carry plastic platinum. Gerstner is just beginning his push into the corporate market. The company has sold only about two million corporate cards, most of them to small businesses. Now American Express is aiming at large corporate accounts among the FORTUNE 500. Gerstner thinks the corporate segment could grow by more than 50% a year, and he doesn't intend to share that growth with Citicorp or anyone else. JERRY C. WELSH, a former head of card marketing and now in charge of worldwide marketing and communications for Gerstner's subsidiary, claims that American Express will ''clean Citibank's clock'' in the corporate card segment with a product called Travel Management Service, or TMS. The product is an integrated package of corporate services wrapped around the basic American Express card. The services include analyzing travel and entertainment costs by division, consulting with companies about travel policies, and actually operating as the travel department for companies that don't have their own. Gerstner's pitch is that TMS will help U.S. corporations control the $80 billion or so they spend on travel and entertainment for employees each year. While Citicorp tangles with American Express in the corporate market, it is already well along in an experiment with the Choice card to find out whether it can collect deposits by mail. Back in 1977, when Reed was head of Citi's fledgling retail banking unit, Citicorp bought NAC, a small Baltimore-area charge card, and renamed it Choice. The bank did little with the card until 1980, when it reintroduced Choice in Baltimore. Now Choice is distributed mainly in the Baltimore-Washington area and in Colorado. The million cardholders have 60,000 places to use the card. Last year Choice customers charged an estimated $700 million on their cards. Though that is small potatoes in the card game (see table), Choice has performed impressively in the Baltimore-Washington area, where the test began. Ronald E. Geesey, president of the Citicorp subsidiary that markets the card, told a group of security analysts last year that in 1983 Choice accounted for more than 25% of sales by ''major retailers'' in that market--more than American Express (16%) and MasterCard (23%) and just a nose behind Visa (28%). As it has with Diners Club, Citi has equipped the card with all sorts of appealing features to get it into consumers' hands and to get them to use it. Cardholders receive Choice and an accompanying credit line of $750 to $5,000 without paying an annual fee, and are promised a rebate of 0.5% on all Choice purchases above the first $600 in any 12-month period. To find out whether consumers would hand over deposits through the mail, Citi has outfitted Choice with several interest-paying accounts. For deposits larger than $1,000, Choice was recently paying 10%, more than a point above prevailing money market rates. Cardholders who overpay their bills by less than $1,000 get 5.25%. When Choice moved to Denver in 1983, it found an ideal test market. Colorado allows out-of-state bank holding companies to open limited-service banks that can collect consumer deposits, and it also requires banks in automated teller networks to share their terminals with other state banks. So in Colorado, through Citicorp Industrial Bank, Choice cardholders can get cash and make deposits at hundreds of ATMs around the state. It's hard to get a fix on how much Citi has collected in deposits from Choice customers, since the bank isn't talking. But Citi must be encouraged by Choice's early returns. Last spring Geesey told the analysts that Choice had ''a great future,'' adding that if the results of the Baltimore test could be duplicated nationwide, ''we are talking about tens of millions of cardholders.'' Several months later, after it successfully petitioned Maryland legislators to pass a bill allowing out-of-state bank holding companies to set up shop in their state, Citicorp opened a Maryland banking subsidiary. Its purpose, Citi told shareholders last November, is to provide a launching pad from which ''to market our Choice card nationwide . . . through mail and telephone marketing.'' Perhaps in anticipation of the rollout, Citi has recently signed up ATM networks in several states--including Florida, Texas, and California--at which Choice cardholders can get cash. Citicorp was able to expand Choice's merchant base from Maryland and Washington, D.C., through Delaware, Virginia, North Carolina, and southern Pennsylvania by using the economies of scale in its huge credit card processing operations. To get into Virginia, Citi started a price war. Through what it called a ''tri-card plan,'' it offered to process merchants' credit slips for Visa, MasterCard, and Choice for about half a percentage point below the approximately 3% charged by banks in the area. Randolph Wyckoff, a senior vice president in charge of credit cards at the Bank of Virginia, says he lost plenty of processing business to Citicorp. In fact, says Wyckoff, ''they kicked our ass all over the block.'' To protect the business he had left, Wyckoff went to Citicorp and offered to sell the Choice card to the merchants whose Visa and MasterCard slips he processed. Citi agreed, and the United Virginia Bank and Central Fidelity, two other Richmond-based banks, soon struck similar deals. THERE WAS some growling from other banks in the state, since nobody in Virginia has much appreciation for Yankee invasions. ''Sure they asked me, 'Why'd you let 'em in?' '' drawls Wyckoff. ''But what else are you gonna do? You can try to hold the door as long as you can--and then when it opens, it squashes you. Or you can try to find an advantage.'' More companies may soon be trying to beat down the door. If Citi can make headway across the U.S. in spite of regulations that make it hard to leave the state, why can't big retailers with cross-country electronic networks for authorizing and processing credit purchases launch their own all-purpose credit cards? And for that matter, if the retailers happen to own banks or savings banks--as Sears does in California and both Sears and J.C. Penney do in Delaware--why can't they collect deposits the same way Citi hopes to? Bankers say that Sears is testing the idea of an all-purpose credit/debit card like Choice that could be used at automated teller machines. And Sears is also looking for ways to link its card to its securities subsidiary, Dean Witter. In San Diego, Sears is experimenting with a card that gives some customers of Dean Witter and Sears Savings Bank access to cash at automated teller machines throughout California. BANKERS and others take comfort from the thought that Sears would have trouble launching a nationwide credit card because other retailers would resist accepting a competitor's plastic. But Sears has been working on a deal with a noncompeting retailer, Phillips Petroleum. In a test, Phillips has been using Sears' sophisticated electronic network to check the credit of customers using cards and to process credit purchases. Penney has been marketing its electronic network through a subsidiary set up in 1983 called J.C. Penney Systems Services. Among its customers are Shell Oil and Gulf Oil, which pay Penney 10 cents to 13 cents per transaction to do what Sears is doing for Phillips. Late last year Penney even signed up a bank in Utah, which uses Penney's network to transmit data for its own bank-card operations. And just to scramble your senses, a 75%-owned subsidiary of American Express, called First Data Resources, thinks it is the largest nonbank processor of Visa and MasterCard transactions in the U.S. The possible permutations suggested by all this, combined with the prospect of electronic debiting at the cash register, justify bankers' fears that nonbanks may wrest control of the payment systems. Before the technology gets sorted out, and before Reed's great experiments prove anything, consumers must cast their votes. Do they really want a card that can zap their bank account to pay for things? Can deposits be coaxed from them, by mail or any other way, or will they coolly shop for the best rate? Do they like the idea of one-stop financial services, or is that just a planner's dream? Will corporations buy charge cards? Will people come to favor some new brand of card over the ones we already have? Strategists can only guess at the answers, but there will be winners among those who are willing to place their bets before all the answers are clear.

CHART: CARD ISSUED BILLINGS ON COMMENTS IN THE U.S. CARD IN 1984 in billions* VISA 77,200,000 60.6 Issued by banks. Banks issuing 25 million cards participate in Visa's automated eller network enabling cardholders to get cash at 1,564 machines in 25 states. A few banks also issue Visa Electron debit cards, which can be used at ATMs and to pay for purchases at 25 test retail locations by debiting the holder's bank account. MASTERCARD 60,000,000 49.7 Issued by banks. Nine million cardholders can get cash at 3,000 ATMs in 28 state . A new card for electronic debiting at supermarkets and gas stations will be announced in February. AMERICAN EXPRESS 15,000,000 36.6 Three million cardholders participating in the Express Cash system can withdraw cash from their checking accounts at 2,000 ATMs in 31 states. SEARS 60,000,000 13.6 Usable only to charge purchases from Sears Roebuck. Issued by CITICORP Visa & MasterCard 6,000,000 $6.8 Diners Club 2,200,000 $4.9 Carte Blanche 300,000 $ .4 Choice 1,000,000$ .7 *Estimated by the Nilson Report newsletter. Diners and Carte Blanche are wholly owned by Citicorp. Choice is a combination credit/debit card owned by Citicorp and issued primarily in Maryland, Virginia, the District of Columbia, and Colorado. Cardholders use it to make payments either from their credit line or from bank deposits. Citibank participa es in networks across the U.S. that enable holders of Choice to get cash at over 1,000 ATMs. BOX: INVESTOR'S SNAPSHOT CITICORP ASSETS (AS OF 9/30/84) $144.7 BILLION CHANGE FROM YEAR EARLIER UP 11% NET PROFIT (LATEST FOUR QUARTERS) $830.0 MILLION CHANGE DOWN 3% RETURN ON COMMON STOCKHOLDERS' EQUITY 14% FIVE-YEAR AVERAGE 14% RECENT SHARE PRICE $37.50 PRICE/EARNINGS MULTIPLE 6 TOTAL RETURN TO INVESTORS (12 MONTHS TO 12/31/84) 11% PRINCIPAL MARKET NYSE Explanatory notes: page 86 INVESTOR'S SNAPSHOT AMERICAN EXPRESS ASSETS (AS OF 9/30/84) $62.8 BILLION CHANGE FROM YEAR EARLIER UP 69% NET PROFIT (LATEST FOUR QUARTERS) $418.0 MILLION CHANGE DOWN 40% RETURN ON COMMON STOCKHOLDERS' EQUITY 10% FIVE-YEAR AVERAGE 18% RECENT SHARE PRICE $36 PRICE/EARNINGS MULTIPLE 19 TOTAL RETURN TO INVESTORS (12 MONTHS TO 12/31/84) 20% PRINCIPAL MARKET NYSE Explanatory notes: page 86