(FORTUNE Magazine) – IT WAS TOO GOOD TO LAST. If you are in the charge card business, you make money six ways from Sunday. If you run a bank, you might get more profits from charge cards than from all other sources combined. If you're Citibank, you made $3.6 billion just in credit card interest last year. Numbers like that attract new players -- and here they come. As the Sears Discover Card grows fast, Japan Credit Bank has landed with its own card in the West, and now Big Mama, AT&T, is threatening to knock the industry silly with a card that offers gold-plated service yet charges no annual fee. The party is apparently over. White-hot competition in the credit card business is wonderful news for consumers, as the industry pampers them with new services and incentives to use their cards everywhere and for everything, including movies and fast food. Parking lots, highway tolls, and even school lunches may be next. It is not necessarily so wonderful for the card issuers, mainly the banks that own the Visa and MasterCard organizations, plus American Express, Sears, and the new entrants. They must ante up to provide the extras while perhaps lowering the amounts they charge. This double whammy is forcing consolidation in the business. Banks with middle-size portfolios, 500,000 or so cards, are finding the demands to be too much and are selling out to bigger players. The intensifying competition comes as just about everybody who is creditworthy (or sometimes isn't) already has cards. ''The easy growth in acquiring card members has disappeared,'' says Charles T. Russell, CEO of Visa. With more than 260 million cards in circulation, the average American adult sports nearly three for his purchasing pleasure. Last year charge volume grew at 20%, which in this business is considered a comedown. ''It's a market share game,'' says Thomas R. Butler, chief of Sears Roebuck's surprisingly successful Discover Card operation. ''We entered the business with just that perspective.'' So how do you build market share? One way is simply by buying the other guy's customers. Citi and its competitors are purchasing the credit card portfolios of S&Ls and other troubled financial institutions at a rapid clip. Last year Chase Manhattan spent about $2.3 billion to acquire five portfolios, including those of Bank of Boston and Meritor Savings. The frenzied buying has sent prices through the ceiling. Citibank recently paid the equivalent of $268 per account, one of the highest prices ever, for the portfolio of the struggling Bank of New England. The other way to raise market share is to differentiate a card by hanging more services on it, lowering its price, or both. To that end, the banks latched on, with mixed results, to so-called affinity cards issued in - conjunction with frequent-flier programs, sports teams, and service organizations. It's a tricky game, and American Express plays it best. It has two kinds of cards -- the well-known travel and entertainment cards (green, gold, and platinum) and a bank credit card called Optima. Last year the company raised the annual fee on the standard green card 22%, to $55, and priced its gold card at $75 (up from $65) -- and heard barely a whimper from the membership, the company says. The premium platinum card remained at a nosebleed $300. ''Our prestige ratings from customers are the highest they've ever been,'' says Edwin M. Cooperman, CEO of Amex's Travel Related Services Co., the shining star of this tarnished company. But Amex is hardly sanguine about it. The company is pouring more than $100 million into revamping its business to get to what Amex officials call the next generation of service: more of everything. In essence, Amex is making the game more costly to play, and other competitors are going to have to pay up or get out. Over the past five years Amex has introduced services at the rate of about one a year. The company in 1986 introduced Buyer's Assurance, a plan to extend warranties up to an additional year. It added car rental collision insurance in 1987, insured the people and things inside the car in 1988, and offered medical monitoring and evacuation services last year. In some cases, such as rental car insurance, the company first offered services to gold- and platinum-card members and then pushed them down to green-card holders when the competition matched them. One reason AT&T so frightens the card industry is that it is attacking strongly on both price and service. Price, or lack of it, is the company's entry strategy. Credit card issuers earn money three ways: fees charged to customers, interest from outstanding credit balances, and the ''discount'' charge they assess merchants on each purchase. This handy operation produces gross profit margins before taxes in the 50% range -- nice work if you can get it. AT&T, like Sears, is simply willing to earn less. Paul G. Kahn, president of AT&T Universal Card Services, says what the industry doesn't want to hear: ''There's room in this business to give something back to the customers.'' Although lots of banks offer no-fee Visa and MasterCards, AT&T is the first mass-marketer to do it and the only one with the swag to fund a national ad campaign. IN ADDITION to taking less, AT&T's card masters are willing to offer consumers as much as or more than the competition, even the high-priced gold cards offered by Visa, MasterCard, and Amex, which originated the golden idea. (In fact, AT&T first approached Amex with a proposal for a joint card. ''Wrong number,'' said Amex.) ''They are shooting a hole right through the gold-card upgrade,'' says Joseph Wallace, an industry consultant. AT&T Universal cardholders get purchase protection against loss or breakage, an extended warranty on what they buy, travel insurance, rental car insurance -- pretty much what the other cards supply -- plus a 10% discount on long- distance calls. The company is also offering instant credit on disputed charges and promises to be an ombudsman for the consumer in those cases. Kahn sounds the battle cry: ''We are raising the bar on service quality. We are doing everything faster than the others, handling transactions on the phone rather than in writing, taking the customer's side in disputes, and not requiring a lot of bureaucracy. We are providing one phone number to call for everything, not a dozen like our competitors.'' AT&T's initial execution has been brilliant. In one move the company has offered a product with a distinct name that consumers can remember, AT&T Universal, along with a marketing strategy -- free for life -- that consumers are finding irresistible. Within days of the card's announcement, calls were pouring into AT&T's offices at a peak rate of 15,000 an hour. The company expects to be among the top-ten issuers by the end of the year, meaning that AT&T will hand out more than three million cards. Creating a superior service organization is a monstrous challenge, but AT&T brings some built-in advantages. It has access to the credit histories of 70 million AT&T long-distance customers. By qualifying these potential credit customers in advance, the company responds quickly to inquiries and lowers its vulnerability to bad credit risks. The heart of the service system is a phone information network. Custom workstations allow service representatives to flip among four computer systems, one of which can pull up images of application and transaction documents. By year-end a computer will call up a customer's account the moment he phones. With AT&T and Amex adding service, while AT&T also lowers the price, pressure on the banks is growing. The top-ten banks (including those run by Amex and Sears) control more than 50% of the bank card market. ''You see the banks having to compete in the one area they can least afford to compete in -- price,'' says Cooperman of Amex. With an average interest rate on outstanding balances of about 19%, credit card portfolios represent a lone rose amid a thicket of thorns for big banks. Not only did Citibank's credit card operation ring up that huge $3.6 billion in interest last year, but it also collected $500 million in card fees. According to the Nilson Report, a leading industry newsletter, about 70% of Citi's and Chase Manhattan's net profits come from credit cards. Another top-ten issuer, MBNA, formerly Maryland Bank N.A., creams more than 50% of its earnings from credit cards. As consultant Joseph Wallace points out, ''The banks are high-priced competitors selling a branded commodity. AT&T has changed all that. Its entry is devastating to the banks.'' SO FAR the big banks' only response has come through lawyers. Citicorp, MBNA, Chase Manhattan, and BankAmerica have filed petitions with the Federal Communications Commission and the Federal Reserve Board that question the legal standing of AT&T's banking partner, Universal Bank, a subsidiary of Synovus Financial Corp. AT&T says the allegations have no merit. But where it really counts -- at the point of purchase -- the banks have not counterattacked. As for Visa and MasterCard, the umbrella organizations that the banks support, their main job in this battle is marketing -- differentiating themselves in a more crowded industry. They are trying hardest to build a fence between themselves. But after years of me-too marketing, consumers perceive little difference between the cards, leaving the two companies a tough communication task. MasterCard, the smaller of the associations with 86 million cards, is trying to position the card as the best for mainstream America with its ''Master the Moment'' campaign. In doing so, MasterCard is downplaying the extravagantly high-living themes of Visa and Amex that typically picture card members casually dropping in on spas in the Swiss Alps as if they were Holiday Inns in Duluth. Visa, with 120 million cardholders, is ticketed for Fantasy Island, in direct competition with American Express. Ads tout the exotic spots and tony shops that accept Visa but not American Express, a not so subtle way of telling consumers that Visa is accepted in more locations than Amex. AT&T's roaring takeoff has drowned out the noise being made by the Discover Card, introduced by Sears' Dean Witter subsidiary in 1986. With 34 million cards in circulation, Discover claims 6% of the market and produced $80 million in earnings for the beleaguered company last year. The card is now accepted in more than a million U.S. locations. The Discover attraction? Solid value: no fee and a rebate to the customer up to 1% of every dollar charged. Although the rebate is a bit of a come-on -- a $1,000 balance nets a consumer $2.50 -- the public clearly appreciates getting something for nothing. Like AT&T, Discover's advantage going in was a list of creditworthy customers -- 70 million Sears charge-card holders -- plus an existing credit card operation infrastructure at Sears. Discover's cost of acquiring a new cardholder was and is about $6 a pop, while for the rest of the industry it is $25 to $80 and rising. ''People would kill to have our acquisition costs,'' says Butler. But other companies would rather not have Discover's portfolio, since Discover cardholders tend to rack up fewer bucks on their plastic. Butler says it's just a matter of time before Discover holders show the same profile as Visa and MasterCard holders. WITH 17% of the bank card business, Citibank has the most to lose from the threats posed by AT&T and Discover, and the company is busily trying to market its way into customers' hearts. Since 1987 the company's advertising has beat the drum of ''Not just MasterCard . . . Citibank MasterCard.'' Like AT&T and Amex, Citi believes its service will keep customers from deserting. Says James L. Bailey, a Citi group executive: ''The credit card customer is more service sensitive than price sensitive.'' Bailey openly wonders whether AT&T's price strategy will buy it a low-rent customer, one less likely to maintain an account balance that earns interest fees. The backbone of Citi's 34% compound annual growth in receivables through 1989 has been its strategy of giving a card to just about anybody who asks for one. The company is spending madly to acquire new cardholders by flooding the market with applications: Some 700 million mail solicitations went out last year. ''Why do people drink Coca-Cola?'' asks Bailey. ''Because it's everywhere.'' The strategy has a cost. Citi is willing to charge off 4% of its outstanding debts, about $1 billion in 1989, as uncollectable. With new U.S. customers getting harder to snag, much of the industry's future growth must come from getting customers to use cards in new places. Bank cards are used an average of only 2.3 times a month, a rate that hasn't changed much since 1970. Says Visa CEO Russell: ''We have no penetration in fast payments -- fast food, tolls, movies. There's no time for ka-chunk ka- chunk and getting approval on the phone.'' So Visa and Master are working on systems that short-circuit the standard verification procedure. At a test in a Burger King in Oregon, MasterCard successfully tried a system that gives seven-second authorization for purchases and requires no signature. That's faster than a cash transaction -- and the charge customer typically spent twice as much as the cash customer. Such a quick payment system could do the same everywhere for small purchases. Even Amex is in the game, rapidly expanding the number of retailers that accept the card. The hot rumor is that Amex desperately wants privileges at Wal-Mart. Amex says it wants to be accepted wherever consumers want it, including Wal-Mart. Discover, however, recently beat Amex to the punch. Looking further ahead, credit card companies see magnificent opportunities around the world. They are positively drooling over Europe. Compared with the U.S., Europe is virgin territory, where most consumers wouldn't think of paying with anything but cash for big as well as small purchases. Sales there increased twice as fast as in the U.S. last year, and the number of merchants who accept cards has been increasing rapidly. The Europeans are lucky. Americans had to put up with high fees and so-so service for years until the competition caught up. But now the cardholder is the boss, and the industry will be better off for it.

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