BJ'S AND BANK TRADE SUITS IN CREDIT-CARD DISAGREEMENT

DEENA AMATO-McCOY

NATICK, Mass. -- A legal disagreement over the terms of a co-branded credit-card contract has high stakes for 12,000 customers of BJ's Wholesale Club here. These cardholders face not having their cards renewed by the card issuer.

The controversy focuses on the profitability of the credit cards for the card issuer, Beneficial National Bank, Wilmington, Del., which does not want to renew accounts of customers who have not accrued finance charges during the previous 12 months.

BJ's, which launched its co-branded MasterCard in 1995, has signed up 260,000 cardholders to date, according to Julie Somers, spokeswoman for BJ's. The card is linked to an incentive program that rewards customers each time they charge purchases to the card.

"Our members that have cards stamped with an expiration date of Sept. 30, 1997 have received notification that if they pay their balances on time, their cards will be canceled," said Somers.

An additional 30,000 cards are subject to nonrenewal by the end of the year.

Beneficial filed a suit Sept. 19 in the Superior Court of Delaware claiming its right not to renew the accounts. In response, BJ's Wholesale Club filed a suit, alleging breach of contract, in the Massachusetts Superior Court Sept. 24. BJ's was denied an injunction Sept. 30 to prevent cancellation of the 12,000 cards, but plans to continue the lawsuit.

According to Beneficial's court documents, BJ's co-branded credit-card program was expected to generate profits for both companies. Instead, the document states, while the program was successful for BJ's, Beneficial suffered substantial losses.

"What is at stake here is that Beneficial is losing millions of dollars on this credit-card program, while BJ's is seeing huge success," said Robert Wade, a Beneficial spokesman. "All Beneficial is looking for is fairness in sharing costs of the program and ending up with a win-win situation for everyone."

While several retailers are exploring co-branded credit cards, industry consultant Carlene Thissen, president of Retail Systems Consulting, Naples, Fla., warns there are risks involved.

"What a bank does reflects on the retailer directly," Thissen said. "If a bank decides not to renew certain accounts, especially nonrevolving customers who have the best credit record, that could leave a bad impression of the retailer in the consumer's mind."

BJ's claims that Beneficial's decision not to renew these accounts is a breach of contract.

"We are, and our customers are, upset that good customers are being penalized for paying their balances on time," said Somers. "Our first priority is our members. We feel the most effective way to fight this is with legal action."

However, Beneficial disagrees. "BJ's was unwilling to make the necessary adjustments in their [credit-card] program to assure profitability for both BJ and BNB USA," said Wade in a statement. "Filing our lawsuit was regrettable, but the action is necessary."

BJ's and Beneficial have been in negotiation on this topic for several months but thus far have failed to reach an agreement on how to handle cards paid in full each billing cycle, according to Somers.

"This issue was supposed to go to mediation and instead Beneficial sued us," she said. "We have a contract with Beneficial until the year 2000. Halfway through they are changing the rules. They are not fulfilling their obligation to us or our members -- that is why we are suing Beneficial for breach of contract," said Somers.

Wade said that Beneficial would still like to work out differences with BJ's. "There is more than a year of our effort in this project. We want to make this work with BJ's," he said.

Through the card's incentive program, customers earn 2% in "BJ Bucks" for purchases at BJ's, and 1% for purchases elsewhere. "Customers receive BJ Bucks in $10 increments and they are redeemable for items in our stores," Somers explained.

The card has no annual fee and has an interest rate of 10.9% over the prime rate. BJ's is continuing to accept applications for its co-branded cards.