NEW YORK ( TheStreet) -- Citigroup ( C) is offering rebates on interest rate charges to customers who meet certain minimums on their frequency of card use. The move, which comes even as the company has recently raised rates on many accounts, is symbolic of the complexity of the ongoing challenges facing card issuers. It's no secret that Citigroup and other banks have been raising interest rates on their card products, cutting borrower's credit lines and implementing other fee changes. The forces at work are twofold: They are trying to make up for large losses on delinquent accounts, but are also looking to position themselves ahead of the implementation of new credit card laws expected to become effective early next year that will provide greater protections for consumers. Citigroup in some cases has raised interest fees as much as 29.99%, according to media reports. But it's still ironic that the card issuers -- namely large banks like Citigroup, JPMorgan Chase ( JPM), Bank of America ( BAC), Capital One ( COF) and others -- are taking these steps and trying to entice their customers to use the cards more even as they feel the pain of charge-offs brought on by record unemployment figures. In conjunction raising its rates, Citigroup is planning to offer rebates on monthly interest rate charges to existing borrowers who spend a monthly minimum amount on Citi-branded cards. The rebates and spending minimums will depend on the cardholders' credit history and will be based on interest charges for a card's entire balance not just new charges. Citigroup says the rebates are an example of how they are offering customers "greater choice and more control" over their accounts.
"Nearly all of our customers now have the opportunity to earn back a portion of the increase each month," Citigroup said in a statement. "Eligible customers who do more business with us will have the most opportunity to reduce their rates." Nearly half of Citigroup's customers will be eligble to earn back between 50% and 100% of the interest rate increases, the company says. Citigroup is also offering balance transfer options to certain card users receiving higher rates. If a customer moves a balance from another card issuer onto their Citi card, the company will apply the lower balance transfer rate to the existing balance on the card. "We want to reward customers for doing more business with us," a company spokesman says. In addition, customers can "opt out" of the changes and choose to shut down the card, but still make purchases on the card until its expiration date, the company says. Finding ways to get customers to put more on their credit cards is a sentiment echoing throughout the card industry. Consumers have slowed their spending on credit because of the economy, and are increasingly using their debit cards. Card issuers are also looking to alter their card business models as large regulatory reforms will change how issuers make money -- essentially the elimination of risk-based pricing -- and give more transparency among fee changes are set to begin in February from the passing of the Credit Card Accountability Responsibility and Disclosure (Credit CARD) Act in May.
Given the changes in the industry, card issuers need to focus on opportunities to increase revenue they generate from interchange fees, meaning that they need to drive more transaction volume, says Ron Shevlin, senior analyst at Aite Group. "Citi's imposing spending minimums, not only do they try to drive the transaction volume but there is a mix of carrots and sticks. The stick being, 'Hey you're going to get hit with a higher interest rate unless you spend the money," Shevlin says. Even though the move is risky, given that some cardholders could decide to close their accounts, "it's a smart business move," he says. "They have to do this to drive the volume." The topic of interchange fees -- the fees paid by a merchant's bank to a customer's bank after they make a purchase on an accepted card network -- is a dicey subject for card issuers and payment networks like Visa ( V), MasterCard ( MA), American Express ( AXP) and Discover ( DFS). Since payment networks set the pricing of interchange fees for their bank customers, there has been much controversy surrounding alleged interchange abuses, including a host of lawsuits against the firms alleging overcharges. Dennis Moroney, research director in bank cards at TowerGroup, says that card issuers should still be able to make money on customers by implementing more fees, such as annual fees, pay for privileges, even possibly charging customers if they don't use a card enough. Bank of America is tacking on annual fees to some of its credit card customers in an effort to what works and what doesn't, for both it and its cardholders. JPMorgan Chase, which is among those issuers to lift interest rates and lower credit lines, has also created card products and services that are tailored to specific customer segments. The company says that it doesn't matter whether a customer uses a JPMorgan Chase debit or credit card, as long as it uses one or the other. --Written by Laurie Kulikowski in New York.