American Express Co., which is free to go after a new range of bank customers after a court ruled Tuesday that Visa and MasterCard illegally monopolized the bank-card business, probably will try to cherry-pick bank card portfolios and segment out high-spending accounts for the upper-class Amex treatment, analysts said.
It gives them the opportunity to look for partners that would like to segment their portfolio, said John McDonald, an analyst at UBS Warburg. Amex charges merchants a higher discount fee than Visa, leaving a bigger pie to be split between the bank and the network, he said.
But such action likely will have to wait for an eventual resolution of the long-running antitrust case.
Discover Financial Services Inc. and Amex hailed the decision by Judge Barbara Jones of the U.S. District Court for the Southern District of New York. David Nelms, the president of the Morgan Stanley Dean Witter & Co. division, said in a press statement that the ruling against Visa and MasterCard association rules that prevented banks from issuing other cards was a vindication for other companies.
We look forward to the additional consumer choice that will result from the elimination of all their anticompetitive rules and practices, which have been selectively applied only to Discover Card and American Express, but not to each other or to Citibank Diners Club, he said. Discover has long maintained that Visa and MasterCard have severely hampered competition among card companies.
Kenneth I. Chenault, American Express chairman and chief executive officer, echoed that sentiment in his own press statement, in which he said that Visa and MasterCard have broken the law, and that the ruling will ultimately lead to more competition and a broader choice of innovative products.
Mr. McDonald said that the potential for higher payments for transactions may appeal to issuers of cards that typically have a high amount of transactions and lower monthly balances, such as frequent flyer cards. These cards may benefit from American Express high profile in the travel industry, he said.
American Express may replicate its overseas partnerships, in which it adapts its role to suit its bank partner, he said. Sometimes it is active, sometimes acting like a network only.
Christopher Keenan, the director of marketing for DeNovo Corp., a Wilmington, Del., marketing and advertising consulting firm for card issuers, said the decision also could initially lead to a segmentation of card portfolios. Issuers could look at their portfolio and say, for example, If I did not have a large share of the traveling segment, I might want to do a deal with Amex to increase that part of the portfolio, he said.
Others downplayed the impact of the decision.
Some issuers with select niches have considered using the American Express brand, but typically for existing issuers, American Express has not been considered, said Jerry Craft, the president and CEO of InfiCorp., an Atlanta credit card management company. It lacks 100% acceptance as compared to Visa and MasterCard.
In the same way, Discover is unlikely to make big strides any time soon, because it does not have a worldwide market, he added.
James L. Accomando, the president of Accomando Consulting Inc. of Fairfield, Conn., also said that the decision would not significantly change the banking landscape. It will just make the covert relationships that some banks have had with American Express more overt, since the ruling allows banks with Visa and MasterCard portfolios to court Amex, he said.
I dont see a huge flurry of activity, even if the ruling is upheld on appeal, he said. I see the financial institutions remaining extremely loyal to the franchises theyve developed over many years.
Those early adopters making deals with American Express or Discover could have financial rewards, but once everybody does it, it levels the playing field, Mr. Accomando said.
The ruling came at a particularly propitious time for American Express, which has taken some hits recently. Theodore Iacobuzio, a senior analyst at TowerGroup, a Needham, Mass., research firm, said Amex reported big junk bond losses in the first quarter, and had lower travel/entertainment revenue in the past few months.
Today, American Express has just one agent relationship with a U.S. bank, Bank of Hawaii, which sold its $226 million card portfolio to Amex late last year. At the time, Visa responded to the sale by releasing a survey it conducted in Hawaii that found that consumers liked Visa better than American Express.
Spokespeople for credit card executives said they were hesitant to speak in detail about the ruling just yet. Though the 157-page decision had been eagerly awaited for nearly a year, its complexity gave executives quite a bit to think through.
Paul Allen, executive vice president and general counsel of Visa U.S.A., said the association was disappointed at Judge Jones decision on its bylaw 210(e), which prohibits Visa member banks from issuing American Express or Discover cards.
This final judgement doesnt go into affect for 90 days. We are hopeful we will get a stay with regard to 210(e), he said. Assuming we get a stay and an appeal, nothing changes for the duration of the appellate process, which could be 2.5 years.
Mr. Allen also said it was highly likely the association will appeal the ruling.
Noah Hanft, MasterCards senior counsel, reiterated his comment from Tuesday that MasterCard was still seriously considering an appeal, and he said that nothing was apt to change until the court case was resolved. It appears that there would be no basis to terminate any of the agreements until a full right to exhaust the appeals process was taken.
A Capital One Financial Corp. spokeswoman said the companys executives were following the ruling closely. We are always interested in the potential for new products and services. She would not comment further.
A spokesman for Metris Companies Inc. said that its president, Ronald Zebeck, who is also a member of MasterCards board, had to absorb the ruling from more than one perspective.
Lawyers commenting on Judge Jones decision pointed to the impact it would likely have on an antitrust suit brought by U.S. merchants against Visa and MasterCard. Parties in the suit, commonly referred to as the Wal-Mart case, for its lead plaintiff, are waiting for a decision the suits class certification potentially of 4 million plaintiffs from the U.S. Second Circuit Court of Appeals in New York, which heard arguments in February.
While the merchants do not concentrate on the same governance and exclusionary policies of the associations that the Justice Department did, certain findings of fact in the governments case are crucial to the Wal-Mart case, and could open the door for more antitrust litigation.
Lloyd Constantine, the lead attorney for merchants in the Wal-Mart suit, said that six findings made by Judge Jones hit exactly the same issues as are raised in his case. In addition to the determination of market power, they including findings that debit cards are separate products from credit cards, and that interchange fees (per transaction fees set by the associations) are imposed on merchants.
Interchange fees could be the basis for determining damages in the Wal-Mart case. The retailers charge that the associations violated antitrust law by tying together two separate products, debit cards and credit cards.
The associations honor all cards rules compel merchants to accept all card payments against their own interest, the suit claims. In particular, the merchants complain that interchange fees tied to signature-based debit cards are unfairly high. The retailers want the card giants to allow them to stop accepting signature-based debit cards, and to pay them damages based on what they have already paid in fees.
In her opinion, Judge Jones stated that debit cards and credit cards are indeed separate products. As for interchange fees, she pointed to the predicament of large retailers such as Target and Saks Fifth Avenue.
Under judicial rules, the presiding court in the Wal-Mart case, Judge John Gleeson of U.S. District Court for the Eastern District of New York, will have to give serious consideration to Judge Jones opinion, since the cases share many of the same witnesses, evidence, and issues.
This was the playoff round, said David Balto, a partner in the Washington offices of White & Case and the former policy director of the Federal Trade Commission. The World Series is the Wal-Mart case. Why? Because in Wal-Mart, theres money involved.
