MBNA Corp.'s landmark deal to issue American Express-branded credit cards shows the dramatic changes envisioned by years of litigation against Visa U.S.A. and MasterCard International starting to take shape even before the court case is over.
The impact of the decision by the second-largest U.S. credit card issuer to sign up with American Express Co. goes well beyond marketing. In a key victory for Amex, MBNA plans to convert a big chunk of its portfolio to the American Express network, which yields a higher interchange on transactions than either Visa or MasterCard, even though its merchant network is considerably smaller.
The companies said that MBNA was a good candidate for an American Express partnership for several reasons. The monoline caters to superprime borrowers and does business in foreign countries. Bruce L. Hammonds, MBNA's chief executive officer, said that many of his Wilmington, Del., company's 40 million cardholders are "the high-spending customers" American Express favors.
"We will solicit many of those for conversion," Mr. Hammonds said in a joint telephone interview Thursday morning with Kenneth I. Chenault, the chairman and chief executive officer of American Express.
Mr. Hammonds said that MNBA has not figured out how many customers will be converted but that it will be "a fairly significant percentage."
Amex has other bank partners. Three years ago, it purchased the card portfolio of Bank of Hawaii, a subsidiary of Pacific Century Financial Corp., which had earlier issued Visa cards. Through its Global Network Services unit, Amex can also sign up banks outside the U.S. Partners through that arrangement include Banco Popular and Canadian Imperial Bank of Commerce.
Mr. Chenault said the MBNA-American Express combination "will be very successful in bringing in new customers." New card programs created by the partnership "will generate additional high spend from already high-spending customers," he said.
The changes will not happen right away. The companies say they will not start mailing offers for the MBNA American Express card until the appeals process in the Justice Department's antitrust case against Visa and MasterCard is finished, as they expect to happen this year if the Supreme Court lets the lower court rulings stand. In the meantime, the companies say, they will build the necessary infrastructure for when the light turns green.
Mr. Hammonds said MBNA will use Amex products to convert and acquire cardholders. "We can solicit [current] customers for an additional American Express card, and then we'll be going out to the affinity groups and soliciting their members - even those that do not today carry an MBNA product," he said.
Furthermore, MBNA said it plans to market Amex cards in Canada, Spain, and the United Kingdom. Amex cards "will enable us to grow faster than we had anticipated" in those regions, Mr. Hammonds said. "It should give us a jump start in a new market like Spain or in some of the other new markets we might enter."
Analysts said the company may also use Amex products to expand its small-business loan portfolio.
Amex and MBNA would not discuss the terms of the contract, but some analysts speculated that they will split the interchange fifty-fifty. Mr. Hammonds called the agreement "the right kind of deal."
He had hinted at such a deal as recently as two months ago. At a financial services conference in November, Mr. Hammonds said MBNA would issue Amex cards only if it could reach an attractive profit-sharing arrangement.
At the time MBNA was one of several large card-issuing banking companies that were considered likely partners for American Express. Others whose names were mentioned during the Justice Department case included Bank One Corp., Citigroup Inc., and Capital One Financial Corp.
Under the deal that was announced Thursday, MBNA, now a partner of Amex's Global Network Services business, will continue to own, market, and manage the card accounts it generates under the Amex brand. It will market them through the vast network of partnerships it has with affinity groups, such as universities and professional trade associations. At yearend, MBNA had $118.5 billion of receivables, up 10.5% from a year earlier.
"Neither company is doing this from a standpoint of weakness, so if you look at our financial performance and our business performance this year, both of us are growing at top of the pack," Mr. Chenault said.
He said his company is open to working with "a range of banks" of all sizes and in different types of deals. "I think we can offer them some outstanding terms," he said. Bank partners, however, should be "focused on high-spending, affluent customers," he said; a subprime American Express card is a "highly unlikely" product.
The conversion of a substantial number of accounts to Amex would chip away from the volume of Visa's and MasterCard's networks, which have long carried most bank card transactions. It could also embolden other U.S. banks to break ranks with Visa and MasterCard, which used bylaws to block members from issuing American Express or Discover cards.
In October 2001 a federal judge struck down those bylaws. An appellate court affirmed the ruling last September. As a final recourse, Visa and MasterCard plan to petition the Supreme Court - a process that the Justice Department has said could prolong litigation by up to nine months.
MBNA chose not to wait. "We do believe that there is probably a competitive advantage in getting out there in front of other" issuers with an American Express product, Mr. Hammonds said. "As this big court case winds down, we'll be putting the technology together so that we're ready to launch at the end of that process," he said.
Visa's and MasterCard's "legal arguments are running their course," Mr. Chenault said. "We believe strongly that the legal issues will be resolved in 2004. And when those are resolved, we will be ready with MBNA to launch these products." Other bank deals will take place this year, he said.
Morgan Stanley's Discover Financial Services Inc. says it is waiting for legal clearance before finalizing bank partnerships. David Nelms, CEO of the Riverwoods, Ill., company, said in a press statement:
"We have been having discussions with Visa and MasterCard issuers regarding third-party issuance of credit, debit, and other payment cards over our network. We are looking forward to completing such deals when the stay of the court's decision overturning Visa and MasterCard's anticompetitive rules is lifted."
In a news statement, MasterCard said the MBNA-American Express announcement implies that the companies know "what the Supreme Court will do."
Daniel Tarman, a vice president at Visa U.S.A., said that Visa "will continue to vigorously compete for" its issuers' business.
According to The Nilson Report, a card industry newsletter based in Oxnard, Calif., MBNA's portfolio is 52% MasterCard and 48% Visa. MBNA holds a seat on MasterCard's U.S. board of directors and on its international board. It does not have a place on Visa's boards.
MBNA does not have a "dedication" agreement with either company that would commit a certain percentage of its portfolio to one brand.
