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Pentagon Federal Credit Union has agreed to become the first credit union to issue American Express cards to its members.
November 16 -
Discover Financial Services, whose card-issuing business has held up well in this recession compared to its rivals', is now also trying to make its weaker network business a contender.
February 24 -
Two years ago this week the Supreme Court's refusal to hear an appeal by MasterCard International and Visa U.S.A. Inc. in the Department of Justice antitrust case freed U.S. banks to partner with other networks.
October 5 -
American Express Co. had been pitching a shutout over Discover Financial Services Inc., in terms of issuing partnerships, in the months since the Supreme Court upheld an antitrust verdict over Visa and MasterCard.
January 24 -
Only a month after the Supreme Court decision that cleared the way for American Express Co. to collaborate with bank card issuers, the company's partnership with MBNA Corp. is bearing fruit.
November 8 -
With American Express Co. and Discover Financial Services eager to enter the bank-issued card market, observers are speculating about how the two companies will affect the industry - and which one will benefit the most.
October 8 -
One consequence of the Supreme Court's refusal to hear an appeal of the antitrust suit against MasterCard International and Visa U.S.A. was predictable: more litigation.
October 5 -
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.
January 30 -
Perhaps the most significant effect of the judge's decision this week in the Visa-MasterCard antitrust trial will be to throw the battle for market share among the four major card brands up in the air.
October 12 -
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.
October 11 -
In a big win for American Express Co. and Discover Financial Services and a potentially major blow to the underpinnings of the two bank card associations a federal judge ordered Visa and MasterCard to abolish policies that prevent banks from issuing other card brands.
October 10
Five years ago, American Express Co. and Discover Financial Services clinched a landmark antitrust victory allowing them to expand their network businesses. Now, the protracted court battles preceding that decision look like the easy part.
October marked the fifth anniversary of the Supreme Court's refusal to hear an appeal by MasterCard International and Visa U.S.A. Inc. in the Department of Justice antitrust case, and the eighth anniversary of the original ruling. That decision freed Visa and MasterCard's member banks to form partnerships with other networks, including Amex and Discover. At first, partnerships proliferated. In 2004, Amex executives even heralded the company's first such link-up, with MBNA Corp., as "transformational."
But since those heady days, progress for Amex's and Discover's network businesses has been difficult to gauge, and after the initial flurry of deals with issuers, the pipeline of issuing partners has dried up.
Indeed, when Amex said this month that it had signed up another issuing partner for its network — Pentagon Federal Credit Union — it was its first such deal in three years.
Executives at both Amex and Discover acknowledged the difficulties their companies have faced in signing up more partners in recent years and blamed the banking crisis for intensifying these difficulties. The number of cards on their third-party networks is still far behind the now-public Visa Inc. and MasterCard Inc.
None of this is to say Amex and Discover cannot still capture a much bigger share of banks' business. But if the last five years are any indication, doing so will take time.
"It's a long and difficult path. Have American Express and Discover severely gored Visa and MasterCard? No. But are they competing with them? Absolutely," said Eric Grover, the principal at the consulting firm Intrepid Ventures and a veteran of Visa. "Five years sounds like a long time, but in the payment network space, it's not that long."
Another headwind: now that Visa and MasterCard are public companies, they are nimbler rivals. "The network space is a lot more competitive, and it's commercial," Grover said.
Amex- and Discover-branded cards accounted for 2% of the direct-mail offers other issuers sent last quarter, according to Mintel Comperemedia, a Chicago firm that tracks direct mail. This share has remained relatively flat since 2005.
The recession's impact on all types of card acquisition direct mail has been dramatic, and it hurt Amex and Discover along the way. In the third quarter of 2006, bank issuers sent out 2.1 billion card offers, including 83 million offers for Amex- or Discover-branded cards, according to Mintel; last quarter, Amex- and Discover-branded cards accounted for barely 10 million of the 391 million offers mailed.
American Express started to overcome its three-year dry spell this fall, with a series of small deals. At least one of those deals came at the expense of Visa and MasterCard, who have both introduced premium brands of their own to compete with the affluent appeal of Amex's brand.
"There's a cachet, there's a prestige, there's a strength with their brand, and we think it aligns very well with our existing members," said Nicole Butler, the vice president of card services and business development at Pentagon Federal, when asked why her credit union chose to introduce its travel rewards card on the Amex network instead of on Visa Signature or World MasterCard.
The Alexandria, Va., credit union issues cards primarily on the Visa network but also offers some MasterCard-branded cards. Butler said that Pentagon Federal considered proposals from both Visa Signature and World MasterCard. "They're strong products," she said, "but we felt that American Express, because we wanted to focus on the travel segment, has really made a greater headway within that industry."
Amex resonates "with a certain type of consumer," she said, "and we really felt that it would be a really good complement to do that with them and to enter this space with American Express versus the others."
MasterCard would not comment on Pentagon Federal's Amex deal. But when asked about the effects of the antitrust ruling, a spokesman said by e-mail: "MasterCard will always defend its business, and we welcome competition."
Visa did not respond to requests for comment.
Pentagon Federal, which now offers a Visa-branded travel rewards card, says it will not forcibly convert this portfolio but will mail offers to the card's holders, inviting them to switch to the Amex product.
Industry members called Amex's deal with Pentagon Federal a strategic victory for the New York credit card company. The credit union has about 400,000 cards in circulation, with $1.5 billion in outstanding loans, and is one of the top 20 U.S. issuers, according to PaymentsSource.com. And the credit union is growing at a time when most issuers have cut back on products and granting credit, aided in part by relatively easy (and inexpensive) entry: Any person can become a member by donating $20 to the National Military Family Association.
"For American Express, landing a major credit union like that is probably a big deal," said Scott Strumello, an associate at Auriemma Consulting Group Inc. "Making progress into this represents a big accomplishment. … Having landed Pentagon Federal, it also says, down the road, it could be that much easier for them to negotiate large deals with other large credit unions."
(Neither Amex nor Pentagon Federal would disclose the deal's terms, but Amex made at least one concession in order to snag its new partner. The companies said that "for a limited time" Pentagon Federal will be the only credit union issuing an Amex-branded card in the United States; they would not specify the period.)
Amex has taken other steps in the past month or two to expand and solidify its network partnerships. Barry Rodrigues, an executive vice president at Amex and head of the Americas for its global network services, or GNS, unit, said Amex also has renewed its contract with Bank of America Corp., which bought MBNA in 2006. And last month it signed a deal with B of A to issue a new version of the premium "Accolades" Amex card for Merrill Lynch wealth management customers.
The introduction of that card was another victory for Amex's network business and its continuing relationship with Bank of America. After the Charlotte banking company agreed to buy Merrill Lynch last year, some industry members speculated that it would phase out its Amex Accolades product in favor of the "deferred debit" Visa card that Merrill offers its wealth management customers. Though the Visa card remains available, the Amex Accolades card now is "the most premium product that Merrill Lynch offers," Rodrigues said.
"Despite the difficult environment, I think we've made solid progress in the United States in becoming the network of choice," he said. "We're been expanding our partnerships … at the same time we've been having conversations with our prospective partners."
B of A did not respond to requests for comment.
Amex executives also said this month that their deal to buy the alternative payments network Revolution Money Inc. could yield new products for its issuing partners, including reloadable prepaid cards.
"What's terrific about this is, this fits very well with the GNS model that we are working with banks, providing them with payment products," Kenneth Chenault, Amex's chairman and chief executive, told reporters on a conference call to discuss the deal. "It just builds out the offerings that we can provide banks."
If nothing else, Amex and Discover benefitted financially from the outcome of the Justice Department case; both companies sued Visa and MasterCard over their bans on third-party issuance and won multibillion-dollar settlements.
But despite the difficulties of recent years, neither Amex nor Discover distanced itself from the "transformational" claim that Chenault made to American Banker in 2004.
"We're well beyond where we ever dreamed we'd be, five years later," Roger Hochschild, Discover's president and chief operating officer, said in an interview this month. "I think at the beginning of the [antitrust] decision the opinion was, it's all about signing the big issuers," but "we felt there was a much bigger picture."
Discover has a few third-party issuing deals, with issuers including General Electric Co.'s GE Money Bank and HSBC Holdings PLC's U.S. operation, but its network focus has, by design or necessity, been more on building its network.
In 2005 Discover bought the Pulse Network LLC debit network, and last year it bought the Diners Club International network from Citigroup Inc. It has practically closed the acceptance gap in the United States by building relationships with merchant acquirers.
"Some of their efforts have been on shoring up their own network and less on landing partners. … That's a huge undertaking for them, but it also positions them very well on an international basis," said Auriemma's Strumello. "They've worked very hard to expand themselves globally. The Diners Club acquisition was a very shrewd move — and once they've integrated that we could see more banks, other than GE, issuing with them."
Without the antitrust ruling, "we would not have been able to acquire Pulse," Hochschild said, "because those banks would not have been able to issue on a network owned by Discover. … We would not have been able to acquire Diners Club, and there were also prohibitions against merchant acquirers, banks acquiring for Discover." Without the ruling, "none of it would have been possible."
