Posted on 01/31/2004 2:18:00 PM PST by College Repub
Financial Services
American Express Backs Up Its Bark
NEW YORK - American Express and MBNA delivered a seismic shock to the credit card system today.
Wilmington, Del.-based MBNA (nyse: KRB - news - people ), the second-largest U.S. issuer of Visa and MasterCard credit cards after Citigroup (nyse: C - news - people ), will now add American Express (nyse: AXP - news - people ) cards to the mix. MBNA will be the first U.S.-based bank to issue cards on the American Express network.
Over the course of 2003, AmEx executives said that the company was working on several bank partnerships for its cards. But few industry watchers expected that it would head for the top of the heap. AmEx Chairman and Chief Executive Kenneth Chenault called the deal "transformational" in an interview with The Associated Press.
While financial terms were not disclosed, MBNA will not only issue American Express-branded cards but will also own, manage and service those card loans. This means that AmEx, which closed 2003 with $38.5 billion in total managed loans, can grow its card usage and merchant fee revenue without the added burden of rate-sensitive lending. On AmEx's fourth-quarter conference call Monday, finance chief Gary Crittenden indicated that the company is shifting its focus from lending to spending, according to A.G. Edwards analyst Matthew Park.
In its current structure, AmEx owns both the card network and the consumer loans. This gives the company total control of its products, but also relieves it of customer delinquencies and charge-offs. In the partnership with MBNA, AmEx will share revenue from interchange fees charged for merchant access to the network, but will not touch the consumer loans.
"They'll get the ride without the headache," said Robert McKinley, CEO of Cardweb, a news Web site, referring to the difficulties of managing an interest rate-sensitive product.
This is a similar format to the networks operated by Visa USA, Visa International and MasterCard International. The companies, owned by member banks, operate both credit and debit card networks in which loan processing is open to the banks themselves or firms like FirstData (nyse: FDC - news - people ) or Total System Services (nyse: TSS - news - people ).
AmEx, however, has been kept out of the loop. In the U.S., Visa and MasterCard restrict member banks from issuing cards on the AmEx or Discover networks. Discover is a unit of Morgan Stanley (nyse: MWD - news - people ).
In 2001, the U.S. Department of Justice successfully prosecuted an antitrust case against Visa and MasterCard to remove this policy. The decision was recently affirmed by an appeals court, but the two companies have indicated that they intend to appeal to the Supreme Court.
In a statement, MasterCard said that it believes its Competitive Programs Policy, which lies at the heart of the DOJ complaint, is pro-competitive and continues to be in the best interest of consumers, merchants and issuers. A representative for Visa USA did not return a call seeking comment.
According to MasterCard, AmEx and MBNA have jumped the gun and assumed the exclusionary rule will be set aside for good.
"American Express has to be careful that the relationship doesn't cannibalize their current customers," said A.G. Edward's Park. But, if the company is truly shifting more toward processing than lending, "investors are often willing to pay a higher multiple for processors."
MBNA ended 2003 with $86 billion in managed U.S. card loans. Citigroup managed $149 billion domestically, including private label cards. Bank One (nyse: ONE - news - people ) closed the year with $76.4 billion in total managed loans. Loans reported on a managed basis represent both receivables owned by the lender and those loans securitized and sold to investors.
By starting with the largest independent card issuer, AmEx could rapidly infiltrate smaller issuers that are getting crowded out of the card market.
The pending mergers of J.P. Morgan Chase (nyse: JPM - news - people ) with Bank One and Bank of America (nyse: BAC - news - people ) with FleetBoston (nyse: FBF - news - people ) are reshaping the top end of the card lending business in the U.S.--shifting the competitive power in the market from the card networks to the issuing banks.
This, in turn, could return the pressure on AmEx, which holds itself to high credit standards for card issuance and charges merchants roughly 2.6% for access to its network. MasterCard and Visa charge around 2.0%, and Discover runs about 1.9%, according to CardWeb's McKinley.
Following the announcement, shares of American Express rose $1.25, or 2.5%, to $51. Shares of MBNA rose 35 cents, or 1.3%, to $26.85.
AMEXCO has been very, very good to me ever since I whutched them in a minor law suit 33 years ago.
No man or his property was safe for awhile there.
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