MBNA-AmEx Deal Helps Them More Than It Hurts the Bank Networks

The card-issuing alliance American Express Co. and MBNA Corp. announced yesterday will benefit the two financial-services companies more than it will hurt Visa and MasterCard, some observers note. Although MBNA, second only to Citigroup Inc. as a credit card issuer, has already said it will seek to convert current cardholders to new cards bearing the AmEx brand, that conversion is likely to be highly selective and limited to portfolio segments most likely to be attracted to the AmEx brand and acceptance network, says Les Riedl, an analyst at Speer & Associates Inc., a consulting firm in Atlanta. At least in the short run, as a result, the alliance “is not going to create any major change” in transaction-volume market shares among AmEx, Visa, and MasterCard, he says. He cautions, though, that “over time it will have an impact” on the bank card networks as MBNA converts more and more cardholders. More important short term, he notes, are the benefits of the deal for the two principals. AmEx harnesses the massive marketing power of the MBNA card machine and gets access to its 40 million cardholders. MBNA gets to use the brand value of AmEx to boost retention among its highly segmented portfolios, which include scores of card programs cobranded with universities, sports organizations, and other so-called affinity groups. “That can be a significant retention tool” for MBNA, says Riedl. At the same time, the deal is likely to prompt other banks to look more closely at partnering with AmEx. A federal court decision striking down a Visa and MasterCard rule preventing members from issuing cards with AmEx and Discover Financial Services Inc. was upheld by a federal appeals court last fall, and this month the court refused a request from the bank card companies to review that decision. The bank card networks have said they plan to appeal the decision before the U.S. Supreme Court. MBNA and AmEx say they will hold off on marketing the new cards until this final appeal is decided, but they expect to have cards issued by the end of the year. Riedl says only large institutions that have “negotiating clout with American Express” are likely to make deals, and notes that MBNA may have locked in exclusivity for a time as part of the agreement in return for its commitment of marketing resources to the alliance. Banks often mentioned as targets for AmEx include Citigroup, Capital One Financial Corp., and Bank One Corp., which announced last week it will merge later this year with J.P. Morgan Chase & Co. Riedl also expects the MBNA-AmEx agreement may cause merchants that don't accept AmEx cards to reconsider, though the higher discount fees charged on AmEx transactions will continue to be a stumbling block for many. Specific terms of the agreement between AmEx and MBNA weren't released, but MBNA will issue the AmEx-branded cards and own the receivables they generate. Observers speculate the two companies will split interchange income evenly. Currently, MBNA's portfolio is almost evenly split between MasterCard and Visa, with a slight tilt toward the former. AmEx already has such bank-issuer agreements in place with 79 institutions outside the United States. Of the 57.3 million cards it has issued, 35.1 million are in the U.S.