Amex has Uncertain History with Financial Institutions; How Many CUs will Want the Card?

ARLINGTON, Va. – The ability to one day be able to issue American Express Cards through an agent program was said to have been a key reason two credit unions recently sold their credit card portfolios to issuing giant MBNA. The Delaware-based card bank is the only financial institution, so far, to have entered into a relationship with Amex that will allow it to possibly issue American Express cards later this year. But should the courts allow banks and credit unions to begin issuing American Express, at least one card expert advises them to move very cautiously and look before they leap. VISA and MasterCard’s current regulations prohibit their card issuers from offering American Express. The U.S. Justice Department has taken VISA and MasterCard to court about the rule, alleging that it violates Federal anti-trust laws. The Department has won both the original case and the first two appeals, leaving VISA and MasterCard to appeal their case to the Supreme Court. The Supreme Court is expected to announce whether or not it will hear the appeal no later than mid-October. Declining the appeal will leave the lower court’s ruling in place in favor of allowing banks to issue American Express cards. Taking the appeal will keep the case alive for as long as it takes for the Court to hear the case and render a decision. As a VISA and MasterCard issuer, MBNA stands bound by the two associations’ bylaws. Nonetheless, the company and American Express announced an exclusive agreement in January 2004 that would allow MBNA to issue American Express credit cards, a notably different product for most of the American Express brand. The probability that the Supreme Court will either decline to hear the case or eventually rule against VISA and MasterCard has led some to look forward, with MBNA, to a time when credit unions may be able to offer American Express. But American Express’s card history with banks suggests that there may be more pitfalls than many credit unions imagine in offering the traditionally higher end card product. Many credit unions may not realize, for example, that while many have long relationships with American Express through its Traveler’s Checks program, there has been an almost equally long history with banks issuing the charge card. When Banks Issued Amex In the early 1970′s, many larger U.S. banks had agreements with American Express that involved the card company issuing American Express Gold Cards that carried the bank’s name. Amex issued the card and collected the bulk, if not all, of the interchange the card transactions generated. But any unpaid balance at the end of the month rolled over into a line of credit that the bank maintained and against which the cardholder made payments. In many ways it was a product which mimicked the nascent VISA and MasterCard programs, which were then called Bank AmeriCard and MasterCharge programs and were not then as pervasive as they have become later. But gradually, banks began to abandon the card product concluding, according to Jerry Craft, CEO of the InfiCorp and one of the few people still in the card business who have memories that stretch back that far, that they were not making enough money on a product whose brand required a fee and from which they were precluded from earning any interchange. “In the end I think it just stopped making enough money for them, especially compared to VISA and MasterCard, because they owned those brands and issued those cards,” Craft explained. He also explained that American Express hurt its relations with banks, in his view, by never offering them access to the sorts of cardholder reward programs that have helped make American Express Cards famous. Banks, in what amounted to agent programs with American Express, had to generate their own reward and incentive programs which in turn burdened the program with more expenses that the banks could not recoup through Interchange. By the end of the program, he explained, American Express shut down the remaining programs that were left and VISA and MasterCard put its policy which precluded its issuers from issuing other cards which is the subject of the Justice Department lawsuit into place. Craft’s knowledge of the history of American Express and banks played a role in InfiCorp’s reluctance to seek a relationship with American Express in its own right. Like MBNA, InfiCorp is a strong competitor for credit unions’ card portfolios and, it could be argued, would benefit from also being able to issue American Express cards eventually. But Craft noted that his firm remained cautious because the mixed history of American Express and bank issuers is not limited to 30 years ago but has included recent incidents as well. Early in 2002, the $300 billion Canadian Imperial Bank of Commerce began issuing American Express cards, only to stop issuing them and re-branding the cards it had issued in 2004 because the program’s results had been weak. At the time, representatives of both American Express Canada and the bank said that the program had not met either company’s expectations. Like previous arrangements with banks, American Express remained in control of the brand and the lion’s share, if not all, of the interchange from its network services for the cards. Crucially, also as before, the bank does not appear to have been given access to any of the cardholder incentive programs that American Express had developed and which helped drive card use. Canadian Imperial was expected to come up with its own programs, Craft explained. The bank offered a 1% cash back rewards program, but also saddled the card with a relatively high 19.5% interest rate, according to press releases announcing the card’s roll-out. Craft acknowledged that there was no reason to suppose that American Express would necessarily structure any future deals with banks in the same way that it has structured previous arrangements, but there is every reason for credit unions and banks in the U.S. to remain cautious. Craft also believed the card market may prove more challenging for American Express than the card company has considered. VISA has begun to press forward with its Signature card line, a product which is clearly aimed at the higher-end cardholders which have traditionally held American Express cards, he noted. -