WASHINGTON - The Supreme Court this week opened the door for credit unions to begin to issue American Express cards, but how many will choose to do so or be able to do so remains very uncertain. The Court made the decision by refusing to review a lower court ruling that held that Visa and MasterCard's policies of not allowing their issuers to issue other cards violated U.S. law. The Court's decision had been anticipated by many card analysts and at least two credit unions sold their card portfolios to MBNA in part because they anticipated being able to issue American Express cards. Currently MBNA is the only financial institution in the country to have an established card issuing agreement with the card brand. "Today is an historic day for the card payments industry in the United States," wrote Ken Chenault, CEO of American Express in an October 4 memo to the card issuer's employees. "The Supreme Court has decided it will not hear Visa and MasterCard's appeal in the government's antitrust lawsuit against them. This decision means the end, once and for all, of Visa and MasterCard rules that have prevented banks from issuing cards on rival networks. In effect, the Court has decided that these rules are illegal and must be abolished. The appeals are over. A new era of greater choice for U.S. consumers and financial institutions has begun." Visa responded by reiterating Visa CEO's Carl Pascarella's previous message that American Express does not have a market access problem, it has a product problem. (See sidebar). "Today's ruling doesn't change the fact that American Express still faces the problem it has always faced: consumers who want an American Express card, despite being accepted at millions fewer merchant locations than Visa worldwide, either already have one, or know how to get one," said Dianel Tarman, senior vice president with Visa. "Access to the market has never been American Express' problem - they have a product problem. They have cultivated a reputation of higher prices and exclusivity that the broader consumer market and many merchants have not embraced," Tarman added. MasterCard's general counsel, Noah Hanft made a similar point. "American Express may, in the short run, be able to induce a small number of financial institutions to experiment with American Express issuance in the United States," Hanft said. "However, we believe that the vast majority of issuers, just like those outside the U.S., will realize that these arrangements stand to benefit American Express more than it benefits them or their cardholders." For its part, American Express has said that it is open to working with large, medium and small financial institutions, including credit unions, but Chenault's October 4 memo didn't mention credit unions by name. On the one hand in the memo American Express appeared to be looking for the sorts of loyalty and brand affiliations that credit unions have long enjoyed with their members. On the other hand, the card issuer is also explicitly looking for "high-spending cardmembers" which may be the case in only a minority of credit unions. Chenault said American Express would be looking for card issuing partners who have a high standard of service to their customers, strong marketing expertise and a quality customer base, and affinity with the American Express brand image of quality, security and trust. But the memo also said American Express will "only work with partnerships that are compatible with our brand and can support or focus on being the network of choice for high-spending cardmembers." Peter Godfrey, president of the card issuer's Global Network Services said that American Express definitely wanted to work with credit unions and he cited the recent decisions by two credit unions to sell their card portfolios to MBNA, in part because of the opportunity to offer their members American Express cards on an agent basis through MBNA. "We are reiterating our willingness to work with financial institutions of all sizes," Godfrey said. "We are willing to work with credit union leagues as well as individual institutions," he added. Obstacles to a CU-Amex Connection Godfrey's observations about American Express' willingness to work with credit unions may turn out to be important because credit unions may need to enter into agent relationships to work through their leagues in order to issue American Express. In his October 4 memo, Chenault said that American Express would only license the use of its card and logo to the card issuers and that the company would not allow the issuers to use its highly popular rewards and bonus programs. In countries where it has a strong proprietary card presence, like the U.S., American Express grants their partner a license to issue American Express-branded cards, Chenault explained. "We process transactions and provide access to our global merchant network," Chenault wrote. "We also maintain sole responsibility for signing and servicing merchants. The issuing partner owns the cardmember relationship, services the cardmember accounts, provides billing and credit management, designs card product features and creates the advertising and marketing programs to promote them." "Membership Rewards and other features designed specifically for our proprietary cards will not be available to our bank partners in the United States," he added. "Our bank partners develop their own compelling reward and loyalty programs for these products, with our support and consultation." So, depending on the details, the licensing fee to American Express combined with the need to develop its own rewards and marketing program might make it extremely expensive for individual credit unions to issue American Express and it might make it much more popular to work through a League or agent relationship. "We are certainly open to the possibility of working with American Express, if that is what our members want us to do," said Kim McCumber, manager of card services for the New York Credit Union League. Though she emphasized that the League's members have not yet indicated an interest, McCumber said she began to think about the possibility last year when it became steadily clearer that credit unions would eventually be able to issue American Express. -

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