Magazine article American Banker

Commitment Issues Linger in Wake of Card Decision

Magazine article American Banker

Commitment Issues Linger in Wake of Card Decision

Article excerpt

Though it has become accepted wisdom in the credit card industry that U.S. banks are lining up their portfolios behind either MasterCard International or Visa U.S.A., some major issuers say they never intend to choose one association over another, and some of those that have made commitments to one or the other are still far from their goals.

The issue is particularly relevant in light of the fact that, in her October decision in the Justice Department's antitrust lawsuit against Visa and MasterCard, U.S. District Judge Barbara S. Jones cited the willingness of banks to align themselves with one association over the other as a major reason for denying the government's request to change the governing structures of the associations.

Though Judge Jones appeared convinced that dual issuance and dual governance were no longer a problem because of the trend toward signing commitment contracts, the "portfolio skew" numbers -- which indicate what percentage of a bank's credit card portfolio is branded Visa vs. MasterCard -- do not paint a portrait consistent with that idea.

Some banking companies already heavily favor one association or seem to be moving steadily toward a commitment goal, but others are not following suit. Most notably, MBNA Corp., whose executive vice chairman, Lance L. Weaver, is also the chairman of MasterCard's board of directors, issues more Visa cards than MasterCard cards and says it intends to keep its portfolio about half Visa, half MasterCard.

"We do not have a commitment with either association," John R. Cochran 3d, the president of MBNA America Bank, said in a telephone interview. "We have had strong relationships with both Visa and MasterCard since duality came into place."

Sharon Gamsin, a MasterCard spokeswoman, said there is no problem with the commitment contracts that banking companies such as Citigroup Inc., Metris Cos. Inc., Household International, and J.P. Morgan Chase & Co. have signed. "All of our member bank agreements are absolutely on target."

As for board members -- such as MBNA -- that have not signed agreements, Ms. Gamsin said: "We do try continuously to work with them, and one way to do that is to appoint people to our board so that eventually, in the long term, they dedicate more (of the portfolio) to MasterCard."

According to The Nilson Report, MBNA's portfolio was 49% MasterCard-branded and 52.1% Visa at the end of last year. Morgan Chase, which has pledged to commit 80% of its portfolio to MasterCard, had issued 59% of its credit cards as MasterCards at yearend; Citi, with an 85% commitment, was at 57%.

The yearend figures do not include debit cards, and it is not clear if the commitment figures are meant to include them or not; the companies and the associations will not reveal some of the details of their contracts.

Citi's 1998 decision to break with Visa and sign a better deal with MasterCard helped bring the issue of portfolio skew to the fore and prompted the associations to begin seeking commitments from their largest members in exchange for price breaks and preferred service.

Indeed, Citibank, the world's largest credit card issuer, has such a massive reach that, because it is now pumping out MasterCards, The Nilson Report predicts that "MasterCard will overtake Visa in the number of credit cards in circulation in the U.S. next year and outstanding receivables by 2004."

Since falling out with Visa U.S.A., Citi has steadily moved its portfolio toward MasterCard. Last year its Visa portfolio fell 15%, to 33.6 million cards, while its MasterCard portfolio rose 15%, to 45.4 million.

Household's chairman and chief executive officer, William F. Aldinger, sits on MasterCard's board, yet his company boosted its Visa portfolio 12% in 2001, to 5.7 million cards, versus a 7% increase for MasterCard, to 16.1 million.

"While our relationship with MasterCard is not exclusive, we are predominantly a MasterCard issuer," said Craig Streem, Household's vice president of investor relations. …

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