CEO: Amex To Sign U.S. Banks

American Express will "be renewing discussions" with U.S.-based banks that presently issue Visa and MasterCard to offer Amex, aiming to have its first "agreements signed no later than the second half of 2004," according to a statement released last month by Amex chairman and CEO Kenneth Chenault.

The announcement followed a recent court ruling that upheld a 2001 antitrust decision against Visa and MasterCard mandating the networks allow its member banks to work with Amex to bolster competition in the market. Both networks have expressed interest in once again appealing the ruling.

"We believe that our policy is pro-competitive and has benefited consumers," said Noah Hanft, MasterCard general counsel. "We anticipate that we will seek further appellate review, including requesting a hearing en banc before the Second Circuit Court of Appeals."

Visa's and MasterCard's continuing appeals process "is likely to delay any significant changes in issuers' practices for some time," analysts covering American Express at CS First Boston forecasted in a report last month. However, once the bylaws are lifted, they predict a "significant" number of bank issuers will choose to work with Amex.

The 2001 ruling demanded that Visa and MasterCard repeal bylaws that restrict issuers from working with Amex, but Visa and MasterCard have yet to do so. The U.S. Department of Justice initiated the antitrust suit against Visa and MasterCard in 1998.

"We believe that the Sept. 17 ruling by the appellate court effectively ended the legal arguments on the merit of this case," Amex's Chenault said. "Visa and MasterCard have said they plan to appeal the ruling, but we believe that represents no more than a delaying tactic. Those delays are likely to run for months, not years. Based on our assessment, Visa's and MasterCard's delay tactics will run their course no later than mid-2004." He added that the ruling "reaffirms the viability" of bringing legal action against Visa and MasterCard.

One analyst pointed to the irony of Chenault threatening a suit against Visa and MasterCard, which, in turn, are owned by the banks Amex is courting. "It's inconsistent to say he would sue Visa and MasterCard, which are owned by the banks, and then expect the banks to want to work with them," said Moshe Orenbuch, an analyst at CS First Boston.

While analysts foresee an inclination among bank issuers to work with an eager Amex, the issuers are taking a wait-and-see approach. Some of the largest T&E bank card issuers would not comment on the matter—"We wouldn't comment with a 10-ft. pole," said one—but others expressed interest in evaluating proposals from Amex.

In a presentation to analysts this summer, Chenault outlined benefits for U.S.-based card issuers that could be derived from cooperation with Amex. He said these included the ability to offer products not available through other networks, "be associated with our brand" and "able to provide a card product with value targeted to particular customer segments, for which an American Express branded product would be particularly appealing."

However, competition issues could arise from Amex's duality as the only network that also acts as the issuer. "You have to get past the competition question," said Chris Pieroth, senior vice president of product and marketing at U.S. Bank, the largest issuer of Visa. "If I issue American Express and I'm sitting across the table from a potential customer and as soon as I leave American Express is also sitting across that table, how can I possibly compete effectively? They absolutely have to address that question before any of the banks that are issuing Visa and MasterCard would even consider what they had to offer."

Yet, working with Amex also could mean higher profitability for bank issuers, possibly at the expense of cardholders and merchants. CS First Boston suggested that since Amex charges higher merchant fees, it could afford to pay the bank issuers a higher interchange rate—the percentage of purchases that goes to the bank issuer—than Visa or MasterCard offer.

"American Express' average merchant discount rate in 1999 was approximately 2.73 percent compared to Visa's and MasterCard's rates of approximately 2 percent," court documents stated.

To stay competitive and keep issuers on their networks, Visa and MasterCard would increase their interchange rates, analysts predicted. While this would be appealing to the issuers, it ultimately could trickle down to merchants and cardholders in the form of higher fees. In the initial ruling, the judge said: "The burden of such increases is at least partly passed on by merchants and so is shared by consumers."

Amex already has established a network of bankcard issuers abroad, where Visa's and MasterCard's U.S. bylaws are not extended. "It's a big part of our international operation that has helped us expand our presence in those countries through the efforts of the partner banks," an Amex spokesperson said. "Because there are no restrictive bylaws, these banks are allowed to do business with Visa or MasterCard or American Express." For example, Toronto-based TD Bank Financial Group stated that it offers a Visa commercial card, as well as "American Express commercial cards and other expense management services to some commercial and corporate banking clients."