The United States Supreme Court this month declined further review of a U.S. Department of Justice case against Visa U.S.A. and MasterCard International, upholding a 2001 ruling that allowed U.S.-based bank issuers to offer American Express cards. Amex said the decision would bolster its opportunities for merchant acceptance, as analysts and industry watchers said it would keep pressure on Visa and MasterCard to maintain higher payments to its bank issuers, which feed directly into corporate rebates.
Although MBNA is the only U.S. issuer that, as of press time, had announced plans to work with Amex, the payment network expects more to follow.
"We also continue to have discussions with other potential U.S. bank partners," said American Express CEO Ken Chenault. "We plan to add more partnerships with other issuers on a selective basis, ensuring they are a strategic fit for our brand and can bring in high-spending customers that are consistent with our franchise. Ultimately, we expect to work with a range of issuers in the United States—small, medium and large players."
The MBNA relationship targets the consumer, not the corporate, market, but American Express said it may eventually pursue U.S. corporate card issuing partnerships.
Likewise, large commercial bank issuers have declined to publicly discuss relationships with American Express, and experts expect MBNA will remain Amex's largest bank partner. "Given the premium economics that American Express is currently offering to bank issuers we expect more issuers to follow suit," said Credit Suisse First Boston payment industry analyst Moshe Orenbuch. "However, we do not believe that large banks are as likely to switch, as they view their own brand as more significant." CSFB analysts expect "smaller regional banks" to be the likeliest contenders to emerge as partners with Amex.
Visa and MasterCard in April increased the rate they pay to commercial card issuers, enhancing issuers' revenue and giving buyers an opportunity to share in that income through rebates
(BTN, March 15). The Visa and MasterCard announcements to raise interchange rates largely were influenced by MBNA's agreement this year to issue American Express cards, which marked Amex's first card relationship with a U.S. bank issuer
(BTN, Feb. 9, 2004).Visa U.S.A. conceded then that its decision to raise interchange was "a result of MasterCard's recently announced fee increase, as well as American Express' appeal to banks based primarily on its higher merchant fees." MasterCard was less specific, saying in a statement the interchange increase "will help ensure the competitiveness of MasterCard's consumer and corporate credit programs."
Industry analysts with Credit Suisse First Boston earlier this month reported that Amex would pay MBNA an interchange rate of 2 percent, "compared to about 1.7 percent to 1.8 percent it receives from Visa or MasterCard."
Meanwhile, Chenault said that opening the Amex network in the United States would help increase the number of merchants that accept American Express cards, as demonstrated by similar relationships Amex has fostered in countries where Visa and MasterCard's restrictive bylaws do not apply.
Chenault, in an internal memo released the day the Supreme Court upheld the decision against Visa and MasterCard, said Amex already has "partnerships with 85 banks in 94 countries" and that such partners so far have added "more than 3 million new establishments to the American Express merchant network." Chenault said such U.S. partnerships will "increase the acceptance of our cards by merchants around the world." Amex, however, would not reveal how much it expects to expand acceptance.
CSFB's Orenbuch questioned Chenault's claim, noting that under the terms of American Express' arrangements, U.S. bank issuers—unlike in those other regions that have helped garner new merchants—do not have the authority to act as merchant acquirers.
Amex has fallen behind in the race for acceptance and, although it won't disclose exact numbers, is expected to have the lowest merchant penetration of all major commercial issuers. Amex was surpassed by Diners Club this year when an agreement with MasterCard more than doubled accepting merchants. Corporate card buyers have told BTN that acceptance is the key service quality issue
(BTN, Nov. 24, 2003).