AmEx-Citi Is Great PR for AmEx, But How Profitable Will It Really Be?

Citigroup Inc.'s decision to issue American Express cards may turn out to be a more symbolic than substantive victory in the credit card wars for AmEx, according to some observers. “It's clearly a victory, but more a marketing victory,” says Gwenn Bezard, a payments-industry analyst at New York-based research firm Celent Communications. “We'll see how the deal plays out from a revenue and profitability standpoint for both companies.” Still, the deal means AmEx has sewn up the two largest U.S. bank card issuers. And, given the size and prestige of Citi, the deal represents a clear slap against Visa and MasterCard, both long-time AmEx rivals. The Citi agreement could encourage other banks that have been talking to AmEx to come on board with the travel-and-entertainment giant more quickly, says Les Riedl, executive vice president at Speer & Associates, an Atlanta-based consultancy. “You'll see a lot more banks looking at American Express now,” he says. “Card issuers are looking at new products that can give them even a limited competitive advantage, and American Express products have a strong appeal to some segments.” Celent's Bezard agrees. “Some banks won't want to be left behind,” he says. Citi is a full-line, traditional banking power that played a role in the creation decades ago of the bank card networks, factors that could play a role in influencing other banks. MBNA Corp., which AmEx signed earlier this year to issue its cards, is a relatively new, monoline issuer. “It's different when you win a traditional bank,” says Bezard. “Monoline credit card companies have always been different animals any way, and they didn't participate in the creation of Visa and MasterCard.” With 129 million accounts, Citi is the largest bank card issuer in the U.S. MBNA is number two, with 50 million. But Bezard questions how lucrative the AmEx-bank deals will ultimately prove to be, particularly for banks, given that the programs are typically targeted at a small fraction of a bank's existing card base. In the arrangements AmEx has made with banks overseas, he says, AmEx penetration has not exceeded 5% to 10% of the card portfolio. These are typically high-spending, low-revolving accounts. “You're making money mostly on interchange,” he points out, without much income from finance charges, which account for a far higher percentage of most banks' card income. AmEx may be happy with that, he argues, but bank partners may be less so. He also says it's unclear yet how many U.S. cardholders will take AmEx cards from banks. MBNA, which began issuing AmEx cards this fall, had been automatically switching some cardholders to AmEx, a practice it stopped last week after a number of individuals and at least one affinity group complained. “It remains to be seen whether there is demand in the market for that product,” he says. “It's possible a large fraction of customers won't want to switch.” The Citigroup-AmEx deal, announced yesterday, is the second one AmEx has hammered out in the U.S. market, following the one with MBNA. AmEx says it expects the first Citi cards on its network to come out late next year. MBNA said last month it has issued 300,000 AmEx cards so far, and AmEx says it is actively seeking similar arrangements with other banks. In both deals, all issuance and risk management is left to the banks, while AmEx processes transactions on its merchant network. AmEx's pursuit of this business, however, is somewhat complicated by a lawsuit it filed last month against the bank card associations and eight major banks, alleging they had unfairly restricted the company from competing in the card market (Digital Transactions News, Nov. 19). The suit followed a decision by the U.S. Supreme Court in October not to hear an appeal from Visa and MasterCard against a 2001 court ruling that voided rules the bank card networks had established that prevented member banks from issuing cards on either the AmEx or Discover Financial Services Inc. networks. Discover filed a suit against the card associations similar to AmEx's immediately after the Supreme Court decision (Digital Transactions News, Oct. 4). Speer's Riedl, however, argues that even the banks AmEx is suing may eventually issue AmEx's cards. “All's fair in love and war,” he says. “Hard feelings are one thing, what makes sense for top line growth and competitive advantage is another.” Earlier this year, Citi struck a deal with MasterCard International that allows merchants that accept MasterCard to also take Citi's Diners Club card, which competes with AmEx's flagship green card.