US Banker  |  December, 2009

By Maria Aspan

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Five years ago, American Express Co. and Discover Financial Services clinched a landmark antitrust victory allowing them to expand their network businesses. Now, the protracted court battles preceding that decision look like the easy part.

October marked the fifth anniversary of the Supreme Court’s refusal to hear an appeal by MasterCard International and Visa U.S.A. Inc. in the Department of Justice antitrust case, and the eighth anniversary of the original ruling. That decision freed Visa and MasterCard's member banks to form partnerships with other networks, including Amex and Discover. At first, partnerships proliferated. In 2004, Amex executives even heralded the company's first such link-up, with MBNA Corp., as “transformational.”

But since those heady days, progress for Amex's and Discover's network businesses has been difficult to gauge, and after the initial flurry of deals with issuers, the pipeline of issuing partners has dried up.

Indeed, when Amex said this month that it had signed up another issuing partner for its network — Pentagon Federal Credit Union — it was its first such deal in three years.

Executives at both Amex and Discover acknowledged the difficulties their companies have faced in signing up more partners in recent years and blamed the banking crisis for intensifying these difficulties. The number of cards on their third-party networks is still far behind the now-public Visa Inc. and MasterCard Inc.

None of this is to say Amex and Discover cannot still capture a much bigger share of banks' business. But if the last five years are any indication, doing so will take time.

“It's a long and difficult path. Have American Express and Discover severely gored Visa and MasterCard? No. But are they competing with them? Absolutely,” said Eric Grover, the principal at the consulting firm Intrepid Ventures and a veteran of Visa. “Five years sounds like a long time, but in the payment network space, it's not that long.”

Another headwind: now that Visa and MasterCard are public companies, they are nimbler rivals. “The network space is a lot more competitive, and it's commercial,” Grover said.

Amex- and Discover-branded cards accounted for 2 percent of the direct-mail offers other issuers sent last quarter, according to Mintel Comperemedia, a Chicago firm that tracks direct mail. This share has remained relatively flat since 2005.

The recession's impact on all types of card acquisition direct mail has been dramatic, and it hurt Amex and Discover along the way. In the third quarter of 2006, bank issuers sent out 2.1 billion card offers, including 83 million offers for Amex- or Discover-branded cards, according to Mintel; last quarter, Amex- and Discover-branded cards accounted for barely 10 million of the 391 million offers mailed.

American Express started to overcome its three-year dry spell this fall, with a series of small deals. At least one of those deals came at the expense of Visa and MasterCard, who have both introduced premium brands of their own to compete with the affluent appeal of Amex's brand.

Amex has taken other steps in the past month or two to expand and solidify its network partnerships. Barry Rodrigues, an executive vice president at Amex and head of the Americas for its global network services, or GNS, unit, said Amex also has renewed its contract with Bank of America Corp., which bought MBNA in 2006. And last month it signed a deal with B of A to issue a new version of the premium “Accolades” Amex card for Merrill Lynch wealth management customers.

The introduction of that card was another victory for Amex's network business and its continuing relationship with Bank of America. After the Charlotte banking company agreed to buy Merrill Lynch last year, some industry members speculated that it would phase out its Amex Accolades product in favor of the “deferred debit” Visa card that Merrill offers its wealth management customers. Though the Visa card remains available, the Amex Accolades card now is “the most premium product that Merrill Lynch offers,” Rodrigues said.

Discover has a few third-party issuing deals, with issuers including General Electric Co.'s GE Money Bank and HSBC Holdings PLC's U.S. operation, but its network focus has, by design or necessity, been more on building its network.

In 2005 Discover bought the Pulse Network LLC debit network, and last year it bought the Diners Club International network from Citigroup Inc. It has practically closed the acceptance gap in the United States by building relationships with merchant acquirers.

“Some of their efforts have been on shoring up their own network and less on landing partners. … That's a huge undertaking for them, but it also positions them very well on an international basis,” said Scott Strumello, an associate at Auriemma Consulting Group Inc. “They've worked very hard to expand themselves globally. The Diners Club acquisition was a very shrewd move — and once they've integrated that we could see more banks, other than GE, issuing with them.”

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