Dean Witter-NationsBank card deal inspires jitters.

In trying to size up the recent announcement that Nations-Bank will issue a MasterCard for Dean Witter, Discover & Co., most people in the bank card industry were fixated on one overriding fact: Yet another nonbank competitor has entered their midst.

And conforming to the credit card cobranding model, two organizations within the banking , community - NationsBank and MasterCard - made the deal possible.

"I think many bankers were surprised and some may even feel threatened or betrayed," said K. Shelly Porges, chief executive officer of Porges Hudson Marketing, a consulting firm in San Francisco.

"We are seeing another back-door approach to the industry," said Robert B. McKinley, president of RAM Research Corp., who sees the Dean Witter incursion as akin to that of American Telephone and Telegraph Co. and other cobranders of MasterCard and Visa cards.

Dean Witter, NationsBank, and MasterCard International announced their plan for the so-called Prime Option MasterCard at a press conference on Nov. 22 in New York.

Dean Witter and MasterCard cleared the way for the product, to be available early next year by agreeing to drop the antitrust charges and countercharges they filed against each other early this year.

As a result, Dean Witter will conform to MasterCard's cobranding rules. That means NationsBank will issue the Prime Option cards and own their receivables. The assets could give a big boost to the bank's $5 billion credit card portfolio, currently 13th-largest in the nation.

Suit Against Visa

Meanwhile, a Dean Witter antitrust lawsuit remains pending against Visa U.S.A., which is appealing an earlier Dean Witter victory to the U.S. Court of Appeals for the 10th Circuit in Denver. Visa continues to insist that because of Dean Witter's success as the issuer of Discover cards, to admit it into card associations would be like McDonald's sharing its competitive secrets with Burger King.

If Dean Witter prevails, then its subsidiary banks - MountainWest Financial in Utah and Hurley State Bank in South Dakota - could become full-fledged MasterCard and Visa issuers, which could leave NationsBank out of a job.

If Visa overturns the earlier decision, the Prime Option MasterCard, as currently formulated, will be unaffected.

Either way, the bank card industry has a new product and marketing force to contend with, and NationsBank cements its relationship with Dean Witter on the cutting edge of where bank and nonbank services are converging.

The two companies announced a joint venture last April, NationsSecurities, which is expected to place 640 mutual fund and annuities brokers in NationsBank lobbies by year-end. NationsBank chairman Hugh McColl has even mused publicly that he might like to merge NationsBank and Dean Witter some day.

Card industry watchers say the Prime Option credit card alliance is a good opportunity for NationsBank, even if it turns out to be short-lived.

Advantages of NationsBank

While Dean Witter officials are not saying what they will do if they win the case against Visa, some industry insiders say it may not be in Dean Witter's best interests to drop NationsBank as a card issuer.

"Being a substantial network, NationsBank is bringing a lot to the table," said Ms. Porges. She contended that if Dean Witter was seeking only a short-term card issuing deal to tide it over while Visa's appeal is pending, then it would have contracted with a lesser institution.

Furthermore, Ms. Porges argued, "it is unlikely that NationsBank, which gravitates toward long-term partnerships, would look al a short-term relationship."

Analysts believe NationsBank simply seized the opportunity regardless of long- versus short-term concerns.

"I think it is clear that NationsBank took the attitude that if it didn't do this, someone else would," said Moshe Orenbuch, an analyst with Sanford C. Bernstein & Co.

Similar Alliances

If he is right, NationsBank used the same reasoning that led Banc One Corp. to provide cards and processing support for the Merrill Lynch Cash Management Account and led Synovus Financial Corp. and its Total System processing unit to handle the AT&T Universal Card.

NationsBank is not disclosing the particulars of the financial agreement, but industry experts believe that Dean Witter will be picking up the bulk of the marketing tab. NationsBank says it will be paying Dean Witter a fee for getting the receivables.

Ahead in the Game

"Dean Witter is probably spending tens of millions of dollars on marketing the card," said Michael J. Auriemma of Auriemma Consulting Group. Indeed, Dean Witter indicated in testimony to the U.S. district court in Salt Lake City that it hoped to attract up to 10 million Prime Option cardholders.

Industry experts say the legal settlement was a master stroke for MasterCard, which is already ahead of Visa in the cobranding game and may be increasing the pressure on Visa to reevaluate its cobranding strategy.

"As time progresses and the cobranding relationship broadens, new tensions will be created" between the bank card groups, said Ms. Porges.

A spokesman for Visa countered that its self-imposed moratorium on cobranding is a thing of the past, that it is aggressively pursuing such business and significant announcements are on the way.

But Dean Witter's choice of NationsBank may be causing some political discomfort at San Francisco-based Visa. G. Patrick Phillips, president of NationsBank Financial Products, is a Visa U.S.A. board member.

If Visa loses its court appeal, observers say, MasterCard will look especially astute for settling before becoming subject to paying the damages that, in antitrust cases, can reach stratospheric heights.

|Some Issuers Are Upset'

"If Visa lost, MasterCard would not have a better chance of winning, so this deal may have saved member banks hundreds of millions of dollars," said Mr. Auriemma. "Some issuers are upset because they believe MasterCard let the enemy in, but I strongly disagree. Dean Witter is not a member."

Much of the uncertainty will be resolved, one way or another, when the court case is over.

Visa believes it fell victim to emotional arguments that swayed the jury in the Salt Lake City courtroom, presided over by Judge Dee Benson. The association is optimistic that it will receive a more favorable hearing from a panel of appellate judges.

Judge Benson "said that Visa had compelling arguments and that had he been a member of the jury, the result would have been a hung jury," said Visa spokesman David Brancoli.

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