When Kenneth Chenault, chief executive officer of American Express Co., gave his semi-annual presentation to analysts last week, he knew that Visa U.S.A. had given some listeners two internal Visa memos calling his company’s deal to buy Bank of Hawaii’s credit card portfolio for $226 million “a money loser” that would “backfire on Amex.”

Mr. Chenault waved off the warnings and vowed that American Express would run the portfolio successfully.

“Visa said seven or eight years ago we would go out of business,” he told an analyst who questioned the deal. “They have the same level of accuracy in that memo. The marketplace will decide.”

The exchange displayed the shifting tactics Visa and American Express have adopted in the lastest phase of their battle over bank relationships as they await the outcome of the Justice Department’s antitrust case against Visa and MasterCard International. All that remains in that trial, in which American Express executives testified that Visa’s bylaws unfairly blocked them from working with U.S. banks, is a decision from Judge Barbara S. Jones of the U.S. District Court for the Southern District of New York.

Perhaps nothing illustrates the change more clearly than the memos, themselves.

The Visa memos, which were also given to American Banker, were addressed to “senior executive management” and were dated Feb. 6 and Feb. 7, the latter being the date of the Amex conference call. Visa executives said the memos stemmed from ongoing research the company routinely conducts into its brand strength and other competitive matters, but they certainly surfaced at a critical moment.

They were written at a time American Express is actively courting other U.S. bank card issuers — including, in all likelihood, Wachovia Corp., a major Visa issuer that recently announced its intention to sell. (See story, page 1.)

In last week’s conference call, Alfred Kelly, American Express group president of U.S. consumer and small-business services, said: “We are now in discussions with three more international organizations to purchase their portfolios.”

Could Visa be trying to warn U.S. banks about the possible repercussions of making deals with Amex? Could Visa be fearful of seeing its brand dominance recede, now that Citigroup Inc. — also a potential buyer of the Wachovia portfolio — has tilted its weight toward MasterCard?

Visa executives deny both motives, and say they do not plan to try to block the Amex/Bank of Hawaii deal on legal grounds — an option they had raised in December, when the deal was announced.

Kelly J. Presta, Visa’s vice president of public affairs, who wrote one of the memos, said his aim was to inform Visa executives of what association members were likely to experience if they sold their portfolios to American Express, and to cast doubt on Amex’s motives for cutting the deal. The memo was not sent to Bank of Hawaii officials, he said.

In an interview, Mr. Presta said around 10 executives would have received the memo, but he declined to name them.

The memo described a random telephone survey of 578 Hawaii residents conducted from February 1-5. “Just 27% of Bank of Hawaii/Visa/MasterCard-holders, which represents just under 5% of all Hawaiians, are likely to keep and use their new American Express cards when they come in the mail,” the memo said.

“American Express bought the portfolio for reasons other than making money,” Mr. Presta said in the interview. “It is clear they won’t make money on this purchase when 73% of members say they don’t want an American Express product.”

He described the survey as a normal part of his job, and not an attempt to tweak Amex as it gears up to convert the 148,000 consumer and business accounts in the Bank of Hawaii portfolio. “This is part of routine research we do constantly. It is part of our issues management function.”

Not everyone took Visa’s survey at face value.

“Visa’s numbers don’t make any sense,” said Robert P. Napoli, senior vice president at ABN Amro, who attended the American Express presentation. Referring to Visa’s assertion that only 27% of Bank of Hawaii cardholders would accept an Amex card, he said, “They should have used some higher number, so people would think the number was rational. It is Bank of Hawaii the customer has the card through, not Visa.”

American Express spokeswoman Susan Korchak called the Visa memos “an obvious public relations ploy” and said, “Visa is obviously running scared and on the defensive.”

The Bank of Hawaii deal was a template for Amex’s future bank card portfolio purchases, and the company anticipates that future deals will be driven more by finances than strategy, she said.

Mr. Chenault said in the analysts’ briefing: “If Visa feels we will be a failure, they should encourage more banks to work with us. I have not read the memo, but I would not put much weight in what they said.”

Visa’s second memo analyzed the purchase price of the Bank of Hawaii deal and concluded that Amex had paid too much to make money off the portfolio. The memo was written by Tim Attinger, Visa’s vice president for emerging technologies, who did not return a phone call asking for comment.

The memo argued that if Amex had paid the average industry premium, 18.5%, the actual purchase price would amount to $268 million, or $283 per account, compared with the industry’s average per-account acquisition cost of $169.

In naming the industry averages, the memo cited American Banker, which in turn had cited information compiled by Robert K. Hammer, an investment banker who specializes in credit card portfolio sales.

Mr. Hammer, chairman and chief executive officer of R.K. Hammer, Investment Bankers, of Thousand Oaks, Calif., said American Express had most likely paid a higher-than-average premium, but the price was probably well within the range of last year’s portfolio premiums.

“There are some portfolios that are economically feasible, even at a higher price,” he said. “Amex will have a plan for making the portfolio even better than it was when it got it.”

Mr. Napoli called the deal “a big test for Amex” and said Visa has “every incentive for Amex to fail.”

On one hand, American Express lacks the experience in buying portfolios that a company like MBNA Corp. has honed, Mr. Napoli said. On the other hand, Amex can pay more, because it has its own processing network and does not have to share merchant discount fees, he said.

Time and economics will settle the matter, Mr. Napoli said. “If Visa is right, Amex won’t make another purchase.”

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.