The partnership between Barnett Banks Inc. and Household Credit Services Inc. to jointly market Barnett's credit cards is being closely watched by an industry searching for new ways to grow.
The two-month-old alliance, in which Household, the sixth-largest credit card issuer, is providing a lifeboat for Barnett's ailing card business, is an inspiration to other frail card players.
"Virtually all of the regional issuers I've spoken to are thinking about this," said credit card consultant Michael Auriemma of Westbury, N.Y.
The idea of partnering with another bank to build economies of scale and rescue marginal business is not limited to the credit card arena.
Indeed, Jacksonville, Fla.-based Barnett in April teamed with Bank of Boston Corp. to add girth to its mortgage unit. The two banks formed HomeSide Lending Inc., by combining the operations of Banc of Boston Mortgage and Barnett Mortgage.
In September, when the card industry was reeling from record loan losses and delinquencies, Barnett announced a similar partnership for credit cards. Barnett said Salinas, Calif.-based Household would purchase $776 million of Barnett's noncore card receivables and help the bank manage its remaining $1 billion card business in Florida and Georgia.
"We could have gotten out of the card business entirely, but we wanted a card for our customers," said Doug Freeman, chief consumer credit executive for Barnett.
So Barnett shut down its 400 employee card operation in Jacksonville and outsourced everything, including customer service, card processing, collections, and underwriting, to Household.
"We are now a player in the credit card market again. For two or three years, we really weren't. We are going to find a way to have Barnett customers carry Barnett cards again," said Mr. Freeman.
Barnett's card chargeoff ratio had risen to 6.4% in the second quarter, from 6.1% in the first.
To limit its exposure to risk, Barnett sold Household the portfolio of newer accounts outside its core market. It also gained the technology and marketing expertise of the developer of one of the most successful card programs to date, the General Motors card.
Wells Fargo Bank, CoreStates Bank, and Mercantile Bank are among the regional card players that could be candidates for a Household-like partner because they lack a coherent strategy, said an industry observer.
But banks are not alone in their interest in the Household-Barnett deal. Kenneth I. Chenault, vice chairman of American Express Co., said in an interview earlier this year that he rues a lost opportunity to work with Barnett.
"It demonstrates an innovative approach, a cooperative relationship that American Express would not have minded being a part of," Mr. Chenault said.
The partnership is "the first indication that large banks are going to say they need help," said Mr. Auriemma. Barnett is one of the top 25 banks in the United States, with $40 billion in assets.
Moreover, its partnership with Household further "blurs the line between competitors and partners," said Jerry D. Craft, chief executive of Card Issuer Program Management Corp., an Atlanta consulting firm that manages card portfolios.
Mr. Craft's company struck a similar alliance with PNC Bank Corp. last year. But the outsourcing relationship ended shortly after PNC won a contract to market financial services for the American Automobile Association.
In the meantime, Household and Barnett said they expect to begin marketing the fruits of their work early next year.
"We are going to measure our success in terms of Barnett card customer penetration," said Mr. Freeman.
Barnett, which has only a few college affinity card programs, plans to leverage Household's proven track record in negotiating cobranded programs.
Household hopes to originate new card accounts in areas where Barnett does not have a branch presence, paving the way for the bank to market retail products in new locations.
The credit card subsidiary of Household International, which has a noncompete agreement with Barnett in Georgia and Florida, is considering converting its own card accounts in those states to the Barnett brand.
"It would make sense to do that," said Michele Iversen, Household's director of business development.
Ms. Iversen also said that Household will probably not pull the Barnett brand off the card accounts it purchased.
As for expanding their partnership outside of Barnett's core markets, the partners were skeptical. But Ms. Iversen said, "If something worked well in Florida, there is no reason why we couldn't expand it out further."
Household may also seek out similar deals with other banks.