The proposed merger of First Union Corp. and Wachovia Corp. could cause some major complications for the combined bank’s credit card operations, as well as for two major rivals in the card-issuing business, MBNA Corp. and Bank One Corp., each of which has a deal to issue cards for one of the banks.

First Union sold its credit card portfolio to MBNA last year, with the agreement that MBNA, which was the second-largest bank card issuer in the country at yearend 2000, would continue issuing cards in First Union’s name to First Union’s customers.

Bank One and its First USA credit card division struck a similar deal this month with Wachovia, which also agreed to serve as an agent bank for First USA, co-marketing card products to Wachovia customers.

The sale of Wachovia’s $8.1 billion in credit card receivables has not closed yet, but, if and when it does, Bank One/First USA will move ahead of MBNA in receivables to claim the No. 2 position in the bank card world, according to the Nilson Report, a card industry newsletter. Nilson said MBNA had $70.45 in card loans at yearend, second only to Citigroup Inc.’s $96.20 billion. Using yearend figures, a combined First USA/Wachovia portfolio would have $75.09 billion of loans, the newsletter reported.

The issue came to a head Wednesday morning when top executives from six major card companies gave presentations at the UBS Warburg’s 2001 Global Financial Services conference in New York.

While some of the executives — including Kenneth L. Chenault, chief executive officer of American Express Co., and Shailesh Mehta, chairman and chief executive officer of Providian Financial Corp. — talked about how they were relying on cobranding deals to help make up some of the profits lost to a sagging economy, the speakers representing MBNA and Bank One were peppered with questions about how they would divvy up the single customer base that would be created by First Union’s planned acquisition of Wachovia.

Further complicating the situation is the impending brand arrangement between the two banks, which have opted to keep the Wachovia name. MBNA says it continue to acquire and manage relationships with First Union cardholders, even though those customers are slotted to become known as Wachovia cardholders, and would thus seem to fall under the purview of Bank One.

Executives from both companies denied that there would be any problems stemming from the Wachovia/First Union merger. “I don’t think it will have any effect at all,” said Bruce L. Hammonds, senior vice president and chief operating officer at MBNA. “Our contract says that if there is an acquisition, we’ll continue to do business. We’ll just issue their Wachovia cards.”

But Bank One is also planning to issue Wachovia cards, and outbid five other major card issuers — probably one of them MBNA — to be able to do so.

“We’ll continue with Wachovia — this is a great opportunity for us,” said Charles W. Scharf, Bank One’s executive vice president and chief financial officer.

Mr. Scharf dismissed the possibility of complications arising from First Union’s deal with MBNA. “We’re fine,” he said.

The moderator of Tuesday’s talks, John McDonald, a UBS Warburg analyst who covers the credit card sector, said in an interview after the speeches that the nonchalance that Mr. Scharf and Mr. Hammonds tried to project did not convince him.

“I think you saw some tension there,” Mr. McDonald said. “It just doesn’t seem sustainable. You have two companies targeting a combined customer base. Someone will get bought out.”

Mr. McDonald would not hazard a guess as to which issuer would lose out. “Both definitely paid for the right” to win the respective portfolios, he said.

In any case, he said, all four companies have some time to work it out, since the First Union/Wachovia deal is not scheduled to close until the third quarter.

For now, Mr. McDonald said, it makes sense for both MBNA and Bank One to continue to make their separate claims, “but at a certain point, it will start to look a little silly.”

A spokesman for Wachovia, Ed Hutchens, said the issue was open. “All we can say is that we’re studying the agreements and considering the matter,” he said. The phase-out of the First Union brand is expected to take three years, he said.

Mary Eshet, a spokeswoman for First Union, issued a similar statement. “We’re still in the process of looking at the two agreements and determining how we’ll operate going forward,” she said.

Other speakers at the UBS Warburg conference touched on more commonly shared hurdles in the industry. Mr. Mehta of Providian said that rising unemployment, a spike in bankruptcy filings, a bear stock market, and a slowdown in productivity will take some toll on everyone in the card industry.

“I’m not an economist, but there does seem to be a consensus that we are experiencing a weaker economy than last year or the year before,” Mr. Mehta said.

Mr. Mehta said that Providian follows the same basic strategy in any market — very refined customer segmentation according to credit risk — but every issuer in the business will need to factor in more losses. “Our business model is not the flavor of the month, but our colors may need to change to keep up with the times,” he said.

Mr. Chenault of American Express said his company planned to weather the downturn by leaning heavily on the profitability of the company’s cobranded relationships, which include deals with Delta Air Lines and British Airways. He said American Express is particularly interested in playing up its cobranding deal with Costco Wholesale, the cut-price chain store that some observers first considered an unlikely match for the posh card brand.

“Costco represents a very important channel for card growth for us,” Mr. Chenault said. The deal, signed two years ago, has generated 1.5 million cards, and Costco has become one of the top five retailers in volume for American Express, he said. Moreover, he said, Amex has still not yet reached 10% of Costco’s customer base.

Coupled with recent findings that Costco customers spend 25% to 30% more on their American Express cards, Mr. Chenault said, there is still a great deal more business to cultivate in that partnership.

Mr. McDonald of UBS Warburg said affinity and cobranding relationships represent a strategic move in a climate of intense price competition, in which 0% teaser rates have become the norm. “Any way you can compete that is not on price is an advantage,” he said. “MBNA has done that with its affinity relationships. Capital One now has its deal with K-Mart. Metris has a couple of good ideas — like its arrangement with Western Union. And the American Express/Costco thing is definitely a part of that trend.”

According to Mr. Hammonds, MBNA has already won the contest for affinity relationships. “It’s a business we dominate,” he said. “We had one competitor in the last 10 years — that was Bank One. And Bank One is pretty much in the sidelines today, so we have it pretty good.”

Mr. Hammonds took another — this time, more implicit — jibe at Bank One during a break-out session that followed his talk, to which reporters were not invited.

According to Mr. McDonald of UBS Warburg, who attended the meeting, Mr. Hammond told analysts that because the credit card business demands large infusions of capital, issuers that are part of large financial companies constantly have to compete with other subsidiaries for their parent company’s resources.

Bank One’s chief financial officer, Mr. Scharf, addressed this situation obliquely in his talk by stating that although Bank One would like to devote more resources to First USA, it would first have to cut expenses in other areas of its business. If that is possible, he said, “we want to spend more money and spend it more efficiently on marketing for First USA.”

But Frank J. Barkocy, a buy-side analyst at Keefe Managers Inc., said Bank One has not been very clear on how much it wants to allot to First USA. “They really haven’t given a breakdown for First USA,” he said. Mr. Barkocy said he was also concerned about how the company would handle the burden of heavier credit risks in an economic slowdown.

“But, overall, I’d say Jamie Dimon has made important steps in turning the company around,” Mr. Barkocy said, referring to Bank One’s CEO. “Unfortunately, the current price of the stock may reflect some high earnings expectations that may be premature.”

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