Visa Nears Crucial Vote On Nonbanks

Visa U.S.A. next week may modify a rule prohibiting nonbanks from joining the card association, according to industry observers.

Visa's board is under pressure from some revenue-hungry members to make it easier for those banks to issue cards on behalf of oil companies, retail stores, and other nonbanks that represent the fastest-growing segment of a saturated credit card market.

A spokesman for the San Mateo, Calif.-based card association said the chief item on the board's agenda when it meets in Dallas next Monday is whether to lift a moratorium on the nonbank cobranding programs.

When Visa imposed the moratorium nearly one year ago, its hard-line stance won praise from bankers who wanted to protect their credit card turf. With new strains on bank profitability and advances in the cobranding market by Visa's chief rival, MasterCard International, the moratorium is being closely questioned.

MasterCard has been actively courting phone companies, oil companies, retail stores, and others outside the bank card world to set up joint programs with its member banks.

As a result, MasterCard is believed to be closing the historical market-share gap between itself and Visa.

The bank card issuers that own Visa, meanwhile, are grousing that Visa is perceived as actively snubbing newcomers who can directly contribute to the banks' bottom lines.

MasterCard Active

"There are new programs that have come out as MasterCard-only programs because of the moratorium," said Anita L. Boomstein, a partner at the law firm of Hughes Hubbard & Reed, New York. "Once they start with MasterCard they will see that they are not losing anything with MasterCard. That will hurt Visa."

One of the biggest new card offerings announced this year is a MasterCard marketed by a bank owned by Household International on behalf of Ameritech to about 10 million customers of the midwestern phone company. It will be a combined telephone charge card and general purpose credit card.

Similarly, General Motors Corp. and Banc One Corp. are believed to be preparing a MasterCard for GM customers.

In Wake of ATT Success

Visa's board adopted the moratorium last December in the wake of American Telephone & Telegraph Co.'s stunning success in signing up members for its new Universal card program. The Universal card was issued in association with both MasterCard and Visa. The moratorium was originally designed to last six months, but has been twice extended by the Visa board.

Visa also imposed new rules that make affiliations between its members and outside organizations cumbersome to initiate.

Visa officials in recent months said they made no decision on the moratorium because of uncertainty about new laws being debated in Washington - not because of internal debate among its members. The Bush Administration early this year proposed allowing industrial companies to own banks, a move that would have made the moratorium moot. Congress has since turned thumbs down on the proposal.

Visa officials also said that they were unwilling to act in the light of a legal challenge by Sears, Roebuck & Co. The retailer is suing to overturn a bylaw passed several years ago that specifically prohibits it from issuing Visa cards despite the fact that it owns a Visa-issuing bank. That matter is still being litigated.

But the moratorium issue has now come to a head because of pressures on bank profitability, industry sources said.

Card company insiders often attribute Visa's vigilance to the composition of its board, which includes representatives from three of the five largest credit card issuers - Citicorp, Chase Manhattan Corp., and First Chicago Corp. These institutions have long been perceived as having the most to lose from new card competitors.

The moratorium does not directly prohibit Visa members from entering into cobranding arrangements, such as the one Household International struck with Ameritech. What it does do is stall new applications for membership from nonbanks. However, Visa is much less eager than MasterCard to help its members work with outsiders.

Prior to adopting the moratorium, Visa tightened its rules so that affinity cards could carry account numbers controlled by issuing banks - not by the affinity-card partner. Combination credit and calling cards could not, for example, sport a separate calling card account number.

Mastercard, on the other hand, rolled out a new set of rules last April for a subset of affinity partners - telephone companies, retailers, and oil companies. This group represents about 650 million proprietary credit cardholders - and more than $100 billion in sales volume. MasterCard, however, still has on its books some toughened prohibitions adopted last year on other nonbank issuers.

The new MasterCard initiatives have borne fruit.

"MasterCard was more aggressive and attentive to what we needed to do to bring this program to fruition," said Joseph Saunders, chief executive of Household Bank. The Salinas, Calif.-based company is the unit of Household International that issues the Ameritech card.

Some Visa diehards, however, are not so sure that it is time to bend. MasterCard, many point out, still gets criticism for its liberal approach.

"The concern is that we are opening the door to cobranders to become issuers," conceded Stephen Bartell, the MasterCard executive in charge of the cobranding effort.

He pointed out, however, that very few of the cobranders that MasterCard works with are as ambitious as AT&T. The phone company issues cards through Synovus Financial Corp., a Georgia bank company, but also offers indirect subsidies to the bank.

For example, AT&T has an option to buy all of the program's receivables, freeing the assets from the bank's books. Visa's affinity rules state that a partner can finance no more than 25% of a program's receivables.

AT&T also established its own corp., AT&T Universal Card Services Corp., to run various aspects of the issuing and receivables program.

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