Washington Mutual Inc., which has been strongly hinting at a plan to issue its own credit cards, is about a year away from offering them - and probably will have to start from scratch when it does so.
A spokeswoman for the Seattle thrift company said its agent bank contract with Citigroup Inc. will expire in December 2004, and that Washington Mutual will start issuing its own credit cards in late 2004 or early 2005.
According to analysts, Wamu's suggestions that it will start the business as a "de novo" reflect the unlikelihood of Citi's selling it the Wamu-branded portfolio of 500,000 accounts.
Analysts expressed mixed reactions to the plan, with some saying that a financial services company that had grown as large as Wamu ought to be offering its own card products, and others saying that other companies had already shown how difficult it is to be a midsize issuer in an age of scale.
Regional banks such as Wachovia Corp., SunTrust Banks Inc., and KeyCorp started outsourcing their card portfolios to larger lenders years ago. Wamu has already indicated it intends to offer cards primarily to its retail banking customers - as these banks did and still do, through third parties - rather than to make a major national business out of credit cards, the way Citi, Bank One Corp., or MBNA Corp. have done.
Kerry Killinger, Wamu's chairman and chief executive officer, told investors at a Dec. 8 conference that while "most asset categories are unattractive right now" because of the low spreads, a proprietary card business would be profitable.
Wamu said it will not break its contract with Citi, which acquired Wamu's business through the 2000 acquisition of Associates First Capital Corp.
Citi said its executives were not available for comment on the Wamu situation. Card industry sources said the contract might give Citi cross-selling rights outside Wamu's retail banking area. The companies have not said whether Wamu will try to buy the Citi receivables, but sources said agent banks rarely have the opportunity to buy their accounts.
"We are currently evaluating our options," Wamu said in an e-mail. "We don't disclose the terms of our contracts."
Deanna W. Oppenheimer, Wamu's president of banking and financial services, explained at the conference that it was looking less to compete nationally in the consumer card market than to offer the product to its current customers.
"We really see this as an internal opportunity - not a large-scale, external, competitive, national-market-share credit card operation, but one that very much comes into the mix of what we're doing on the retail side," she said.
Sheri Pollock, a Wamu spokeswoman, said last week that it is pursuing cards for several reasons. "Credit cards are the mainstream unsecured lending product for the broad middle market," and they should complement Wamu's other consumer banking and mortgage products.
Ms. Oppenheimer said it is currently testing "innovative" card offers that it could extend to its customers. It is also researching "a variety of different packaging options."
The rise of outsourcing is one of the things that make it possible for Wamu to issue cards, she said. "Now that the full-scale things that you need - payment processing, for example - can be outsourced to third parties," the card business looks more attractive.
But some analysts expressed reservations about the prospects of a midsize bank entrant to the cutthroat cards market.
Eric Wasserstrom, an analyst at UBS AG, said Wamu is probably more interested in cross-selling opportunities than in the profitability of the card business itself. "I don't know if it's looking to make a ton of money on that business, but a way to solidify the relationship with that customer is to cross-sell other, more profitable products, like home equity, where you can clearly make a lot of money."
Ms. Pollock said Wamu expects the card business to contribute to revenue growth. The company will also benefit from diversification on its balance sheet, she said.
Richard X. Bove, an analyst at Hoefer & Arnett Inc. in Tampa, was skeptical. "The credit card business is now one of the most sophisticated consumer finance businesses in the U.S.," he said. "If Wamu were to go cold turkey, as it were, into issuing credit cards, it's just a bad decision."
Not even the cross-selling opportunities would justify the move, Mr. Bove said. "A large number of banks have discovered over the years that it's not a profitable venture, and it makes more sense to work through someone else. If Wamu were to introduce a new credit card backed by Citi or Bank One or MBNA, that would make sense."
In her investor day presentation, Ms. Oppenheimer said improvements in Wamu's lending infrastructure make card issuance more feasible. "As you recall, we have grown up and really retooled thoroughly our consumer lending platform over the last three years."
She credited Ken Kido, the head of Wamu's retail bank products and services division and a former bank card executive, with building a platform that could readily support a card program.
But Wamu's enthusiasm for its new and improved infrastructure did not exactly convince analysts.
"I've never seen it. I don't know anything about it," said Michael R. Hughes, an analyst at Merrill Lynch & Co.
Another analyst, speaking on the condition of anonymity, said Wamu's new platform is adequate but nothing to brag about. "What they would call a completely retooled consumer lending platform, I would call a consumer lending platform."
However, Mr. Hughes said he approved of Wamu's overall credit card strategy. "If you're going to be a consumer bank, you should have a full palette of consumer products, and a credit card is certainly one of them."
Contrary to Mr. Bove's belief that a bigger player can issue cards for Wamu more efficiently than it could do for itself, Mr. Hughes said, "it makes no sense to outsource a high return-on-equity product to someone else, particularly if you have a customer base the size of Wamu's."
Sources said any company with retail banking ambitions would not want a competitor's hands on its customers, even if just through a card agreement.
Andrew Mathieson, the managing director of InfiCorp, an Atlanta subsidiary of First National of Nebraska Inc. that runs portfolio management and agent bank card businesses, said even though agent banks can prohibit issuers from marketing noncard products to their customers, that provision can be difficult to enforce.
Because InfiCorp (a former issuer for Wamu) does not sell auto loans, mortgages, or debit cards, it has nothing to pitch to agents' customers, Mr. Mathieson said. "We are invited in to service their portfolios" rather than to run it as a proprietary business. "That's a distinction that may not be important to Citibank or First USA."
