The New British Invasion

  Three United Kingdom banks recently bought credit card issuers in the United States, eliciting warm memories among some Baby Boomer bankers of an earlier British invasion.
  But unlike the incursion led by the Beatles 41 years ago, there won't be screaming teenage girls fainting at the sight of the Fab Four. In one respect, however, this invasion and the musical one led by the Beatles are similar.
  After the Beatles arrived on American shores, other British rockers soon followed. Similarly, Americans can expect more British banks, as well as financial institutions from other parts of the world, to take a stab at the U.S. card industry, according to Moshe Orenbuch, a card analyst with Credit Suisse First Boston in New York City.
  "It's not me saying this," says Orenbuch, managing director of equity research. "I am repeating what they (financial institutions) are saying."
  The latest acquisition occurred in August, when Barclaycard, the U.K.'s biggest issuer, purchased Juniper Financial Corp. for $293 million. Barclaycard bought Juniper, the U.S.'s 20th-largest issuer, with $1.4 billion in receivables and 700,000 card accounts, from Canadian Imperial Bank of Commerce and Juniper's management.
  Barclaycard opened its checkbook after deals were completed by its U.K. cohorts Royal Bank of Scotland Group plc and HSBC Holdings plc. Edinburgh-based Royal Bank of Scotland, the world's sixth-largest bank in terms of market capitalization, in August purchased Lynk Systems Inc, an Atlanta-based merchant acquirer, for $525 million. Three months earlier, RBSG bought Charter One Financial Inc., a Cleveland-based bank and debit card issuer, for $10.5 billion.
  And in February, RBSG bought for $360 million the credit card portfolio of Bridgeport, Conn.-based People's Bank. The portfolio, which has $2.3 billion in receivables, is composed primarily of prime and superprime cardholders. Royal Bank of Scotland set its U.S. acquisition strategy in motion in 1988 when it bought a regional banking company, Citizens Financial Group Inc. of Providence, R.I.
  London-based HSBC completed its purchase of card issuer and consumer finance giant Household International Inc. in March 2003. HSBC recently rebranded Household's vast franchise with the HSBC name.
  'Doing the Same'
  The reasons why the three British banks are buying U.S. card programs and banks involve a number of issues, including the need for growth, regulatory matters and the need to survive in a consolidating, global banking market.
  British banks are merely doing what U.S. issuers have been doing, according to a spokesperson for the London-based Association for Payment Clearing Services (APACS), a trade group of financial institutions. Some of APACS's members include Barclaycard, Royal Bank of Scotland, and MBNA Europe Bank Ltd., a subsidiary of MBNA Corp., the world's third-largest issuer.
  "American companies for years have purchased U.K. card portfolios to establish a presence here, and now U.K. issuers are doing the same in the U.S.," the spokesperson says, citing as an example Wilmington, Del.-based MBNA's purchase of Abbey National Bank's card portfolio for $412.6 million in March 2001. MBNA bought Alliance & Leicester plc's $1.2 billion card portfolio in August 2002. The deals became the foundation for MBNA Europe, which now controls more than 10% of the U.K. card market.
  And U.S. card issuers' desire for British card programs hasn't waned. Witness, for example, the furious bidding for Egg Plc, a U.K.-based online bank with 3 million credit card accounts, good for 6% of the region's card market.
  Prudential plc, which owns 79% of Egg, shopped it around for seven months in an attempt to exit the franchise that included a money-losing operation in France. (Banque Accord is negotiating to purchase Egg's French credit card business.) MBNA, Capital One Financial Corp. and J.P. Morgan Chase & Co. were rumored at one time or another to have submitted bids for Egg. Prudential changed its mind and pulled Egg off the market in August. None of the financial institutions confirmed that they had submitted a bid.
  The official scrutiny that card issuers receive in the U.K. but don't receive in the U.S. also may or may not be a factor. The Treasury Select Committee of the House of Commons, which is made up of members of Parliament, for example, has called card issuers to testify about pricing and other aspects of their programs.
  "Members of Parliament are good at asking questions, and they ask questions card issuers don't want to be asked," the APACS spokesperson says.
  The committee doesn't have any power to bring actions against issuers, but its hearings are closely monitored by government agencies that do. British newspapers also widely reported the committee's hearings. Two hearings were held in October.
  In the U.S., investigations of card-industry practices have been much more muted. Sen. John Kerry, the Democratic Party's presidential nominee, over the summer raised the issue of allegedly abusive credit card penalty pricing. Because this is an election year, some dismissed Kerry's concerns as political rhetoric. Also, the Office of the Comptroller of the Currency issued a warning to card issuers about their some of their questionable practices. Its effect is not yet known.
  Gary Hoffman, chief executive of Barclaycard, says the U.S. may be an easier market in which to operate because of the regulatory pressures and issues concerning transparency in the U.K.
  Another factor that is playing a role in the purchases of U.S. card operations by U.K. financial institutions is the way the banks view themselves.
  Seeking Growth
  The APACS spokesperson says HSBC and banking giant Barclays PLC, parent of Barclaycard, have always seen themselves as world-class institutions. In fact, an HSBC spokesperson made sure Credit Card Management knew that HSBC issues cards in 38 countries on five continents. And the APACS spokesperson adds that RBSG is emerging as a global bank.
  The commonest theme that runs through all of these deals, however, can be summed up in a six-letter word-growth. U.S.-based issuers in the U.K. such as MBNA gained share from the big banks by offering lower card pricing and attractive affinity and cobranded programs. But some believe the major British issuers' domestic market shares may have plateaued.
  "There are over 70 million people with credit and charge cards in the U.K., and two-thirds have at least one card," the APACS spokesperson says.
  Barclaycard's Hoffman, however, doesn't believe the British market is saturated. "In the U.K., the card penetration rate is 49% to 50%," he says. "We may reach a 65% penetration rate in five years, but we will be nowhere near the 75% penetration rate in the U.S. In the U.S., consumers may have eight cards, and in the U.K., they may have one or two."
  Indeed, few countries are as credit-oriented as the U.S. But despite some gains, credit cards are still a tough sell in Europe because of debit's dominance. Growing by staying close to home is tough.
  "We alternate with Barclaycard being either the No. 1 and No. 2 card issuer in Europe," says a spokesperson for RBSG. "We're looking for places to grow the cards business." RBSG has about 13 million cardholders in Europe.
  A Viable Strategy
  So, despite concerns about market maturity, the U.S. as the world's largest credit card market still attracts would-be issuers. Globally, there are an estimated $1.5 trillion in credit card receivables, and the U.S. accounts for half, says Credit Suisse's Orenbuch. New issuers are willing to fight for some of that huge pie, and they see the acquisition of American issuers as the most viable strategy for entering the market.
  "We've always had an eye on the U.S. market because it's so big," says Hoffman.
  Northampton, England-based Barclaycard said it purchased Juniper Financial to help Barclaycard International grow so that in 10 years its contribution will equal to Barclaycard's U.K. operations. At the time of the Juniper announcement, Barclaycard U.K. had 10.8 million cardholders and ?10 billion ($17.8 billion) in receivables, Hoffman says. Barclaycard International has 1.8 million cardholders in Europe and Africa.
  "Over the last four years, Juniper has been one of the fastest-growing credit card issuers in North America," Hoffman said in a statement at the time of the sale. "We believe this acquisition will provide us with a low-risk entry into the largest credit card market in the world ... "
  In an interview with CCM, Hoffman said "the U.S. market is certainly mature and certainly competitive. But we bought Juniper because its executives have managed much larger card operations, and its operational and technical platform is scaleable." (Juniper boss Richard Vague headed First USA, and others in senior posts at Juniper also worked there.)
  Hoffman also notes that Juniper has cobranded partnerships with such companies as AirTran Airways, Best Western International Inc., and casino operator Caesars Entertainment Inc., "which we see as a way of growing its card business."
  Ben Brake, chief marketing officer of Juniper Bank, Juniper Financial's operating arm, says Barclaycard's purchase will enable Juniper to move beyond card issuing into other areas, such as installment loans. The deal also will enable Juniper to offer international partnerships to its domestic affinity/cobranding clients.
  "Barclays issues cards in 30 countries, and we have only been able to offer clients domestic partnerships," Brake says.
  Similarly, HSBC is looking to expand is global presence, and cards are a key part of that strategy. When the bank announced its purchase of Household for $14.2 billion, HSBC said the deal would make it one of the 10 largest issuers in the world. At the time of the purchase, Household was the country's second-largest third-party issuer of private-label credit cards and the eighth-largest issuer of MasterCard and Visa cards, including the General Motors Corp. cobranded card.
  Partnerships
  Household also had over 200 branches in the U.K. and Ireland that operated under the HFC and Beneficial brand names. As a result, Household was a leading provider of credit cards in both countries. In Canada, Household had 110 branches that provided a range of consumer financial services.
  When the deal between Household and HSBC was completed in March 2003, the bank said personal financial services are now HSBC's largest line of business.
  Royal Bank of Scotland Group is following a similar strategy. In August, when RBSG announced that it had purchased Lynk, the bank also said that it would begin issuing a cobranded MasterCard for The Kroger Co., one of the nation's largest supermarket chains. The card, dubbed the 1-2-3 Rewards MasterCard, made its debut in October at Kroger stores in greater Cincinnati and Dayton, Ohio. It will be rolled out to other states in 2005.
  "The U.S. may seem like a saturated market, but we find customers in a profitable way through partnerships," the Royal Bank spokesperson says.
  Partnerships and acquisitions, that is. The U.S. card industry is definitely hearing more English accents.