In the past month three major issuers, holding nearly $30 billion in card loans, have sold or have publicly announced their intentions to get out of the card business. Indeed more than $35 billion of bank credit card receivables, representing an 8% market share, has been on the selling block this year.
Here's the skinny on the most recent issuers throwing in the towel:
After seven and half years of issuing VISA and MasterCards AT&T wants out. AT&T says it will now focus on "only businesses central to AT&T's communication services strategy". However the company indicated it would ideally like to continue its program in a cobranded relationship.
While AT&T sent shockwaves through the credit card industry in March 1990 with its launch of a no-annual-fee-for-life VISA and MasterCard, the recent announcement did not come as a surprise. AT&T initially signed up cardholders at an unprecedented rate, more than one million accounts per month. However the company has been frustrated in building its profitability in line with industry averages. AT&T's average balance per active account is $1106 compared to an industry average of $2109. Universal's YTD charge volume, per active account, is $1492 compared to an industry average of $2374. The portfolio ranks as the third largest VISA and MasterCard portfolio in terms of number of accounts but ranks as the seventh largest VISA and MasterCard portfolio in terms of outstandings. At the end of the third quarter AT&T Universal held $14.2 billion in receivables, $6.9 billion in third quarter volume, $19.7 billion in year-to-date charge volume, 18.9 million accounts and 22.5 million cards-in-force, according to CardWeb, Inc.'s CardData.
Premiums paid by buyers of credit card portfolios is averaging about 13% this year but the AT&T Universal Card portfolio has unique characteristics. The portfolio contains a disproportionate number of non-revolving cardholders and significant percentage of cardholders with no-annual-fee-for-life status. Under current market conditions the ability to assess annual fees is crucial to profitability. AT&T's timing is good as new management has brought chargeoffs and delinquencies under control and the company has largely recovered from an quarterly operating loss less than one year ago. However the market has a glut of higher quality portfolios on the block so it is likely AT&T may only draw a premium in the single percentage digits.
Chase Manhattan agreed to purchase substantially all of Bank of New York's credit card portfolio. BONY has been divesting its card portfolio since the first quarter of 1996 when it held $8.8 billion in receivables. At the end of third quarter BONY held $4,177,905,000 in receivables according to CardData. Chase will absorb all BONY card accounts, except late cycle delinquent and bankruptcy accounts, and will establish an agent program with BONY. The acquisition, expected to close by year's end, will boost Chase Manhattan's account base to about 21.4 million accounts and approximately $31.4 billion in receivables. During the third quarter Chase acquired First Omni Bank's $360 million 'Bell Atlantic' portfolio.
Reeling from a number of miscues during the past twelve months, Advanta reached an agreement to sell the bulk of its $10.5 billion credit card portfolio to Fleet Financial Group. Under terms of the agreement, Advanta will receive cash to produce an after-tax gain $500 million and will hold 1% of a newly formed limited liability company 99% owned by Fleet Bank. Advanta estimated the total value of the transaction to be $1.3 billion.
The purchase will move Fleet into the "Top Ten" of bank credit card issuers. According to third quarter data gathered by CardData the combined portfolio will have total receivables of $12.6 billion. Fleet will therefore become the nation's ninth largest issuer, based on outstandings, surpassing #10 Optima. Fleet's customer base will be approximately 9.3 million accounts.
Advanta's meltdown began last fall following the launch of its partnership program with American Express involving the Rewards Accelerator VISA and MasterCard which linked AmEx's rewards program to a VISA and MasterCard. Advanta became embroiled in trademark litigation with VISA and MasterCard over the product and eventually, after openly challenging the card associations, agreed to terminate the program. At the time Advanta's portfolio peaked at $12.9 billion. During the fourth quarter the company lost key eecutives followed by a $20 million operating loss in the first quarter of this year. In an effort to regain profitability, Advanta engaged in a portfolio wide repricing which boosted average cardholders rates by 300 basis points. Advanta also boosted fees, introducing new fees such as an account closing fee and a dormancy or inactivity fee. Since the peak in last year's third quarter Advanta's portfolio dropped to $12.7 billion (4Q96), $12.2 billion (1Q97), $11.2 billion (2Q97), to $10.5 billion (3Q97) according to RAM's CardData. The shrinkage has been largely attributed to tighter underwriting and higher attrition from the repricing efforts.
While the company is unloading its consumer credit card portfolio, Advanta said it will retain its corporate card business. Receivables for Advanta's business card products have risen from $218 million last year to $606 million at the end of the third quarter, according to CardData. Advanta is also retaining its mortgage and business services companies. Advanta National Bank and Advanta Financial Corp, the company's two banks, will also remain. Advanta also announced it will buy back about $800 million of its common stock after the transaction. The company estimates its book value will be about $650 million next year. Advanta will have combined managed assets of $8.4 billion and an additional $10.3 billion of mortgage contracts serviced.
Among casualties of the Advanta-Fleet transaction are Advanta CEO and former MasterCard International CEO Alex W. "Pete" Hart, and Jim Allhusen, who served as group executive of Advanta Personal Payment Services. Advanta's chairman and largest shareholder, Dennis Alter, will reclaim the CEO position from Hart. The company simply said the two top executives will "leave to pursue other interests".
Will the shakeout continue ? Stay tuned !
While the future of the AT&T Universal Card is cloudy, a new cobranded Universal card rolled out in late October. The Universal Studios Card is not a VISA or a MasterCard but rather a card issued by NOVUS Services. Perhaps confusing to most consumers the NOVUS brand belongs to the Discover Card people. So the new card will be accepted everywhere the Discover card is accepted. Cardholders will earn StudioPoints with each purchase good towards free admission to theme parks, movie and concerts. Cardholders may also earn the opportunity to play a walk-on part in a music video or television production.
