Three Strikes
From the February 2002 Issue of CardTrak
American Express, one of the greatest brand names in the world, has hit some very rough waters over the past six months. First strike was the recession, second strike was the terrorists, and the third strike was a court ruling.

This month, the financial services giant was dealt another setback when the U.S. District Court for the Southern District of New York granted a stay in its ruling which ordered VISA and MasterCard to drop their exclusionary rules which prohibit members from issuing American Express cards. The stay will enable the card associations to pursue the appeals process and could run from two to three years. In October, Judge Barbara S. Jones issued a 157-page ruling which said VISA’s bylaw ‘210(e)’ and MasterCard’s ‘Competitive Programs Policy’ weaken competition and harm consumers in a number of ways. American Express said the development “was disappointing, but not surprising.” VISA said the latest ruling “preserves the market structure of an industry” and avoids making the payment card business “subject to an academic experiment using untested remedies with unknown consequences.” MasterCard said the court recognized “the importance of maintaining the member business agreements pending appeal and the potentially irreversible consequences of imposing the Judgement.”

The September 11th attacks hit American Express hard as it was driven from its New York City headquarters, followed by an unprecedented decline in travel and entertainment activity by its cardholders. Corporate spending was already down before the attacks, but continued to spiral down through the end of 2001.

In late January, American Express reported that it Travel Related Services or card division had fourth quarter net income of $170 million, a 64% decline from 4Q/00. Weak business charge volume and higher provisions for losses were the major factors for the decline. However these factors were partly offset by the decline in marketing/promotion expenses and a lower payroll. Included in the 4Q/01 results are $219 million pre-tax ($140 million after-tax) of restructuring charges. Excluding the restructuring charge, TRS 4Q/01 net income would have been $310 million, down 34% from last year. Fourth quarter charge volume was down 5.5% compared to 4Q/00. Card loans have also slowed to an 11.5% annual growth rate, compared to 15.5% growth rate for 3Q/01. Charge-offs have soared 34% over the past twelve months while delinquency has increase nearly 18%. Thanks to lower funding costs, the net interest yield has dropped almost 25% and interest expense was down 35%.

Despite all the bad news for AmEx, it appears the worst is over as corporations and consumers begin traveling again.

SEARS GOLD

The Sears ‘Gold MasterCard’ portfolio exploded by 111% last year as the number of accounts climbed from 9 million at the end of 2000 to 19 million as of Dec 31, 2001. Receivables tripled during 2001, from $1.5 billion to $5.0 billion. Sears indicated it expects to add more than five million MasterCard accounts during 2002, and average balances to double as the portfolio matures. Sears also indicated it will switch the pricing for its core private label card to a variable rate later this year. For the fourth quarter, Sears reported total credit card receivables of $27.6 billion, a 2.2% increase over 4Q/00. The net charge-off rate for the fourth quarter increased to 5.23% from 4.79% last year, primarily due to increased customer bankruptcy filings during 2001. The delinquency rate was flat at 7.58% for 4Q/01, compared to 7.56% one year ago.

PAYROLL CARD

The 'Stratus Card' is picking up momentum with the signing of Children's Healthcare of Atlanta and Firstar's merger with U.S. Bancorp. The payroll ATM card is offered by Atlanta-based Skylight Corporation and issued through U.S. Bank. The pre-approved 'Stratus Account' is an FDIC insured, checkless account, targeted at unbanked employees. The card has access to 11,000 surcharge free ATMs and 50,000 point of sale locations. Skylight Corporation formed an alliance with Firstar Bank in August 2000 to offer the 'Stratus Card' to clients with employees in Ohio, Wisconsin, Missouri, Kentucky, Illinois, Indiana, Iowa, Minnesota, Tennessee, Arkansas, Kansas, Arizona and Florida. Firstar provided access to 2,200 ATMs. With the merger of Firstar and U.S. Bancorp, the program has been expanded to western states, and ATM access has grown five fold. Skylight has clients in 46 states and over 50% of the Fortune 100 companies currently have employees who have their pay deposited into their 'Stratus Account'.

PAYPAL IPO

Despite a pending patent infringement lawsuit and resistance from state banking regulators, PayPal has gone ahead with its IPO this month. The e-payments company is seeking to raise $70 million from its offering of 5.4 million shares at $13.00 per share. The stock, which represents a 9% stake in the company, will trade under the symbol: ‘PYPL’. DE-based CertCo filed a lawsuit against PayPal over patent infringement on Feb. 4th, delaying PayPal’s IPO, which was scheduled for pricing Feb. 7th. CertCo investors include Deutsche AG and Bank One. Meanwhile banking regulators in New York and Louisiana claim the company is providing unlicensed banking services and may prevent the firm from operating in those states. Furthermore, PayPal reportedly rebuffed a merger offer last year by Citigroup, which runs the rival ‘c2it’ P2P service. Ironically, Citigroup’s Salomon Smith Barney unit served as bookrunning manager for the new offering. PayPal launched its payments-via-email service three years ago and has lost nearly $300 million to-date. The company has 12.8 million clients. The PayPal service is widely used among buyers and sellers of online auction services such as eBay. PayPal members send more than $10 million per day in approximately 200,000 daily transactions.

ELITE REWARDS

Metris Companies and Cendant Corporation have signed a co-branded credit card agreement to issue the ‘Elite Rewards MasterCard’. Cardholders will earn one point for every dollar spent with the card, and bonus points when using their card at any one of 17 ‘Bonus Point Partners’. Some Cendant subsidiaries and ‘Bonus Point Partners’ participating in the rewards program include Days Inn, Avis, Howard Johnson, Knights Inn, Super 8, Travelodge, Villager Lodge and Wingate Inns. Points can be redeemed for airline tickets under the ‘Any Airline, Any Seat, Any Time’ program. Points can also be redeemed for hotel stays, car rentals, gift certificates at over 35 participating merchants, and specific merchandise rewards. The no-annual-fee ‘Elite Rewards’ card will be available to consumers in April. Metris will issue cards through its Direct Merchants Credit Card Bank.

TJX VISA

Capital One has landed the TJX co-branded credit card contract and will begin issuing the card in March. TJX Companies formerly issued the co-branded card through CT-based People's Bank. The card will be available in 1,400 T.J. Maxx, Marshalls, HomeGoods and A.J. Wright across the country beginning March 1st. Under the program cardholders will earn 5% rewards on TJX purchases and 1% for all other purchases. Rewards are issued to cardholders as they are earned in $10 increments. Pricing details have not been released. TJX operates 688 T.J. Maxx, 582 Marshalls, 112 HomeGoods and 45 A.J. Wright stores in the United States.