A Credit Card Revolt At The Banks?

Citibank and other major issuers are wondering just how much they need Visa and MasterCard

Open your wallet. Take out your credit cards. Most likely, you have several Visas and MasterCards. Look at the blue-and-yellow Visa logo and the orange-and-red MasterCard logo. You may not have noticed it, but the logos are about 15% smaller than they used to be--and the name of the financial institution or a co-brand like United Airlines is probably in larger type.

These changes may seem insignificant. But they symbolize a potentially far-ranging realignment in the $2 trillion-dollar credit-card business. That shift could seriously undermine Visa and MasterCard's hegemony.

For three decades, the two associations have led the development of the credit-card market, linking more than 20,000 financial institutions that own Visa and MasterCard. They built two umbrella brands, which have gained near-universal retail acceptance and consumer recognition. The associations also operate the back-office switching networks that allow banks to communicate with each other. In return, they receive dues from the banks, plus a slice of the transaction fees charged to retailers. That added up to an operating profit of $673 million in 1997 for Visa International in the U.S. alone, and $55 million for nonprofit MasterCard International, which they plow into promotions and network enhancements.

MEGABANK MUSCLE. For the majority of the banks, these services are well worth the price. But now, as rapid bank consolidation shifts ownership of the card business toward a few Goliath banks, the calculus is changing. The top five card-issuing banks--Citibank, MBNA, Bank One/First USA, Chase Manhattan, and Household International--have 52% of the business. With their own national brands, marketing budgets, and sophisticated processing systems, these megabanks don't need or want much marketing assistance from the associations. In fact, banks complain they are actually subsidizing the associations by running huge volume through their processing networks. "Large issuers are increasingly asking how much do we really want Visa to do," says James G. Jones, head of consumer credit at BankAmerica Corp. and a bank representative on the Visa board. Adds Philip G. Heasley, vice-chairman of U.S. Bancorp, "Some bankers believe it would be in their best interest if Visa and MasterCard started evaporating. Others are running for cover under their brands. We're in-between."

The associations are well aware of the issue. "Whether they like it or not, the Citibank name isn't recognized at merchants," insists Steven VanFleet, head of U.S. consumer programs at MasterCard. "A number of times, banks who have wanted to do things on their own have come back to us." Carl F. Pascarella, chief executive officer of Visa USA Inc., says, "It's an era when banks can do more for themselves. We will make sure we are not only relevant but absolutely necessary."

To preserve their relevance, Visa and MasterCard are pushing into new payment systems such as debit cards and smart cards. But they are facing new competitors, new technology, and even the Justice Dept., which is probing possible antitrust problems. "Their role is in flux. Their existing role will definitely decline in importance," claims Dudley M. Niggs, executive vice-president of Wells Fargo Bank.

Still, few companies can rival Visa in marketing savvy. Its long-running "It's Everywhere You Want To Be" tagline and big-ticket sponsorship of events such as the Olympics have made it the most recognized brand name in the financial industry. That recognition, and its ongoing battle for market share with MasterCard, have caused credit-card use to soar. But it also has lowered the barriers to entry. In the early 1990s, nonbanks such as AT&T, Advanta, and First USA were able to enter the market and quickly take on the larger banks by issuing Visa- and MasterCard- branded cards with no annual fees and lower interest rates.

BRAND WARS. That has been great for the consumer, but it has helped wreck the economics of the industry. According to Lee A. Spirer, a consultant with Booz, Allen & Hamilton Inc., since 1992, the average return on assets for credit-card issuers has slipped from 3.5% to 1.5%.

The tougher competition and slower industry growth have prompted big banks to stand out by promoting their own brands--hence the shrinking logos. "It is inevitable that the branding strategies of the associations and the banks will start to run into each other," says Wells Fargo's Niggs.

The leader in the slowly building revolt against Visa and MasterCard is clearly Citibank, which accounts for 16% of all credit cards and is the industry's largest Visa and MasterCard issuer. Several years back, it experimented with its own credit card. And it has long vied for equal attention for its brand. Former ads carried the tagline: "Not just Visa, it is Citibank Visa." Unlike many big banks, it has even refused to issue Visa- or MasterCard-branded debit cards.

Last year, several sources claim, Citibank considered acquiring American Express Co., which not only issues cards but handles all processing for merchants. "This would give Citi a proprietary network and brand it could build into a Visa-like dominance," says Michael Smith, a consultant with Mercer Management Consulting. But Citi would have had to force Visa and MasterCard to change their bylaws that prohibit member banks from issuing American Express cards--or failing that, resign from the associations.

Citibank may already be pressing Visa and MasterCard more aggressively on fees. David Robertson, president of The Nilson Report, a credit-card newsletter, says Citicorp CEO John S. Reed recently called a meeting of Visa board members to discuss how much to spend on advertising the Visa brand, vs. lowering fees to members. Citibank executives declined comment on the event.

The nation's largest banks are trying to pressure Visa and MasterCard to drop their "all for one, one for all" philosophy and behave more in the biggest players' interests. The size of both boards has been significantly shrunk to focus more on the big banks. Representatives of large banks on both boards are arguing against funneling money into developing new credit products such as Visa's Signature Card and World MasterCard. "The tension is definitely escalating," says John H. Bennett, a banking consultant and former head of marketing for Visa International. "Visa has grown beyond the banks' wildest dreams and fears."

In the future, says Citicorp's Daniel Schutzer, an expert on Internet technology, big banks also may question how much they are paying for the backbone network provided by Visa and MasterCard. Companies such as Hackensack (N.J.)-based First Data Corp., which do substantial bill-processing for banks, already can authorize and clear a good percentage of transactions between banks without the Visa or MasterCard networks. "As the Internet develops," says Schutzer, "there will be both private and public network alternatives."

To bolster their position, Visa and MasterCard are expanding their systems around the globe, opening new avenues, such as allowing consumers to charge their utility bills, and broadening their role beyond consumer credit cards to corporate cards, debit cards, and new products like stored-value cards. In the past three years, debit cards have brought banks an extra $700 million in annual revenue. For continued growth, both point out that 80% of all purchases are still made by cash and check. "Ultimately, people will come to see Visa as the world's best way to pay, as opposed to the world's best credit card," brags Michael Beindorff, head of marketing at Visa USA.

But Visa and MasterCard have not been as successful in blazing a path for their members in the virtual world. True, most transactions on the Internet are made with traditional credit cards. But so far almost all new initiatives by the associations--such as Visa Interactive, a home-banking platform, and SET, a protocol jointly developed by all the major credit-card companies to secure Internet transactions--have fallen flat. Smart-card pilot programs that Visa and MasterCard have run over the last two years, such as one recent test in New York City's Upper West Side, have generated little consumer interest. And in a slap at the two cards' brands, major banks have formed separate consortiums to set their own standards for E-commerce, such as Integrion Financial Network, a venture with IBM for Internet banking.

Visa and MasterCard still retain a commanding position and could overcome these obstacles. But the evidence suggests the two card giants may be reaching their credit limit.