Friday, July 04, 2003

Plastic slowly contracts The credit card industry has a fourfold structure: The big credit card companies (Visa and MasterCard above all) that act as intermediary between the vendor and the money source, and often some of the transaction processing Certain companies that specialize in handling the transaction from the point-of-sale (see our write-up on Concord and First Data) The retailers and other business who decide what cards to accept The banks and other institutions that issue the cards (Visa, MasterCard) and monitor the consumer accounts. The credit-card issuing operations of banks are consolidating fast. The reason is that the bigger the number of debtors, the easier it is to spread the risk. The way they do it is to buy up the debt of other banks, and at a premium, from 15% to 20%. Here are some of the recent deals: J.P. Morgan Chase bought a chunk of the Providian bank debt portfolio $8.2 billion. Bank One bought some of Wachovia's debt for $6.2 billion Household Credit Services bought the Saks department store debt for $1.4 billion MBNA bought another part of Wachovia's debt for $1.3 billion Last year, according to one report there were 37 deals adding up to $24 billion worth of debt. This year there have been 20 deals for $4 billion. In general, over a hundred deals have taken place in the last few years, as small banks and financial institutions and a wide variety of retailers (like Ann Taylor and Reeds Jewelers) sold their debt portfolios. Slower this year, but the big prize is on the table: the $31 billion Sears debt from their proprietary credit cards. Sears has decided it does not want to be in the credit business any more. The credit card issuing leaders are: Citigroup MBNA Bank One Chase Manhattan Bank of America Capital One Household Credit Services Discover (a special case, since it has its own card) The order after the first three may have changed somewhat. These rankings are for 2000. In 2000, the ten largest companies accounted for 75% of he credit cards issued; that total is certainly higher by now. The reasons for consolidation are typical of any industry: Perceived (and real) economies of scale The ability to set rates and fees Fewer wild card competitors Increased marketing muscle The ability to talk to politicians (about passing new personal bankruptcy laws that protect issuers, for example) Stength in dealing with other businesses, especially MasterCard and Visa Fear of being left behind Overall, the desire to control as much as possible the ecosystem of the industry For these reasons, assuming others' debts becomes worth a premium price. We have seen fines and fees increase substantially in the last few years. Although the new bankruptcy laws did not pass, we assume that the issuers' banks and their alies will keep trying. Info from Business Week, June 16, 2003 "Plastic that Looks like Gold" 5:26:48 PM

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