Credit Card Affinity Agreement between MBNA and ACC Bank: Competition Authority Decision

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Introduction

Notification was made on 13 March 2001 of a Credit Card Affinity Agreement between MBNA Europe Bank Limited and ACC Bank Plc. with a request for a certificate under Section 4(4) of the Competition Act, 1991 or, in the event of a refusal by the Competition Authority to issue a certificate, a licence under Section 4(2). The agreement is an amended version of MBNA’s Standard Credit Card Affinity Agreement, Notification CA/1/98, which was granted a certificate by the Competition Authority (Decision 522).

The Facts

(a) The Subject of the Notification

2. The notification concerns a Credit Card Affinity Agreement (“the Agreement”) between MBNA Europe Bank Limited (“MBNA”) and ACC Bank plc (“ACC”). The agreement sets out the terms and conditions for the marketing of an MBNA/ACC credit card to ACC customers, employees and others. MBNA is not being given direct access to ACC’s customer lists.

(b) The Parties

3. MBNA Europe Bank Limited (previously MBNA International Bank Limited) is a wholly owned subsidiary of MBNA America Bank, N.A. a company incorporated in the United States of America and having its address at Wilmington, Delaware, 19-884-0785, USA. The company is registered in England and Wales and is acting through its Irish Branch Registered Number E3873 at 46 St. Stephen’s Green, Dublin 2. The principal activity of MBNA is the issuance of bank credit cards and ancillary activities in the United Kingdom and the Republic of Ireland. On its website, MBNA America Bank, N.A. states it is the largest independent credit card lender in the world and also provides retail deposit, consumer loan and insurance products, though not currently in the Republic of Ireland. It also states that it is by far the leading affinity marketing company in the credit card industry and has the endorsement of more than 4,700 organizations worldwide. In the year 2000, MBNA America Bank, N.A acquired 459 new endorsements from organizations, including 80 in Europe. The company states that it directs its marketing efforts primarily to members of endorsing groups, to customers of financial institutions, and to targeted lists of people with a strong common interest.

4. ACC Bank Plc is a credit institution incorporated in Ireland as a public limited company with its principal place of business at Charlemont Place, Dublin 2.

5. The nature of the services affected by the Agreement is the provision of credit card services to Irish resident consumers. The relevant credit cards were designed for compliance with Irish law and cannot be marketed in any other jurisdiction. The notifying parties stated that the Irish credit card market was a subset of the total Irish market for payment cards. That total market could be divided into two sections:

a. payment cards offering domestic and international acceptance; and
b. payment cards accepted only in one or more domestic stores.

Within each of those sections there can be a number of competing product types:

i. credit cards, where credit is advanced and may be left outstanding;
ii. charge cards, where credit is advanced but must be repaid in full at the end of each billing period (usually one month); and
iii. debit cards, where no credit is advanced, the card merely being used to access a current account.

6. The Agreement only relates to credit cards (i. above) offering domestic and international acceptance (a. above). Although the notification only concerns that part of the market so described, the notifying parties claimed that it should be considered in the wider context with the other product types (in both market sections) being seen as substitute and competing products.

7. The relevant market is that for the issuance of credit cards offering domestic and international acceptance, and the provision of credit card services in the Republic of Ireland.

(d) Structure of the Market

8. The provision of credit card services is divided into two levels, credit card issuers (“Issuers”) and credit card acquirers (“Acquirers”). Issuers provide the actual cards, related account and credit facilities to consumers, subject to the Issuer’s terms and conditions. The main Issuers in the State are Allied Irish Banks plc and Bank of Ireland. Acquirers provide credit card acceptance facilities to merchants. An Acquirer will arrange payment to a merchant for credit card transactions and will in turn be reimbursed by each relevant Issuer. The main Acquirers in the State are Allied Irish Banks plc and Bank of Ireland.

9. In addition, to enable a credit card to be accepted for payment it is necessary for the relevant Issuer and Acquirer to be a member of the same payment system. The two main international payment systems are VISA and MasterCard both of which are wholly owned by their respective members. The payment systems provide a global framework and rules for use of affiliated credit cards

10. MBNA does not operate as an Acquirer and has no current intention to do so. MBNA commenced operations in Ireland as an Issuer in March 1997; the Agreement relates solely to its activities as an Issuer.

11. The notifying parties believed that market share (by number of cards issued) was currently distributed amongst Issuers as follows;

Table 1:

Participants	Market Share
Allied Irish Banks plc	[ ]%
Bank of Ireland	[ ]%
MBNA	[ ]%
TSB Bank	[ ]%
Ulster Bank, National Irish Bank and Tesco	[ ]%
ACC Bank	[ ]%
TUSA	[ ]%

12. The parties stated that there were substantial barriers to entry to the market. In order to become a member of either VISA or MasterCard for any particular jurisdiction, one needed to be authorised to carry on banking activities in that jurisdiction. Such a requirement led to substantial capital and regulatory costs. Each payment system required the installation of a major computer system to enable the daily clearing of transactions and there are initial and on-going payment system fees. Initial marketing costs were also high, the parties claimed.

13. Despite the barriers to entry, the market for issuing credit cards in the State has changed dramatically in recent years. Historically, the two major banks, AIB and Bank of Ireland, had issued almost the entire credit card stock in the State, either through the banks themselves or on behalf of smaller banks and building societies. The emergence of MBNA in the State was followed by the entrance of TUSA to the market in October 1999 and then Tesco Personal Finance, with a VISA card offering an initial APR of 4.9%, in May 2000.

14. It is estimated by the Authority that 22% of Irish adults hold credit cards, which is low compared to the US where over 80% of adults have credit cards. There are approximately one million active credit card accounts in the State. The Irish government charge an annual lump sum tax per credit card account held in the State. This reduces the incentive for customers to have more than one credit card account. The basic measurement of price in relation to credit cards is the Annual Percentage Rate of Interest (“APR”). The standard APR of credit cards in Ireland ranges from 16.9% to 18.9%; around six percentage points lower than the rates that existed before MBNA’s entry in to the Irish market. As more than half of the State’s credit card holders clear their balance every month, and thus incur no interest penalty, it seems that APR differences may not induce customers to gravitate to low APR card issuers. In fact, APRs have converged over the past four years. MBNA (as well as Tesco) currently offers the lowest standard APR on the market, of 16.9%, but also offers tailored rates to certain customers through affinity groups. ACC/MBNA is currently offering 18.9%.

15. MBNA generates a substantial amount of income by authorising and providing specialised credit cards, a practice known as “affinity marketing”. MBNA’s marketing in the State is tailored to such “affinity groups”. These are groups which have common interests or loyalties, such as professional societies, members of clubs, employees of large corporations, financial institutions etc. MBNA competes for existing customers of other bank’s credit cards by offering low introductory APR’s and special deals. MBNA also uses the information given to it by the affinity groups to try and increase the numbers of people holding credit cards. Credit card affinity groups enable the card

issuer and the affinity group to exploit synergies. For example, the affinity group can send promotional material etc. with the monthly credit card bill. Credit cards issued to affinity group members or financial institution customers usually carry custom graphics and the name and logo of the endorsing organization. MBNA develops a customized marketing program for each endorsing organization or financial institution. In addition to servicing the credit cards, MBNA offers economic incentives to the endorsing groups and financial institutions.

16. The parties submitted that MBNA currently has more than 60 Irish-based organisations now endorsing an MBNA credit card programme, including the Law Society and Dublin Zoo. MBNA already has affinity programmes with two financial services companies in Ireland: Irish Permanent plc and One Direct...

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