American Express deal raises stakes in Isle charge market

American Express Hawai‘i: Alliance with Pacific Century Financial Corp., parent company of Bank of Hawaii U.S. headquarters: New York, N.Y. U.S. cards: 33 million U.S. merchant outlets: 2.5 million U.S. annual volume*: $214 billion Visa Hawai‘i: Alliance with American Savings Bank and First Hawaiian Bank U.S. headquarters: San Francisco U.S. cards: 347 million U.S. merchant outlets: 4.3 million U.S. annual volume*: $788 billiion Mastercard Hawai‘i: Alliance with Bancwest Corp., parent company of First Hawaiian Bank U.S. headquarters: Purchase, N.Y. U.S. cards: 222 million U.S. merchant outlets: 4.3 million U.S. annual volume*: $407 billion *As of September 30, 2000 Source: Visa

And each year Lazar turns him down.

"Their fees are too expensive, and almost everyone carries another credit card anyway," said Lazar, whose restaurants already accept Visa and Mastercard.

Many merchants might have agreed with Lazar in the past, but things could change this year.

American Express recently announced a deal to buy Bank of Hawaii’s $226 million credit card portfolio, which many say could revive the hotly competitive local credit card market and create a window of opportunity for other banks to grab market share.

Competition in Hawai‘i’s credit card sector — which always has been intense — could be even fiercer this year, experts say. At stake is approximately $2.7 billion in credit card debt, about $5,400 per household.

"There are going to be a lot of incentives thrown at consumers to take one card over the other," said Robert McKinley, chief executive officer of CardWeb.com, a Frederick, Md.-based consulting firm that tracks the credit card industry for banks and card issuers.

McKinley said consumers likely will be bombarded in the months ahead with direct mailings touting incentives that could include attractive Hawai‘i-only promotions not offered anywhere else, or lower interest rates and fees for local card holders.

"There is a very big concern here for Visa, because all the banks issued only Visa and Mastercard up until now," McKinley said.

Thinking ahead

The Bank of Hawaii deal represents the first agreement by American Express to acquire a bank’s card portfolio, and was a strategic move as it waits for a verdict in its federal antitrust case against Visa and MasterCard International in the U.S. District Court for the Southern District of New York.

American Express executives testified in the Justice Department antitrust case that Visa’s bylaws unfairly blocked U.S. banks from issuing their card along with Visa cards.

American Express has largely failed to persuade U.S. banks to issue its charge cards, so a closer link with a big banking institution such as Bank of Hawaii was the next step.

The company is now hoping the Bank of Hawaii deal will help put American Express cards directly into the hands of consumers, industry analysts said, and become a model for other financial institutions that no longer see the credit cards as an attractive business to run themselves.

"American Express has been thought of only as a high-end card for years. It is attempting to shake off that perception without tarnishing its image," said Craig Woker, an analyst with Morningstar.

After the deal closes in the first or second quarter, Bank of Hawaii customers will continue to receive Bank of Hawaii credit cards, but American Express will handle the billing, accounting and processing of card transactions, American Express officials said. The new card will have the Bank of Hawaii brand along with a small American Express logo to signal the affiliation with the New York-based credit card company.

"This is a new area for us, but it is one that we have been looking at for quite a while," said Judy Tenzer, a spokeswoman for American Express.

American Express will buy about 148,000 credit card accounts with approximately $226 million in receivables from Pacific Century Financial Corp., parent company of Bank of Hawaii.

Pacific Century has struggled financially in the past couple of years. The company started a review of its business operations to sell any underperforming assets. So far it has announced plans to sell its credit card portfolio and branch operations in the South Pacific and Arizona.

"We are not selling and walking away," said Lori McCarney, executive vice president of marketing for Bank of Hawaii, of the decision to align with American Express.

McCarney said the bank realized it was not going to be able to provide the benefits and diverse choice that card holders were looking for. "We did not want our customers to be left behind," she said.

The transition is expected to be seamless for customers, McCarney said. The Bank of Hawaii-branded cards will be accepted at American Express’ merchant network worldwide.

Fight heats up

The deal comes as Bank of Hawaii’s credit card business has matured and profit margins have been shrinking just as competition heats up between national and local card companies.

"It’s definitely an opportunity. We will not sit idly by," said Ed Pei, senior vice president for electronic banking services for First Hawaiian Bank, of recent changes in the local credit card landscape.

Visa USA and Mastercard International also are helping local banks turn up the promotional volume in a not-so-subtle bid to win market share.

"We have already received a large number of calls from Bank of Hawaii customers who don’t want American Express," said Terry Hayes, a vice president with American Savings Bank, which will become one of the state’s biggest issuers of Visa cards once the Bank of Hawaii deal closes.

Visa launched its first attack in a full-page advertisement in The Honolulu Advertiser that took a shot at American Express, noting that its card is accepted by fewer merchants than Visa’s card.

"There is a lot of bad blood between American Express and Visa. There always has been," McKinley said.

In recent years Visa has been aggressively pursuing trendy restaurants and upscale merchants — typical American Express customers — in a bid for prestige and more corporate charge business. Meanwhile, American Express has been busy quelling discontent among some merchants annoyed with the company’s higher processing fees.

Visa is the largest consumer payment card system in the world, with 6,000 member banks. American Express, on the other hand, is a publicly traded company that issues its own cards directly through customers.

"It’s a very highly competitive environment," said Kelly Presta, a spokesman for Visa in San Francisco. "What is important for Visa is we have an opportunity to compete."

Internal memos at Visa earlier this month called the American Express deal to buy Bank of Hawaii’s portfolio "a money loser." Dated Feb. 6 and 7, the memos cited a random telephone survey of 578 Hawai‘i residents conducted Feb. 1-5.

Struggle to persuade

According to Visa, the survey found "60 percent of all Hawaiians [sic] expect Bank of Hawaii customers will be looking to other local banks for their banking and credit needs as a result of the AmEx deal."

American Express dismissed the survey as a public relations ploy. "Our reaction to that was it truly shows that Visa is on the defensive, and they have been for some time," Tenzer said.

American Express knows it faces some challenges, of which the biggest will be to convince Bankoh card holders that American Express is widely held. American

Express plans to start running its own marketing campaign as part of a joint-marketing agreement with Bank of Hawaii once the deal closes.

American Express says that while Visa dominates in number of transactions per year, the average sales amount is usually higher on American Express cards.

"Perception versus reality is the biggest challenge," said Bank of Hawaii’s McCarney. She said 97 percent of the dollar volume charged in Hawai‘i can be handled on an American Express card, and 85 percent of establishments that accept credit cards accept American Express.

"We are looking at filling in that gap. But we are starting with a perception that is lower than the reality," McCarney said.

Money matters

Getting more merchants to accept the American Express card may be easier said than done, experts say.

American Express typically charges merchants to 1 to 1.75 percent more to process its transactions than does Visa or Mastercard, said Morningstar analyst Woker.

"For small mom-and-pop convenience stores trying to minimize their expenses, this could be a very big issue for them," Woker said.

Back at Haleiwa Joe’s, Lazar said the American Express deal with Hawai‘i’s biggest bank changes things somewhat. He said more than half his business is paid for with credit cards, and he figures many of those sales are made on Bank of Hawaii credit cards.

"I might have to sit down with American Express again," Lazar said.

Frank Cho can be reached by phone at 525-8088, or by e-mail at fcho@honoluluadvertiser.com.

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