A tumultuous month has seen a wave of rushed
banking mergers and acquisitions across the world, with
consequences for the cards businesses of several leading players.
The ramifications will also spread much wider to the card networks
and processors, as Charles Davis reports.

With the greatest reconfiguration of the American banking industry
in the rear-view mirror, it is safe to say the financial landscape
will never be the same, and that certainly includes the credit and
debit card issuance and processing markets.

Whether Wells Fargo and Citigroup wind up splitting assets or not,
the changes to the cards industry promise to reverberate across the
payments industry for years to come, likely triggering a subsequent
round of consolidation among issuers. Already on the books,
JPMorgan Chase’s purchase of Washington Mutual’s banking arm alone
could shift the balance of power between MasterCard and Visa, and
offers MasterCard a game-changing opportunity to regain some of the
ground it has recently lost to its rival.

The meltdown and subsequent bailout, and the breathtaking
willingness of federal regulators to intervene in steering assets
between chosen players, could have the biggest effect on processors
like First Data and TSYS, which must work to retain market share in
a rapidly changing marketplace.

Macroeconomic headwinds

The greatest threat to issuers may have little to with the moving
chess pieces and far more to do with the macroeconomic drag being
produced daily on the consumer. This will inevitably exacerbate the
decline in consumer spending already underway and accelerate the
shift to debit at the expense of more profitable credit
transactions. This spreads the pain between issuers and processors,
who reap much more revenue from credit transactions.

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This much is certain: JPMorgan Chase’s credit card portfolio got a
real shot in the arm by adding Washington Mutual’s $28 billion card
portfolio to the mix. JPMorgan has a storied reputation as a master
at integrating acquisitions, and has already said it plans to let
the subprime half of that portfolio run off, planning instead to
use the celebrated WaMu branch network to grow the cards

Marketing cards from branches is one of JPMorgan’s great strengths,
so adding a massive new distribution platform in markets new to the
bank clearly outweighed worries over the risk inherent in a
portfolio that some analysts have said is as much as one-quarter

The acquisition of WaMu’s banking operation from the Federal
Deposit Insurance raised JPMorgan Chase’s card receivables to about
$181 billion. And many of those cards were already generated
through branch sales: card distribution through branches accounted
for 35 percent of its new accounts in the second quarter, compared
with 38 percent in the first quarter and 37 percent in the fourth

That is impressive, until one realises JPMorgan recently said its
branches produced two times more credit card sales than WaMu’s did
last year. If JPMorgan can bring WaMu branches up to its own
performance levels, the bank said it could result in 500,000
additional card sales a year.

On a conference call with investors and reporters, Charles Scharf,
the CEO of JPMorgan Chase’s retail financial services, said:
“Because of what we have at JPMorgan Chase, we will have the
ability to just bring a whole series of products and services that
Washington Mutual did not have.”

JPMorgan Chase will now enjoy tremendous leverage in negotiations
with both card associations.

“We haven’t decided what we are going to do with brands yet,” James
Dimon, JPMorgan Chase’s chairman and CEO, said in response to an
analyst question on a conference call to discuss the WaMu

The addition of WaMu is not without its fair share of headaches for
JPMorgan Chase. During its second-quarter earnings conference call
in July, WaMu increased its charge-off projection for this year to
10.5 percent, up from the range of 9.5 percent to 10.5 percent it
predicted in April.

MasterCard and Visa must be watching developments in the legal saga
of Wachovia, Wells Fargo and Citibank closely, as the effects of
that battle could have major repercussions on each

Wachovia is Visa’s fourth- largest US debit issuer, and Citi issues
mostly MasterCard-branded debit products, while Wells Fargo issues
mostly Visa debit cards. WaMu was MasterCard’s largest single debit
issuer, while JPMorgan Chase predominantly issues Visa debit

Wachovia re-entered the credit card-issuing business in July 2006
after Bank of America bought MBNA, which had previously issued
Wachovia’s cards.

Should Wells Fargo prevail in the battle for Wachovia, it would
create a true debit card giant as well as a credit card powerhouse
with a 39-state ATM and branch network.

Banking presence

Wells said buying Wachovia would give it a banking presence, for
the first time, in: Alabama, Connecticut, Delaware, Florida,
Georgia, Kansas, Maryland, Mississippi, New Jersey, New York, North
Carolina, Pennsylvania, South Carolina, Tennessee, Virginia, and
Washington DC.

Wells would cement its position as the nation’s second-largest
issuer. It had 17.5 million cards in issue as of the end of 2007,
while Wachovia is the fifth-largest, with 10.4 million cards.

At the time of going to press, it is anyone’s guess as to which
banking giant will win the prize of Wachovia.

Wells Fargo has asked a federal judge to void Citi’s earlier
agreement to buy parts of the Wachovia retail banking business,
while Citi has filed a $6 billion breach of contract and tortuous
interference suit against Wells in New York state courts after
agreeing initially to bow out of the Wachovia sweepstakes.

Federal regulators have pitched a deal that would divide Wachovia’s
retail operations geographically, a move that would carve the
bank’s debit and credit portfolios fairly evenly, leaving both Citi
and Wells Fargo short of the national issuance platform each
clearly craves.

For a banking system already in disarray, the prospect of a lengthy
court battle could further erode confidence in the system and place
tremendous pressure on the federal government to intervene and
resolve the situation.