card issuers – banks – are already having to contend with saturated
credit markets as they fight for new business. Now, US non-bank
issuers are also ratcheting up the competitive pressure in the
battle for market share. Victoria Conroy

Within the US credit card industry, non-bank institutions have
always been a fundamental part of the system. They occupied a small
space that the major bank issuers could not serve, or indeed did
not want to serve. Non-banks dominated the store card industry –
Sears and Federated Department Stores were two of the largest US
retailers with sizable credit card programmes. The profitability of
such store card portfolios made the bank issuers envious, and soon
they were acquired by JPMorgan and Citi respectively.

Also, the acquisition by Bank of America of the largest non-bank
issuing institution in the US – MBNA – demonstrated how lucrative
non-bank card portfolios could be. Such acquisitions, however, do
not suggest that non-banks are under threat from their more
established bank competitors. It could be that the reverse is
slowly coming true.

Expansion and diversification

Non-bank players have built upon their success to expand their
operations into the mainstream credit lending space. The rise of
non-bank players correlates with the general shift towards
electronic payments and card products, instead of cash and cheques,
particularly with regard to payments made at POS locations. At the
same time, non-bank players have also increased and diversified
their activities, such as the operation of ATM networks, and have
benefited from the rise in the use of debit cards in the US.

Electronic funds transfer (EFT) networks, used for ATM and online
debit card transactions, have a large non-bank presence. Non-banks
also are important operators of ATM terminals and are prevalent in
private-label credit card issuance. Debit card issuers comprise an
important third category. The majority of debit cards are issued by
banks belonging to one or more of the regional or national EFT
networks or offline debit card networks, but some non-banks issue
debit cards as well.

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New entrants, such as card payment network Tempo Payments,
previously known as Debitman, have made their bank issuing
competitors sit up and take notice. In the prepaid card space,
non-bank players are even more prominent.

Increasingly, non-bank players are taking away market share from
their bigger bank rivals, and as such they are becoming an even
more important part of the retail and consumer credit payment
systems, due to the competitiveness they have brought to the wider
payment industry.

A look at the activities of some of the best-known non-bank players
over the past year indicates how proactive they have been in
increasing their presence in the wider payment industry.

GE Money

GE Money is the world’s largest non-bank financial institution.
With $163 billion in assets, GE Money provides credit services to
consumers, retailers and auto dealers in approximately 50

In 2006, it teamed up with online auction website eBay to launch
the PayPal Plus credit card, a MasterCard-branded card
incorporating a rewards programme. The Plus Card is an expansion of
the relationship originally created in June 2004 for GE to offer
PayPal Buyer Credit, a private-label revolving credit line
available to registered PayPal customers. The PayPal Plus Credit
Card is part of a new multi-year credit agreement in which GE also
plans to launch an eBay-branded credit card. GE Money Bank will be
responsible for issuing the PayPal Plus Credit Card, and providing
customer service, billing and credit management.

In January 2006, GE announced that it would issue American
Express-branded credit cards in the US, enabling retailers to have
more choice and flexibility. The first product to be offered under
the new agreement was a card for retailer Dillard’s. Under the
terms of the agreement, GE is responsible for issuing the cards,
managing the customer relationships and providing customer service,
billing and credit management.

Tempo Payments

Tempo Payments operates a PIN-based payment network that uses
retailer-issued and branded debit cards. The Tempo Payment Network
requires no merchant changes at the point of sale because
retailer-issued cards are accepted through existing payment
terminals and processor networks. Retailers issuing and accepting
Tempo-enabled debit cards are charged lower interchange rates,
reducing their payment processing costs. Participating retailers
can pass on a portion of the savings to consumers in the form of
incentives and discounts, which increases customer loyalty and
drives more frequent and larger purchases.

In November 2006, Tempo signed an agreement with Fiserv EFT to
provide access to the Tempo Payment Network beginning in early
2007. Fiserv EFT operates one of the largest debit authorisation
gateways in the US, providing ATM and debit services to more than
2,700 financial institutions across the US, and the agreement
provides expanded processor access to the Tempo Payment Network for
merchants issuing and accepting retailer-branded debit cards.
Fiserv EFT currently processes approximately 435 million ATM and
debit transactions per month, making it one of the largest EFT
processors in the US.

Over the past year, Tempo has expanded its processor relationships,
raised $12.3 million in financing, and worked with grocery,
pharmacy and convenience store chains to issue retailer-branded
debit cards. Retailer-branded card programmes are available through
Homeland Stores, Wesco and Wawa.


Discover Financial Services, a business unit of Morgan Stanley,
operates the Discover Card with more than 50 million cardholders,
and the Discover Network, with more than 4 million merchant and
cash access locations. Discover Financial Services also operates
the Pulse ATM/debit network, which serves more than 4,200 financial
institutions and includes nearly 250,000 ATMs and approximately 3.4
million POS terminals. Discover acquired the Pulse ATM/debit
network in January 2005.

In February 2006, Discover announced that it had become the first
credit card services company to compete directly with Visa and
MasterCard in the rapidly growing US signature debit market with
the launch of Discover Debit. This marked the first new signature
debit programme to be offered to financial institutions since the
ruling in the Department of Justice anti-trust case in October
2004. The ruling enabled financial institutions that already issue
credit or debit cards from the bank card associations to issue
additional cards from other brands.

First Data

First Data Debit Services, part of global payment processor First
Data, provides ATM, PIN-secured and signature debit card
processing, ATM terminal driving and monitoring, fraud prevention
services and PIN-secured debit network access via the Star Network.
Approximately 5,500 financial institutions participate in the Star
Network, offering cardholders access to their deposit accounts at
approximately 2 million ATM and retail locations in the US. There
are approximately more than 140 million cards carrying the Star

Star has a broad footprint of distribution points across the US,
including the acceptance of the Star card at approximately 5.1
million POS terminals. In 2005, First Data Debit Services processed
9 billion transactions.

MasterCard considering non-banks

Visa and MasterCard, being bank-owned membership associations, are
also watching the rise of the non-bank issuers intently. Recent
speculation in the US alluded to MasterCard considering authorising
non-banks to be card issuers on its network, which would have
wide-ranging implications not only for MasterCard and its bank
customers, but also for the wider payment industry. If non-banks
were to become issuers, banks would be eliminated from the payment
processing side of the business, resulting in a significant dent in

Also, the recent spate of interchange-related lawsuits in the US,
brought by disgruntled merchants, would be threatened – instead of
paying interchange to banks, merchants would receive interchange
themselves. This too would have a major impact on bank

There are significant obstacles in the way, however. Any merchant
would have to have an official bank or an industrial loan company
(ILC), via a Federal Deposit Insurance Corporation (FDIC)-insured
loan company, but this would have the potential to bolster the
merchant’s profits.

Wal-Mart alliances

The world’s largest retailer, Wal-Mart, has been thwarted by
regulators in its efforts to buy a US bank, but it has been
successful in forging alliances with other non-bank players. In its
latest move, announced in January 2007, it linked up with Discover
and GE Money to launch a fee-free Wal-Mart Discover credit card,
offering 1 percent cashback. Wal-Mart already has bank branches in
its supercentres across the US, and is planning to expand the
number of Wal-Mart-branded money centres, which offer payroll
cheque-cashing services, money transfers and money orders at
significantly lower costs than its banking competitors.

In March 2007, Wal-Mart was foiled again in its plans to open a
bank, after intense opposition from consumer groups and politicians
scuppered its 2005 application with the FDIC, forcing Wal-Mart to
withdraw its application. Wal-Mart said its application had been
surrounded by “manufactured controversy” since its submission, and
it was dropping its bank plans in order to focus on rolling out
financial services through its store network.

Wal-Mart said that it was looking to use the bank to internalise
credit card and cheque transactions, enabling it to save money on
more than 140 million credit and debit card transactions carried
out each month at its stores, but opponents to the plan insisted
that it was just the first step towards Wal-Mart becoming a fully
featured retail bank.

Other non-banks, such as retailer Target and auto manufacturer
General Motors, had previously received approval from the FDIC to
operate banks.

Another large US retail chain, Home Depot, is ploughing ahead with
plans to acquire an existing bank, EnerBank USA. Home Depot said
that the Wal-Mart decision would have no effect on its plans, but
it has yet to receive FDIC approval. In the wake of the Wal-Mart
decision, it is unlikely to gain approval, and this will
undoubtedly deter other retailers from pursuing similar
applications. Another stumbling block was the January 2007 decision
by the FDIC to delay reviewing applications for ILCs. There has
also been pressure in the US Congress to bar non-banks, such as
retailers, from owning banks.

Other companies that will be blocked by the moratorium include
DaimlerChrysler AG and American Pioneer. However, the FDIC did lift
the freeze it had put on applications by financial companies for
new ILCs.

There are also other risks exclusive to the non-bank players. In
the US, there is increased concern about the possible associated
operational risks facing non-bank issuers, and that has led to a
renewed focus on their supervision.

According to a recent paper from the Federal Reserve Bank of
Kansas, non-bank issuers that rely on outsourcing their card
operations to third parties run the risk of fraudulent card
purchase liability being placed on merchants, which merchants argue
discourages issuers from implementing stronger anti-fraud

Also, critical software and payment processing services are
sometimes outsourced so that the issuer does not face liability in
case of failure.

Security risks

Another risk is that of security. Electronic payment networks are
vulnerable to viruses, worms and other types of computer hacking.
Processing transactions over these networks is also at risk –
online debit transactions are processed in real-time, making it
impossible to reverse a fraudulent transaction. Many security
incidents relate to the use of databases and computer systems for
the execution of transactions and storage of payment

Recently, several high-profile PIN debit fraud incidents in the US
have focused attention on the safety of such information.

According to the paper by the Federal Reserve Bank of Kansas, the
risks tied to the participation of non-banks in the payment process
interact with risks associated with electronic networks. Non-banks
can add another link in the chain of information flows in payment
clearing and settlement, resulting in yet more complexity.

Non-bank payment providers in electronic networks pose challenges
even if they are supervised, because they have risk profiles that
are different from those that concern supervisors of banks. The
supervisory process that governs oversight of non-banks has evolved
over time, but is it sufficient to manage the risks that have
accompanied the trend towards more non-bank players providing
electronic payment services? This is something that the Fed is

A combination of regulatory obstacles and capital requirements may
certainly restrict the ability of non-banks to take on their bank
counterparts in offering comprehensive retail banking services, but
in the cards sector, for the time being at least, banks will
continue to monitor the developments of their non-bank rivals