The takeover tussle for ABN AMRO rumbles
on, in another instalment of the rapid consolidation of Europe’s
banking industry. What would a potential combination of ABN AMRO
and Barclays
mean for their respective card operations? Victoria

 The long-running takeover saga between UK banking behemoth
Barclays and ABN AMRO of the Netherlands has dominated business
headlines over the last few months and there seems to be no sign of
a resolution any time soon, particularly as Royal Bank of Scotland
(RBS), Spain’s Santander and Benelux banking group Fortis have
thrown their hats into the ring.

Barclays is determined to secure the Dutch banking group, which
incorporates investment banking, cash management and trading
operations, and it is these aspects of ABN AMRO’s business that
Barclays sees as the most lucrative areas of profit in any merged
entity. This is also the reason why RBS, Santander and Fortis are
refusing to give up the fight to land ABN AMRO, although Barclays
has long been tipped as favourite to win.

The saga took another twist in July 2007, when China Development
Bank and Singapore stake investor Temasek agreed to invest up to
€13.4 billion ($18.3 billion) in Barclays. Aside from raising the
stock price of Barclays and enabling it to increase its bid for ABN
AMRO, co-operation with China would give the proposed Barclays/ABN
AMRO combination greater access to China’s burgeoning payment cards

Universal banking model

The proposed combination of ABN AMRO and Barclays is intended to
create one of the world’s leading universal banks – universal
banking, according to the two organisations, is the model best
equipped for success in an industry where customer needs are
converging and where demand-led growth will be significant across
the globe.

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By GlobalData

Core to this is the fact that ABN AMRO and Barclays hold two
sets of what the banks believe are highly complementary geographies
– approximately 90 percent of the combined group’s branches will be
in seven countries, of which the European markets of the UK, the
Netherlands, Italy, Spain and Portugal are expected to be the
leading franchises of the new group. Additionally, the combination
will have significant exposure to the fast-growing developing
economies of Brazil and South Africa. The combined group will also
leverage ABN AMRO’s Asian business.

The rationale behind the merger is that retail and commercial
product capabilities will be significantly enhanced, and that core
strengths of the group, such as ABN AMRO’s global cash and payments
infrastructure and Barclays’ expertise in credit cards, will be
leveraged. The need for cost efficiencies in operating
infrastructures and processes is also paramount.

With the implementation of the Single Euro Payments Area looming
and driving the need for economies of scale, Europe’s banking
industry has embarked upon a wave of consolidation over the past
four years, and more mergers and acquisitions are already in the
pipeline. Newly merged banking entities are pinning their hopes on
increased transaction volumes and values in relation to the payment
card area, at a time when electronic transactions are growing
strongly across Europe.

Barclaycard is the UK’s largest credit card issuer, with 9.8
million UK customers and 6.4 million Barclaycard International
customers. Barclaycard also has over 93,000 Barclaycard Business
retailer relationships. ABN AMRO currently is the eighth-largest
bank in Europe and 13th in the world based on total assets of $1.3
trillion as of December 2006. It has around 7 million cards in

Within the merged entity, one of the two principal business
groups will be Global Retail and Commercial Banking (GRCB), under
which the Barclaycard business will operate along with ABN AMRO’s
card operations. Frits Seegers will be CEO of GRCB with
responsibility for Barclaycard; his previous roles have included
stints at Diners Club Japan and Citibank Handlowy Bank, and he has
experience of card migrations, which will no doubt come in handy
when the time comes for Barclaycard and ABN AMRO to integrate their
card platforms. One of the synergies that Barclays and ABN AMRO
will aim to achieve will be the migration of ABN AMRO’s cards
portfolios to Barclaycard’s management and platform. They will then
leverage Barclays’ product expertise to enhance the existing ABN
AMRO portfolio and improve penetration through the combined

The two are also looking to consolidate middle-office functions
to ensure tighter controls and cost reduction and rationalise
network telecommunications and data centre infrastructure – both
banks run massive global telecommunications networks and large
diverse data centres. The intention is to consolidate from 27 data
centres (ABN AMRO has 19, Barclays has seven) to 21 and continue to
look for rationalisation.

Offshoring potential

Another area of synergy that has been identified is operational
efficiencies – the new group intends to leverage ABN AMRO’s captive
capability in India with best practices in offshoring. Both banks
currently operate at levels of offshoring below that of direct
competitors, around 3 percent, and are aiming to double that to 6
percent in the next two years. Also, scale benefits will be
achieved by consolidation of back office sites and common

In terms of geographical ambitions, the merged entity will aim
to eliminate overlap in countries where both banks have operations
in order to streamline integration. GRCB’s identified €1.8 billion
synergies will be largely driven by expense reductions of €1.65
billion, or 9.7 percent of the total combined expense base.
Overall, Barclays and ABN AMRO have identified €3.5 billion of
synergies to be delivered by 2010. This includes €2.8 billion of
cost synergies, which represents about 9 percent of the combined
cost base.

However, this is all dependent on how quickly and efficiently
the two can integrate their infrastructures. Estimated cost savings
can quickly diminish the longer the integration process drags on,
and Barclays and ABN AMRO have already admitted that they may face
significant challenges in integrating the two companies’
technologies, organisations, procedures, policies and operations in
a timely and efficient manner, as well as in addressing differences
in the business cultures of the two companies, and retaining key
Barclays and ABN AMRO personnel.

Barclays’ card expertise

Harmonising Barclays and ABN AMRO’s differing risk management
strategies and techniques may initially leave the combined group
exposed to unidentified and unanticipated risks that may be
different from those previously faced by the two companies as
separate entities.

John Varley, CEO of Barclays, is confident that a smooth
integration can be pulled off. In an analyst and investor
presentation in mid-June 2007, he said: “What this [merger] creates
is a group offering better capabilities to more customers and in
more places than either franchise could individually. In Global
Retail and Commercial Banking, our merger would create the fourth
largest retail and commercial bank worldwide by market share, and
in a world where the needs and buying behaviours of retail and
commercial customers are growing more similar, this will create
economies of scale.”

Addressing cost synergies, Chris Lucas, Barclays group finance
director, said: “The bulk of the cost synergies come within GRCB at
€1.65 billion and that’s in an area with a relatively limited
overlap. The second piece that is big in here is operational
efficiency, where the model that ABN AMRO use is very much an
effective offshoring model and something that we can put a lot more
volume through.”

According to Barclays, migrating ABN AMRO’s cards portfolios
onto Barclays’ processing platform will yield savings of €50
million, and the combined business will be one of the largest card
issuers outside the US, with around 27 million cards in issue.
Barclaycard’s penetration rate of selling cards to its retail
banking customers is around twice that of ABN AMRO. An example of
this is Barclays’ 2005 acquisition of South Africa’s Absa – since
the latter half of 2005, Absa’s card operation has achieved a 2
percent rise in market share to 25 percent and new card acquisition
is up 61 percent, mainly due to Barclaycard’s more sophisticated
campaign management techniques and better channel management.

Barclays benefits from extensive credit risk, marketing and
operational expertise, which will help to enhance the ABN AMRO
cards portfolios, and lead to an increase in revenues and loss
control through analytically driven portfolio stimulation
programmes, credit line management, product offerings and pricing
optimisation. Barclays’ product and marketing know-how should also
increase penetration through the global 7,894 branch network of the
combined entity. Improved cost and revenue per card performance is
expected to result from the combined card business, and should also
help to expand the global merchant acquiring network.

Risks to success

Some analysts remain sceptical as to whether the two banks can
achieve their projections. They have highlighted the fact that both
banks believe that by 2010 the merger will be 5 percent accretive
in earnings per share, but this will happen only if 100 percent of
the phasing-in of synergies is successfully completed. If the cost
synergies integrations stray off course over a longer period of
time or projected costs rise significantly above estimates, this
will dampen investor confidence and could lead to reduced

In terms of technology and infrastructure, both organisations’
stated intention to make more use of offshoring will lead to
significant job cuts in their domestic markets – if capabilities
such as customer service centres and back office management are
outsourced or offshored, this will lead to significant cost savings
initially but the longer-term impacts are less certain, especially
if levels of customer service in the new entity fall below customer
expectation levels, which could in turn lead to an erosion in
customer loyalty. Over the last year, the UK’s Lloyds TSB and
NatWest were forced to relocate their outsourced call centre
operations from India back to the UK amid strong customer

But for the time being, and especially in relation to card
payments, the proposed merger seems to make business sense for both
parties. Barclaycard, along with its parent Barclays, is
increasingly looking beyond the difficult credit conditions of the
UK towards international markets for growth and profitability. ABN
AMRO’s extensive presence in emerging markets such as India and
South America will provide Barclays with a much wider pool of
possible card customers, especially at a time when India and Brazil
are experiencing a boom in the numbers of consumers taking up card
products. ABN AMRO can also reap the rewards of Barclaycard’s card
marketing and risk management capabilities to enhance its card
offerings, both in credit and debit.

Barring any last minute hiccups, the Barclays-ABN AMRO
combination looks set to deliver a formidable new card player.