Over the past few years, the US credit
card market has been transformed by a wave of consolidation.
Justin Bandy explores the background to this
reshaping of the cards landscape and looks at how the US experience
might translate to other markets.

The US credit card industry is among the most concentrated in the
global cards landscape. By the beginning of 2006, the top three
issuers controlled over 61.8 percent of the market as defined by
their proportion of outstanding credit card debt, and the top ten
issuers controlled roughly 90 percent of the market (see Figure 1).
In contrast, in 1997 the top five issuers controlled only 36.5
percent of the market, with the top three accounting for only 26
percent between them (see Figure 2). Though other markets in the
world are also highly concentrated, none has undergone as massive a
transformation as the US. In 1977, the top 50 banks controlled
about one-half of the credit card market. The 1980s saw the
emergence of global leaders in credit cards such as Citibank and
American Express, which became dominant players in the US, but as
recently as 1992, the top ten card issuers still controlled only 57
percent of the market. The latest round of mergers and
acquisitions, which began in 1997, has left only a few mega banks
as serious players in the US’s credit card industry.

The consolidation of the US’s credit card industry has occurred as
three distinct processes: the absorption of small cards programmes
– often run by retailers – by industry leaders; the combination of
monoline issuers with large banking groups; and consolidation as a
by-product of mergers and acquisitions between banks.

Proprietary retailer cards programmes

The growing skills gap between credit card specialists and the rest
of the field was responsible for many retailer credit card
programmes being sold to national issuers. Since 1997, much of the
private-label cards industry has been essentially rearranged so
that retailers and credit card companies can combine their core
capabilities to improve operations. The trend has been for
retailers to shift the back-office functions of their branded
credit card programmes to credit card specialists and focus
exclusively on customer relationships. This has occurred both
because banks had better resources to manage retailer portfolios
from a risk and data perspective, and because retailers often did
not have the management skills to successfully run their own
programmes. Citibank was an active player in bringing about this
transformation. In 1998 it purchased telecom service provider
AT&T’s credit card subsidiary, which at the time was the
eighth-largest portfolio in the country. In 2003 it made two big
moves when it acquired the troubled $29 billion Sears MasterCard
portfolio as well as a $6 billion portfolio from Home Depot – Sears
and Home Depot are two of the largest retail chains in the

Citibank was not alone in swallowing up private-label credit card
portfolios. GE Consumer Finance acquired the portfolios of several
retailers and department stores including Dillard’s, JC Penny and
Mervyn’s. Household Retail Finance (now a part of HSBC) was another
major player, acquiring portfolios from retailers such as
Gottschalk’s, a department store. JPMorgan Chase acquired the
retail card programme of Kohl’s, another department store. Circuit
City, an electronics retailer, sold parts of its credit card
portfolio to both Bank One and FleetBoston.

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Many of these sales were made while retailers were seeing sub-par
performance from their credit card portfolios and wanted to get rid
of what they considered to be a losing business. For example, when
FleetBoston Financial acquired the receivables and cash reserves
associated with Circuit City’s MasterCard and Visa portfolio, it
paid only $1.3 billion, even though the portfolio had a value of
$1.5 billion. At the time of the sale, Circuit City had been
struggling with losses from its credit card operations. The sale
allowed Circuit City to focus on its core business of retailing
electronics, which was also having problems. At the same time,
FleetBoston was able to acquire a credit card port-folio at a
reasonable price and use its superior capabilities to improve the
operations of the Circuit City branded cards.

Monoline issuers

Another major locus of merger and acquisition activity involved the
US’s monoline card issuers. These organisations were prime targets
for consolidation because, although they excelled in their use of
data and customer segmentation, they lacked a diversified banking
business model that could be used to cross-sell other products and
also act as a buffer against any potential downturns in credit card
profitability. When US monolines had financial difficulties, such
as trouble funding themselves or credit problems, their
shareholders and directors looked for possible mergers to add
stability to the monoline business model.

“Once you stumble as a monoline, odds are that you are going to end
up as part of something much bigger,” said Kenneth Posner, a credit
card analyst for Morgan Stanley.

The entities that were formed by the combination of a monoline
issuer and a large retail bank gained expertise in credit card
operations, linked two distinct sets of customers for cross-selling
activities and generally obtained a more appropriate allocation of

Monoline issuers generally saw their cost of funding drop as part
of a larger banking group, since the risk profile of the combined
organisation received a better credit rating than the stand-alone
monoline. This fattened lending spreads and also made more funds
available for their credit card operations.

Monoline acquisition began in 1997 when First USA was acquired by
Banc One for $7.3 billion. In 2005, HSBC purchased sub-prime issuer
Metris for $1.59 billion, and Providian was bought by Washington
Mutual for $6.45 billion. However, these two deals were
overshadowed by the blockbuster $35 billion acquisition of MBNA by
Bank of America in the same year. The large banking groups involved
in these three deals each had different motivations for their
transactions. HSBC used its acquisition of Metris as part of its
entry strategy in the US market (HSBC had previously acquired
Household, a consumer finance specialist, for $15 billion in 2003).
Washington Mutual did not have a significant credit card operation
before its acquisition of Providian, and therefore obtained
expertise that could be used to cross-sell credit cards to existing
customers. Bank of America was able to become the top issuer in the
US and probably also gained technical skills from its acquisition
of MBNA.

Although monolines were generally swallowed up by diversified
banking groups, the reverse process was not unheard of. In 2005
Capital One acquired Hibernia National Bank, a Louisiana regional
bank, for $5.35 billion and in 2006 it acquired NorthFork Bank, a
regional bank in the greater New York area, for $14.6 billion.
Before being acquired by Bank of America, MBNA had also acquired
the credit card portfolios of SunTrust and PNC Bank.

Bank-to-bank mergers and acquisitions

The credit card industry has also become consolidated as a result
of merger and acquisition activity between diversified banking
groups – a trend that has been going on for several years in the
US. Credit cards have usually been a secondary consideration in
these mergers and acquisitions, although certain deals involved
considerable credit card portfolios.

From 1991 through 2005, the number of Federal Deposit Insurance
Corporation-insured institutions in the US dropped from 14,838 to
8,868, as the entire nation’s commercial banks and savings and
loans institutions underwent a prolonged bout of

However, a number of mega-deals in the past few years have had a
noticeable impact on the credit card industry in a way that had not
been seen before. In 2004, JPMorgan Chase and Bank One merged,
combining what at the time were the fifth- and third-largest credit
card portfolios in the country. In addition, the merger of Bank of
America and FleetBoston created what at the time was the
third-largest portfolio in the US.

Lessons from the US

To some extent, consolidation in the US’s credit card industry has
been shaped by its unique historical trajectory. Had the sector not
been extremely fragmented to begin with, it is possible that the
industry would have started out with a number of large players
rather than arriving at that process through mergers and

Since few other countries have a similar regulatory legacy, US
consolidation may be more extreme than that which might occur in
other regions.

Furthermore, with 300 million inhabitants, the US market rewards
economies of scale in financial services in a way that few other
markets can. In addition, the US’s laissez faire mentality probably
made the consolidation process more straightforward and rapid than
it would have been had the country shared the bureaucratic,
regionalist or nepotistic inclination that is more pronounced in
many other parts of the globe.

However, elements of the US experience are likely to be repeated in
less mature markets as they expand. Several of the factors that
drove US consolidation – the necessity for good data management,
lower risk associated with large banking groups and reaping
economies of scale – will cause mergers and acquisitions in many
other markets. One difference between the US’s process and that in
other countries is the role that foreign card issuers will

Although Barclaycard and HSBC have established themselves in the US
market, it is the domestic players that are firmly entrenched as
the market leaders and that control the lion’s share of
receivables. In few other markets, if any, will domestic issuers
dominate credit cards the way they do in the US, since global cards
players are actively expanding outside of their home markets.

If other countries follow the US model, it is likely that
cross-border mergers and acquisitions will play a significant part
in the consolidation process.