Major Business News

Citigroup's Switch May Signal
Shakeout in the Card Industry

By PAUL BECKETT
Staff Reporter of THE WALL STREET JOURNAL

Citigroup Inc.'s planned defection from Visa to MasterCard could signal a
major shakeout in the credit-card industry in which banks align themselves with
one card or the other.

For years, big banks have issued both Visa and MasterCard and the two have
been viewed pretty much as allies: Their cards are accepted on the same
machines, their logos are often jointly displayed, and they have cooperated on
new products such as "smart cards."

                      Indeed, the government viewed them as so closely
                      allied that the Department of Justice last October
                      filed a lawsuit alleging that the dual roles some
                      banks play in the Visa USA and MasterCard
                      International associations is anticompetitive. The
                      suit is pending. Visa and MasterCard denied the
                      allegations.

                      But now, Visa and MasterCard are at war to
persuade card issuers to align themselves more closely with one card brand or
the other. And Citigroup's plans to move as much business as possible to
MasterCard over the next few years in return for lower fees and more branding
flexibility marks MasterCard's first big victory.

Concentration of Issuers

The heightened competition among Visa and MasterCard reflects the increased
power of the card-issuing banks, as a result of massive industry consolidation
that has put the lion's share of the market in the hands of a few. Now, those few
banks are demanding that Visa and MasterCard respond to their needs and
Visa and MasterCard are fighting each other to do so.

"There's a momentous shift in power going on here -- it's a reflection of the
banks' desire to regain power where they think it appropriately belongs," said
Anita Boomstein, a partner in New York law firm Hughes, Hubbard & Reed,
who has represented several major credit-card issuers.

Behind the scenes, major card issuers say, Visa and MasterCard have both
been lobbying hard in recent months, hoping that issuers will align themselves
with one and ditch the other.

Playing for Big Stakes

In that campaign, Visa and MasterCard are each pursuing a very different
strategy, and whichever proves the more appealing to the big card issuers, such
as Citigroup, Bank One Corp., MBNA Corp. and Chase Manhattan
Corp., could wind up radically changing the credit-card landscape.

"This is high-stakes poker," said Robert McKinley, president of
CardWeb.com, an industry research firm.

MasterCard was able to woo Citigroup by its willingness to let Citigroup
promote its own "Citi" brand over MasterCard's and to cut Citigroup a deal on
fees. Citigroup had tried to gain flexible branding within Visa but had become
increasingly frustrated by the amount it pays in annual Visa fees, which Visa
officials said Wednesday totaled $73 million in 1998.

Citigroup felt that money was being wasted by Visa on its splashy advertising
campaign and on promotion of the Visa brand, which benefits all Visa-card
issuers equally. MasterCard is expected to reduce its role as brand promoter
and to focus instead on processing payments. A MasterCard spokeswoman
declined comment.

Despite Citigroup's defection, Visa officials say they intend to stick to their
strategy of strong brand promotion, which they believe works in tandem with
card issuers for the mutual success of both. Visa officials also say they are
reluctant to cut any company a special deal that tips the balance against the
majority of its member banks.

"Visa has been steadily procuring market share for 15 years and widening the
gap between MasterCard and American Express and there's nothing in
[Citigroup's move] that says we can't continue to do that," said Michael
Beindorff, executive vice president at Visa USA.

He said that rather than promote their own brand name, most banks want "to
build their house on the foundation of Visa, which is already so powerful and
strong."

Limits to Flexibility

Although Citigroup officials viewed Visa as inflexible, Mr. Beindorff said Visa is
willing to work with big issuers on branding and will likely approve a proposal,
ironically made in November by Citigroup, that allows issuers to relegate the
Visa logo to a card's back. But, he added, "we can't break the model to satisfy
an individual issuer."

At the very least, Citigroup's move has put Visa on the defensive for now, an
unusual posture for the association after years of riding high. Visa has increased
its global market share to more than 50%. It has entered marketing agreements
with the Olympics and the National Football League (its latest NFL campaign
involved sponsoring the "Visa Hall of Fans"). And it is making inroads to secure
a strong position on the Internet with an estimated 51% share of all online
payments.

Whether other big banks would consider following Citigroup's lead remains
unclear. For instance, officials at Bank One's First USA unit, which recently
overtook Citigroup as the largest credit-card issuer in the U.S., have said they
don't support Citigroup's view of the card associations becoming little more
than payment processors. And William P. Boardman, a senior executive vice
president at Bank One, in November became chairman of Visa's U.S. board of
directors.

Contrasting Views

But BankAmerica Corp., the nation's seventh-largest issuer, has said it wants
the BankAmerica brand name to take precedence over the Visa or
MasterCard brand name, and a spokesman said the company "is watching
Citi's experience with interest" but continuing to work with Visa for now.

"We have been and remain advocates for changes in how the card associations
operate," the spokesman added.

Visa's strategy of strong brand promotion has generated strong support among
small banks, which benefit the most from Visa's advertising. Indeed, Mr.
Beindorff said he expects Visa to pick up some business from MasterCard
banks that want their association to maintain a strong brand presence. But even
some small-bank officials said they agreed with Citigroup that Visa's and
MasterCard's strong brand promotion and costly advertising campaigns had
gone far enough and should be reined in to save the banks money.

"Right now there is so much development of the MasterCard and Visa names
that I wonder if it's not like taking more Vitamin C -- eventually it just washes
through your system," said Joseph Boutin, president of Merchants Bank in
Burlington, Vt. "I don't think they have to do anything else now."