Irish Competition Authority Decisions

1. Notification was made by Bank of Ireland Credit Card Services and American Express Services Europe Ltd on 17 September 1996 for a certificate, or in the event of a refusal by the Authority to issue a certificate, a licence in respect of an arrangement whereby the Bank of Ireland would carry on the existing charge card and merchant acquisition and servicing business in Ireland of American Express Services Europe Ltd.

2. The notification relates to an agreement whereby the Bank of Ireland will carry on the existing charge card and merchant acquisition and servicing business in Ireland of American Express Services Europe Limited and American Express Europe Limited (Amex) for an initial period of ten years, the first five years of which will be on an exclusive basis.

3. Bank of Ireland is a provider of a wide range of banking and financial services in Ireland. Credit card services are conducted through a separate department within the retail division of Bank of Ireland. The Bank of Ireland has issued credit cards in Ireland since 1980 and has provided merchant acquisition and servicing since 1989. The Bank of Ireland issues Europay/Mastercard and Visa cards. In addition it also acquires card members for Maestro and Laser and on an agency basis for American Express and Diners Club.

4. The American Express group is headed by American Express Company, the publicly quoted corporation, and it operates a diversified travel and financial services business around the world. Worldwide, American Express has approximately 39,000,000 cards in issue and [ ] merchant locations accepting the American Express Card. The bulk of the European card businesses of American Express are conducted through two second tier subsidiaries of American Express Company, namely, American Express Services Europe Limited (AESEL) and American Express Europe Limited (AEEL). An Irish Pound denominated American Express Card has been in issue since 1981. Prior to that date all cards issued in Ireland were denominated in Pounds Sterling. American Express had for a number of years a marketing agreement with Bank of Ireland for the promotion of Gold Cards. To date, all American Express Cards in Ireland have been issued by AESEL. There are currently [ ] American Express Irish Pound cards in issue. AEEL has a base in Ireland of [ ] active locations.

5. The Independent Operator Agreement provides for the grant of authority by Amex to Bank of Ireland in relation to the American Express Card Service in Ireland, the right to issue American Express cards and to sign up merchant locations who will become local service establishments.

6. Clause 2.01(b) provides for this to be on an exclusive basis, initially for a period of five years as follows;

“This Initial Grant shall be on an exclusive basis (subject to clause 10.02) for a period of five (5) years from the Launch Date. This exclusivity period represents the parties’ good faith estimate of the time required for the Operator to achieve a normal return on its capital invested in taking over the Card service in the Country.”

7. The Independent Operator Agreement provides for Amex to retain the right to terminate the agreement and or the exclusivity element for the failure by the Bank of Ireland to meet certain agreed upon goals, which include target as to the total number of cards in force and the total number of billings.

8. Under a business transfer agreement between AESEL and AEEL, and the Bank of Ireland Limited, the business will be reorganised by having AESEL and AEEL transfer to a newly established company incorporated in the Republic of Ireland, namely, Centurion Card Services Limited (CCSL), the existing benefits and rights under the various Amex contacts with card members and merchants in Ireland. CCSL will be a newly formed company which will be set up for the sole purpose of acquiring and conducting the business.

9. Under a share purchase agreement between the Bank of Ireland and American Express Travel Related Services Company Inc., the Bank of Ireland will acquire the entire issued share capital of CCSL. As part of the proposal, American Express Limited will enter into an agreement with CCSL under which CCSL will be granted the right to carry on the business in Ireland for an initial period of 10 years, the first five years of which will be on an exclusive basis. Pursuant to the Arrangements, Bank of Ireland will become the sole issuer of American Express Cards denominated in Irish Pounds and will take over responsibilities for all Irish Pound denominated cards presently in issue. In addition, the Bank of Ireland will take over the network of merchants maintained by AEEL in Ireland and will, going forward, sign up in its own name and provide service to additional merchants in Ireland accepting the American Express Card. The customer service, credit control, item processing function, and support services for American Express in Ireland will be transferred from the United Kingdom to Ireland. This will be phased over approximately 1 year during which time the necessary system support will be developed. Some services, e.g. customer services, may, in time, be merged with those for existing Bank of Ireland credit card holders. AESEL employees currently involved in the Business in Dublin will transfer to CCSL. In addition, it is anticipated that up to 20 staff will be recruited in Dublin to provide those services currently provided from the United Kingdom.

10. The Bank of Ireland operates, along with a number of competitors in Ireland, a spectrum of cashless payment systems. Aside from credit cards, customers have a choice of cheques, direct debits, charge cards, automatic credit transfers and paper based credit transfers as well as cash. In addition, various financial institutions are now issuing laser debit cards. The following institutions are also in the card issuance business:- AIB, ACC Bank, National Irish Bank, TSB, Ulster Bank, Irish Permanent Building Society, First National Building Society, EBS and The Foreign Exchange Company of Ireland, which has a franchise arrangement with Diners Club.

11. Currently, the Bank of Ireland has a total card portfolio of [ ] cards in force in Ireland. Bank of Ireland has a merchant base of [ ] merchant outlets for Visa and Mastercard.

12. The generic term credit card, however, also includes charge cards as issued by American Express and Diners Club. These are not credit cards strictly speaking, since they do not provide any extended credit facility. Such cards are referred to in the business as travel and entertainment (T&E) cards. Large retail outlets also issue charge cards to their customers. Such cards, while providing extended credit facilities, can only be used to make purchases within the issuing store. Many petrol companies also issue cards, primarily to businesses. These can only be used to purchase motor fuels in filling stations retailing the products of the issuing company.

13. Charge cards do not have the extended credit facilities which credit cards offer. Nevertheless they provide the same ease and convenience of payment as credit cards and may therefore be regarded as part of the same market. Individual store cards may only be used exclusively in the store which issues them and therefore would not appear to represent a realistic alternative to credit cards as a means of payment, since one of the main attractions of the latter is their widespread acceptance as a means of payment. For amounts up to £100, credit cards and cheques backed by cheque guarantee cards are sufficiently interchangeable as payment media to constitute part of the same market. However for amounts greater than £100, they cannot be considered to be close substitutes. The relevant market therefore consists of credit cards, charge cards and, for payments up to £100, cheques backed by cheque guarantee cards.

14. Some data on the use of credit cards for the years 1991 - 1994 is given in Table 1 below. The figures indicate that there has been a steady increase each year in the use of credit cards. In 1994 there were 929,000 credit cards in circulation with 29m card transactions and payments amounting to £1.2bn. This represents a significant increase since 1991 when there were only 664,000 cards, accounting for 18m transactions with payment transactions valuing £0.8bn. According to figures issued by the Irish Bankers Federation (IBF) there were 164m cheques issued in 1993 with a value of £323bn. Cheques accounted for 57% of the total cashless payments. The majority of cheques, however, are issued by businesses so that the number and value of personal cheques being issued using cheque guarantee cards is much lower.

Note: Figures relate only to cards issued by banks and exclude credit cards issued by building societies and charge cards.

Source: Irish Bankers Federation

Bank of Ireland Cardholder and Merchant Acquiring turnover for the year ended 31/3/1996 was as follows:

Cardholder T/O (ex. cash) [ ]

Cardholder T/O (inc. cash) [ ]

Merchant T/O [ ]

Loans Outstanding [ ]

Amex Cardholder and Merchant Acquiring turnover for the calendar year 1995 was as follows:

Cardholder T/O (ex. cash) [ ]

Cardholder T/O (inc. cash) [ ]

Merchant T/O [ ]

Loans Outstanding. [ ]

15. [ ]

16. According to banking industry statistics, credit cards and charge cards represent only 7% of total cashless payments in 1993. Of this, charge cards represent a much smaller proportion. Although it is not possible to calculate the respective market shares of the parties in a market that properly includes certain payments by cheque, such an inclusion would significantly reduce the market share held by American Express as set out in the Lafferty survey.

17. The parties do not believe that the arrangements, nor their provisions, restrict the parties in their freedom to take commercial decisions.

18. The parties claim that neither the provisions in clause 2.01 (i)(a) and Clause 2.01 (b) of the Independent Operator Agreement nor the arrangements themselves have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State within the meaning of Section 4(1) of the Act.

19. The parties do not believe that there are any real barriers preventing financial institutions from issuing credit or charge cards. Increasingly, a number of processing/operational support organisations have developed which means that individual credit or financial institutions are in a position to offer card products to their customers whilst not having to develop their own individual infrastructures and can rely, instead, on specialist external providers. Nor is there any need to develop individual merchant networks as access to these is attained through affiliation with one of the global card associations.

20. The Bank of Ireland requires the five year exclusive period as a matter of commercial necessity. Costs to Bank of Ireland associated with the acquisition of the Business would be significant. In particular, the systems development costs are substantial [ ] and recoupment of such cost would be impractical without a minimum five year exclusivity term not available. In this regard, Bank of Ireland would explain that it is investing [ ] in the deal, made up of approximately [ ] in cash payments to American Express Limited and [ ] on systems development.

21. Using reasonable business assumptions regarding cardholder and merchant growth over a 5 year period, the Bank of Ireland anticipates it will recover its investment by the end of year 5 at the earliest. There are a number of major sensitivities identified in these assumptions, particularly in the bad debt area (with charge cards in Ireland having historically carried a higher risk level than credit cards, primarily because the customer has no pre-set spending limit on a charge card) and in the level of the merchant service charges. Overall, the Bank of Ireland believe that 5 years is the absolute minimum required to recoup its investment.

22. In addition, the Bank of Ireland is anxious to lock in the extra processing activities generated by Amex transactions in order to achieve economies of scale in its card processing operations. An assured exclusivity period of five years means that the Bank of Ireland can, with some confidence, plan its operational demand and capacity going forward.

23. Section 4(1) of the Competition Act states that ‘all agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State are prohibited and void’.

24. Section 3(1) of the Competition Act defines an undertaking as ‘a person being

an individual, a body corporate or an unincorporated body of persons engaged for gain in the production, supply or distribution of goods or the provision of a service.’ The parties to the arrangements are Bank of Ireland and American Express Services Europe Ltd. Bank of Ireland is a corporate body engaged for gain in the provision of financial services. American Express Services Europe Ltd. is also a corporate body engaged for gain in the provision of a financial payments service system. Therefore the parties involved in the arrangements are undertakings within the meaning of Section 3(1) and the arrangements constitute an agreement between undertakings.

25. Under the arrangements Amex grants to Bank of Ireland the right to issue American Express Cards in Irish Pound Cards, to enter into contracts with persons who will become local service establishments and to engage in other aspects of the Card Service in the country. This right is limited in duration (10 years - 5years exclusive) and scope (American Express may terminate the agreement if the Bank of Ireland does not meet certain targets). The limited grant of authority by Amex to Bank of Ireland makes this agreement more analogous to a licence arrangement than a sale of business. Such an agreement is not anti-competitive per se. The main purpose of the agreement is to grant to CCSL the right to carry on the Business in Ireland for an initial period of ten years, the first five of which will be on an exclusive basis. The Bank of Ireland will take over the network of merchants maintained by AEEL in Ireland and will set up in its own name and service additional merchants in Ireland accepting the American Express Card.

26. The relevant market is very competitive with all of the major financial institutions in the State issuing credit cards. Maryland Bank of North America (MBNA), one of the fastest growing card issuing organisations in the world and the second largest issuer of credit cards in America after Citicorp has recently announced its entry into this market. Other new entrants include the National Westminster Visa Purchasing Card issued through Ulster Bank - a subsidiary of Nat-West. New Entrant Products include the Laser Debit card, AIB Affinity cards and the recently issued AIB Gold Card.

27. The market itself is highly competitive and can accommodate new entrants easily, Amex itself have a relatively small share of the market [ ].

28. Given the high level of competition in the market, evidence of recent market entry and the small market share of American Express in the relevant market, the Authority does not consider that the grant of authority by American Express to Bank of Ireland over the Business offends against Section 4(1).

29. Clause 2.01(b) grants CCSL the right on an exclusive basis for a period of five years to carry on the business in Ireland as detailed in the Independent Operator Agreement, while during such time Amex will not authorise or permit any other person to carry on any of the activities referred to in clause 2.01(a), nor will Amex itself engage in such activities. The Authority recognises the commercial basis for the 5 year exclusivity term as a means for Bank of Ireland to secure its investment in the Business and finds that it does not offend against Section 4(1).

30. In the Authority’s opinion Bank of Ireland Credit Card Services and American Express Services Europe Ltd are undertakings within the meaning of Section 3(1) of the Competition Act and the notified arrangements granting Bank of Ireland the right to carry on the existing charge card and merchant acquisition and servicing business in Ireland of American Express Services Europe Ltd constitutes an agreement between undertakings. In the Authority’s opinion, the agreement does not have, as its object or effect, the prevention, restriction or distortion of competition and does not offend against Section 4(1) of the Competition Act, 1991.

31. The Competition Authority has issued the following certificate:

The Competition Authority certifies that in its opinion, on the basis of the facts in its possession, the agreement between Bank of Ireland Credit Card Services and American Express Services Europe Limited (notification no. CA/27/96), notified on 17 September 1996 under Section 7, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority