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MBNA Europe Bank Ltd./ ACC Bank plc (Credit Card Affinity Agreement) [2001] IECA 592 (28th June, 2001)

COMPETITION AUTHORITY

Competition Authority Decision of 28 June 2001 relating to a proceeding under Section 4 of

the Competition Act, 1991.

Notification No. CA/3/01 - MBNA Europe Bank Limited/ ACC Bank Plc (Credit Card

Affinity Agreement)

Decision No: 592

Price £0.90, ( €1.14 )

£1.40, ( €1.77 ) including postage

Competition Authority Decision of 28 June 2001 relating to a proceeding under Section

4 of the Competition Act, 1991.

Notification No. CA/3/01 - MBNA Europe Bank Limited/ ACC Bank Plc (Credit Card

Affinity Agreement)

Decision No: 592

Introduction

1. Notification was made on 13 March 2001 of a Credit Card Affinity Agreement between

MBNA Europe Bank Limited and ACC Bank Plc. with a request for a certificate under

Section 4(4) of the Competition Act, 1991 or, in the event of a refusal by the

Competition Authority to issue a certificate, a licence under Section 4(2). The

agreement is an amended version of MBNA’s Standard Credit Card Affinity Agreement,

Notification CA/1/98, which was granted a certificate by the Competition Authority

(Decision 522).

The Facts

(a) The Subject of the Notification

2. The notification concerns a Credit Card Affinity Agreement (“the Agreement”) between

MBNA Europe Bank Limited (“MBNA”) and ACC Bank plc (“ACC”). The agreement

sets out the terms and conditions for the marketing of an MBNA/ACC credit card to

ACC customers, employees and others. MBNA is not being given direct access to

ACC’s customer lists.

(b) The Parties

3. MBNA Europe Bank Limited (previously MBNA International Bank Limited) is a

wholly owned subsidiary of MBNA America Bank, N.A. a company incorporated in the

United States of America and having its address at Wilmington, Delaware, 19-884-0785,

USA. The company is registered in England and Wales and is acting through its Irish

Branch Registered Number E3873 at 46 St. Stephen’s Green, Dublin 2. The principal

activity of MBNA is the issuance of bank credit cards and ancillary activities in the

United Kingdom and the Republic of Ireland. On its website, MBNA America Bank,

N.A. states it is the largest independent credit card lender in the world and also provides

retail deposit, consumer loan and insurance products, though not currently in the

Republic of Ireland. It also states that it is by far the leading affinity marketing company

in the credit card industry and has the endorsement of more than 4,700 organizations

worldwide. In the year 2000, MBNA America Bank, N.A acquired 459 new

endorsements from organizations, including 80 in Europe. The company states that it

directs its marketing efforts primarily to members of endorsing groups, to customers of

financial institutions, and to targeted lists of people with a strong common interest.

4. ACC Bank Plc is a credit institution incorporated in Ireland as a public limited company

with its principal place of business at Charlemont Place, Dublin 2.

(c) The Product and the Market

5. The nature of the services affected by the Agreement is the provision of credit card

services to Irish resident consumers. The relevant credit cards were designed for

compliance with Irish law and cannot be marketed in any other jurisdiction. The

notifying parties stated that the Irish credit card market was a subset of the total Irish

market for payment cards. That total market could be divided into two sections:

a. payment cards offering domestic and international acceptance; and

b. payment cards accepted only in one or more domestic stores.

Within each of those sections there can be a number of competing product types:

i. credit cards, where credit is advanced and may be left outstanding;

ii. charge cards, where credit is advanced but must be repaid in full at the end of

each billing period (usually one month); and

iii. debit cards, where no credit is advanced, the card merely being used to access

a current account.

6. The Agreement only relates to credit cards (i. above) offering domestic and international

acceptance (a. above). Although the notification only concerns that part of the market so

described, the notifying parties claimed that it should be considered in the wider context

with the other product types (in both market sections) being seen as substitute and

competing products.

7. The relevant market is that for the issuance of credit cards offering domestic and

international acceptance, and the provision of credit card services in the Republic of

Ireland.

(d) Structure of the Market

8. The provision of credit card services is divided into two levels, credit card issuers

(“Issuers”) and credit card acquirers (“Acquirers”). Issuers provide the actual cards,

related account and credit facilities to consumers, subject to the Issuer’s terms and

conditions. The main Issuers in the State are Allied Irish Banks plc and Bank of Ireland.

Acquirers provide credit card acceptance facilities to merchants. An Acquirer will

arrange payment to a merchant for credit card transactions and will in turn be reimbursed

by each relevant Issuer. The main Acquirers in the State are Allied Irish Banks plc and

Bank of Ireland.

9. In addition, to enable a credit card to be accepted for payment it is necessary for the

relevant Issuer and Acquirer to be a member of the same payment system. The two main

international payment systems are VISA and MasterCard both of which are wholly

owned by their respective members. The payment systems provide a global framework

and rules for use of affiliated credit cards

10. MBNA does not operate as an Acquirer and has no current intention to do so. MBNA

commenced operations in Ireland as an Issuer in March 1997; the Agreement relates

solely to its activities as an Issuer.

11. The notifying parties believed that market share (by number of cards issued) was

currently distributed amongst Issuers as follows;

Table 1:

Participants Market Share

Allied Irish Banks plc [ ]%

Bank of Ireland [ ]%

MBNA [ ]%

TSB, Ulster Bank, National Irish Bank and Tesco [ ]%

ACC (prior to sale of portfolio) [ ]%

TUSA [ ]%

12. The parties stated that there were substantial barriers to entry to the market. In order to

become a member of either VISA or MasterCard for any particular jurisdiction, one

needed to be authorised to carry on banking activities in that jurisdiction. Such a

requirement led to substantial capital and regulatory costs. Each payment system

required the installation of a major computer system to enable the daily clearing of

transactions and there are initial and on-going payment system fees. Initial marketing

costs were also high, the parties claimed.

13. Despite the barriers to entry, the market for issuing credit cards in the State has changed

dramatically in recent years. Historically, the two major banks, AIB and Bank of

Ireland, had issued almost the entire credit card stock in the State, either through the

banks themselves or on behalf of smaller banks and building societies. The emergence

of MBNA in the State was followed by the entrance of TUSA to the market in October

1999 and then Tesco Personal Finance, with a VISA card offering an initial APR of

4.9%, in May 2000.

14. It is estimated by the Authority that 22% of Irish adults hold credit cards, which is low

compared to the US where over 80% of adults have credit cards. There are

approximately one million active credit card accounts in the State. The Irish government

charge an annual lump sum tax per credit card account held in the State. This reduces

the incentive for customers to have more than one credit card account. The basic

measurement of price in relation to credit cards is the Annual Percentage Rate of Interest

(“APR”). The standard APR of credit cards in Ireland ranges from 16.9% to 18.9%;

around six percentage points lower than the rates that existed before MBNA’s entry in to

the Irish market. As more than half of the State’s credit card holders clear their balance

every month, and thus incur no interest penalty, it seems that APR differences may not

induce customers to gravitate to low APR card issuers. In fact, APRs have converged

over the past four years. MBNA (as well as Tesco) currently offers the lowest standard

APR on the market, of 16.9%, but also offers tailored rates to certain customers through

affinity groups. ACC/MBNA is currently offering 18.9%.

15. MBNA generates a substantial amount of income by authorising and providing

specialised credit cards, a practice known as “affinity marketing”. MBNA’s marketing

in the State is tailored to such “affinity groups”. These are groups which have common

interests or loyalties, such as professional societies, members of clubs, employees of

large corporations, financial institutions etc. MBNA competes for existing customers of

other bank’s credit cards by offering low introductory APR’s and special deals. MBNA

also uses the information given to it by the affinity groups to try and increase the

numbers of people holding credit cards. Credit card affinity groups enable the card

issuer and the affinity group to exploit synergies. For example, the affinity group can

send promotional material etc. with the monthly credit card bill. Credit cards issued to

affinity group members or financial institution customers usually carry custom graphics

and the name and logo of the endorsing organization. MBNA develops a customized

marketing program for each endorsing organization or financial institution. In addition to

servicing the credit cards, MBNA offers economic incentives to the endorsing groups

and financial institutions.

16. The parties submitted that MBNA currently has more than 60 Irish-based organisations

now endorsing an MBNA credit card programme, including the Law Society and Dublin

Zoo. MBNA already has affinity programmes with two financial services companies in

Ireland: Irish Permanent plc and One Direct (the An Post financial services company).

Irish Permanent credit cards were previously issued by Bank of Ireland. AIB and Bank

of Ireland also have affinity programs with professional bodies, institutions and also

Ireland’s third level institutions. The parties stated that, at a guess, they believe that AIB

and Bank of Ireland have between them around twenty affinity programmes, though no

figures are available on this.

(e) The Notified Agreement

17. The Agreement is essentially a marketing arrangement whereby the parties market an

MBNA/ACC affinity credit card to ACC customers, employees and others (identified as

suitable by the parties) - “the Programme”. MBNA is itself not being given direct access

to ACC’s customer lists. MBNA develops the Programme which is endorsed by ACC

and contains ACC’s indicia on correspondence and the credit card itself. Potential

customers are identified by ACC and agreed with MBNA, and ACC then mail-shots

these potential customers with details of the Programme. MBNA has sole control of any

accounts opened on foot of this marketing. In return for providing the marketing

information on ACC customers and licences to use its indicia, ACC receives from

MBNA royalty payments, of a fixed fee per new account opened and a percentage of

purchases thereafter, in accordance with the Agreement. ACC is also entitled to put

messages on customer statements issued by MBNA to its customers taking part in the

Programme and to insert advertising materials with customers’ statements. MBNA

claimed that it is fully responsible for the operation of the Programme and has full

control over the terms and conditions (subject to informing ACC of any proposed

changes), including APRs . The term of the Agreement is for an initial period of 5 years

and, unless terminated by either party in accordance with terms of the Agreement,

thereafter for successive periods of 2 years.

18. Pursuant to a Purchase Agreement, 1 concluded on the same date as the notified

agreement, MBNA bought from ACC a portfolio of “eligible” credit card accounts and

the receivables relating to those accounts. Ineligible accounts are those with debts which

MBNA did not wish to take on board. ACC customers, whose accounts were acquired

by MBNA under the terms of the Purchase Agreement, have been issued MBNA/ACC

credit cards. The Programme is not being marketed to the ACC customers acquired by

MBNA pursuant to the Purchase Agreement. Those few remaining ACC accounts not

acquired by MBNA have been closed by ACC.

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1 The Purchase Agreement was not notified to the Authority, and does not form part of this Decision.

19. The main differences between the Agreement and the standard MBNA credit card

affinity agreement are:

a. MBNA are themselves not being given direct access to ACC’s customer lists.

b. Clause 6.5, which restricts MBNA’s use of information obtained through the

Programme, for the purposes of marketing products similar to current ACC Products

within Ireland (mortgages, deposit facilities etc.).

Also, ACC was, before the Agreement, a competitor in the credit card market, as

opposed to being a professional society, club, or large corporation. Following the sale

of its credit card accounts to MBNA, however, ACC no longer competes with MBNA

in this market.

(f) Submissions of the Parties

20. The parties drew attention to the following provisions of the notified Agreement which,

they stated, might be regarded as restrictive:

21. Clause 3.1: Whereby for the duration of the Agreement, ACC will promote the

Programme in Ireland exclusively and “ will not sponsor, advertise, aid or develop any

rival programme without the prior written consent of MBNA. ” ACC will not license

ACC indicia nor make available its marketing lists or information about customers or

potential customers (as identified by MBNA and ACC) in relation to or for promoting

any rival credit card programme; and “ its publications shall not carry any

advertisements for any rival programme provided that, nothing in this Agreement shall

prevent or restrict the right of ACC to display signs and logos acknowledging that it

accepts other types of credit card for payment purposes .”

22. Clause 6.5: Whereby for the duration of the Agreement, neither MBNA nor any of its

associates shall use any of the information obtained on ACC Members (customers and

employees) through the Programme “ to directly mail-shot Members (including e-mail or

telephone marketing programmes) in offering products similar to ACC products within

Ireland.” “ACC products” means the products currently offered by ACC to Members,

namely, term loans, mortgages, overdrafts, current accounts and deposit facilities.

Arguments in Support of Request for the Issuing of a Certificate

23. The parties submitted that Clause 3.1 was part of MBNA’s standard affinity agreement,

which had already received a Certificate from the Authority, and that it would continue

to operate in the same manner. The parties did not wish to make any further submissions

on this clause.

24. The parties believe that Clause 6.5 does not prevent, restrict or distort competition in the

State. They stated that the clause relates only to the marketing and promotion, but not

the provision, by MBNA, of products currently offered by ACC. That is, the clause does

not restrict MBNA from entering and competing in such markets in the future. The

parties claim that Clause 6.5 aims only to protect ACC’s legitimate business interest, by

restricting MBNA’s use of ACC customer information (obtained pursuant to the

Programme) to targeting those customers for the purposes of the credit card programme

only. ACC claimed that the clause safeguarded ACC’s position in ensuring full

compliance under the Data Protection Act.

25. The parties stated that the clause did not restrict MBNA marketing or promotional

campaigns which were targeted at individuals as a result of information received

otherwise than through the Programme. They claimed that Clause 6.5 did not put

MBNA in a worse position than it was before the Agreement and so could not restrict

competition which did not exist in the first place.

26. The parties stated that the Agreement placed no restrictions on the end user in terms of

entering into credit card arrangements with any other issuer at any time. They claimed

that the market for credit card products would be relatively unaffected by the Agreement,

particularly given ACC’s negligible share of the relevant market.

Arguments in Support of Granting of a Licence

27. The parties submitted arguments in support of the granting of a licence which, in the

view of the Authority, are not relevant to this decision.

Other Information

28. MBNA and ACC submitted that, other than the clauses of the Agreement quoted above,

all the terms of the Agreement (in particular the Schedules thereto) constitute

information which is commercially sensitive and commercially confidential information.

Assessment

(a) Section 4(1)

29. Section 4(1) of the Competition Act, 1991 prohibits and renders void all agreements

between undertakings 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.

(b) The Undertakings and the Agreement

30. Section 3(1) of the Competition Act, 1991 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 .” MBNA is

a limited company engaged for gain in the provision of credit card services. ACC is a

limited company engaged for gain in the provision of banking services. Thus both

parties to the arrangements are “undertakings” within the meaning of the Act

(c) Applicability of Section 4(1)

31. The relevant market is that for the issuance of credit cards, offering domestic and

international acceptance, and the provision of credit card services in the State. MBNA

and ACC are not competitors in this market and, currently, do not compete in any other

market.

32. The Authority considered whether there may exist a relevant market for the provision of

affinity credit card programmes, marketable in the State, to affinity groups, financial

institutions and other such customers. According to the Authority’s information, MBNA

currently has [ ] such arrangements in place in the State (whereby the custom graphic

and/or the name and logo of the endorsing organisation appears on the credit card but the

necessary services are provided by MBNA). The two other main competitors in Ireland,

Bank of Ireland and AIB have, between them, around 20 such arrangements. Assuming

the market could indeed be defined along the lines sketched above, this data would

suggest MBNA has considerable market presence. For the purposes of this decision,

however, the Authority decided that it was unnecessary to make a final determination on

this point. Whether or not the market should be defined as the market for provision of

credit card services to end users, or the market for provision of affinity credit card

programmes to affinity groups, the Authority’s assessment of the agreement would not

change. The Authority also notes that the potential number of groups to which affinity

services may be provided appears to be rapidly expanding – with a potentially limitless

amount of possible customers ( e.g., sports and music clubs, alumni groups, charity

groups, and professional bodies and institutions).

33. The relevant market has seen at least three new entrants (MBNA, TUSA and Tesco) in

recent years and a significant fall in APRs - this bodes well for competition in the

market. Moreover, given the current distribution of market shares and the strong

positions of AIB and Bank of Ireland over a long period of time, neither of the parties

have significant market power.

34. The Agreement leads to a concentration of the relevant market but also facilitates the

emergence of a significant competitor to AIB and Bank of Ireland. Given the

historically significant presence in the market of these two banks, this is a welcome

development from a competition perspective. ACC does not provide credit card services

by itself and, under the terms of the Agreement, APRs are set solely by MBNA and are

not fixed for the duration of the Agreement.

35. The Authority is satisfied that Clause 3.1 is necessary to ensure the proper functioning of

the arrangements and does not contravene Section 4(1) of the Competition Act, 1991.

Also, clauses of the Agreement which appear verbatim in MBNA’s Standard Credit

Card Affinity Agreement, notification CA/1/98, 2 still do not contravene Section 4(1) of

the Act. In particular, the confidentiality, advertising and trademark provisions are

necessary to ensure the proper functioning of the arrangements and the willingness of

ACC to participate. In the opinion of the Authority, the length of the agreement ensures

that neither party is locked into a long-term arrangement which would restrict

competition or their own commercial freedom.

36. Clause 6.5, restricts MBNA from using customer information provided to MBNA by

ACC in the context of the Agreement, to market services that directly compete with

ACC’s current products (term loans, mortgages, overdrafts, current accounts and deposit

facilities ). The ancillary product markets have a similar distribution of market share to

that of the relevant market, with at least seven incumbent firms and AIB and Bank of

Ireland being the major players. The clause does not restrict MBNA from actually

entering other ancillary product markets, nor does it put MBNA in a worse a position

than they were in before the Agreement. It does, nonetheless, place a restriction on a

potential competitor in these markets. In addition, if MBNA was to enter ancillary

product markets, the parties would become competitors in that market and the

Agreement would therefore be an agreement between “competitors” involving a

restriction on one of the competitors. It is the Authority’s view that Clause 6.5 is

reasonable in protecting ACC’s legitimate business interests in the uses to which its’

valuable customer database may be put by MBNA. It is unlikely that ACC would have

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2 Under Authority Decision No. 522 of 19 December, 1998, a Certificate was issued in respect of MBNA’s

Standard Credit Card Affinity Agreement.

entered the Agreement without the inclusion of such a clause. In the opinion of the

Authority, this clause does not contravene Section 4(1) of the Act.

The Decision

37. In the Authority's opinion, MBNA Europe Bank Limited and ACC Bank plc are

undertakings within the meaning of Section 3(1) of the Competition Act, 1991 and the

notified arrangements constitute an agreement between undertakings. The Authority

considers that the notified arrangements do not have as their object or effect the

prevention, restriction or distortion of competition and do not contravene Section 4(1) of

the Competition Act, 1991.

The Certificate

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 Credit Card Affinity Agreement between MBNA Europe Bank Limited and ACC Bank plc

(notification no. CA/3/01), notified on 13 March 2001 under Section 7, does not contravene

Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Declan Purcell

Member

28 June 2001.