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MBNA Europe Bank Ltd./ TUSA Financial Services Ltd. (Credit Card Affinity Agreement) [2001] IECA 593 (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/4/01 - MBNA Europe Bank Limited/ TUSA Financial Services Limited

(Credit Card Affinity Agreement)

Decision No: 593

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/4/01 - MBNA Europe Bank Limited/ TUSA Financial Services Limited

(Credit Card Affinity Agreement)

Decision No. 593

Introduction

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

MBNA Europe Bank Limited and TUSA Financial Services Limited 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 TUSA Financial Services Limited

(“TUSA”). The agreement sets out the terms and conditions for the marketing of an

MBNA/TUSA credit card to TUSA customers, employees and others. MBNA is not being

given direct access to TUSA’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. TUSA Financial Services Limited is a joint venture company owned 51% by TSB Bank

(which was acquired by Irish Life and Permanent plc on 20 April 2001) and 49% by

Superquinn. It is registered as a “credit institution” pursuant to the Consumer Credit Act,

1995. TUSA is a subsidiary of TSB Bank and acts as an agent of TSB Bank offering its

products and services. This means that it is actually TSB Bank that provides the loans and

books the deposits of the TUSA customers. A proportion of the costs of TUSA is

recoverable from TSB Bank. However, TUSA is a separate company with the profits and

losses shared between TSB and Superquinn. TSB Bank is a body governed by the Trustee

Savings Bank Act, 1989.

(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 Bank [ ]%

Ulster Bank, National Irish Bank and Tesco [ ]%

ACC Bank [ ]%

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. TUSA, had traditionally offered

the lowest rate in the market for standard credit cards but is currently offering the second

lowest rate in the market of 17.5%.

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 banks’ 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/TUSA affinity credit card to TUSA customers, employees and others (identified as

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

TUSA’s customer lists. MBNA develops the Programme which is endorsed by TUSA and

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

are identified by TUSA, and agreed with MBNA, and TUSA 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 TUSA

customers and licences to use its indicia, TUSA receives from MBNA royalty payments, of

a fixed fee per new account opened and a percentage of purchases thereafter, in accordance

with the Agreement. TUSA 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

TUSA of any proposed changes), including APRs . The term of the Agreement is for an

initial period of 3 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 TUSA [ ] “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. The monthly statements and general business of TUSA credit card accounts

was previously processed by ACC Bank. ACC decided to exit the credit card market, and

begin its own MBNA affinity programme. In order to continue to provide credit card

services, TUSA was left with choices: (a) look for a new partner to process the credit card

accounts, (b) process the credit cards themselves or (c) exit the credit card market and begin

an MBNA/TUSA credit card programme. The parties noted the considerable expense

involved in option (b). TUSA chose to exit the credit card market by selling as many of its

credit card accounts as possible to MBNA and entered into an affinity agreement with

MBNA. In addition to purchasing the receivables relating to those accounts, MBNA paid a

fixed fee per account comparable to the fixed fee TUSA receive for new MBNA/TUSA

credit card accounts opened on foot of direct marketing by TUSA. TUSA customers,

whose accounts were acquired by MBNA under the terms of the Purchase Agreement, have

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

been issued MBNA/TUSA credit cards. The Programme is also being marketed to those

customers. Regarding those few remaining TUSA customers not acquired by MBNA:

TUSA does not have the facilities to process the accounts and so they are being terminated.

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 TUSA’s customer lists.

b. Clause 6.4, which restricts MBNA’s use of information obtained pursuant to the

Purchase Agreement and through the Programme, for the purposes of marketing

products similar to current TUSA Products within Ireland (mortgages, deposit

facilities etc.).

Also, TUSA 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, TUSA 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, TUSA 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. ” TUSA will not license TUSA

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

customers (as identified by MBNA and TUSA) 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 TUSA to display signs and logos acknowledging that it accepts other types of credit card

for payment purposes .”

22. Clause 6.4: Whereby for the duration of the Agreement, neither MBNA nor any of its

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

employees) through the Purchase Agreement or the Programme “ to directly mail-shot

Members or Potential Customers in offering products similar to TUSA products within

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

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

Customers are those identified by TUSA for the purposes of the programme only.

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 6.4 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 TUSA. That is, the clause does not

restrict MBNA from entering and competing in such markets in the future. The parties

claim that Clause 6.4 aims only to protect TUSA’s legitimate business interest, by

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

Agreement and the Programme) to targeting those customers for the purposes of the credit

card programme only. TUSA stated that it viewed the Purchase Agreement as part of the

overall arrangements with MBNA and hence the clause covered information obtained on

those customers too. TUSA claimed that their customer information database formed a

valuable asset of the business of TUSA as a going concern and that were it not for the

inclusion of Clause 6.4 it would have been commercially impossible to conclude the

Agreement.

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 Purchase Agreement and the Programme. They claimed that Clause 6.4

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 TUSA’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 TUSA 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. TUSA is a

limited company engaged for gain in the provision of financial 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

TUSA 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. It is possible that TUSA would have been unable to continue in

the market, were it not for the agreement. TUSA 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 TUSA 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 6.4, restricts MBNA from using customer information provided to MBNA by TUSA

in the context of the Purchase Agreement and the Agreement, to market services that

directly compete with TUSA’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 markets have also seen new entry in

recent years - namely TUSA and Tesco Personal Finance. The clause does not restrict

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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.

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

any of the 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 6.4 is reasonable

in protecting TUSA’s legitimate business interests in the uses to which its’ valuable

customer database may be put by MBNA. The fact that it covers information obtained

pursuant to the Purchase Agreement is also reasonable as these accounts are now

MBNA/TUSA accounts. It is unlikely that TUSA would have 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 TUSA Financial Services

Limited 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 TUSA Financial

Services Limited (notification no. CA/4/01), 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