Competition Authority Decision of 19 November 1998 relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No. CA/1/98:  MBNA International Bank Ltd. (Credit Card Affinity Agreement).

Decision No 522

Introduction

1.	Notification was made by MBNA International Bank Ltd. on 6 January 1998 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 grant a certificate, a licence under Section 4(2) in respect of a Standard Credit Card Affinity Agreement.
 
The Facts

(a) Subject of the Notification

2.	The notification concerns a Standard Credit Card Affinity Agreement between MBNA International Bank Ltd. and the Affinity Groups.  The agreement is a marketing arrangement whereby the Affinity Groups provide to MBNA access to their mailing lists and MBNA (in conjunction with the Affinity Group) market their credit cards to people on the Affinity Group’s mailing lists.

(b) The Parties Involved

3.	MBNA 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. This notification concerns rights and obligations arising from a standard Credit Card Affinity Agreement (the “Agreement”) which MBNA International Bank Limited, a company registered in England and Wales acting through its Irish Branch Registered Number E3873 at 46 St. Stephen’s Green, Dublin 2 (“MBNA”) proposed to conclude or make with various organisations (“Affinity Groups”).

4.	At the date of notification MBNA had no sales or turnover in relation to credit cards in the State and, as it is a new entrant to the market, it does not have market share data readily available, either by sales or turnover.  MBNA stated that they do not have any substantial interest in any other company competing in the market affected.

(c) The Products and the Markets

5.	The notifying party claimed that the nature of the services affected by the Agreement is the provision of credit card services to consumers.  The Agreement relates to the marketing of MBNA’s credit card programme, specifically designed for the purpose (the “Programme”), to Irish resident customers and employees of the Affinity Groups.

6.	The notifying party claimed that the market for credit card products is global.  However, the Agreement applies only to the State.  The relevant credit cards were designed for compliance with Irish law and cannot be marketed in any other jurisdiction.

7.	The notifying party stated that the Irish credit market is a subset of the total Irish market for payment cards.  That total market can 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.

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

	(a)	credit cards where credit is advanced and may be left outstanding;

	(b)	charge cards where credit is advanced but must be repaid in full at the 		end of each billing period (usually one month); and

	(c)	debit cards where no credit is advanced, the card merely being used to 		access a current account.

9.	The notifying party claimed that the Agreement only related to credit cards (product type (a), above) offering domestic and international acceptance (market section (a), above).  Although the notification only concerns that part of the market so described, the notifying party stated, 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.
	
(d) Structure of the Market

10.	The notifying party claimed that the provision of credit card services is divided into two levels, credit card issuers (“Issuers”) and credit card acquirers (“Acquirers”).  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.  There are 21,000 bank owners of Visa world-wide.  The payment systems provide a global framework and rules for use of affiliated credit cards.  Issuers provide the actual cards, related account and credit facilities.  A consumer’s credit card contract is with an Issuer as opposed to a payment system and in accordance with the Issuer’s terms and conditions (although the Issuer’s terms and conditions must not contravene the rules of the payment system).  In Ireland the main Issuers are Allied Irish Banks plc and Bank of Ireland.

11.	Acquirers operate by providing credit card acceptance facilities to merchants for the payment system or systems of which they are members.  An Acquirer will arrange payment to a merchant for credit card transactions and will in turn be reimbursed by each relevant Issuer, through the clearing operations of the relevant payment system.  In Ireland the main acquirers are Allied Irish Banks plc and Bank of Ireland.

12.	MBNA does not operate as an Acquirer and has no current intention to do so.  MBNA has recently commenced operations in Ireland as an Issuer.  The Agreement relates solely to its activities as an Issuer.  At the time of notification MBNA were new entrants to the market and thus had not yet accrued a market share.

13.	The notifying party claimed that the current market share (by number of cards issued) is distributed amongst Issuers as follows;
Table 1:
	
Participants	Market Share	

Allied Irish Banks plc
Bank of Ireland
Ulster Bank
National Irish Bank
TSB
Irish Permanent (issued by Bank of Ireland)	
40%
37%
 6%
 6%
 6%
 3%	
	 Others						           2%

	The notifying party claimed that other than regulatory requirements, primarily pursuant to Irish banking legislation, the main bar to entry to the market is establishment cost including payment system membership.  In order to become a member of either VISA or MasterCard for any particular jurisdiction, one needs to be authorised to carry on banking activities in that jurisdiction.  Such a requirement leads to substantial capital and regulatory costs.  In addition, each payment system requires a major computer system to be in place to enable the daily clearing of transactions to take place through that payment system.  That computer system also needs to assist with the consideration and underwriting of applications, the on-going processing of customer transactions, the issue of statements, the receipt of customer payments and general account maintenance.  Initial marketing costs are also high.  In addition, there are initial and on-going payment system fees.

14.	It is estimated by the Authority, that 21% of Irish adults hold credit cards which is low as compared to the US where over 80% of adults have credit cards.  In looking at credit card holders by social grouping, some 66% of AB and C1’s do not have a credit card.  MBNA is targeting this market.  Of all credit card holders in the State 75% of holders spend less than IR£250 per month and the same percentage of card holders pay on time and thus incur no interest penalty.  There is estimated to be 25,000 to 30,000 credit card friendly outlets in the State.  The basic measurement of price in relation to credit cards is the Annual Percentage Rate of Interest (“APR”).  In Ireland the APR of credit cards range from 23% to 25.5%.  In the UK the APR of credit cards ranges from 14.5% to 22.3%.  As 75% of people never incur interest penalties, and many that do may not have envisaged not paying on time, it seems that APR differences do not induce customers to gravitate to low APR card issuers.  In terms of developments in payment methods in the State over the past number of years the number of cheques has fallen by 6% to 154m, ATM transactions are up 31% to 97m and credit card transactions are up 30% to 29m.  From this we can see that there is a movement away from cash and cheques to payment methods based on cards.
Affinity Groups

15.	MBNA generates a substantial amount of income by authorising and providing company 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 etc.  MBNA competes for existing customers of other bank’s credit cards by offering low APR’s and special deals.  MBNA also uses the information given to it by the Affinity Groups to increase the numbers of people holding credit cards. Credit card affinity groups enable the card issuer and the affinity group to exploit synergies such as the transactional relationship with the customer.  Using this the affinity group can send promotional material etc. with the monthly credit card bill.  MBNA runs an affinity card programmes with the like of Rehab, Eureko (Friends First) and Church & General [vide Decision No 523].  MBNA is not the only company in the State offering affinity group services.  AIB has 15 affinity marketing programmes, including those with the INTO, TUI and UCG while BOI have affinity programs with  UCD, UCC, TCD, Queens and UL.

16.	MBNA moved into UK in 1993.  Since that time it has built up a 2 million customer base outside US.  MBNA’s UK division runs 530 affinity programmes.  In the UK, MBNA is one of 9 issuers in the UK market.  Potential entrants (into the market in the State) operating in the UK are Advanta, Capital One and Household Financial Corporation.  Another potential competitor is GE Capital (Europe’s second largest issuer of private label cards).  

17.	In a previous decision (Decision No. 481) involving an arrangement whereby one bank agreed to carry on the charge card and merchant acquisition business of the other, the Authority decided that the relevant market consisted of credit cards, charge cards and, for payments up to £100, cheques backed by cheque guarantee cards. In this case, since the arrangements concern the marketing of credit cards to existing affinity groups, the Authority considers that the relevant market is that for the issuance of credit cards and the provision of credit card services. The market for issuing credit cards is opening up in the State.  Historically, the two major banks 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 and the existence of other potential entrants, notably UK based, augers well for competition in this market in the State.

18.	Affinity groups sell the use of their database to MBNA.  This enables MBNA to target both current credit card holders and likely credit card holders with application forms for the MBNA credit card.

(e) The Notified Arrangements

19.	The Agreement is essentially a marketing arrangement whereby the Affinity Groups provide to MBNA mailing details of its customers, employees and others (identified as suitable by the notifying party).  MBNA develop the Programme which is endorsed by the Affinity Group and contains the Affinity Group’s indicia on correspondence and/or the credit card itself.  MBNA market the Programme to the potential customers on an agreed basis with the Affinity Group.  In return for providing the marketing information and licences to use its indicia, the Affinity Group receive from MBNA royalty payments in accordance with Clause 8 and Schedule B of the Agreement.  The Affinity Group are 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 are fully responsible for the operation of the Programme and have full control over the terms and conditions (subject to informing the Affinity Group of any proposed changes).  The term of the Agreement is for an initial period of 5 years.

(f) Submissions by the Notifying party

20.	The Agreement contains the following provision which might be regarded as restrictive:

Clause 3.1:  [The Affinity Group] agrees that during the term of the Agreement:  

It does and will continue to promote the Programme in Ireland exclusively and will not sponsor, advertise, aid or develop any Rival Programme without the prior written consent of MBNA;

It will not licence the [Affinity Group] Indicia nor sell, rent or otherwise make available its Marketing Lists or information about Customers or Potential Customers in relation to or for promoting any Rival Programme; and

Its publication shall not carry any advertisements for any Rival Programme provided that, nothing in this Agreement shall prevent or restrict the right of  [the Affinity Group] to display signs and logos acknowledging that it accepts other types of credit card for payment purposes.”

Arguments in Support of Request for the Granting of a Certificate

21.	MBNA stated that it believed that the Agreement does not contravene Section 4(1) of the Competition Act, 1991 (the “Competition Act”) as it does not prevent, restrict or distort competition in the State.  The Agreement relates only to the marketing of a specific credit card programme and in no way restricts the end user of the product from entering into credit card arrangements with any other Issuer at any time.  The notifying party claimed that the relevant market will be unaffected by the Agreement.

22.	The exclusivity of the Affinity Group’s endorsement and agreement not to licence its indicia or carry advertisements for Rival Programmes for the initial five years and thereafter (if extended) for successive two year periods is required in order to justify the investment of MBNA in developing and launching the Programme which (excluding management time, overheads and cost of setting up in Ireland) will involve card design and production costs of   [  ] and initial marketing costs of [  ].  Upon expiry of the initial five year term and any subsequent two year extensions the Affinity Group will be free to negotiate with any other credit card issuer for their endorsement.

23.	In Competition Authority Decision No. 421 dated 12 September 1995 (Adidas/FAI Notification Number CA/425/92E) the Authority was of the view that:

“The net issue is whether by denying other suppliers the right to promote their products by supplying them to the FAI such an agreement prevented, restricted or distorted competition.  In the Authority’s opinion it did not do so.  Of course Adidas benefited from the fact that what it was selling was a reproduction of the kit worn by the international team.  The marketing benefits of supplying the team applied not only to Adidas sportswear in general but to that particular design, demand for which was undoubtedly enhanced as a result of it being worn by the team.  While the success of the Irish international soccer team in recent years meant that it represented an attractive means for a sportswear manufacturer to promote its goods it is by no means the only way of doing so.  Indeed there are many other teams and individuals that other sportswear manufacturers can enter into similar agreements with.”

24.	MBNA submitted that the same argument applies to the Agreement.  It remains open to other Issuers to enter into similar arrangement with other groups and nothing in the Agreement will restrict the card users choice of product. In the Adidas/FAI case Competition Authority also stated:

“nevertheless other suppliers were not prevented from entering the sportswear market by virtue of this agreement.  They were not prevented from producing soccer shirts, for example, only a particular style of soccer shirt carrying the official FAI crest.  The Authority does not, however, believe that that can be considered to prevent, restrict or distort competition.”

25.	A similar argument applies in relation to the Agreement.  Nothing prevents other credit card issuers from providing similar products.  Nothing in the Agreement could be shown to prevent other Issuers from entering the market.

Arguments in support of Granting of a Licence

26.	Arguments in support of the grant of a licence were presented which, in the opinion of the Authority, are not relevant in this case.

Other Information

27.	MBNA stated that they have not made any notification to the European Commission of the Agreement or any related matters.  MBNA is not aware of any proceedings under the Competition law of any country or State relating to the Agreement.  MBNA stated that they were not aware of any EC Decisions, block exemption regulations or notices, or EC Court judgements relevant to this Notification.  MBNA reserved the right to produce further supporting facts for arguments not yet available on any points raised in this notification.

28.	MBNA 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 which is claimed is commercially confidential information.

(g) Submissions by Third Notifying party
29.	There were no submissions by third notifying party.

Economic Assessment

Applicability of Section 4(1)

The Undertakings and the Agreement

30.	Section 3(1) of the Competition Act defines an undertaking as ‘a person, being an individual, a body corporate or an unincorporated body engaged for gain in the production, supply or distribution of goods or the provision of  a service MBNA is a bank which provides financial services to consumers for gain and is thus an undertaking.  The Affinity Groups are businesses involved in many different areas who sell information to MBNA in return for payment and are thus undertakings.  The notifying party are therefore undertakings and the agreement is an agreement between undertakings.   The agreement has effect within the State.

Applicability of Section 4(1)

31.	In the opinion of the Authority, the relevant market, vide para 17, is highly competitive. The emergence of MBNA and the existence of other potential entrants augers well for competition in this market in the State.  

32.	Clause 3.1 does not restrict competition. Clause 3.1 contains provisions which in the opinion of the Authority, are an integral part of any new promotional/marketing effort that attempts to ensure compliance with the agreement and that the agreement reaches its stated objectives. For example, the obligation to “promote the Programme in Ireland exclusively and will not sponsor, advertise, aid or develop any Rival Programme without the prior written consent of MBNA” ensures that the Affinity Group has the proper incentive to fulfil the agreement to its best ability.  Similarly the obligation on the Affinity Group not to “...licence the [Affinity Group] Indicia nor sell, rent or otherwise make available its Marketing Lists or information about Customers or Potential Customers in relation to or for promoting any Rival Programme” ensures that MBNA has exclusive access to the lists and intellectual property of the Affinity Group.

33.	The provisions also facilitate complimentarities between various parts of the agreement; for example, the restriction which ensures that the Affinity Group’s “..publication shall not carry any advertisements for any Rival Programme” ensures that the complimentarities between the Affinity Group and MBNA are maximised.  This clause also provides “that, nothing in this Agreement shall prevent or restrict the right of  [the Affinity Group] to display signs and logos acknowledging that it accepts other types of credit card for payment purposes.”  This proviso ensures that competition in credit cards is maintained as Affinity Group members can be explicitly told that their body takes the credit cards of competing networks.  Thus, in the opinion of the Authority, Clause 3.1 does not contravene Section 4(1) of the Act.  
34.	The Clauses relating to intellectual property rights in trademarks do not operate in a manner contrary to Section 4(1) of the Act.  

35.	The restriction on MBNA in Clause 3.8 which entitles the Affinity Group to place advertising material in MBNA’s circulars to card holders “no fewer than four times a year” is no more than is necessary to ensure that the Affinity Group willingly participates fully in the agreement.  This also enables the notifying party to ensure that all the potential synergies are exploited to their mutual advantage.  This restriction, in the opinion of the Authority, does not contravene Section 4(1) of the Act.  

36. 	Under Clause 10 the parties agree to keep confidential information which they  obtain through entering into the agreement, other than information which is in “the public domain other than through a breach of this Clause”. The confidentiality provisions in Clause 10 are an integral part of any new promotional/marketing agreement and do not in the opinion of the Authority, operate in a manner contrary to Section 4(1) of the Act.

37.	The Authority considers that the term of the agreement (Clause 11) of an initial period of 5 years and to continue for successive periods of 2 years after that does not contravene Section 4(1) of the Act.  In the opinion of the Authority, the length of the agreement ensures that neither notifying party is locked into a long term arrangement which would restrict competition or their own commercial freedom.

The Decision

38.	In the Authority’s opinion MBNA and the Affinity Group(s) are undertakings within the meaning of Section 3(1) of the Competition Act and the notified arrangements constitute an agreement between undertakings. In the Authority’s opinion the Affinity Agreement does not contravene Section 4(1) of the Competition Act.

The Certificate

39.	The Competition Authority has issued the following certificate

The Competition Authority certifies that, in its opinion, the Affinity Agreement notified under Section 7 on 6 January 1998, does not contravene Section 4(1) of the Competition Act

For the Competition Authority

Professor Patrick McNutt
Chairperson

November 19 1998