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Lloyds TSB / Amex: playing their cards right

27th April 2005
By IB Staff Writer

Lloyds TSB is rumored to be on the verge of announcing a link-up with American Express.

Lloyds TSB is set to announce the launch of American Express branded card products for its wealthier customers. Such a move would allow the bank to increase revenues from its existing customer base and earn a degree of protection from any reduction in Visa and MasterCard interchange rates. For Amex, the benefits lie in economies of scale and greater merchant acceptance.

Lloyds TSB [LLOY.L] is to begin issuing a range of American Express (Amex)-labeled premium card products to its wealthier customers, according to a report in the Financial Times. Lloyds TSB has recently reorganized its retail banking division and has made clear its desire to acquire and retain 'quality' customers. An Amex alliance will allow Lloyds to compete more effectively in the niche upper end of the credit card market, away from the intense price-led competition in the mainstream market.

The bank stands to enjoy significantly higher revenues if this move is a success. Consumer spending on Amex cards is widely viewed to be higher on average than MasterCard or Visa branded products, partly as a result of the quality of the reward programs available. Greater card use equates directly to greater end revenues as a result of two things: interest revenue and interchange, and this is at the heart of the value of this deal to Lloyds TSB.

Amex has traditionally levied higher interchange fees on transactions than either MasterCard or Visa, which clearly has a positive benefit for issuers in terms of revenue. Crucially, it has also managed to avoid the enforced cuts in these fees that have occurred in Australia. This could leave Lloyds extremely well positioned in comparison to its competitors if a cut in multilateral interchange fees levied by MasterCard and Visa in the UK exempted Amex.

From the latter's perspective, its greatest benefit will stem from the greater use of Amex cards. This will encourage greater merchant acceptance, which will enable Amex to increase its future growth potential through its own issuance, and through further partnerships of this kind.

This is an interesting development in the UK market, and one that may well precipitate the emergence of other such agreements. This move will strengthen the position of Lloyds TSB in the UK card market, giving it a significant point of difference over its competitors, while Amex will stands to gain from wider card acceptance.

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