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Federal R eserve Bank
OF DALLAS
W ILLIA M
H. W ALLACE
December 11
f i r s t v ic e p r e s id e n t
1990
DALLAS, TEXAS 75222
AND CH IE F O PER A TIN G O FFIC ER
Circular 90-87
TO:
The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Amendment to Regulation Y
(Bank Holding Companies and Change in Bank Control)
DETAILS
The Federal Reserve Board has announced approval of an amendment to
Regulation Y to permit banks to offer a price reduction on credit cards issued
to their customers if the customer also obtains a traditional banking product
from any of the credit card bank’s affiliates. The amendment will be effec
tive December 18, 1990.
The amendment follows the Board’s recent approval of separate
requests by Norwest Corporation, Minneapolis, Minnesota, and NCNB Corporation,
Charlotte, North Carolina, to consolidate their credit card operations into
card-issuing banks and to offer reduced-rate credit cards to customers of
their affiliate banks.
ATTACHMENT
A copy of Federal Reserve System Docket No. R-0699 is attached.
MORE INFORMATION
Questions concerning the Board’s action should be addressed to Jane
Anne Schmoker at (214) 651-6228. For additional copies of this circular,
please contact the Public Affairs Department at (214) 651-6289.
Sincerely yours,
For additional copies of any circular, please contact the Public Affairs Department at (214) 651-6289. Bankers and others are encouraged to use the following
toll-free number in contacting the Federal Reserve Bank of Dallas: (800) 333-4460.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Regulation Y; Docket No. R-0699]
Exemption Permitting Banks to Offer Reduced-Rate Credit Cards
To Customers of Their Affiliates
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Final rule.
SUMMARY:
Section 106 of the Bank Holding Company Act Amendments
of 1970 (12 U.S.C.
1971, 1972(1))
("section 106") generally
prohibits banks from offering reduced consideration for credit or
other services on the condition that the customer also obtain
some additional service from the bank or a holding company
affiliate of the bank.
This exemption would permit banks to
offer a price reduction on credit cards issued to their customers
if the customer also obtains a traditional banking product from
any of the credit card bank's affiliates.
EFFECTIVE DATE:
December 18, 1990.
FOR FURTHER INFORMATION CONTACT:
Robert deV. Frierson, Senior
Attorney (202/452-3711) or Mark J. Tenhundfeld, Attorney
(202/452-3612), Legal Division; or Anthony Cyrnak, Economist
(202/452-2917), Division of Research and Statistics, Board of
Governors.
For the hearing impaired only. Telecommunication
Device for the Deaf (TDD), Earnestine Hill or Dorothea Thompson
(202/452-3544).
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SUPPLEMENTARY INFORMATION:
Background
Section 106 generally prohibits banks from offering
reduced consideration for credit or other services if that
reduction is conditioned on a requirement that the customer also
obtain some additional service from the bank or a holding company
affiliate of the bank.-/
However, section 106 provides that the
Board may, by regulation or order,
"permit such exceptions ... a s
it considers will not be contrary to the purposes" of
section 106.
Pursuant to this exemptive authority, the Board
recently approved separate requests by Norwest Corporation,
Minneapolis, Minnesota ("Norwest"), and NCNB Corporation,
Charlotte, North Carolina ("NCNB"), to consolidate their credit
card operations into card-issuing banks and to offer reduced-rate
credit cards to customers of their affiliate banks.-/
Norwest and NCNB proposed to vary the consideration
(including interest rates and fees) charged on a credit card
issued by one of their banks if the cardholder also obtained a
"traditional banking product"
(defined by section 106 as a loan,
discount, deposit or trust service)
from any of their other
-/ Such arrangements constitute tie-ins and may result in a
customer being forced or induced to purchase a product that the
customer does not want (the "tied product") in order to obtain a
product that the customer desires (the "tying product").
-/ Norwest Corporation and NCNB Corporation. 76 Federal
Reserve Bulletin-702 (1990).
-
subsidiary banks.-/
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Regardless of the combination of banking
services offered, the proposed variation in consideration would
occur on the credit card (the tying product)
and was conditioned
upon the customer also obtaining traditional banking products
(the tied products)
from a subsidiary bank of the card-issuing
bank's parent holding company.
In addition, all products offered
under this arrangement were also available to customers for
separate purchase.
The Norwest and NCNB proposals were prohibited under
the literal terms of section 106.
Under its provisions, a bank
may not offer reduced-rate credit on the condition that a
customer also obtain some additional service from an affiliate of
that bank.-/
Accordingly, without an exemption under section
106 from the Board, a multi-bank holding company like Norwest and
NCNB would be prohibited from offering a reduced-rate credit card
at one of its banks on the condition that a customer also obtain
-/ For example, a depositor maintaining a minimum deposit
balance at any of their affiliate banks might be eligible for a
credit card with no membership fee.
-/ Section 106 permits a bank to reduce consideration for
credit or other services if the customer obtains some other
traditional banking service from that bank. This exception does
not apply, however, where the credit from one bank is conditioned
on obtaining an additional product from an affiliate. Thus,
while section 106 permits a bank to require a customer to obtain
its own traditional banking services as a condition for reducedrate credit, its does not permit a bank to impose the same
requirements for a traditional banking service offered by an
affiliate of the bank.
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a traditional banking product from one of its other affiliated
banks.
In order to grant an exemption,
section 106 requires
the Board to find that the reduced-rate credit card arrangement
would not be contrary to the purposes of the section.
The legislative history indicates that the purpose of the section
was to address an underlying Congressional concern regarding fair
competition and that its prohibitions were "intended to provide
specific statutory assurance that the use of the economic power
of a bank will not lead to a lessening of competition or unfair
competitive practices."-/
This legislative history also indicates that the Board
should exercise its exemptive authority selectively.
The Senate
banking committee's report states that "the committee expects
that by such regulation or order the Board will continue to allow
appropriate traditional banking practices."-/
The
Supplementary Views of Senator Brooke filed with the Senate
Report note that "adequate discretion is vested in the Federal
5/ S. Rep. No. 1084, 91st Cong., 2d Sess. 16 (1970)
("Senate Report").
The Senate banking committee's report
explains:
"The purpose of [section 106] is to prohibit anti
competitive practices which require bank customers to accept or
provide some other service or product or refrain from dealing
with other parties in order to obtain the bank product or service
they desire."
Senate Report at 17.
-/
Senate Report at 17.
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Reserve Board to provide exceptions where such are founded on
sound economic analysis."-/
In determining whether the proposed exemption would be
inconsistent with section 106's purpose and legislative history,
the Board has considered it appropriate to analyze the
competitiveness of the relevant credit card market.
In the
Board's view, unless it would be likely that the seller's market
power in the credit card market for the tying product is high
enough to force a consumer to also purchase on uncompetitive
terms a traditional banking service in the tied product market, a
reduced-rate credit card arrangement would not appear to produce
anticompetitive effects.
The Board has found the relevant market for credit
cards to be national in scope-/ and, with nearly 5,000 cardissuers, relatively unconcentrated.
In the case of Norwest and
NCNB, their small market shares and the presence of many other
competitors providing credit cards in the tying product market
indicated that they could not exercise sufficient market power to
impair competition in the tied product market for traditional
banking services.-/
-/
The Board also noted that both companies
Senate Report at 46.
-/ First Chicago Corporation. 73 Federal Reserve Bulletin
600 (1987); RepublicBank Corporation. 73 Federal Reserve Bulletin
510 (1987).
-/ According to market data as of December 31, 1988,
Norwest accounted for less than 1 percent of total credit card
(continued...)
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would continue to offer credit cards and traditional banking
services separately,-^/ and, given the competitive nature of
the credit card market, these separately available products would
be required to be offered at competitive prices.
Under these circumstances, the Board concluded that the
Norwest and NCNB proposals were not contrary to the purpose of
section 106, and that granting the exemptions was consistent with
the legislative history of the Board's authority to permit
exemptions for traditional banking services on the basis of
economic analysis.
Approval was conditioned, however, on the
Board's right to terminate the credit card proposals if
conditions developed to indicate that the arrangement was
resulting in anticompetitive practices that were inconsistent
with the purpose of section 106.
In light of section 106's purpose of preventing unfair
competitive practices, and the relatively unconcentrated nature
of the national credit card market, the Board also considered it
appropriate to permit reduced-rate credit card arrangements by
-/(...continued)
balances outstanding and NCNB held only 1 percent among the top
100 card-issuers. Moreover, the top 100 card-issuing
institutions accounted for approximately 80 percent of total
industry outstandings and Citicorp, the largest single issuer,
accounted for 18 percent of all credit card balances outstanding.
— / Under antitrust precedent, anticompetitive concerns are
substantially reduced where the buyer is free to take either
product by itself even though the seller may also offer the two
items as a unit at a single price.
Northern Pacific Rv. Co. v.
United States. 356 U.S. 1, 6, n.4 (1958).
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bank holding companies, without the need for acting on individual
requests.
Accordingly, the Board proposed an amendment to
Regulation Y authorizing bank holding companies generally to
offer reduced rates on credit cards for customers of their
affiliated depository institutions under the same circumstances
discussed in the Norwest and NCNB approvals.— /
During the
regulatory comment period, the Board received 49 written
comments, with 4 0 in favor of and 9 opposed to the proposal.
Discussion
Commenters opposing the proposed amendment generally
argued that reduced-rate credit card arrangements would permit
larger bank holding companies to compete unfairly against smaller
holding companies for credit card customers.
The Board believes,
however, that the proposed exemption addresses the potential for
unfair competitive practices in several respects.
As the Board
has previously noted, concerns regarding reduced-rate credit card
proposals from an antitrust perspective are substantially reduced
when the buyer is free to obtain the tying or tied product
separately, thus assuring the availability of these products to
customers not wishing to obtain all the products offered in the
arrangement.
Moreover, the competitiveness of the credit card
market would require that the separately available credit cards
be offered at competitive prices.
In any event, the Board has
reserved the right to terminate any reduced-rate credit card
55 FR 26453
(1990).
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arrangement offered under the proposed exemption that results in
anticompetitive practices.
One commenter disputed the conclusions to be drawn from
the data on credit card receivables and alleged that the credit
card industry is highly concentrated.
As previously discussed in
the Norwest and NCNB Order, however, these data confirm the
relatively unconcentrated nature of the credit card market.
The
approximately 5,000 card-issuers in the market for credit card
services substantiate the existence of numerous competitors in
the present market and the absence of significant barriers for
entry by prospective competitors.
The largest single issuer has
less than 2 0 percent of all credit card outstandings and cannot
be characterized as being dominant enough to exercise significant
market power through its market share.
In addition, the credit
card market is also national in geographic scope.
This national
scope implies that, regardless of local banking market structure,
customers can choose from many competitive alternatives for basic
credit card services, thus making it unlikely that any one
competitor would be able to exert monopolistic power in any local
market for credit cards.
And, as noted above, the Board can
terminate any reduced-rate credit card program if the facts
demonstrate that competitors offering the program can exert
sufficient power in this market to result in anticompetitive
practices.
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Seventeen of the commenters in favor of the proposal
have requested that the Board expand the proposal to include one
or both of the following:
(i) a variation in consideration for
any traditional banking product; and (ii) traditional banking
products offered by nonbanking subsidiaries in addition to
depository subsidiaries of the card-issuing bank's parent holding
company.
As discussed above, section 106 permits the Board to
approve only exemptions that are not contrary to the purpose of
preventing anticompetitive practices.
In the case of the
reduced-rate credit cards, an analysis of the current credit card
market indicates that no seller's market power in this tying
product market is high enough to force a consumer to also
purchase on uncompetitive terms a traditional banking product in
the tied product market.
In the Board's view, analyses of the market for other
tying banking products would be appropriate before the Board
expanded the scope of the proposed amendment.
The Board has
found that the competitive characteristics of the credit card
market are an appropriate consideration in determining whether an
exemption for credit cards would not be contrary to the purposes
of section 106 for purposes of exercising its exemptive
authority.
Accordingly, the Board believes that market analyses
for the other proposed tying products would be relevant to the
Board's determination of whether those tying products would
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result in anticompetitive practices and thus would be
inconsistent with the purposes of section 106.
In this regard,
staff reviews market characteristics of banking products on a
continuing basis and analyses for other traditional banking
products may be concluded in the future.— /
The Board believes it appropriate, however, to expand
the proposed exemption to include traditional banking products
offered by both depository and nonbanking subsidiaries of the
card-issuing bank's parent holding company.
Multi-bank holding
companies today offer a variety of traditional banking products
through nonbanking subsidiaries.
In addition, the Board notes
that subsequent Congressional action in other contexts regarding
prohibitions similar to section 106 tends to support the
inclusion of all subsidiaries within the exemption.
For example,
Federal thrifts are permitted to offer arrangements with
traditional banking services obtained from any of the thrift's
affiliates.— /
In the Competitive Equality Banking Act of 1987
("CEBA"), which applied the prohibitions of section 106 to
nonbank banks, Congress indicated that these restrictions "would
— / For example, staff has recently completed an analysis
of the lending market for small businesses.
According to this
study, the market for these services is relatively local in
scope.
— / 12 U.S.C. § 1464(q)(1).
During the enactment of the
Financial Institutions Reform, Recovery, and Enforcement Act of
1989, amendments to similarly exempt traditional banking services
offered by subsidiaries of bank holding companies from
section 1 0 6 's prohibitions were unsuccessfully offered in both
House and Senate banking committees.
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not be violated by tying one of these traditional banking
services offered by a grandfathered nonbank bank to another
traditional banking service offered by an affiliate.
While
this excerpt does not accurately reflect the literal terms of
section 106, it lends support for expanding the proposed
exemption to include traditional banking products offered by any
of the card-issuing bank's affiliates, given the lack of
economic evidence of anticompetitive effects.-^/
Analysis of the final rule
The final rule would permit a bank owned by a bank
holding company to vary the consideration (including interest
rates and fees) charged on extensions of credit made pursuant to
a credit card offered by the bank (including a credit card bank)
on the basis of the condition or requirement that a customer also
obtain traditional banking products from another subsidiary of
the card-issuing bank's parent holding company.
However, both
the credit card and the traditional banking products offered in
the arrangement must be separately available for purchase by the
customer.
— /
(1987) .
Moreover, the Board may terminate any exemption if
H.R. Conf. Rep. No. 261, 100th Cong.,
1st Sess. 128-29
— / In light of section 106's applicability to nonbank
banks, the Board notes that the proposed amendment to
Regulation Y for reduced-rate credit cards would also apply to
holding companies entitled to grandfathered treatment under CEBA,
subject to any additional restrictions imposed on such companies.
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facts develop to indicate that the arrangement is resulting in
anticompetitive practices.
Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Reculatory
Flexibility Act (Pub. L. 96-354, 5 U.S.C. 601 et sea.). the Board
of Governors of the Federal Reserve System certifies that this
final rule will not have a significant economic impact on a
substantial number of small entities that will be subject to the
regulation.
List of Subjects in 12 CFR Part 225
Administrative practice and procedure, Appraisals,
Banks, Banking, Capital adequacy, Federal Reserve System, Holding
companies, Reporting and record keeping requirements, Securities,
State member banks.
Forthe reasons
amends
set forth in this document,the Board
12 CFR Part 225 as follows:
PART 225 - BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
1.
The authority citation for Part 225 is revised to
read as follows:
AUTHORITY:
1843(c)(8),
1844(b),
12 U.S.C. 1817(j)(13),
1818, 1831i,
1972(1), 3106, 3108, 3907, 3909, 3310, and
3331-3351.
2.
In § 225.4, the heading to paragraph (d) is
revised,paragraph
(d) is redesignated as paragraph (d)(1) and
new paragraph (d)(2) is added to read as follows:
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S 225.4 Corporate practices.
* * * * *
(d)(1) Limitation on tie-in arrangements.
* * * * *
(2) Exemption for credit cards.
A bank (including a
credit card bank) owned by a bank holding company may
vary the consideration (including interest rates and
fees) charged on extensions of credit made pursuant to
a credit card offered by the bank on the basis of the
condition or requirement that a customer also obtain a
loan, discount, deposit, or trust service (but no other
products)
from another subsidiary of the card-issuing
bank's parent holding company, if the credit
card and the loan, discount, deposit, or trust service
offered in the arrangement are also separately
available for purchase by a customer.
The exemption
granted pursuant to this paragraph shall terminate upon
a finding by the Board that the arrangement is
resulting in anticompetitive practices.
* * * * *
By order of the Board of Governors of the Federal
Reserve System, November 8, 1990.
(sianed) William W.Wiles
William W. Wiles
Secretary of the Board
@FedFRASER