First USA, Inc.
First USA, Inc.
Incorporated: 1985 as MNet
Total Assets: $5.49 billion
Stock Exchanges: New York
SICs: 6712 Bank Holding Companies; 6022 State
First USA, Inc. is one of the largest credit card companies in the United States. Through its First USA Bank subsidiary, the company serves over 7.8 million credit card users throughout the nation, managing about $8.9 billion in credit card loans. All of the credit cards issued by First USA are either Visa (84 percent) or MasterCard (16 percent). Of those, more than half are premium accounts such as gold cards, and 70 percent bear the First USA brand name. The company also issues affinity cards in affiliation with a variety of organizations. In addition to providing credit cards, First USA is also a leading processor of credit card transactions for merchants. Through its First USA Merchant Services, Inc. subsidiary, the company processed over 304 million credit card transactions worth $17.3 billion during the fiscal year ending in June 1994. Another subsidiary, First USA Capital Markets, is responsible for locating funding sources for First USA Bank. First USA Capital Markets also handles the bank’s investment portfolio and manages the investments of some of the company’s agent banks, which offer First USA products to their customers.
First USA was established in 1985 as MNet, a subsidiary of Dallas-based financial holding company MCorp. MCorp had been formed a year earlier upon the merger of two major Texas financial concerns, Southwest Bancshares Inc. and Mercantile Texas Corporation. Executives at MCorp felt that the creation of an umbrella company for its emerging batch of consumer financial operations would enhance profits in those areas by consolidating their management in one place. MNet was formed as a holding company, and John C. Tolleson was named its first chairman and chief executive.
Under Tolleson, former CEO of MBank Austin, MNet immediately took control of MCorp’s entire retail banking structure, which included a network of 63 banks. Among MNet’s initial activities were credit cards, traveler’s checks, mortgage banking, insurance, discount stock brokerage, and point-of-sale systems for retailers. The company also provided marketing support for these operations. Credit cards were issued through MBank USA, with headquarters in Wilmington, Delaware. MNet was charged with the task of developing new consumer banking products, as well as more efficient ways of marketing them. By the time MNet was established, MCorp already had 1.2 million credit cards issued, with outstanding loans worth $400 million on them.
Over the next year, MNet was one of the few bright spots for MCorp, which reported a loss of $91 million for the first nine months of 1986. Desperate for an infusion of capital, MCorp began looking to sell off one or more of its subsidiaries. In November 1986, MNet was purchased for $300 million by Dallas-based Lomas & Nettleton Financial Corporation, the second largest mortgage banking firm and largest independent mortgage banker in the United States. Lomas & Nettleton was attracted by MNet’s huge new customer base, to whom Lomas’ broad range of financial services could now be marketed. By the time of the sale, MNet had total assets of $900 million. Over two-thirds of that was in credit card loans through MCorp’s 62-bank network and through 575 affiliated outside banks. MNet also had a thriving credit card processing business for 22,000 merchants. In addition, the company had a $700 million mortgage servicing portfolio. MNet also brought to Lomas its insurance business and its 26,000-customer discount brokerage service. Tolleson and the rest of MNet’s upper management team moved to Lomas in the deal as well.
As part of the Lomas & Nettleton empire, MNet’s name was changed to Lomas Bankers Corporation, while MBank USA, the Delaware-based credit card bank, was renamed Lomas Bank USA. By 1988 Lomas Bank had one million active credit card accounts, and was one of the 20 largest credit card issuers in the United States. Its assets were worth $1.2 billion. Much of the company’s growth during this period came through the purchase of other banks’ credit card portfolios, part of an overall consolidation trend in the credit card business. In the spring of 1988, Lomas bought a portfolio of nearly 100,000 Visa and MasterCard accounts from Dollar Dry Dock Savings Bank, ranked 92nd among the nation’s credit card companies. The price was $107 million. Another major portfolio purchase took place that fall. In October, Lomas completed the acquisition of 35,000 credit card accounts with a total outstanding balance of $22.5 million from Bright Banc of Dallas.
Lomas Bank was the thirteenth largest credit card company by 1989. That year, parent company Lomas Financial Corporation (formerly named Lomas & Nettleton) ran into its own problems as the housing and real estate industries in the Southwest began to collapse. In desperate need of cash, Lomas Financial announced that its rapidly growing credit card unit was up for sale. An agreement was announced in June of 1989 to sell Lomas Bankers to an investment group led by Merrill Lynch Capital Partners Inc. and included members of Lomas Bank’s upper management corps. The $500 million buyout was completed in August, and the company, now the nation’s eleventh largest credit card issuer with 1.7 million active accounts and receivables totaling $1.35 billion, was on its own.
Lomas Bankers became First USA, Inc., following the buyout, while principal subsidiary Lomas Bank USA was renamed First USA Bank. Throughout the company’s series of ownership changes, its management stayed relatively constant. Tolleson remained the only chairman and chief executive officer in the company’s history. Richard Vague, president of First USA Bank, was also a holdover from the company’s genesis at MCorp.
As the 1990s began, First USA’s impressive growing spree did not slow. By early 1990 the company had $1.5 billion in credit card receivables. First USA began to cultivate its merchant services more actively; in 1990 the company signed a 10-year contract worth over $50 million for computerized credit card processing with Electronic Data Systems Corporation, a unit of General Motors. The First USA Merchant Services Inc. subsidiary was by this time processing credit card transactions for about 50,000 customers.
First USA continued to grow, and by the end of 1991 it had outstanding credit card loans of $2.2 billion from purchases and cash advances on three million accounts. In early 1992, First USA began exploring the possibility of reducing its leverage through an initial public stock offering. The company’s original plan called for the sale of 6 million shares at$16to$18a share. That notion was quickly dropped because of weak market conditions. A few months later, however, a scaled-down version of the stock offering was completed. The company raised $41 million from the sale of 4.5 million shares of First USA stock, which was listed on the New York Stock Exchange. Those shares amounted to 20 percent of the company. Merrill Lynch continued to hold a majority interest of 51 percent, and company management retained control of ten percent of its stock. The offering made First USA one of only three independent credit card companies, including Advanta Corporation and MBNA Corporation, to go public up to that time.
Gold cards featuring low finance charges and no annual fees played a growing role in First USA’s plans as the 1990s continued. As competition among credit card company’s stiffened, the company concentrated on the most profitable segment of the market—namely, those cardholders who carried over sizable balances on their accounts from month to month, thereby generating interest income. Marketing efforts were focused on this group rather than on those who tended to pay off their entire bill each month. The company also sought to stay at the forefront of the industry in its use of technology. Its investment in state-of-the-art equipment improved efficiency and reduced long-term costs in a number of areas, including application processing, security, and billing.
Toward the end of 1992, First USA announced that it was joining a trend among credit card issuers by introducing variable-rate cards. Floating rates protect the company against sharp rises in interest rates. In addition, variable-rate credit cards usually begin at a lower rate than fixed-rate cards, making them more attractive to new customers. For the year, First USA added 570,000 new credit card accounts, 66 percent more than had been added the year before. The sales volume of merchant transactions processed by the company grew 67 percent to $5.9 billion.
First USA more than doubled its net income to $39 million in 1993. The company’s performance played so well on Wall Street that the per share price of its stock increased 270 percent between the beginning and end of fiscal 1993, from $111/4 to $415/8. Stock offerings in February and August brought in over $72 million, further reducing the debt incurred during the buyout from Lomas a few years earlier. Merrill Lynch still owned about 30 percent of the company’s stock after these offerings.
Over a million new credit card accounts were opened during 1993. Late in the year, First USA introduced a new product, a no-fee gold card with a 6.9 percent variable interest rate. This was to become the primary product in the company’s upcoming marketing efforts. In November First USA completed the acquisition of MAGroup Inc., a credit card processing service based in Tucson, Arizona. MAGroup, a private firm with 6,000 clients, was made part of First USA Merchant Services Inc., although it continued to operate under its own name and out of its Tucson offices.
Another 300,000 credit card accounts were opened with First USA in the first three months of fiscal 1994. By this time, the company had honed its risk evaluation process to such a degree that only 2.8 percent of its accounts were delinquent, compared with a 4.6 percent average for the industry as a whole. First USA rejected about half the credit card applications it received.
In 1994 First USA was ranked seventh in the industry in managed credit card loans at $5.4 billion. It was also in the top four among merchant processors of credit card transactions. The company’s growth no longer came from acquiring portfolios from other companies as it had in the past. Most of its expansion came from direct marketing of First USA’s own branded products. The company continued to focus on no-fee, low interest rate Visa and MasterCard accounts, marketed to customers whose histories showed a pattern of good credit and revolving balances, the best sources of profit. Another stock offering in March of 1994 reduced the company’s debt even further.
As 1994 continued, things kept getting better at First USA. The company earned $27 million in the third quarter alone, and another half million credit cards were issued. In May, Peter Bartholow became chief financial officer. Prior to his arrival the position was held by Pamela Patsley, who continued to serve as president of First USA Merchant Services, Inc. There was an irony to the selection of Bartholow; a former CEO of MCorp, he oversaw First USA’s birth as a subsidiary.
Meanwhile, First USA began to pay even more attention to the merchant services side of the operation. In July of 1994, the company announced that it had acquired two more independent processing outfits: the New York-based Electronic Processing Source Inc. and NationalCard Processing Systems Inc. of Englewood, New Jersey. Both companies were folded into the First USA Merchant Services subsidiary. The addition of those companies not only gave First USA a greater presence on the East Coast, but also gained it access to proprietary software developed for certain niche markets, including performing arts organizations, upscale retail stores, restaurants, and luxury hospitality.
As the credit card industry entered the mid-1990s, consolidation of card issuing with merchant processing seemed assured, and First USA appeared to be in a strong position to continue taking advantage of the trend. As long as the use of credit cards in the United States continues to expand, the pool of potential customers for companies like First USA is sure to grow.
First USA Financial, Inc.; First USA Bank; First USA Merchant Services, Inc.; First USA Capital Markets, Inc.; First USA Management, Inc.
Apear, Leonard M., “MCorp Agrees to Sell Retail Bank Unit to Lomas & Nettleton for $300 Million,” Wall Street Journal, November 18, 1986, p. 20.
Block, Valerie, “First USA Buys Two Processing Sales Agents,” American Banker, July 19, 1994, p. 13.
_____, “First USA Hires CEO of MCorp, its Former Parent, as Finance Chief,” American Banker, May 18, 1994, p. 16.
Blumenthal, Karen, “Lomas Financial Agrees to Sell Off Credit-Card Lines,” Wall Street Journal, June 9, 1989, p. A4.
Guenther, Robert, and Karen Blumenthal, “Lomas Financial Puts Credit-Card Unit on Block at a Price Under $700 Million,” Wall Street Journal, May 16, 1989, p. B2.
Gullo, Karen, “First USA Signs with EDS,” American Banker, February 28, 1990, p. 3.
Homa, Lynn, “Pair of Texas Banks Take New Names,” American Banker, October 13, 1989, p. 16.
lida, Jeanne, “First USA Expanding Scope of Card Document System,” American Banker, July 17, 1992, p. 3.
Kleege, Stephen, “First USA Moves to Variable Rates,” American Banker, December 14, 1992, p. 2.
_____, “First USA Putting Its Own Brand on the Industry,” American Banker, April 7, 1994, p. 14.
Kutler, Jeffrey, “Dollar Dry Dock Sells Credit Card Portfolio to Lomas Bank,” American Banker, April 1, 1988, p. 12.
LaGesse, David, “Dallas’ MCorp Gets $300 Million for Sale of MNet Unit to Lomas,” American Banker, November 18, 1986, p. 1.
“Lomas Financial Sells its Credit-Card Line to Merrill Lynch Unit,” Wall Street Journal, August 10, 1989, p. C14.
Mathews, Gordon, “First USA’s Showing Bodes Well for Spinoffs,” American Banker, July 16, 1992, p. 10.
“MCorp Establishes MNet Subsidiary to Sell Consumer Financial Services,” American Banker, June 13, 1985, p. 3.
Quint, Michael, “Profits Are Slowing in Credit Cards, but First USA Does Well,” New York Times, November 12, 1993, p. D6.
Schoultz, Donald, “Lomas to Sell Retail Banking Unit for $500 Million,” American Banker, June 9, 1989, p. 3.
Siegel, David, “First USA Lowers Sights for Public Offering,” American Banker, May 19, 1992, p. 16.
Weinstein, Michael, “MNet Set to Manage MCorp’s Retail Concerns,” American Banker, October 11, 1985, p. 11.
—Robert R. Jacobson