William S. Eckland, Esq.
Sidley & Austin
1722 Eye Street, N.W.
Washington, D.C. 20006

Dear Mr. Eckland:

This is in response to your letter, dated November 1, 1999, regarding the application of the anti-tying prohibitions of section 106 of the Bank Holding Company Amendments of 1970, 12 U.S.C. § 1972 ("section 106"), to a credit card bank affiliated with a retailer. Your client, a limited purpose national credit card bank ("Bank") affiliated with a retailer ("Retailer"), has filed an application with the Office of Thrift Supervision to convert to a federal savings bank charter. You have asked for confirmation that Bank's present operations comply with section 106, and therefore will comply with section 5(q) of the Home Owners Loan Act, 12 U.S.C. § 1464(q) ("section 5(q)"), following Bank's conversion to a federal savings bank. Section 5(q) places restrictions on savings associations that are nearly identical to those placed on banks by section 106.

You have indicated that your client offers both private-label credit cards for its retailer affiliate (the "retailer card") and Visa credit cards that are branded with Retailer's name. The Visa cards are general purpose cards that may be used at any business that accepts Visa cards for payment. The retailer card, as a practical matter, may be used only to make purchases from Retailer, though Retailer also accepts all Visa and Mastercard credit cards, as well as cash and checks, for payment.¹

The present question is whether the restriction on the use of the retailer card to purchases made at Retailer violates the anti-tying restrictions of section 106. Section 106 prohibits a bank from extending credit on the condition that the customer obtain any other non-banking product from the bank holding company or any other subsidiary of the bank holding company. The question arises whether the retailer card offered by Bank violates this restriction because it involves the extension of credit by Bank to a customer only when that customer makes a purchase from Retailer.

The Board does not believe that Bank's retailer card business involves the type of anticompetitive activity that section 106 was intended to address. Consumers who use the retailer card do so because they wish to purchase goods or services from Retailer, not because they are seeking credit offered by Bank though the retailer card. Consumers are always free to use other methods of payment, including general use credit cards offered by other banks. The purpose of section 106 is to prevent banks from using their market power in banking products to gain an unfair competitive advantage in markets for non-banking products and services. The purpose of section 106 is therefore not implicated in the present case, as it is the desire by a customer to purchase goods or services from Retailer that drives the transaction, not the availability or non-availability of credit from Bank.

In view of the facts outlined in this letter and the other materials you have submitted to the Board, the Board concludes that Bank's retailer card activities do not fall within the anti-tying prohibitions of section 106. In order to provide more certainty in this area, the Board will propose an exception from section 106 for these type of credit card arrangements.

Bank does not discount the credit it provides to customers of Retailer and offers its credit on market terms, with interest rates that are generally equivalent to the rates charged by other credit cards. Thus, this opinion does not address the situation under section 106 where a bank affiliated with a retailer offers a discount or discounts the credit it provides through a private-label credit card of the affiliated retailer.

Transactions involving the use of the retailer card at Retailer are subject to sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. §§ 371c and 371c-1. Section 23B would require that such transactions be on terms that are substantially the same, or at least as favorable to Bank and its subsidiaries, as those then prevailing for comparable transactions with nonaffiliated companies.

This opinion is based on the facts and representations you have provided, and any material change in these facts or representations could result in a different conclusion and should be reported to Board staff. If you have any questions about this matter, please contact Andrew Baer (202/452-2246), of the Board's legal staff.

Very truly yours,

(Signed) J. Virgil Mattingly

J. Virgil Mattingly

1. The retailer card is limited to use at Retailer because Retailer is the only merchant with a system in place that allows it to communicate with Bank regarding whether credit should be extended on the retailer card. There is no contractual limitation on where the retailer card may be used to make purchases. Return to text