AmEx And MasterCard Could Be Losers in BofA-MBNA Deal

Bank of America Corp.'s planned acquisition of MBNA Corp. and its 40 million active credit card accounts has payment industry executives pondering the fate of American Express Co.'s ambitious efforts to jointly issue credit cards with banks. The $35 billion deal, announced this morning and expected to close in the fourth quarter, could also have a major impact on MasterCard, observers say. As MBNA was one of the first and biggest banks to announce plans to issue credit cards cobranded with the AmEx logo, many in the industry were watching that program to gauge the success of AmEx's efforts to get banks to issue cards on its network. But with BofA now acquiring MBNA, no one is sure whether BofA?which founded Visa–will put a stop to that program or go ahead with it, perhaps even moving some of its own cards to the AmEx column. “The fate of the MBNA/AmEx deal is one of the biggest issues to come out of this proposed merger,” says John Gould, director of consumer credit for TowerGroup. “While it seems almost inconceivable that BofA would ever put an AmEx logo on its credit cards, a lot of inconceivable things have happened in this industry lately.” Some observers wonder whether BofA might use MBNA's AmEx program as a negotiating chip in a lawsuit AmEx filed in November against Visa, MasterCard, BofA, and other major banks (Digital Transactions News, Nov. 19, 2004). The suit alleges the banks and card associations unlawfully excluded AmEx from the card market through a rule that was struck down by a federal court in 2001, a decision the Supreme Court let stand in October. But Gould says this tactic would depend on how well the program is faring, something that has been hard to determine owing to the secrecy both AmEx and MBNA have maintained around it. An AmEx spokesman today refused to say how many AmEx/MBNA cards have been issued other than to point out that last November MBNA had announced it had presold 300,000 cards. He added that “the number has grown substantially since then.” Says Gould: “A lot depends on how successful that program is and I'm not really sure just what MBNA is doing with it. If the program is successful?and that's a big if?it is likely that BofA will want to keep it going.” Much of the fate of that deal could be determined by how binding the language is in the contract MBNA signed with AmEx, says Ali Raza, a consultant with Atlanta-based Speer & Associates Inc. “Most of those contracts have a clause that says you can terminate the deal if there is a change of ownership,” he says. While Raza expects BofA will get plenty of subtle pressure from Visa to discontinue the arrangement, he notes the deal could “give BofA another brand to satisfy different consumer demands.” For their part, bank executives aren't saying much about the future of the program. At a press conference announcing the merger, Bruce Hammonds, chief executive of MBNA (he is slated to become chief executive of BofA Card Services once the merger is completed), said only that MBNA would be evaluating many of the existing partnerships and relationships that MBNA has. Separately, the AmEx spokesperson said only that “we plan to continue to work with MBNA, but this transaction obviously changes the playing field.” He declined to comment on whether the merger would also affect the company's lawsuit against the banks and card associations. Another card company that could be seriously affected by the merger is MasterCard. MBNA's portfolio currently has about 57%–or more than 32 million–of its cards issued with the MasterCard logo while 95% of BofA's cards bear the Visa logo, according to Gould. At the press conference, Hammonds pointed out that MBNA is on the MasterCard board while BofA is on Visa's board. He said a review would be conducted to decide which board relationships to keep. But Gould says branding is the real concern. “It would be easy for MBNA to simply drop off the MasterCard board,” he says. “The bigger question is what will happen to all those cards. If BofA decides to rebrand all the MBNA cards with the Visa logo, it would be a huge blow to MasterCard. MBNA was one of MasterCard's premier issuers?in terms of the number of cards and the quality of those accounts.” But it is not a given that BofA will automatically rebrand the cards with the Visa logo, Raza says. “There will likely be pressure to switch the cards to Visa, but BofA could see the advantages of offering multiple brands,” he says. “Chase faced a similar decision when it acquired Bank One and Chase decided to maintain both brands.” J.P. Morgan Chase & Co., which acquired Bank One last year, was a major MasterCard issuer while Bank One was more heavily involved with Visa. The merger may also get BofA to reconsider whether it should continue outsourcing the processing function for its card-issuing business. Currently BofA outsources that function to TSYS while MBNA conducts its processing internally for its consumer cards and outsources only the smaller commercial card business, Gould says. The merger would give BofA the capability and volume to reconsider bringing those operations in-house, Gould says.