The $35 Billion Question: How Will BofA’s MBNA Deal Impact The Industry?

The announced merger between Bank of America (Charlotte, N.C., $1.21 trillion in assets) and MBNA (Wilmington, Del., $61.4 billion in assets) will leave no question as to which financial institution is the biggest player in the U.S. credit card market. But how long will it stay on top?

What Would Sandy Do?

"Citigroup has gone from being number one to number three in the last 12 months," observes John Gould, director of TowerGroup's (Needham, Mass.) bank card research service. "With the Bank One-Chase Merger, they're number two. Now they're number three. Can you imagine that Sandy Weill's company is going to stay number three?"

Indeed, a Citi-AmEx merger is one possibility, as American Express "would clearly be a crown jewel for a large banking franchise lacking in the cards arena, such as Citigroup or HSBC," writes David Hendler, senior analyst with research firm CreditSights (New York). "The days of AmEx and Capital One are basically numbered since their product capabilities are more valuable to a financial banking conglomerate than to grow it organically," continues the report.

Another unanswered question is the status of the MBNA-AmEx relationship, through which MBNA issues AmEx-branded cards. Given that AmEx is currently suing Bank of America and other Visa and MasterCard member banks for billions of dollars, the conflicts are both obvious and unresolved. "There's at least a 50-50 chance that if they legally can contractually, they'll terminate this [Amex-MBNA] program," says TowerGroup's Gould. "If that were to happen, it would be a significant blow to the [Amex] U.S. strategy for co-branding with card issuers."

Reshuffling the Cards

The acquisition of one of the last monoline credit card companies also represents a strategic move for Bank of America, which had just about run out of options for domestic expansion for deposits under the current regulatory regime."Bank of America's not really allowed to buy another bank at this point, because they're close to the deposit limit," explains Bob Brady, senior industry consultant for Teradata, a division of NCR (Dayton, Ohio). Bank of America is a Teradata customer for its enterprise data warehouse.

The Riegle-Neal Act of 1994 prevents banks from acquiring more than 10 percent of insured deposits in the U.S. "This credit card purchase doesn't affect the 10 percent at all, but it gets them 40 million customers," says Brady. "If you can turn those into deposit or investment customers, that's considered organic growth."

Another benefit to buying credit card companies " or for that matter, mortgage or insurance companies " is that customers do not have the expectation of seamless integration as they do in a bank-to-bank merger. "If they had bought a bank, and you're a customer of either one of the banks, you'd very quickly expect that you could go into a branch from either side and do your business. With a credit card company, it's not so much the case," says Brady. "They could really run the MBNA portfolio separately from the Bank of America credit card portfolio for a long period of time. It may be a little inefficient, but it wouldn't cause the customer that much anxiety."

Rather, the integration would be driven by the bank's need to cross-sell additional financial serivces. "From an organic growth perspective, it's important to get as complete a view of that customer as possible," observes Brady. "From a marketing and customer management perspective, you want to have a complete view of your customer base."