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BankAmericard Resurrection: Just Posturing or Real Business?

BofA might pose the first real challenge ever to the card association establishment.

After Bank of America announced last week that it is entertaining plans for creating a new credit card brand and processing network, many in the industry would do well to take notice of the move, say at least two insiders.

The Charlotte, N.C.-based financial institution, known as the creator of what is now Visa, is showing signs that it wishes to free itself of the shackles of the card associations. In an interview with the Wall Street Journal, CEO Kenneth Lewis stated that he was not exactly happy about having helped build Visa and that BofA's money would have been better spent on its own brand.

So far, the card associations have remained pretty much mum on the situation. That comes as no surprise to Andrew Dresner, director in the retail and business banking/strategic IT practices with Mercer Oliver Wyman. "Bank of America is one of the largest issuers in the country. The prospect of losing a client that accounts for at least 20 percent of Visa's volume would be a very negative event for [the card association]," he says.

Dresner says there are a few developments in the credit card world that could be behind the announcement. Consolidation is one of these. "A number of the very big players have consolidated. We're down to a half dozen material players out there. Only two have both big issuing and acquiring operations—Bank of America and Chase. With all this consolidation, it becomes quite conceivable that something like this could happen, whereas five years go, nobody had the size on the processing or acquiring side to do this."

Also, Dresner comments that this could all be the culmination of years of tension that has been simmering under the surface within the associations. "There has always been some tension in the associations between the large and smaller issuers about how much the associations should do versus what the individual issuers should do [regarding product differentiation]. The interests of all the parties are not quite in alignment."

Gartner's payments systems research director Avivah Litan concurs, saying, "The BofA announcement shows there's some dissent in the ranks among the senior board members [of the card associations]."

As far as she is concerned, it's about time for a new card brand to hit the market for "on us" payments. "We do need another closed loop system. We only have American Express, Discover and, Visa and MasterCard. This could be really good news for consumers and businesses. There's not enough competition [in the card/processing space]," she opines.

According to Dresner, it's not really a question of whether there's a need for a new card or processor. "The question is, is it more efficient for BofA to have its own brand as an acceptance mark or issuing mark rather than riding with the association?" he poses.

Both experts agree there could be some cost savings for BofA by creating its own network. After all, the money it would normally send to the card associations could be kept in-house. However, says Dresner, "I'd like to see if BofA will continue to associate with Visa and MasterCard on the Cirrus/Plus brands on the ATM side."

Visa and MasterCard will be in a dilemma if BofA follows through on its plans, says Litan. There have been few attempts over the years to go head-to-head with the mammoth card associations. Dresner recalls Discover's attempt to create an acceptance network in the '80s. The company started from scratch and was unsuccessful. BofA, however, already has a number of large national merchants in its corner, an advantage Discover lacked. First Data is the most recent example of a company trying to brave these waters. However, they were sued by Visa, Litan notes. She adds, "Bank of America is a whole different story for Visa. They should be concerned. This announcement sets a precedent because why couldn't others try this too, like Chase?"

Yet, could this just be a lot of saber rattling? Yes and no, says Litan. "There's word that Visa might want to sue BofA for the big PIN breach earlier this year. This could be posturing by BofA where they're basically telling Visa not to fine them, or else," she speculates.

Perhaps coincidentally, Visa announced just days later that members at its annual members meeting approved corporate governance changes that will allow independent directors to sit on Visa's board for the first time in the organization's history.

"Although we are a private organization, this is one of a number of steps Visa is taking to meet today's standard of good governance," said John Philip Coghlan, president and CEO of Visa USA, in a statement. "In addition to the breadth of perspective and experience that these new board members will provide, we believe these changes will strengthen Visa's position in the electronic payments industry."

Visa also said it will expand the representation of smaller financial institutions on the board of directors by adding an additional board seat to represent financial institutions with less than $1 billion in annual Visa volume.

Dresner, however, does not necessarily think the two announcements are coincidental. Rather, they are addressing the same issue—litigation costs and exposures—in different ways. "In Visa's case, this move is designed to insulate interchange from a charge of monopoly pricing," he explains. "In BofA's case, as an independent, closed-loop network they could essentially be insulated from similar lawsuits."

Whatever the case, there's no doubt the associations will be keeping an eye on BofA.

"[Lewis] doesn't have control over how Bank of America's money is spent by the associations," states Litan. "He sounds very annoyed."

"If he didn't think it was doable, he wouldn't have announced it," says Dresner.

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