BankAmericard Resurrection: Just Posturing or Real Business?

Bank of America may pose the first real challenge ever to the card association establishment.

Bank of America announced in late April that it is entertaining plans for creating a new credit card brand and processing network. According to industry insiders, the move would significantly alter the card/processing space.

The Charlotte, N.C.-based financial institution, considered the creator of what is now Visa, is showing signs that it wishes to free itself from the restrictions 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 Bank of America's money would have been better spent on its own brand.

So far, the card associations essentially have been silent on the situation. That's not a surprise, relates Andrew Dresner, director in the retail and business banking/strategic IT practices with Mercer Oliver Wyman (New York). "Bank of America is one of the largest issuers in the country," he says. "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]."

Why Now?

Dresner says consolidation is among the developments in the credit card world that could be behind the announcement. "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," he says. "With all of this consolidation, it becomes quite conceivable that something like this could happen, whereas five years ago, nobody had the size on the processing or acquiring side to do this."

Additionally, Dresner continues, the move could 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]," he comments. "The interests of all the parties are not quite in alignment."

Avivah Litan, payments systems research director for Stamford-based Gartner, also points to tension among card issuers as a factor in Bank of America's announcement. "The BofA announcement shows there's some dissent in the ranks among the senior board members [of the card association]," she says.

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

According to Mercer Oliver Wyman's 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 Bank of America could realize cost savings 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."

A Formidable Opponent

Visa and MasterCard will be in for a fight if BofA follows through on its plans. There have been few attempts over the years to go head-to-head with the mammoth card associations, Dresner points out, recalling Discover's attempt to create an acceptance network in the '80s. Discover started from scratch and was unsuccessful, he notes. Bank of America, however, already has a number of large national merchants in its corner, an advantage Discover lacked.

Payments solutions provider First Data (Greenwood Village, Colo.) is the most recent example of a company trying to brave these waters. However, it was sued by Visa, Gartner's Litan notes. "Bank of America is a whole different story for Visa," she says. "They should be concerned."

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 after the BofA announcement that its members approved corporate governance changes that will allow independent directors to sit on Visa's board for the first time in the organization's history. "We believe these changes will strengthen Visa's position in the electronic payments industry," said John Philip Coghlan, president and CEO of Visa USA, in a statement. 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.

Mercer Oliver Wyman's Dresner, however, does not think the two announcements are coincidental. Rather, they address 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, the associations will be watching Bank of America. Visa USA vice president Rosetta Jones tells BS&T in a statement, "Our mission is to deliver an exceptional value to all financial institutions large and small, and our long-standing partnership with Bank of America is no exception. We believe that the safety, reliability and affordability that Visa offers financial institutions contribute greatly to their success in electronic payments."

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

Adds Mercer Oliver Wyman's Dresner, "If he didn't think it was doable, he wouldn't have announced it."