Monday, April 17, 2006

"BofA Ponders Card to Rival Giants" (Charlotte Business Journal)

Bank would take on MasterCard, Visa - Charlotte Business Journal - April 14, 2006, by David Mildenberg - Staff writer

With credit cards increasingly important at
Bank of America Corp., the bank is considering the bold step of starting its own payments network to compete with MasterCard and Visa. Morgan Stanley analyst Betsy Graseck, who recently met with senior BofA officials, paraphrased Chief Executive Ken Lewis in a report as saying such a move would be considered.

"While we don't anticipate that (BofA) would make this move in the near-term, we wouldn't be surprised if (they) were to investigate this option for the long term," Graseck wrote. Bank spokeswoman Betty Reiss says, "We don't comment on speculation."

But several bank employees in Charlotte, who asked to remain anonymous, say the credit-card idea is being studied, though they acknowledge they're unaware if a final decision has been made.
While taking on powerhouses Visa and MasterCard could be daunting, credit-card industry analyst Curtis Arnold says BofA's $35 billion acquisition of MBNA Corp. makes it much more likely. That deal closed Jan. 1.

"You have to think that economies of scale make this more plausible," says Arnold, founder of, an Arkansas-based company that analyzes credit-card offerings. "We've created a behemoth in the card industry through this merger, and things like this seem like a natural progression going forward."

Graseck estimates BofA could boost its earnings by $70 million to $75 million annually by instituting its own card-payment network.

That isn't a big amount for BofA, which earned $16 billion last year, but the effort could pay larger dividends by further bolstering the increasingly powerful brand of the nation's second-largest bank after Citigroup.

It would also cause tumult in the global credit-card industry, where Visa and MasterCard have market shares of 60% and 27%, respectively, according to the Nilson Report, a California-based newsletter that tracks the industry. Both firms are owned by member banks that issue the cards. When you get as large as BofA, and you have such a large part of the credit-card business already, you create some opportunities for yourself," says Tony Plath, a UNC Charlotte finance professor who has followed BofA for 20 years. "But no one has really ever tried to mess with MasterCard or Visa on such a large scale."

Spokesmen for MasterCard and Visa decline comment.

Lucrative business

Cards already play a huge role at BofA. The bank's credit-card profits totaled $5.7 billion in 2005, or about 23% of BofA's total noninterest income. In comparison, its credit-card profits accounted for only 13% of the bank's noninterest income in 1998.

Bank of America Card Services had revenue of $9.4 billion last year, or about 17% of the bank's total.

Those ratios are certain to rise in coming years after the purchase of Delaware-based MBNA, which earned $2.7 billion on revenue of $12.3 billion in 2004.

Banks make most of their money from credit cards through interest fees and late-payment charges.

But processing also generates substantial revenue. For every dollar spent using a credit card, roughly 2 to 2.5 cents go for processing fees.

About 1.5 cents per dollar typically go to the bank issuing the card and a half cent to the merchant bank. The rest is split between companies that process the transaction, such as First Data Corp. and Total Systems Services Inc., and a payments network such as Visa or MasterCard, which facilitates the transaction and promotes card use.

With MBNA in the fold, BofA ranks as the nation's leading credit-card issuer, with 40 million active credit-card accounts. It also is among the biggest card processors after acquiring National Processing Inc. in 2004 for $1.4 billion.

In addition, BofA announced plans in December to start offering American Express cards, which are supposed to be paid off in full each month.

Saving on transactions

Graseck estimates BofA could save 0.8 or 0.9 cents per $1 that now goes to Visa or MasterCard -- about $240 million to $270 million a year -- by having its own card-payment network. That's based on BofA's credit-card volume of $302 billion in 2005. The bank would save another $74 million on debit-card transactions, where Visa and MasterCard charge slightly less, according to Graseck. She estimates BofA would incur added operating costs of about $245 million to $270 million annually, leaving a yearly benefit of more than $70 million.

MBNA adds to BofA's "already strong debit- and credit-card network," she states in her report. "We think this gives (BofA) an incentive to invest in its own network and keep the payments for itself rather than fund third-party networks and share revenues with them."

MasterCard, which is going public, says in its March 23 offering statement that it received $200 million from BofA and MBNA in 2005, or about 7% of its total revenue. It also notes BofA owns 6% of MasterCard's shares, compared with Citigroup's 8.8% stake and JP Morgan Chase & Co.'s 10.3% holding.

Retailers, and particularly giant discount chain Wal-Mart Stores Inc., have long complained that card-processing costs are too high. Having another competitor such as BofA might help reduce costs, says Arnold, the credit-card industry analyst. But the overall trend in credit cards is toward less competition because four main issuers -- Citigroup, JP Morgan Chase, BofA and Capital One --dominate the business, he says.

"Competition is about the only thing that has kept this industry in check because there is very little direct federal and state regulation of credit cards," Arnold says. "These tremendous mergers have definitely hurt the competitive market." Visa and MasterCard likely have agreements that penalize member banks from offering competitive services, and that could complicate BofA's strategy, says Plath, the UNC Charlotte professor.

Ironically, California-based BankAmerica created Visa's predecessor, the BankAmericard, in 1958. It spun off the card to member institutions in 1970, and the card's name was changed to Visa in 1976. Two senior Charlotte bankers, Wachovia Corp.'s Ben Jenkins and BofA's Tim Arnoult, are on Visa USA's 13-member board of directors. Arnoult, the bank's global treasury executive, retires at the end of April.

MasterCard was started in 1966 under the name MasterCharge.

[source: Charlotte Business Journal]