t's funny how cycles run in businesses such as banking and payments. Bank of America Corp.'s (BofA) planned acquisition of card giant MBNA Corp., for example, brings BofA back to the days when its name was practically synonymous with bankcards.

At the end of June, BofA announced that it would acquire MBNA for $35 billion in cash and stock. The deal, which the companies expect to close by year end (provided that regulators and stockholders give the OK), will catapult BofA to the top spot among card-issuing banks.

With the merger, BofA will have 40 million active card accounts and more than $143 billion in outstanding balances, according to a presentation the companies gave to investors and analysts.

BofA will not only be the largest issuer of Visa- and MasterCard-branded credit cards, it will also be the largest issuer of debit cards, with 15% of the U.S. debit card market, the presentation noted.

(Over the years, BofA has had a reputation as the bank with the largest nightly load of check processing work, and it's always been considered a top issuer of debit cards in the United States.)

Coming Full Circle

Those of us old enough to remember the early years of bankcards will recall that what is known today as Visa originally started out as BankAmericard. In fact, if you look hard, you might find BankAmericard signage still in place at some stores, particularly in rural areas.

BofA launched BankAmericard in the 1960s as a pre-approved credit instrument that could help the bank tap into a market pioneered by a few large retailers: revolving credit.

Then BofA franchised the brand to large banks in major cities around the country. (Soon, somewhat smaller banks in many of those same markets began issuing MasterCharge cards; today those cards bear the MasterCard logo.)

The spin-off and brand name change came only after widespread branching (the precursor to nationwide banking) gave the other banks issuing BankAmericards second thoughts about working too closely with a potential competitor.

Still, BofA has remained a major player in the card-issuing business, with 8.6% of the bankcard market, prior to the addition of MBNA's card portfolio, according to the bank's data.

BofA has also shown that it has an appetite for transaction acquiring, as evidenced by its purchase last year of National Processing Co. Combining these two portfolios made BofA the second largest acquirer of credit and offline debit card payments in 2004, according The Green Sheet's tabulations (see "The Charge for the Lead!" GSQ Vol. 7 No. 4, December 2004).

First Data Corp., on its own along with its alliance partners, is the only company today that acquires more credit and offline debit card payments than BofA.

Affinity Growth

MBNA is one of a group of banks created in the 1980s and 1990s for the sole purpose of issuing credit cards. Headquartered in Delaware, the bank is largely credited with creating the affinity card market. Do you carry a credit card in your wallet that bears the name of your favorite sports team, or perhaps your college alma mater? Chances are MBNA issued it.

Add together the two merging banks' affinity card programs and you're looking at relationships with more than 5,000 organizations and financial institutions, the companies said.

It's a good bet those numbers will grow once the two bankcard giants merge.

These days, affinity programs are the major avenue of growth for card issuers. A lot of affinity programs also feature rewards. And let's not forget, Visa revamped its interchange schedule earlier this year specifically to help issuers capture more interchange through rewards programs. (Interchange flows to card issuers from acquirers.)

MBNA claims its affinity customers are less risky than plain vanilla cardholders; credit losses on affinity card accounts are 150 - 200 basis points lower than on other accounts. Affinity cardholders also carry balances that are about 48% higher than other cardholders, the bank reports.

And in what can only be beneficial to BofA, 20% of MBNA's affinity cardholders use multiple financial products.

Clearly, what attracted BofA to MBNA was MBNA's card portfolio, which is estimated at 11.6% of the bankcard market, significantly more than the 8.6% share BofA currently holds. Only Citibank and JPMorgan Chase & Co. issue more credit cards than MBNA does today. In 2004, MBNA reported $156 billion in cardholder charges.

Wachovia Corp., which sold its card portfolio to MBNA several years ago, was rumored to have been in negotiations to buy the company, but it apparently got sticker shock. This suggests that it takes a healthy appetite to buy into the issuing side of the bankcard market these days.

Here's the way BofA and MBNA executives described the merger during their presentation to investors and analysts: "Unique opportunity to create the world's leading card platform."

The name on that platform will be BofA, and it will be a force to be reckoned with on both the issuing and acquiring sides of the payments card business. In today's market, scale economies rule, and clearly that is a major motivator of the deal. BofA said in a statement that the combination could create "overall expense efficiencies of $850 million," after taxes, including the elimination of about 6,000 jobs.

"Bank of America is now in a much more solid position to pursue its own destiny in the card market through in-house card processing, a greater ability to create new card products and super premium rewards programs as well as the potential to become a closed loop network card processor," research and consulting firm Financial Insights said in a statement to clients and reporters.

Bruce Hammonds, the Chief Executive Officer who grew MBNA from a small regional card issuer to one of the largest in the United States, is slated to become President and CEO of BofA Card Services.

That should bode well for BofA coming full circle and reasserting its leadership role in bankcards.

Patti Murphy is Contributing Editor of The Green Sheet and President of The Takoma Group. E-mail her at patti@greensheet.com .