ank of America Corp. (BofA), which last year advanced its positioning in the card acquiring business when it bought National Processing Co. (NPC), is now poised to become the nation's largest bankcard issuer. The mega-bank closed out the second quarter with news that it would buy MBNA Corp., the Delaware-based card issuer that practically built the affinity card market.

The deal is worth an estimated $35 billion in stock and cash. If approved by regulators and shareholders, analysts say the combined portfolios will represent more than 20% of the card-issuing market.

"The result will be the country's top retailer of financial services with the size and scale to drive distribution and marketing efficiencies," BofA Chairman Kenneth D. Lewis said in announcing the acquisition.

BofA said the combination, which it expects to close during the fourth quarter of this year, will result in cost savings of $850 million by 2007. Cost reductions will come from a range of sources, including the elimination of 6,000 jobs.

A Changing Market

With the acquisition, BofA "joins an elite group of three mega issuers at the top of the market," said Aaron McPherson, Payments Research Director at research firm Financial Insights. McPherson said he sees a three-tiered market forming, with the top three issuers, BofA, JPMorgan Chase & Co., and Citigroup, each holding portfolios of about 80 million cards with outstanding balances.

Ranking far below the top is a mid-tier of issuers that have between 30 and 60 million cards with outstanding balances, McPherson explained. At the bottom are issuers with 20 million cards or fewer.

He said other financial institutions will most likely acquire members of the bottom tier in deals similar to BofA's acquisition of MBNA. For example, in June Washington Mutual Inc. announced plans to buy non-bank card issuer Providian Financial Corp. for $6.45 billion in cash and stock

With growth in the 6% - 7% range, McPherson said bankcard issuing has become a slow-growth market. He also said consolidation in this industry will continue to occur with great fervor because the market is becoming saturated with bankcards, leaving little opportunity for growth from new accounts.

David Hendler, a Senior Analyst at research firm CreditSights Inc. recently issued an analysis of the MBNA acquisition. "The whole idea behind the acquisition was for BofA to fill in a strategic gap in their consumer banking toolkit which was credit cards," Hendler wrote. " ... With the eventual addition of MBNA, [BofA] will be the leader in the space."

MBNA created the affinity card market more than a decade ago, and today it boasts the largest affinity network, with more than 5,000 affiliated partners. The network will provide BofA with many additional opportunities to issue co-branded credit cards, McPherson said.

Will ISOs/MLSs Be Affected?

BofA's latest acquisition is sounding alarms, especially in the ISO/merchant level salesperson (MLS) channel, and particularly in light of its acquisition of NPC, which at that time had better than a 20% share of the card acquiring market.

A recent thread on GS Online's MLS Forum titled "BofA Acquiring MBNA Can't Be Good for Us," illustrates this concern. In the thread, an MLS Forum member expressed alarm over BofA eliminating interchange fees charged to merchants for credit card processing services and then recouping this loss by offering other financial services to merchants such as mortgages and business loans.

Another MLS Forum member responded, "They're not doing this just for the hell of it. What if they want to increase their insurance portfolio? One department helps or works with the other department for the good of the whole. Merchant services may be a good loss leader for strategic purposes."

John Gould, Director of the Bank Cards Practice at MasterCard International-owned TowerGroup, said during a recent interview that BofA isn't apt to do that.

"As an acquirer, they [BofA] are not in a position to stop interchange," Gould said. Asked specifically about the merger, he said, "I wouldn't see how this would have any affect on ISOs at all. This has nothing to do with the acquiring side of the business."

The impact of the BofA/MBNA merger on the payment processing industry will be measured in more than the number of cards issued and percent of market share.

With consolidation only expected to increase, the way in which this acquisition unfolds might be an accurate indicator of future activity among bankcard companies.