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CHARLOTTE, N.C. – In a move which may strongly impact the market for credit union credit card portfolios, Bank of America has moved to purchase MBNA, the giant monoline card bank which has been a leader in the CU card portfolio market. Bank of America is offering MBNA stockholders a $35 billion, or 31% premium for MBNA’s card portfolio which is generally considered high quality and higher end. Should it go through, the deal, which is still subject to regulator approval, will mean a purchaser of credit union card programs which has been known for a willingness to push its own brand into the background will be replaced with a bank whose brand is one of the best known among the U.S. banking brands. “Today’s announcement is not only about the creation of one of the world’s largest card providers. That is compelling in and of itself,” said Bank of America CEO Kenneth D. Lewis. “But it’s really a much larger story about two companies with complementary strengths. The result will be the country’s top retailer of financial services with the size and scale to drive distribution and marketing efficiencies.” Bank of America has announced that it expects to cut 6,000 jobs in the wake of the merger and that the merger will be completed by the end of 2005 absent any regulatory problems which neither the banks nor analysts anticipate. While some sort of buy-out involving MBNA had been anticipated for some time, analysts around the card industry expressed surprise that Bank of America had made the offer so soon after consolidating its purchase of Fleet Boston. Analysts pointed out that MBNA appeared ripe for a deal because of the overall stagnation of the U.S. credit card market and a slowing even among affinity marketing, which is MBNA’s traditional strength. The bank’s stock price had fallen as well after the Wilmington, Delaware-based issuer had tried to stop offering the 0% APR’s which had become the industry standard for new account offers and other issuers had not fallen suit. “We had hoped that the other issuers would follow our lead but that was not to be,” MBNA CEO Bruce Hammond told stock analysts in a conference call convened to discuss the deal. Bank of America will largely leave MBNA’s facilities in place in Wilmington where Hammond will continue on as president of Bank of America Card Services. MBNA will also have a seat on the Bank of America board, Lewis and Hammonds said. Analysts speculated that Bank of America’s interests in the deal included having an easier way to beef up its card offerings and card experience, which had been considered a weakness with the bank, as well as a primarily defensive move as it prevented competitors, such as Citigroup or J.P. Morgan Chase from making the same move. More Questions Than Answers Aside from the “big picture” stock and performance topics covered in the June 30 briefings convened for financial analysts and the financial press, the pending deal left more questions than answers. This is particularly the situation in the credit union space which, despite having had MBNA as a significant player, remains a very small market overall. Hal Erskine, senior vice president with MBNA in charge of the credit union division and Jim Donahue, spokesman for the card issuer, stressed that MBNA would remain committed to “transparency” about the deal and that little, if anything, would change in the way the card issuer dealt with its credit union partners and how it seeks card portfolios. Also, despite Lewis’ stated intent to replace the MBNA brand as soon as possible with the Bank of America brand, Erksine and Donahue said that they expected Bank of America to set up a separate card organization which would retain the MBNA brand and whose sole province would be to work with credit unions, community banks and other affinity partners which might have a problem with working with Bank of America instead of MBNA. This is potentially an issue because, as a monoline issuer, MBNA could argue to credit unions that it wouldn’t even be tempted to cross-sell products to credit union members because it only offered cards. In addition, with a brand which MBNA was pleased to have melt into the background, there was little chance of there being any so-called “indirect” cross selling, in which a credit union member might become familiar with MBNA through its card services and then choose other products. But Bank of America, by comparison, has one of the best known banking brands in the country, as well as a nationwide banking footprint. In fact, one of the considerations in doing this deal was that a number of MBNA’s customers might already carry Bank of America credit cards and thus might be considered poorly situated for taking more. The bank also made a point of looking forward in its briefings to cross-selling debit cards, demand deposits, mortgages, home equity loans, retirement products, auto loans, wealth management for affinity customers, small business loans, student loans and commercial loans – although Erskine and Donahue made it clear that Bank of America will honor MBNA’s commitment not to cross-sell any of these products to credit union members. One of the key questions the agreement leaves hanging is what will happen with American Express. Currently MBNA is one of the only financial institutions to have an agreement allowing it to issue American Express branded credit cards, an ability that it has offered to its existing and perspective card processors and which it has said has been key to helping it seal some deals. But it is unclear what will happen to the MBNA-American Express relationship if the deal goes through. For example, American Express made a point of leaving MBNA out of a fairly high stakes lawsuit it has filed against Visa, MasterCard and many large banks, including Bank of America, over the card associations’ previous card rules which the courts have ruled anti-competitive. If the deal goes through, will American Express be willing to drop Bank of America from the list of defendants or to settle its lawsuit privately? Or will the credit union MBNA partners which offer American Express branded cards to their members now have to close or sell the accounts to American Express? Neither Lewis nor Hammonds could answer any questions related to American Express in the stock analyst or press briefing. One of the biggest questions of all is what MBNA’s credit union partners can or will do in the wake of this deal. Both Lewis and Hammonds indicated that the bank expects to take a $17 billion hit to its revenue from some of its financial institution card issuing partners leaving, but also indicated that the bank will fight to retain financial institution partners. Currently MBNA has about 350 financial institution card issuing partners, ranging from the biggest, Wachovia, to the smallest which likely includes the 85 credit union issuing partners that the issuer claims to have. Analysts take for granted that Wachovia and some of the other larger partners will leave, but it’s unclear whether the smaller community banks and credit unions will do so. Lewis summed up some of the banks’ attitude at the analysts briefing when he asked “where will they go” referring to the smaller financial institution partners. Even if some of them have clauses in their contracts allowing them to leave if MBNA is bought out, leaving usually would mean leaving the accounts with Bank of America which would likely start cross-selling them other products. Erskine said that MBNA has been in contact with all of its credit union partners and that none have expressed any doubt about the pending deal and none of its credit union partners contacted, so far, would comment on the pending deal because they said they knew too little about it. The exceptions are MBNA’s two most recent credit union partners, the $346 million Franklin Mint FCU, headquartered in Broomall, Pennsylvania and the $384 million Weyerhaeuser Credit Union headquartered in Longview, Washington. Spokesmen for both credit unions said that the credit unions planned to continue their deals with MBNA and that the prospect of the Bank of America deal would not change their minds. The bigger hit may come in new deals where perspective credit unions might be significantly less willing to partner with Bank of America than they might have been to partner with MBNA. “I think that a credit union has always had to consider this decision very carefully,” said Robert Hackney, president of Card Services for Credit Unions, the association of credit unions that process their card transactions with Certegy. “But this change means that a credit union will have just that much more to think about. Bank of America is one of the leading bank brands in the U.S. and has many products to offer credit union members.” – [email protected]

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