Bank of America Acquisition Of Merrill Lynch Has Important Implications For U.S. Debit Card Market

18 September 2008

While Bank of America’s acquisition of Merrill Lynch most directly impacts the retail brokerage and capital markets sectors, it also carries important implications for retail payments – and, more specifically, for debit cards. New research from TowerGroup finds that the acquisition provides Bank of America with a special edge in the high-net-worth card business – a niche requiring that customers hold no less than $500,000 in assets.

Merrill Lynch recognized the broad access features that branded network debit card products provide, and incorporated these features into its well-run Cash Management Account (CMA). Its innovations in the card business included the ability to offer deferred debit cards, which are short-term credit accounts that sweep against asset and brokerage accounts. These products provide low-interest or no-interest loans for a short period until settlement. Additionally, Merrill Lynch’s rewards program targets high-net-worth individuals with an innovative approach – raising the cardholder’s standing based on cumulative purchase thresholds, similar to airline frequent flier programs.

“Bank of America’s acquisition of the Merrill Lynch card business brings more innovation than scale,” said Brian Riley, research director in the Bank Cards practice at TowerGroup. “Merrill Lynch built its debit and credit card business into the top 20 rankings by addressing a sole market: high-net-worth. This added dimension offers Bank of America the opportunity to step into the top-tier of global private banking, putting it on equal footing with high-end card product offerings from global banks such as Citi and JPMorgan Chase.”

Riley added that Bank of America will be able to integrate the Merrill Lynch portfolio instantly, thanks to the bank’s 2006 acquisition of MBNA – the servicing company that handles the bulk of Merrill’s card processing.

In the face of this move by Bank of America, large card issuers with top-tier global private banking groups – including Citi, JPMorgan Chase, and Wells Fargo – will need to reassess their offerings to ensure relevance. But it is ultimately American Express, which currently partners with Bank of America on its high-end Accolades card, that is likely to feel the most pressure.

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