Credit card bankers are taking down the "for sale" signs on their merchant processing businesses.
After spending much of the last decade deemphasizing or selling the merchant side of their card businesses, and ceding increasing control to nonbank processors, commercial bankers are giving it another look.
Many are making an aboutface, pursuing processing business they shunned until recently. The big banks that stayed in the merchant business all along believe they are especially well prepared to benefit from the anticipated growth in electronic transactions of all kinds.
"If banks want to play in the credit card arena, they cannot neglect the acquiring business," said Sharif Bayyari, senior vice president of Bank of America, the largest of the traditional banks that stayed in merchant processing.
Speaking last week at the American Bankers Association's national bank card conference, Mr. Bayyari called for greater industry attention to merchant processing. It is a service that can be "leveraged" on existing branch networks, he said, and can provide a competitive advantage to nationally-expanding branch banks like BankAmerica Corp., Banc One Corp., and NationsBank Corp.
"We think it's definitely a good business," said Eileen Friars, president of NationsBank's card services unit, another of the long-term merchant survivors. "But the margins are thin and you need scale to be good."
At the same time, card servicing is seen as attractive for smaller retailers, which may not be sought after by the big transaction processing "factories," and with which banks are eager to deepen deposit and credit relationships.
Regardless of market segment, bankers see profit opportunities that may not have been so obvious before, as supermarkets and other new credit card frontiers open up, and as retailers move to accept new types of cards. Bankers regard these emerging products - such as business, procurement, debit, and prepaid cards - as valuable addons to their existing deposit relationships.
Uppermost in bank strategists' minds is that they "own" deposit relationships in ways nonbanks by definition cannot.
Meanwhile, the bank card industry seems loath to risk repeating what happened in credit cards: As card-issuing profits mounted, the industry generally decided to focus on consumer marketing, which allowed processing specialists led by Nabanco to become dominant in meeting merchants' needs for clearing and settling the payments.
The merchant side, known in the trade as the acquiring business, became an industry stepchild or pariah, despite warnings from the credit card associations and others that banks were giving away a critical part of the payment system.
Judging by the most recent bank card conference, held in Chicago, the acquiring business is well on its way back within banks. William Westervelt of First Annapolis Consulting in Maryland, one of the leading experts on card acquiring, went so far as to predict that "1995 will be a watershed year [as] major banks take on the national processors that had a cost advantage."
While some other observers disagreed with Mr. Westervelt's time estimate, they said it won't be far off the mark.
In a further sign of changing attitudes toward acquiring, an ABA conference attendee could have spent most of the 2 1/2 days attending seminars on merchantrelated topics - an abundance not seen at any such show in recent memory. The same message came across repeatedly: Don't neglect the acquiring business.
There was an equally insistent corollary: Do it smartly by understanding the costs, the competition, and the core strengths of depository institutions against some very savvy rivals with hard-to-beat cost structures.
For example, banks need to improve their profitability measurement systems, which lag those of the high-powered nonbanks. Ms. Friars said effective merchant-profit readings may be difficult for banks that intermingle their issuing and acquiring businesses.
"It's most important to understand your costs and your need to make investment s to stay competitive," she added.
Fred O. Gumbel, president of the electronic commerce division at Electronic Data Systems Corp. and former credit card chief at corporate-card and merchant processing stalwart First Bank System of Minneapolis, said it is essential for banks to deliver profitability and related pricing measures "down to the account level."
Good news, perhaps, for the banks is that third-party competitors "have been as underinvested as many banks" in some of these accounting areas, Mr. Gumbel told the card conference.
In one of the more comprehensive presentations of the Chicago meeting, David A. Poe, a director of the San Francisco consulting firm Edgar, Dunn & Co., debunked some acquiringside generalities, such as that the nonbanks are all-powerful, or that banks cannot attack their strongholds.
Mr. Poe, who is based in London, said nonbank dominance is indeed pronounced in the upper reaches of the acquiring market. The top 10 merchant acquirers handle 70% of the transactions, he said. The five nonbanks in this group have four times the transaction volume of the five merchant-servicing banks.
In dollar volume, the five nonbanks have a three-to-one edge over the five banks.
But there are other ways to measure market share that make the banks look collectively stronger. One of the five companies classified as a nonbank, National City Processing Co., is owned by a bank holding company, National City Corp. of Cleveland. But NCPC operates much like the competitors it is most often compared with Nabanco, which is owned by First Financial Management Corp. of Atlanta, and Card Establishment Services, the merchant business that Citicorp spun off in 1992.
There might also be a case for shifting First USA Inc. of Dallas into the bank column. It owns a credit card bank charter but does not itself have a parent outside the banking industry.
Even when NCPC and First USA are listed among the nonbanks, commercial banks still control 48% of all merchant card transactions, Mr. Poe said. "If you broaden the definition of what is a bank, the banks control a lot more," he said.
The nonbanks' 52% suddenly does not seem so overwhelming but for the fact that it is so highly concentrated in an elite few. Mr. Poe said changing times, technologies, and retailers' demands brought about the high-speed, low-cost specializations for which Nabanco and other nonbank processors became renowned. Those companies were superior to banks in making systems and technology investments, gaining scale economies, managing networks, and meeting compliance requirements.
But banks have their own set of competencies, Mr. Poe said: a direct sales force, existing account relationships with merchants, customer service, marketing support, branch networks, and risk management expertise.
The consultant suggested that banks play up their strengths their 24-hour service levels, training programs, customization capability, and profitability measurement will need help initially - and enter into strategic alliances to gain the skills or scale economies they don't have.
Mr. Poe's general conclusion: "Banks not only can, but should, continue to compete in order to maintain ownership of the merchant relationship."
Mr. Poe said credit card volume has not stopped growing. Credit cards capture less than 14% of total spending, and that growth potential doesn't take into account the fact that "debit and prepaid cards will be a huge [cash] displacement opportunity."
Payment Systems Inc., in a study commissioned by the transaction systems supplier Verifone Inc., found a significant, untapped debit card opportunity among relatively small, specialty retailers in categories ranging from auto pans to consumer electronics to shoes.
Large majorities of most of these segments do not take debit, nor are they aware of the card associations' Maestro and Cirrus product, according to the survey.
There are more than a million establishments in the speciality markets, with annual sales ranging from under $4 million to more than $10 million, compared with the 158,000 in the gasoline and grocery markets that have most readily accepted debit cards.
Michael J. Shade, director of U.S. marketing for Verifone, which is based in Redwood City, Calif., said the acquiring industry's goal should be "to deliver multiple products through a fixed infrastructure ."
He sees potentially lucrative opportunities to sell merchants on additional uses for existing point of sale networks, including health care payments, electronic benefits transfers, check authorizations, electronic coupons, loyalty or frequent-shopper schemes, and perhaps most basic of all, time-and-attendance logging for store employees.
"Multiple-product solutions can increase your market penetration and income while spreading costs across an endless array of applications," Mr. Shade said. "There is no limit to this if you understand your merchants and what they need."
Neither banks nor their competitors can expect a monopoly on such understanding. Mr. Shade counseled his ABA conference audience to find ways to be different from the pack.
Mr. Gumbel of EDS was especially insistent on that. point: "You have to be where the market is, but if you're not differentiated, you'll follow the herd over a cliff. To grow, and grow profitably, you can't look like everyone else."
A smaller player in the merchant business, Boatmen's Credit Card Bank vice president Jeffrey Rankin, expressed a willingness to be different by being more like the nonbank rivals.
"We should be acquiring American Express, Discover, and JCB transactions, because that's what our business should betransaction processing," Mr. Rankin said, acknowledging that the idea would not go over well with MasterCard and Visa traditionalists.
He said merchants are irritated at what they perceive to be banks' greed and lack of understanding of their own costs, Other than perhaps the interchange-fee component set by MasterCard and Visa.
"We banks have to become transaction processing companies, understand our costs, and not get too greedy," Mr. Rankin said.
He also said strategic alliances will be essential to survival, as virtually no bank below the top tier can by itself stave off a concerted attack by a national processor.
Mr. Rankin reported getting four calls within a month from people wanting to form alliances. In fact, the idea came up repeatedly during the bank card conference.
The leading credit card processor, First Data Corp., presented itself as a "strategic partner" to merchant banks, handling their operating responsibilities while' the banks "own the relationship." Card Establishment Services has entered into a strategic alliance with Wells Fargo Bank of San Francisco, which many acquiring-side observers view as a sign of things to come.
"From what I have heard, there are no competitors left in this business," Richard Robida, executive vice president of Speer & Associates in Atlanta, said tongue-in-cheek. "Everybody wants to be your strategic partner.
"Most of the off-line meetings [at the ABA conference] were on the acquiring side."
