First Data Corp., the nation's largest bank card processor, has apparently scored a major coup in merchant services.
Paymentech, which is third in merchant card processing, behind First Data and National City Corp.'s National Processing Corp., said this week that it signed a letter of intent to transfer backroom support functions to First Data, for which it now relies on Electronic Data Systems Corp.
Paymentech, which is 55%-owned by Bank One Corp.'s First USA credit card subsidiary, said the switch will probably take place within a month and allow it to concentrate on serving the front lines of the merchant business.
"It positions us to be very efficient and very focused on our product set," said Paymentech president and chief executive officer Pamela H. Patsley.
Dallas-based Paymentech, regarded as a top-notch specialist in processing for mail-order and telephone-order, or MOTO, businesses, is transferring only back-office functions such as statement printing and customer service for merchants that deal with face-to-face customers.
About half of Paymentech's $58 billion portfolio at yearend 1998 was in the MOTO category. That does not include a $5 billion portfolio recently acquired from Mellon Bank Corp.
Observers said the non-MOTO move may be the beginning of a consolidation of Bank One processing with First Data and its card-account and merchant processing units, including First Data Resources.
"This move certainly cements the Bank One-FDR relationship," said Paul Martaus, president of Martaus & Associates in Clearwater, Fla.
Observers said First Data, which lost some business in the recent wave of big-bank consolidation, is the beneficiary of Bank One's bias in favor of outsourcing over in-house ownership of technology. Bank One also chose First Data to handle all of its card-issuing, which had been an in-house operation, in the wake of its merger with First Chicago NBD Corp.
On the merchant side, Bank One also plans to stick with First Data. Now, First Data will pick up a slice of Paymentech's business.
"Bank One is clearly interested in relying on third-party processing," said David Robertson, president of The Nilson Report, an industry newsletter based in Oxnard, Calif. "They have several years of experience" as a member of First Data's merchant bank alliance program.
Paymentech maintains that it will control its destiny, and that the move to First Data was strictly for gaining access to more functions on First Data's platform.
"This allows us to focus on the value-added part of the solution to the merchant and really get our back office streamlined with the best products out there today," Ms. Patsley said.
In the cutthroat, slim-margin merchant processing business, retailers are demanding more information-based services on top of basic credit and debit card services. The more products that merchant-acquiring processors can offer, the less likely that merchants will jump ship and shop for a better price.
Ms. Patsley said the company could reap more benefits from FDR than it could by managing the separate EDS relationship. "This includes accelerating the development of proprietary front-end authorization and capture products and better technology that meet our merchants' increasing needs for information," she said.
An EDS spokesman said, "We have enjoyed a mutually beneficial relationship and will continue to provide services for the foreseeable future. In the meantime, our business in this area continues to grow, and we'll continue to seek opportunities where we can make a difference for our customers."
Brent Wouters, a research analyst at Robinson Humphrey of Atlanta, said, "First Data has invested a lot and probably adds a lot of flexibility and functionality options" to Paymentech's customer base.
