U.S. Bancorp has set out to make its name in transaction processing.
The Minneapolis banking company said its plan to buy Mellon Network Services, announced last week, is the first step toward building a larger business.
Mellon Bank Corp.'s processing subsidiary handled 586 million automated teller machine and debit card transactions last year for 1,900 financial institutions in 34 states.
U.S. Bank, the Minnesota company's banking subsidiary, does far less business, handling 300 million transactions a year, largely for its own customers.
The deal is "our stake in the ground," said Frank J. Partel Jr., head of Nova, the U.S. Bancorp division that includes electronic funds transfer. Buying Mellon Network Services, he said, "will give us a lot of capability to exploit the growth in point of sale, which we think is growing at about 30% to 40% a year."
The purchase, due to close this quarter, is expected to help bolster U.S. Bank's card business, which has taken some knocks in the last year.
U.S. Bank is one of the largest issuers of Visa purchasing cards, and until last year, it was the exclusive provider of purchasing cards for federal government agencies. But in November, when the General Services Administration adopted its SmartPay program, which let several other banks compete for the business, U.S. Bank lost market share to Citigroup, Bank of America Corp., and others.
Mellon Bank is also a card provider to the federal government, though its share of the business is much smaller than the other banks'. Mellon has sold its consumer credit card portfolio to Citigroup and its merchant processing business to Paymentech Inc., a Bank One Corp. subsidiary, but will retain its smart card and purchasing card programs, said Ron Gruendl, a company spokesman.
"We will continue to work with the government and on other pilots we're doing" in smart cards, Mr. Gruendl said.
In January, Mellon put several businesses up for sale, including credit cards, electronic funds transfer, and commercial mortgages.
Ronald V. Congemi, president and chief executive officer of Star Systems Inc., the Maitland, Fla., ATM network, said "numerous organizations" reviewed the offering documents for Mellon Network Services.
"Their focus of business is in gateway services, ATM driving, and off- line debit processing," Mr. Congemi said. Mellon's business is "very heavily concentrated in New England and the Northeast."
Mr. Partel of U.S. Bank said these attributes complement his company's electronic funds transfer business, which is concentrated in states served by the old U.S. Bank of Portland, Ore., and its 1997 merger partner, First Bank System Inc. of Minneapolis.
Mellon Network Services "has a much stronger mix in the point of sale area, with off-line and on-line debit," Mr. Partel said.
U.S. Bank might make further deals to augment its processing business, he said, and will also try to sign up financial institutions as processing customers.
The "principal attractions" of the Mellon deal are that point of sale processing is a "growth area" and Mellon's systems "give us certain capabilities that would cost us several million dollars to develop internally," Mr. Partel said. "This brings us right to the competitive edge of the market the day we close."
Neither institution would state the price of the deal.
Nearly all Mellon Network Services employees will be offered jobs with U.S. Bank, which is to take over the operation's Pittsburgh facilities.
Joseph Duwan, an analyst at Keefe, Bruyette & Woods Inc. who covers U.S. Bancorp and Mellon, called the Minneapolis company "a very sophisticated electronic processor." The payments system operation "has been one of their fastest-growing initiatives."
"Although they did lose a piece of the federal government business," Mr. Duwan said, this deal "does indicate that they are focused on growing the business and feel their strengths can be leveraged with more scale."
