Review 2004: How One Debit Acquisition Led to Another

The three deals that reshaped the debit industry in the last year - two of which have closed - were built on one another and on earlier changes, analysts say.

All three deals followed a decade of consolidation in the industry and demonstrated the growing importance of debit as a payment method, analysts said.

Metavante Corp. purchased the NYCE network, which was put on the block as a result from First Data Corp.'s acquisition of Concord EFS Inc. and its Star Systems debit network, the country's largest.

Faced with tougher competition from publicly held companies, the banks that own Pulse EFT Association agreed to sell it to Morgan Stanley's Discover Financial Services.

"The seeds of '04 were sown in '03 and, in some cases, before that," said Robert A. Bucceri, a general partner of Chaddsford Planning Associates in West Chester, Pa., and a senior consultant to the Electronic Funds Transfer Association. "The tipping point was First Data buying Star. That put a lot of balls in motion."

First Data's deal in April 2003 for Concord, a Memphis processor, triggered a review by the Justice Department. At the time First Data, of Denver, owned a 64% stake in NYCE. (Four large banks were minority owners.)

The Justice Department determined that combining NYCE with Star would have created a "monopoly" with a 45% market share. (Earlier estimates from analysts had the market share as high as 70%, but that was before Star began to lose some high-profile bank customers in 2003.) The department said it would not let First Data buy Concord unless it sold its interest in NYCE.

First Data avoided a court battle by agreeing in December 2003 to sell NYCE within eight months. The Concord purchase closed in February.

Numerous processors and network operators bid for NYCE. Metavante, an outsourcing arm of the Milwaukee banking company Marshall & Ilsley Corp., agreed in May to pay $610 million. That deal closed in July. First Data pocketed $389 million. The rest of the money was split among four large banks: J.P. Morgan Chase & Co., Citigroup Inc., HSBC Holdings PLC, and Bank of America Corp., which had bought FleetBoston Financial Corp. the previous month.

Discover, of Riverwoods, Ill., announced plans in November to buy Houston's Pulse, one of the country's four largest debit networks and one of the oldest. That deal is expected to close this month.

Mr. Bucceri said that Discover's deal for Pulse came about because of the market realities after the acquisitions of Star and NYCE.

Because of the offerings that the new owners of Star and NYCE will develop, Pulse would have had a tougher time remaining "a go-it-alone entity" in the future, he said.

But change had been in the works much earlier than 2003, he said, because of the consolidation trend that had been going on for a decade in the EFT industry.

Mr. Bucceri said that at one time the EFTA organized a trade group called the Network Executive Council, which at one point consisted of over 20 debit networks. Over time, the membership declined because of consolidation, he said.

"We knew there was a problem when we started holding those meetings around a breakfast table," he said.

Stan Paur, the president and chief executive of Pulse, was once one of the industry's staunchest advocates of keeping the networks bank-owned. He once argued that owning the networks gave the banks more control over their destinies.

Pulse is for now owned by thousands of banks, each of which has one vote on decisions. In an interview last week, Mr. Paur said that Pulse's board decided to accept the Discover offer because banks, particularly large ones, no longer saw ownership of an EFT network as a high priority.

"That was no longer an overriding concern of the larger institutions that we had spoken to," he said. "Their focus was on products and economics."

Small banks were concerned about the Discover deal, but they "probably realized that change was inevitable," he said.

As of last week about 35% of the proxy votes had come in, and 95% of them favored the sale, Mr. Paur said.

The deal will probably close Jan. 10 or 11, he said.

Tim Sloane, the director of the debit advisory service at Mercator Advisory Group Inc. of Shrewsbury, Mass., said the shift in focus by consumers and thus banks from credit to debit cards precipitated much of the industry consolidation.

Mr. Sloane cited a Federal Reserve study released last month that found that credit card transactions grew at a compound annual rate of 6.7% from 2000 through 2003, versus 24.9% for signature debit and 21% for PIN debit.

"From a bank and associations perspective, given the growth in debit, you've got to keep your eye on the debit ball," he said.

Mr. Sloane also pointed out that the Fed has announced a development that had been expected - that in 2003 the number of electronic payments surpassed check payments for the first time.

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