Total System Reveals Acquisition Plans

Total System Services (TSS) plans to reinvent itself by becoming a larger provider of direct merchant services, senior executives said during an analyst day Tuesday in New York.

TSYS, of Columbus, Ga., has a big legacy business offering payment processing technology, products and services as a third party provider. That business accounts for about 60% of TSYS's revenue, which was $395 million in the first quarter of 2012. While servicing those existing customers is important to TSYS, the big opportunity lies in direct acquiring and processing, the remaining part of its business revenue, senior executives said during the meeting in New York.

"Our vision is to be the leading global payments provider," Paul Todd, executive vice president of strategy, mergers, and acquisitions, said during the meeting.

In order to grow, TSYS plans to make an acquisition that would boost its direct merchant acquiring and processing business, TSYS executives said. The acquisition would increase its scale, and is likely to be made in the North America, because the merchant acquiring and processing business is large and more fragmented here than in other regions, executives said.

TSYS executives said they would take their time deciding what company to buy, as the company will also have to fit culturally with the rest of TSYS. The executives mentioned TermNet Merchant Services, of Atlanta, which TSYS acquired last May, as a template.

There are between 20 and 30 possible acquisition targets, says Peter Heckmann, a senior research analyst for Avondale Partners. Those include Heartland Payment Systems, Transfirst Merchants Services, iPayment, Mercury Payment Systems, and EVO Merchant Services. Specialty processors like Euronet Worldwide and Fleet One are also possibilities, Heckmann says, as well as prepaid company InComm.

Executives also discussed the importance of keeping on top of, and introducing, new payment innovations such as big data analytics that could enable more sophisticated rewards programs that could influence consumer buying before, during and after the purchase. Such new services are important given the fee squeeze banks have experienced under new regulations such as the Durbin Amendment.

Paul Bridgewater, group executive of global product, said Square has been a "game-changer," and suggested TSYS was competing with it in person-to-person payments.

"Square has broken the mold of traditional merchant acquiring," Rick Oglesby, a senior analyst at Aite Group, says.

Traditional merchant acquiring is driven by economies of scale and services that often require direct contact with merchants, Oglesby says. Square has created a new category of very small merchants who don't require high-touch services, and who are instead accessible through the Web.

Small and medium-sized businesses are TSYS's most important source of sales, accounting for nearly 90 percent of merchant locations and of net revenue, Mark Pyke, president of TSYS Merchant Services, said. By contrast, top national merchants, who can demand price concessions and require more service, represent 7% of merchant locations and just 6% of net revenue, he said.

TSYS is a top 10 merchant acquirer and processor, competing with First Data, Fidelity National Information Services, which acquired card processor Certegy in 2006. It also competes with Bank of America Merchant Services, JP Morgan Chase's (JPM) Paymentech division, U.S. Bancorp's (USB) Elavon, Heartland Payments, and Vantiv, among others, Heckmann says.