Almost no part of banking has changed as dramatically in the past year as the credit card industry — OK, maybe mortgages — but cards have faced the triple hit of massive re-regulation, consumer defaults and declining spending. So when 60% of a company's revenue comes from card processing, it goes without saying that the past two years have been challenging. But TSYS has persevered, continuing with its plan to diversify into merchant-acquiring and the community bank market, and holding onto enough cash to make acquisitions if the price is right.
The Card Act, which went into effect this summer, had profound implications for banks and their card businesses. But getting the industry into compliance from a tech perspective fell disproportionately on processors like TSYS. "It was a huge project for us, bigger than Y2K," says CEO Phil Tomlinson. "First of all, the dates kept changing. And the regs kept changing as they were being interpreted."
And then there was the process of sitting down with each customer to walk through the required changes, updating systems to reflect the new regulations, and doing end-user testing before it all went live. While this was going on, TSYS closed a deal with First National Bank of Omaha that bought it 51% of FNBO's merchant-acquiring business, First National Merchant Solutions, for $150 million. Later this year, TSYS forged a partnership with BancVue giving TSYS access to more than 1,400 community bank customers. And on the technology front, the company unveiled a hybrid card that can be used as a debit or a credit card, with consumers using the Internet to make changes to funding sources and control where the card can be used. "Some people think it's controversial. We don't," Tomlinson says. "I think as things cut into revenue, you're going to see customers get more creative."
Where does he see the industry getting more creative in the coming year? Prepaid cards, for one, an area where TSYS has strength, as well as loyalty cards and mobile payments. And despite the Dodd-Frank bill and the creation of the Consumer Financial Protection Bureau, Tomlinson has a modicum of confidence that the majority of the regulatory changes to the credit card industry are complete.
But from a revenue perspective, analysts say card processors in the United States will probably struggle for the remainder of the year, though TSYS's international plays in Brazil and Japan are producing strong growth. "We see no real signs of a near-term upturn in the company's core card market as large issuer portfolios continue to decline," writes Robert Dodd of Morgan Keegan & Co.
Tomlinson's outlook is slightly rosier. "We're actually starting to see a crack. The U.S. market for us had been virtually dead, and we're starting to see prospecting picking up."