For decades, bankers have assumed that they were the proper custodians of the networks that switch and settle automated teller machine transactions, and that handle purchases made with bank cards at the point of sale.
If that notion was already starting to look a little antiquated, it began to look positively obsolete last week when First Data Corp., the giant public company that runs the worlds biggest card processing operation, announced it was going to take a majority stake in NYCE Corp., a bank-owned private company that began life in 1985 as a shared ATM network.
First Data plans to use NYCE as the centerpiece of a network whose services it plans to sell to banks and merchants, to be called First Data Net. This network will bypass the networks run by Visa and MasterCard, cutting them out of transaction fees, but keeping their interchange fees intact.
First Data and NYCE emphasized that four large banks Citigroup Inc., J.P. Morgan Chase & Co., FleetBoston Financial Corp. and HSBC USA Inc. and a few hundred smaller ones will still own 35% to 40% of NYCE after the transaction is completed. But the deal comes after three years in which another large public company, Concord EFS of Memphis, has been buying up electronic funds transfer networks first MAC, then Star Systems (which had already bought Honor Technologies Inc.), then Cash Station Inc.
Consolidation and ownership changes in this part of the industry have indeed been dramatic. In 1999, when Concord EFS bought MAC, the situation was considered a curious anomaly, since all other networks were owned by groups of banks. When the First Data/NYCE deal closes this year, two public companies will own the largest networks, and neither of those networks will be regional in their reach, as had historically been the case.
Pulse EFT Association of Houston, which was once a smaller player, has by default become the largest bank-owned network. Pulse has been playing the acquisition game as well, flexing its muscle this month by announcing a deal to acquire a small local network, TYME of Brown Deer, Wis.
When Concord EFS began buying up networks, industry executives expressed concern about what it would mean for banks to become customers of the networks as opposed to owners of them. But as public companies continue to take a broader grasp of the network business, fears about banks loss of control are voiced less often, and seem to have been replaced by a growing sentiment that, under todays circumstances, professional processing concerns are the proper custodians of the networks.
Raimundo C. Archibold, vice president of equity research at J.P. Morgan Chase & Co., said the alliance between First Data and NYCE would benefit all 2,400 banks that use the NYCE network, by bringing scale and depth of management to the operation.
Moreover, he said, the processing might of First Data could help eliminate some of the complications in the network system, which often requires that transactions be routed among differing systems. First Data is in the position and economics dictate that they should be able to process that transaction end-to-end without leaping to other networks, which would only have the effect of adding layers of inefficiencies, Mr. Archibold said.
Charles T. Fote, the Denver-based companys president and chief operating officer, said First Data Net would streamline routing and settling of all electronic payments and bypass many of the third parties that normally touch those transactions in particular, Visa and MasterCard.
If someone says, I want you to route them in the same way you did in the past, well continue to do that, Mr. Fote said. But he said he suspects that most customers will opt for the more efficient means.
Industry experts were divided over whether First Data Net would be a threat to Visa and MasterCard.
The Visa and MasterCard brands are more important than the highway itself, said Michael Strada, the president of Electronic Commerce Strategies, a consulting firm in Atlanta. The associations have worldwide recognition. I dont think theyll go away.
Paul Martaus, president of Martaus & Associates, of Mountainhome, Ark., a research and consulting firm, said that First Data has been trying to supplant the authority of Visa and MasterCard since time immemorial. He argued that First Data Net was viable because the company has links to two out of three merchants in the country and links to the same percentage of cardholders nationwide.
It doesnt take a card-carrying genius to realize that when a transaction takes place at the point of sale, theres a 66% chance that both the merchant and the consumer side are on the same system owned by First Data, Mr. Martaus said.
Bradley A. Berning, a senior research analyst for U.S. Bancorp Piper Jaffray, said First Data can process the transaction and go straight through, but theres a pretty big question whether you can cut Visa and MasterCard out of their interchange fees.
Perhaps a bigger challenge will be to Pulse, which has always prided itself on its ownership structure. At Pulse, we still feel very strongly about the financial industry-owned, not-for-profit, membership-driven model that we have, said Cindy Ballard, Pulses executive vice president. In the new NYCE, where do the community banks and credit unions fit in? Thats a question that pops up in my mind.
Ms. Ballard said Pulse will remain a viable alternative to banks that want to maintain control of the EFT networks, but observers said Pulse and the handful of remaining bank-owned networks may be in over their head in vying the new publicly owned model.
I dont see how Pulse has deep enough pockets to compete with First Data and Concord, Mr. Strada said.
The big public processors have end-to-end solutions for all of the consumer card transactions, he said. Whether it be debit or credit, they have back-end and issuer processing. Pulse has EFT switching; thats all they have.
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