At BankAmerica Corp., as at many of its big card- issuing peers, merchant processing was once a backwater. But the San Francisco-based banking company never let its merchant functions drift completely away. It kept enough business to rank among the leaders on the acquiring side of the credit card business, which allowed it to become an even bigger market force when the time seemed right.
It proved its mettle last year by partially spinning off BA Merchant Services, raising more than $200 million in an initial public offering.
BA Merchant Services is the only one of the top five merchant processors with roots in a traditional credit card bank. The biggest in the business is a nonbank, First Data Corp. It is followed by National Processing Inc., a unit of the Cleveland-based banking company National City Corp., and First USA Inc.'s First USA Paymentech, now part of Banc One Corp.
Sharif M. Bayyari, 52, BA Merchant Services' president and chief executive officer, is credited with transforming an operation that dates to the 1950s, when BankAmerica introduced credit cards in California.
Having grown from a barely break-even enterprise to one that holds its own in a rapidly changing and consolidating marketplace, the merchant subsidiary is setting its sights on global opportunities.
Industry observers said Mr. Bayyari helped BA Merchant Services make the grade by modernizing its technology, cutting expenses, and relying on BankAmerica's brand name and 2,000-branch retail network to bring in small and medium-size merchants.
"We sign accounts one at a time and we bring a proper solution to the customer," Mr. Bayyari said. "We know what the customer wants and we bundle our services with the services of the bank."
The bundling tends to solidify account relationships and reduce attrition rates. BA Merchant Services loses 5% of its customers a year, well below the 40% typical of the independent sales organizations that coordinate many bank-merchant relationships.
"They have long recognized that the small business is also a consumer," said Paul Martaus, president, Martaus and Associates, Clearwater, Fla. "Making small business their bailiwick allows them to service consumers and provide a whole host of services."
Before joining BankAmerica in 1993, Mr. Bayyari was group vice president of National Data Corp., the Atlanta-based transaction processor that is No. 5 in the merchant business.
Mr. Bayyari "is largely responsible for the acceleration" of BA Merchant Services, said Gregory Gould, a vice president at Goldman Sachs & Co. "Before he got there it was growing at 8% to 9%. Now it is growing at 16%, and there is a chance it could accelerate over 20%."
Mr. Bayyari "breathed life into the company" by applying "public market discipline" learned at National Data, Mr. Gould said.
Mr. Bayyari said when he arrived at BankAmerica in 1993, the majority of the $6.7 billion merchant portfolio was in California. Thirty-five salespeople solicited clients.
The sales force is up to 175. The Nilson Report, Oxnard, Calif., puts the annual portfolio volume at $22 billion.
"We set about changing the operation from a maintenance mode into a revenue and marketing mode," Mr. Bayyari said. "We increased the sales effort tremendously."
The performance improvements made feasible last October's offering of 14 million shares, mainly nonvoting. Other transaction processors, notably Paymentech, had already partaken of the IPO boom.
BA Merchant Services "went public at the top of a very hot market for this type of stock," said Marc Abbey, principal of First Annapolis Consulting, Linthicum, Md.
The unit's stock opened at $15.50 a share. Six months later it was down to $12 but has since seen a steady rise to around $20.
Richard K. Weingarten, director of Salomon Brothers Inc. in New York, said the offering gave BA Merchant Services "a currency that can be used in acquisitions, and it is a higher-multiple currency than the parent bank's stock."
Some outsiders questioned the wisdom of the stock offering by a deep- pocketed megabank.
The spinoff "does what independent sales organizations do, signing up merchants," said a veteran in the merchant market who asked not to be identified. "It doesn't take a multibillion-dollar bank to do that. Why take a subsidiary public to do what small companies do? How are they leveraging money from the initial public offering and other resources behind them?"
The offering, Mr. Bayyari said, generated $233 million. Some of that is being used to fund day-to-day operations. Another portion is parked in short-term investments, perhaps for acquisitions, he said.
Unlike other merchant processors that overtly seek out acquisitions, BA Merchant Services is content to mine the existing customer base and sign new merchants one at a time.
"They are not really aggressive in the acquisitions market, but on the other hand, acquisitions are at record highs and it is expensive to buy portfolios," Mr. Abbey said. "So maybe they are wiser than the rest of us."
BankAmerica, Mr. Bayyari said, has 850,000 retail banking customers that are merchants, and 170,000 use BA Merchant Services.
Through the first seven months of 1997, the burgeoning sales force brought in $4.7 billion of new volume, well surpassing the $3.5 billion for all of 1996.
Internal generation of accounts, Mr. Weingarten said, "is probably a cheaper and a more sustainable alternative than going out and buying them."
Mr. Gould said "the internal way" allowed BA Merchant Services to save $20 million to $40 million - the cost of buying a portfolio of equivalent size.
Of the merchant customers, 25% do more than $50 million each in annual bank card sales; 55% are medium-size, between $250,000 and $50 million; and 20% are small, under $250,000.
Mr. Bayyari said he sees "explosive" growth possibilities in Asia, where his company handles $2.5 billion of sales volume and obtains $13 million in top-line revenue.
"He has agreements in the Asia-Pacific region and is going to leverage the bank relationships at every opportunity," said Richard Robida, executive vice president, Speer & Associates, an Atlanta-based consulting firm.
Mr. Robida also said BA Merchant Services "will continue to be the most successful bank processor" in the United States. Mr. Bayyari "knows his costs extremely well."
"If well-managed, merchant processing can be very lucrative," Mr. Robida said. "Other banks, before they exited the business, should have thought about that."
