Bank of Montreal and Royal Bank of Canada are planning to combine their merchant-acquiring services and provide card-based transaction processing throughout North America.

The banks signed a letter of intent to form a Canadian company that would begin operating this fall and would seek to expand the banks' merchant processing business into the United States.

The deal comes as First Data Corp. of Atlanta has entered the Canadian market. The firm announced June 27 that it had bought the Canada Trust MasterCard merchant acquiring portfolio from Toronto-Dominion Bank. Its new subsidiary, First Data Loan Company Canada, is to take over the portfolio this month.

Bank of Montreal and Royal Bank say their yet-unnamed company initially would handle annually about 1.3 billion transactions worth $55 billion, the combined value of the two banks' merchant portfolios.

Bank of Montreal is a MasterCard issuer, and Royal Bank issues Visa cards. Because Canada is a non-dual market - card issuers can only work with either Visa or MasterCard - the banks would not combine their card portfolios but would use the new company to create economies of scale in transaction processing.

"We start with a processing portfolio that is strong in Canada," said Mark Tonnesen, executive vice president for cards at Royal Bank. "We are a lot bigger in debit card transaction processing than U.S. companies. That will be our basis." The banks say the new company would build on their standing relationships with U.S. merchants that use Bank of Montreal or Royal Bank for acquirer processing in Canada.

Bank of Montreal offers processing services in the United States and intends to use its Chicago subsidiary, Harris Bank, to expand its clientele.

"We look at the U.S. market, which is 10 times bigger than ours, and we look to grow," said Wendy Porter, senior vice president of merchant services at Bank of Montreal. "We offer a world class chargeback system, and we did significant investments in technology, particularly towards the Internet and e-commerce."

Paul Martaus, president of the merchant-processing and merchant-acquiring consulting firm Martaus & Associates of Mountain Home, Ark., said the Canadian banks are taking an "incredible" risk by pushing into turf that is well-mined by U.S. companies. Offering online debit transactions would not give the new company enough substance to make the banks' investment worthwhile, he said.

"This is a commodity market where price is everything," Mr. Martaus said. Even merchants who have signed up with Royal Bank and Bank of Montreal in Canada would only close a deal with the new processor in the United States if the service were cheaper - and this could turn out to be costly to the Canadians.

"They obviously analyzed the U.S. market and found a lack in service or a profit potential lucrative enough for the risk," Mr. Martaus said. "It depends how deep their pockets are."

As the Canadians look south, First Data continues to look north. "We are always looking for opportunities, and Canada is a logical point of expansion," said Rich Aiello, senior vice president of mergers and acquisitions at First Data. "Canada is a good-size market."

As the next step, First Data will look to expand its relationship with Toronto-Dominion Bank, a Visa issuer, to become a "Canadian powerhouse," he said. First Data's advantages are "state of the art technology and a higher degree of service," Mr. Aiello said.

First Data is not concerned that the Canadian venture could hurt the company in the United States, Mr. Aiello said. "We compete every day with bank merchant services. I am not sure what a Canadian company could add to our market that we cannot."

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