Total System Services Inc. plans to expand Vital Processing Services LLC’s international operations, though TSYS’ chief executive officer made it clear that he has no plans to move into merchant acquiring.
TSYS, the transaction processor that is majority-owned by Synovus Financial Corp. of Columbus, Ga., already owns 50% of Vital, the country’s second-largest merchant processor. On Tuesday, TSYS said it would buy the other 50% from Visa U.S.A. Inc. The $95 million cash deal is expected to close this quarter.
Several analysts raised the question about merchant acquiring during TSYS’ fourth-quarter earnings conference call Wednesday, but Philip W. Tomlinson, its CEO, said Vital would avoid the business. One of its primary businesses is back-office accounting and settling card transactions for merchant acquirers.
“Vital does not compete with its clients,” Mr. Tomlinson said in an interview Wednesday. “We believe that Vital is a trusted agent to the financial institutions and the merchant acquiring institutions and the ISOs [independent sales organizations] that use Vital.”
Instead, Vital, of Tempe, Ariz., plans to enter the international transaction processing market, where TSYS, the country’s largest card issuer processor, already operates, he said.
Vital is upgrading it systems to better compete for international merchant processing contracts, Mr. Tomlinson said. “We have great ambitions internationally.”
Taking control of Vital would let TSYS increase its revenue, because it would “play in both ends at the point of sale,” he said.
The one area where TSYS remains weak is in debit. It has been shut out in its bid to gain ownership of the top electronic funds transfer networks that carry PIN debit transactions.
Several networks have changed hands in the past two years, and TSYS was a bidder in some of these deals. Last year it tried to buy NYCE, which Metavante Corp. bought from First Data Corp. for $610 million in July, and Pulse EFT Association, which Morgan Stanley’s Discover Financial Services bought this week for $311 million.
“We are very disappointed that we haven’t been able to get that accomplished,” and entering that market remains one of his goals, Mr. Tomlinson said.
Debit is the fastest growing segment of the card business, he said. “If were going to be a significant player in the issuing business and the merchant acquiring processing business, it’s pretty obvious to us that we need to be in the debit business.”
Mr. Tomlinson cautioned analysts against predicting that TSYS’ income from Vital ($22 million last year) would simply double, because Vital would have to start paying for some services that Visa has provided for free.
Neil Williams, Visa U.S.A.’s chief financial officer, said it was willing to sell its share of Vital because merchant processing was not a core business for the San Francisco company.
When Visa founded Vital with TSYS in 1996, there were fewer “good alternatives” for merchant processing than there are now, he said.
Robert J. Dodd, an analyst for Morgan Keegan & Co., said Visa could use the money from the sale to secure its debit card relationships with banks. It might also use the money to cover some legal expenses, such as those arising from its ongoing litigation against Discover and American Express Co., he said.
But Mr. Williams said the money is not earmarked for either of those purposes. “The Vital transaction is important, but it’s a relatively small amount compared to the cash and liquidity that we already have.”
Visa would probably invest the proceeds “in technology and product offerings that differentiate Visa at the point of transaction,” he said. These offerings could include point of sale balance inquiries, which would let prepaid cardholders ask a merchant exactly how much money remains on the card.
In the past few months MasterCard International has started converting some high-profile debit portfolios.
Timothy W. Willi, an analyst for A.G. Edwards & Sons Inc., said that there were few risks involved in TSYS’ decision to take full ownership of Vital. In fact, he said, a bigger risk was remaining in a joint partnership, because it required Visa and TSYS to agree on major decisions.
Also, having full ownership of Vital would help TSYS expand internationally, which will be the “more attractive market over the next five years,” he said.
Mr. Tomlinson said there were occasions when TSYS and Visa did not see “eye to eye” about Vital, but there were never any significant disagreements. If another opportunity to partner with Visa came along, he said, he would jump at it.
TSYS’ said Tuesday that its fourth-quarter net income rose 9% from a year earlier, to $43 million, while revenues rose 10.4%, to $307.2 million. Full-year net income rose 6.8%, to $150.6 million.
This year TSYS expects net income to grow between 19% and 22% and revenue to growth between 30% and 33%.
