With the deal it announced Wednesday to buy the network company Concord EFS Inc., First Data Corp. says it is one step closer to its long-stated goal: "to process every electronic payment transaction worldwide from the point of occurrence to the point of settlement."
It aims to do so by presenting itself as the most bank-centric and electronically oriented payments company - a position that will continue to be staked out and challenged by Visa U.S.A. and MasterCard International.
To describe how his company plans to improve on the business model of Concord EFS - the PIN-debit and automated teller machine network processor that First Data intends to buy for $7 billion in stock - Charles T. Fote, the processing firm's chairman and chief executive officer, draws an analogy to the bridges it built with banks in the mid-1990s.
That was when the Denver company began setting up 50-50 merchant-acquiring and processing ventures with about a dozen large banks, including J.P. Morgan Chase & Co. and Bank One Corp. The so-called partnership strategy drew flak at the time but has since proven to be the glue of First Data's strong relationships with the banks, which in turn view their processor as a partner and recognize its heft and clout in the payments stream.
Initially First Data "owned 100% of those merchant portfolios," Mr. Fote said in a telephone interview Wednesday morning, but "then we went out and made arrangements with the banks and created these alliances."
After the Concord deal closes, "that type of behavior will not be out of the norm," he said. First Data will offer Concord's bank customers "revenue sharing, profit sharing, and straight-out cash bonuses," he vowed.
Concord's recent stumbles, which led to a senior management shuffle and a devaluation of the Memphis stock, seem to have stemmed almost exclusively from its difficulties getting major banks to renew their contractual commitments to the Star Systems electronic funds network that Concord operates. Visa, among others, has been trying to lure Concord's banks away with price incentives, and the fact that Concord's interchange rates are set by a for-profit company with no bank owners has been seen as a big drawback.
First Data bought 65% of the NYCE Corp. network - which is in the same lines of business as Concord's Star Systems network but has little geographic overlap with Star - in 2001. Mr. Fote said the deal for Concord "strengthens First Data's ability to complete transactions conveniently and securely at point of sale locations around the world, and it fosters competition to the benefit of consumers."
He said he expects the deal to close in the third or fourth quarter. If it is finalized - there will no doubt be some antitrust scrutiny from bank regulators and other federal agencies - First Data will then take on the task of re-signing the Star banks. Until that time, Mr. Fote said, "We're going to compete like a son of a gun" with Concord for those contracts.
The deal by the nation's largest bank card processor for the nation's largest electronic funds transfer company shows how mighty First Data has grown in the 13 years since one of its founding companies, the credit card processor First Data Resources, was spun off from American Express Co.
Three years later, First Data Merchant Services - the merchant processing arm of First Data, and the division that houses the merchant/bank alliances - was created through the mergers of Card Establishment Services and Nabanco, which was a division of a company First Data bought, First Financial Management Corp. A year earlier First Financial had bought Western Union, which today is the third large piece of First Data's business tripod.
Those deals made First Data No. 1 in handling cardholder accounts for banks, handling credit card processing for merchants, and handling money transfer transactions for consumers. Three years ago it set up a much smaller division called eONE Global to handle wireless transactions, government and B-to-B transactions, and other newfangled categories of payments. The most recent additions to the family of transactions First Data handles have been ATM and POS debit, which NYCE handles, and which Wednesday's Concord deal will build on.
Analysts agreed that buying Concord would reinforce First Data as a viable alternative to the Visa and MasterCard networks.
"Charles Fote perceives First Data as the premium payments company," said Craig Peckham, an analyst at Jefferies & Co. Inc. in New York. As such, "First Data needs to have a role in the next big payments story over the coming decade, and all of the metrics on the growth side say that's PIN debit."
Though a retailers' victory in the pending Wal-Mart class action against Visa and MasterCard could boost the market, Mr. Peckham said, "you don't need the Wal-Mart case to be resolved in any particular way" to ensure the rapid expansion of PIN debit.
Edward Neumann, the managing director of the Farragut Group LLC consulting firm in Arlington, Va., called PIN debit "the market battlefield for the next 12 to 18 months" for the payment networks. The Concord deal, he said, is "a bold move by First Data to take out one of its competitors and its main rival for future business."
MasterCard's announcement last month that it would raise interchange rates on its PIN network, Maestro, means that the game is heating up, Mr. Neumann said. Even MasterCard, which has negligible PIN debit market share in the United States, is turning its attention to this space. "For First Data to make this kind of move right now make a lot of sense," he said.
First Data, Mr. Neumann added, "definitely has the merchant edge" over Visa and MasterCard. "From the banks' perspective, their consortium is going to find it more difficult to compete with these major nonbank processors."
Mr. Peckham of Jefferies said First Data, while stiffening its position against Visa, probably will not alienate individual banks. "First Data is certainly in a delicate position here," he said. "But historically, for example, in the merchant processing side, they've managed their relationships with banks very effectively by including them as partners."
After First Data acquired the NYCE network, Mr. Peckham said, it strategically kept banks "entrenched" in NYCE. Pointing to Concord's recent troubles getting banks to renew their membership in Star, he added, "Star may not have faced such difficulties if those banks were partners, not just customers."
John Kraft, a D.A. Davidson & Co. analyst who covers both companies, called them "a natural fit."
"First Data has a dominant position in the merchant processing business, and Concord has a dominant position in the networking business," Mr. Kraft said. And though they compete in different lines of business, "they don't seem to overlap in customers."
Mr. Kraft said that First Data has a better chance of re-signing the Star banks to contracts because it is more "bank-centric" than Concord. "First Data jointly owns its ATM network, and that seems to be the sticking point for the Star banks," he said. "The Star banks were not committed to re-signing with Star necessarily; they wanted more control of the ATM network."
But what it really comes down to is control of interchange rates, Mr. Kraft said. "Having a private company run that was making some of them nervous about their ability to control interchange fees."
Concord does not give banks a say in interchange rate-setting, but it says it plans to give them "input" in the future. First Data and NYCE already do: NYCE is 35% owned by a consortium of large banks, and it is understood in the industry that those banks are the ones that are most influential in setting the interchange. Mr. Fote's comments indicated that Concord's networks will be run with at least as much bank influence.
The potential downside of this deal includes integration problems and the antitrust risk, Mr. Kraft said. It would depend on how the Department of Justice or the Federal Trade Commission defined the market: If it is defined narrowly, as just PIN debit, the new entity would own two-thirds of the market, and that could be a problem. It could mean that First Data might have to divest the NYCE network for the larger Star network.
But if it is defined more broadly, "their market share shrinks," Mr. Kraft said. "Then they wouldn't have a problem."
The deal for Concord is just the latest that Mr. Fote, who has been with First Data and its predecessor companies since 1975, has overseen. He has played a large role in orchestrating everything from the First Financial Management deal to the NYCE deal. Before rising to the top spot at First Data a year and a half ago (from the No. 2 position), he had supervised, at various times, the Western Union business and the merchant services business.
In February, after several quarters of lackluster performance in its unit that processes transactions for card issuers - and the loss of Bank One to rival TSYS Inc. as a customer in that unit - First Data ousted the head of the division, Eula Adams, and Mr. Fote took personal management responsibility for it.
Now he will help oversee the Concord merger. Mr. Fote said in a conference call Wednesday that it will cost about $400 million to integrate the two companies. He predicted that these costs would be nondilutive in 2004 and that the merger would save $230 million in 2005.
Mr. Fote said Star Systems and NYCE would be integrated over time but that their brands would not be merged right away. Concord, which bought three networks in quick succession from 1999 to 2001 - MAC, Cash Station, and Star - integrated the networks and consolidated them under the Star brand.
One part of Concord that will be jettisoned before the deal closes is Concord EFS Bank, Mr. Fote said. First Data already has many alliances with banks, so it does not need its own bank to move transactions.
Richard Kiphart, the chairman of Concord's board, said, "We think this relationship puts us in a better competitive position to renew those [bank] contracts in the upcoming months."
Bond Isaacson, Concord's co-CEO, said that the roles of the respective management teams have not been worked out yet. "I'm still responsible for re-signing and competing with NYCE for those banks' businesses," he said. "Right now we are not merged companies and we still need to compete with the assets that we have."
Visa U.S.A. said in a press release that the deal offers "further evidence that the competitive PIN marketplace continues to evolve rapidly."
