First American Payments Buys Way into Government Market

The merchant acquirer First American Payment Systems LP says its acquisition of the technology vendor Govolution Inc. is a bid to capture a piece of the growing market for electronic payments made to government agencies.

"Government payments are an emerging market," said Neil L. Randel, First American's president and chief executive. "It's a vertical we have wanted to get into for the last few years."

First American, of Fort Worth, did not say what it paid for the privately held Govolution. The acquisition was announced Tuesday.

A similar vendor, Link2Gov Corp., which processes consumer credit card payments made to various government agencies, is being sold to Metavante Corp.; that deal was announced Oct. 3 and is expected to close by yearend. Metavante is the technology subsidiary of the Milwaukee banking company Marshall & Ilsley Corp.

Some reports have found that about $9 trillion a year is paid to local, state, and federal government agencies for taxes, tolls, fees, permits, fines, and the like. "We want to be a part of that market," Mr. Randel said.

Private businesses are aggressively encouraging customers to make payments electronically. But the public sector has lagged, in part because of laws barring many agencies from paying the interchange fees for accepting credit and debit card transactions.

In some of these cases, people who want to pay their taxes or fees with a credit card can do so, but they must also pay a so-called convenience fee to the processor. For example, Link2Gov is one of two vendors that people can use to make their federal tax payments, but it charges them a 2.49% fee. The other company is Official Payments Corp., which charges the same rate.

Govolution has had a slightly different business model and does not depend on convenience fees.

In the past it has focused on selling its software to government agencies that are not barred from paying interchange fees, and it has made the business case that its customers can increase transaction volume and save money on processing by accepting electronic payments. Those savings would cover both the interchange and the cost of Govolution's software, which can handle credit and debit card transactions and automated clearing house debits of people's bank accounts.

Mr. Randel said there is a huge market for things such as fishing licenses and national park entry fees, for which people often want to use payment cards. "The government is finding out it's less expensive to use cards to collect payments," he said.

But Mr. Randel said he might revisit the idea of charging convenience fees once First American absorbs Govolution. "People will pay for convenience," he said. "We might continue" the practice of not using the fees, "or we might change it. There is room to tweak the business model."

Govolution will keep its name and continue to work out of Arlington, Va., and there are no plans to eliminate any of its 26 employees, Mr. Randel said.

First American also evaluated Link2Gov as an acquisition target several months ago, before the Metavante deal was announced, but Mr. Randel said he settled on Govolution because he thought its payments software was superior.

Dan Schatt, a senior analyst for the Boston market research firm Celent Communications LLC, said only a handful of vendors specialize in government payments, and that he wasn't surprised to see Govolution get snapped up.

"Everyone is looking at the government market as the next big opportunity to promote debit cards and credit cards," Mr. Schatt said. "The government market is a huge source of payments."

He said that with both Govolution and Link2Gov off the market, there would be slim pickings for any other processors looking to buy their way into the government payments field.

One of the few remaining vendors is Official Payments, which is owned by Tier Technologies Inc. of Reston, Va.

Mr. Schatt said another avenue would be to buy First American. Its purchase of Govolution could make First American "an attractive target" to the industry's biggest transaction processors, he said.

Mr. Randel said that First American has been transforming itself, with five acquisitions in the past two years aimed at expanding its processing capabilities. He said the company handles transactions for 80,000 merchant locations, mostly small and midsize merchants, and that he expects it to process about $7 billion of purchases this year.

He said he is optimistic about the government payments market and that he plans heavy marketing of Govolution's products. "We've got to have the technology to get to the dance. Now we have the technology and we are going to the dance."

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