First Data Deal Puts Payments Industry on Notice

The dust kicked up by First Data Corp.'s merger agreement with First Financial Management Corp. may never settle, judging by the reactions of credit card bankers and other observers.

Virtually all of the industry leaders and opinion leaders contacted by American Banker in recent days reported being surprised and amazed by the transaction processing giants' June 13 announcement.

Once the shock wore off, the experts began to raise questions about the companies' ability to exploit all the potential synergies, about possible antitrust challenges, and the likelihood of a competing bid. Complaints about the price - an exchange of First Data stock worth $6.7 billion - led to a lawsuit by First Financial shareholders.

Still, a consensus emerged that whatever the outcome, even if the terms change or another deal occurs, the credit card landscape has undergone a tectonic shift, the ultimate consequences of which may not be fully comprehended even by the two principals.

They have presented the banking industry with a textbook challenge to its control of payment systems, said Edward E. Furash, chairman of Furash & Co. in Washington. Mr. Furash's firm wrote a version of that textbook - "Banking's Role in Tomorrow's Payments System" - a report published last year by the Bankers Roundtable.

While most attention focuses on First Data's and First Financial's combined market share in processing card payments for retail merchants, Mr. Furash is concerned about their compilation and control of the "value-added information" that banks need if they are to maximize profits.

"If the nonbanks control the information, the payment system is a throwaway," Mr. Furash said.

He and other experts had no doubts that First Data, whose holdings include the largest processor of bank credit card accounts, and First Financial, whose even larger portfolio includes the No. 1 merchant card servicer, know exactly what they are doing.

"First Data and FFMC are driven by economies of scale, and in their businesses there is compelling logic for it," said Scott P. Marks, executive vice president of First Chicago Corp.

"One can't help but see the logic in it," added Stephen P. White, managing director of Dove Associates in Atlanta. "First Data is clearly building a great deal of scale and mass.... They plan and intend on being a very large player, and others will find it difficult to compete with their imposing scale."

To William M. Randle, senior vice president of Huntington Bancshares in Columbus, Ohio, the agreement merely raises a series of prior wake-up calls to a deafening pitch.

"I find it ironic that banking has evolved to the point where most of the value-added transactions have been passed off to third parties, First Data being the largest," said Mr. Randle, a tough critic of his own industry and an admirer of First Data's strategy and agility.

"Every time the nonbanks get a little more consolidated and more focused, commercial banking in this country looks to be more and more at risk," the banker said.

As a $4 billion processing powerhouse, the postmerger First Data Corp. is seen as fully capable of dominating the network and backroom aspects of electronic payments for years to come - and of permanently upending some long-standing economic relationships and power structures.

No such relationships stand to be more affected than those among MasterCard and Visa, their thousands of owner-member banks (hundreds of which use First Data for account processing), and the merchant accepters of bank cards who have increasingly turned to First Data's Electronic Funds Services Division and First Financial's Nabanco subsidiary, among others, for swift and inexpensive transaction processing.

"They know processing and they know distribution," Mr. Randle said of the merger partners. "You can say that First Data now controls the merchant and the card and the processing end, and they must have broad plans about what they are going to do with their network."

MasterCard International and Visa U.S.A. issued cautious statements the day of the merger announcement. Both cited the need to study the impact of the deal on banks and on the overall payment system.

Behind the scenes, Visa has made no secret of its displeasure at what it views as First Data's increasingly bold incursions into historical banking sanctums. The conflict took on a personal dimension in early 1994 when Roger Peirce, Visa's information systems chief, left to become president of First Data's electronic funds services division, in charge of merchant processing, debit cards, and other new initiatives.

Among other steps, Mr. Peirce engineered the acquisition, consummated in March, of Card Establishment Services Inc., which ranked third in merchant processing after Nabanco and National City Processing Co.

Critics charged that First Data was building the capacity to "close the loop" - processing transactions within its own cardholder-merchant orbit and without recourse or accountability to MasterCard, Visa, or other established utilities.

Some observers pointed out that a "closed loop" drains revenue from MasterCard's and Visa's clearing systems. Others raised the specter of First Data's creating a brand of its own to rival MasterCard or Visa.

While professing a desire only to help card-issuing banks compete, and denying any designs on "competing with our customers," First Data launched a marketing blitz that included the biggest trade campaign in memory at the September 1994 American Bankers Association bank card conference in Chicago.

First Data was declaring itself an equal, if not a counterweight, to MasterCard and Visa.

"I can see another competitor being born," said an executive at another processing company. "It could live a life of its own, independent of Visa and MasterCard, and both associations have to be worried about that."

"There was never any secret about what (First Data was) trying to do," said a source within Visa, who asked for anonymity.

When portrayed as the villain, First Data is seen exacerbating the loss of control that too many banks suffered after giving up on the merchant side of the card business. In tandem with former First Data executive Jerry Craft, now heading his own consulting firm, First Data can provide a complete card outsourcing service, from marketing and portfolio management to payment processing and debt collecting.

Assuming the merger goes forward, Nabanco and the former Card Establishment Services become one, First Data's core card processing and related activities "close the loop," and the companies even have an opportunity to exploit an already potent brand name - Western Union - for which First Financial outbid First Data last year.

"It's been largely overlooked that First Data gets its first brand in Western Union," said Stephen White of Dove Associates. "The company had been holding itself out as a utility, but adding that brand to everything else they do might be what this deal is all about."

Mr. White pointed out that First Data's payment processing competitors - such as Deluxe Data Systems, Electronic Data Systems Corp., and Total System Services Inc. - have no comparable "brand franchise."

"It will be interesting to see what they do" with Western Union, Mr. White said. "It's something to be feared."

As much as bankers, their card associations, and First Data's direct competitors may have reason to fear, none have gone public with any kind of vocal opposition or threat to try to block the merger on antitrust or other grounds. Most regard a legal challenge as either unrealistic or fruitless; they generally accept the reality of rapid industry change and the need to react strategically.

Total System, No. 2 in card account processing, will stick to its knitting, vowed chairman Richard W. Ussery.

"We decided a long time ago not to compete with our banks and not to get directly into the merchant business," he said. "A lot of banks feel strongly about that, and we'll continue to approach it that way."

"We're in a new era of bold deals," Mr. Furash said. "In banking and elsewhere, the feeling is that it makes the most sense to do something big and bold and position oneself before the competition can respond."

"There will be regulatory questions, but these companies will get past them," said Anne Morgan Moore, president of Synergistics Research Corp. in Atlanta.

"This is not front-page to consumers, like Microsoft and Bill Gates," Ms. Moore said. "The average consumer never heard of FDC or FFMC."

The companies' low profiles could work in their favor as federal antitrust authorities delve into the case, legal experts have said. But that ignores the Western Union factor, which the Federal Trade Commission indicated would have caused First Data problems if it had bought that company last year. First Data owns the competing Moneygram service.

"Anytime two large players come together, they are typically reviewed by the Justice Department. It's the way the world works," said Scott Marks, head of First Chicago's credit card bank and a Visa director.

"I don't see as many gremlins in the closet as many of my banking industry colleagues do. (First Data is) providing a value-added service to a segment of the business world that banks decided to withdraw from. Since they didn't wish to make the investment required to be a leader of that industry, it's odd to turn around and complain that someone else is."

First Data's and Nabanco's growth have prompted bankers to reconsider their retreat from merchant processing, said Alan Welch, senior vice president of Wachovia Bank Card Services. But he also suggested that banks' relationships with outsourcers may have paid dividends in the form of "greater capabilities. If that's the case, they should be better off afterwards."

Mr. Welch and others are expecting responses from MasterCard and Visa. Liam Carmody, of the New Jersey-based consulting firm Carmody & Bloom, said self-preservation may lead them through contractual requirements or rulemaking to try to "regain control of the point of sale."

"I'm not sure what it's going to take, but I know some big things are going to happen in the next six months, and leadership has to come from somewhere," said David A. O'Connor, chief executive officer of Internet Inc. in Reston, Va., operator of the Most electronic banking network.

"What we need is a single, cohesive infrastructure for U.S. payment systems, because without it, the banks will lose customer relationships. It's as simple as that."

"The situation isn't hopeless for banks, but it certainly requires action within two or three years," Mr. Furash said. "Any longer, and it will be too far gone, and banks won't be able to make the massive expenditures necessary to get back what they lost."

Valerie Block contributed to this article.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER