First Data Corp., in a new Internet strategy, has started pouring venture capital into young technology companies whose products mesh with the payment processor's businesses.
First Data's approach is somewhat unusual in that chairman and chief executive officer Ric Duques is personally overseeing the effort, flying around the country from his Atlanta headquarters to look at Internet companies that sound promising. So far, he has selected five.
"We invest in businesses that offer us payment opportunities," said Charles T. Fote, who, as president of First Data, is Mr. Duques' second-in-command. "From a payment systems standpoint, at some point you have to make money on the Net."
So far, the companies on the receiving end of First Data's largesse - which a First Data spokeswoman placed at $30 million to $50 million - have been Yclip.com, which sells Internet advertising technology; Passlogix Inc., an electronic wallet maker; iMall, an Internet marketplace that was bought in October by Excite@home; CoolSavings.com, which offers on-line coupons and loyalty programs; and Reciprocal, which helps companies manage the sale and distribution of original content (such as music and unpublished books) they sell on the Internet. More deals are expected, Mr. Fote said.
In the rush to inject themselves in Internet technology, some traditional companies have taken a do-it-yourself approach, buying the equipment and expertise required to convert their businesses. First Data has done some of that, but the strategic investments it is making in Internet firms mark a conscious decision by the world's largest transaction processor not to attempt everything on its own. One bank industry company that is also placing financial bets on Internet companies is Visa, but Visa - a bank-owned association whose activities are meant to benefit all members - is a different type of animal from First Data.
Mr. Fote said First Data will continue to make direct investments in companies whose technologies it can benefit from and will also invest through funds that back technology firms. "We spin off a lot of free cash flow from operations" that can be put toward these efforts, he said. "We have some significant capital resources because of the CheckFree deal we did," in which Transpoint, the electronic billing and payment venture between First Data and Microsoft Corp., is being sold to CheckFree Corp., the Atlanta company in the same business as Transpoint. That deal was announced in February.
"Anything we do on the acquisition front will fit into our core businesses," Mr. Fote said. "That won't change. If it's Internet activity, merchant activity, debit activity, if it's certificates on transactions, it will relate to payment transactions. You won't see us buying a company that is issuing certificates on architectural designs."
Not everyone thinks First Data is on the right track. "The Old Economy companies that will benefit the most from their exposure to virtual payments are those that have integrated proprietary technology rather than those that are incubators," said Andrew Jeffrey, an analyst at Robertson Stephens in San Francisco who covers First Data. He cited Sunguard Data Systems and Fiserv Inc. as companies that "have developed integrated, proprietary Internet products" and have thus put themselves in better positions to confront the new paradigm.
Mr. Jeffrey said Mr. Fote "deserves an enormous amount of praise for containing costs," but that profit margins are narrowing in First Data's core businesses. "The dynamic of higher competition and lower prices makes it harder for a company like First Data to divert incremental dollars into development of proprietary systems," Mr. Jeffrey said.
James F. Kissane, an analyst at Bear Stearns in New York, took a brighter view. "I think First Data is extremely well positioned for the Internet and the proliferation of electronic transactions," he said. "They're in two million merchants, they're doing more than 50% of the MasterCard and Visa volume at the point of sale, so I think they should logically follow their brick-and-mortar customers on to the Internet. To the extent that they can find companies that accelerate that process, it makes sense."
Mr. Kissane did not think it was important for First Data to develop proprietary technology. The company is "not going to go out and hire thousands of Internet engineers," he said. "Heavy-duty technology, bleeding-edge-type stuff is where First Data should be spending its time, attention, and lots of money, because some of the stuff is going to work, and some of it is not. They have to place a lot of bets and see which ones pan out."
In January, First Data announced it had bought an 18% stake in Yclip.com, an Austin, Tex., company that concurrently raised $22 million from other investors. Yclip plans in June to introduce a system that will let consumers click on advertising offers and save money. Luis Gonzalez, the company's CEO, gave the theoretical example of a person who clicked on a 10% discount offer from Chili's restaurant, then went to the restaurant and spent $40 on a credit card. Yclip would arrange for the $4 discount to be debited from the merchant and credited to the customer, he said - a job that would be more easily done with First Data as a processing partner.
Needless to say, Mr. Gonzalez is thrilled at the prospect that First Data's bank and merchant customers will be introduced to his service. "We're flattered that of the hundreds of companies that throw themselves at First Data, they picked us," he said in an interview Wednesday. "Today there will be three people from First Data who will be here through the rest of the week, and last week we had five of our people up there. They don't just say, 'Yeah, we'll work with you' - they really work with you."
Duncan Shaw, executive vice president at Reciprocal, said his company's experience with First Data has been similar. Reciprocal, of New York, runs a digital clearing house that helps settle transactions between buyers and sellers of copyrighted material. In a two-month pilot that ended in February, the company worked with Simon & Schuster to operate a Web site that let people pay for and download the first chapters of unpublished novels from famous writers.
Reciprocal says the nature of its business requires that it establish a high level of trust with customers. "We're saying that we're not a bank, but we've been smart enough to work with the biggest transaction processor around," Mr. Shaw said. "That should give folks a level of comfort about how seriously we take our role."
First Data's Internet ventures are meant to complement different areas of its three central business units: First Data Merchant Services, the merchant-processing business; First Data Resources, its processing business for card issuers; and Western Union Financial Service Inc., its money transfer business. Last month each of these businesses received new leaders, all of whom report to Mr. Fote.
The most striking appointment was that of Pamela Patsley, the executive vice president who heads the merchant processing division (which includes the TeleCheck check guarantee and approval business). Ms. Patsley had been president and CEO of Paymentech Inc., the Dallas processor that competes with First Data but is also jointly owned by First Data and Bank One Corp.
Eula Adams, who had been in charge of the merchant business, was moved over to the card-issuing business, which he will lead along with David Bailis, who had been working there already.
Kimberly Patmore, an accountant who has been at First Data since 1992, was named executive vice president and chief financial officer, succeeding Lee Adrean, who left to become chief financial officer at Earthlink Inc. Mr. Adrean had been in charge of First Data's Internet initiatives, and Mr. Duques, the CEO, took on that role.
Alan Silberstein, whose career has included stints as head of the retail and consumer banking businesses at Midlantic (now PNC) and Chemical (now Chase Manhattan) banks, was named president of Western Union.
DALLAS - In the wake of Pamela Patsley's departure as chief executive officer, Paymentech, the merchant processing company has hired some new executives and changed the roles of others.George White, who had once been Paymentech's chief technology officer, returned to the company as chief operating officer Feb. 28 after a brief stint at an Internet company. Michael Duffy, who had been chief operating officer, was promoted to Ms. Patsley's former job.
Scott Cruickshank, formerly senior vice president of sales and acquisitions for First Data Merchant Services, jumped to Paymentech in the new position of chief marketing officer.
Before last year's merger between Paymentech and Banc One Payment Services - a joint venture of First Data and Bank One Corp. - Mr. Cruickshank had been managing partner for the alliance for three years. Banc One Payment Services now operates under the Paymentech name.
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