Perhaps it is the tradition of southern hospitality that led First Tennessee Bank to its merchant-processing specialty, serving the hospitality industry.
Hospitality has been a First Tennessee tradition since the 1970s. While many commercial banks fled the merchant side of the card business in the 1980s, First Tennessee stuck with its big-name hotel and motel clients, following them as far away as Canada and Puerto Rico and growing to the 14th-largest acquirer of merchant transactions.
"The acquiring business is a fee-generation business, a low-capital business," said Ralph Rolen, 42, the bank's executive vice president of retail credit. "It doesn't have the traditional return on revenues that most banks like to see, which is why many of the banks have gotten out of it.
"When you look at it on a return-on-capital basis, it is a very efficient business and very attractive," he continued. "So when you put in our strategy of diversifying into fee-income businesses and look at it from a return-on-capital basis, it makes a lot of sense for us to stay in it."
Only First Data Corp.'s merchant services unit is a bigger processor of card transactions for the hospitality industry.
First Tennessee's current customers include Westin Hotels and Resorts, Marriott International, ITT Sheraton Corp., Doubletree Hotels and Resorts, Promus Cos., Destination Hotels and Resorts, Carnival Hotels and Casinos, and more than 300 Holiday Inn franchises. Holiday Inn is Memphis-based, like First Tennessee.
By yearend, the bank says, it expects to have processed about $9 billion of Visa and MasterCard volume and about $11 billion on all cards, including debit cards.
Ralph Horn, chairman and chief executive officer of First Tennessee National Corp., the parent holding company, said all senior managers were challenged in 1989 to develop 10-year plans. These plans were to determine how the company would stay independent or be bought out.
Mr. Rolen, who became head of retail credit seven years ago, said that out of that assessment came a mandate to get bigger in both card issuing and merchant-acquiring.
The $13 billion-asset bank has the profile of regional issuer, with about $500 million of outstandings, but is a nationwide niche player in merchant processing.
"Our focus is on giving the merchant the best value for his money," Mr. Rolen said - which means minimizing processing costs and the expenses associated with records retrieval and chargebacks.
Although First Tennessee has been in hospitality since the early 1970s, when it began processing for Holiday Inn, it can trace its more recent successes in large part to Electro Data Corp.
Electro Data, which used to process $5 billion of card payments for hotel clients annually, was absorbed by Nabanco, now part of First Data, in 1990. Its headquarters in Denver was shut down in 1992.
The company's founder, Ronald R. Nation, currently First Tennessee's senior vice president for merchant services, joined the bank in 1992 with about 40 former Electro Data employees to run hospitality processing from Denver.
The bank's hotel customers credit its proprietary software for enabling an overdue modernization of payment services.
Philip A. Mervin, director of financial management at Westin Hotels in Seattle, said that, as recently as four or five years ago, credit card associations were almost exclusively focused on the retailing industry. Retailing software was "patched together" for hotel applications.
Though more than 80% of Westin guests pay with credit cards, the payments industry had not developed a standard to process guests quickly and cost-effectively, Mr. Mervin said.
"The automation within the industry was not set up to handle" quick check-ins of guests, he said, adding, "The hospitality industry was paying a higher discount rate on certain transactions because of the lag between authorization and settlement."
Today, First Tennessee's system can match the name on a credit card with a reservation, and hence the number of nights the guest is staying. It automatically dials out to get an authorization for the estimated amount.
The system also pulls down the transaction identifier, the number code attached to each authorization. When the guest checks out, the transaction identifiers go back to the associations for batching.
"Visa can automatically identify it and can tie the authorization with the settlement," Mr. Mervin said.
Transaction times and chargebacks are down significantly, he said, and his discount rates are lower because the bank's software gives the MasterCard and Visa networks more customer information.
A Westin hotel in Houston with 1,000 rooms has reduced processing of front-office transactions that used to take a full day to an hour and a half, Mr. Mervin said.
Consultants said First Tennessee is positioned well for growth in the hospitality area. Visa is estimating 1996 lodging sales on its cards of $18.9 billion, 20% more than last year. Also, Visa travel and entertainment transactions in the United States are expected to reach $72 billion. MasterCard figures were not available.
Competition for merchant processing will be fierce, but First Tennessee is in it for keeps.
"We will continue to look for ways to grow our business," said Mr. Horn, "and if acquisitions make sense, or partnerships make sense, we are always open to those types of issues. But we have no intention whatsoever of exiting the business."
"It's a severe environment and a consolidating industry," said Marc Abbey, principal of First Annapolis Consulting, Linthicum, Md. "There are a bunch of 800-pound gorillas they will have to deal with. They are not looking to be like the competition. They are looking to be better, faster, and cheaper in their target market."
Mr. Abbey said he sees a "real opportunity in the international part of the business" because "the hospitality industry is growing across borders."
"First Tennessee has distinguished itself through its ability to measure profitability of each line of business," said Sheri Ptashek, a Salomon Brothers bank analyst. "Merchant processing is clearly a strength. They grew up with a relationship to the hotel-motel industry."
