Plans to consolidate Bank One Corp.'s and J.P. Morgan Chase & Co.'s 95 million credit card accounts into one business could reopen a contest between the two largest card processors, First Data Corp. and the Synovus Financial Corp. affiliate TSYS.
In what was considered a coup for TSYS, Bank One said last year that it would shift its card processing business from First Data to TSYS, with the ultimate goal of taking it in-house. Though all of the Chicago bank's accounts still reside with First Data, plans call for Bank One Card Services to wind down its contract with the Denver processor by Sept. 30, 2005, and move its accounts to the TSYS platform.
But those plans could change now that Bank One has agreed to merge with J.P. Morgan Chase, which relies on First Data for processing. That contract has six more years to go, and Chase Credit Cards has shown nothing but support for First Data, with which it runs the nation's largest merchant-acquiring and processing venture, Chase Merchant Services.
Bank One also has a joint processing venture, Paymentech Inc., with First Data.
On Thursday, TSYS said Bank One had cleared it to continue the conversion. "It's too early to be specific, but I can say that members of Bank One's management team have directed us not to be distracted by the news of the week," said TSYS spokesman Eric Bruner. "They told us instead to remain focused on the conversion campaign, to complete it with quality and on time, and that's exactly what we're going to do," he said.
But at a town meeting for employees in Chicago on the same day, James Dimon, the chief executive officer of Bank One, was singing a slightly different tune. "We put out a lot of money to convert to TSYS because we thought it had a better capability," he said in the meeting. Referring to J.P. Morgan Chase and the First Data Resources division of First Data Corp., he said, "Now they're on FDR, so we'll have to make a decision. And all I can say is, 'FDR, we're back too.' Let's see what they can do for us that makes the most sense."
The agreement with TSYS is consistent with Mr. Dimon's penchant for in-house operations. Two years of outsourcing are to be followed by a six-year license under which Bank One would run its own operation on the so-called TS2 platform.
But integration with the Chase card portfolio would make that transition less palatable, analysts said. And, they said, it would be a bigger and more expensive job still for TSYS to win the combined business of the merged bank, which would become the largest credit card issuer in the U.S.
"When you look at the card businesses, the common denominator right now is First Data," said Christopher Penny, an analyst with Friedman, Billings, Ramsey Group Inc. "It makes more sense to stay with First Data for a while."
Robert J. Dodd, an analyst with Morgan Keegan & Co. Inc., agreed. "There are enough integration headaches," he said. "You solve one by not moving the Bank One accounts" to a different platform.
"It's sensible to stay with First Data, integrate on that platform, and worry about whether you want to bring things in-house" down the road, Mr. Dodd said.
The companies have said that combining credit card operations should save $800 million, a big piece of the $2.2 billion of savings they expect from the merger.
First Data's other relationships with the Chicago and New York banking companies may also give it an edge, analysts said. J.P. Morgan Chase and First Data are equal owners of Chase Merchant Services, the largest merchant acquirer in the United States. And Bank One and First Data co-own the merchant processor Paymentech Inc. (Bank One owns the majority stake.)
"Those are deep institutional relationships on First Data's side," said David M. Scharf, an analyst with JMP Securities LLC. "It's certainly reasonable to think those broader relationships might impact how a combined bank approaches all of its processing contracts."
But while speculating on the financial incentives to choose one processor over another, analysts may be giving too little weight to Mr. Dimon's vision of an in-house operation like rival Citigroup Inc.'s.
Andrew Jeffrey, an analyst with Needham & Co., said such a consideration is hard to factor in. "Who knows how that stuff plays out?" he said. "Bank One has expressed the cultural and subjective view that control over internal systems is desirable" he said, but outsourcing - and therefore First Data - make more sense "from purely economic considerations."
Mr. Bruner said TSYS, of Columbus, Ga., has completed the "design and conceptual phase" of that campaign. It will now build the bank's processing system as it enters a "test and dress-rehearsal" stage, with the final conversion of all card accounts from First Data's platform to the TSYS platform to take place during the fourth quarter.
"The conversion is on schedule," Mr. Bruner said. "It's important for me to underscore the quality of the relationship we're building with Bank One. Our tremendous rapport gives us a lot of confidence."
In an e-mail statement, a First Data representative said that though both banking companies have "important relationships" with First Data, "it is too early to determine what this merger means for us."
Analysts said that losing the merged entity's card processing business would not hurt either TSYS or First Data significantly in earnings. But Mr. Scharf noted: "Card services is a minor contributor to First Data's growth, whereas it's the core of TSYS' business - so the stakes and risks are a lot higher for TSYS."
This and another pending merger - First Data's acquisition of Concord EFS Inc. - may also threaten some ancillary First Data relationships. Bank One runs its automated teller machine network through Concord's Star network and is widely rumored not to be renewing that contract when it comes up this year. Chase uses First Data's NYCE ATM network, which First Data is divesting to complete the acquisition of Concord.
So First Data could lose both Bank One and Chase as customers of its ATM business.
"People may reevaluate those decisions when mergers happen," said John Kraft, an analyst at D.A. Davidson & Co. But over all, he said, there is more chance of the JPM Chase-Bank One deal benefiting First Data than hurting it.
Mr. Jeffrey of Needham & Co. agreed. "Multiple items are now up for grabs," he said. "First Data will probably come out no worse," and may come out better.
As for online banking, more than one analyst noted the potential windfall to the Portland, Ore., vendor Corillian Corp., which has contracts with both J.P. Morgan Chase and Bank One. Both banking companies have discontinued contracts with the electronic bill payment vendor CheckFree Corp., which is based in Norcross, Ga.
