As a nation we like rankings. We rank all kinds of things: Companies, cities, television sets. Usually, the reasons for a particular ranking are clear. Companies are ranked by revenues, cities by the number of jobs and hospitals they have, and television sets by the clarity of their picture.
But when it comes to payment card transaction processors, the picture is anything but clear. A few publications print rankings of the largest card processors, but the companies themselves dont agree on much when it comes to deciding exactly how they should be ranked. Processors favor several different measures of transactions, not surprisingly usually settling on the one that makes their performance look better.
Paul R. Garcia, chief executive officer of Global Payments Inc., National Data Corp.s e-commerce spinoff, found that out when he stated in an article that ran in these pages that his acquisition of Canadian Imperial Bank of Commerces merchant processing business would move Global Payments into the No. 2 spot in that category. His reasoning was that the two processors combined are projected to settle 2.4 billion transactions in 2000, comfortably ahead of No. 2-ranked Vital Processing Services of Tempe, Ariz., which reported 1.78 billion settled transactions for 1999.
Not so fast, said Vital. A company spokeswoman said it was true that it had settled 1.78 billion transactions but that it had also performed four billion transaction authorizations. According to Vital, authorizations, not settlements, are the right way to size up transaction processors.
Yet a third point of view in the industry is that the dollar value of transactions processed gives the clearest view of the companys business.
Who is right?
One answer is that it depends, among other things, on how you define a transaction. One way or another, a great deal is at stake for these companies, since their bank customers would prefer to do business with a processor that can demonstrate its clout through market share.
The right way to measure is based on the authorization at the point of sale, insisted Marc Cochrane, senior vice president and director of business development at Vital Processing. For every transaction that is initiated, you have to get it authorized.
For Vital Processing, which specializes in providing millisecond-fast authorizations that allow a consumer to swipe a card and make a purchase, that authorization typically marks the end of the companys involvement with the purchase.
But processors that use a different yardstick point out that a transaction is not really finished until the purchase is settled at the end of the day. Merchants frequently use one processor for authorizations and a different one to transmit end-of-day transaction reports to their acquiring bank, pay discount fees, and receive a net deposit into their accounts. That financial settling of transactions has its own set of supporters who vote that settlement counts.
Kenneth G. Reid, Internet compliance manager for Total System Services Inc., which is a part owner of Vital, takes the settlement position. Normally, the numbers we give out are posted transactions, he said. His company processes card accounts for bank card issuers, not merchants.
Even so, Mr. Reid said, it is just as fair for Vital to count authorizations. Their main business there in Tempe is as a terminal provider of authorizations, and their volume would be the number of authorizations they process, he said. To them that is a transaction.
For their part, Vital executives will grudgingly admit that a settlement-oriented processor could view things in a way that Vital does not. Paul is measuring it differently based on his business model, Mr. Cochrane said of Mr. Garcia.
Processors specializing in settling transactions insist that their end of the transaction involves more work, brings in more revenue, and deserves the nod as the heart of the transaction.
Settled transactions should count because that is how money is being handled between associations and merchants, said Thomas A. Wimsett, president and chief executive officer of National Processing Inc., Louisville, Ky.
Some processors that handle both parts of the transaction reason that because both authorization and settlement require a separate query through different computer systems, each should count as a transaction. The undisputed industry leader in merchant processing as well as card issuer processing, First Data Corp. of Atlanta, follows this reasoning, as does Dallas-based Paymentech.
It depends on who you ask, said Lori E. Kastrick, vice president of settlement and industry services for First Data. If you ask an issuer they would probably say the transaction starts at the time of the authorization. If you talk to a merchant the transaction is when he gets paid for it. There really are two transactions.
Though the industry newsletter The Nilson Report occasionally ranks processors, company president David Robertson said the publications rankings depend on numbers reported by the processors themselves. When it comes to the dispute about authorizations versus settlements, I dont really make any judgments as to what is more correct, he said.
Mr. Robertson agreed with other industry experts that a processors business focus would probably dictate its definition of a transaction. There is a distinction that needs to be made, he said. Vital is a pure third-party processor, and National Data is both a third-party processor and owner of the contract with the merchant.
James J. Daly, editor of Credit Card Management, published by Thomson Financial, parent company of American Banker, says his publications rankings also rely on numbers reported by processors, which typically emphasize the numbers they find relevant. This can get very murky, he said. Like Mr. Robertson, he declined to take sides. They are both right when you look at the narrowly focused arguments.
Though the companies differ on how to count transactions, they agree on the importance of rankings.
A lot of major merchants, when they are in the process of evaluating their credit card processing relationships, will turn to Nilson rankings to see who the biggest players are, Mr. Wimsett of National Processing said. That is who they target for RFPs.
Companies that are publicly traded, including National Processing and, in the near future, Global Payments, say that dollars are a more accurate measure of a companys strength than transaction numbers. Mr. Wimsett said he prefers that his company be ranked by dollar volume settled.
Dollars are more important than the number of transactions, he said. It lays out who is handling those transactions from a settlement standpoint.
U.S. Bancorp Piper Jaffray equity analyst Bradley A. Berning, who covers the processing industry, says he too would prefer to rank companies by the dollar volume of the transactions they process. The problem, he said, is that the companies usually dont provide that information.
Out of necessity, Mr. Berning looks at transaction numbers both settlements and authorizations when he reports rankings. It is not necessarily the best way, he said. But it is the only way we have to look at them.
Mr. Garcia of Global Payments agreed: I think it is perfectly acceptable to measure by settled transactions, by volume, or by authorized transactions, but at the end of the day probably the most important measure is, What kind of revenue do you produce?