There's gold in bank card transactions, and the prospectors have crowded in.

As in a gold rush, victory has gone to the swift: A select few companies from outside traditional banking circles have staked most of the claims. In roughly a decade they have redefined the specialty of merchant processing, changed the terms of competition, sparked new waves of innovation, and forced the banking industry to come to grips with still another case of market-share erosion.

But as the business of handling merchants' card transactions has gotten bigger and with more of it consolidated among a few elite players, the differences between banks and nonbanks have become blurred. Former rivals approach each other as friends or allies; historical concerns that banks might be losing control of part of the payment system have given way to a scramble among an even wider array of potential competitors and partners.

The stakes are higher than ever, and there may be room for more contenders.

The Nilson Report said that last year $500 billion was charged on bank cards in the United States and estimated that in 10 years the annual figure will triple.

Yet as banks, independent processors, and a sizable number of agents known as independent sales organizations jockey for position, conventional wisdom holds that only a handful will survive, pushing out the smaller entities that serve 10,000 or fewer merchants. And as the big companies gobble up their competition, they must reach for maximum economies of scale and minimize their unit costs.

Leading the charge is CES/Nabanco, which combines the merchant activities of information-processing powerhouse First Data Corp. Also in the top rank is National Processing Co., which is controlled by the Cleveland-based banking company National City Corp.; and First USA Paymentech, an offshoot of fast-growing card issuer First USA Inc.

BankAmerica Corp. and Banc One Corp. stayed in the business while many of their peers left, and now say their strategies have been vindicated. Nova Information Systems and PMT Services are prominent in the second tier of nonbank specialists.

Just this year came two new forces, competing joint ventures of the MasterCard and Visa organizations designed to keep the banks' hands in the retailers' till, so to speak. (See related article on page 12.)

The drive to acquire or ally with complementary businesses that can provide a complete merchant-processing service has been fueled by a need to increase technological sophistication, streamline infrastructures, reduce overhead, and push prices down.

"Everyone in the world knows this is a scale business, and all that hope to continue to compete in this industry are doing everything they can to enhance their scale," said Edward Grzedzinsky, chairman and chief executive officer of Nova Information Systems in Atlanta. "We are certainly no stranger to that process."

Nova, PMT Services, National Processing Co., and First USA Paymentech have all completed initial stock offerings in recent months, giving them capital to fuel expansion.

"Our business is national retail merchants," said Tony G. Holcombe, president and chief executive officer of National Processing in Louisville, Ky. "We want to move downstream into the middle merchant, and reach into the mom and pop organizations. We will sell our product through PMT."

In that recently announced alliance, National Processing, which usually processes for large national merchants, would provide back-end support for PMT's growing portfolio of smaller, local retailers.

"You have this tremendous pressure to consolidate and concentrate taking place within the United States," said Roger Peirce, group president of electronic funds services for First Data Corp., the indisputable titan not just of merchant processing, but of account processing for credit card issuers.

Mr. Peirce, who is based in Palo Alto, Calif., said the natural trend is toward "large concentrated providers of service."

Hackensack, N.J.-based First Data Corp. underscored this message last year with its acquisition of First Financial Management Corp., allowing it to combine First Data's CES subsidiary, then the No. 3 merchant processor, with First Financial's Nabanco, the biggest in the business.

As a giant, if not quite dominant, in processing on both the cardholder and merchant sides of the card business, First Data caused suspicions that it was creating a "closed loop" that could threaten MasterCard's and Visa's hegemony. But through CES - a one-time Citicorp spinoff known as Card Establishment Services - First Data tried to defuse those criticisms by forming joint ventures with banks. First Data would do the processing, while the banks controlled the relationships with merchants.

Expanded after the Nabanco merger, the merchant-bank alliance strategy will eventually result in all of First Data's major customers' being parceled out to partners, company officials said. Current alliance participants include

Boatmen's Bancshares, Wachovia Corp., Bank of Hawaii, Barnett Banks Inc., Banc One, NationsBank, U.S. Bancorp, PNC Bank Corp., Wells Fargo Corp., and Huntington Bancshares.

A banker involved in an alliance, who spoke on condition of anonymity, said First Data's acquisitiveness has caused some sensitivity.

"They are still involved with bringing together some fairly large and complex entities," he said. "This doesn't get done overnight. Integration takes time and focus. Those issues have probably slowed somewhat our maximizing the potential of our alliance."

This year, First USA Paymentech in Dallas, the third-largest merchant processor, acquired a 10,000-merchant portfolio from Mercantile Bank in St. Louis, with annual volume of $35 billion.

After its initial public offering, which raised $141 million, Paymentech bought Gensar Holding Inc. for $170 million. Before the acquisition, First USA had primarily outsourced its processing functions.

"They see the handwriting on the wall," said Paul Martaus, president of Martaus & Associates, Clearwater, Fla. "They are locked in a death struggle with FDC."

"We needed a larger platform for front-end processing, and (Gensar) had a lot of product-feature functionality that was attractive to us," said Pamela Patsley, president and chief executive officer of First USA Paymentech. "They were really the largest independent processor that was out there, and it was a very good strategic move for us to make that acquisition."

Ms. Patsley said the deal also allowed First USA to enter the third- party processing arena. But banks that had processed through Gensar also saw First USA as a competitor, and they were alarmed.

"They had a lot of independent sales organizations and banks that they provided processing for, which launched us into that market as well," Ms. Patsley added.

Industry analysts wonder how long the pace of acquisitions will continue, and if investors will stay interested.

The transaction processing business rode the recent, nationwide crest of initial public offerings, said Nicholas Ferrante, president of Ferrante Financial Services Inc., Chatsworth, Calif. Nova and PMT had great timing, he said, adding, "There will not be the same opportunity for others."

"Companies will be saying, 'Now that I am public, I must grow at a specific rate to keep my stock value,'" Mr. Martaus said. "That's where the rubber meets the road."

The current shakeout is just the most recent chapter of a saga that started in the 1970s, when major banks began reevaluating their credit card strategies. Most found the profit margins on transaction processing, typically 0.5%, less worthy of their attention than those on the far more attractive card-issuing side.

Large national merchants also began to throw their weight around, resisting discount rates on transactions that went above 2% of the sale amount - which increased the margin pressure on lower-volume operators.

Edgar Dunn & Co., a San Francisco-based consulting firm, said banks representing about 10% of merchant card sales, some $15 billion, left the market between 1986 and 1988.

Independent sales organizations - many staffed by people who through layoffs lost merchant jobs at banks - filled the void. But as the years passed, banks wanted back into a business they realized could still be profitable.

"Some banks that exited the business figured out that they gave away something valuable," Mr. Martaus said. "They found if they have a merchant relationship, there is more to it than (being the) merchant depository."

"We have an edge over the nonbanks," said Sharif Bayyari, executive vice president and manager of merchant card services at Bank of America. "Why? Because we have the branch delivery system as a core competency."

David L. Strider, chairman and president of Banc One Point of Sale Services Corp., said Banc One's business-banking and merchant portfolios are symmetrical, providing a good opportunity for cross-selling.

"What we have tried to do is take advantage of the fact that we are connected with a much larger and resource-rich corporation, so we don't have the difficulties of capital accumulation," he said. "We can use the corporation's capital, and in return we provide a pretty good use of that capital."

Most experts agree the consolidation trend is far from over, but the dynamics could change with new forms of electronic commerce.

"There will be increased competition and the ability to process large amounts of data efficiently will be very important," said Peter T. Dunn, managing director of Edgar, Dunn & Co. "Interface between electronic commerce and data mining, and the ability to process this information effectively, will be the key to success."

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