MasterCard International Inc. and National Data Corp. said Thursday that they will combine their transaction processing businesses to be more competitive against other industry giants.
They have agreed to form a new company, Global Payment Systems, that will be majority-owned by National Data, an Atlanta-based computer services company with a long history of processing financial transactions.
It will give the banking industry a new alternative to First Data Corp., which has established itself in recent years as a dominant provider of credit card support services to retail merchants. But compared to First Data, a transaction-processing conglomerate with $4 billion of annual revenue, Global Payment Systems will begin as a niche player, at about $175 million, with 1,100 employees.
Still, National Data chairman Robert A. Yellowlees, who will be chairman and acting chief executive officer of the new enterprise, called the announcement "one of the most significant in the history of the payment systems business."
The company will absorb the MasterCard Automated Point of Sale Processing organization, known as MAPP, and 140 employees in that group. MasterCard will receive an undisclosed cash payment from National Data and will have a minority ownership position that entitles it to a board seat.
Global Payment Systems will be based in Atlanta and have satellite operations in St. Louis and Purchase, N.Y., which are principal MasterCard sites, as well as in Dallas, Los Angeles, Toronto, and London.
The MasterCard-National Data pairing comes six months after Visa U.S.A. and Total System Services Inc., First Data's closest competitor in processing MasterCard and Visa accounts for banks, announced a joint merchant processing venture called Vital. It has yet to begin operations.
Both Visa and MasterCard have said their initiatives are designed to help, and not compete with, member banks that have struggled in recent years to stay in the merchant-processing game. Leaders like Nabanco and Card Establishment Services - both recent acquisitions of First Data's - combined economies of scale with a tight focus on merchants' needs to drive many major banks from the business.
But First Data has also struck a bank-friendly pose, offering to keep its customers in control of merchant relationships while Nabanco or CES does the processing.
Mr. Yellowlees said National Data and MasterCard are responding to banks' perceptions of First Data as an enemy.
"There is a growing demand for outsourcing from independent processors who will not compete (with banks) and will supply end-to-end processing," Mr. Yellowlees said Thursday in a telephone press conference.
A key to the new venture's ability to compete will be its size and efficiency.
Mr. Yellowlees said National Data's telecommunications network processed 2.5 billion transactions last year, and has capacity for further growth. The company expects to be in a position to take advantage of transaction growth stemming from technologies such as smart cards and the Internet.
"Global Payment Systems will merge National Data and MAPP to achieve economies of scale while growing the combined customer base," said Heidi Goff, a MasterCard senior vice president. "Our vision of the future suggests that a partnership of this nature is the way to develop a noncompetitive but aggressive environment to help our members."
Though the new company will compete with Vital, National Data's relationship as one of Total System's largest customers for merchant accounting services will continue.
Mr. Yellowlees called the new organization a "terrific investment opportunity" and hinted that an initial public offering might be in its future.
Richard Weingarten, principal analyst at Montgomery Securities in San Francisco, said Global Payment Systems "will be a service for banks that want to stay in the merchant processing business."
He said it's a good move for National Data from a stock perspective, which the market confirmed Thursday. The Atlanta company's shares were up $4.375, to $29.75. "NDC traded at discount to a lot of other companies," the analyst said, and "this does unleash shareholder value."
He pointed out that in a scale-driven business characterized by consolidation, participants need to be big, and companies like Total System that are strong in "back-end" accounting and processing will search out a front-end partner, as Total System did with Visa's Merchant Bank Services unit, which is the industry's biggest in terms of the gross number of point of sale transactions handled.
Mr. Weingarten said he does not expect the MasterCard-National Data venture to be a major threat to First Data.
Marc Abbey, principal at First Annapolis Consulting in Maryland, concurred that "consolidation is the name of the game. ... Both are strong organizations. I'm sure they'll meet with great success with financial institutions."
Though Mr. Yellowlees said Global Payment Systems would offer far more back-end services than Vital, a Visa spokeswoman said the two companies would have a similar product profile.
Global Payment Systems plans to expand its services to the Asia-Pacific region, Europe, and South America; Visa said it already has operations in Brazil and Japan.