After sounding repeated alarms about banks' retreat from providing credit card services to merchants, MasterCard and Visa finally did something about it.
Each card association enlisted the help of a transaction processing company to preserve its member banks' stake in what is known as the merchant processing, or acquiring, portion of the business.
Visa U.S.A. announced a joint venture, Vital Processing Services LLC, with Total System Services Inc. last year. The Tempe, Ariz., company, with 400 employees, opened in May and expects $100 million of revenue for 1996.
MasterCard International of Purchase, N.Y., announced its entry, Global Payment Systems, in February with National Data Corp. of Atlanta.
Vital had more symbolism attached to it. San Francisco-based Visa had become the most vocal antagonist of First Data Corp., the card processing leader, particularly after Visa systems chief Roger Peirce defected in 1994 to spearhead First Data's aggressive drive on the acquiring side.
Total System, meanwhile, is First Data's closest rival in account processing for card issuers. Total System also played a significant, though quiet, role supporting its banks' merchant businesses, which became more obvious with the formation of Vital.
In contrast to Vital, a 50-50 partnership, MasterCard retained only 10% of Global and a single board seat. National Data controls the operation, with estimated 1996 revenue of $175 million and 1,100 employees.
In both cases, the idea was to offer banks and their merchant customers an end-to-end service. Visa married its Merchant Bank Services unit with Total System's back-end processing capabilities.
MasterCard contributed to Global its front-end point of sale processing program, known as MAPP. And National Data, taking cooperation to another level, relies for some of its back-end processing - merchant clearing and settlement - on Vital.
With 2.5 billion transactions annually passing through Global's system, and more than 3 billion expected to be processed by Vital this year, the two companies became immediate forces to reckon with.
Both take aim at First Data, the $4 billion behemoth that shook up the merchant processing market when its 1995 merger with First Financial Management Corp. made it by far the largest in the field.
With some bankers wary of First Data's designs on their relationships with retailers, MasterCard and Visa sought to give them a profit-generating alternative with the necessary scale economies.
Vital says it is dedicated to assisting bank customers, pointedly saying it has no intention of competing for their merchant accounts.
Global, citing National Data's capabilities in high-volume transaction processing, cash management, and electronic data interchange, claims a more robust set of offerings. For example, a link to National Data's medical processing business could be attractive to banks serving the health care industry.
In pure point of sale volume - the "front end" piece of merchant processing - Visa was already No. 1 before contributing that strength to Vital. First Data is second and Global will be third, said Liam Carmody, president of Carmody & Bloom in Ridgewood, N.J.
It is too early to assign the new companies ranks in terms of back-end merchant acquiring, industry experts said.
Fred Gumbel, Vital's chief executive, said Vital's bank-friendly position is paramount.
"We don't go to merchants directly," said the payments industry veteran, who was previously president of an Electronic Data Systems Corp. electronic commerce business and a senior executive at First Bank System Inc. "We do it at the behest of our customers."
Mr. Gumbel insisted that Vital is unique in that stance. He said First Data, despite a merchant-bank alliance program, and Global, despite MasterCard's involvement, still compete head-to-head with banks for primary merchant relationships.
"We aren't out with sales forces selling Visa and MasterCard processing to merchants," said Mr. Gumbel.
Robert Yellowlees, National Data's chairman and Global's acting chief executive, acknowledged that Global's parent sells directly to merchants. Even so, he described National Data's merchant services unit as "a partnership arrangement with banks. We don't overtly compete with banks in any material way."
Mr. Yellowlees noted that some banks use processors to reduce the risks in the credit card business such as fraud, chargebacks, and the unique hazards of serving telemarketing or mail-order companies.
John B. Benton, president of Benton International, a Torrance, Calif.- based consulting firm, said connections to the card associations notwithstanding, there is little difference among Vital, Global, and other processors.
"They're profit-making companies that follow the same rules" as their competitors, Mr. Benton said. "The idea that there's anything about Vital that is fundamentally different than First Data is suspect."
With First Data's alliance program attracting major banks like Banc One, NationsBank, U.S. Bancorp., and Wachovia, "a large contingent of banks view First Data as a partner," said Richard Weingarten, senior analyst at Montgomery Securities in San Francisco. "I think it's extreme to say FDC has become a huge threat to banks."
Mr. Benton, who recently finished a stint as acting chief executive of Deluxe Data Systems, a major electronic funds transfer processor, said "the real story" of the acquiring ventures is that Visa and MasterCard are diversifying into unbranded, profitable businesses. He believes further transformations will lead to these associations' becoming viable companies, trading on the New York Stock Exchange.
Mr. Benton said he "welcomes Visa and MasterCard into the (processing) game. Are they different than anyone else, in truth? Of course not, but more competition means lower prices and better products."
Both Global and Vital claim some of the same clients, like BankAmerica Corp., which has outsourcing relationships with many processors as well as a strong acquiring business in its own right.
Vital recently signed First National Bank of Omaha, best known for its merchant-processing niche in the telemarketing industry. National Processing Co. moved both front- and back-end merchant accounting and point of sale business to Vital. And through Nova Information Systems, First Union converted $6 billion in processing business to Vital's back-end processing.
Mr. Gumbel said his goals for Vital include domestic growth of 35% to 40% a year, from existing and new customers. The company also has its sights on international expansion.
Global, well established in Europe, Asia, and Canada, will pursue international markets aggressively. With cash management and electronic data interchange services, the company is winning business from multinational corporations like Unilever and banks such as Dia-Ichi Kangyo in Japan.
Global "has very good earnings and cash flow," said Mr. Yellowlees. "I'm confident in our ability to finance future growth."
Alan Welch, senior vice president of commercial card products at Wachovia Corp., who is responsible for the merchant alliance with First Data, said the conversion hasn't been "without bumps," but for the most part the company is satisfied.
Will other banks flock to processors that are owned by or affiliated with MasterCard or Visa? Mr. Welch said market forces hold the answer: "In the long run, whoever offers the most efficient and effective services and the greatest value" will get the business.