There was a time when banks signed up merchants to accept credit card transactions and then processed those transactions.

Then banks decided the merchant business wasn't a core area and sold out, making way for the rise of third-party processors.

But these days some banks have gotten back in the business, either on their own or by hooking up with those third-party processors.

During a recent forum, merchant acquirers and merchant processors debated the pros and cons of bank alliances, as well as the viability of going it alone.

Daniel Rogers, vice president of merchant alliance liaisons at Comerica Inc. in Detroit, spoke in favor of the alliances at the second annual transaction processing and merchant acquiring conference in Santa Monica, Calif.

Comerica is a $34 billion superregional bank. It entered a 1996 alliance with the No. 3 processor, National Data Corp., Atlanta.

Mr. Rogers said the most difficult thing to predict about an alliance is the cultural compatibility of the two organizations involved.

"It's a lot like a marriage," he said. "You have to keep the in-laws happy."

Mr. Rogers said Comerica sought to increase the growth rate of its merchant division "by 50%, and wanted to keep the merchant attrition rate at 10%." The bank also wanted to boost individual merchant transaction volume from $70,000 to $140,000 a year.

He said banks must look for their "window of opportunity," since there is a line waiting to form alliances.

Steven D. Wulfekuhle, vice president and sales manager, Michigan National Bank, Lansing, Mich., spoke against alliances.

He said that in the early 1990s Michigan National jettisoned the card- issuing part of its business but decided to keep the merchant acquiring and processing side, bucking the national trend of banks quitting the merchant business.

He claimed it's a myth that alliances increase profits and market share.

"The majority of alliances do not work out," Mr. Wulfekuhle said. "Long- term viability is on the other side of the graph."

He said alliances tend to displace customer contacts, putting ownership of the merchant relationship in the hands of a third party.

Mr. Wulfekuhle urged banks to "think outside the alliance model," and "create new partnerships."

Michigan National has a processing agreement with Vital Processing Services, the partnership between Total System Services Inc. and Visa USA.

But there is no company more immersed in alliances than the market leader, First Data Corp.

First Data is the largest third-party processor and operator of bank alliances in the industry. First Data has 12 alliances, where it puts up 50% of the merchant portfolio, and the bank puts up the other 50%. BankBoston is the most recent addition to the fold.

Scott Loftesness, president of the processor's merchant unit, First Data Merchant Systems in Palo Alto, Calif., said the merchant processing business is now First Data's largest. It has grown from annual revenues of $100 million in 1993 to $1 billion in 1996.

Mr. Loftesness said about $1 billion in equity money has been invested in public transaction processors over the last few years.

First Annapolis Consulting said between 1995 and 1996, First Data alliances as a group lost 2% of market share, capturing 36.5% of bank card transactions, probably because "people were busy putting deals together and not selling to merchants."

First Data alliances currently process $192.1 billion in volume a year.

In the fast consolidating industry, nonbank acquirers, which held only 16.5% of the market in 1989, are steadily picking up share, grabbing 45.3% of the market in 1996.

There are still gains to be made, Mr. Manfred of First Annapolis said. The top 10 processors in the half-trillion-dollar merchant processing business control less than $200 billion in transactions.

And merchant processing companies, formerly seen as the "red-headed stepchildren" of the credit card industry, as one industry observer has called them, are now held in high regard by investors.

"This dirty little business is now the darling of Wall Street," Mr. Manfred said.

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