Merchant services: High-Tech Alliances to Grow Share

More banks are forming subsidiary alliances with high-tech companies to grow their share of the market for merchant services. But experts say there is a limit to the number of potential alliances that the marketplace can support.

To solidify its place as a provider of merchant services, Cleveland- based KeyCorp and Nova Information Systems, Inc. , of Knoxville, TN, and Atlanta, recently formed an alliance in which the two will jointly own a new company, Key Merchant Services. KeyCorp will contribute its merchant sales and marketing workforce of 90 associates and merchant services contracts representing $5.1 billion in annual credit and debit card sales. Nova will provide technology and back-office support, making it one of the top five U.S. payment processors. Nova has other alliances including First Union, FirstStar and CrestStar.

KeyCorp, which has been providing merchant services since before the advent of MasterCard and Visa in the 1960s, is one of the nation's largest providers of financial services to small businesses. "Being able to provide a full suite of services is very important," says David Campbell, evp, payment services at KeyBank, KeyCorp's banking unit. "We felt KeyBank would be best served by focusing on marketing and distribution, and tech development would be best served by a partner. The alliance is a way for us to connect with leading technology without giving up all of our management control."

KeyCorp identified a fundamental shift in the merchant services industry and jumped at the opportunity, says Campbell. "Merchant services today is more than processing credit card transactions for the cheapest dollar. It's empowering small businesses by analyzing their transactions to provide vital management information services, such as data on customers' purchasing habits."

Campbell says that banks that continue to purchase third-party technology and fail to make similar alliances will be locked out by the competition because high-tech companies hold back their leading-edge technology for their best customers. "The acquiring industry has been going through a rapid consolidation with the number of players shrinking," he says. "Eventually, alliances like ours will no longer be available. Banks will be forced to sell products that are one or two generations old and they're just not going to be successful."

-peterson tfn.com

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