Banks that have not aligned with top merchant processing firms like Nabanco and Card Establishment Services are on the verge of extinction in the acquiring side of the credit card business.

That prediction, together with many other "fearless" forecasts, made up the bulk of Richard N. Speer Jr.'s presentation at the American Bankers Association bank card conference last week.

Mr. Speer, chairman and chief executive officer of an Atlanta-based consulting firm that bears his name, hosted a well-attended session titled "New and Emerging Merchant Markets."

In it he touched on three key areas in merchant processing: the recently announced alliances between banks and third-party processors, a debate over surcharges, and the need to achieve cost efficiencies through scale.

"The top five bank card acquirers represent more than 50% of the annual volume, and the top 10 represent 69%," said Mr. Speer. "We expect that latter number to grow to 80% in five to 10 years."

Mr. Speer then suggested that the market share concentration is driving consolidation and what he characterized as "the all-important" alliances.

"You need scale. That's it," he said.

Mr. Speer's presentation was followed by a discussion group, led by William Westervelt, a principal with First Annapolis Consulting Inc., in which bankers, card association employees, and processors discussed the issues raised by Mr. Speer.

Banks need to realize the advantages they bring to any alliance with a third-party processor, said Mr. Speer and Mr. Westervelt.

One of the reasons First Data Corp. or Card Establishment Services are willing to go into alliances "is that the banking industry's branch structure is something they couldn't hope to duplicate, and gives them access to a broad base of customers," said Mr. Westervelt. "And banks bring brand identity to the table."

That brand identity is especially important with small, local merchants, a category characterized by both speakers as growing in importance. Such merchants, said participants in the discussion group, tend to be price shoppers - always searching for a good deal. They are not, said bankers, as concerned about service.

That is probably a good thing, since, as one banker pointed out, "Nobody we've met anywhere is about to win the Malcolm Baldrige award for servicing merchants."

Small merchants are also interested in assessing surcharges for use of cards - credit or, more likely, debit - at the point of sale. The card associations have successfully blocked surcharges in those states where legislative action overrules their procedures, but the huge and potentially lucrative government sector may change that philosophy, said Mr. Speer.

"The total government market is $100 billion," said Mr. Speer. "I predict that card associations will soon allow surcharges to be charged to customers to attract the huge government market.

"If this approach is allowed for government, why not Sam's Club?"

MasterCard and Visa officials said the surcharge issue is one that has caused great debate within their boardrooms, but neither association would comment on whether their surcharging policies would soon change.

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