The second-largest merchant processing company has teamed up with a smaller counterpart to round out their services.

In a deal announced this week, Louisville, Ky.-based National Processing Inc. said it will provide merchant card authorization and back-end processing services to PMT Services, Nashville, in a multiyear contract.

Terms were not disclosed.

"National Processing has been a processor for large tier 1 merchants like KMart and Wal-Mart," said Paul Martaus, president, Martaus & Associates, Clearwater, Fla. "If they lose two or three of the very large merchant relationships, they are vulnerable. What they have to do is expand into other markets and gain scale in those markets. So they have to expand to tier 2 or tier 3."

While giving National Processing access to a base of smaller merchants, the deal expands options for PMT's clients. PMT has similar agreements with other processors.

"We've demonstrated our ability to acquire and build merchant portfolios and integrate those at our (processor) of choice," said Richardson M. Roberts, chairman and chief executive of PMT. "This opportunity with NPC strengthens our ability to acquire portfolios and convert them in a timely fashion."

PMT has been on an acquisition tear of late. It has added three portfolios with a total of 11,000 merchant accounts in the first quarter of fiscal year 1997. It now has 105,000 merchant accounts.

"What they need is bread and butter transaction processing," said Mark D. Hughes, a securities analyst at Equitable Securities Corp., Nashville. "PMT is eager to get merchants shifted over to their network as quickly as possible. NPC will be a good partner in that regard."

National Processing Co., the operating company of National Processing Inc., is the nation's second-largest processor of MasterCard and Visa transactions, with more than 125,000 merchant outlets and $80 billion in sales. The company, formerly National City Processing, made an initial public offering in August.

Mr. Martaus said that National Processing's relationship with National City Bank will give PMT Services greater access to the Federal Reserve and Visa and MasterCard interchanges.

"It's a good combination. It gives us an opportunity to sell in that marketplace by partnering with them," said Tony G. Holcombe, president and chief executive of National Processing. "It's been part of our strategy for a year or two. We wanted to partner with PMT to leverage our processing scale into a type of market we have not traditionally been in."

Mr. Martaus said the deal spells a change in philosophy at National City. "They want to get into smaller businesses because they know there are more revenues to be made there."

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