Five years ago National Processing Inc., the second-largest processor of credit card transactions for merchants, was at the top of its game. Then, like Icarus, it crashed and burned, falling so hard that Wall Street nearly wrote it off.

The past few years have been humbling, but the Louisville, Ky., company, has a happy story to tell now - one that analysts say shows it has regained much of its vitality.

A new executive team has engineered the transformation, which includes shedding money-losing units and focusing on regional merchants.

The troubles began in 1996 when Wal-Mart Stores Inc., its largest merchant card client, took most of its business to rival First Data Merchant Services, siphoning 12% of National Processing's card processing revenue. Just weeks before the defection National Processing was spun off from its majority owner, Cleveland-based National City Corp., in an initial public offering.

National Processing, now 88% owned by National City, barely had time to see its symbol pass along the ticker before trouble started.

"When you lose a mom-and-pop merchant, you don't lose sleep at night, if it's one location," said Thomas A. Wimsett, president and chief executive officer. "When you lose a Wal-Mart, your hair falls out and it turns gray."

Things got worse. A few months later it lost United Airlines' business to First Data.

These events, in combination with the sudden departure of key executives, wounded transaction volumes and earnings and sent stock prices tumbling in what Mr. Wimsett called a "body blow" to the company.

For the last two and a half years National Processing has been putting its disappointments to good use. The company, once focused strictly on national chains like Kmart Corp. and Target Corp., is aggressively targeting smaller merchants, eager to diversify revenue streams and leave the company less vulnerable to big losses. Additionally, he said, regional merchants typically produce fatter profit margins than big chains, which have enough buying clout and volume to garner heavy discounts.

Perhaps more importantly, National Processing - historically a conglomerate of seven business units including check services, remittance processing, freight billing services, and corporate payables - divested itself of four money-losing units in the second quarter of 1999. It now focuses primarily on its card processing business and, to a lesser extent, its administrative outsourcing and travel services units, which have been blended into one division.

"The last 18 months have really been a comeback for the company," said 36-year-old Mr. Wimsett, who has worn various hats since 1983. That is when the old National Processing Co. was created as a subsidiary of First Kentucky National Corp., which later merged with National City. (The processing company is still widely known as NPC.)

Indeed, the numbers show that National Processing has reversed its downward spiral. Net income for 1999, excluding the restructuring charges associated with the divestiture, was $34.3 million, compared to $15.3 million in 1998 and $21.1 million in 1997. For the card processing unit, net income for 1999 was $21.6 million, up from $12 million in 1998 and $9.5 million in 1997. Transaction volume has similarly bounced back, growing 28% in 1999, compared to 18% growth in 1998, and 2% in 1997.

"They've delivered on the financial performance as promised, and I think the future looks much more positive today than it did a couple of years ago," said Joseph C. Duwan, an analyst at Keefe, Bruyette & Woods Inc. "They deserve a lot of credit for refocusing."

Analysts point to a new slate of senior executives as a positive sign. Mr. Wimsett, named CEO in September, succeeded Robert E. Showalter, who retired after two and a half years at the helm. Chief financial officer David Fountain, 40, was promoted from within after Jim W. Cate resigned in July. Mark D. Pyke, 39, executive vice president of merchant services, worked for First Data before joining National Processing.

"It's really been in the last two years where I think Tom has really started to shine," said Robert G. Seifers, who is chairman of National Processing as well as vice chairman and chief financial officer of National City. "Not to take anything away from any of the prior management teams - they were all good guys," Mr. Seifers said. "But I think this management team is young, energetic, sophisticated, creative, and probably in most respects the best management team we've ever had there."

National Processing turned a corner when it bought FA Holdings Inc., a Louisville-based independent sales organization, in late 1997. Mr. Wimsett, who had been asked to step in and try to stabilize the card business earlier that year, returned to his focus on the check acceptance division, and for about a year FA Holdings executives ran the card business. The acquisition brought 50,000 smaller merchants to National Processing, and significantly helped in its efforts to "move down-market," Mr. Wimsett said.

Last December, National Processing took more than 15,000 merchant accounts from Heartland Payment Systems, a Princeton, N.J.-based independent sales organization that sold a third of its portfolio. By yearend 1999 the company had 187,500 merchant accounts and counted on national accounts for less than half of its revenues. Three years earlier the company had just 10,000 merchant accounts and relied on national merchants for 79% of its intake.

Today NPC boasts extensive sales tentacles and is aiming to process 20% of all MasterCard and Visa U.S. dollar volume by 2004. It now controls 13% of the processing market handling $107 billion in volume.

Besides a national sales team well-steeped in industries like petroleum, retail, and travel and entertainment, the company now has 300 sales agents in 28 offices focusing on smaller merchants.

Additionally, it has relationships with 130 independent sales organizations that resell its services and is actively looking to acquire ISOs with intact sales forces. For the last nine months NPC has been signing up between 6,000 and 8,000 regional merchants every month, Mr. Wimsett said.

Patrick Burton, an equity analyst at Salomon Smith Barney, initiated coverage of NPC on April 10 with a "buy, high risk" rating. "With a new management team, newly focused operations, and improving fundamentals," Mr. Burton said in a report, Salomon believes National Processing "is on the verge of a major transformation."

NPC executives were disappointed when stock that initially traded in the high teens, reaching $20.625 on Oct. 18, 1996, dropped to below $7 in the second quarter of 1997 and dipped as low as $4.375 in April 1999. Shortly after, National City unsuccessfully offered to buy back the company's public shares.

Stock prices have been above $10 for more than a month, however. On Thursday the stock closed at $11.688, equaling its 52-week high. Mr. Burton said he believes the company can maintain 15% to 20% long-term growth in earnings per share. In April he projected the stock would go up to $17 within a year.

Despite the new focus on smaller merchants, Mr. Wimsett does not diminish the role of large merchant customers such as RadioShack Corp. and Southwest Airlines.

Their extensive business gives the company the scale to be able to offer volume discounts. Additionally, the national merchants force National Processing to keep its service standards high. "Our culture for service in our company is very different than most of our competitors, a lot of whom have grown up in the regional market," Mr. Wimsett said, distinguishing NPC from Nova Corp. and Concord EFS. "We service the largest, most sophisticated, most demanding customers in the country."

NPC's largest rival is First Data. Once smaller than NPC, First Data bought the former's fiercest competitors, Nabanco and Card Establishment Services, in the mid-1990s, and now gets a cut of more than 44% of all MasterCard and Visa card transactions.

First Data is best known for its alliances with big bank acquirers, although it has historically been able to protect its profit margins with regional as well as national accounts. Chase Merchant Services, the joint venture between First Data and Chase Manhattan Corp., is the largest merchant acquirer, having processed $142 billion, or 17% of the MasterCard and Visa dollar volume in 1999.

Like many First Data competitors, NPC says the unique "alliance" business model leaves First Data less sensitive to merchant needs.

Mr. Wimsett said First Data partners are also typically huge bankcard issuers less objective about the merchant-issuer interchange tug-of-war.

"One of the other things that differentiates us from the alliances is that our interests are completely aligned with the merchant," he said.

Indeed, NPC says its strategy is to minimize the overall cost of card acceptance. Through a proprietary product, it offers merchants with PIN pads the ability to promote online debit transactions, which carry a lower interchange.

The product, if desired by a merchant, enables National Processing to give a choice whenever it can route the transaction via an online debit network instead of through MasterCard or Visa. Shoppers are asked whether they want to conduct an online transaction, which is activated by a personal identification number, or an offline transaction, which is authorized with a signature.

NPC's proprietary network has direct connections to about 70% of the debit networks, including Star Systems Inc, and four more deals this year will bring that to 90%, Mr. Wimsett said.

This online debit technology has recently helped NPC get a foothold in the supermarket industry, which is particularly resentful about high interchange rates. NPC recently finalized a deal to process for Safeway Inc., a major supermarket chain and a current customer of one of the First Data alliances.

NPC's Internet strategy is to stick with what it knows best, and tap others for their expertise. This differs from the strategies of competitors like Concord EFS, which offers several of its own Web products.

"We're not going to outspend Silicon Valley, and we're not going to out-innovate Silicon Valley as it relates to developing store fronts, shopping cart, site promotion, etc.," Mr. Wimsett said. "What we know and what we're good at is merchant acquiring, and so we will partner with Web developers and other players in the industry to provide that solution."

In contrast to First Data, however, the company has no interest in investing in its new partners. "We feel that's more of a venture capitalist's play," Mr. Wimsett said. "Frankly, we think it's still very early to say who's going to ultimately have the best products and solutions."

"It's going to be your national merchants that will ultimately win" on the Internet, Mr. Wimsett said. "Those are the customers that we serve today."

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