An increase in bank card transaction volume, related to a change in its merchant mix, caused Nova Information Systems Inc.'s cost of service to rise in the first quarter.

Some new merchants Nova recently signed are larger than the small and medium-size organizations more typical of its portfolio. They include several grocery chains, which tend to demand lower pricing because of thin profit margins.

Nova, No. 7 in the merchant-acquiring business, would not name the new merchants.

Consolidation has pushed transaction prices down in the merchant processing industry, and an expansion in processing volume has generally caused a proportionate rise in costs for merchant processors.

Though accounting differences make it difficult to compare transaction processing companies, some experts said cost of service, has generally held steady. Others said it may soon go up.

"In general, acquirers are riding the cost scale down," said Marc Abbey, principal, First Annapolis Consulting, Linthicum, Md. "But wages and inflationary pressures" are going up and "are not declining due to scale."

Different processors define cost of service differently, but it usually includes telecommunications and data processing; the treatment of bank card association fees varies. Nova includes interchange fees and assessments in its cost of service, while First USA Paymentech Inc. does not.

In a financial statement, Nova said the cost of service increase resulted primarily from the higher interchange and assessment fees associated with increased transaction volume.

Nova's cost of service increased 11.7% to $52.1 million in the first quarter, compared with $46.6 million a year earlier.

Cost of service as a percentage of revenue increased from 77.5% to 78.3%.

Revenue increased 10.5%, though merchant sales volume increased only 8.5%.

"The change in the cost of service has to do with the mix of business,"said Jim Bahin, chief financial officer, Nova Information Systems. In addition to the grocery stores, there were "some smaller acquisitions" that have not yet been converted to Nova's platform.

"This is not a larger trend," Mr. Bahin added. In "the second quarter the cost of service has declined."

Nova announced Wednesday it had completed the acquisition of Richmond, Va.-based Crestar Bank's $1.8 billion portfolio. The portfolio, No. 42 in the country, added about 7,500 merchants to Nova's base.

The acquisition also allowed Nova to jump up two places, from ninth on the merchant processing list.

Although Nova's "volume has increased, the cost of service has increased, primarily due to the merchant mix," said Franco Turrinelli, research analyst with William Blair & Co., Chicago. It is "not an overall trend, but it potentially suggests that the profit margin is decreasing."

Mr. Turrinelli quoted Nova's chief executive officer, Edward Grzedzinski, in a recent conference with analysts as saying Nova is "pleased with its success in capturing large merchants." But for the long term, "very large merchants with thin margins are not where Nova sees itself going."

By comparison, First USA Paymentech, the No. 3 processor, saw a 60% increase in revenue for the 1997 quarter ending March 31, to $50.63 million. Operating expenses increased 38.8% year over year to $34.3 million, or about 67.7% of revenues.

Sales volume increased 29.1% in the 1997 quarter ending March 31 to $10.2 billion.

Michael P. Duffy, First USA Paymentech Inc.'s chief operating officer, said Paymentech reports revenues net of dues, assessments, and interchange.

Net revenue "presents a clear and focused accounting of what we do," Mr. Duffy said.

Some industry experts said MasterCard and Visa's increased demands for the transmission of transaction data are driving processing costs up.

Stanley W. Anderson, president, Anderson and Associates, Aravada, Colo., said processors "will see a continuation of increased fees to support the capturing and transmission of supplemental data at the point of sale." He attributed these to card associations, whose policies affect terminal manufacturers and processors.

Mr. Duffy said Paymentech's "systems are laid out so they are robust enough on the front end to capture enough of that data, so it does not represent an increased cost."

"We are capturing as much data as possible and always have, knowing that we would need more information, potentially, to qualify for the best rates at all times," he said.

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