Conventional wisdom holds that merchant processing is a commodity business, in which companies handle basic transactions at low margins and constantly chase volume.
But Edward Grzedzinski, who was the chairman and chief executive of Nova Information Systems Inc. until stepping down two weeks ago, begs to differ.
Mr. Grzedzinski, a processing veteran who co-founded Nova in 1991, is aware of the industry's reputation. However, he said in an interview last week that a recent wave of processor acquisitions by banks indicates that reality is different.
"If you provide a quality service and bring a unique value proposition to the client, I think you have an opportunity to differentiate yourself. If you do that, it defies the definition of commodity," he said. "And the profitability of these businesses underscores that point."
Nova is the merchant processing division of U.S. Bancorp, and the Minneapolis parent does not break out the division's financial results. But Mr. Grzedzinski said it has done very well this year.
"If the company was still public, we'd be coming out with record revenue, volume, and profitability" this year. Nova's European arm, euroConex Technologies Ltd. of Dublin, has also fared well, he said.
Nova's success highlights why banks have been taking a second look at a business they had largely abandoned, Mr. Grzedzinski said. "If you go back 10 or 15 years ago, many banks looked at merchant processing as a noncore activity. They didn't look at it as particularly strategic and had a lot of difficulty making any money, because their portfolios were too small."
In the late 1980s the industry began consolidating. Now, he said, a handful of big banks are recognizing that merchant processing can be profitable "if you have the right skills and the right technology."
Last month Bank of America Corp. bought National Processing Inc., which was majority-owned by National City Corp., for $1.4 billion. Royal Bank of Scotland Group PLC bought Lynk Systems Inc., an Atlanta private merchant acquirer and transaction processor, in September for $525 million. U.S. Bank acquired Nova, previously a publicly traded company, in 2001.
Nova is now the third-largest merchant processor, behind First Data Corp. and National Processing, and claims about 8% to 10% of the market. Mr. Grzedzinski, 49, was reluctant to discuss why he left the company he built from scratch. He said he plans to return to work fairly soon - though a noncompete clause in his contract prohibits him from taking another job in merchant processing.
Many consultants and analysts who cover both merchant processing and banking characterize Mr. Grzedzinski as an entrepreneurial person who prefers to be his own boss.
He agreed with that assessment. "It's more attractive to me to be running the parent company rather than running a unit of a parent company."
He also said he has a lot of confidence in his successor, Pamela A. Joseph, formerly Nova's president and chief operating officer, who reported to Mr. Grzedzinski for 10 years.
"The great news for me is that I'm walking away when the business is running as well as it ever has," he said. "Hopefully it's not at the peak, because Pam will put her stamp on the business, and I also think she's the person to take it to the next level."
