Now that First Data Corp. has agreed to sell NYCE Corp., financial services companies are assured of a market in which there would still be at least three major PIN-secured debit processors - possibly four, unless one of the other networks turns out to be NYCE's buyer.
And bankers say the result likely will be a more dynamic competitive landscape, one in which, some speculated, NYCE could emerge as a force among small and midsize institutions, the better to avoid bumping heads with First Data on large-bank contracts.
Had the Justice Department not forced the divestiture as a condition of First Data's acquisition of Concord EFS Inc., the deal would have left only these major players: a combination of NYCE and Concord's Star, which had an estimated 56.1% market share as of March; Visa U.S.A.'s Interlink, with 15.5%, and Pulse EFT Association, with 9.6%. (By itself, NYCE would have a market share of about 10%.)
There have been some shifts since then - Wells Fargo & Co. and Wachovia Corp. defected from Concord's Star to Visa, leading the Justice Department to estimate that a combined Star/NYCE would have a market share closer to 45% - but they were not enough to persuade opponents of the deal, among them the Independent Community Bankers of America, to change their stance.
Though the ICBA put out a press release Monday supporting the settlement, David L. Petro, an executive vice president at the group's ICBA Bancard, said the divestiture would not be enough. Even with Star alone, First Data would be the largest merchant-acquirer and the largest PIN network operator, a combination that Mr. Petro said would be devastating to community banks that provide merchant processing for their business customers.
"It will be hard for a small bank to compete with an entity that is that massive and has that kind of market clout," he said.
Dennis F. Lynch, the president and CEO of NYCE, said that at the very least, the departure from First Data could give NYCE room to become a more active and competitive processor. In an interview Monday, he said that it never combined its operations with First Data's and maintained its own board of directors, so the divestiture will amount to little more than selling stock shares.
For banks, he said, "I think it will mean one more organization vying for customers, working on innovative products, and delivering highly reliable service."
Banks won't notice any technological changes, Mr. Lynch said. "We don't have anything to disconnect, or any platforms or processing infrastructures to change or decouple. We're actually in a solid position to continue to support and deliver services to our customers."
Much, of course, will depend on who buys NYCE, which was a private company backed by four major banks until 2001, when First Data took a 64% stake. Everyone involved in the transaction says it is too soon to tell who will get NYCE, but some are placing bets on processing vendors, such as Fiserv Inc., Global Payments Inc. or the TSYS subsidiary of Synovus Financial Corp., a rival of First Data's in card issuer processing.
Fredrick Spratlin, the chairman of Pulse and the first senior vice president of electronic banking at First Tennessee National Corp., said that the settlement would not affect his bank, but that Pulse might well be interested in a combination with NYCE. The best outcome for the industry would be to "put NYCE back into the hands of bank ownership," he said. "I think that's a good thing for networks to see things from a bank perspective."
Some say that Visa might want to add NYCE to its Interlink network, or that MasterCard International, which does scant PIN debit processing in the United States, might want it - or even that American Express Co. might want to buy a PIN debit network to enhance its automated teller machine business, or for other reasons.
"I think if MasterCard wants to be in the debit business, I won't say its their last gasp, but this certainly is the best chance to have a creditable presence," said John Gould, the director of consumer lending and bank cards at the Needham, Mass., financial services technology consulting firm TowerGroup.
Others speculate that the four banks that currently hold a minority stake in NYCE - Citigroup Inc., J.P. Morgan Chase & Co., FleetBoston Financial Corp., and HSBC Holdings Inc. - would buy the rest of it. Those banks did not return phone calls for comment on Monday.
"I think the most logical buyers are going to be those that are already playing in this space," said John Kraft, an analyst at D.A. Davidson & Co. A buyer could build on the model of a bank-owned network to gain an edge on First Data, he said.
Christopher Penny, an analyst with Friedman, Billings, Ramsey Group Inc., suggested that one or two of the smaller regional networks, such as Pulse or Shazam, could merge with NYCE to create a consolidated network for small and midsize banks. That would take pressure off NYCE to compete against First Data and Interlink and would "be a nice alternative for the smaller banks."
