First Data Corp.'s merchant bank alliances are a big factor in the merchant processing business. Processing almost a third of credit card transactions at merchant sites, the joint ventures First Data has formed with 11 major banking companies have been the subject of continual debate over whether they are truly bank-friendly or simply a way for First Data to enrich itself and its shareholders.
Last month, when one of the allies left the fold, some merchant processing observers wondered if the juggernaut was running aground.
But First Data pointed out that the lost customer was the old U.S. Bancorp operation in Portland, Ore., which had been acquired by, and was being consolidated with, the much larger First Bank System of Minneapolis. And the alliances with banks like Banc One, Chase Manhattan, and NationsBank still claim a combined 30% market share.
Roger Peirce, who oversees the joint ventures for First Data as president of electronic funds services in Palo Alto, Calif., remains bullish on alliances and insists they are in the banks' best interests-one of the points he stressed in the interview below.
Mr. Peirce, 56, joined First Data in 1994 after 13 years at Visa U.S.A. He has consolidated most of the company's merchant business on a single operating platform and says First Data is now in a position to expand its service offerings.
The importance of scale and investment in technology really started in the bank card industry with the advent of electronic transactions in the early 1980s. Being physically located adjacent to the point of the transaction became less important.
Chase really started it off back in 1981 when it sold its merchant program, and that was the program that ultimately became Nabanco (which First Data acquired in its takeover of First Financial Management Corp. in 1995). Other banks-Chemical, Citibank, and others-started divesting their merchant programs.
During this commoditization of merchant processing, banks faced the choice of continuing to slog it out-losing market share with very thin margins, competing with much larger entities like Nabanco and Card Establishment Services (another 1995 First Data acquisition) and NPC and others-or selling their portfolios.
What about the banks' motivations?
It started to become recognized that if banks don't have a presence in the merchant business, it would be very difficult for them to participate in a meaningful way in the emergence of electronic payments in general. A key element of the payment systems was at risk.
Nobody knew for sure what the downside would be if the banks en masse exited the merchant business, but there were a number of scenarios that (suggested it was) not a good thing to do. After all, the primary purpose of things like credit cards and debit cards is to effect transactions at the point of sale. If the banks don't have any participation in that environment, there is an opportunity for others to come into the business or direct the transactions in some other way, or establish depository relationships through their merchant relationships.
Where does the alliance strategy stand today? How has the mission changed?
Now we are into a phase that we really have not exploited in the past, but clearly it was the ultimate intent. Now that we have this structure in place and operating efficiently, how do we leverage the fact that the banks now have the ability to deliver a wide range of services to a merchant marketplace within this mechanism called an alliance?
We are just embarking on the process of enabling and empowering the bank distribution system to be effective with merchant services, and a process of trying to bundle and package other banking services into the whole offering.
When we go out to a merchant, we are not just offering Visa and MasterCard acceptance. We are offering a depository relationship, perhaps a small-business loan, perhaps payroll services, all in a comprehensive package. Therefore, merchants that are entering the business for the first time can look to their bank as the primary source for getting themselves established.
How important was the loss of U.S. Bancorp?
First Bank System (which became U.S. Bancorp after acquiring the Oregon- based company of that name) has always had a philosophy of in-house processing. First Data had a 40% interest in (the smaller bank's) program. First Bank was weighing its options and saying, "Should we move the larger portion over and give up 40% of something that we already own 100% of? Or should we buy out First Data and move the smaller program into the larger program which is processed in-house?"
It was very amicable, and we discussed it at length. First Data came up with a price at which our 40% would be purchased, and we also offered to buy 40% interest in their portfolio, and they elected to bring it in-house.
What is the growth potential for the alliances, and will they be affected by future bank consolidation?
How many more alliances do we see? Can we continue to grow through acquisitions and consolidation? Yes, there is some room for that, but fundamentally our focus is to grow through expanding our electronic payment services.
In general the alliance structure leaves us in the beneficial position of having the survivor in the merger of two banks. With the exception of U.S. Bancorp, we've benefited from a number of acquisitions: Wells Fargo buying First Interstate, Nationsbank buying Boatmen's Bancshares.
You don't worry about the U.S. Bancorp scenario repeating itself?
We worry, but history has shown that for every one of those there are probably a half dozen that come the other way.
Can you talk about the fall in First Data's stock price and the statement that growth on the merchant processing side of the house would be weaker than expected?
We are moving out of a stage of rapid growth through acquisition of joint-venture interests and consolidation through conversion of portfolios. We are now using what we have built to start expanding the market through normal kinds of growth efforts, increased services, and sales to the marketplace. It is not the same sort of easy revenue growth through acquisition of joint ventures.
We also have the legacy of transition. We have made a commitment not to compete with the banks, and that left us with a fairly large portfolio of merchant business that basically is not supported by a sales force.
We still have a large number of clients-100 banks that we do processing for-that as a group are losing market share. They ultimately will have to make a decision either to move to full-service processing of some kind so they get the complete scale benefit, or sell their portfolio, or form an alliance.
There are rumors that First Data may be losing another merchant bank partner.
I don't know of any that are leaving. We are not having discussions with anybody who is leaving. All of our alliances are 10-year deals. (Members) really don't have a mechanism for leaving except on terms that we usually agree on. Even the U.S. Bancorp separation was reasonably favorable to us.
Any plans to add alliances?
We are pursuing some, and we have one that is unannounced but committed, and we are pursuing discussions with some others. But it is not being pursued as an aggressive expansion strategy, because the market is fairly well served with the current set right now.
Who would you say is your biggest competition today?
Ourselves. We have a lot of work to do to take the alliance structure and accomplish its full objective, which is making the banks a very formidable force.