Total System Services Inc. has won the credit card industry's biggest outsourcing prize: the 60 million-account portfolio of Sears, Roebuck and Co.
Total System, which is second to First Data Corp. in bank credit card processing, said it will embark on the 10-year Sears contract by making "the largest (system) conversion in the history of credit cards."
Sears-which has 32 million active accounts, $26.8 billion of receivables, and heretofore handled its own processing-said it expects Total System to help improve debt collections and cross-selling. It also wanted to avoid the costs of meeting year-2000 requirements on internal systems.
The relationship "will be key to Sears' strategy of continuing to develop and leverage Sears' customer relationships," said Alan J. Lacy, president of Sears Credit.
In its rivalry with First Data, Total System has tried especially hard to woo major MasterCard and Visa issuers away from in-house processing. Its current customers include BankAmerica Corp., NationsBank Corp., and Citicorp's AT&T Universal portfolio.
Sears is in the nonbank private-label category, but the win is sure to boost the confidence level at Total System as it pursues bank deals of similar magnitude. Sears' current level of managed receivables would place it fifth among bank card issuers, behind Chase Manhattan Corp. and ahead of First Chicago NBD Corp.
Sears had negotiated earlier with First Data. After the talks ended, presumably over pricing issues, Total System was able to seal an agreement within 90 days.
"We look forward to the challenges of exceeding Sears' expectations," said Richard W. Ussery, chairman and chief executive officer of Total System. The processor is based in Columbus, Ga., as is its 80.7% owner, the bank holding company Synovus Financial Corp.
"It was very prudent on Sears' part to outsource to an entity whose key area of expertise is processing credit card operations," said Asma Usmani, retailing industry analyst at Edward Jones in St. Louis. "This will enable them to offer tier pricing and attract and retain more quality credit-card holders by offering them more compelling interest rates."
"We can give them a better product with better technology at a better price than what it was costing them in-house," Mr. Ussery said.
Sears Credit, which generates nearly half the company's profits, has had other problems. Last summer, chargeoffs climbed to more than 8% of receivables. A pattern of questionable debt collection practices led Sears to set aside $475 million pretax to settle lawsuits in 50 states.
Private-label cards tend to be less profitable than general-purpose bank cards. Average account balances are lower, and more accounts tend to be inactive.
Mr. Ussery said Sears can take advantage of TS2-the newly developed, year-2000-compliant software that Total System says is fueling its growth- to help activate dormant accounts.
"I think it was in the back of Sears' mind that TS2 is very powerful on the marketing side," Mr. Ussery said. "We have a much more sophisticated capability than they do today. They are going to be able to do some things today to activate some old accounts and hopefully get more churn."
"A couple of years ago people were counting (Total) out because First Data was growing so fast," said James Shanahan, a partner in the Newark, Del., office of Business Dynamics Consulting Inc. "Winning this account really reflects how solid they are, and reflects that Total is going to be a player for a long time to come."
Total System processes for 13% of the top 50 bank card issuers and First Data for 36%, according to Deutsche Morgan Grenfell analyst Wayne Segal. First Data was handling 170 million card accounts as of March 31, he said, compared with Total System's 93 million. Sears' 60 million accounts-or just the 32 million that are active-would close much of that gap.
Total System said it added 17 clients in 1997. With the Sears conversion-expected to begin this fall and end by mid-1999-Total is projecting an account base of 170 million by 2000.
Philip W. Tomlinson, president of Total System, said the Sears account will generate profit margins "in the 10% to 15% range."checking this fact
"Sears' is not as active an account base as other credit card portfolios its size," said Brent Wouters, an analyst at Robinson-Humphrey of Atlanta. But "the profitability will clearly be there."