Signet Buys Equity Stake In Credit Card Processor
Seeking savings while retaining control of a profitable business, Signet Banking Corp. has bought an equity position in a St. Louis-based credit card processing firm.
Richmond, Va.-based Signet, estimated to be the 21st-largest U.S. credit card issuer, will become the largest shareholder of Credit Systems Inc., currently owned by several midwestern banks.
Signet officials declined to reveal how much the bank will invest in Credit Systems, whic now processes 2 million credit card accounts.
Shunning Nonbank Processors
Signet, which processes its credit card transactions in-house, chose to buy into Credit Systems rather than sign up with a large nonbank processing firm such as First Data Resources, Omaha, Neb., or National Data Corp., Atlanta, because it wanted more control over the processing operation.
Some credit card industry observers have warned in recent years that financial institutions were giving up too much control to nonbank processing companies, and the Signet-Credit Systems deal is the latest example of a big card-issuing bank's making a financial commitment to this technology-intensive business.
Last May, MBNA America Bank, Newark, Del. - the third-largest U.S. card issuer - announced it would become sole owner of Southwestern States Bankcard Association, a large processing firm where the bank already held a majority stake.
Credit System's transaction volume will increase by 75% with the Signet deal. The investment will make Signet the firm's single largest card-issuer. Signet, with $11.4 billion in assets, has $1.5 billion in card loans outstanding.
"We're not only going to be a significant customer, but we'll occupy seats on the board of directors," said William F. Binns, executive vice president of the bank card division. "It gives us a comfort level" that the bank would not have as a customer of another processor.
Aside from cutting costs by turning over back-office processing to Credit Systems, Signet also hopes to profit from the company's growth.
Credit Systems, whose principal owners are Boatmen's Bancshares Inc., St. Louis, Mercantile Bancorp., St. Louis, and United Missouri Bancshares Inc., Kansas City, Mo., primarily processes for midwestern financial institutions. The company operated as a nonprofit organization until last year, when it was restructured as a for-profit stock corporation.
Seeking Bank Customers
The company then began marketing its processing services nationwide, and it hopes to benefit from the trend of banks' turning over back-office processing to third parties, an arrangement known as outsourcing. Outsourcing back-office savings of 20% to 50%, depending on the size of the business.
"Our input is going to make them more competitive," said Mr. Binns of Signet. "We look at the CSI relationship as a partnership, as opposed to just a vendor relationship."