There are several ways Sovereign Bank measures its progress in the merchant processing business it entered in 2001.
The simplest may boil down to two figures: 16 months, more than 3,000 new banking customers.
The subsidiary of Philadelphia's Sovereign Bancorp Inc. says it has added about 3,000 merchants to the roughly 11,100 it began with, including at least one Fortune 100 retailer. And Joseph P. Campanelli, the bank's president and COO, said the business was a key to its 25% growth in 2002 fee income.
Mr. Campanelli said the 27% growth in the number of merchant accounts last year was directly responsible for a boost in deposit accounts. Its merchant business is run under a revenue-sharing arrangement with First Data Corp., which supplies sales personnel and marketing expertise.
"We wanted to develop more banking relationships and we wanted to increase deposits," Mr. Campanelli said in an interview Tuesday. "This program helps us attain that."
Sovereign Bank, whose parent has assets of $39.5 billion, struck the First Data deal after the Denver company ended its merchant processing partnership with the former Bank Boston, which became FleetBoston Financial Corp. in 1999. In addition to picking up that partnership's 11,087 merchant customers, Sovereign Bank signed a deal to become First Data's settlement bank for the six-state region it serves.
Winning the settlement bank business was big, Mr. Campanelli said.
"We needed a major edge over the competition," he said. "If a merchant currently banks with another bank and they want to stay there, they could still be part of our merchant services program, but there is an advantage in switching their bank to us, because deposits will be available to them one day sooner."
Marshall P. Soura, the managing director of global cash management at Sovereign Bank, said merchants have found that to be a powerful argument for consolidating their merchant and banking relationship with his company. "We want to sell six or more products in the relationship," he said.
Only 880 of those 11,000 merchants it started with had a banking relationship with Sovereign. The rest probably banked at BankBoston, which was First Data's settlement bank in the area, and elsewhere. Now nearly 4,000 of its 14,276 merchants have bank accounts with Sovereign.
Mr. Soura said that the 14,276 merchants represent 20,000 outlets and that they generated $4.3 billion of transactions last year, versus $3.8 billion when Sovereign started out.
First Data has 65 salespeople covering Sovereign's Pennsylvania, New Jersey, Connecticut, New Hampshire, Rhode Island, and Massachusetts service area. Members of the sales team work exclusively for Sovereign's merchant business and even carry business cards with the Sovereign name.
Mr. Campanelli said branch and merchant processing salespeople are trained to push bank products to merchant customers.
"At the end of the first quarter of this program we looked at how well branches were at giving referrals to our Sovereign partners, and only 50% had referred any activity," he said. "We shared this information with First Data and brought branches up to speed." Now only seven branches out of Sovereign's 510 could use improvement, he said.
Mr. Campanelli would not specify the revenue the First Data deal is generating but said the fees were just under $1 million last year and would probably be just over $1 million in 2003.
"That is not the salient part of the profit," he said. "That is what we get paid for this, but it is like having 65 additional salespeople. Our real play was to provide the best of a big bank and the best of a community bank."
Steven Bacastow, the cofounder of Collective Dynamics LLC in Atlanta and a partner at the consulting firm, said that, given the data provided, "it is hard to render an opinion about a salesperson generating about 4.5 merchant accounts a month," a number he arrived at using sales-staff size and account growth figures. Is a typical merchant account "a 15-restaurant chain or a bait shop?" he offered.
But he called the processor's 27% growth in merchant accounts "good, given the economy."
John S. Shlonsky, senior vice president of the direct business group for First Data Merchant Services, said revenue from Sovereign's merchant business is probably growing somewhere between 20% and 25%; the industry average is in the low teens. The processor picked Sovereign to be its settlement bank in large part because of its willingness to make the merchant business the centerpiece of its marketing strategy, he said.
"They recognize and value and let us specialize in the things that we do well," Mr. Shlonsky said.
His group had 2002 revenue of $2.8 billion, up 22%. First Data has said its merchant alliances have generally been successful and that it intends to start more of them.
These deals are "magic," Mr. Shlonsky said. "The processing component is critical because the merchant needs a bank account to have their funds deposited. That ties the credit card to the banking relationship."
