SunTrust Banks Inc.s partial exit from the merchant-acquiring business through a joint venture with First Data Corp. in which the processor will handle the details reflects the same rationale as its 1999 exit from credit card issuing: A midsize operation lacked the economy of scale it needed to flourish.
Many large banking companies stopped running independent merchant-acquiring processing businesses long ago, but SunTrust had been one of the few that stuck with the business instead of selling it or teaming up with a processor. 
That changed Monday with the announcement of the First Data deal, which will create a joint venture called SunTrust Merchant Services LLC.
The venture will do what First Datas other dozen merchant/bank alliances do: give the banking company continued access to card-related relationships with retailers, while freeing it from the nitty-gritty aspects of facilitating and processing card transactions.
With a 0.6% market share, we are too small to stay independent, said Ron Eastburn, the chief executive officer of SunTrust BankCard, the division that houses SunTrusts independent acquirer operation. This is a commodity business. You need to align yourself with someone who can give you scale and skill.
In its February ranking of bank card merchant-acquirers, The Nilson Report, an Oxnard, Calif., credit card newsletter, ranked SunTrusts merchant-acquiring business 18th, with around $7.5 billion of transaction volume processed last year and 17,000 merchant customers.
Every one of the top 20 merchant providers has an alliance, Mr. Eastburn said. We were the only ones out-of-kilter with the way the market was going.
SunTrust, of Atlanta, sold its $1.5 billion credit card loan portfolio to MBNA Corp. in 1999, but kept its merchant-acquiring business. First Data, which had already handled the processing for the business, will now also oversee the day-to-day operations.
The economics of running a merchant processing business have been tough for second-tier processors like SunTrust.
Our net spread on the fees the processor collects for each transaction is eroding, Mr. Eastburn said. Over the last 10 to 15 years it has declined 25%. It varies from company to company, but on average that is what it would be.
In its deal with First Data, SunTrust is getting out of the more costly aspects of running the acquiring business while losing none of the sales benefits, Mr. Eastburn said. SunTrust will continue to work with its merchant customers the way it always had, and merchants that need credit card processing will still be referred to its merchant-acquirer specialists, who will become First Data employees, he said.
You need to have some unique skills for the merchant processing business, Mr. Eastburn said. We are not getting out of the merchant business. What we are doing is getting out of running it day-to-day.
The effects of consolidation in the merchant-acquirer business are the same as they were in the credit card business, Mr. Eastburn said as the top companies got bigger, they created economies of scale that made it hard for smaller companies to compete.
When it began developing alliances in the mid-1990s, First Data gave merchant-acquirers a way to get out of the cost-draining elements of the business while retaining the ability to cross-sell other banking services to its merchant customers, he said.
These alliances are not for everyone, but for banking companies with a large branch network, handing off the risk management and sales of the business to a big partner can generate more revenue than staying in the business by themselves, Mr. Eastburn said.
One of the things that made First Data attractive to SunTrust was its technical expertise in the areas of fraud and risk management, he said. The bigger acquirers had better software than companies the size of SunTrust could develop on its own, he said.
We were concerned about risk, he said. You really need to have some sophisticated tools to do that. We get to preserve all the cross-selling opportunities.
SunTrust was in the uncomfortable position of being too big to be a niche player and too small to compete with the biggest acquirers, but not all small acquirers are in that position, Mr. Eastburn said.
If you look at companies smaller than ours, most are extremely small and doing business on a one-on-one basis, he said. They may continue to keep those niches. You have to have a big branch franchise to make these alliance deals work.
With 1,200 branches, mostly in the Southeast and mid-Atlantic, SunTrust will probably be one of the last banking companies to make such a deal, Mr. Eastburn said.
The SunTrust alliance is First Datas second in the last several months. In September it made a similar arrangement with Sovereign Bancorp Inc. of Philadelphia.
We have been a processor for SunTrust since 1997, so this is a kind of evolution of that, Pamela Patsley, the president of First Data Merchant Services and a senior executive vice president of First Data. We can broaden product offerings and services to their merchant base, and leverage our expertise in running merchant portfolio and managing a sales force against their banking relationships.
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