Fidelity National Financial Inc.'s plan to combine its back-end banking technology with Certegy Inc.'s card processing business has prompted debate about whether competitors should follow suit.
Card processors tally the costs of purchases, while core processors like Fidelity National handle the accounting for deposit accounts and loans. Among outsourcers there is little overlap between the two businesses, and some core processors expressed skepticism about the value of combining them.
However, William P. Foley 2d, Fidelity National's chairman and chief executive, called the two business lines "complementary rather than competitive" and said there were "very significant and unique revenue synergy opportunities."
This month Fidelity National announced a stock-for-stock deal in which Fidelity National Information Services Inc., which is majority owned by Fidelity National Financial, would merge with Certegy. The deal, set to close this year, has at least one competitor, Fiserv Inc. of Brookfield, Wis., considering ways to follow Fidelity into card processing.
"It's going to make a lot of us think about what pieces we need to serve our customers down the road," Leslie M. Muma, Fiserv's president and CEO, said in an interview last week.
By expanding into areas such as health-care payments, flood insurance claims, and electronic bill payment, Fiserv has "transformed from a financial institution processor to a processor of financial transactions," and it is open to a wide variety of processing options, Mr. Muma said.
He would not say whether Fiserv plans to offer credit card processing, but he did say, "We're looking for ways to broaden what we do in the whole payment systems space."
Paul A. Frank, the president of Fiserv's ePayments division, said his company has some card processing services, but they are a small part of its overall business. It offers private-label card processing, and it processes credit card transactions for issuing banks - typically small ones - that use its core banking or electronic funds transfer services.
Fiserv is considering integrating these card operations with its debit business, "because typically they're the same people," Mr. Frank said.
Last week it made another move in card processing: Its Fiserv Lending Solutions announced that it plans to add credit card transaction management for home equity lines of credit to its MortgageServ loan servicing system. Banks increasingly are offering customers cards as well as checkbooks for tapping the lines.
Executives at two other major core processing vendors - Metavante Corp., the technology subsidiary of the Milwaukee banking company Marshall & Ilsley Corp.; and Jack Henry & Associates Inc. of Monett, Mo. - said they probably will not enter the card processing market.
Frank D'Angelo, the president and chief operating officer of Metavante's payments group, said it resells Total System Services Inc.'s processing services to about 200 bank clients, mostly small ones. It has little interest in acquiring its own processing capabilities, he said. "That's not our niche."
And Jack Henry says the connection between transaction and core processing is not a compelling argument for getting into card processing.
"We don't think that credit card processing necessarily influences core banking decisions," said Thomas J. Walsh, its general manager of marketing. "We've talked about it, but when we've done our due diligence, it just hasn't seemed to be the right thing to do."
Fidelity National and the other core processors have made numerous acquisitions in recent years. Mr. Walsh said Jack Henry tends to focus on purchasing small companies with strong growth prospects.
But in card processing, "there are a few providers, and they are all of significant scale. It's tough to grow that business," he said.
The transaction processing industry has undergoing its own wave of consolidation in the past few years. In October, for example, Bank of America Corp. bought the merchant acquirer National Processing Corp., including the 83% stake held by National City Corp., for $1.4 billion. Buying National Processing, which was renamed BA Merchant Services LLC, made B of A the nation's No. 2 acquirer.
In March, Total System Services, a Columbus, Ga., transaction processor 81% owned by Synovus Financial Corp., bought Visa U.S.A. Inc.'s 50% stake in the merchant processor Vital Processing Services LLC for $95 million. Visa and TSYS had operated Vital as a joint venture.
And last week the Mountain View, Calif., online payment processing software provider CyberSource Corp. said it would buy the assets of CardSystems Solutions Inc., the beleaguered Atlanta processor that was involved in a data breach this year that compromised 40 million credit card accounts. The price was not disclosed.
Mr. Muma said that if the combination of core and transaction processing proves effective, small core processors could become targets of large card processors. "Right now you've got data processing people acquiring card processing," but that's "another approach someone could take."
Robert Hunt, a senior analyst at MasterCard International's TowerGroup market research unit in Needham, Mass., said that consolidation in the core processing industry has been going strong for at least three years, and will probably continue. "It seems like the appetites are awfully strong."
He called the Fidelity-Certegy deal "a wow" and said that other core processors will likely be tempted to move in the same direction, because the combination would let the vendors offer more services to their bank customers. "It's all financial services in the end."
However, Ariana-Michele Moore, an analyst at the Boston research and consulting firm Celent Communications LLC, said transaction processing is "a very difficult business to get into, because of the scale that is necessary."
Since three of the top five processors are owned by banks, opportunities for a newcomer to buy its way into the business through a single deal are slim, she said, and the alternative - a series of deals for small processors - would be challenging to pursue.
Robert J. Dodd, an analyst at Regions Financial Corp.'s Morgan Keegan & Co. Inc., said the diverse nature of the payment processing market - debit versus credit, acquirer versus issuer, bank card versus private-label - further complicates any effort to achieve scale by acquisition.
"I wouldn't expect a lot of consolidation," he said. "People are going in too many different directions."
