TransFirst Holdings Inc. is trying to make a niche for itself in third-party merchant processing, a business it says regional banks are vacating.
This month the Dallas company, which is owned by the investment group GTCR Golder Rauner, announced the purchase of the third-party and agent bank merchant division of Fifth Third Bancorp's Processing Solutions.
The deal would make TransFirst the 12th-largest U.S. merchant acquirer, according to the 2002 ranking of bank card acquirers published in The Nilson Report, an Oxnard, Calif., industry newsletter
In October it bought the agent bank portion of BA Merchant Services Inc., the acquiring and processing arm of Bank of America Corp.
With banks like Fifth Third losing interest in processing for customers either too small or too far away for cross-selling, TransFirst - whose parent also owns several payments-oriented companies, including Verifone Inc. and Genpass Inc. - says it can gain an edge.
"There is a trend in the industry for large national and regional banks to focus on the business in their footprint and with their branded products," said Thomas Rouse, TransFirst's chief executive officer.
When the sale to TransFirst was disclosed in a filing to the Securities and Exchange Commission, a Fifth Third payments executive said in an interview that the transferred contracts were for small merchants outside the Cincinnati bank's area of retail operations. Fifth Third is interested in processing for national and commercial retailers, he said. The bank also seeks processing customers to whom it can cross-sell other banking products, he said.
The deal is expected to close by April 1. TransFirst did not say how much it would pay.
"Most of these merchants are mom and pops that generally average $125,000 a year in processing volume," Mr. Rouse said. "For a large commercial bank, they are fairly difficult to service and manage. The infrastructure at these large banks doesn't lend itself to supporting" small merchants.
In his annual letter to shareholders, released in January, Fifth Third's president and chief executive officer, George A. Schaefer Jr., wrote that it would continue to divest itself of smaller businesses to invest "where we feel we have a competitive advantage within our core middle-market commercial and retail customer base."
Kurt Strawhecker, a partner with Strategic Management Partners LLP, an Omaha consulting firm for merchant acquirers, said investor-backed companies like TransFirst are courting regional banks for their third-party businesses.
"Regional banks are retrenching, and they are being approached with very attractive offers" for these businesses, he said. "The banks are saying, 'We can take this kind of a financial payment for something we don't view as strategic.' "
Fifth Third's third-party business generated $7.5 billion of transaction volume last year, mostly through community banks that branded the merchant acquiring business with their own names, according to TransFirst. The deal would increase TransFirst's volume by over 68%, to $18.5 billion.
Mr. Rouse says TransFirst specializes in serving smaller merchants because the accounts are more profitable and there is less competition for them. "We don't have to compete with the big guys," who would rather sell products under their own names.
A small number of processors, including Global Payments Inc. and iPayment Inc., compete for small merchants and third-party deals, he said. The biggest processors, such as First Data Corp. and Chase Merchant Services, typically are not interested. "They are talking to Sears, J.C. Penney - high-volume accounts."
Mr. Strawhecker said regional banks like Fifth Third will likely hang on to processing businesses they conduct in their own retail area. "There if they let the merchant business go, they give up the strategic connection to commercial demand deposit accounts."
