Total System Services Inc. is betting that buying a stake in what it calls the top transaction processor in China will help it quickly become a major player there, and leapfrog over First Data Corp.
TSYS, of Columbus, Ga., announced Tuesday that it had purchased a 34% stake in China UnionPay Data Co., the Shanghai processing subsidiary of the country's only card network, China UnionPay Ltd.
By March, TSYS expects to acquire an additional 10.5% of the business. It did not give a price for either deal.
This is TSYS' first venture into China. The world's most populous nation has 840 million debit cards but only 35 million credit cards, and its card market is widely seen as having huge growth potential. First Data has done processing work in the region for several years.
"This is a tremendous opportunity," M. Troy Woods, TSYS' president and chief operating officer, said in an interview Tuesday.
Mr. Woods said that TSYS spent three years courting China UnionPay before the card company would agree to a deal. "Doing business in Asia can take a lot of relationship-building. We went into China on the premise that we needed, and wanted, a partner."
David Duncan, the senior director for TSYS' international services division, said buying into an entrenched player was an important part of his company's strategy. After spending years putting the deal together, China UnionPay Data's executives view Mr. Duncan's team as "old friends" and would be able to open doors in China that TSYS would not have been able to open on its own, he said.
"Doing a deal with CUP Data is such a credentializing thing for us. We are going to have lots of opportunities in China," he said.
Pamela Patsley, the president of First Data International, said in an interview that First Data's Western Union Financial Services Inc. has offered money transfer services in China since 1995, and its cards business has been there since mid-2002. In October 2002 it opened a data center in Shanghai, and its processing customers include Ping An Bank, a joint venture between Ping An Insurance Co. of China and HSBC Holdings PLC.
Four of the top five Chinese banks use First Data software to process transactions in-house, Ms. Patsley said.
First Data has used both partnerships and a "build-from-scratch" approach in different countries, and in general, a partnership works better in more mature economies, because it can help the company get a foothold in a market where relationships are already formed, she said.
China is a "nascent market," she said. "We have been able to grow alongside its cards market."
Ms. Patsley also said that she has had no difficulty forming relationships in China. "Every door has been open to me, and I have never had problems getting a meeting that I wanted."
And though she said the revenue growth rate for First Data's Chinese card business is one of the largest in the entire company, she also said the revenue is extremely small when compared to the company's total revenue of about $11 billion. She would not say how much money the China business generates.
China UnionPay Data was formed two years ago. TSYS would not reveal the unit's volume or market share, except to say it has won processing deals with 21 banks.
Every domestic card in China carries the China UnionPay logo, and every domestic transaction moves across its proprietary network. However, issuing banks can process their card transactions in-house or outsource the work to a processor such as China UnionPay Data or First Data.
This month China UnionPay announced that Discover Financial Services had begun accepting Chinese consumers' UnionPay cards abroad, routing payments across Discover's Pulse debit network.
John Gould, a partner with the Nashua, N.H., research firm Prepaid Service Group, said, "Buying a major piece of an established Chinese company will make it much easier [for TSYS] to do business."
Robert J. Dodd, an analyst for Regions Financial Corp.'s Morgan Keegan & Co. Inc., said that the partnership would give TSYS an immediate edge over First Data.
"In an open market, there's not much difference" between starting up from scratch, as First Data has done, and buying a stake in another company, he said. "But in a closed market like China, relationships are so important, and so hard to build. Even though First Data has been there for several years, it takes a long time to build those relationships. Even though TSYS is relatively late to enter the market, this is likely to put them ahead of the game."
However, Craig Maurer, an analyst with Fulcrum Global Partners LLC, said that at this point the Chinese cards game is still low-stakes.
"Having 35 million credit cards is a nice start, but it's not the hundreds of millions of cards that we have in the United States," he said.
Most Chinese cards have been issued in the major cities and along the Pacific coast, which is far more developed than the interior, he said. "It could be a long time before credit cards and payment terminals" reach the less-developed areas.
The fact that TSYS did not say how much it paid for its stake China UnionPay Data indicates that the unit is small, he said. The deal "an investment in the future."
The payment card market has grown dramatically in China in the last few years; Mr. Woods said that there were only about a million of the cards there in 1993. He also said that there could be 200 million credit cards issued by 2010.
There are about 200 million "middle-class" people in China now, and that figure could triple in 20 to 50 years, he said. "It's a tremendous opportunity."
But Mr. Maurer said that persuading Chinese consumers to use credit cards would not be easy.
"You need to get banks to issue cards, and get people accustomed to borrowing money," he said. The Chinese are, for the most part, happy with their debit cards, and "there's a big difference between getting one big bill at the end of the month and making lots of little transactions every day."
Mr. Duncan said TSYS plans to move into other markets. "This lays the groundwork for our expansion in Asia."
