U.S. Bancorp Closes a Gap in Payments Via Citi Deal

U.S. Bancorp and Discover Financial Services, which have avoided the worst of the financial crisis, are getting a significant boost in their efforts to expand abroad from one of the banks that has been hit the hardest — Citigroup Inc.

In a pair of deals announced Monday, U.S. Bancorp bought Citi's Diners Club International merchant portfolio in Western Europe and agreed to process the brand's transactions in the region.

The sale came as part of Citi's continuing effort to unload unwanted assets, and the processing contract is the latest in a string of deals Discover has struck this year aimed at increasing acceptance for its cards around the world.

Taken together, the two announcements will help U.S. Bancorp increase its presence in Europe, a market where the Minneapolis financial company is eager to expand its operations.

The Citi-Diners Club deal will "fill in some gaps for us, particularly some geographic gaps" in Western Europe, Stuart Harvey, the chief executive of U.S. Bancorp's Elavon acquiring unit, said in an interview Monday. "These merchants are based in countries where we want to have more of a comprehensive presence … and these are ideal merchants for us for cross-border activity."

The Diners Club portfolio includes 75,000 merchant-acquiring contracts in Europe. The purchase is the latest transfer of assets from Citi Holdings, the troubled New York giant's repository for unwanted assets, to U.S. Bancorp. Earlier this month, U.S. Bancorp acquired three credit card portfolios, with a face value of $1.3 billion, from the Citi unit.

"Citi's been pretty candid with their need to raise capital and exit certain businesses or certain business lines … It's creating tremendous opportunity for us," Harvey said. "We do a lot of business with them — Citi has very strong underwriting, we know the quality of the merchants … and I think we've proved ourselves to them." Neither company gave a price for the portfolio, and Citi would not provide executives to discuss the sale.

For Discover, the deal also opens up more merchant locations in Western Europe — and broadens the category of merchants where its cardholders can use their cards. The Diners Club International network, which Discover bought (also from Citi) in July of last year, is mostly accepted at high-end hotels and restaurants of the sort visited by corporate or travel-and-entertainment cardholders, the kind of spending that has taken a big hit during the recession.

The Elavon agreement will give Discover and Diners Club cardholders the opportunity to use their cards at more of small to midsize merchants in Western Europe. "In these tough recessionary times, business travelers may not be staying at the five-star hotel, so we need to be able to broaden our acceptance," Gerry Wagner, the vice president of international acceptance for Diners Club International, said in an interview Monday.

For Discover, which already has a merchant-acquiring relationship with Elavon in the United States, the U.S. Bancorp unit "can help us with Diners Club acceptance at merchants, beyond the portfolio they purchased with Citi," Wagner said.

Wagner would not discuss the number of merchants at which Diners Club expects to gain acceptance through the deal or the expected increase in transaction volume. Elavon, which says it is the sixth-largest acquirer in Western Europe, has about 200,000 merchants in the region, and expects to add Diners Club acceptance for its existing portfolio by the second quarter of 2010. Neither company would discuss the terms of the deal.

Despite the global slowdown in travel-and-entertainment spending, Harvey said that increasing his company's exposure to high-end merchants was actually an incentive for Elavon. "If you have a long-term, more strategic approach, these are markets and partnerships that we want to be a part of," he said. "There are a lot of signs that we've been through the worst. We're seeing the high-quality merchants really bounce back."

The deal is the latest in a series of plays Discover has made to enhance its international presence recently. Earlier this month, it announced a deal with the Belgian processor Trionis that will enable Discover and Diners Club cardholders to use at least 74,000 automated teller machines in Europe. That followed a similar ATM deal in Canada this summer and a long-term merchant-acquiring deal in India announced in August. In March, Multipay AG, a Swiss processor, agreed to handle Diners Club and Discover credit card transactions.

Wagner said that the Trionis deal "really stands out as a key accomplishment" because "it expanded and helped us create a global ATM network." But he highlighted the importance of this deal for cementing Discover's relationship with Elavon, which he called "a key global player."

Observers called the deal a positive for both parties. "Discover has been making a concentrated effort over the last couple months to increase the appeal of its card in Europe. … With this deal, it increases their penetration of merchant locations where the card can be accepted, and becomes more of an attractive product for Discover cardholders," said David Lott, a senior vice president with the Atlanta payment consulting firm Speer & Associates Inc.

And for Elavon, which already has its European infrastructure built, the deal offers an opportunity "to boost up transaction volume in the card processing business. You've got such a fixed cost associated with all your infrastructure," he said. Not to mention, he added, even without "knowing what price they got, but given the financial straits that Citi is facing, I'm sure it was a relatively good deal from an Elavon perspective."