Visa U.S.A. said Wednesday that it will team up with a leading credit card processing company to offer banks a new option for providing card services to retail merchants.
The as yet unnamed joint venture, combining the merchant processing activities of Visa and Total System Services Inc., is expected to be in business by yearend - in time to provide a counterweight to the pending $6.7 billion merger of transaction processors First Data Corp. and First Financial Management Corp.
However, Visa and Total System officials downplayed the tactical implications, saying they had been pursuing their deal months before the First Data-First Financial announcement in June.
Visa was more concerned about member banks' exodus from the merchant business in recent years, ceding dominant market shares to nonbanks like First Financial's Nabanco subsidiary, said Visa U.S.A. president Carl F. Pascarella.
Nabanco and First Data's Electronic Funds Services unit are No. 1 and No. 3 in merchant transactions and control some 30% of that part of the credit card market, according to various industry estimates.
The consolidation and economies of scale in merchant processing, also known as the card-acquiring business, have left banks in need of a "cost- effective, high-quality alternative," Mr. Pascarella said at a press conference in New York.
"Merchant banks have been in a position of having to sell their portfolios or give up their (merchant) relationships and do business with a company that is their competitor," said Richard W. Ussery, chairman and chief executive of Total System. "We are here to provide a service, not to compete with our customers, and to help the banks stay in the merchant business."
Said Mr. Pascarella: "Some of the other alternatives in the market are good, but we think this is better. It will be attractive to banks interested in staying in the acquiring business or getting back into it."
The companies did not reveal financial aspects of their joint venture, which was put together with assistance from Montgomery Securities Inc. Visa and Total System will each own 50% of the for-profit entity. Questions such as where the operation will be based and who will run it remain unanswered.
Rosalind Fisher, executive vice president of Visa U.S.A. and president of a not-for-profit offshoot called Merchant Bank Services, and Philip Tomlinson, president of Total System, are "interim business contacts" pending formation of a separate management and board.
The early disclosure of the companies' intentions was required in part because of the need for Securities and Exchange Commission filings and regulatory approvals. Total System is publicly traded and 80.8% of its shares are owned by Synovus Financial Corp., a bank holding company in Columbus, Ga.
The stock, which trades at a fat price/earnings multiple of 55, was up $1.625 a share Wednesday afternoon, to $22.
Total System will essentially quit the merchant business, transferring its current division to the new company. The processor's chief financial officer, James Lipham, said merchant processing contributed 9% to 10% of its $188 million of total revenue last year.
The bulk of Total System's business is on the cardholder processing side, where it serves 139 banks with 56 million accounts. The company is second in that business to First Data, which services more than 100 million accounts.
Mr. Ussery said there is "no overlap" between the merchant part of Total System, which provides "back-end" accounting and other support for banks' merchant relationships, and Visa's "front-end" terminal, authorization, and transaction routing concerns.
"We are in a position to offer a one-stop, full-function ... vertically integrated, and cost-effective processing solution that will fill a void in the marketplace," Mr. Ussery said.
Visa's contribution to the venture, Merchant Bank Services, was created in 1992 in the latest of several moves by the San Francisco-based card association to keep banks in the merchant business. Many active merchant banks are represented on its board, including Bank of America, National City Corp., and First National Bank of Omaha.
The unit competes against MasterCard's point of sale processing arm, known as MAPP, which has a close back-end relationship with Total System. MAPP general manager Sharon Cline said the Visa-Total deal appears "nonexclusive" and therefore should not affect its partnership.
Merchant Bank Services' 1.6 billion transactions last year led the point of sale processing market, but its lack of a back end led Visa to explore new options, Mr. Pascarella said.
When asked about Visa's relations with First Data, he said the Total System arrangement is "not in any way defensive. ... The more competition in the marketplace, the better for the banking industry."
First Data, which is awaiting federal antitrust clearances for its big merger, declined to comment on the Visa-Total announcement.