Visa U.S.A. and Total System Services Inc. said they launched their merchant processing venture Monday, taking aim at First Data Corp. and other perceived threats to banks' control of card transactions.
The company, Vital Processing Services LLC, started up in Tempe, Ariz., with about 400 employees, estimated annual revenue of $100 million, and Fred O. Gumbel as president and chief executive officer.
The announcement ended eight months of suspense - particularly over the site and the CEO - since Visa and Total System said they had agreed to pool businesses that together handled 2.8 billion transactions last year for card-accepting merchants.
In Mr. Gumbel, Vital has nabbed one of the most highly regarded payment systems executives. He spent the last two years as president of Electronic Data Systems Corp.'s electronic commerce business unit in Plano, Tex., and before that was the senior bank card executive at First Bank System Inc., Minneapolis.
"Fred is a well-established business leader with tremendous credibility in the marketplace, and his joining Vital signifies that the company is for real," said Joel Friedman, managing partner of Andersen Consulting in San Francisco. "Vital is positioned to offer a full array of merchant processing, and Fred brings a solid base of experience in that arena."
Vital combines Visa's Merchant Bank Services unit, the industry's biggest supplier of "front end" transaction services at merchant locations, with the "back end" processing capabilities of Total System.
Both Visa and Total System, 81%-owned by Synovus Financial Corp. in Columbus, Ga., went into their venture vowing not to compete with the banks that use Vital Processing.
Total System is second in processing of credit card accounts to First Data Corp., which in addition to being No. 1 in that category is the leader in merchant accounts through its merger last year with First Financial Management Corp.
The perception of First Data as an actual or potential competitor of credit card banks and their associations led Visa to negotiate with Total System. Similarly, MasterCard International recently passed control of its point of sale processing business to a new company operated by National Data Corp. of Atlanta, with anticipated revenues of $175 million.
Mr. Gumbel, 43, described Vital as the partnership of "two terrific companies that will do some terrific things together.
"In the short term we plan to continue the quality of service and effective delivery of the two companies and (through) synergy to create a more effective and complete service for the customer base," he said.
Mr. Gumbel said a longer-term ambition is to take Vital's services international.
Mr. Friedman, a consultant who has worked closely with Visa, called Vital a "significant base of competition" in the merchant segment to First Data, the $4 billion information-processing powerhouse based in Hackensack, N.J.
Richard Weingarten, principal of Montgomery Securities in San Francisco, pointed out that MasterCard has a minority interest in Global Payment Systems, its joint venture with National Data. MasterCard's venture is thus likely to be managed differently from Vital, which is a 50-50 ownership proposition.
"Vital was formed because Visa knew just having a front-end system would be a competitive disadvantage" as the industry moves toward fully integrated processing, Mr. Weingarten said.
Albert Coscia, a spokesman for Visa, concurred, saying banks that have typically outsourced their front-end business now want to outsource the back end as well.
"Visa and Total have a longstanding association that will give them a competitive advantage," Mr. Coscia said. "They will leverage their economies of scale and will fairly quickly become a powerful player in the merchant-acquisition business."
He cited Total System's "preeminent position for merchant services," and said, "Vital will have a strong focus on keeping banks in the driver's seat to help them stay competitive as payment systems evolve."