Vital Processing Services, a bank-controlled provider of credit card processing services to retail merchants, has won a major customer away from First Data Corp.
U.S. Bancorp of Minneapolis has decided to consolidate its business with Vital, a joint venture of Visa U.S.A. and Total System Services Inc.
The decision means that the old U.S. Bancorp of Portland, Ore., which First Bank System Inc. acquired this year, will back out of its merchant bank alliance with First Data.
The old U.S. Bancorp served 30,000 merchants with $5.6 billion in annual charge volume and was one of about a dozen banks that had formed joint merchant processing ventures with First Data, Hackensack, N.J. Though its defection may be tied to its merger with a bank that was already a customer of Total and Vital, it marks an unusual setback for First Data's aggressive bank alliance strategy.
The contract between the new U.S. Bancorp and Vital was signed Sept. 22, and the conversion is expected to be completed by yearend 1998.
Some experts said the deal is more of a win for Vital than a loss for First Data. First Data, they said, has the scale to roll with the punch.
"The old First Bank system was and is a large merchant processor," said Philip G. Heasley, vice chairman of U.S. Bancorp. Staying in the First Data alliance would have conflicted with that business, he said.
"We decided it made more sense for us strategically to stay independent as a processor, and we saw large opportunities to do so," Mr. Heasley said.
Vital "has a natural advantage" for U.S. Bancorp, Mr. Heasley said, because U.S. Bancorp is one of the few banks in the country that is a "one- association issuer."
"We only issue Visa cards-we are not a MasterCard bank," Mr. Heasley said. "It made sense for us to support a key brand in our arsenal."
"This ends the relationship between U.S. Bancorp and the alliance agreement," said Fred O. Gumbel, Vital's president and chief executive officer. "If you look at our positioning, we are not an acquirer. We are a processor and not a competitive threat to the acquirers."
Some industry observers, however, saw the deal as bad news for First Data and the large processors.
"This shows a chink in the armor for the mega-processors such as First Data," said Stanley W. Anderson, president, Anderson and Associates, Arvada, Colo. "One of the problems that they always have is the ability to manage a large portfolio, multi-relationships, and to keep the clients happy and really provide enough service and attention so that people don't feel they are being ignored."
For other members of the First Data alliance who have been unhappy or considering a move, "this may give them the impetus to look seriously at Vital or the other processors," Mr. Anderson said.
First Data executives declined to comment.
Vital was created in 1995 expressly to help banks retain merchant business that had gone to nonbanks led by First Data.
It is a counterpart to MasterCard's venture with National Data Corp., called Global Payment System. MasterCard has a minority stake in Global Payment System, which is controlled by National Data of Atlanta.
Merchant acquiring veteran Nicholas Ferrante, president and chief executive officer, Ferrante Financial Services, Chatsworth, Calif. called the current deal "a terrific opportunity for Vital."
"Vital needs very badly a big victory," he said. "First Bank has itself a huge portfolio to process, and they are investing millions of dollars to upgrade features and functions of their own system." By assimilating the U.S. Bancorp portfolio, they could have made themselves vulnerable to service interruptions. They may be using "Vital while they are making investments in their own system."
Some analysts said the U.S. Bancorp news was important in light of First Data's third-quarter earnings, which show downward momentum in its merchant processing business. On Thursday, First Data's stock dropped $6 on news of its disappointing third-quarter earnings.
"There was a slowdown in the merchant processing business and that is what investors are focusing on right now," said Gregory Gould, vice president, Goldman Sachs.
First Data's total revenues grew 2% for the third quarter to $1.278 billion.
"This will be a continuing issue for First Data," said Marc Abbey, principal, First Annapolis Consulting, Linthicum, Md. "They've established all of these alliances with banks and the bad news is that all of these banks are consolidating."
"The combination of U.S. Bancorp and First Bank will be imposing" for the merchant acquiring industry, he said.