With Deal for Cardservice, 1st Data Takes a Web Leap

First Data Corp., which is far and away the biggest provider of credit card services to merchants, has signaled a new level of comfort with Internet merchants with its acquisition of Cardservice International, a company that facilitates bank card acceptance for retailers on the riskier end of the spectrum.

The Denver company said late Wednesday that on Dec. 28 it had bought the half of Cardservice International that it had not bought in 1997, when it paid $60 million for a 50% interest in the independent sales organization. A First Data spokesman said the price for the other half would not be disclosed until the company files it annual report in March.

First Data also said late Wednesday that, as anticipated, Charles Fote, who has been serving as president and chief operating officer since 1998, had assumed the roles of president and chief executive officer. He succeeds Henry “Ric” Duques, who will remain chairman through 2002.

Mr. Fote said he would seek to sustain growth in First Data’s main businesses and to expand in new markets. The purchase of Cardservice International, which began as a mom-and-pop operation in 1988 and now serves more than 185,000 businesses, fits neatly into the latter goal.

Though Cardservice International, of Moorcroft, Calif., serves many traditional real-world merchants, many of its customers fall into the “non-face-to-face” category — which includes mail order and telephone order merchants, as well as Internet retailers. Merchants in this category tend to produce higher chargeback rates and historically have proven more apt to go out of business. Because of the various risk factors, they are charged higher interchange rates and are often snubbed by merchant-acquirers.

Cardservice has developed risk management tools that are meant to shield it from these risks by detecting when merchants seem to be getting into trouble. It was this specialty that attracted First Data, which said it will be able to use Cardservice’s technology to expand broadly into what was once considered the riskier range of merchant customers.

Cardservice International’s client list “consists of a wide range of underserved merchants that traditional acquirers have not focused on,” said Pamela Patsley, the president of First Data’s merchant services division and a senior executive vice president of First Data. “Its risk management product is what makes Cardservice International unique.”

First Data will be able to handle riskier merchants thanks to the purchase, Ms. Patsley said. “They have unique front- and back-end monitoring services,” she said, and those tools have “taken us to a much more comfortable level in terms of us getting more involved in that merchant [base]. A lot of things came together” with the purchase.

First Data began an acquiring relationship with Cardservice International in 1996, when a program was set up to refer merchants to Cardservice whom First Data deemed too risky to take on.

First Data has always handled the transaction processing for Cardservice’s merchants, and it was on the acquiring side — which involves providing a range of card-acceptance service to retailers — that the two companies gradually grew closer. The 1997 deal in which First Data bought a 50% stake in Cardservice was a shot in the arm for the ISO, which had by then become a leader in its industry. Its founder, Charles R. “Chuck” Burtzloff, served in 1997 and 1998 as the president of the Electronic Transactions Association, a trade group of smaller merchant-acquirers and ISOs.

Ms. Patsley of First Data — who herself hails from Paymentech Inc., a company that specializes in serving non-face-to-face merchants — said the purchase of Cardservice has been on First Data’s wish list for some time. She said Cardservice’s technology will give First Data a key product to pitch internationally and to new markets in the United States.

First Data has made some inroads into merchant processing in Canada and Europe and plans to use Cardservice International’s risk management tools to expand in those markets. “In any underserved merchant community, it takes expertise and knowledge,” said Ms. Patsley. “We will have a more robust offering” with the purchase of Cardservice International, which already has some Canadian clients.

Ms. Patsley said Cardservice International’s risk tools would probably remain a stand-alone product for the time being and that they would not be integrated into First Data’s existing risk tools. “It remains to be seen. It is something that is portable; we can take this model to Canada or the U.K.” as it stands, she said.

A prepared statement from First Data said that Mr. Burtzloff will “continue to support the company” throughout 2002. He was not available for an interview.

Mr. Burtzloff and his wife, Lisa, founded their company in their California living-room and built their risk management expertise over the years. They developed a method of carefully recording individual transactions by each of their merchants in their proprietary database, said an industry consultant.

Paul Martaus, the president of Martaus & Associates, an electronic payments consulting firm in Mountainhome, Ark., said, “Years ago when they had a portfolio of about $4 million, they had 40 employees specializing in risk,” and the industry leader in merchant-acquiring had “around four.” As a result, the Burtzloffs “knew instantly when a merchant had exceeded his historical sales pattern.”

As the Internet caught on, Cardservice International became the leading merchant-acquirer of e-tailers, Ms. Patsley said. “A lot of what [Mr. Burtzloff] learned through risk management models was applicable to Internet merchants,” she said. “The financial metrics for Cardservice International are very good.”

Cardservice International’s Web site said it handles 180 million transactions a year, amounting to $12 billion of credit and debit card volume. It has 800 employees and 2,500 sales representatives. First Data Merchant Services processed nearly nine billion transactions last year for 2.6 million merchants, inclusive of Cardservice International, which it counts as a “partner” company.

Mr. Fote joined First Data in 1975 and becomes the second head of the company since it spun off from American Express Co. in 1992. Mr. Duques joined American Express in 1987 and headed the business that would eventually become First Data in the 1992 initial public offering.

Mr. Fote said in a prepared statement that he intended to “build upon the solid foundation we’ve established under Ric’s leadership.”

He added, “Continued growth in our core businesses remains our goal as we continue to look for ways to provide efficient and effective payment systems throughout the world.”