A Powerful Group Of Processors

  Hot 'Lanta is burning up the card industry, with Global, TSYS, Certegy and Nova scoring contract coups, buying vendors and expanding worldwide. In this profile, CCM assesses the Georgia quartet's strategies and prospects.
  Is it something in the water? Processors in and around Atlanta this year have been beating the competition, busting into new markets, and putting smiles on the faces of their investors.
  Global Payments Inc. has made several acquisitions to spread its merchant-acquiring business into Eastern Europe, a risky but promising region for consumer payments. Fellow merchant acquirer Nova Information Systems also has made strides in Europe. Nova, a unit of U.S. Bancorp, however, has preferred the tried-and-true economies of Western Europe.
  Total System Services Inc. (TSYS), about 100 miles down the road in Columbus, Ga., has locked in several important deals on the issuing side of the processing business, garnering the blockbuster 87 million card accounts of J.P. Morgan Chase & Co., which in July bought the No. 3 card issuer, Bank One Corp.
  Meanwhile, Certegy Inc., just across the Atlanta city limits in Alpharetta, Ga., has quietly built its processing for credit unions and community banks into a $1 billion business.
  There's no great secret to the Peach Tree State's success this year-smart, strategic planning by seasoned management, bucket loads of hard work, a willingness to strike out in new areas, an emphasis on top-notch customer service, a dash of luck, and other basics taught in Business 101, observers say. But bringing these elements together in one place at one time is a different and intriguing story.
  Atlanta has been an economic powerhouse for the last 20 years. It claims, rightly, to be the capital of the Southeast, and has become a banking center there. Georgia Tech, University of Georgia and other schools keep generating brainpower. Hartsfield-Jackson International Airport has made the city a global center of transportation.
  The sprawling metropolitan area counts a population of over 4 million, bringing in national and international influences. But Atlanta itself has less than half a million residents, giving it a smaller-town feel, especially for those working in a specialized industry.
  "In Atlanta, everybody knows everybody. There are very few strangers in payments systems there," says Paul Martaus, president of Martaus & Associates, a veteran payments consultant in Mountain Home, Ark. That stirs the pot with both cooperative and competitive interaction, he says.
  Industry behemoth First Data Corp. always seems to be lurking nearby for its Georgia competitors. First Data itself was headquartered in Atlanta for several years after it was spun off from American Express Co., but the $38.2 billion-asset processor shook off the red dust of Georgia and moved to suburban Denver in 2001. Yet First Data operates a data center in Atlanta that it picked up when it bought Concord EFS Inc. in February.
  Atlanta also is home to payments consultant Speer & Associates Inc., while terminal marketer VeriFone Inc. operates its North American software development, marketing and finance offices in the city. VeriFone archrival Hypercom Inc. runs its North American division there, generating 30% of its worldwide revenues. And Atlanta-based Lynk Systems Inc., a rising merchant acquirer that offers full-service processing, was bought in September by the Royal Bank of Scotland Group plc for $525 million.
  This year, TSYS, Global, Nova and Certegy are the leaders of the Georgia pack.
  TSYS's $93.5 million headquarters in Columbus sits on the banks of the Chattahoochee River, the one-time nexus for the cotton manufacturing industry. That business has largely gone overseas, and now Columbus is attempting to rebuild itself with financial-services outfits like Synovus Financial Corp., the holding company that owns 81% of TSYS.
  TSYS's pride and joy is its TS2 operating system, which gives its credit card-issuing clients high-speed processing along with a slew of tools that fight fraud, predict consumer behavior, produce eye-catching statements, and other add-ons that have become standard products. TSYS processed 7.4 billion card transactions in 2003. Income from its processing services made up 67% of its 2003 revenues of $1.05 billion.
  Chase said it selected TSYS due to its technology and pricing, and other issuers agree. TSYS in 2004 won the 12 million accounts of FleetBoston Financial Corp., after its acquisition by Bank of America Corp., in addition to more than 1 million from People's Bank. Bank of America accounted for about 18% of TSYS's revenues from 2001 through 2003. TSYS projected this summer that it would have 417 million accounts on file at year-end 2005. By coincidence, First Data this June reported 417 million domestic and international accounts on file.
  Philip W. Tomlinson, TSYS chief executive, told analysts that the company had 287 million accounts at the end of the second quarter, and that the conversion of the Chase portfolio will give it a 35%-to-40% market share.
  Gary Prestopino, an analyst who follows the payments industry for Barrington Research in Chicago, says that TSYS could see growth of 10% to 15% in 2005 as it converts the card accounts.
  TSYS's strength in credit cards, however, has an Achilles heel, as consumers increasingly shift to debit and prepaid cards. "Our success is (due to) our concentration on issuing and processing," says Gaylon Jowers Jr., executive vice president of global sales, strategy and emerging markets. "Our weakness is diversification."
  In response, TSYS in August bought prepaid provider Clarity Payment Solutions for $53 million, and renamed it TSYS Prepaid Inc. Jowers says prepaid cards in the U.S. will see 20% annual growth for the next several years and come to rival credit cards in consumer use.
  Prepaid product lines will encompass payroll, wireless/mobile phone, insurance claims, incentives and convenience, along with the common merchant gift cards, says Jowers.
  Jowers now seeks to fill TSYS's debit hole, saying that TSYS will acquire or partner with a brand-name network though he declines to discuss specifics. Tomlinson told analysts in April that TSYS put in a "very aggressive" bid on First Data's NYCE Corp. network but "we didn't make the first cut, and it wasn't over price ... "
  Observers note that there aren't many major networks left. In the last 18 months, First Data bought Concord and its Star network, Metavante Corp. bought NYCE from First Data and its minority bank owners, and Visa USA has seen healthy growth in its own Interlink point-of-sale debit network. Both Pulse and the Co-op Network are independent, and have the breadth and size that TSYS appears to be looking for, but are owned by consortiums of financial institutions.
  TSYS also offers its Value Added Products division, an office that has recorded 300% growth since it was formed five years ago, says Andy Marks, group executive of the unit. Clients have been snapping up its anti-fraud products along with tools that predict cardholder behavior. Chase plans to use all 41 of the value-added services as it converts its accounts to TSYS, says Marks.
  The next logical step is data analytics, he says. TSYS gathers reams of cardholder information while processing transactions but passes that along to specialists like Acxiom Corp. and Harte-Hanks Inc. for the analysis.
  "We probably don't take advantage of all the data we have," Marks says. "Clients want us to be more consultative. We can use that data to grow our portfolio."
  TSYS sees analytics as the vehicle that will help clients' cards grow from being top-of-wallet to being the link that ties everything in the wallet together, according to Connie Cartledge Dudley, executive vice president of product and client development. A financial institution may have many relationships with a cardholder and her household, but putting all that information in one place and using it has long been an impossible dream for banks.
  The consolidation in the banking industry and the power of today's computing systems makes the dream possible, argues Dudley. Risk management improves when an institution can monitor all the products it is selling to a household. A bank may reduce costs by combining monthly statements to the household. Finally, a total view of the customer's financial situation can lead to smarter marketing.
  "(Our client) can aggregate risk, send a single statement, and conduct pinpoint marketing," says Dudley.
  TSYS is also an important player in processing for merchant acquirers through its 50-50 ownership with Visa USA of Vital Processing Services L.L.C., the second-largest front-end processor in the country after First Data. An estimated 9.5 billion transactions were processed through Vital's network in 2003, according to Thomson Media's Card Industry Directory, 16th Edition. Last year, TSYS generated revenues of $22.1 million from Vital, down from $23.6 million in 2002. TSYS attributed the drop to price concessions to two large clients and Nova shifting certain transactions to in-house processing from Vital.
  TSYS would like to expand more internationally but its results there have been mixed.
  Global Growth
  American processors have been licking their chops over Europe as the region's banks, acquirers and merchants face a 2005 deadline to meet Europay/MasterCard/Visa, or EMV, standards for smart card acceptance and processing ("U.S. Acquirers Eye Europe," July). These EMV requirements have many European players seeking to outsource much of their card operations rather than invest in upgrades.
  TSYS opened in September a $36-million data center in the United Kingdom to serve the 20 million card accounts it processes for such major clients as Barclays Bank plc, Royal Bank of Scotland and others.
  TSYS entered the Mexican market in 1995 through TSYS de Mexico, a joint venture with 13 banks in the region. But clients representing over 90% of its Mexican revenues have de-converted from the TSYS platform in the last 12 months, according to TSYS filings. The contracts were picked up by Banco Santander.
  International markets appear to be paying off for Global Payments. It paid $65.3 million for Muzo a.s., a major acquirer in the Czech Republic that Global intends to leverage for growth throughout Eastern Europe. Last year, Global got into the money-transfer business, paying $190.4 million for DolEx Dollar Express Inc. and its affiliates. DolEx offers electronic consumer-to-consumer money transfers, primarily to Mexico.
  Global is a classic merchant acquirer, offering card processing and other transaction services to small and mid-sized merchants in the U.S. and Canada. It processed 2.7 billion transactions in its 2004 fiscal year ended May 31. Revenues have grown steadily from $462.8 million in fiscal 2002 to $629.3 million in 2004.
  Prestopino credits much of Global's success to Paul R. Garcia, the company's chairman, president and CEO. Garcia has been instrumental in building Atlanta's payments business. In the 1990s he led First Data's issuing services division, and was CEO of National Bancard Corp. (NaBanco) when it was the top processor of merchants' Visa and MasterCard transactions. Garcia was president and CEO of National Data Corp.'s eCommerce division when it was spun off as Global in February 2001.
  Alternative
  Garcia sees DolEx as a strong alternative to First Data's industry-leading Western Union, and as a means to serve the 38 million Hispanics in the U.S.
  "DolEx has distributed 850,000 Amigo Latino cards, and all of the consumer's information is entered electronically," says Garcia. DolEx outlets are "culturally attuned to the Hispanic market. Staff speaks Spanish, signage is Spanish. The store becomes a de facto community center."
  Prestopino says Global is adding about 20 DolEx branches each quarter to the 640 now operating. The money-transfer market to Latin America was worth about $38 billion in 2003, according to the Inter-American Development Bank.
  Jeffery B. Baker, Global's senior vice president of strategic planning, says DolEx will add services such as prepaid phone cards and check cashing, and expand further into Latin America. The business model also could be applied to India, Spain, Europe and China, says Baker.
  Prague-based Muzo gives Global a central outpost in Europe, where it is 90 minutes by plane to Moscow but west of Vienna, says Garcia. Global is seeking to buy other acquirers in the region that dominate their home markets, he says. Card markets there are similar to the U.S. of 25 or 30 years ago with little penetration into the wallets of a growing middle class, adds Baker.
  Back in the U.S., Global in August bought Comerica Inc.'s 49% interest in Cash & Win, a provider of credit and debit card cash advances at casinos and riverboats. Global now owns 100% of Cash & Win and will bundle it with its other gaming products, says Garcia.
  Rumors have swirled that Global could be acquired, but Garcia downplays the idea, saying his company's complicated structure and $1.8 billion market capitalization-big compared to other independent merchant acquirers-ward off many suitors.
  Nova Information Systems could be a brother to Global with its card processing services for merchants, and it, too, is moving fast into Europe. But Nova's strategy is to partner with banks to serve established merchants, with the bank stamping its name on the relationship.
  Nova has alliances with 19 banks that market its services, says Edward Grzedzinski, president and CEO. "It's white-label distribution at their branch. Merchants come to do their business and I don't spend a dollar on brick and mortar. We ride the coattails of a trusted partner," says Grzedzinski.
  The money instead goes to customer service, he says. Nova's annual client attrition rate is under 10%, an outstanding number for a merchant acquirer, says Grzedzinski.
  The big payoff was in 2001, when U.S. Bancorp paid $2.1 billion to buy Nova, at the time a publicly held non-bank acquirer. U.S. Bancorp named Grzedzinski, Nova's head, vice chairman of the Minneapolis-based bank holding company while keeping him as Nova's leader.
  The $192 billion-asset U.S. Bancorp has given Nova deep, deep pockets and opened doors to merchant clients and bank partners. In April, Nova paid a reported $56 million for the 10,000 merchant accounts of Union Bank of California. Nova will market its services through Union Bank's 302 branches in California, Oregon and Washington. Annual charge volume from the merchants will total $3 billion, Nova reports.
  In the last three years, Nova has applied its white-label model to Europe, marketing itself to banks pondering whether they want to upgrade their technology to meet the imminent EMV requirements.
  In 2001, Nova launched euroConex Technologies Ltd. with the Bank of Ireland. It expanded into the United Kingdom in April with the $148.3 million purchase of the 27,000 merchant accounts of Alliance & Leicester Commercial Bank. That month Nova also bought out Bank of Ireland's share of euroConex for a reported $48 million.
  Nova moved into Eastern Europe with the purchase of CardPoint, a merchant acquirer with about 15% of the Polish market. In August, Nova paid an undisclosed price to buy the acquiring operations of a leading Norwegian firm, Euroline Norge.
  EuroConex processed about $7 billion in transactions last year and now has about 100,000 merchant locations under its belt. Grzedzinski predicts Nova's European business will process transactions worth $35 billion in 2005 "without further acquisitions." That compares to the $130 billion that Nova will process in the U.S. and Canada. But, "in the next three to five years our processing in Europe will exceed what we do in North America," he says.
  The fourth Atlanta-area processor is more of a tortoise compared to its three hare neighbors. Certegy Inc. is primarily a card processor for issuers, focusing on community banks and credit unions. Certegy's second major business is check authorization at the point of sale.
  In 2003, Certegy garnered revenues of $1.01 billion, with the Card Services group contributing $644.5 million and Check Services, $371 million. Certegy began as a division of the Big Three credit bureau Equifax Inc. Equifax spun it off in 2001.
  Barrington's Prestopino credits the company for dominating a niche that is less price-competitive and for its long-term alliances with the Independent Community Bankers of America and Card Services for Credit Unions. "It's a good business that is under-penetrated. It grows as small (institutions) issue cards," he says.
  Certegy has a domestic portfolio of about 25 million cards, built from its relationships with 6,500 financial institutions, says Larry J. Towe, Certegy's president and chief operating officer. That gives it economies of scale that its clients, typically with fewer than 25,000 cards in their portfolio, just don't have.
  Credit unions aren't glamorous but they provide a steady rate of growth, says Towe. About 40% of the 11,000 credit unions in the U.S. don't issue cards, and Certegy will sign anywhere from 200 to 400 new clients a year. Membership numbers at the average credit union grow from 4% to 6% annually, he says.
  Being a one-time unit of a global firm like Equifax helped Certegy offer its services worldwide. It processes about 25 million card accounts outside the U.S. and is in the United Kingdom, Australia, Chile, Brazil and France. Generally, Certegy's international clients are larger than the firms it serves in the U.S., says Towe.
  In 2003, Certegy announced its Melbourne, Australia center would process for the Krungthai Card Public Co. in Bangkok, Thailand. "They have one million credit card accounts we will convert this (fourth) quarter," says Towe. The deal opens markets in Southeast Asia, including Singapore and Malaysia.
  Certegy has taken its lumps, too. Revenues from its card group in 2003 dropped 2.5% from the previous year, primarily due to the loss of Banco Real, a large Brazilian customer. Certegy also has a merchant-acquiring arm within Card Services that reported 2003 revenues of $170.3 million, a 16% drop from 2002 due to the loss of client PayPal after its purchase by eBay Inc.
  The check-authorization division targets major merchants and points to clients Wal-Mart Stores, Best Buy, Sears, and Saks Fifth Avenue. Check writing is "declining about 4% annually at the point of sale in some stores," Towe says. But Certegy still processed checks with a face value of $35.2 billion worldwide in 2003. Further, check fraud is increasing, so merchants have been inclined to outsource their "check-warranty" needs, says Towe.
  Bulking Up
  This year, Certegy made several strategic acquisitions, paying cash for three firms. Like Global, it expanded its presence in gaming, acquiring Game Financial Corp., a provider of debit and credit card cash advances, check cashing and other services at 60 casinos. Certegy reported it paid $43 million for the firm that could add $50 million to revenues.
  In February, Certegy bulked up its core processing business, paying $22.5 million for Elkhart, Ind.-based Crittson Financial Services LLC. Crittson also targets community banks, and is a full-service card processor for 275 financial institutions and 8,500 merchants nationwide. Crittson could add about $20 million in revenues.
  In August, Certegy paid $7 million for Caribbean CariCard Services, Inc., a card processor in 16 countries throughout the islands. CariCard could add as much as $4 million to revenues.
  Clearly, each of these four firms has set itself a full plate as a new year is about to begin. Their 2004 accomplishments make a strong addition to the record of growth that Atlanta area companies have made to the card industry. Whatever happens in 2005, this was Atlanta's year.