A World of Opportunity

  Cards&Payments this month introduces "Executive Inquiry," a continuing series of conversations with industry leaders on company strategies, industry trends, and observations on challenges and opportunities in the electronic payments field.
  Philip W. Tomlinson is chief executive officer of Total System Services Inc. (TSYS), one of the largest card processors in the U.S. with a growing international presence. From 1983 to 2003 Tomlinson served as TSYS president, while also contributing as chief operating officer, and moved to the CEO chair in 2004.
  TSYS today claims over 420 million card accounts, recording a 26% compound annual growth rate since 1983. In the last 18 months, it has won processing contracts with Chase Card Services, Capital One Financial Corp., Fifth Third Bancorp and Dutch giant ABN AMRO NV. In March TSYS took sole ownership of Vital Processing Inc., paying $95 million for the other 50% held by partner Visa USA.
  There have been bumps as well. Citigroup Inc., for example, announced plans in June to shift its $29 billion Sears, Roebuck and Co. card portfolio from TSYS to archrival First Data Corp.
  From its headquarters in Columbus, Ga., TSYS has been expanding worldwide, opening a $36 million data center in the United Kingdom last year.
  The following discussion is from an interview C&P Managing Editor Burney Simpson conducted with Tomlinson in late August.
  Q. This year's consolidation wave among credit card issuers gives the remaining giants great market power over vendors such as TSYS. How do you generate adequate returns in the credit card processing business in the U.S.?
  A. The number of issuers is dropping, but the card and transaction markets are getting larger. In the past three years especially, you've also seen the marketplace broaden to include new products like gift cards and new segments.
  The U.S. is still the largest market, and a number of large issuers continue to process in-house. That's a great opportunity long term because there is room for credit card growth. We estimate that in 2003 we held a 20% share of the domestic MasterCard and Visa card processing market. By the end of this year, we project we will hold a 37% share.
  There also are opportunities to gain share from the competition, to add in-house processing and overcome the obstacles of processing private-label cards.
  Q. What are some of the challenges to garnering in-house business? How do you market your TS2 operating system to these issuers?
  A. Historically we've done well. Look at Capital One. They were in-house since their inception. We are fortunate they picked us. A lot of our customers come from in-house operations. We understand it can be an emotional decision. Careers can be at stake. It is similar to the stories you read now about outsourcing to India and the Philippines. In a sense, the issuers are outsourcing their systems to us in Georgia.
  We have to offer more functionality and our costs have to be under control on a long-term basis. There can be no surprises. We invest tens of millions of dollars into TS2 every year to make it bigger, more complete and richer than ever.
  Q. Is there more of a future in processing store cards?
  A. We are very interested in the private-label card business. But the economics aren't as good there. You don't have the transaction activity and consumers holding balances. We are driven by transaction fees. But we have got a lot of private-label customers that are great customers.
  Q. You've been an aggressive acquirer of firms, buying the prepaid specialist Clarity Payment Solutions and the loyalty provider ESC. Why be a buyer?
  A. We are attempting to diversify, fill in with acquisitions where we need to be. Clarity is a good example. Prepaid will keep growing faster than the branded card market. ESC's loyalty programs are a logical business for us to be in. Our task is to determine how we can take a small entrepreneurial company and help it do business with large institutions. That can be hard for small companies.
  Q. You bought Visa's 50% share of Vital. Why?
  A. When Visa USA and TSYS started Vital it was two businesses that needed each other, with TSYS operating the point-of-sale side and Visa the merchant-acquiring side. That is a nice company that's grown and must expand beyond U.S. borders. But Visa USA can't operate outside the U.S.
  We've wanted to buy Vital outright for a long time. We want to expand outside the U.S. That's a logical path for us to go. We can use Vital to enter the international acquiring community. We don't have a timetable, but it gives us the ability to go international and do some other things.
  Q. What other things?
  A. I can't discuss that.
  Q. You've made no secret you want to acquire a debit network. Do you remain on the lookout?
  A. Our hole is the debit industry. We want to be larger there. It's a market that's growing fast. For a long time we've been seen as a branded card and a private-label card processor. We want to change that. We want to acquire a network, but we haven't been successful. Recently we've seen NYCE and PULSE go out of play. They were the last large ones left.
  Q. Would you consider buying one or more of the remaining regional networks?
  A. There may be other ways to become more significant. Also, there's the international side in debit. Much of that is debit already. We are working hard on that. I don't think it's imminent. We are talking to a lot of people.
  Q. You have always been seeking clients beyond U.S. borders. How would you judge your success? What European markets are you interested in?
  A. In Canada, we do 40% of the market. In Europe we've created partnerships with the Royal Bank of Scotland, the Bank of Ireland and Allied Irish. In March, we partnered with ABN AMRO in the Netherlands. We will go into Spain, Germany and Italy. And Eastern European countries have potential. There are a lot of processors there that, over time, probably will consolidate.
  We've been in Mexico about 10 years, and we've had our ups and downs. At one point we had about 35% of the market. During the economic crisis of a few years ago there, the major banks were bought primarily by banks based in Spain. But we are seeing activity pick up there now.
  In Latin America, we have not had success. We are exploring Brazil and Argentina.
  Q. What are your plans in Asia and China?
  A. We had a slow start in Japan. We entered the market, the economy went south and financial institutions got into trouble. Long term we've done well in Japan and in the Asia/Pacific region. We've learned to be patient in that part of the world.
  We also have our eyes on China. Our preference there is to go in with a well-connected local partner. In the long term that will be huge. We have the Olympics in 2008, and the government has said that all merchants must be ready to accept cards by the Olympics.
  Q. Synovus Financial Corp. owns 81% of TSYS. Some have suggested that selling stock or conducting a spin off could raise capital to fund global expansion plans or the purchase of a debit network. Is a spin-off in the offing?
  A. The relationship keeps us grounded. Our roots come from banking experience. Synovus have never held us back. Our success has made that company better.
  Will we always be a part of Synovus? I don't know. Nothing is imminent. The only way to do it would be a spin-off because it's tax-free. A spin-off is more likely now than in the past. We've gotten bigger. Synovus has gotten bigger.
  I don't see the Synovus board stopping us from a spin-off if the reasons are sound and logical. A spin-off would happen if we see an acquisition that we had to have to ensure our success.
  Q. Your stock has traded in the range of $20 to $25 a share for several years. How can you pull up that price?
  A. I'm very unhappy how the market reacted to what we've done this year. We've seen 40% increases in revenues and income. We've signed deals with Chase, ABN AMRO and Fifth Third. We completed the purchase of Vital. The only negative is Sears leaving us in May of 2006. But the stock is static.
  There's not a lot of liquidity in the stock. A lot of people in Columbus own it and don't want to sell. Plus, there seems to be a disinterest in the market.
  I'm open to the stock price taking care of itself. But it is frustrating. I'd stack up our track record in 2005 against anyone, and we have a good pipeline going into 2006.
  Q. How does TSYS ensure the consumer data it holds are safe?
  A. It's top of the list with our clients, our prospects and the regulators. Synovus is a financial institution regulated by several federal agencies, in addition to state regulators. I won't discuss specifics about budgets, but we look under every rock and crevice here. It's clearly a more dangerous world. We must ensure that none of our information can get out. We must stay ahead of the criminals. In a sense, we spare no expense due to the risk to our clients, the card industry and us. Any player small or large could have a problem. That crosses all competitive boundaries.
  Q. Health Savings Accounts show great promise. Are you processing these accounts?
  A. We are dabbling in health care as we speak. There are transactions there where it would be a logical next step. We haven't got it totally figured out. An acquisition is possible.
  Q. Look five years down the road, where will TSYS be? Where will the industry be?
  A. You will see a larger, more diversified TSYS. We will be doing business in all major countries and in most major languages.
  We'll see more card capability. The chip card will be in more wallets, particularly in the U.S. It has not been a success here, but we are experimenting with clients. It's a neat product and required in the U.K.
  We also will process other types of transactions. Every processor is dabbling in health care and in other areas where you could apply this processing expertise.
  We'll develop new areas for our customers to make their lives easier, save them money and make them more profitable. We need to raise the bar on our services. You can't do business in the next 25 years the way we've done it the last 25 years. We need to be more efficient, which comes down to being faster, better, cheaper. To be a success, you've got to deliver that every day.
  Philip Tomlinson, the 59-year-old chief executive officer of Total System Services Inc. (TSYS), has helped lead the processor since before its establishment in 1983 as a spin-off from Columbus Bank and Trust Co. He served as TSYS's president for over 20 years, in addition to contributing as chief operating officer. Tomlinson was named CEO last year. He is a member of the TSYS board of directors and its executive committee, and serves on the boards of Vital Processing Services and the company's divisions for Japan and Mexico. Before TSYS, he was with General Electric Corp., and joined Columbus in 1974. He is a graduate of Louisiana State University's School of Banking of the South.
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