Ownership Change Brings Uncertainty

  Ownership changes are part of the payments business. But the PIN-debit market has seen more change than usual lately, as owners of the three highest-volume electronic funds transfer networks in the United States have announced sales plans or spin-offs.
  In December, Morgan Stanley announced plans to spin off Discover Financial, owner of Pulse EFT Association. In April, First Data Corp., owner of the Star network, announced that it had agreed to sell itself for $29 billion to New York-based private-equity investment firm Kohlberg Kravis Roberts & Co. That same month, Marshall & Ilsley Corp. announced plans to spin off Metavante Corp., owner of the NYCE Payments Network LLC.
  It is unclear how changes in ownership of their parent companies will affect the operations of the three EFT-network powerhouses. Analysts and bankers offer some cautious theories, along with caveats that their crystal balls are a bit cloudy. "It's a guessing game until it really happens," says Paul Tomasofsky, president of Two Sparrows Consulting of Montvale, N.J.
  First Data, Star, Discover and Pulse executives declined to comment, citing "quiet-period" conventions leading up to their ownership changes.
  Steve Rathgaber, NYCE president and chief operating officer, predicts smooth sailing after Metavante's spin-off. "NYCE, as part of Metavante, will continue to enjoy the access to the customer relationships that a larger and fast-growing Metavante will bring," he says.
  As chairman of Speer & Associates, an Alpharetta, Ga.-based consultancy, George Albright has seen a lot of changes in EFT networks over the past 25 years, during which the number of networks has fallen from well more than 100 to less than two dozen today. When regional associations of banks owned most networks, they had more control over such issues as pricing, standards, how transactions are routed and customer service, Albright says. The banks' "agenda was, 'we just want to have a seat at the table,'" he says.
  Today, Albright contends, major EFT networks offer commoditized services to banks by the organizations that own them. Those services can range from basic transaction switching and processing to fraud monitoring and printing and mailing new cards to customers, he says.
  Banks do not care as much as they used to about which EFT network brands adorn their debit cards, according to Albright. And the networks, in turn, no longer favor their card-issuing customers more than their merchant and independent sales organization customers.
  "They're neutral in the industry," Albright says. "They have to be."
  Many companies that have bought EFT networks have treated them more as transaction-processing businesses "without too much concern about the growth of the EFT industry and where the world was going," Albright says.
  Where the EFT "world" will go when the parents of EFT networks are spun off or sold is a subject of shop talk among EFT analysts.
  One point of speculation is whether First Data's new owner will keep Star or sell it. Tomasofky says First Data's new owner would have little difficulty finding a buyer for Star.
  "Star is big enough to buy itself via a private-equity play," he says. "And there are plenty of the usual suspects out there that would be interested in buying Star. It could be an opportunity for somebody like MasterCard, which wants to boost its debit card business in the U.S."
  MasterCard representatives would not say whether the card network would be interested in buying an EFT network such as Star.
  GROWTH LIMITED?
  A sale of Star would make more sense for First Data's new owner sooner than later because growth in the number and value of PIN- based point-of-sale debit transactions, while still healthy, is starting to slow, according to Tomasofky. "EFT networks are probably going to be at their peak sales potential now or in 18 to 24 months," he says.
  Albright agrees that EFT-network revenue growth will be limited. "It's very much a commodity business with not a whole lot of upside in terms of immediate growth," he says. While point-of-sale debit transactions still grow at a rate of 20% per year, issuers can only increase the number of debit cards they issue as fast as they increase their checking-account bases, he adds.
  Rathgaber disagrees with the characterization of EFT network services as "commodities." He cites the networks' varied EFT achievements, such as NYCE's development of account-to-account funds transfers in 2000 and mobile-payments work today, that differentiate them from each other.
  'FACTORY' VS. 'BRAND'
  Also determining whether First Data's new owner sells or keeps Star is how it wants the network to fit into the overall corporation. The question is, according to Tomasofsky, "Do they want to be a factory, or do they want to be a brand?" First Data has run its core business and many of its divisions more as a factory, offering customers a plethora of payment services from card production to transaction processing, he explains.
  Another unknown is whether parental-ownership changes will spawn new innovation by the three EFT networks. "A lot of people ask us, 'What's the next big killer application on the EFT-payment side?' We are hard-pressed to come up with more right now because they are already doing a lot," Albright says.
  But Tomasofky says he believes spin-offs of their parents could give Pulse and NYCE more breathing room, with the buck stopping at Discover and Metavante instead of higher up the corporate ladder.
  "Decision-making will, hopefully, be streamlined, and they'll be able to really focus on what's good for the new company," he says.
  Such EFT activities Tomasofsky would like to see more of include PIN-less debit Internet transactions, which Star is testing, and better development of the market for account-to-account transfers via EFT networks, such as those NYCE offers.
  As for Pulse, Albright says he was surprised when Discover announced in 2004 its pending purchase of Pulse and wondered whether Discover's management would understand the EFT market as well as its competitors did. But he says Pulse has done fine under Discover's ownership.
  "It's chugging along," Albright says. "They get their share of interchange."
  Pulse was founded as a Texas-based not-for-profit to serve banks, Albright says. Pulse has continued to provide services at the lowest possible costs but not at the most impressive profits for its owners, he adds.
  Still, it makes sense for the Discover Network to keep Pulse to expand acceptance and issuance of its debit cards, according to Tomasofsky. "Pulse comes in handy because Pulse has relationships with financial institutions," he says. "And Pulse gives [Discover] connectivity outside the U.S., even though it's a national network."
  A notable international acceptance example is Discover Network's reciprocal agreement to accept debit cards issued by China UnionPay, China's largest card issuer, on the Pulse network. In exchange, terminals on China UnionPay's network in Asia accept cards issued on the Discover Network.
  Also chugging along is NYCE, particularly on its home turf.
  Despite less concern overall from banks about EFT-network logos, NYCE is still a "significant" brand in its original market in the Northeast, Albright says.
  That brand recognition sometimes has been a hindrance to NYCE, Tomasofsky contends, as banks that use Metavante services but compete with branches of other banks owned by M&I have refused to print the NYCE logo on their cards, he says.
  Tomasofsky predicts that being free of M&I will draw more bank business to Metavante and NYCE in certain regions where brand matters more.
  Rathgaber believes banks and cardholders care a lot about EFT-network brands, which engender trust and let cardholders know where their debit cards are accepted. And he does not agree that ownership by M&I has made some banks reluctant to show the NYCE brand. "We've always been bank-owned, as has every other network," he says.
  In the end, Rathgaber says, performance is what banks, merchants and cardholders care about, not who owns the EFT network.
  EFT transactions will continue to be a necessary component of modern banking and payments. And whoever owns the networks will want to keep the EFT rails running smoothly while also providing new services that can take advantage of their systems.
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