TSYS Nears 30 in an Industry Upended by Newcomers

The processor Total System Services Inc. has been through lot in its nearly three decades of existence, but nothing compares to the state of the payments industry today.

New entrants such as Square Inc. and Groupon Inc. are challenging the conventional way of reaching merchants and handling payments. Plastic cards may lose prominence as mobile wallets, such as the Isis wallet that launched its test Monday, gain traction. And prepaid cards are opening doors for companies that otherwise would not be able to dip a toe in the payments industry. 

"There's more innovative and different things happening in the payments industry than I've seen in the past 30 years," Phil Tomlinson, TSYS' chairman and chief executive, said in a conference call with analysts Oct. 23.

TSYS, which will be a 30-year-old company next year, views some of these disruptors as partners and acquisition targets instead of rivals, Tomlinson says. TSYS highlighted its recent deal with Truaxis, a unit of MasterCard Inc., which allows TSYS to offer loyalty rewards based on consumers' spending data. 

"We really like what those guys have," Tomlinson says. "We think it's got a lot of potential."

Though Tomlinson did not name specific acquisition targets, he said TSYS is eyeing areas such as online enrollment and e-commerce rather than making an acquisition to simply build scale.

"You don't see us trying to buy a big merchant portfolio that's pretty vanilla," he says.

When asked about the disruptive power of Square and its peers, which sell portable card readers that attach to smartphones, Tomlinson said, "we would like to be able to come out with our own version of that because we do think that, for a certain market, it's a very attractive product."

Even the Merchant Customer Exchange, or MCX, was cast as an opportunity rather than a threat. MCX is a developing payments initiative created by major retailers. An executive at Best Buy, one of the participating retailers, said at a recent conference that the merchants are developing MCX out of a desire to keep customer data rather than hand it over to a bank, carrier or handset maker. 

Tomlinson would not predict whether MCX would succeed, but he said its existence might benefit TSYS.

"TSYS could certainly play a role in that initiative," he says. "A lot of those big merchants are our customers already."

This is not to suggest TSYS is never threatened. In recent years it faced the loss of client relationships with some of the largest financial institutions, including Washington Mutual and Wachovia, which moved their accounts after their operations were taken over by JPMorgan Chase and Wells Fargo, respectively. TSYS has endured — and, in the example of Bank of America Corp.'s consumer card portfolio, even attracted one of its major clients back.  

TSYS announced its earnings the same day Target Corp., a TSYS client, announced its decision to sell its card portfolio to TD Bank. TSYS does not expect to lose Target's business as a result of this deal.

"We have a contract with Target up to 2019," Tomlinson says. Under Target's agreement with TD, "they'll still control the processing and the customer service."

TSYS' net income rose 7.5%, to $62 million in the third quarter from the same period a year earlier. Its revenue rose 1.8%, to $468.1 million.

In a research note published Oct. 24, Thomas McCrohan, an analyst at Janney Capital Markets, said TSYS' earnings were "generally in line with expectations," though transaction growth in North America appears to be slowing.

TSYS should have an opportunity to make an acquisition, as the U.S. merchant processing market is "highly fragmented and a good candidate for consolidation," he wrote.