Title: The Rise and Sprawl of a Card Services Empire
Abstract: First Data Corp. rose from a bonanza of card processing acquisitions. Fearing its power, banks have moved successfully to reestablish a measure of bank control in the card services market. Is there a bigger bank role in First Data's future? The rise of First Data Corp. out of the banking industry to become the largest credit card transaction processor, and its return into the banking fold, is a story of power and control, mergers and acquisitions, and management's efforts to invest the company's strong cash flow propitiously. The company was founded in 1969 as Mid-America Bankcard Association, a card processing cooperative. American Express acquired it in 1980, built it up into eight segments of the computer services industry, renamed it First Data Resources, and exited the business via two public equity and one debt offering in the early '90s. First Data's primary business was and remains card issuer services for Visa and Mastercard issuers, and merchant processing. It is a capital-intensive information-technology business whose back-office tasks of posting, clearing, and settling transactions are invisible and unglamorous, but essential to providing retailers with a complete package of card services and consumers with credit card purchasing and borrowing services. Banks would offer retailers a bundled package either by the transaction processing technology themselves, which many did, or outsourcing technology services to a third-party specialist, like First Data Resources, yet still owning the relationship with the retailer. Merchant processing was, until recently, a fragmented industry comprising many providers. It was also a lucrative line of business for many banks (known as merchant acquirers). Every $100 in card purchases would yield about 27 cents to the merchant acquirer ($1.35 went to the card issuing bank, and 8 cents to either the Mastercard or Visa association--all paid for by the retailer). These were typical margins as late as 1993. In search of volume But super retail stores springing up across America gave retail chains enormous clout--not only with banks but with all their suppliers of goods and services, pushing card transaction margins down. That, plus skyrocketing costs for new technologies--especially electronic point-of-sale systems and networks for transaction authorization, capture, accounting, and chargeback functions--made merchant processing a prohibitively expensive business for most banks without the volume to sustain it. It was no longer a banking but rather a technology business. The key to turning any transaction processing business into a money maker is to drive higher volumes of transactions through a fixedcost computer infrastructure. Many banks sought alternatives to either merchant processing, or card issuing computer services, or both. Some money center banks who chose to stay in the business turned to the equity markets to fund their technology units, sometimes spinning them off wholly or in part to public ownership. Bank of America did this with its BA Merchant Services unit; National City Corp. did the same with National Processing Co.; so did First USA with Paymentech. However, most banks could not, or chose not to, sustain the capital investments required to stay in the card transaction technology business, and opted out entirely. Those who wanted out are now out. This trend, which occurred mostly in the early to mid-1990s, led to a blitz of mergers and a large consolidation in search of economies of scale and scope among card processors. What emerged was a behemoth financial transaction technology company called First Data Corp., with $5.2 billion in revenues last year. The road to empire During the last five years, First Data's management has used the company's healthy cash flow and common stock as currency to help finance an acquisition binge (see timeline on following page), pushing it to the top of both parts of the card processing business--issuer and merchant services. …
Publication Year: 1998
Publication Date: 1998-07-01
Language: en
Type: article
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Cited By Count: 1
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