CardSystems Deal Could Catapult CyberSource High into Acquiring Ranks

CyberSource Corp.'s deal to acquire the assets of CardSystems Inc. would hand the Mountain View, Calif.-based transaction-gateway provider a major sales channel for both card-present and Web-based payment processing, catapulting the company squarely into the ranks of processors for small and mid-sized multi-channel merchants, according to observers. The move also accelerates CyberSource's movement beyond gateway services and into full-fledged merchant acquiring, a trend that started at the company more than a year ago. “I'm not surprised [at the deal],” says Robert Lynch, vice president of the retail solutions group for eFunds Corp. and former chief executive of CyberSource competitor ClearCommerce Corp. “The move makes sense.” But the deal for CardSystems, which has been hammered by litigation and card-network termination notices since a huge security leak came to light in May, could also cause problems for CyberSource. Lynch points out that the company's move into acquiring has been more or less gradual but with the CardSystems acquisition would become glaringly apparent to partners and clients. “It's just tremendous channel conflict,” he says. “There's no way to downplay it now. If they're out there competing for the same merchants, why would their clients want to be a client, or on the partner side why would their partners funnel deals [to them]?” CyberSource currently derives 20% of its revenue?which totaled $11.9 million in the second quarter–from merchant acquiring, up from 5% a year ago. A CyberSource spokesman, though, says competitive conflict should not be an issue for the company. “There's a considerable amount of competition and co-opetition in the payments business overall, and we don't anticipate that will get more difficult” after the CardSystems deal, says the spokesman. CyberSource, which announced this morning it had signed a non-binding letter of intent earlier this week to acquire CardSystems' platform, merchant contracts, and other assets for an undisclosed price, has historically concentrated in software and services, including fraud management, to handle transactions for card-not-present merchants. The acquisition of CardSystems, which is expected to close by year's end, would bring to CyberSource more than 120,000 merchants?12 times the number it serves now?and a network of independent sales organizations to resell acquiring and other services. CardSystems serves a mix of card-present and card-not-present retailers. “It will mean a strategic expansion of CyberSource's payment platform,” said William S. McKiernan, chief executive of CyberSource, in a statement. McKiernan may have hinted at a potential deal with CardSystems during a conference call with securities analysts in July when he said the processor's difficulties may present opportunities for CyberSource to pick up some of its merchants (Digital Transactions News, July 21). Another issue hanging over the deal is that effective Oct. 31 CardSystems' connection to the Visa U.S.A. and American Express Co. networks will be terminated. The card companies' actions against CardSystems came after a security breach earlier this year at the company's Phoenix data center exposed data and security codes on some 40 million card accounts to hackers, who apparently were able to steal information on about 200,000 accounts. Security enhancements made by CardSystems in the wake of the security breach may well have rendered the processor one of the most secure in the country. To satisfy card company demands that the company plug its security gaps, CardSystems called in vendors such as Ambiron TrustWave and Ingrian Networks Inc. to help it come into compliance with the industrywide Payment Card Industry data-security standard, which includes such requirements as encryption of stored data. Still, while CardSystems met an Aug. 31 deadline for compliance, neither Visa nor AmEx would back off on their resolve shut off CardSystems' link to their networks. Now CyberSource says it and CardSystems are “working with the card associations and banks to provide uninterrupted processing for CardSystems merchants and channel partners,” according to the CyberSource statement released today. Contacted by Digital Transactions News this morning, a Visa spokeswoman says the card network is “currently reviewing the announcement by CyberSource” but has no further comment beyond noting that for now its previously announced position on CardSystems stands. Since the acquisition is being structured as an asset purchase, CyberSource may be able to run transactions on CardSystems' technology while CardSystems itself remains as a shell entity, retaining all liabilities, including the termination notices from the card networks and any judgments stemming from litigation against the company, observers say. The CyberSource spokesman could not address the issue beyond noting that the proposed asset acquisition would not include CardSystems' liabilities. “We are working closely with the card associations” to ensure that transactions continue beyond Oct. 31, he says. CyberSource says that while the letter of intent restricts CardSystems from talking to other suitors, the deal is subject to continued due diligence, negotiation of a purchase agreement, regulatory approval, and “satisfaction of closing conditions,” which were not named.