Having Built Its Own Processing Platform, TransFirst Prepares for a Partial IPO

The big merchant acquirer TransFirst Inc. gave notice Wednesday that it is planning a partial initial public offering.

Hauppauge, N.Y.-based TransFirst filed a registration statement, or S-1, with the Securities and Exchange Commission announcing its IPO plans and putting a tentative value of $100 million on the deal. The filing says Welsh, Carson, Anderson & Stowe, a New York City-based private-equity firm that bought TransFirst in 2007, will continue to own a majority of TransFirst’s voting shares after the IPO. Key details, such as the number and price of shares to be sold and the pricing date, will be set later.

Assuming the deal goes through as planned, TransFirst will join a small but growing number of acquirers and payment processors that have attracted strong investor interest through either IPOs or sizable private investments. They include Mercury Payment Systems Inc., which processor Vantiv Inc. bought in June, sidetracking Mercury’s planned IPO. Founded by Fifth Third Bancorp, Vantiv itself has been publicly traded only since March 2012.

Founded in 1995, TransFirst is one of the nation’s largest acquirers, serving more than 200,000 small and mid-sized merchants. The S-1 reports the company’s gross settled volume at $41.6 billion last year, up 13% from $36.9 billion in 2012. The filing also says TransFirst processed more than $48 billion in total volume in 2013, but doesn’t explain the difference between that figure and gross settled volume. A TransFirst spokesperson says the company is in a quiet period and would not comment.

TransFirst reported total revenues of $1.07 billion in 2013, up 13% from $946.9 million the year before. Although operating income grew handily, net income fell 66% last year to $16.3 million from $47.9 million in 2012, mainly because of a large increase in interest expense.

Technically TransFirst is an independent sales organization and as a non-bank company it can’t access the Visa Inc. and MasterCard Inc. networks without a bank sponsor. TransFirst’s sponsors are Wells Fargo & Co. and Synovus Bank, and by year’s end it expects to add a third sponsor, Deutsche Bank.

But TransFirst is different from most ISOs in that over the years it has built a largely soup-to-nuts processing system. The system’s various components have their own names—ProcessNow, a gateway platform; OnTrak, a proprietary database system, and TransClear, a proprietary back-end clearing and settlement platform the company introduced less than a year ago. One of the few tasks TransFirst doesn’t do itself is provide dial-up payment card authorizations, which are less common today as merchants switch to Internet-connected point-of-sale equipment.

Unlike Mercury, which integrates its payment services with business-management software from hundreds of so-called value-added resellers and uses those VARs as its distribution network, TransFirst relies on the more traditional model of a bigger processor using smaller ISOs and other partners to sell its services to merchants. TransFirst says it has some 1,300 distribution partners.

Payments consultant Eric Grover, principal of Minden, Nev.-based Intrepid Ventures, expects investor interest in TransFirst will be strong mainly because of its full-service platform, which helps it stand out from competitors. But he doesn’t expect TransFirst’s valuation to be quite as rich as that for Mercury, which has been highly successful using a less common distribution model. Vantiv paid an eye-catching $1.65 billion for Mercury.

“Most ISOs buy all their processing,” says Grover, noting that ISOs typically aren't big enough to rationalize an investment in their own systems. “They [TransFirst] are kind of on the cusp. They’re taking a bet and saying yeah, we can do it.”

TransFirst acknowledges that there are risks to the do-it-yourself approach. “As we perform all of the services of a processor, we may be unsuccessful in implementing, utilizing and maintaining our in-house processing systems and functions,” the filing says. “For example, the process by which the interchange rate of a particular transaction is determined is highly complex, open to interpretation, and in some cases subject to payment network rules that are contradictory. If we fail to interpret and apply these standards correctly, we may be subject to complaints by our merchants.”

The filing says merchants in the business-services, health-care and retail industries account for approximately 17%, 15%, and 12%, respectively, of TransFirst’s processing volume.

TransFirst plans to use most of the IPO proceeds to pay off or refinance debt and pay preferred-stock dividends.