TSYS Changes Course, Forms Joint Venture with First National of Omaha

The joint merchant-acquiring venture announced Monday by Total System Services Inc. (TSYS) and First National Bank of Omaha marks a major change in strategy by both companies. The deal, scheduled to close April 1, marks the first time TSYS is taking an ownership interest in a merchant portfolio. And for First National of Omaha, well known for its bank-centric orientation, the venture represents a major ramp-up in its dealings with a third-party processor. Columbus, Ga.-based TSYS will pay $150.5 million in cash for a 51% stake in the bank's big acquiring operation, First National Merchant Solutions (FNMS). TSYS will have three seats on the joint venture's five-seat board of directors, and First National two. Diana Mehochko, president of FNMS, will serve as president of the joint venture, which will run independently and be headquartered in Omaha. A top 10 acquirer, FNMS serves 302,000 merchant locations and had charge volume of $74 billion last year. TSYS and the bank expect to close the deal April 1. News of the venture came at the same time TSYS confirmed rumors that Robert J. Philbin, president of its merchant division, TSYS Acquiring Solutions, resigned last week. A spokesperson tells Digital Transactions News that Philbin left “to pursue other interests.” In an interview, TSYS president and chief operating officer M. Troy Woods declined to give details about Philbin's departure last Tuesday. He says the company is “real close” to naming a successor. TSYS archrival First Data Corp. did not invent but implemented the joint-venture strategy with at least 10 banks beginning more than a decade ago. TSYS long maintained that such an approach turned processors into competitors of their bank customers. Woods says TSYS now takes a different view. “We talked about that for a long, long time at TSYS,” he says. “We were as sincere and direct about it as we could be, but things change.” The pros of joint ventures, he notes, now “clearly outweigh the cons.” They include TSYS getting direct access to merchants, meaning TSYS can more easily sell its big assortment of payment products that include prepaid card services and the capabilities of Infonox Inc., a specialty software firm TSYS bought in 2008 for $50 million (Digital Transactions News, Nov. 6, 2008). “It puts us a lot closer to the point of transaction,” says Woods. “We felt it made a little more sense to get one step closer to the merchant rather than to sell [through] the acquirer.” Secondly, the revenue potential of direct ownership is in the “multiples” of that of third-party processing, Woods adds. FNMS generated $93 million in net revenues last year. According to Woods, the joint venture's revenues will more than compensate TSYS for the loss of Bank of America Corp.'s merchant-processing business to First Data last year (Digital Transactions News, June 29, 2009). TSYS's new strategy makes sense, according to acquiring consultant Kurt Strawhecker, managing partner of Omaha-based The Strawhecker Group. In fact, he says merchant-acquiring banks now expect processors to have portfolio-management expertise, and TSYS's lack of joint ventures may have played a role in First Data winning BofA's business. “I think when they lost BofA, part of it was, 'you don't know how to run a portfolio, First Data does,'” says Strawhecker. “What TSYS for years had regarded as an asset, not owning merchants, ending up being a disadvantage.” FNMS already uses TSYS's front-end system for about half of its authorizations, but does the core processing functions itself. FNMS will continue to use TSYS for authorizations, and the current plans call for the core FNMS and TSYS Acquiring Solutions platforms to remain independent of each other. First National of Omaha said by that selling a majority stake in FNMS to TSYS, it gets increased scale and access to more technology. “This joint venture gives FNMS increased opportunities to compete in a rapidly changing industry,” bank president Daniel O'Neill said in a statement. The bank will refer business customers to FNMS under a long-term marketing and referral agreement. Securities ratings agencies last year expressed concerns about the capitalization levels of First National of Omaha and its parent company, First National of Nebraska Inc., the nation's largest privately held bank holding company. But bolstering the company's financial underpinnings was only part of the motivation to create the joint venture, a bank spokesperson says by e-mail. “The capital benefit is a consideration, but not the prime motivation for the agreement,” the spokesperson says. “We believe it was the best way to take First National Merchant Solutions to the next level.” Last year, another big bank, Cincinnati-based Fifth Third Bancorp, sold a 51% stake in its Fifth Third Processing Solutions acquiring unit to private-equity firm Advent International (Digital Transactions News, March 30, 2009).