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First Data-Concord Merger Creates Payments Powerhouse

The long-anticipated merger of First Data and Concord creates a payments powerhouse with a coast-to-coast EFT network formed by Star and NYCE.

Ending months of speculation, First Data Corp. and Concord have agreed to merge in an all-stock deal, forming a $10 billion entity that's nationwide in scope and a major force in e-payments. Valued at $7 billion, the deal creates a powerhouse in EFT switching, online and offline debit, ATM terminal driving and card issuing services.

The deal holds advantages for both parties. In the POS sector, First Data adds Concord's 900,000 merchants-mainly gas stations, supermarkets and convenience stores-to its roster of 3 million merchants. In EFT switching, it gains Concord's Star network which, when combined with its NYCE network, creates a coast-to-coast debit network. It also gains Concord's 200,000-terminal ATM driving business.

For Concord, the deal enhances its ability to renegotiate contracts with major banks. Set to expire over the next 18 months, the contracts are critical to Concord's survival, said Dick Kiphart, chairman of Memphis, Tenn.-based Concord. "The uncertainty of these renewals has been a source of speculation. This partnership offers us a unique opportunity to retain these contracts."

Concord is counting on First Data's reputation to win banks over. "First Data is bank-centric, both in their card issuing business and particularly through their merchant bank alliances. These relationships, coupled with First Data's strong cash flow, will put us in position to renew these contracts," said Kiphart.

Instead of competing against each other, Star and NYCE will now work together to retain customer relationships. "There was some concern on Concord's part that these institutions would not renew, and either go to First Data or more likely bring the ATM driving and terminal switching back in house," said Jerry Silva, senior research analyst at TowerGroup.

First Data itself recently lost an important account when Bank One tapped TSYS to take over its credit card processing from First Data in 2004 (see BS&T, April 2003). Starting in 2006, Bank One will process its own transactions as a licensee of the TSYS processing application. In 2010, the bank will own the card processing technology outright.

A compelling reason for the First Data-Concord deal is the $230 million a year the companies expect to save on combined operations. "Whenever you look at a merger, one of the things you look at besides synergies is how much you can reduce your costs," Silva said. "How much more efficient can I be?"

In order to realize these savings, however, the companies will have to merge the technology operations in their data centers, something that First Data and NYCE are still working at a full 18 months after their merger, said Silva. "I don't think either of those have gotten to the point where they've finished digesting and realizing those savings."

Although the companies overlap in some areas, there are synergies, such as between First Data's strength in merchant processing and Concord's strengths in EFT switching and terminal driving.

"With the union of First Data and Concord, we will add the processing expertise and scale to the already significant presence we enjoy," said Kiphart.

"The deal leverages the strong presence of both First Data and Concord in the online debit space," said Charles Fote, chairman and CEO of Denver-based First Data.

One of the most important reasons for doing the transaction was the opportunity to provide universal authentication. By enabling all debit transactions, both online and offline, to be secured with a PIN, universal authentication makes it harder to steal another's identity or repudiate a legitimate transaction. Universal authentication can be performed both at the POS and online.

"Every transaction's going to be signed electronically. When you can electronically sign anything, including transactions at your home PC, the transaction has a better chance of sticking than in an offline signature-based mode," Fote said.

Doing away with signature verification would shift the burden of verifying transactions from the back office to the POS, giving First Data an opportunity to sell additional processing services. "When you electronically authenticate the transaction, you identify yourself and then the verification takes place in some database," Fote said. "The back room and the account relationship with the consumer are combined with the application at the POS."

The deal is unlikely to be affected by-nor have an affect on-First Data Net, a closed-loop network that provides a direct connection between issuing and acquiring banks. First Data Net is the subject of a lawsuit by Visa, which has accused First Data of trying to steer transactions away from its VisaNet system, in violation of bylaws requiring that authorization and settlement of Visa transactions be done over VisaNet.

In a countersuit, First Data has claimed it's merely "eliminating unnecessary detours in the payment process."

While the furor over First Data Net gets resolved in court, First Data is exploring other avenues for creating an end-to-end payments network. "We'll be moving transactions efficiently from point A to point B, and that's what First Data Net was all about," said Fote.

Noting that First Data plans to spend $1 billion buying back its own stock after the merger is completed, Fote was optimistic about the prospects for the merged company.

"Some estimates call for electronic payments to make up half of all payments by 2010, compared to 35 percent today. Both First Data and Concord benefit from the underlying consumer trends toward electronic payments."


- Create national EFT network
- Annual savings of $230M
- Boost online debit at POS

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