The marriage of First Data Corp. and NYCE is about lebensraum, as each party seeks a way to break out of its respective compartment-credit card and merchant processing in the case of First Data and online debit processing in the case of NYCE.
The combination of NYCE's PIN-based debit competence and First Data's offline debit and credit card expertise opens up new opportunities for both. "It gives NYCE the opportunity to expand geographically. And First Data is going to be able to leverage the NYCE network to channel its transactions," said Jerry Silva, senior analyst for retail banking at TowerGroup.
The deal is similar to the one last year between Concord and Star Systems in the sense that both involved one payment company acquiring another. But there are differences. Concord was a huge ATM processor and had acquired the Cash Station and MAC networks. First Data, on the other hand, has comparatively little expertise in the online debit world. "The Concord-Star deal was empire building," said Silva. "They were looking to gain national coverage. The NYCE-First Data deal is a real synergy between two different kinds of businesses."
The NYCE-First Data and Star-Concord deals leave PULSE as the largest privately-held EFT network, raising speculation that it could be a takeover target. "First Data-NYCE could look at PULSE as an attractive way to increase their national coverage," said Silva.
For NYCE-which serves 48 million cardholders through 44,000 ATMs and 270,000 point-of-sale locations, mostly in the Northeast-the deal culminates a period of soul searching about its mission in the payments universe. That mission, executives say, is to expand real-time debit capabilities beyond ATMs and the POS locations where they're trapped today (convenience stores, gas stations and supermarkets) to the nation's entire retail POS establishment. With 2.6 million merchant POS locations under its wing, First Data fit that requirement to a tee.
"The match with a partner like FDC with the business model that we came up with-a commercial business model still with significant involvement by financial institutions-was appropriate at this time," said Dennis Lynch, president of Woodcliff Lake, N.J.-based NYCE. Terms of the deal weren't provided.
Of the 10 banks that are current NYCE shareholders, four-Citibank, HSBC, FleetBoston and J.P. Morgan Chase-will continue as minority owners with First Data as majority owner.
For First Data, the NYCE acquisition eliminates dependence on third-party networks like Visa, MasterCard and others to route the billions of debit transactions it captures at POS locations through regional ATM switches and back to consumer checking accounts. As NYCE expands its brand geographically, more and more of these transactions will be routed through NYCE. "If a consumer's using that NYCE-branded card, then it would be routed directly to NYCE, without going through any of the other third-party debit networks," said Rodney Bell, a spokesman for Denver-based First Data.
The decision to cut out third-party networks was also behind another First Data initiative, First Data Net, whose goal is to integrate the company's card issuing and merchant processing businesses. About four billion of the 10 billion retail transactions captured annually by First Data are originated by consumers who are in First Data's card issuing files, giving the company a natural reason to create its own end-to-end payments network.
"First Data Net is our desire to have a proprietary system, to take the payment processing from the point of origination through settlement, so that it doesn't have to go through third-party systems," said Bell.
Electronic payments is just one of the synergies between First Data and NYCE. First Data's electronic check acceptance subsidiary, Telecheck, meshes with NYCE's SafeCheck, a system that provides real-time verification of paper checks presented at the POS. "We're both in the payment business, albeit a slightly different payment business," said Lynch.
Both companies are looking at extending their payment systems through new technologies. NYCE has launched SafeDebit, a system for using ATM cards for making Internet purchases, and has developed a capability for "PIN-less" consumer-to-business or consumer-to-consumer payments. First Data's eONE Global venture is exploring wireless and Web payments.