At a time when many banks have shed their credit and debit card processing businesses, $160 billion U.S. Bancorp has bought Nova, an Atlanta-based bankcard processor, in a stock and cash swap worth about $2.1 billion.
U.S. Bancorp said the deal would make it the third-largest merchant payment processor in the United States, two paces back of Atlanta's First Data. The combined company expects to process more than $100 billion in payments in 2001, according to U.S. Bancorp, whose first quarter credit card and payment processing revenue increased by $30.8 million, or 14.1%, over first quarter 2000 revenues.
Nova, which will keep its name but become a wholly owned U.S. Bancorp subsidiary, processes payments for about 560,000 small-to-medium-size companies, including 1,800 banks, while Nova provides the same services to 90,000 larger merchants, including 2,900 financial institutions and agent banks.
"This combination creates the economies of scale that are critical to being a long-term survivor in this desirable segment of the payment services industry, as well as further diversifying the breadth of our current client base," said Jerry A. Grundhofer, president and CEO of U.S. Bancorp in Minneapolis and former head of Firstar, which bought U.S. Bancorp, also the parent company of U.S. Bank, last October.
In addition to increasing U.S. Bancorp's client base, the Nova deal, expected to close in August, gives it greater volume efficiencies, said Jan Estep, executive vice president for merchant payment services at U.S. Bancorp. Although the bank has provided the back-office accounting and settlement for all the transactions for more than 30 years, it has relied on outside parties for 100% of its front-end processing. Nova, on the other hand, has a strong front-end authorization and capture system but has depended on third-party providers for much of its back-end processing.
"It's the combination of those two that give us a great technology fit for both companies," said Estep. "It gives us the volume efficiency over time as we take more advantage of linking the two systems together."
The combined technology also provides a simpler integration relative to the merger with Firstar, whose merchants had used Nova. Although analysts have questioned the timing of the Nova acquisition, coming as it did only seven months after the Firstar merger, "it makes the integration much simpler and puts us more in control of how we could apply good service and quality to those merchants," said Estep. "Having a broader base of merchants on which to spread out the technology capabilities will give us a lot more flexibility to more rapidly create some new offerings."