Cover Story

by Lisa Dowling

   Adam and Eve. Tracy and Hepburn. Lewis and Clark. Tom and Jerry. Since the time of the Garden of Eden, couples have dominated the planet. Both the famous and the infamous have left their mark on history. When one looks at coupling in the payment processing industry, that statement holds true as well.
   What makes a good match? Why and how do companies hook up?
   "Obviously it depends on what the strategy is and how the strategy between the two partners is designed to create the 2 plus 2," says Stephen D. Kane, one of the premier matchmakers in the payment processing industry and newly appointed Senior Executive Vice President of Business Development for his newest match, First American Payment Systems. "We have seen good partnerships where there were different cultures. It wasn't necessarily the culture but the nature of the business and how they expanded the marketplace and allowed a provider to offer more services than what they previously did that worked."
   Kane believes what motivates companies to hook up is quality of service, more services and the all-telling bottom line. He cites entities like First Data Corp. and First Financial as examples of mixed marriages - each partnering with culturally different entities but the couplings allow for more and better services for their respective customer bases while allowing both partners to become more efficient and more competitive in their respective distribution channels.
   Speaking of First Data, they may very well be the Liz Taylor of the payment processing industry � consummating more marriages than any other corporation. Recent hookups include BP Petroleum, Western Union International, Paymentech, TASQ, Card Service International and Concord EFS, just to name a few.
   After its 2001 purchase by First Data, TASQ grew considerably within the last year or so. That association appears to be fruitful. Then at the end of 2001, First Data finally walked down the aisle with Card Service after acquiring the remaining 50% ownership interest. Card Service is also purported to be enjoying increased growth.
   For superpowers like First Data, one can't always know what they look for, what is important, what catches their eye. Kane has a theory about how and why choices are made.
   "In the early days of our industry, you had a bunch of niche players," says Kane. "Everyone focused on the strategy of 'this is my product and service.' Then they discovered the cost of the distribution channel in marketing their products would be reduced and more effective if they provided a wider array of products and services. Everyone guards their customers. Someone having a full array of products and services is less likely to have another cannibalize their customers. Companies realized each one of those product's parties could be in jeopardy if someone came along and provided an all-in-one entity."
   Kane believes matchmakers are called in when a company has a need and doesn't know how to solve it. As regards his own personal matchmaking accomplishments, Kane also focuses on more substantive aspects in addition to protection of customers and product.
   "A good match must insure that the parties compliment each other as well as offer what customers are looking for, not just being bigger for the sake of being bigger," says Kane. "A company must look at who would be the best partner for new and unique products as well as scale. Scale is always an issue, but companies are also looking for cross sale and lowering of distribution channel. It's about being more effective and most efficient in scale and size."
   Kane sees the biggest challenges lie in finding that complimentary coupling and once found, maintaining it.
   "The challenge is in the comfort level between the two partners, allowing them to co-exist and grow as opposed to becoming subordinate or insignificant to the other partner," says Kane. "They must be allowed to form and foster a partnership. Like all complicated business marriages, there is a degree of confidence in senior individuals putting it together. Depending on the relationship, though, that may not be an issue."
   Then there are the Oscar and Felix relationships. Take for example, MasterCard and Visa who recently announced a joint agreement to develop a common standard for EMV application personalizations, i.e. MasterCard's M/Chip and Visa Smart Debit/Credit (VSDC).
   How can two companies that don't appear good on paper come together to form an "odd couple?" What really happens when the two become one?
   "Whoever is the acquired entity gives up a lot of independence and how you manage through that takes a lot of personal integrity and interaction," says Kane. "Whether it's bank alliances, joint ventures, processors, or ISOs that come together, all have complicated arrangements that take a lot of time and effort to join and maximize the individual strengths from each one."
   Kane continues, "Any significant player who has done a variety of acquisitions, they work in various degrees of effectiveness. It is how carefully they plan, organize, convert and how effectively they are able to retain people following the acquisition that makes the difference. I call it the change curve. Anytime you implement a material change. people in those organizations go through a traditional change curve. They are concerned and get upset with the change even though it has been well thought out and planned. The new entity ultimately rises to a new level of effectiveness. It is all about how well you can manage that process, level out that change curve and minimize the disruptiveness. Some of big guys get better at it, others get more callous."
   Rather than dwell on the negative aspects of business relationships, consider instead the positive contributions of these couplings to the industry. Kane sees revenue growth, better quality of product, more services, enhanced distribution channel of products and services and the joining companies becoming more valuable to their customers and their colleagues. He also sees no decline in future corporate hookups.
   "Alliances and partnerships will continue because we live in a very competitive environment where the ultimate survivor is the most efficient provider of products and services. That requires a variety of relationships. You have to joint venture with somebody. For the smaller ISOs, you must always stay mindful of who you are partnering with and the integrity of those people, as well as whether or not that relationship is based on mutual beneficial interests. If two people can't get comfortable with each other, it's probably not likely that relationship will work out. Some come about for wrong reasons, such as undercapitalization or seeking a more efficient way to buy rather than build. There are a broad range of reasons why these relationships exist. If they are managed well by smart intelligent people, these ISO partnerships can work out well."
   Regarding ISO hookups, the industry has witnessed a recent tidal wave of weddings. For instance, Worth, Texas-based First American Payment Systems recently acquired Plano, Texas-based Certified Merchant Services. Was it because they were in that "geographically desirable" category, being neighbors and all? Was it because First American recently hooked up with the capital rich equity firm of Goldberg & Bessemer and was looking to spend some money? Or was it because they had a superior matchmaker in the form of Stephen Kane?
   Here's an example of an ISO with a former, less than stellar reputation that made the intelligent decision to invest in an extreme makeover. Following on the heels of the dispute settlement with the Federal Trade Commission over allegations of "unfair and deceptive business practices," CMS called in industry guru and ETA President Mary Dees, who gave the company a whole new look. It paid off. The suitors came calling and a relationship was consummated to the tune of an anticipated $4 billion in credit card transactions this year through a combined customer base of over 63,000 merchants.
   Another interesting coupling occurred this fall between Intuit and Innovative Merchant Services. Their marriage license calls for Intuit to acquire IMS lock, stock and barrel. Not a bad deal considering IMS brings a dowry of an estimated $25 million in net revenue. By hooking up with IMS, Intuit joins the merchant account services party and is anticipating increased profit and growth. What triggered this union?
   "Originally just a discussion about referring business," says Joe Kaplan, Division President of Innovative Merchant Services. "Ultimately, as we started to talk, we realized our corporate cultures were so much alike and our goals and visions were in line with each other that it made sense to do it together as opposed to apart."
   Kaplan equates the reasons behind this merger to those experienced by all types of couplings. "In every relationship, any time you get together it's about 'Do you like each other?' 'Are your goals the same? 'Is there a need."
   Kaplan admits a lot of other companies came calling. Intuit got the final rose.
   "We are a typical ISO," says Kaplan. "We're very focused, tenacious and passionate about our business. The reality is that Innovative makes the customer #1 and production tends to become a by-product. When other companies look at you, the first thing they look at is if you are servicing your customers properly. Our industry is so production-based and so priced-based that sometimes we make it a commodity. At Innovative, we don't and Intuit's philosophy was right in line with ours."

How is the marriage of Intuit and Innovative working?

   "The courting is definitely over while the honeymoon period, in some respects, isn't," says Kaplan. "It's been amazing. I'd like to stay in this phase. I'd like to stay married to Intuit for a very long time. We are really into the marriage. We're building a foundation for tremendous growth and everyone is transitioning well. There have been no major problems."
   Innovative's 110 employees probably also echo Kaplan's sentiment as they received bonuses of nearly $10 million as a result of the merger. Like Kaplan says, "It takes a lot of people to get you to the dance." And obviously, they were well compensated for it.
   What is Kaplan's advice for other companies looking to hook up?
   "The best time to find a partner is when you don't need a partner," says Kaplan. "Build the operation with the big picture in mind and not just being a commodity. Be your own benchmark as opposed to emulating someone else. Take the risk of being true to yourself."
   Another newlywed ISO couple enjoying good fortune is Total Merchant Services and Money Tree Merchant Services. They picked April 1 of this year to consummate their coupling but there's been nothing foolhardy about it.
   Total Merchant Services is one of the nation's leading merchant account acquirers and under the leadership of Edward Freedman, is on a dedicated path to prosperity and growth. They surveyed the field of potential partners and were captivated with Money Tree Merchant Services.
   "I believe they approached us because of our reputation and the numbers we were doing," says Money Tree President Mitch Lau. "We were courted by other companies but I really like Ed and his brother, Matt. They make it work well for sales partners and like us, they are a Global Payments partner."
   Lau enthusiastically states the partnership is working well, especially because Money Tree was able to merge its back end seamlessly.
   "It's been great," says Lau. "Because of the numbers we are both sending Global, we were able to get better pricing from many of our providers like Global, TASQ and Hypercom. We are able to pass that savings along to our sales partners."
   According to Lau, the biggest challenge was making all the pieces fit, kinda like when two families come together because the parents have hooked up and decided to set up a new house.
   "It's a good marriage," says Lau. "The honeymoon period is ended, the transition is pretty much complete and we are still in love with each other. I see it lasting a very long time because the numbers we are bringing in is only making us stronger. There is strength in those numbers and that will allow us to get better pricing on everything for our sales partners."
   When asked what he'd recommend other companies look for when seeking a mate, Lau answered immediately and emphatically.
   "Make sure the processor they are using is compatible with yours," says Lau. "Make sure you know your partners. Make sure they are out not only for their own good but your own good. Both parties must want a win-win situation. It is too hard to put together a good marriage even with those elements. If you don't have them, it will be a match made in hell."