Scale is weighing heavily on the minds of financial institution acquirers. Because bank processors have little chance of operating efficiently and profitably without large volumes, most organizations are perpetually searching for additional transaction sources.
Many institutions are working to achieve greater economies by signing additional merchants and marketing newer products and services to existing customers. But some acquirers, such as Cincinnati-based Fifth Third Processing Solutions, a division of Fifth Third Bancorp, also are bolstering volumes by using their merchant-processing platforms to support other bank-related activity.
The acquirer has kept its merchant processing in-house since launching the business in 1973. In 2004, it handled nearly 12 billion transactions, including credit and debit card purchases and ATM volume for more than 1,350 financial institution customers. Fifth Third Processing also is connected to 130,000 retail locations in the U.S., including Kroger, AutoZone, Abercrombie & Fitch, and Nordstrom stores.
"It is very difficult to compete without the scale, which is why so many merchant-acquiring banks are outsourcing and few are bringing the business in-house," says Donald Boeding, Fifth Third Processing's senior vice president and director of merchant services.
Boeding says Fifth Third's acquiring business is growing in the double digits annually. In addition to offering core processing services, Fifth Third also is marketing proprietary gift and prepaid card programs to its merchant customers, and provides transaction information through a back-end portal called Fifth Third Direct.
The portal enables merchants to connect online to Fifth Third's host system to access information on chargebacks, gift card inventory and other account data. Users of the portal also can garner real-time information on other Fifth Third services, such as treasury management and commercial banking.
In another example of operating outside of the box, Fifth Third is the sole processor of Debitman card purchases, which are PIN-based debit transactions that flow through the automated clearinghouse system. Debitman volume is small, but some insiders believe the network has the potential to grow, especially if frustration with the costs associated with bank card programs continues to grow.
Retailers have issued 7,000 Debitman cards, which are accepted at more than 100,000 Fifth Third merchant locations. Issuers receive interchange when the cards are used for purchases at other retail sites.
While most Fifth Third processing is done internally, the acquirer still is forced to buy some services from third parties, Boeding says.
In some circumstances, retail customers are using hardware and software that is not certified to connect to Fifth Third's mainframe. The bank will process transactions generated at such merchant locations over authorization systems belonging to Tempe, Ariz.-based Vital Processing Solutions LLC or other vendors, Boeding notes.
The key challenge in keeping Fifth Third's activities in-house is staying current with evolving processing technologies and the different types of communications protocols, Boeding says. The acquirer also needs to quickly comply with system changes that are mandated by Visa USA and MasterCard International, such as adjustments to rate structures, and ensure that it is able to identify and qualify all transactions at the appropriate interchange.
"It also is critical to be laser-focused on product development," he says. "You can't survive by creating products that don't have a business case."
The acquirer benefits from its in-house capabilities by being able to more quickly attend to its system requirements, Boeding notes. "There is no waiting in a queue or negotiating with a third party to get things done," he says.
And technology supporting a wide range of bank business lines on a single platform makes it easier to justify the expenditure to management.
Authoritative analysis and perspective for every segment of the payments industry
Authoritative analysis and perspective for every segment of the industry
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