News

Transaction processing is going global

Royal Bank of Scotland Group plc's decision to buy privately owned merchant acquirer and processor Lynk Systems of Atlanta for $525 million provides proof that transaction processing is becoming a truly global business.

August 15, 2004

For evidence that financial services are becoming a truly global business, one need look no further than Royal Bank of Scotland Group plc's decision to buy privately owned merchant acquirer and processor Lynk Systems of Atlanta. The $525 million deal was announced last week.

The deal came on the heels of Royal Bank's purchase of the credit card business of People's Bank of Bridgeport, Conn., for $360 million and its announcement of a deal to buy Cleveland's Charter One Financial for $10.5 billion. Royal Bank plans to combine Charter One with Citizens Financial Group, the Rhode Island bank it has owned since 1988.

Lynk has long been a client of Citizens, using it as its EFT network gateway and for ISO sponsorship. The Charter/Citizens combination will create the sixth-largest bank in the United States.

According to a recent conference call, Royal Bank Chief Executive Fred Goodwin said the likelihood of cross-border acquisitions is growing in the wake of such big U.S. banking deals as Bank of America's $47 billion purchase of FleetBoston Financial and J.P. Morgan Chase's $55.1 billion purchase of Bank One, both announced in the past year.

BofA also plans to buy National Processing Inc. for $1.4 billion, a deal that will create the nation's second-largest credit card processing company with nearly $250 billion in annual volume.

"The climate in Europe has changed a little. There is a type of conversation that hasn't happened before. U.S. banks are getting bigger and bigger. You don't have to spend too much time looking in the crystal ball to think they will be turning their attentions elsewhere," Goodwin said.

While Royal Bank has expressed interest in acquiring Britain's Abbey National, it has said it doesn't believe British competition authorities would permit the deal. Authorities scotched Lloyds TSB's proposed purchase of Abbey in 2001.

The U.S. is a ripe market for an entity like $90 billion Royal Bank, which has "boatloads of cash" and enjoys an attractive valuation on the dollar compared to the British pound, said Alan Falconer, senior vice president of consulting firm Paragon Data Services.

The merchant acquiring and ATM businesses also provide some interesting opportunities for Royal Bank, Falconer said.

Charter One has agreements with retailers including Wal-Mart, Starbucks and Kroger to offer in-store banking. Royal Bank will issue co-branded credit cards to Kroger customers in 2004's fourth quarter.

During the conference call, Goodwin said there is plenty of room for growth in Charter One's and Citizens' credit card businesses. According to a recent American Banker report, it is not yet clear whether Lynk or Fifth Third Processing Solutions, Kroger's current processor, will process payments made with the new cards.

With a national sales force of some 350 employees, Lynk has the potential of making Royal Bank a powerhouse in the mid-tier merchant processing market, said Norma Wayco, a Lynk senior vice president.

Like banking, transaction processing is becoming an increasingly international business. Atlanta's Global Payments, which is partly owned by the Canadian Imperial Bank of Commerce, earlier this year acquired 98 percent of MUZO, the largest payment processor in the Czech Republic, for $64.7 million.

Also earlier this year, First Data Corporation bought payment processing businesses in Greece and Australia (Delta Singular Outsourcing Services and Cashcard, respectively).

Foreign banks in the U.S. are not uncommon -- not with the presence of banking giants like the Netherlands'ABN Amro and Britain's HSBC -- but the transaction processing appears to be a somewhat new twist, said Ali Raza, a vice president at consulting firm Speer & Associates.

"Now you've got the Royal Bank of Scotland owning not only one of the top 10 banks in the U.S. but also a fairly decent-sized merchant processing and ATM company," he said.

With the Lynk purchase, Royal Bank gains a company with proprietary processing technology Raza said.

Wayco said that Royal Bank was attracted to the company's in-house platform. Because Lynk has sat on the sidelines during the flurry of merger and acquisition activity among U.S. transaction processors during the past few years, it has focused on updating its core technology rather than platform integration issues.

"We've always plowed a lot of dollars back into our technology. (Royal Bank) intend(s) to use us as their platform to grow their business here in the States," Wayco said.