International marketing and delivery of bankcard processing services (TSYS).
Finley, John T.
CASE DESCRIPTION
This case depicts a US-based firm that painstakingly but
successfully markets its bankcard processing services to international
prospects. The case intends to enable the student to assess how
TSYS' success in the European market entry has taken place.
Following this assessment, students will study strategic considerations
related to the present market attained by TSYS in the United Kingdom and
Ireland and the possibility of further expansion of operations
internationally. The basic modes of supply are a combination of services
supplied from one country to another, corporate subsidiary setup of
operations and local personnel recruitment. Prior to the establishment
of operations, an extensive discovery, sales and marketing process
leading to contract negotiation takes place. The case describes the
strategic challenges facing a services firm and the integration
requirements necessary for successful market penetration. The case
concludes with an overview of the successes enjoyed by TSYS as a result
of these efforts and decisions to be made regarding subsequent actions.
Although TSYS has developed operations in several regions
internationally, the case concerns service delivery to the European
market and the potential of further expansion in that market. A firm
embarking on such exportation must be cognizant of and form entry
strategies bearing in mind the longer sales cycle and a need for direct
in-country representation to achieve product awareness. This case is
designed for a junior level undergraduate course in International
Business, International Marketing or International Strategy in which the
above topics may be covered.
The exercise is designed to be taught in a one hour class and is
expected to require two hours of outside preparation. The author
endeavors to provide an enhanced understanding of bankcard services
marketing and delivery with the corporate objective of long-term growth,
increased revenue generation and improved market share. Study of the
proliferation of services is notably important in light of the
continuous augmentation of this type of business endeavor versus
manufacturing. According to the 2004 World Investment Report published
by the United Nations Conference on Trade and Development, future
economic growth improvements will be patent particularly in "the
case of services, which make up the largest economic sector in many
countries, and which dominate foreign direct investment" (UNCTAD World Investment Report, 2004).
CASE SYNOPSIS
Service industry exportation entails a certain marketing-related
complexity not similarly encountered with the export of manufactured
goods. TSYS, a processor of bankcard transactions, boasts top notch
sales, technical and project management expertise that has effected
success in the services marketplace. Having thoroughly penetrated the
United States bankcard services market, TSYS set out to explore new and
international opportunities through a customized sales approach of
bankcard processing service offerings. Just as regulations and other
compliance issues vary from country to country, so do processing
requirements, rules and other idiosyncrasies of the industry on an
international level. The solution to ensure ultimate delivery is shaped
by several elements "unique to a services solution that
differentiate it from a [tangible] product solution" (Hill, 2003).
Speed to market is greatly affected in comparison with that of tangible
product offerings. Additionally, estimation and control of the
timeliness of deliverables tend to be more elusive thus requiring
increasingly skilled management of the process. TSYS' marketing
with regards to crossborder service bankcard provision involved dealing
with factors such as intangibility, customization requirements, lack of
inventory, time sensitivity and change and quality management. The case
is instructional in terms of the challenges such service firms may face
and how to respond.
COMPANY BACKGROUND AND INFORMATION
TSYS' foundations date back to 1959 as a division of Columbus
Bank and Trust Company (CB&T) in Columbus, GA. Named Total System
Services after going public in 1983, the company was one of the first
institutions to offer a revolving credit card product in the United
States. Further innovation in the mid 1970's led to the electronic
movement of transactions among bankcard issuing institutions. TSYS, as
Total System Services began to be called starting in 2002, has become a
prominent third party processor (TPP) of "non-domestic accounts
with a global presence that spans countries, regions and
continents" (TSYS website, 2005). TSYS' client base consists
of bankcard issuers (cardholder bank processors) and acquirers (merchant
bank processors) for credit, debit, commercial, private-label, prepaid,
and chip card product processing. This clientele is located around the
world on "three continents, in seven languages and 16
currencies" (TSYS website, 2005).
Within a decade after going public, TSYS turned its attention to
specific research and development of an enhanced,
"option-driven" processing platform known as TS2[R] which was
implemented in the mid 1990's. The TS2[R] data processing system
has been a reliable source of competitive advantage for TSYS since this
time and is upgraded as required to continue meeting the market needs.
To the average consumer, these "options" that TS2 enables
include a great deal of the offers that many individuals see arriving in
their mailbox in the form of introductory rates, promotional
interest-free purchase periods, incentive programs that accumulate
"points" toward airline miles or toward further personal
consumption purchases and, recently, a consumer savings account program
allowing cardholders to channel a certain percentage of purchases into a
special account set up by their bank. These options are in demand both
in the United States and in abroad. As a result of its technological
innovation, TSYS enjoys increased international growth due to "cost
savings, improved customer service, unsurpassed speed to market and
efficient workflow" (TSYS website, 2005). TSYS' revenues have
continually increased during its existence in part due to decisions to
internationalize and assertively target markets outside of the United
States The company has continued to portray success in financial,
technological and innovative terms. Internationally, the company has
faced the challenges of differing environments. TSYS generates revenues
for electronic payment processing services principally from:
Charges based on the number of accounts on file, transactions and
authorizations processed, statements mailed, credit bureau
requests, credit cards embossed and mailed, and other processing
services for cardholder accounts on file. Cardholder accounts on
file include active and inactive consumer credit, retail, debit,
stored value and commercial card accounts.(TSYS Annual Report
2003-p. F-11)
The business has evolved within a highly competitive market
domestically and abroad. TSYS maintains strong relationships with
clients and the bankcard associations. The key to the international
expansion efforts is due to the research and sales teams that take on
tasks of discovering the potential markets, analyzing the environment
and establishing and maintaining relationships with prospects.
TSYS' adaptation to continuous change is an essential skill set
required in light of the ambiguities faced when exploring international
opportunities. The United Kingdom proved to be a good choice due to the
lack of a language barrier, large established banks such as Royal Bank
of Scotland Group and National Westminster Bank as well as the Irish
bank Allied Irish, and a demand for the products and options provided by
the TSYS processing system. The banking centers of the United Kingdom,
in spite of the similarity in language, have quite particular processing
rules in comparison to most other European nations. Entry into the Irish
market allowed TSYS the chance to prove its ability with processing of
the Euro beginning in 2002 since the United Kingdom does not utilize
this currency. This strategic entry into Ireland is intended to have the
additional benefit of attracting the attention of banks from other
Euro-zone countries. The European clients' processing began in the
spring of 2001. Nonetheless, negotiations had begun as early as 1997
which evidences the long sales process involved in the marketing of
bankcard processing services.
INDUSTRY AND COMPETITORS
Background of the Bankcard Industry
Before the Great Depression of the 1930's, several
"charge" cards without a revolving credit feature issued by
individual hotels, oil companies and department stores were in existence
as early as pre-World War I. (Mandell, 1972) Other entities issued
charge cards during the early 1950's such as Diners Club, Carte
Blanche and American Express. The innovative feature with the product
issued by these latter entities was the capacity to use at different
merchant locations instead of being restricted to one, which was the
case with the prior cards. Joseph Nocera refers to a watershed event
that took place in 1958 in Fresno, CA as the "drop". (1994)
The California-based Bank of America issued and sent via mass mailings,
60,000 live and unsolicited "revolving" credit cards. From the
"drop" of 1958, the more recent technological innovations have
enabled further proliferation of credit cards and continued acceptance.
The different transactional methods such as mail order to telephone
order to internet transactions bring about increasingly higher purchase
volumes. On a domestic and global level there is an ever-increasing
cardholder base as well as universal acceptance and recognition of
brands such as Visa and MasterCard.
Unsolicited live card distribution was outlawed by 1970. The years
between 1958 and 1970 entailed the trial-and-error beginnings of the
nascent credit card industry. Over 100 million cards were mailed as part
of the BankAmericard program from 1958-1970. These revolutionary
financial products were a radical change from the checking and savings
accounts; the principle financial "products" available to the
majority of the United States population prior to the credit card, money
market and subsequent mutual fund boom. A side-effect was the resultant
consumer debt which started as a trickle in the first decade after 1958
evolved into an inundation by the 1980's in terms of consumer
credit. In what has become an era of expansive dissaving, credit cards
have simply made it too easy to purchase items that the consumer may not
really want or need or otherwise could not afford.
Credit cards became popular due to the user-friendliness of the
product and due to the decreasing of post depression aversion to
financial risk and the markets. There was decreasing influence of
the post-depression logic of "going without until enough saved to
purchase" (Nocera, 1994). There was a growing concept of "spending
money not yet in one's possession" and from the years 1945-1970,
consumer credit growth was strong with consumer credit increasing
from $2.6 billion to $105 billion. (Nocera, 1994)
In the following table are the card industry achievements 10 years
after the introduction of the BankAmericard (Nocera, 1994):
In the late 1960's, banks began to discover their ability to
use credit cards to reach out and lure new customers and possibly avoid
state and federal regulations. In 1966, BankAmericard as the beginning
of the Visa association and an organization known as Interbank Card
Association (ICA) as the beginning of what is now MasterCard were
separate entities that worked with member banks in which directorships
were established in order to "establish rules for authorization,
clearing and settlement [as well as] marketing, security and legal
aspects of running the organization" (MasterCard, 2005). These two
associations still maintain a vibrant rivalry. As a first-mover in
Europe, MasterCard formed an alliance with a clearing and settlement
entity known as Eurocard in 1968. MasterCard and Eurocard have recently
merged into one global organization. Nonetheless, the major historical
industry trends for this credit product are rooted in the United States
processing environment.
The efforts at establishing a nationwide bank in the United States,
started by the Bank of America, continued in the mid 1970's. In
1977, Citibank conducted a "drop" of 26 million credit card
solicitations across the country which very quickly resulted in 3
million Visa accounts. A burning question was how could a bank go
"national" and still be within legal limits. The answer seemed
to be via credit cards. Just as before with the drop of the actual live
cards with the BankAmericard, these solicitations acted as lures into
the national pool of potential customers. This was a major step in
nationwide and global banking.
From a regulation standpoint, a few key decisions in the last few
decades have brought about explosive growth and competition in the
global credit card industry. An issue brought up by consumer advocacy
groups is the aggressive fee structure imposed by the credit card
companies. The legislation that presaged these issues included two key
United States Supreme Court cases. (Lazarony, 2005) In 1978, Marquette
vs. First Omaha Service Corp was a decision that a national bank could
charge the highest interest rate allowed in their home state to
customers living anywhere in the United States, including states with
restrictive interest caps. In essence, it didn't matter what kind
of rate cap existed in a customer's state. This was essentially the
deregulation of rates for unsecured loans which was a boon for the
credit card issuing banks. In South Dakota in 1979, Governor Bill
Janklow allowed higher rates to be charged, thus inviting Citibank and
other entities to do business in their state. Mr. Janklow's lifting
of usury laws caused a catalytic event in the credit card industry. Walt
Wriston, then CEO of Citibank, went to South Dakota because at the time,
Citibank had a large number of cardholders due to the aforementioned
card solicitation "drop" of 1977 which resulted in a large
number of accounts. With the high interest rates in the late
1970's, Citibank was losing money basically because of the 12% cap
on card rates in New York State and a cost of funds of around 20%.
(Frontline, 2004) An additional round of decisions resulted from the
1996 Smiley vs. Citibank Supreme Court case which lifted state
restrictions on fees credit card issuers could charge. This same
principle applies to credit card late fees. As Smiley vs. Citibank in
1996, the Supreme Court gave national banks free rein on credit card
fees. (Lazarony, 2005) Before the Smiley ruling, the typical late fees
were from $5-$10. After the Smiley decision, those late fees rose to as
high as $29 or even $39. In addition to late payment assessments, other
fees were imposed as well such as over-the-limit or returned check fees.
Credit cards are used for a variety of expenditures such as
discretionary spending, convenience and, in some cases, basic needs.
Banks issue credit cards due to the potential profitability with
interest rates that climb as high as 25-30% and due to the increasing
consumer credit usage over the last 50 years. In 2003, lucrative profits
of more than "$30 billion before taxes" were generated by more
than 641 million cards issued in the United States alone. (Frontline,
2004) During the last 10 years, bankcards have become a common item in
consumers' possession in developed and developing regions. From the
1983 to the mid 1990's, there was a real increase of 179% in
consumer borrowing. "Credit rose from $291 1983 dollars to $812
1983 dollars based on household data" (King, 2004).
The bankcard product treated in this case has the following
characteristics:
** The product is called a bankcard--a card issued by a bank that
extends credit to the cardholder.
** All cards substitute for cash or checks in transactions.
** Most cards have similar payment plans; generally a month's
charges will be billed to the credit cardholder in one statement.
** If payment is made promptly, there is no interest assessed
against the cardholder.
** Finance charges on credit card debt are similar for most cards.
Generally the debt is treated as a revolving type of account in which
payment must be at least a specified portion of the outstanding balance
but can be larger if the cardholder wishes. (Mandell, 1972)
Characteristics of all cards imply that they may potentially have
similar effects on the economy. Since all cards substitute for cash and
checks, this may enable the economy to be moving toward a
"cashless" or "checkless" society. (Mandell, 1972)
The primary regulatory forces in the United States that can effect
necessary change to the credit card industry include state entities and
the Office of the Comptroller of the Currency (OCC). The OCC is a
federal agency that regulates and supervises national banks to ensure a
safe and competitive banking system that supports the citizens,
communities and economy of the United States. Growing consumer debt and
consumer spending is a central issue associated with the ubiquity of
credit cards. There is no EU equivalent of the OCC. Each of the European
countries has its own bank regulatory agency which in some cases may be
co-located in the central bank. The European Union's supervisory
equivalent is covered by the European Central Bank, based in Frankfurt,
in coordination with the National Central Banks of the EU Member States.
The National Central Banks, in turn, monitor and supervise the
commercial banks operating in their areas of jurisdiction. The European
Commission also plays a role in monitoring and advising Member States in
developing policies for managing their financial markets.
The key participants in the world of bankcard processing include
the cardholders, card acceptor locations, acquiring banks, issuing
banks, bankcard associations such as Visa and MasterCard and third party
processors (TPPs). The acquiring bank represents the card acceptor
location which may be a merchant, mechanical card reader, a touchless
sensor or the internet. The issuing bank represents the cardholder and
this bank name along with the association is clearly visible on the
physical card. The TPP can provide outsourced transaction processing
services to acquiring and issuing banks. TSYS falls into the category of
third party processor or TPP. The bankcard associations, such as Visa
and MasterCard, essentially serve as an extremely sophisticated conduit
for the transaction and information flow as well as a financial
settlement engine. The association "identifies buyer to seller and
seller to buyer [and] acts as a guarantor for payment" (Visa,
2004). Associations utilize global networks that facilitate global
acceptance of bankcards. To familiarize the reader with the various
stages of the transmission of data, the table below provides a high
level overview of the clearing transaction, which transports the
transactional data in the processing cycle for the various stages of a
transaction leading directly to the information printed on a cardholder
statement:
As technological innovations continue to improve, so does the
pipeline through which greater numbers of cardholders are reached on a
global level. Other key technological breakthroughs have been made in
the area of internet transaction processing, chip or smart cards, mobile
phone transactions, and touchless credit card transaction all of which
further the omnipresence of bankcards. The following statistics from the
MasterCard corporate website provide an indication of the steady growth
of card users and global acceptance over the past two years. The
following 2 tables include all programs except online debit programs:
From the Visa perspective, the picture of growth is no different.
As Visa endeavors to "change the way the world pays", the
increases in cards and sales volumes have also been robust in the past
few years thus confirming the continuing role of bankcard products in
the economy. The total card sales volume for Visa was recently reported
as follows:
The number of cards has also dramatically increased:
The growth of the presence of bankcards enables a greater number of
personal expenditures to be conducted with these financial instruments
thus affecting consumer behavior in terms of spending. The Visa Annual
report provides the following insight regarding the "Personal
Consumption Expenditure (PCE)":
Personal Consumption Expenditure represents the market value of all
goods and services purchased by households and non-profit
institutions, excluding the purchase of homes. [...] Today, global
PCE is valued at US$24 trillion and is composed primarily of cash
and cheque payments. (Visa, 30)
In spite of the majority of PCE being conducted with cash and
checks, the growth of PCE share has been steadily increasing over the
years as is portrayed in the following table:
Competition and the European Market
The bankcard processors such as TSYS, Certegy, First Data, Nova,
and Global Payments continue to be greatly influenced by the merger and
acquisition activity of the larger banks of the world. In many cases,
this activity has resulted in bank changes in TPPs for the processing
service. There is presently a trend towards consolidation of the market
share among the major processors. The problem for some processing firms,
however, is the overall pieces of the pie are becoming larger and fewer
as the banking industry consolidates under fewer and fewer roofs.
Consider the merger and acquisition activities of JP Morgan Chase as
well as Bank of America and Fleet Bank. Such consolidation among large
banking corporations with sizeable bankcard portfolios implies that in
the near future there will be some processing firms with greatly reduced
market share and possibly some acquisitions or takeovers of the weakened
firms.
The global reach of the different TPPs varies. TSYS has clients in
Europe, Mexico, the Caribbean, Canada and Honduras. The other processors
all have clients in Europe as well. Certegy also has global extension in
Chile, Brazil, Australia and New Zealand while First Data actually
partitions their global presence into 5 different regions: Latin
America/Caribbean, Australia/New Zealand/South Asia, Europe/Middle
East/Africa and China/North Asia. In general, the competitors'
weakness is the use of legacy systems that are not as flexible in terms
of customization as the more advanced TSYS processing software.
FirstData, for example, has lost a few clients to TSYS in recent years.
One of the banks with whom TSYS started European processing, the United
Kingdom bank Royal Bank of Scotland, is an example. The strengths of the
competition are their existing client base and global reach. The
preceding table provides a high level summary of the competition faced
by TSYS internationally:
Less ability to customize to particular client needs means less
opportunity to take advantage of economies of scale with the processing
platforms. The basis for competition is usually price, ability to comply
and process per local rules and options and flexibility provided by the
systems used to easily introduce changes or add new product offerings
such as affinity programs or incentive interest rates for an
introductory period as mentioned previously.
INTERNATIONAL APPROACH
TSYS entered the international arena as a market seeker to increase
market share, as an efficiency seeker to take advantage of economies of
scale and to hedge by diversification of the "portfolio" of
clients. The 2003 TSYS annual report states:
TSYS' revenues are derived from providing electronic payment
processing and related services to financial and nonfinancial
institutions, generally under long-term processing contracts. TSYS'
services are provided primarily through the Company's cardholder
systems, TS2 and TS1, to financial institutions and other
organizations throughout the United States, Mexico, Canada,
Honduras, the Caribbean and Europe. (F-23)
The business concept defined above entails highly specific
technology solutions outsourced by bankcard issuers and acquirers
worldwide. The TS2 processing system is an option driven software engine
for bankcard processing that handles transactions for issuing banks. TS1
is an earlier version that is not quite as robust but there are still
clients using that lower priced offering. These two systems represent
the core competency of TSYS' processing of bankcard transactions
for issuing banks. The competitive advantage that TSYS has enjoyed in
recent years is attributed to the TS2 system which has been very popular
in winning an ever-increasing client base. The basic units of revenue
generation in the bankcard industry are cardholders conducting
transactions around the globe. The processing compliance requirements set forth on a continuous basis by the bankcard associations,
principally Visa and MasterCard, have increased in quantity and
complexity over the last decade. Today, there are more data transmitted
per transaction than previously. While the additional data adds value to
an individual transaction such as consumer behavior tracking or purchase
type categorization for business accounting purposes, there are
technical and resource costs involved in maintaining the capacity to
send and receive the additional data.
The European countries in which TSYS has had initial success
include the United Kingdom and Ireland. These countries use different
currencies, have different nuances in terms of domestic processing rules
per the bankcard associations and entail regulatory issues requiring
specific market entrant research, investment and planning. For example,
the United Kingdom legal system requires that sensitive bankcard data be
stored within the United Kingdom. This requires foreign direct
investment in either the form of leasing or purchase of property such as
a data center. TSYS, as the processor, would not outsource this further.
A direct result of such regulations is the latest related maneuver for
TSYS which has been a "greenfield" investment in a new data
center in the United Kingdom to "accommodate client growth and the
company's expansion throughout the continent" (TSYS Press
Release, 6 Oct 2004).
CHALLENGES OF SUCCESSFUL PROVISION OF SERVICES OUTSOURCING
Exploring other markets entails the research of key channels,
potential markets, and areas in which to benefit from economies of scale
or strategically enhancing and customizing processing platforms to
efficiently handle multiple smaller markets. Frequently the larger
potential clients observe the results of the processing of smaller
entities and engage in a "wait-and-see" approach. A successful
observation phase implies higher possibility for an organization such as
TSYS of signing on the bigger clients. The sales cycle involves lengthy
contractual discussions and agreements as well as highly coordinated
turning over of clients known as the deconversion/conversion process.
That is, when a bank changes processor, there is a deconversion (from
previous in-house or other vendor processing) and a subsequent
conversion (in this case, to TSYS) of the live cardholder accounts. The
processing of these accounts cannot be placed on hold while outsourcing
changes are underway thus the meticulous and time sensitive nature of
this process.
There are numerous discrete elements unique to a services solution
that TSYS, as an internationally expanding enterprise, faced regarding
its market offering:
** Intangibility of services
** Inseparability of buyer and provider
** Lack of inventory
** Sensitivity to time
** High degree of risk
** Customization requirements (Hill, 2003, 2, Magrath, 1986, 3)
TSYS has faced this array of challenges in its international
endeavors. The services offered by TSYS, such as card issuance,
transaction authorization, transaction clearing, statement generation,
dispute resolution, financial settlement and associated reporting all
lack physical substance not including the bankcard itself. The sales
cycle in securing a client base for delivery of these services tends to
be longer, "with cycles of 12 months or more [being] the norm
rather than the exception" (Hill, 2003, 3). Of particular interest
was the raising of potential market consciousness of the values and
benefits of the product. TSYS' approach in the United Kingdom and
Ireland primarily entailed the following activities:
** Market research
** Prospect discovery
** Initial high level discussions
** Functional site analysis and gap determination
** Contract negotiation and pricing
** Conversion and deconversion activities
This particular process lasted longer than a year and was labor
intensive in terms of the provider and the buyer coming to an agreement
on each aspect of change related to the conversion of accounts from one
processor to another. Note that the initial discovery and contact with a
prospective client until the actual implementation can be from two to
five years. Therefore, a manifold-like pipeline is an important strategy
for TSYS because having multiple prospects in the pipeline enables TSYS
a greater diversification in terms of time and size of the prospects
that finally reach a decision.
The gap determination analysis included uncovering of operational
differences and everchanging association (Visa/MasterCard) compliance
differences. Such a gap analysis is used to examine the "gap"
or "difference" between what the customer requires and what
the processor can provide through current offerings or via
customization, thus the importance of a flexible system. For example,
the clients in the United Kingdom processes certain bankcard transaction
types that adhere to domestic rules of that country such as transaction
rate structure, dispute reasons, specific ATM fees etc. The gap analysis
may reveal that the present "off-the-shelf" version of the
TSYS software system does not meet all of these requirements. If this is
the case, special ad hoc project work and software configuration is
conducted in order to "close" such gaps in order to comply
with the client needs. The specific gaps are discussed between the
project management team for TSYS and the project representative of the
client so that a specific project plan can be developed to resolve
processing differences. Operational differences may vary from adding a
field to a system screen to developing a new report or database function
as required by the association or as requested by the client. The key is
to add value and this was not possible with a "vanilla" or
"off-the-shelf" offering of TSYS products due to customization
needs and requirements. An additional factor was the necessity for the
continuity of the business process upon changing of service provider.
Not only was the processor faced with the complexities of a different
processing environment encountered in Europe compared with the United
States region, but it was imperative that the transition on
implementation day of conversion be conducted with as few interruptions
as possible. As previously mentioned, the cardholders do not cease card
usage for a specific period to accommodate a conversion/deconversion.
Thus, the coordination among the winning firm (conversion), the losing
firm (deconversion) and the bankcard associations must be precise and
timely.
The management of change in light of such requirements or requests
is a TSYS competitive advantage that sets the company apart from rivals
as is apparent by the growth in accounts on file, especially in terms of
international clients as seen in Table 9:
After initial market research and prospect discovery were
concluded, the company invested heavily in infrastructure to support
global expansion. Cost for labor and capital factors were incurred in
the establishment of an international processing center in Harrogate,
England. This center preceded the Knaresborough location completed in
the third quarter of 2004 as mentioned above. This
"greenfield" investment in Knaresborough, England was decided
upon in order to meet the potential demands of other prospects on the
European continent. Such investment was a risky endeavor with major
costs. However, with long-term projections of "20% of total revenue
[to be] derived from international sources," TSYS was aggressive
toward entering the profitable United Kingdom and Irish markets and
planned to continue throughout the rest of the continent.
Pricing the product proves a daunting challenge as the pricing in
the bankcard processing arena is rarely based on a standard worldwide
price due to the factors in the negotiation process and the level of
customization that each client requires. In the credit card processing
services industry, there are not necessarily price increases due to
distance as may be the case when a physical product must be shipped or
direct investment in assets within the target market is a factor. The
objectives of TSYS as well as market conditions have greatly affected
prior pricing decisions. This case depicts a firm using, in certain
initial phases of a particular market entry, a market-differentiated
price-setting strategy based on client-specific demand and potential
rather than actual cost of the sales process, establishment of
operations and project management. This can imply different foreign and
domestic pricing. One of TSYS' objectives with the choice of the
United Kingdom and Ireland was to take advantage of economies of scale
as related to the processing platforms. As this turned out possible, the
outlook from a capital budgeting project had a favorable outlook. The
following table provides an illustration of the cash flow factors for
entry into the United Kingdom and Ireland market includes the following
capital outlays and operating cash flows.
Expansion into other countries that may reduce the advantages of
economies of scale is carefully considered as such a maneuver may become
detrimental if the different platforms on which processing takes place
are not managed properly and either cause reduced economies or data
processing issues which can potentially damage the company's
reputation. There are specific challenges posed by the processing
environment in other countries. The business processes in France are
extremely unique and have been relatively difficult for acquiring
processors to master. In Germany, the debit bankcard product is less
compelling due to lower margins. These three areas, the United Kingdom,
France and Germany represent the majority of the bankcard processing
volumes in Europe.
In Spain there is a barrier of a national consortium of banks known
as Sistema 4B. This is a consortium of banks that cooperates as the
Spanish transaction processing authority.
From a technical standpoint, an additional challenge deals with
association processing regulations which must be adhered to by all
interfacing banks or processors. For example, MasterCard of Europe will
be fully integrated with MasterCard international from a business and
technical processing standpoint by the end of 2006. This implies that
banks that process in-house and smaller interbank shops will need to go
to the required lengths to meet the demands of the technical system and
data format changes that will internationally standardize MasterCard
processing. TSYS' competitive advantage is that they presently
operate in both environments.
Euro currency processing
The euro currency came into effect financially on 1 January 1999
becoming the defined currency for monetary policy in the Economic and
Monetary Union of the European Union. The subsequent physical
circulation of the Euro, beginning in January 2002, posed no problems
for TSYS. From TSYS' perspective, the European client adoption of
the euro varied as is noted in a related passage in TSYS' 2001
Annual Report covering "Euro Conversion Readiness":
The Company converted the account portfolios of RBS [Royal Bank of
Scotland] and AIB [Allied Irish Bank] in 2001. The United Kingdom
is not a participating country with respect to January 1, 1999,
"Euro" currency conversion and it currently is not known when or if
the United Kingdom will elect to convert to the Euro. However,
Ireland is a participating country. As of October 2000, TSYS' TS2
processing system is capable of processing Euro-denominated
transactions. TSYS' costs in connection with the Euro conversion
were not material. The European Union officially converted to the
Euro currency on January 1, 2002. TSYS has not experienced any
difficulties in processing Eurodenominated transactions. (F-12)
Having successfully converted United Kingdom and Irish clients,
TSYS was able to display its technical and project management skills to
other potential client prospects in the euro--zone. While the British
Isles constitute a major share of the processing volume, there still
remain other key potential large volume processing areas in which to
expand.
RECENT RESULTS, ACTIVITIES AND FUTURE OPPORTUNITIES
As the background of the bankcard industry suggests, this business
is complex and highly competitive. The competitive environment is active
and the risks with international markets indeed exist. TSYS'
approach has yielded solid results. As an outcome of the efforts made in
terms of revenue, TSYS achieved the following operating outcomes over
the 2001-2003 period:
Ireland and the United Kingdom appear to be a point of departure
for TSYS' presence in Europe. The improving revenue and income
figures above represent steps in the right direction for the company.
Recently, TSYS has further opened up its opportunities with the pending
reacquisition of the 50% equity stake that Visa USA holds in Vital
Processing Services, an acquiring processor:
Following the closing of the transaction, Vital will become a
wholly-owned subsidiary of TSYS. The purchase of the remaining 50%
interest in Vital provides TSYS greater synergies for its clients
that service merchants who accept cards as payments and issue
credit to their customers. Vital is the second-largest processor of
merchant accounts in the United States, serving more than one
million merchant locations. Formed in 1996 as a joint venture
between Visa U.S.A. and TSYS, Vital specializes in attractive,
cost-effective, turn-key alternatives for acquirers that outsource
their merchant business.
As TSYS has mastered its bankcard processing skills in Europe to
include quick response to association compliance changes, the future
portends opportunity. Is there a cost effective option for pan-European
bankcard processing? While processing in the United Kingdom and Ireland
has posed some obstacles, there are the aforementioned additional
barriers to further expansion to other larger volume areas of Europe
such as in France, Germany, and Spain. Furthermore, a key potential
development for the near future entails consolidation among larger third
party processors such as TSYS, FirstData, Certegy and smaller interbank
processors. There are many niches and peculiarities within the European
bankcard processing environment. How will the processors deal with the
challenge of these niches and differences among the European countries
in terms of processing environment? In spite of the differences, with
the advent of the euro and general attempts to harmonize various
accounting and financial methodologies in Europe, standardization is
starting to apply as well to the card processing market. Since larger
processors such as TSYS already operate in both the European and
non-European international environments, this provides a clear
competitive advantage and particularly when faced with strict and
continuous compliance requirements and deadlines set forth by the
bankcard associations.
REFERENCES
Certegy, Inc. (2005). "Certegy reports third quarter diluted
EPS from continuing operations of $0.36, or $0.47 before direct merger
and acquisition costs". Press Release 25 October 2005. St.
Petersburg, FL.
Daly, James. (1992). International: the card boom beyond
America's shores. Credit Card Management. 5(2), 46.
FirstData, Inc. Annual Report Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934, Fiscal year ended December 31,
2004.
Frontline-Public Broadcasting Services . (2004). "Secret
History of the Credit Card". program -
http://www.pbs.org/wgbh/pages/frontline/shows/credit/
Global Payments, Inc. Annual Report Pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934, Fiscal year to end December
31, 2005. Interactive web version.
Guido, Gianluigi. (1992). What U.S. marketers should consider in
planning a pan-European approach. The Journal of Consumer Marketing. 9
(2), 29.
Hill, Paul. (2003). The Internationalisation Of Services Marketing.
Retrieved October 20, 2004, from
http://globaledge.msu.edu/KnowledgeRoom/FeaturedInsights/0002.asp
King, Amanda Swift. (2004). "Untangling the Effects of Credit
Cards on Money Demand: Convenience Usage vs. Borrowing". Quarterly
Journal of Business and Economics. Lincoln: Winter 2004. 43(1/2); 57-80.
Lazarony, Lucy. (2005). "The higher the balance, the higher
the late fee". Retrieved from
http://www.bankrate.com/brm/news/cc/20020408a.asp on 12 April 2005
Magrath, A. J. (1986). "When Marketing Services, 4 Ps Are Not
Enough" Business Horizons. Greenwich: May/Jun 1986.9(3); . 44.
Mandell, Lewis. (1972). Credit card use in the United States. Ann
Arbor, Institute for Social Research, University of Michigan.
Nocera, Joseph. (1994). A Piece of the Action : How the Middle
Class Joined the Money Class. New York: Simon & Schuster.
Peng, Mike. (2004) Global Strategy. Thomson South-western
Simpson , Burney . (2004) A Powerful Group Of Processors. Credit
Card Management. 17 (8), 30-35.
TSYS, Inc. Annual Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934, Fiscal year ended December 31,
2003. F11--F47.
TSYS, Inc. Annual Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934, Fiscal year ended December 31,
2002. F10--F41.
TSYS, Inc. Annual Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934, Fiscal year ended December 31,
2001. F8--F18.
TSYS, Inc. (2005). "TSYS To Acquire Full Ownership of Vital
Processing Services: Offers End-to-End Processing Services for Merchant
Acquirers and Issuers". Press Release 18 January 2005. Columbus,
GA.
TSYS, Inc. (2004). "TSYS Builds European Data Center".
Press Release 6 October 2004. Columbus, GA.
TSYS Global Operations. (n . d.) Retrieved on 8 February 2005, f r
om http://www.tsys.com/company/global_operations/index.htm
Table 1: BankAmericard--First decade (ending 1968)
Year Cards in use Sales Consumer debt Bank profit
1960 233,585 $ 59 million $ 28 million $179,000
1968 >1,000,000 $400 million $252 million $12.7 million
Table 2: Transaction flow of a credit card clearing (post
authorization *) transaction
ACQUIRER = Acquiring bank that represents the merchant location
ISSUER = Issuing bank that represents the cardholder
ACQUIRER MC/VISA then
submits submits
Stage 1 to[right arrow] to[right arrow] ISSUER receives
PRESENTMENT The ACQUIRER The transaction ISSUER posts the
transmits a is approved for transaction to
presentment as a quality, the cardholder
result of a quantity and statement. If
cardholder timeliness. there is no
purchase at a Quality implies dispute, the
merchant appropriate process ends
location pending formatting, with the
an approval quantity implies cardholder
authorization amount of paying the
result. information and balance. If
Presentment: A timeliness deals there is a
data message with the amount dispute, then
with the of the fee the presentment
original assessed. is submitted
purchase data. Usually, back to the
All subsequent transactions ACQUIRER. This
data messages submitted is called a
submitted have quickly result chargeback
mostly the same in a lower MC/
transaction data Visa fee to the
ACQUIRER
MC/VISA then
ISSUER submits submits to[right ACQUIRER
Stage 2 to[right arrow] arrow] receives
CHARGEBACK ISSUER forwards Similar approval If the ACQUIRER
the same process as does not have
transaction back above. However sufficient
to the ACQUIRER the issuer documentation or
for a specific usually has other evidence
valid reason. about 180 days to re-transfer
The different to submit this the transaction
reasons range type of to the ISSUER,
from account transaction. then the
number was not ACQUIRER accepts
on file to financial
duplicate responsibility.
processing to If, however, the
credit posted as ACQUIRER does
purchase etc. find sufficient
evidence to
return the
transaction to
the ISSUER, then
this takes place
in the form of a
representment
(see below) to
the ISSUER.
MC/VISA then
ACQUIRER submits submits to[right
Stage 3 to[right arrow] arrow] ISSUER receives
REPRESENTMENT If, however, the Similar approval ISSUER will
ACQUIRER does process as again post the
find sufficient above. However transaction to
evidence to the issuer the cardholder
return the usually has statement. If
transaction to about 180 days there is no
the ISSUER, then to submit this dispute, process
this takes place type of ends with
in the form of a transaction. cardholder
representment to paying balance.
the ISSUER.
MC/VISA then
ISSUER submits submits to[right ACQUIRER
Stage 4 to[right arrow] arrow] receives
ARBITRATION If there is a Albeit costly,
CHARGEBACK dispute, then the transaction
the PRESENTMENT can still be
is submitted disputed by the
back to the ACQUIRER. Once
ACQUIRER. the process
reaches this
point it can
become more
costly to
proceed.
Continuation at
this point would
usually be due
to larger dollar
volume items
that justify the
efforts
dedicated to
resolution.
* For a credit card transaction, authorization services generally refer
to the process in which the card issuer indicates whether a particular
credit card is authentic and whether the impending transaction value
will cause the cardholder to exceed defined limits. Basics results of
these transactions are either approval or decline of a transaction.
Table 3--Number of bankcards per MasterCard region (millions)
FY2004 Growth FY2004 Growth
Worldwide Cards (Millions) 679.5 8.6% 625.5 5.8%
South Asia, Middle East, Africa 12.7 29.8% 9.8 26.4%
Asia Pacific 131.8 8.4% 121.6 8.5%
Europe 111.6 11.6% 100.0 14.9%
Latin America 57.0 19.5% 47.7 7.4%
Canada 28.5 7.1% 26.6 9.7%
United States 337.8 5.6% 319.8 1.3%
Table 4--Acceptance locations per region per MasterCard region
(millions)
FY2004 Growth FY2004 Growth
Worldwide Cards (Millions) 24.6 9.8% 22.4 12.7%
South Asia, Middle East, Africa 0.5 15.1% 0.5 14.1%
Asia Pacific 8.8 13.6% 7.7 12.4%
Europe 7.1 3.4% 6.9 13.8%
Latin America 1.9 8.4% 1.7 9.8%
Canada 0.7 13.5% 0.6 -0.2%
United States 5.6 12.0% 5.0 14.2%
* Acceptance Locations include Merchant Locations, ATMs and Manual Cash
Locations.
Table 5--Visa--Total global card sales volume
Total Card Sales Volume (in
Year billions USD) Year-Over-Year Growth
2002 $2,400 17%
2003 $2,900 11%
2004 $3,190 13%
Table 6--Visa--Total global card sales volume
Year Total Cards (in millions) Year-Over-Year Growth
2002 960 10%
2003 1,050 10%
2004 1,190 13%
Table 7: Visa--Growth of personal consumption expenditure
Growth of PCE Share
Growth of PCE Share with use of Visa,
with use of only MasterCard, Discover
Year Visa products and American Express
2002 7.1% 12.1%
2003 7.6% 13.0%
2004 8.4% 14.4%
Table 8: Principal International Competitors in Bankcard processing
# of
Primary cardholder
Company product Global accounts
Name offering presence (millions)
TSYS --Cardholder --United States 430
processing --Europe
--Merchant --Mexico
processing --Caribbean
--Canada
--Honduras
Certegy --Cardholder --United States 52.4
processing --United Kingdom
--Merchant --Ireland
processing --France
--Chile
--Brazil
--Australia
--New Zealand
--Thailand
--Caribbean
FirstData --Cardholder --Latin America & 406
processing Canada (LAC)
--Merchant --Australia, New
processing Zealand & South
Asia (ANZSA)
--Europe, Middle
East &, Africa
(EMEA)
--China & North
Asia (CNA)
Global --Cardholder --United States, 1
Payments processing --Canada
--Merchant --Europe
processing --Latin America
Company
Name High level SWOT analysis
TSYS S-Highly flexible systems that can be customized to meet
variety of requirements
W-New ventures into certain areas may not allow for
continued economies of scale advantages
O-Exploration in the Chinese market offers chance to
develop market for bankcards in China
T-Continuous merger and acquisition activity causes
uncertainty regarding the bigger banks choices regarding
who will process their cardholder transactions
Certegy S-Smaller semi-focused operations
W-Nat as specialized or flexible as the TSYS systems
O-Several markets covered by present operations allow
easier further penetration to those markets
T-Since Certegy is a smaller operation, larger firms such
as TSYS and FirstData have potential cost advantages due
to economies of scale
FirstData S-Very large conglomerate wielding market power in
various areas of data processing
W-Older less flexible processing systems
O-Global reach through current established presence in
5 regions
T-TSYS has recently overtaken FirstData in terms accounts
on file and has momentum
Global S-Solid relationships with existing client base
Payments W-Smaller clients mean less experience with the top
issuing banks. Tough to penetrate that market
O-Global payments' specialization in recent processing
compliance enhancements may help with new smaller client
acquisition
T-The larger processors such as TSYS and FirstData that
have economics of scale advantage
Table 9: TSYS accounts on File 2001-2003 (in millions)
Accounts on file 2001 % increase 2002 % increase
Domestic 190.4 6.6% 215.4 13.10%
International 28.1 66.9% 30.5 8.6%
Accounts on file 2003 % increase
Domestic 229.8 6.70%
International 44.1 44.8%
Source: TSYS 2003 Annual Report
Additional comments on data: The upward trend of 66.9% in 2001 was due
to the United Kingdom accounts opened during that period and the 44.8%
increase indicates very strong international "organic" growth of
accounts already on file.
Table 10: Various cash flow factors in TSYS' European expansion
Factors related to [future]
Year Capital outlay cash flows
2000 Opening of headquarters in In the 2000 annual report a
York, England. Cost = $13 15% per year market growth is
million ** predicted for the European
expansion area.
2000 During 2000, the Company
ceased development of two
software projects. The
projects were evaluated to
determine their utilization in
a new design plan that
included expanded
international functionality.
Based on its review, the
Company expensed $6.1 million
of costs as employment and
other expenses that were
originally capitalized on
those projects. *
2001 Decline in cash flows from
operating activities from
prior year. The amount of the
decline = $77 million due to
outlay without full year of
processing revenues. (entails
net operating expenses related
to European expansion = $16.4
million)
2001 $121,967 currency translation
gain related to financing of
European operations
2002 $9.44 million segment
operating cash flows
2002 $3 million currency
translation gain related to
financing of European
operations
2003 On July 30, 2003, the Company $15.43 million segment
announced the groundbreaking operating cash flows
for a new TSYS data center in
Knaresborough, England. The
53,000 square-foot facility
and n October 6, 2004, the
Company announced the
completion of the new data
center. The Company invested
approximately 16.6
million [pounds sterling], or
approximately $30.2 million,
in the new building, land and
equipment. **
2004 $15.16 million segment net
income
Note: The figures above are actual figures extracted from annual report
financial data. The outlay and inflows are to provide an idea of the
costs involved, not to serve as a projection of what costs may be as is
the case in basic capital budgeting. The source of the above data is
the corresponding year TSYS Annual Report.
* Software development costs: In accordance with Statement of Financial
Accounting Standards No. 86, "Computer Software to be Sold, Leased or
Otherwise Marketed," software development costs are capitalized once
technological feasibility of the software product has been established.
Costs incurred prior to establishing technological feasibility are
expensed as incurred. Technological feasibility is established when the
Company has completed a detailed program design and has determined that
a product can be produced to meet its design specifications, including
functions, features and technical performance requirements. The Company
did not successfully achieve technological feasibility.
** To be capitalized
Table 11: TSYS Total revenues and Net Income 2001-2003 Revenues
Domestic-based International-
Year services based services % International
2003 $973,251,890 80,288,103 8.25%
2002 $890,830,320 64,948,732 7.3%
2001 $859,113,429 33,214,304 3.87%
Net income
Domestic-based International-
Year services based services % International
2003 $133,859,727 7,113,240 5.31%
2002 $123,145,684 2,659,287 2.16%
2001 $114,604,567 (10,186,338) --
John T. Finley, Columbus State University