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