Bank of America Corp.’s $1.4 billion deal to buy National Processing Inc. is all about bulking up in the payments business, a top Bank of America executive says.
“If you believe that we are going to see migration of payments from paper to electronic, being able to acquire those transactions in [the] small, medium, and large corporate space, we believe, is strategically important,” Jonathan Wilk, who became B of A’s payments “czar” less than a year ago, said in an interview Tuesday. “We want to offer customers a choice in terms of how they pay.”
The cash deal, announced early Tuesday and slated to close next quarter, is meant to advance the Charlotte company’s aspiration of offering payment processing services to a fuller spectrum of customers — retail and wholesale — than it currently does through its much-smaller Bank of America Merchant Services, Mr. Wilk said.
B of A’s processing and acquiring business would become the second-largest in the country, with around $250 billion of annual volume. First Data Corp. is the biggest merchant processor; together with its partner banks, it is also the largest merchant-acquirer.
National Processing, which is headquartered in Louisville, serves around 700,000 merchant locations in North America and processes nearly one out of every six Visa and MasterCard transactions. B of A is slated to acquire both National City Corp.’s 83% stake in National Processing and all publicly traded shares.
Mr. Wilk, B of A’s payments and strategy executive and the chairman of its payments leadership council, said its No. 2 standing in merchant payments would create synergies with its retail banking business, which has a share of about 10% of the nation’s deposits. It is the largest debit card issuer and fourth-largest credit card issuer; it also clears more checks than any other banking company.
“We have seen the migration of payments happening,” he said. “We believe debit and credit products offer our consumers a far stronger value proposition relative to cash and checks.”
The acquisition also would broaden B of A’s offerings for wholesale customers, Mr. Wilk said. “We already provide services like check clearing and cash management, and we want to be able to offer holistic solutions to wholesale customers that include check clearing, cash management, and merchant acquiring.”
Both Bank of America Merchant Services and National Processing outsource some processing work to Vital Processing Services, a joint venture of Visa U.S.A. and Total System Services Inc. (which is majority owned by Synovus Financial Corp.). Mr. Wilk said both his merchant division and National Processing handle some customer processing in-house and rely on Vital to do the work for some regional customers.
David M. Scharf, an analyst with JMP Securities LLP, said the deal would not bring about a “sea change” in the processing market, since other top acquirers are backed by banking companies like Fifth Third Bancorp, U.S. Bancorp, and J.P. Morgan Chase & Co.
Though B of A’s retail banking business could help a larger processing shop (for example, by cross-selling to its extensive small-business base), Mr. Scharf said the holistic payments strategy being touted by the bank is not entirely convincing.
“I found it hard to connect the dots in terms of translating this into a broader payments strategy beyond vanilla processing,” he said.
Richard X. Bove, an analyst with Hoefer & Arnett Inc., said B of A is following the same strategy as JPMorgan Chase in looking for more processing opportunities.
B of A’s merchant processing business would move to Louisville and would report to G. Patrick Phillips, B of A’s president of card services and e-commerce. Mark Pyke, currently National Processing’s chief operating officer, would oversee B of A’s merchant business. That business does not currently have a headquarters, but it has offices in Boston, Charlotte, San Francisco, and Spokane, Mr. Wilk said.
He could not say if any employees would lose their jobs. In a letter to employees distributed Tuesday, Jon L. Gorney, National Processing’s current chief executive and a National City executive, wrote, “In the very near future, you will be learning more about Bank of America and their plans for NPC.”
Other banking companies with well-established processing businesses, such as U.S. Bancorp — as well as other companies interested in the payments market, like the investment firm GTCR Golder Rauner — were rumored to be possible bidders on National Processing when it came on the block less than two months ago.
National City has been trying to focus on its core banking operations in the Midwest, and it has been evaluating the importance of its other businesses. The Cleveland company has been waiting for its renewed focus on retail banking to pay off, and for commercial loans to pick up; in May it agreed to sell its corporate trust administration business to U.S. Bancorp.
David A. Daberko, National City’s chief executive officer, said in an interview in March that the processing business, along with its credit card operations and some parts of its institutional asset management business, did not have enough scale.
Denis Laplante, an analyst at Keefe, Bruyette & Woods Inc., estimates that National Processing will generate $500 million of revenue this year, versus around $200 million for B of A’s merchant business. The combined $700 million would be just a tiny part of B of A’s expected revenue total of $50 billion.
“It is a small piece of the total pie, but it gives them a little more scale,” Mr. Laplante said.
National Processing was the fourth-largest merchant acquirer last year, according to The Nilson Report, an Oxnard, Calif., industry newsletter. Bank of America Merchant Services was eighth.
Shareholders of record at the deal’s closing would receive $26.60 a share, around $3 less than National Processing’s closing price Monday. On Tuesday, shares of National Processing fell 10.7% to $26.25.
National Processing would have to pay a $50 million penalty fee if it breaks the deal or fails to hold a shareholder vote by Nov. 19.
Anthony Davis, an analyst at BankAtlantic Bancorp Inc.’s Ryan Beck & Co. Inc., said B of A probably saw National Processing as a once-in-a-lifetime opportunity to gain merchant scale quickly. B of A “has not talked about their existing merchant business a lot,” he said. “I think what this signals is more focus on the areas of cards.”
