Global Payments, Inc. - Credit Card Processing

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Global Payments Inc. - Credit Card Processing & Merchant Services - Category Directory

Sales

$516 million

Global Payments is a high volume processor of electronic transactions and related money transfers that principally enables consumers, corporations, government agencies and other profit and non-profit business enterprises to purchase goods and services or further other economic goals. Our role is to serve as an intermediary in the exchange of information and funds that must occur between the necessary parties such that a transaction can be completed. Including our time as part of National Data Corporation, now known as NDCHealth, or NDC, we have provided transaction processing services since 1968. During that period, we have expanded our business to include debit card, business-to-business purchasing card, check guarantee, check verification and recovery, and terminal management services, which we collectively include as a component of our merchant service offerings. In addition, we provide funds transfer services to domestic and international financial institutions, corporations, and government agencies in the United States, Canada, and Europe. The company's website is www.globalpay.com.

We operate in one business segment, electronic transaction processing, and provide products and services through our merchant services and funds transfer offerings. We provide our products and services to merchant customers in many vertical industries including government, professional services, restaurant, universities, utilities, gaming, retail and health care.

Merchant Services

Our merchant services offerings provides merchants and financial institutions with credit and debit card transaction processing, check guarantee, check verification and recovery services. We are primarily the intermediary between the merchant and the card associations and debit networks or individual financial institutions. Our value added services allow us to leverage our scale to concentrate high volume transactions for many merchant customers to access the card associations and debit networks at a significantly lower cost. Our check products offer merchant customers risk management, in the case of verification and recovery, or risk elimination, in the case of guarantee, by leveraging our vast database of checkwriters to help decide whether the merchant should accept a check as the form of payment from a particular checkwriter.

Credit Card Processing and Debit Card Transaction Processing

Credit card processing and debit card transaction processing includes business-to-business purchasing card, private label, gift and loyalty card and electronic benefits transfer program processing. Credit and debit card processing describes a consumer acquiring goods or services from a retail location, whereas business-to-business card processing refers to a corporate purchasing department acquiring goods, such as office supplies or raw materials, from a corporate vendor.

Although card transactions may appear simplistic, a transaction requires a complex process involving various participants in a series of electronic connections. Aside from electronic transaction processors, also known as merchant acquirers, such as Global Payments, participants in this process include card issuers, merchants, cardholders, and card associations. Card issuers are financial institutions that issue credit cards to approved applicants and are identifiable by their trade name typically imprinted on the issued cards. The term merchant generally refers to any organization that accepts credit or debit cards for the payment of goods and services, such as retail stores, restaurants, corporate purchasing departments, universities, and government agencies.

An approved applicant for a credit card from a card issuer is referred to as a cardholder, and may be any entity for which an issuer wishes to extend a line of credit, such as a consumer, corporation, or government agency. The cardholder may use the card at any merchant location that meets the qualification standards of the card associations, known as MasterCard and VISA, or other card issuers such as American Express, Discover, Diners Club and debit networks such as STAR, NYCE, and PULSE in the United States and Interac in Canada. Debit cards payments differ slightly from traditional credit card transactions in that the cardholder is required to have sufficient funds available in a deposit account at the time of the transaction, or the debit card transaction will not be authorized. PIN-based or online debit transactions are sent through a debit network, while signature-based, offline debit, or check card transactions are sent through card associations and require a signature at the time of purchase. Also, PIN-based or online debit transactions deduct the purchase amount from the cardholder’s deposit account within a day of the purchase, depending on the time of the purchase. Signature-based, offline debit, or check card transactions typically debit the cardholder’s deposit account two to three days after the purchase, although the funds are “held” with a memo posted to the cardholder’s bank account. A credit card posts to a cardholders account, reducing the available credit limit in a similar manner.

The card associations and debit networks consist of members, generally financial institutions, who establish uniform regulations that govern much of the industry. During a typical card transaction, the merchant and the card issuer do not interface directly with each other, but instead rely on electronic transaction processor intermediaries, such as Global Payments, and card associations to exchange the required information and funds. Credit card and debit card transactions account for approximately 81% and 19%, respectively, in the United States, and 34% and 66%, respectively, in Canada, of our total transactions processed. We perform a series of services including authorization, electronic draft capture, funds settlement and certain exception-based, back office support services such as chargeback and retrieval resolution. The following is a more detailed description of credit and debit card transactions:

A card transaction begins when a cardholder presents a card for payment at a merchant location and the merchant swipes the card’s magnetic strip through a point of sale, or POS, terminal card reader, which may be provided by Global Payments through our terminal management offering. For a credit card transaction, authorization services generally refer to the process whereby the card issuer indicates whether a particular credit card is authentic and whether the impending transaction value will cause the cardholder to exceed a defined limit. The terminal electronically records sales draft information, such as the credit card identification number, transaction date, and dollar value of the goods or services purchased. In a PIN-based debit transaction, the terminal records the card number, PIN and dollar value of the purchase.

After a card is swiped, the terminal automatically dials a pre-programmed phone number connected to our network in order to receive authorization of the transaction. We route the request to the applicable card association or debit network. The card association or debit network forwards the authorization request to the card issuer, who determines a response based on the status of the cardholder’s account. The response is returned to the merchant’s terminal via the same communication network. This entire authorization and response process occurs within seconds from the time the merchant swipes the cardholder’s card through the point of sale terminal card reader.

Electronic draft capture is the process of transferring sales draft data into electronic format so that it may be sent through networks for clearing and settlement. The card associations use either a system known as interchange, in the case of credit cards, or the debit networks in the case of debit cards, to transfer the information and funds between the card issuers and us to complete the link between merchants and card issuers.

Funds settlement refers to the process of transferring funds for sales and credits between cardholders and card issuers, including the final debiting of a cardholder’s account and crediting of a merchant’s account for a sales transaction. Depending on the type of transaction, either the interchange system or the debit networks are used to transfer the information and funds between electronic transaction processors and card issuers, and complete the link between merchants and card issuers. We use our network telecommunication infrastructure and the Federal Reserve’s Automated Clearing House system, or ACH in the United States and the Automated Clearing Settlement System, and the Large Value Transfer System, both in Canada, to ensure that our merchants receive the proper funds due to them for the value of the goods or services that the cardholder purchased. In the United States, merchant funding primarily occurs after we receive the funds from the card issuer. This business model differs from the business model followed in Canada, where we advance payment to merchants for credit and debit card transactions before receiving the interchange or debit transaction reimbursement from the card issuers. Each participant in the transaction process receives compensation for their services. As an illustration, on a $100.00 credit card or offline debit transaction, the card issuer may fund us $98.50 retaining approximately $1.50 referred to as an interchange fee. We would, in turn, pay the merchant $100.00 and pay assessment fees to the card association of approximately $0.10. After the end of the month, we would bill the merchant a percentage of the transaction, or discount, to cover the full amount of the interchange fee, assessment fee and our net revenue from the transaction. If our net revenue from the merchant in the above example was 40 basis points, we would bill the merchant $2.00 at the end of the month for the transaction, reimburse ourselves for approximately $1.60 in interchange and assessment fees and retain $0.40 as our net revenue for the transaction. For a PIN-based debit card transaction, a rate per transaction is charged which includes our fee and debit network fees. The card issuer seeks reimbursement of $100.00 from the cardholder in the form of a monthly credit card bill or charging the cardholders bank account in the case of a debit card transaction.

In addition to the card processing services described above, we also process retrieval requests on behalf of merchants for issuing banks and portfolios and provide chargeback resolution services, both of which relate to cardholders disputing an amount that has been charged to their credit card. We review the dispute and handle the related exchange of information and funds between the merchant and the card issuer if a charge is to be reversed.

Our merchant accounting services provide information primarily for our financial institution customers to monitor portfolio performance, control expenses, disseminate information, and track profitability through the production and distribution of detailed statements summarizing electronic transaction processing activity. Our risk management services allow financial institutions and independent sales organizations, or ISOs, to monitor credit risk, thereby enhancing the profitability of their merchant portfolios. Our risk management services include credit underwriting, credit scoring, fraud control, account processing, and collections. We also provide our customers with various support services, such as working with merchants to set-up their credit card programs or resolving issues relating to their terminal card readers.

Check Guarantee Services

Check guarantee services include comprehensive check verification and guarantee services designed for a merchant’s specific needs and risk adversity. Since this service offering guarantees payment of all checks that are electronically verified (primarily using point-of-sale check readers) through our extensive database, merchants may safely expand their revenue base by applying less stringent requirements when accepting checks from consumers. If a verified check is dishonored, our check guarantee service generally provides the merchant with reimbursement of the check’s face value, and then pursues collection of the check through our internal collection services. To protect against this risk, we use verification databases that contain information on historical delinquent check writing activity and up-to-date consumer bank account status. We derive revenue for these services primarily by charging the merchant a percentage of the face value of each guaranteed check.

In the specialized vertical market of gaming, our VIP Preferred proprietary software provides the gaming industry with the tools necessary to establish revolving check cashing limits for the casinos’ customers. Because VIP Preferred cardholders have fast access to cash with high limits, gaming establishments can increase money to their floor and eliminate associated risk because transactions are 100 percent guaranteed. We also offer an electronic check option, VIP Preferred e-Check, which eliminates the need for paper checks as part of the VIP Preferred suite of products.

Check Verification and Recovery Services

Check verification and recovery services are similar to those provided in the check guarantee service, except that this service does not guarantee payment of the verified checks. This service provides a low-cost, loss-reduction solution for merchants wishing to quickly measure a customer’s check worthiness at the point of sale, while not having to incur the additional expense of check guarantee services. We derive revenue for these services primarily from the service fees collected from delinquent check writers, fees charged to merchants based on a transaction rate per verified check, and fees charged to merchants for specialized services, such as electronic re-deposits of dishonored checks.

Our terminal management offering provides a variety of products and services relating to electronic transaction processing equipment, such as terminal programming and deployment, set-up and telephone training, maintenance and equipment replacement, warehousing and inventory control, customer service and technical support, customized reporting, and conversions. We provide these services directly to our own portfolio of merchants to support our credit and debit card transaction processing, check guarantee and check verification and recovery services, as well as, indirectly to merchants on behalf of our financial institution and independent sales organization customers. We derive revenue from equipment sales and rentals, programming and deployment fees, and repairs and maintenance services.

Funds Transfer

Our electronic funds transfer product and service offerings include a wide variety of services such as financial electronic data interchange, or EDI, account balance reporting, management information and deposit reporting. These products and services provide financial, management and operational data to financial institutions, corporations and government agencies worldwide and allow these organizations to exchange the information with financial institutions and other service providers. We also provide EDI tax filing and Internet tax payment services that allow financial institutions and government agencies to offer corporate taxpayers a secure and convenient method of paying taxes electronically. Tax payment security is handled through both SSL encryption/decryption and multi-level password access and operates through a web site that serves as the portal for securely receiving tax information and delivering the transaction for payment.

Competition

Our primary competitors in the electronic transaction processing industry include other independent processors, as well as major national and regional financial institution processors and ISOs. Certain of these companies are privately held, and the majority of those that are publicly held do not release the information necessary to precisely quantify our relative competitive position. As an independent processor, our principal affiliation with financial institutions relates to the sponsorship that enables our access to the card associations and debit networks. We believe an independent processor will tend to be a merchant customer advocate, as there is no other relationship with a card issuing business or cardholder customer service, as a financial institution. Also, a financial institution processor sales channel is primarily based on referrals with in the institution, to further leverage a customer relationship, an independent processor or ISO will tend to be focused on sales from all channels, including internally generated leads. Finally, a financial institution processor may not have the same executive focus on a merchant services business, as the business is not core to the total revenues of the financial institution. We primarily differ from ISOs in that we have our own platform and financial institution sponsorship agreements.

Based on industry publications such The Nilson Report, dated March 2003, we are a leading, mid-market merchant acquirer in the United States. According to that report, one of our competitors, First Data Corporation and its affiliates, is the largest electronic transaction processor in the United States. In April 2003, First Data Corporation announced a definitive agreement to merge with Concord EFS, Inc. The merger is currently under review by antitrust authorities and if approved, the combined companies, excluding VISA and MasterCard, would result in the largest market share of electronic transaction processing and network ownership in the United States. Although the consummation of this merger would increase the size of the largest competitor in the merchant processing industry, this merger may present us and other merchant processors with additional opportunities. This merger should not directly impact us as we focus on the mid-market merchant segment in the United States and we do not own a debit network, whereas these competitors focus on larger market merchants and own debit networks.

Our primary competitor in Canada is Moneris Solutions, which we believe has a slightly larger share of the Canadian electronic transaction market than we do. Moneris Solutions is a joint investment of the Royal Bank of Canada and the Bank of Montreal. However, we believe that we are the largest, publicly traded independent processor in Canada.

The most significant competitive factors related to our product and services include customer service, quality, value-added features, functionality, price, reliability, the breadth and effectiveness of our distribution channel, and the manner in which we deliver our services. While we service all industry segments, we specialize in the mid-market segment in the United States and the large market segment in Canada. We define mid-market as a merchant with an average of $250 thousand to $300 thousand in annual VISA and/or MasterCard volume. These competitive factors will continue to change as new distribution channels and alternative payment solutions are developed by our competitors and us.

Our primary strategy to distinguish ourselves from our competitors focuses on offering a variety of electronic transaction processing payment solutions to our customers. These enhanced services involve vertical market and sophisticated reporting features that add value to the information obtained from our electronic transaction processing databases. We believe that our knowledge of these specific markets, the size and effectiveness of our dedicated sales force, affiliations with trade associations, agent banks and CAPs, our ability to offer specific, integrated solutions to our customers, including hardware, software, processing, and network facilities, and our flexibility in packaging these products are positive factors that enhance our competitive position.

Industry Overview and Target Markets

We believe that significant opportunities exist for continued growth in the application of transaction processing services to the electronic commerce market. Although a large percentage of retail transactions still utilize cash, merchants encourage electronically authorized and settled transactions using credit and debit cards as a more efficient means of transacting business with their customers.

The rapid growth of retail credit card transactions, as well as the increased utilization of debit cards, directly correlates with the historic growth of our business. In the United States, total consumer spending is expected to continue to increase, together with an increase in the percentage of consumers using forms of payment other than cash and checks (i.e., credit and debit cards and other electronic means). Based on The Nilson Report dated April 2003, we believe that more than $2.1 trillion of annual consumer spending is charged using VISA and MasterCard. In Canada, we expect to benefit from similar consumer spending trends. Based on The Nilson Report dated July 2003, we also believe that over $157 billion (U.S.) of annual Canadian consumer spending uses VISA, MasterCard or debit as the form of payment.

Payment processing service providers, such as Global Payments, provide high volume electronic transaction processing and support services directly to banking institutions and to new entrants into the business. The shift in the industry from traditional financial institution providers to independent providers is due in large part to more efficient distribution channels, as well as increased technological capabilities required for the rapid and efficient creation, processing, handling, storage, and retrieval of information. These capabilities have become increasingly complex, requiring significant capital commitments to develop, maintain, and update the systems necessary to provide these advanced services at a competitive price.

As a result of the continued growth in our industry, several large merchant processors, including us, have expanded operations through the creation of alliances or joint ventures with banks and have acquired new merchant portfolios from banks that previously serviced these merchant accounts.

We believe that the proliferation of “loyalty” or co-branded cards that provide consumers with added benefits for card use should contribute to increased use of credit and debit cards in the future. Additionally, as merchants and consumers continue to use electronic commerce as a means to purchase goods and services, both the consumer-to-business and business-to-business aspects of electronic commerce will demand a growing array of transaction processing and support services. We currently provide complete processing capabilities for major credit cards, co-branded credit cards, debit cards and purchasing cards and are continuing to research services to compliment new technology and demand.

Business-to-business electronic data interchange using purchasing card technology and associated systems software provides businesses with increased efficiency and us with strong growth in industries that have not traditionally utilized credit cards. Purchasing cards and the related business-to-business electronic data interchange replace the costly, time-consuming paper ordering and invoicing with inexpensive, real-time electronic payment processing transactions.

VISA has recently announced that they will begin offering cards containing chip technology in Canada. Chip technology can securely store and encrypt confidential information. The chip is virtually impossible to copy and has the power to be programmed with spending and usage limits making it possible to authorize transactions off-line. Chip technology will enable a host of additional features including a choice of applications such as loyalty, access control, rewards, and public transit passes. This complex project to offer chip technology in the Canadian marketplace is expected to take up to seven years for all participants to implement the equipment necessary to accept and process the chip card compliant transactions. We have been working to develop a long-term plan to ensure our merchants will benefit from the migration to chip technology in the Canadian market.

We believe that the number of electronic transactions will continue to grow in the future and that an increasing percentage of these transactions will be processed through emerging technologies, such as wireless payment products, stored value cards and other custom payment solutions. We have focused on bringing niche wireless POS products and services into the mainstream. Today, we offer products that meet the needs of fixed location, portable and mobile merchants. We have also participated in multiple wireless payment card pilots, also known as Radio Frequency Identification, RFID or contact less payment card pilots, designed to decrease consumer checkout time allowing our merchants to service more customers and process more transactions. We continue our development of a new electronic check system, which the industry sometimes refers to as check truncation or conversion, designed to further reduce our customer’s paper handling cost by converting paper checks into an electronic ACH file transaction. In anticipation of the growing demand for Internet communications by traditional merchants we are focused on developing new and secure solutions. These emerging technologies will be a major factor in accelerating the continued conversion from paper transaction processing to electronic transaction processing, which will result in greater growth opportunities for our business.

Strategy

Our business strategy centers on providing a full range of electronic transaction processing services in our existing markets and expanding into new markets through customer service, products and services, strategic acquisitions and new relationships with trade associations and agent banks. We believe that this strategy provides us with the greatest opportunity for leveraging our existing infrastructure and maintaining a consistent base of recurring revenues. We believe that the electronic commerce market presents additional attractive opportunities for continued growth. In pursuing our business strategy, we seek to increase our penetration of existing markets, to continue to identify and create new markets, such as the electronic commerce market, and to further leverage our infrastructure through the following:

• providing the best possible customer service by investing in technology, training and product enhancements;
• expanding distribution channels, primarily direct merchant services, ISOs, and CAPs;
• growing our domestic and Canadian market share by concentrating on the mid-market segment in the United States and on the small and mid-market segment in Canada;
• providing the latest, secure, enhanced products and services by developing value-added applications, enhancing existing products, and developing new systems and services to blend technology with our customer needs;
• continuing systems integrations, primarily consolidation of operating platforms and implementation of cost reduction initiatives; and
• focusing on potential acquisitions, investments and alliances with companies that have compatible products, services, development capabilities and distribution capabilities in the direct card business (domestic and international).