By Maureen Flanagan
TransFirst Holdings, Inc., provides a complete platform of credit and debit card transaction processing services for small and mid-sized merchants. Based in Dallas, TX, TransFirst serves over 760 banks and approximately 150,000 merchant customers and is the largest non-bank affiliated, privately held processor in the United States. The company's customers currently process $18.5 billion in annual sales and include merchants in such high-growth sectors as health care, agent banks, and merchandisers handling orders by mail, telephone and the Internet where the card is not present at the time of the transaction.
TransFirst has grown dramatically since 2000 when it was recapitalized by GTCR Golder Rauner LLC, a leading private equity investment firm that now holds a majority share of the company. In an April 1, 2004 transaction, TransFirst continued its growth by purchasing the third party and agent bank merchant division of Cincinnati-based Fifth Third Bank (Nasdaq: FITB) Processing Solutions.
In support of TransFirst's acquisition of Fifth Third, American Capital Strategies, Ltd. (Nasdaq: ACAS) provided $15.6 million of senior subordinated debt. American Capital made its investment alongside a revolving credit facility and senior financing by Merrill Lynch Capital. GTCR and TransFirst's senior management provided additional senior subordinated debt and also invested in preferred and common stock.
TransFirst was founded in 1995 to process the credit and debit card transactions of Affiliated Computer Services, Inc. (NYSE: ACS). Led by Thomas Rouse, CEO and an experienced management team, the company established technologically advanced payment processing services and risk management with a focus on providing processing services through agent banks. After its recapitalization by GTCR, TransFirst made acquisitions that dramatically increased processing volume and added new customers, markets and capabilities. These acquisitions included MoneyTree, PulseCard, DPI Holdings and Bank of America Merchant Services. In February 2004, the company acquired Payment Resources International, providing TransFirst with the ability to process electronic payments for credit and debit cards. It also gave TransFirst Automated Clearing House (ACH) capabilities in addition to proprietary technology that enables any computer to be converted into a traditional point-of-service terminal with fully integrated card swipe technology and on-line transaction capabilities.
The company's newly acquired Fifth Third portfolio consists of merchants that Fifth Third acquired via its own agent banks and by the Independent Sales Organizations (ISOs) and Independent Sales Contractors (ISCs) who broker transaction processing services. These customers fit well with TransFirst's portfolio and create an opportunity for cost reductions and integration with the company's platform of shared services. It also broadens TransFirst's focus in the profitable ISO channel.
TransFirst focuses on merchants and agents in high-growth, service-intensive markets. Because of the extensive level of support needed to service these customers, this market segment is not served by the large processors that handle services for large regional and national merchants. This niche, however, has significant opportunity as nearly 95% of the 6.5 million retail merchants in the U.S. are smaller local or regional merchants.
TransFirst provides customers with a broad range of services. In addition to electronic transaction authorization for all major credit and debit cards at the point-of-sale, the company provides comprehensive transaction data capture, data transmission, and information reporting services, including the provision of real-time data and customized data mining services.
In addition, TransFirst helps agent banks, ISOs and other third-parties evaluate the credit risk involved in processing transactions. The company's proprietary risk assessment technology, which has made TransFirst an industry leader in this regard, allows for highly effective merchant screening and selection as well as transaction approval and monitoring. In fact, the company's success in assessing the risk profiles of smaller merchants has yielded a loss ratio of less than 1 basis point compared to the industry average of 3 basis points. Other services include project management, application underwriting, help desk and technical support, risk management review/monitoring and chargeback processing.
"With this investment, American Capital is supporting a market leader with expertise in the most attractive sectors of the transaction processing industry," said Tom Gregory, American Capital Managing Director. "TransFirst's quality services tailored to customer needs in addition to expertise in the markets they serve are exactly what the target market is looking for to make their business more efficient."
Since 1997, American Capital has provided more than $2.2 billion in middle-market financings and currently manages a portfolio of more than 90 companies, including several in the financial sector. For more information about American Capital's portfolio click here.
The overall market for electronic transactions is currently estimated to be nearly $1.5 trillion. The industry has experienced tremendous growth over the past decade, as merchants and consumers have migrated from paper-based forms of payment to embrace credit and debit card payment as a more cost-effective, convenient, and secure payment vehicle. Credit card purchasing volume is expected to grow at an 8% annual rate from $1.37 trillion in 2002 to $2.1 trillion in 2007; debit card volume is expected to increase 18% over this period to $1.1 trillion.
TransFirst has established a leading presence in processing services for merchants involved in health care services transactions. This is an emerging market that is forecast to demonstrate strong growth over the near-term as changes in U.S. demographic trends create greater demand for personal health care services.
The company's focus on agent banks is also expected to show solid returns as this market provides consistently profitable revenues and low customer attrition. The ISO channel is also growing and TransFirst will utilize ISOs to drive growth with its small and medium size merchants.
A key growth area is the card-not-present market. Government institutions, retail merchants, restaurants, and other entities with shorter product cycles continue to leverage the cost saving benefits of electronic commerce and telephone and mail-order marketing and fulfillment. This creates a growing need for quality processing solutions for credit and debit card based transactions that take place at a distance from the consumer.
The company's market dominance, focus on customer service and extensive technology and expertise targeted to smaller merchants give TransFirst a solid platform for capitalizing on market opportunities. TransFirst is banking on a successful future.
