Certegy, Inc

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Certegy, Inc.

11720 Amber Park Drive, Suite 600
Alpharetta, Georgia 30004
Telephone: (678) 867-8000
Fax: (678) 867-8101
Web site: http://www.certegy.com

Public Company
Incorporated: 1961 as Telecredit, Inc.
Employees: 4,000
Sales: $1.01 billion (2003)
Stock Exchanges: New York
Ticker Symbol: CEY
NAIC: 522320 Financial Transactions Processing, Reserve, and Clearinghouse Activities

Certegy, Inc. is a leading provider of check authorization services and credit card, debit card, and merchant card processing. The company provides its services to more than 6,000 financial institutions and to more than 100,000 retailers worldwide. Certegy's business is divided into two main areas, Check Services and Card Services. Certegy helps client retailers such as Wal-Mart and Best Buy by providing risk management and data services that catch bad check writers and verify customers with adequate funds. For its service Certegy receives a percentage of the total dollar amount of checks written to the client. Certegy pioneered this business in the 1960s. Certegy's Card Services unit has prevailed despite competition from larger vendors by concentrating on providing card processing services to small banks and credit unions. The company also has growing international sales, doing business in the United Kingdom, Ireland, and France, in Chile and Brazil, and in Australia and New Zealand. Certegy's card processing unit in Melbourne, Australia, handles multinational and multilingual transactions, allowing Certegy to service customers in Thailand and throughout the Asia Pacific region. Certegy was founded as Telecredit, Inc., and operated under that name through 1990. From 1990 to 2001 the company was the Payment Services unit of Equifax, Inc. Equifax spun off the unit in 2001.

Founding a New Industry in the 1960s

The company that became Certegy was founded in 1961 as Telecredit, Inc. by two men, Ronald A. Katz and Robert Goldman. The Los Angeles company put together existing telephone and computer technology, and patented a quick system of verifying whether a check written to a merchant was good. Telecredit collected data about check writers' habits, and kept it filed by driver's license number. Telecredit kept track of how many checks a person normally wrote a month, what the amounts were, and any instances of bad checks. The company was able to use this databank to assess the merchant's risk of accepting a check from a particular person. At the time, merchants usually monitored bad check writers with a simple system, often a handwritten list kept at the cashier's elbow. If the cashier was in doubt, he or she could call the customer's bank and wait for authorization. Telecredit was the first company to offer a fast and sophisticated automated system. Telecredit compiled many more variables than merchants themselves were able to cover, and the company stored data on a much larger pool of people than the small number of known defaulters that individual stores looked out for.

Telecredit's system had clear technological advantages. Yet it was slow to catch on. Telecredit began by marketing its services to area supermarkets. Business grew gradually, and it was a long time before the company made any money. Telecredit went through 100 consecutive months in the red before finally becoming profitable in 1970. Telecredit's entrepreneurs kept inventing, coming up with a new system for reading and writing codes on the magnetic strips on the backs of credit cards. Ronald Katz went on to hold close to 50 patents for various systems and devices related to computer and telecommunications technology. He continued at Telecredit as its patent licensing administrator, while the business end of the company was run by CEO Lee Ault beginning in 1968. Ault described the early years of the company to American Banker (November 7, 1984), saying, "We developed and invented a lot of things that went on to become industry standards. The problem is that they were never commercially successful. The things we had in the '60s never became popular until the '70s. That's the price of being a pioneer."

Yet Ault and his team were patient, and by the mid-1970s Telecredit had sales of $8 million. It collected fees of about 2 percent of the amount of checks it guaranteed. The company also began operating a second business segment, processing credit card transactions. In 1977 Telecredit bought Florida Service Center, a bank card processing company. This was right at the beginning of the era when automated teller machines (ATMs) were being introduced, and plastic cards were being used for new services as well, such as to debit checking accounts. As more and more transactions were done by card, companies including Telecredit made money by processing the data for banks. Bank card servicing became a highly competitive industry, but Telecredit found a niche by working for small banks and credit unions. Bigger competitors such as American Express subsidiary First Data Resources overlooked these smaller financial institutions. This became a growing second line of business for Telecredit. By the early 1980s, some 34 percent of Telecredit's revenue came from its credit card processing division.

Even as credit card, debit card, and ATM card use increased over the 1970s and early 1980s, people continued to write checks and retailers continued to use Telecredit's verification system. As its data banks became larger, Telecredit was able to pursue accounts with national retailers including Toys 'R' Us. By the early 1980s Telecredit was clearly the leader in the check guarantee field, with a market share of about 25 percent. It guaranteed more than $2 billion worth of checks in 1982, and pulled in revenue of $61.5 million. Both sales and earnings grew through the mid-1980s. In 1985 revenue had reached $85 million.

Light Signatures and Other Ventures in the 1980s

Telecredit toiled through the 1960s and finally began earning money in 1970. It began paying dividends to stockholders in 1976, and was able to raise the amount it paid out every year through the mid-1980s. By that time, the company seemed to have arrived. Its technology was widely understood, unlike in its early years, and Telecredit had two viable business units, card processing and check guaranteeing. In the mid-1980s, the company began picking up more large national accounts. By 1985, mall clothier The Gap, the discount department store Kmart, and the electronics chain Circuit City Stores all used Telecredit's check guaranteeing services. Telecredit had only one major competitor in this business sector, and there seemed to be plenty of room for expansion. Of all checks written to U.S. retailers, only about 3 percent were guaranteed (by Telecredit or other companies), meaning that the potential market for the service was still large. Telecredit's credit card processing business also grew nicely in the early to mid-1980s. Telecredit had an arrangement with the trade group representing the nation's smallest banks, the Independent Bankers Association of America (IBAA). In the mid-1980s Telecredit processed credit cards for 300 of these small banks, and the IBAA estimated that the number would be up to 1,000 in a few years. Telecredit also had an arrangement with a Florida organization called Payment Systems for Credit Unions, in which Telecredit managed credit card payments for the group's 800-plus member credit unions. This was a lucrative niche for Telecredit, providing almost 20 percent of Telecredit's revenue by the late 1980s.

The company had little debt and seemingly strong finances in the mid-1980s. Stock market analysts began to take note of the company. Its two main business areas were sound and expanding, and the company was a leader in its market. In addition, Telecredit revealed that it had another important new technology in the wings. This was an anti-counterfeiting system called Light Signatures. Light Signatures, Inc. was organized in 1981 by Telecredit's founders Katz and Goldman. By 1983, Telecredit owned 51 percent of the company, and it bought the remainder for $14.8 million the next year. Light Signatures used a light beam system to verify the authenticity of paper, plastic, fabric, and other materials. Manufacturers could use Light Signatures' technology to check for counterfeits. Early customers were the blue jeans manufacturer Levi Strauss and the maker of the popular Jane Fonda Workout videotapes. In 1983 Telecredit CEO Lee Ault hired a new president and chief operating officer, Louis Buglioli, and put him in charge of the company's established businesses. Ault gave himself the job of chairman, with the mission of shepherding Light Signatures and seeing to the long-range planning for Telecredit. Ault estimated that the counterfeiting business in the United States, comprising everything from government documents to ripoffs of designer clothes, was worth $50 billion. Thus Light Signatures, a system that could detect many different kinds of fakery, had a potentially enormous market. One analyst from the brokerage firm Raymond James told American Banker (November 7, 1984): "Unless I'm missing something, Light Signatures is the next Xerox."

Company Perspectives:

Certegy provides credit and debit processing, check risk management and check cashing services, merchant processing and e-banking services to nearly 7,000 financial institutions, 117,000 retailers and 100 million consumers worldwide. Headquartered in Alpharetta, Georgia, Certegy maintains a strong global presence, providing services in the United States, the United Kingdom, Ireland, France, Chile, Brazil, the Dominican Republic, Australia, New Zealand, and Thailand. As a leading payment services provider, Certegy offers a comprehensive range of transaction processing services, check risk management solutions and integrated customer support programs that facilitate the exchange of business and consumer payments. Certegy generated over $1 billion in revenue in 2003.

Yet there were problems getting Light Signatures off the ground. The machines were apparently sometimes difficult to use, and it was not clear how the company could establish a viable business by relying on the manufacturers of the often faddish goods that were most often counterfeited. Light Signatures wanted to develop a business detecting fake credit cards. The technology worked best, however, with paper or fiber that already had a slight irregularity in its "signature" when held up to the Light Signatures beam. Thus the company had to manufacture its own plastic cards, which were embedded with a random pattern of extra plastic crystals. This venture apparently went nowhere, while Light Signatures began to fish for customers in the securities industry. Counterfeit stocks and bonds were a real problem, and Light Signatures developed special verification machines called Signa Three. By 1988, Light Signatures had letters of intent from some 20 banks that were interested in buying the Signa Three technology. The major stock exchanges mulled over compelling their members to use the technology. This meant that new stocks and bonds would have to be "signaturized," like the new credit cards, or manufactured with a magnetic strip and certain random elements so that the Signa Three machines could read and code them.

There were many big "ifs" in Light Signatures' future. The stock market crashed in October 1987, and that may have left the securities industry jittery about shelling out for unproven technology. The unit lost money, while Telecredit's core businesses continued to do well. Telecredit had revenue of $133.2 million in 1988, about 60 percent from its check guaranteeing division and most of the rest from credit card processing. Light Signatures had sales of $6.1 million, but at that point it seemed a drain on the parent company. In May 1988, Chairman Ault announced Telecredit would write off more than $25 million in its investment in Light Signatures. This led to a net loss of almost $7 million for Telecredit in 1988. Only a few months later, Telecredit had more bad news to deal with. Payment Systems for Credit Unions, which provided a substantial portion of Telecredit's credit card processing business, announced that it was ending its agreement with the company and moving to a competitor. Telecredit scrambled to set up its own unit, called Card Services for Credit Unions, and it persuaded about half of its former credit union clients to stick with it. Despite these two blows close together, Telecredit managed to do well over 1989. Its revenue came in at $158 million, and profit was about $25 million, which looked impressive compared with the loss of the previous year.

With Equifax in the 1990s

Though Telecredit had shown growth in its core businesses throughout the 1980s, in some ways the company seemed stymied. Revenue was more holding steady rather than bounding along, as the big promise of Light Signatures fizzled out. The company was vulnerable to competitors in its card processing division, as was demonstrated when First Data Resources, a bigger player, took almost half its credit union business away. Nevertheless, Telecredit had strong cash flow, and after writing off Light Signatures, it was free of debt. Analysts expected the company to grow now by acquisition, or to be acquired. Telecredit took the latter choice. It had a firm base on the West Coast, while its competitors were in the East. Therefore, the company hoped it would be a nice acquisition for an Eastern rival looking to build in the other end of the country. In July 1990, Telecredit announced that it was being bought by Atlanta, Georgia-based Equifax, Inc. Equifax had revenue of about $800 million. Equifax was the nation's leading credit bureau, compiling reports and providing information on consumer transactions. The key to both companies was data, and they were in complementary if not overlapping businesses.

As an Equifax subsidiary, Telecredit kept its name for two years, but in 1993 the business became Equifax Payment Services. Equifax Payment Services headquarters were in Tampa, Florida. The division operated two segments, Equifax Card Services and Equifax Check Services. The division attracted large customers, like the growing electronics retailer Best Buy. That firm began to move quickly into new markets in the early 1990s, and it credited Equifax Payment Services with helping it manage check writing risk, especially in unfamiliar urban markets. The Payment Services division also grew by acquisition. In 1996 Equifax bought the card services division of Credit Union National Association (CUNA), the fifth largest credit card processor in the United States. The CUNA unit became part of Equifax Payment Services. The Equifax unit continued to serve small banks through the Independent Bankers Association of America, an arrangement Telecredit had established in the early 1980s.

The parent company also began to grow internationally. Equifax moved into check guaranteeing in Europe beginning in 1992, through a joint venture with regional leader Transax. The arrangement with Transax also led Equifax Payment Services into new markets in Australia and New Zealand. In 1996 Equifax acquired Transax, giving it the leading market share in check guaranteeing in Europe. Equifax also bought First Bankcard Systems, maker of advanced software for credit card processing, and in 1998 bought UNNISA, a large credit card processing firm in Brazil. Over 1999 and 2000 Equifax Payment services moved into markets in England, Ireland, and Chile, and gained a significant contract for credit card processing in its established markets of Australia and New Zealand.

Key Dates:

The firm is founded in Los Angeles as Telecredit.
Telecredit begins earning money.
The company buys Florida Service Center and begins credit card processing.
Light Signatures is founded.
Telecredit writes off its investment in Light Signatures.
Equifax buys Telecredit.
The name is changed to Equifax Payment Services.
The Payment Services division is spun off as Certegy.

Independent Again in the 2000s As Certegy

Equifax Payment Systems seemed to thrive in the 1990s as Telecredit had never done. It grew quickly through acquisitions, and over the decade the division came to comprise half of Equifax's total revenue. The division's revenue for 1999 came to $680.7 million, with operating income of $135.5 million. The division had worldwide markets, and client retailers in some 300,000 locations. Parent company Equifax decided in 2001 to spin off its payment services division into a separate, publicly traded company to be called Certegy. (The name stood for a combination of "certainty," "technology," and "energy.") Equifax felt that its own stock was undervalued because investors did not fully understand its business. It was known as a credit bureau, yet it had this large and profitable division in a related but separate industry. Equifax's management felt its stockholders would get better value if the payment services unit stood on its own. The company had pursued a similar course in 1997, spinning off ChoicePoint, a division that sold consumer data to insurers. In 2001 Equifax Payment Services, formerly Telecredit, debuted on the New York Stock Exchange as Certegy. The company operated out of headquarters in Alpharetta, Georgia, with 5,000 employees total.

As a newly independent company, Certegy continued to expand its services at home and abroad, and to grow through acquisition. Shortly after going public, the company hit some bumps, but it seemed to recover well. In late 2002 the company learned it had lost a credit card processing arrangement with a Brazilian bank to rival Electronic Data Systems Corp. The loss of the Brazilian contract cost the company an estimated $46 million. The company also had problems putting in place a check guaranteeing program at a Brazilian discount retailer, causing Certegy to restate its revenue projections. In the United States, Certegy lost its account guaranteeing checks to the online transaction service PayPal when that firm was acquired by eBay. But Certegy moved ahead in other markets, increasing the amount of credit card processing it did in Australia, for example. The company was already a leading player in the Australian market by 2003. The company used its Melbourne, Australia data center to move into new Asian markets. In 2004 it entered an eight-year contract with a Thai credit card company to process transactions and introduce a personal loan program. In 2003 Certegy began offering a payroll check cashing service through the California supermarket chain Safeway. Certegy had begun a payroll check cashing service in 1999 (when it was still Equifax Payment Services). This was possibly a valuable new niche for the company. Also in 2003, Certegy teamed up with the world's largest retailer, Wal-Mart Stores Inc. Certegy began providing Wal-Mart customers with a new service that let them write checks for shopping at Wal-Mart's online catalog. Certegy also let online shoppers write checks for Dell Computers at Dell's company web site, and did the same for Apple Computer.

In 2003, Certegy authorized more than $35 billion in checks and serviced more than 46 million credit cards. Its revenue topped $1 billion, and its services reached about 100 million consumers around the world. Certegy was the world's leading provider of check guaranteeing services. In its second business area, credit card processing, the company continued to focus on small banks and credit unions, and was the leading service provider in that particular niche. In 2004, Certegy made some key acquisitions. It moved into the gaming industry for the first time, purchasing the Game Financial unit of Viad Corporation for $43 million. The unit provided check cashing services and cash advances on credit cards at 60 U.S. casinos. The acquisition was expected to bring Certegy an additional $50 million in revenue. That year Certegy also acquired a smaller rival in the credit card processing field. The company paid $22.5 million for Elkhart, Indiana-based Crittson Financial LLC. Crittson operated in the small bank niche, like Certegy.

Principal Divisions

Card Services; Check Services.

Principal Competitors

Electronic Data Systems Corporation; First Data Corporation; Nova Information Systems Corporation.

Further Reading

"Australia's Suncorp. Metway to Launch New Visa Card in 2003," AsiaPulse News, December 17, 2002, p. 5887.

"Best Buy Prizes Equifax Expertise," Chain Store Age Executive, September 1994, p. E12.

Breitkopf, David, "In Brief: Certegy Gets Safeway Deal," American Banker, April 22, 2003, p. 9.

"Business Saves Big Money with the 'Minitrial,"' Business Week, October 13, 1980, pp. 16872.

"Cashing in on Bank Card Recording," Business Week, September 14, 1981, pp. 8586.

"Certegy Expands Presence in Thai Card Market," AsiaPulse News, October 6, 2003.

"Certegy to Buy Viad Unit for $43 Million," New York Times, February 21, 2004, p. C4.

Coulton, Antoinette, "Equifax to Buy Credit Union Group's Card Processor," American Banker, September 25, 1996, p. 12.

Cox, Rebecca, "Telecredit Posts $25 Million Net for Year," American Banker, July 6, 1989, p. 10.

, "Telecredit Re-Signs 345 Credit Unions," American Banker, May 17, 1989, p. 9.

Edgerton, Jerry, and Jordan E. Goodman, "Cash Cows About to Calf," Money, November 1985, p. 7.

"Equifax Renames Two Business Units," American Banker, October 29, 1993, p. 18.

"Forgery Foiler," Fortune, February 29, 1988, p. 14.

Fung, Amanda, "Loss of Revenue Source Spurs Revamp at Equifax," American Banker, January 14, 2002, p. 21.

Kutler, Jeffrey, "Telecredit Suffers $6.9 Million Loss, Cites Writeoff in High-Tech Unit," American Banker, June 30, 1988, p. 9.

Kuykendall, Lavonne, "Three Strikes Against Certegy," American Banker, September 23, 2002, p. 24.

Lazo, Shirley A., "Speaking of Dividends," Barron's, September 19, 1988, p. 66.

Mollenkamp, Carrick, "Equifax Hopes to Revitalize Its Stock by Spinning Off Payment-Services Unit," Wall Street Journal, October 2, 2000, p. A3.

"More Bad News for Telecredit," American Banker, October 26, 1988, p. 8.

Neal, Roger, "Walking the Wire," Forbes, November 21, 1983, p. 275.

"Telecredit Inc. Expects Lower Income in Fiscal '85," Wall Street Journal, June 19, 1985, p. 1.

"Telecredit Planning Write-Off, Revamp for Unprofitable Unit," Wall Street Journal, May 27, 1988, p. 1.

"Telecredit Sticks Out Its High-Tech Neck with a Risky But Promising Innovation," American Banker, November 7, 1984, p. 40.

"The Tools for a Risky Business," Chain Store Age, April 2002, p. 3A.

Wade, Will, "Wal-Mart Taps ACH As Way to Cut Interchange," American Banker, July 23, 2003, p. 1.

Walsh, Jim, "Telecredit Inc.: Knowing When to Fold Is the Key to Growth," California Business, October 1990, p. 12.

Welling, Kathleen M., "Up & Down Wall Street," Barron's, April 18, 1988, pp. 1, 5556.

Wiegner, Kathleen K., "What Checkless Society?," Forbes, September 21, 1987, p. 8.

Wolfe, Daniel, "Certegy to Buy Game Financial, Crittson," American Banker, February 23, 2004, p. 18.

A. Woodward