CyberSource to Take Over CardSystems

By Evan Schuman  |  Posted 09-23-2005 Print Email
With the nation's worst credit card security disaster on its resume and AmericanExpress and Visa cutting its contract, payment processor CardSystems has few long-term options.

In what might signal the closing chapter in the CardSystem credit-card security breach saga, CyberSource Friday announced its intent to acquire all of CardSystem's assets for an undisclosed amount.

In May, CardSystems Inc. reported its role in the nation's largest known data security breach, when it revealed that someone had broken into its systems and stolen the details of as many as 40 million payment cards, including names, account numbers and expiration dates.

CardSystems might have been considered the victim in the incident had it not admitted to having violated its contracts with Visa, American Express and others by failing to encrypt credit card transaction data and by keeping on file card verification numbers that are never supposed to be stored.

The day before testifying before a U.S. House subcommittee, both Visa and American Express announced they were terminating their relationships with CardSystems. MasterCard said it would continue if CardSystems met various criteria.

Friday's statement from CyberSource confirmed that it had signed on Sept. 20 a non-binding letter of intent to acquire the assets of CardSystems.

Those assets, the statement said, include "CardSystems advanced payment processing platform with direct connections to major credit card association networks and banks, contracts to process credit card transactions on behalf of more than 120,000 merchants representing more than $18 billion in annual processing volume and a network of Independent Sales Organizations (ISOs)."

Is it possible for CardSystems to fix its security procedures? If so, is it enough? Click here.

The distinction between wanting to purchase the assets of CardSystems and purchasing the company itself is significant, said Colin Gillis, the equity research analyst who tracks CyberSource for the Adams Harkness Inc. investment firm.

Given the substantial liability from various potential lawsuits and government investigations, purchasing the company would bring those liabilities to CyberSource.

By purchasing just the assets, CyberSource would, in theory, not be accepting those liabilities, Gillis said.

When both American Express and Visa announced they were terminating their CardSystems contracts, many industry observers questioned whether the processing firm could survive.

During testimony before a Congressional investigative committee, even CardSystems CEO John Perry raised the issue of whether his company could survive without those credit card giants' support.

That background suggests that CyberSource could be picking up CardSystems' assets at a substantial discount.

"For CardSystems, this seems like it was something they had to do because of the tremendous bad publicity and security problems," said IHL Services President Greg Buzek said. "That's a shame because people spend so much time building something and because of this mistake and criminals, they are basically forced to sell."

CIOs learn very little about their security from security audits. Is it their own fault? Click here.

As for the pricing, he added: "I'm sure CyberSource will get the assets at a greatly discounted rate compared with what it would have been a year ago."

Bruce Frymire, the director of corporate communications and investor relations for CyberSource, wouldn't comment on the price his company has offered to pay, but he did challenge the premise that it would be a huge discount.

"We do not feel like we paid anything like a fire sale price," Frymire said.

Next Page: Is CyberSource really getting a deal?



 

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