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Guard Dog on Duty

F rom a conversation over dinner lamenting the losses of deposit fraud issues, a small group of bank executives drew out a plan of attack on a napkin. That early strategy eventually evolved into a company that is in high demand today for its suite of risk-management services. The company is Primary Payment Systems, and by utilizing a common platform that various industries contribute information to as well as share in, PPS offers solutions that detect high-risk and fraudulent individuals as well as payment transactions.

From that early dinner, those bank execs took their idea to Ron Congemi, a respected player in the ATM network-provider space. Ron embraced the idea and, having the resources to support it, founded PPS in 1991 in San Diego, where his company, Star Systems, was headquartered. He hired top professionals in the payment-processing field and relocated the office to Phoenix, where it subsequently has grown into an organization of 72 employees that handled more than 1.2 billion transactions totaling $1.7 trillion in 2000.

Primary Payment Systems' business model involved Star Systems taking an equity position, and the remainder was owned by a number of banks - including Bank of America, Wells Fargo and California Co-op - that contributed data and more important, shared that data with each other. The philosophy incorporated the belief that banks would be far more effective in combating fraud if it was treated as a competitive issue.

"The banks all agreed they needed to work in combating it collaboratively," says John Longobardo, Executive Vice President for Primary Payment Systems. "You can do a good job of tackling issues when the greater good of the industry is put in front of the competition."

While that philosophy has remained steadfast, the dynamics of Primary Payment Systems has changed. In 2001, it became a wholly owned subsidiary of Concord EFS through the acquisition of its majority owner, Star Systems, by Concord. At that time, PPS was in negotiations to acquire WJM Technologies, which had developed an early warning product screening new accounts for banks.

With a complementary product and a business culture akin to its own, PPS completed the acquisition with an initial funding by its new majority owner, Concord. While Primary Payment Systems is 86% owned by Concord, it is a combination of the old PPS and WJM technologies.

How much does Concord dictate to the running of Primary Payment Systems, or is it hands-off?

"They have a healthy interest in our business and make sure we have resources to grow business," says Longobardo. "Up until now it has been hands-off with involvement still from our minority bank owners. Very much to Concord's credit, it has been respectful that PPS is kind of an industry-owned utility respectful of banks."

That respect translates into a suite of products and services that is making a marked difference in payment transactions. PPS's core competency operates within a somewhat narrow and confined business environment - namely, fraud and risk.

"Our employees are people tuned in with reducing fraud and risk through years of hard work and defining and redefining our products over and over," says Longobardo. "Our business is more complex now. Our whole business model of collaboration and cooperation is built around finding ways to reduce fraud losses and share data. This clearly sets us apart. It's not software that works independent of any processor."

Longobardo contends that nothing at PPS would work if the banks didn't have that same commitment to work together by virtue of sharing data. Primary Payment Systems is the custodian for a database that encompasses about 170 million accounts. PPS believes it is the largest of its kind in the industry.

A unique aspect of the PPS database is that it is a full positive file with data contributions from financial institutions. While other companies contain just negative data bases examining certain profiles, PPS's database looks at and examines all accounts, updating information every 24 hours. That current data reflects on the status of all depositors. Surprisingly, PPS discovered that only .5% of all data contained reflects some kind of negative experience.

Who actually owns the database? "The data belongs to the banks," says Longobardo. "It is their data, and they want to feel comfortable about how that data is utilized."

That comfort is provided by a board of directors that still counts banks among its members. PPS also has an Operations Advisory Committee comprised of representatives from the country's 15 largest banks that participate in PPS's system. The committee meets quarterly to provide input and direction for the solutions that assist in reducing losses associated with bank and/or fraudulent checks or high-risk accounts.

One of the results of that positive input has been the rebranding of PPS services. About six months ago, after the WJM acquisition, PPS decided to rename its offerings. "Early Warning" was the umbrella, so to speak, over the company products that all share one thing in common - providing early warnings of pending loss to institutions. How did the name come about? "Our studies showed that 'early warning' had a high recognition by banks," says Longobardo. "We utilized that asset."

Early Warning is the suite of risk-management products, each bearing the familiar PPS "chek" moniker.

For example, one of the most visible offerings is PPS's Identity Chek, a computer software system used to detect new account fraud. On the market for 14 years, it is utilized to authenticate bank accounts, looking for inaccuracies in data provided by new customers. PPS considers this a product that provides value in an area that goes outside the traditional financial services marketplace.

"Especially since 9/11, much of the same information can be utilized to determine and authenticate who people say they are," says Longobardo. "Since the Patriots Act, banks are faced with two milestones - determining whom they are doing business with and keeping adequate records of how they've checked them out. We really feel that Identity Chek will be a key authentication tool for the Patriots Act."

Other entities have that same feeling. PPS took the data the FBI had published on the 19 terrorists involved in the World Trade Center attack and ran it through Identity Chek. On 12 of those 19 terrorists where more than just a name was available, Identity Chek highlighted 11 of them as highly suspicious. According to Longobardo, "That was the impetus for a lot of interest we're having in this product."

PPS officials were invited to participate in a February 2002 roundtable in Washington, D.C., that explored what existing tools were available to help prevent terrorism, in light of the fact that criminal issues go beyond financial fraud.

"This was a watershed mark for Primary Payment Systems," says Longobardo. "Only a small number of vendors were invited. We were delighted to participate."

Longobardo is quick to stress that one doesn't have to be a bank or government agency to derive value from PPS products. Brokerages and credit unions, in addition to the recent interest from government entities, all are considering utilizing software to authenticate persons or any security-related applications where authentication is needed.

Other PPS products include Deposit Check, a check-loss reduction service providing advance notification of potential check returns to participating financial institutions; Prime Pay, developed for use by check-acceptance companies to improve their verification and guarantee decisioning at the point-of-sale; and Prime Chek, designed for credit card issuers and other major retail payment processors to reduce their exposure associated with bad and fraudulent checks being accepted for payment and to facilitate better open-to-buy decisions.

All utilize the database Primary Payment Systems has built and all are derivative products of the same database and software.

One product is notably absent - check conversion. Why? According to Longobardo, "We're not working on one at present. There is opportunity for anyone to do check conversion validation and authentication, but it is still pretty much in its infancy. We see it as a market opportunity in the future."

For now, Primary Payment Systems concentrates on a more tangible market. Until recently, it had focused on the top 100 banks. Now PPS is looking to expand to Tier 2 and 3 markets, such as credit unions and the retail space.

Primary Payment Systems sees a huge opportunity in retail markets at the point-of-sale. And with the retail market expansions comes the issue of ISOs. Longobardo admits that PPS is seriously looking into that lucrative channel, but nothing has been determined.

Installation of PPS products doesn't happen overnight, though. For example, Deposit Chek takes 90 days for software installation, mapping and training at financial institutions. Extract software is not required for retailers, so if they decide to utilize PPS for inquiries it takes about 30 to 60 days to get up and running.

However, Primary Payment Systems does get high marks for its customer support. Its Customer Relations Department has been in place for four years, managing client relationships and support and enhancing customer sales after the contract is signed. If there is a technical issue, then PPS's Operations and Technology Department comes to its CRD's aid.

Primary Payment Systems also conducts on-site training to ensure that the software is not only installed correctly but is properly certified. Customers are shown how to read reports as well as effectively utilize the products. Is it all working? PPS says absolutely. "One of the things our customers love besides the software that reduces their losses is our support and our response to them," Longobardo says.

Primary Payment Systems takes pride in the fact that not only is its customer support handled in-house, but everything from sales, marketing, finance and product development is also self-contained. "Everything is kept in-house except for processing," says Longobardo. "That's outsourced to eFund. They manage database and processing."

In addition to eFund, Primary Payment Systems has several other alliances. California Co-op markets PPS's MICR reader, as does Payment Resources. Westcorp is PPS's processor for the credit union marketplace, and PPS is looking to add more partners.

"Managing the alliance and partnership piece of the business - we are going to be very active in this area," says Longobardo. "We're looking for complementary kinds of business to offer enhanced or multiple service to our customers. I don't know of anyone out there doing everything."

When it comes to strategic partners, does size matter to PPS?

"A lot of companies in this market space are not very large, but if their technology is good, we might be interested," says Longobardo.

"There's a lot of emphasis on vendors who compete for dollars. The interesting thing about this marketplace is that we never competed directly with our products. We competed for budget dollars and IT resources. We never competed head-to-head with anyone who claimed they had a product that we did."

Longobardo believes that a lot of vendors are finding people looking more closely at their services.

"I think that a lot has changed sine 9/11," he says. "The Patriots Act is going to force the financial institutions to have tools in place to authenticate. A lot of tools will need to be used to comply.

"In a similar vein, I think that one of the things that everyone has woken up to is the fact that if financial institutions have tools to detect money laundering and theft, these tools can be used for security in other markets. I see the industry moving in that direction. "Financial institutions have spent a great deal of money and effort over the last 20 years detecting fraud and identity theft. Now the rest of the country is waking up to the fact that systems need to be put in place in the security arena."

Lombardo sees Primary Payment Systems as being able to provide those systems, especially at the retail point-of-sale with continued penetration in Tier 2 and 3 marketplaces and broader security areas such as government and transportation, which are non-traditional for PPS.

"We expect dramatic growth in the next two years due to the potential in retail POS and security," says Lombardo. "We will expand appropriately as the business grows with infrastructure and funding from Concord."

Primary Payment Systems ISO contact: John Longobardo Phone: 480-556-8522 E-mail: jlongobardo@primarypayments.com

Company address: 14646 N. Kierland Blvd., Ste. 120 Scottsdale, AZ 85254 Phone: (480) 483-4610 Fax: (480) 483-4628 Web site: www.primarypayments.com

ISO benefits: - Banks contribute to and share data from suite of risk-management services. - Database is believed to be largest of its kind in the industry. - Helps businesses keep adequate records to comply with Patriots Act. - On-site training ensures that the software is not only installed correctly but is properly certified.