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A Thing
Issue 01:07:01

Check Conversion Isn't in the Cards
By Patti Murphy

Giving ISOs the Right Equipment to Sell
By Brandes Elitch

International Standards and the Other ISO

Company Profiles

United Capturdyne Technologies Inc.

Innuity Inc.


N.Y. Clearing House Enhances CHIPS

And the Winner of 'The Verix' Is ...

Bank of America Starts Check Imaging

New Products

Little MSP Net Captures Big Fish

No End to VeriFone's Terminal Parade

Chips Ahoy


Uncle ISO Wants You!

ISO Driver's Ed

The Doctor Is In


Resource Guide


Bullet Dodged

Most in the industry are either unaware of the near-miss that the industry just experienced as it relates to POS authorizations or are just happy not to have had to implement their backup strategies.

What I am talking about is the fact that for nearly a decade the majority of the nation's payment transactions have been flowing through the systems of a company called TNS (Transaction Network Services Inc.). TNS has been the highly reliable and cost-effective solution for reducing POS communications costs for many industry players.

In May, TNS's new owner, PSINet, filed for bankruptcy protection, and TNS was salvaged at the last moment. While both bankcard and check authorization traffic has been handled by TNS, most stakeholders also have had alternative solutions just in case TNS had a problem.

For example, CrossCheck Inc. has every other transaction routed by TNS to its California or Wisconsin centers. For belt and suspenders, CrossCheck also has in place a national network of its own, capable of handling its entire traffic load should TNS fail. While many TNS customers also have such backup capabilities, no one wants to be forced to use them.

Here is the history of TNS and how it came to be involved with PSINet:

In 1990, TNS was established in Reston, Va., by veteran businessman and entrepreneur Jack McDonnell Jr., who brought to the table 30-plus years of telecommunications and transaction experience.

TNS began with $1.5 million in venture capital and a commitment from one of the nation's largest processors, First Data Corp. From $1.29 generated on the first day of business to June 1999, when TNS was first listed on the New York Stock Exchange, McDonnell built a national data network that became the leading provider facilitating credit card and check authorizations between point-of-service and processors.

When McDonnell received the KPMG Peat Marwick LLP's High Tech Entrepreneur Award in May 1997, Richard K. Weingarten, equities analyst at Salomon Brothers, said, "In less than six years, TNS, under Jack's leadership, has become the dominant supplier of communications to the credit card processors. Jack clearly represents entrepreneurship at its best."

At the time, TNS employed 106 people both in the U.S. and abroad and averaged nearly $500,000 in revenue per employee - nearly three times the telecommunications industry standard. It processed more than 20 million transactions per day from 2 million businesses and reported revenues of $52.3 million.

One year before the start of TNS, PSINet was established in nearby Herndon, Va., and quickly became one of the world's largest providers of IP-based communication services for business. PSINet specifically engineered its network for Internet applications, resulting in an infrastructure optimized for Internet performance. In 1992, it built a switching fabric that provided a scalable infrastructure on which it built an IP architecture with performance and reliability standards not obtainable by any other ISP.

With more than 40 milestones, PSINet helped create, implement, deploy and commercialize nearly every important technical development that makes the Internet what it is today. PSINet was the first company to provide commercial Internet access, offer guaranteed Internet access, become an independent ISP with a global IP network, offer multicurrency e-commerce, offer 100 percent guaranteed uptime Web hosting services, provide dial-up Local Area Network (LAN) connectivity and offer ISDN services.

The company also offered access services to connect businesses to the Internet, hosting services for Web site and mission-critical data, e-commerce solutions that enabled business to complete transactions over the Internet, communications services that brought together geographically dispersed employees and operations, and consumer services that allowed dial-up connectivity to more than 1 million customers.

Then, in August 1999, PSINet announced that it had entered into a definitive agreement to acquire TNS. During the quarter ending in June 1999, TNS reported revenue of $42.7 million and a net profit of $3.1 million. The $720 million aggregate purchase price consisted of $351 million in cash and up to 7.8 million PSINet common shares.

"This transaction represents the first combination of a market-leading e-commerce enterprise with a global facilities-based Internet service provider," William L. Schrader, former PSINet chairman and CEO, said at the time. "Combining PSINet and TNS creates the leading global provider of e-commerce and Internet solutions to businesses worldwide and enables PSINet to better access the $1 trillion marketplace for e-commerce services."

McDonnell's thoughts then: "TNS is known for its ability to deliver leading-edge technology to its customers as they expand their businesses. It is clear that virtually all of our customers are playing an increasing role in the electronic commerce space. TNS is committed to providing an innovative transport infrastructure to support them as they move their businesses forward. We view the acquisition by PSINet as a strategic way for TNS to meet that objective."

By Nov. 11, 1999, PSINet announced that it had completed the acquisition. This was the perfect merger of two great companies into PSINet Transaction Solutions (PTS), creating the leading provider of e-commerce and Internet solutions.

In fact, PTS reported a record-breaking holiday season that year. PTS carried more than 585 million transactions in December 1999, averaging about 19 million transactions per second. The peak of traffic was reached on Dec. 23, when PTS carried 24 million transactions for last-minute shoppers.

A short time later, in a letter to customers, Larry Crompton, PSINet's senior vice president and general manager for Point of Service Systems-North America, said, "The year 2000 has brought many exciting changes to our company. We recently changed our name to PSINet Transaction Solutions, but continue to be the premiere innovator and provider of network solutions for transaction-oriented services. PSINet's acquisition of TNS allows us to better meet the 21st-century transaction processing needs. Working closely with PSINet for the past several months, we've found ways to leverage their global Internet capabilities with our financial data transport experience."

But PSINet was leveraged heavily, and - despite the continued success of TNS - the stock price of PSINet plummeted in the next year and a half. By February of this year, rumors of bankruptcy first began to surface.

PSINet's cash resources at that time, as well as any cash generated by additional asset sales, were not sufficient to meet its anticipated cash requirements absent successful implementation of one or more financial or strategic alternatives under construction by PSINet. In fact, even if those alternatives were implemented, there was no guarantee that it would not run out of cash, but then this is an Internet horror story that we have heard all too often in recent months.

On May 1, PSINet announced that it would default on $36.7 million in interest, equipment and note payments, and on June 1 it filed for protection from its creditors under Chapter 11. The filings, in U.S. Bankruptcy Court in New York, covered PSINet and 24 of its operating subsidiaries in the United States. Four Canadian subsidiaries filed for protection in the Ontario Court of Justice.

"Our existing capital structure did not permit us to respond to the rapid changes in our markets," said Henry G. Hobbs, the new president and CEO of PSINet, whose stock has been delisted on the Nasdaq after falling more than 99 percent in the last year.

So if PSINet had gone under, Transaction Solutions would have gone down with it along with its millions of daily credit card transactions. Except ...

On March 13, PSINet agreed to sell its PTS subsidiary to a group that includes McDonnell, a team of executives and a Chicago-based asset management company, GTCR Golden Rauner LLC, for $285 million. (Remember, the previous sale was for $351 million plus stock worth an equal amount.). If you are not aware of GTCR, they have been very active in our industry, including providing the capital for the acquisition of NPC Check Services, now International Check Services. The company reverted to its original name, Transaction Network Services.

"Just as it is with top professional athletes, businesses are often sought after and traded because they are valuable assets. PSINet Transaction Solutions' value in the transactions marketplace has continued to grow despite the market volatility in the technology sector," said Rod Lyman, PSINet president and COO.

GTCR principal William Kessinger said, "TNS's position in its marketplace is a testament to Jack's vision and his ability to execute upon a growth strategy. We look forward to working with him and the other managers at TNS to continue to build the company's momentum."

McDonnell's comment: "I am thrilled to have this opportunity to build upon what we accomplished previously at TNS. With GTCR's strong financial backing, we expect to grow TNS, both in its current markets and in new areas."

As TNS is structured today, TNS is a privately held company owned by GTCR along with TNS management and employees. All business units that were part of the original TNS were included in the recent buy-back.

"The TNS staff who stayed on to serve the TNS customer base over the past 18 months did a wonderful job maintaining the quality our customers have come to expect from TNS," said Brian Bates, TNS president and COO. It appears that TNS will live happily ever after. PSINet? Too soon to tell.

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