First Data Corp. has apparently drawn a line in the sand to define how competitive it wants to be.
The Hackensack, N.J.-based transaction processing giant has reportedly pulled out of negotiations for the private-label card business of Sears, Roebuck and Co.
Total System Services Inc., second to First Data in the card processing business, announced last week that it had entered into negotiations with Sears.
"We thought it was a positive move by First Data in deciding to walk," said Wayne Segal, an analyst at Deutsche Morgan Grenfell. "It might set new benchmarks in pricing."
Sears, responsible for about 10% of all private-label cards, apparently wanted specific services at a set price, and First Data would not accept the terms, said Gregory Gould, analyst at Goldman, Sachs & Co. He also called it "a good sign." First Data, which signed a letter of intent to handle Sears' accounts in May 1997 but never began the operation and reassigned the 80 relevant employees, "is more attentive to profitability," the analyst said.
Analysts foresee more sanity in pricing, as First Data was regarded as an instigator of price wars that lowered margins in credit card processing.
First Data is responsible for processing nearly a third of all bank card accounts, with 72 of the top 150 issuers as customers. Total System, a unit of Synovus Financial Corp., Columbus, Ga., processes for 33 of the largest 150 issuers.
Total System made a terse statement about its talks with Sears to process the 60 million private-label accounts. The store says 25 million are active and receivables total $27 billion.
Regardless of the outcome, First Data will continue to process MasterCard and Visa transactions for Delaware-based Sears National Bank.
Last year was difficult for several processors including First Data. Among those suffering earnings and share price difficulties were the merchant services companies Paymentech Inc. and National Processing Co. They are majority-owned by Banc One Corp. and National City Corp., respectively.
Patrick Burton, an analyst at Lehman Brothers, said First Data had an inordinate number of card processing deals that were repriced in the last year. As a result, it had to make aggressive and discounted bids to retain business.
The company offset those discounts by selling less strategically important activities such as credit scoring and collections.
"It appears First Data has stopped discounting prices dramatically to keep accounts if the account is not a substantial purchaser of value-added services," Mr. Burton said. "This implies to me that there are not a lot of services they can sell."
Mr. Burton rates the stock a "neutral." He cited the slowdown in growth in two of the three core businesses-cards and merchant processing. The third main business, the payments unit that includes Western Union, is in better shape due to overseas growth, he said. But it is also plagued by substantial discounting in transactions between the United States and Mexico.
Shares of First Data closed Friday at $33.5625,down50 cents for the week.
