First Data Sees Opening in Debit Rules

First Data Corp. said it plans to support the Federal Reserve Board's proposed debit interchange cap with a two-tiered pricing structure for debit interchange rates on its Star Network, and expects slow but steady revenue growth ahead.

The rules that would cap debit rates at 12 cents a transaction would not apply to financial institutions with assets of less than $10 billion, allowing for different rates from issuers of different sizes. The final version of the regulations that are scheduled to be published April 21 "could look different" than the proposed rules, so it is too soon to detail their effects on pricing or how new network exclusivity rules will affect the industry, Ray Winborne, First Data's chief financial officer, said during a conference call Wednesday to discuss fourth-quarter earnings.

"We believe the effects of the regulations will be neutral to positive for us," Winborne said, adding that First Data plans to implement "the most competitive interchange that market conditions will allow."

The payment processor's losses narrowed in the fourth quarter as it continues digging out from debt associated with its costly 2007 takeover by the private-equity firm Kohlberg Kravis Roberts & Co. and is beginning to see the effects of an improving economy, Jonathan Judge, First Data's chief executive, said.

Despite short-term challenges to its business model caused by the Fed's new debit regulations, Winborne told analysts he believes the new rules could "unlock" opportunities for First Data.

"The recent regulatory changes and alternative payment schemes, including mobile, could profoundly change the [payments] landscape," Winborne said, suggesting that emerging mobile payment technologies represent a significant opportunity for First Data to capture business in new channels.

The sluggish economy continues to affect First Data's performance. Transaction ticket sizes shrank in certain categories during the fourth quarter, such as in the restaurant industry where cards are used for a growing share of low-ticket purchases, Winborne said.

First Data's total number of credit cards on file declined during the quarter compared with a year earlier, because of economic and regulatory changes, Winborne said. But the card file loss "seems to be stabilizing" as the economy improves, he said.

First Data expects continued growth from new credit processing accords, including one for Kohl's Corp., which had handled processing in-house.

First Data's net loss narrowed to $179.2 million in the fourth quarter from $368.6 million a year earlier. Revenue increased 5.4%, to $2.73 billion, which it attributed to debit network fee increases and overall transaction growth.

By segment, retail and alliance services revenue rose 6.5%, to $872.8 million, boosted by sales of prepaid cards and point of sale terminals and equipment, Winborne said. Financial Services revenue increased only 1.4%, to $357.8 million, partly as a result of pricing pressures, customer losses and a 2% decline in active card accounts on file, he said.

International segment revenue fell 2.7%, to $439.5 million, hurt by lower demand in markets abroad.