First Data Corp. expects to benefit this year when the last measure of the new debit-interchange legislation under the Durbin amendment takes hold on April 1, requiring financial institutions with more than $10 billion in assets to have at least two processing networks on their debit cards.
"As expected, the Star network (First Data's PIN-debit network) is winning in the market with more than 20 commitments in various stages of contracting," Ray Winborne, First Data chief financial officer, told analysts Wednesday during a conference call.
Yet the Atlanta-based card processor will not realize the full benefits from the network mandate until it is known how financial-institution strategies on debit products play out, Winborne said. Merchants also will have a say by having the option to route transactions to the least-expensive network.
First Data "is in the eye of the storm" regarding the ongoing effects of the Durbin amendment, says Gil Luria, analyst with Los Angeles-based Wedbush Securities.
"The next most disruptive thing for merchants is likely to be network-participation fees, and there will be a lot of conversation about that," Luria says.
First Data has "a lot of moving parts" as it relates to the debit networks, but its foremost task likely will be "serving as the messenger" in relaying information about network fees, Luria says.
First Data, a unit of the Kohlberg Kravis Roberts & Co. private-equity firm, reported a $115 million decline in debit-network fees for the fourth quarter, forcing its consolidated revenue to decline by 1.5%, to $2.69 billion from $2.73 billion a year earlier.
"The vast majority of debit-network fees relate to interchange, so the reduction in rates mandated by the Durbin amendment led to this decline," Winborne said. However, because of the "pass-through" nature of these fees, expense declined by the same amount, leaving no impact to the company's operating income, he said.
In fact, the processor cited a $171 million improvement in operating income as a key reason the company was able to reduce the net loss attributable to First Data to $69.3 million from a loss of $179 million loss a year earlier.
Adjusted revenue, which excludes debit-network fees. rose 3% to $1.73 billion from $1.68 billion, Winborne said.
Merchant-related services revenue rose 7%, to $994 million from $928 million, driven by lower debit interchange and additional Bank Associates Merchant Services processing revenues. Card services revenue stayed flat at $439 million.
International services revenue also was essentially flat, rising to $441 million from $440 million the prior year.
First Data has focused on international growth in the acquiring business despite the turbulent economy in Europe, Winborne said. Sixty percent of First Data's international business occurs in Europe, the Middle East and Africa, he said.
Increased terminal sales and a consistent currency rate boosted Latin America revenue by $6 million, or 11%, Winborne said.
