First Data Corp.'s decision to lay off 10% of its merchant processing division came to no surprise to industry experts, who said the move was an attempt to cut costs in an increasingly competitive business.

Citing the need to streamline operations, First Data Merchant Services announced Thursday that it was firing about 500 of its 5,200 workers. The unit also said it would close one of its 10 credit and debit card processing facilities, the one in Sunnyvale, Calif.

Charles T. Fote, executive vice president of First Data Corp., said the cuts would save the company $17.5 to $25 million a year.

"We decided we were not close enough to the customer," Mr. Fote said in an interview. The changes were meant to "take layers out of the organization."

The belt-tightening had been foreshadowed by a series of management changes carried out last fall and made public in January. Several senior managers left in that shake-up, and others were recast in transitional roles.

Industry observers said the housecleaning at the nation's top merchant processor would probably help it retain its edge.

The cuts are "a sign of how competitive the merchant processing business has become and how important it is to have a low cost base," said Bill Burham, a research analyst for Piper Jaffray, a Minneapolis-based investment firm.

Stanley Anderson, president of the consulting firm of Anderson & Associates of Arvada, Colo., agreed. "They were somewhat bloated in terms of the size of their staff," he said. "Given the size that they are today, a 10% cut is probably not terribly significant, and I'm not sure that is the last of the cuts they will have in order to compete in the marketplace."

A First Data spokesman, Peter Ziverts, said the cuts announced last week were "across the board," though no senior executives were let go. The goal was to reduce costs and to "further define and focus each manager's responsibility," he said.

First Data Corp. expects that expenses associated with this reduction will be offset by a gain on the recent sale of the company's transportation services unit.

Observers said that First Data, which went on an acquisition tear in 1995, has started to feel the effects of several purchases. The company is grappling with the consolidation of operations from several companies it bought then.

Simultaneously, the Omaha-based unit is working to broaden its merchant bank alliances, which are joint venture arrangements it has with about a dozen banks. First Data handles the back-room processing, while the banks focus on client relationships.

The two-fisted strategy has frayed the resources and attention of the merchant unit, some observers say.

"They have not appeared in the industry to have a clear and defined focus on how they are going to utilize new merchant technology to improve their efficiency," Mr. Anderson said.

In such a competitive market, "the higher the infrastructure (cost), the lower the profitability," he added.

First Data acquired both the Card Establishment Services and Nabanco processing systems in 1995, catapulting it into the No. 1 spot in merchant processing. But the splashy announcements about large acquisitions had to be followed by a period of retrenchment, Mr. Burnham said.

"As the step-increases in size have slowed, a lot more of the cost improvement comes from the nitty-gritty from within," said Mr. Burham. "That's why you see them working under the hood furiously."

Part of the furious work may be to fend off threats from rising competitors like Vital Processing Services, a two-year-old merchant processing venture formed by Visa U.S.A. and Total System Services Inc. Other processors, like PMT Services Inc., have also vowed to grab market share from First Data.

The merchant processing market, though lucrative, suffers from thin profit margins.

"It's a basis-points business," said Paul Martaus, president of Martaus & Associates of Clearwater, Fla.

Charles R. Burtzloff, president and chief executive officer of Cardservice International, a merchant processor based in Agoura Hills, Calif., said First Data's layoffs will be a chance for other processors to step in and hire their staff.

"The bottom line is, like most public corporations they are looking at next quarter-not long term," said Mr. Burtzloff, whose company is 50% owned by First Data, and thus both competes and cooperates with the company. "The competitors are going to pick up those people as quickly as possible," which will "put more pressure on First Data."

Mr. Burtzloff predicted that the opportunity for others to capitalize on First Data's woes would be short-lived. Mr. Burtzloff and others said it was only a matter of time until First Data "gets its house in order."

"Before the year's out, get what you can get," Mr. Burtzloff advised.

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