Consumer spending habits have shifted dramatically from credit to debit this year, and Total System Services Inc. has been caught out of position.

The Columbus, Ga., processor's earnings dropped sharply in the first quarter, and the company said to expect more of the same for the rest of this year, in part because its portfolio is skewed so heavily to credit cards.

Credit transactions have long been the place to be in the processing industry because they carry higher interchange rates. But U.S. consumers are tightening their belts and shifting away from spending borrowed money in favor of debit transactions.

"The consumer has just been hammered," said Philip W. Tomlinson, TSYS' chairman and chief executive, in a conference call with analysts to discuss the company's results.

TSYS said a new debit customer would help address the imbalance between credit and debit and several new clients abroad would boost overall earnings. "We don't process a lot of debit," Tomlinson said, though "a very large debit player … will be coming on board here this year." He would not name the new customer.

Debit makes up a tiny portion of TSYS' business. At the end of the first quarter, its portfolio included 5.2 million debit card accounts, 1.5% of its total. Consumer credit made up the largest portion of TSYS' business, accounting for 54.8% of its 340.4 million accounts.

The consumer credit market has changed significantly during the lengthy economic slump as U.S. households pare their spending.

Brian Riley, a research director in the bank card practice at TowerGroup, the Needham, Mass., independent research firm owned by MasterCard Inc., said that spending on credit had grown every year since his company began tracking the market, but this year "for the first time, this number will drop" and will continue to fall through the end of next year.

Spending on credit should rise again by the start of 2011, he estimated, and by the end of 2012 the amount spent on credit will be comparable to 2008 figures.

Debit, by contrast, continues to grow, he said; there will be 50 billion debit transactions by the end of this year and 59 billion in 2010.

Robert Dodd, an analyst at Regions Financial Corp.'s Morgan Keegan & Co. Inc., wrote in a research note Wednesday that TSYS is overexposed to credit transactions and has not been able to take advantage of consumers' shift to debit. TSYS "has minimal exposure to [the] U.S. debit market — and a strong earnings headwind" as a result, Dodd wrote.

Gwenn Bezard, a research director at Aite Group LLC in Boston, said that banks have been pushing debit use over credit because there is less risk. If a consumer overspends on credit, the bank might end up on the hook for the entire month's bill, but banks can reject any single debit purchase if the account lacks sufficient funds.

He said that the shift to debit may persist after the economy recovers. "When the recession ends, there is nothing that says consumers will go back to their past behaviors," he said. "The recession is accelerating a trend that has been in the making for 10 to 15 years in the United States, which is a gradual shift from credit to debit."

TSYS' processing rival First Data Corp. reported strong growth in debit last month during a conference call to discuss its fourth-quarter results. "Debit growth is still outpacing credit growth by about three times," said Phil Wall, chief financial officer of the Kohlberg Kravis Roberts & Co. unit.

Tomlinson said TSYS has won several significant new customers abroad, including Deutsche Bank AG, Banco Carrefour SA and ING Group NV. "The thing that's so frustrating in this business, to us, is we're continuing to win, we're continuing to do well, our prospect list is very strong," he said. "We're going to do great, but we need to get this period of time behind us."

Riley said the processor made a smart move in focusing on international business. "They've really sort of hedged themselves outside of the U.S. market," he said.

TSYS' revenue in the first quarter dropped 2.6%, to $408.9 million, from the year earlier. Its net income fell 17.5%, to $46.9 million.

The processor said it expects full-year revenue of $1.64 billion to $1.67 billion, down 3% to 5% from 2008, and net income of $217 million to $221 million, down 11% to 13%.

These projections are down from an earlier 2009 forecast estimating revenue of $1.94 billion to $1.98 billion, and net income of $243 million to $250 million.

TSYS also said it plans to sell its collections management and bankruptcy processing subsidiary, TSYS Debt Management, this quarter and already has a letter of intent from a potential buyer, which it did not name. TSYS said the unit is not core to its focus on payments, and its results were listed as discontinued operations in the first-quarter report.

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