When First Data Corp. announced plans to spin off its money-transfer business, it was betting that its remaining processing operations would fare better within a company focused solely on transaction processing.
So how do the executives running the processing businesses plan to take advantage of First Data's renewed focus?
In a series of interviews last week, the heads of First Data's three business units other than Western Union discussed a strategy of partnering with small banks to sell its merchant processing services, as well as plans to upgrade its core transaction processing capabilities.
After hiring an investment bank last year to evaluate its card-issuing unit - a move that was widely perceived as a precursor to selling the unit - First Data surprised shareholders in January by announcing plans to spin off instead Western Union Financial Services Inc. (The spinoff is expected to be completed in the second half.)
The company also announced a major restructuring for the remaining transaction processing units.
The merchant services businesses are now housed within the commercial services division, which plans to boost sales by focusing on small customers. The card-issuing businesses are now in the financial institution services division, which plans to invest in its core transaction processing platform and to develop products to attract and retain customers. The international operations, whose results were previously reported as part of the other businesses, has become a stand-alone division.
"This is the new First Data," said Ed Labry, the president of the commercial services division. Western Union, which serves consumers directly, was not considered a good fit with the rest of the company's behind-the-scenes operations. "Everything we do inside First Data is geared to the transaction processing industry."
Mr. Labry was named the president of the merchant services unit in January, only a few weeks before First Data announced the restructuring. He said that his business, which handles merchant acquiring and processing, has long focused on large merchant customers but is expanding its sales focus to include small merchants and small banks that can resell its products and services to merchants.
Such customers offer lower transaction volume but bring in higher margins than large, national retailers. At an investor conference in May, First Data said national merchants generated 70% of the merchant unit's transaction volume, while midsize and small merchants each generated about 15%. However, the small merchants generated half the unit's revenue, while midsize and national merchants each generated a quarter.
To reach more small merchants, Mr. Labry said First Data is pursuing more agent relationships with banking companies with about 20 branches or less.
"This has not been a strategy of First Data in the past," and revenue from that channel now is "very limited," he said.
However, he does not plan to develop any processing products or services aimed specifically at small banks, because "these banks need everything the big banks need," he said.
John Kraft, an analyst at D.A. Davidson & Co., said partnering with banking companies provides First Data with a low-cost distribution network and could help defray some of its marketing expenses. Cost-cutting is important, because "selling to small merchants is expensive."
The key to energizing the commercial services division is simple, he said. "Ultimately, it comes down to sales," and Mr. Labry has a reputation as a strong salesman. "He may be just what the doctor ordered."
Mr. Kraft, who has "neutral" rating on First Data's stock, said he is more concerned about the financial institution services division, which has lost some important customers in recent years and has long been perceived as First Data's weak link.
"The bottom line is that the issues, the problems in card processing, haven't been addressed," he said. "Spinning off Western Union doesn't improve anything."
But David Bailis, the financial institution division's president, takes issue with the notion that the card processing business is losing customers. "I won't accept the idea that people are moving away from me. That's a myth."
First Data has lost some major customers in the past two years, including JPMorgan Chase & Co., Bank One Corp. (which JPMorgan Chase bought), and FleetBoston Financial Corp.
However, he said that 14 customers renewed their contracts last year, and Citigroup Inc., a longtime customer, said in June that it would shift to First Data the private-label portfolio it acquired from Sears, Roebuck and Co. That portfolio, with more than 80 million accounts, is due to convert in May.
Timothy W. Willi, an analyst with A.G. Edwards & Sons Inc., said many of those losses resulted from acquisitions. For example, Bank of America Corp. acquired Fleet and moved its cards business to the Charlotte company's longtime processor, Total System Services Inc.
"It's hard to say whether First Data lost these contracts" because of any problems at the company, he said.
Mr. Willi, who has a "buy" rating on First Data, said that the company's reorganization plan is a step in the right direction. "The way they have organized the business makes sense in terms of who their customers are," he said.
Mr. Bailis said he plans to invest "significantly" - many millions of dollars - in the core transaction processing platform over the next few years and develop products and services, such as improved loyalty programs and better ways to communicate with customers.
"My mission is growth," as measured in improving margins and retaining and winning customers, he said. "Over the next 12 to 24 months, I will grow the financial institution segment in a meaningful way." He would not offer specifics.
Robert J. Dodd, an analyst at Regions Financial Corp.'s Morgan Keegan & Co., said that First Data's processing system needs attention. "They need to push their platform to be more competitive with TSYS."
TSYS' core TS2 processing system was rewritten several years ago, but First Data's system has been "patched" over the years, he said. As a result, "First Data can do a lot of the same things that TS2 does, but it's not as smooth."
However, he also said that investing in the software "doesn't generally help your margins."
Pamela Patsley, the president of First Data International, said her division "is the one that didn't change at all" as a result of the reorganization. Her basic mission is still to sell her company's transaction processing products and services anywhere outside the United States.
Though her division is the smallest, it has had the fastest growth, she said. Last year its revenue rose 18%, to $915 million, and the current run rate puts it on track to reach $1.1 billion this year. Its operating profits rose 45%, to $113 million, and transaction volume rose 39%, to 2.6 billion.
Creating a separate division for international merchant and card processing will help investors and analysts get a better sense of First Data's foreign sales, she said. "It is very important that it there is more visibility into our success."
Mr. Dodd said that even though First Data will face competition from local companies, "there is a lot of opportunity" abroad, and it has an advantage, because "payment systems are not as sophisticated abroad."
The only caveat to First Data's international strategy is that "every U.S. competitor is trying to do the same thing," he said.
Mr. Willi said that he is looking forward to getting a better look at those numbers, and said that the international operations have been "an underappreciated part of the business."
