ISOs working with Global Payments Inc. will play a role in determining the effects of a proposed 12-cent cap on debit transactions imposed by the Federal Reserve Board on the Atlanta-based payments processor, Global Payments said last week during a conference call to discuss its fiscal second quarter results.
“The significant majority of our U.S. business is indeed through ISOs,” David Mangum, Global chief financial officer and executive vice president, told analysts Jan. 6.
ISOs generate about $650 million of the processor’s revenue annually, estimates David J. Koning, an analyst with Robert W. Baird & Co. Inc. of Milwaukee. More than 50% of the transactions generating that revenue are debit-card based, Koning notes.
ISOs could retain a portion of the revenue above 12 cents if they do not lower their merchant pricing, Paul R. Garcia, Global Payments chairman and CEO, said during the call.
That could have a “deleterious” effect on the processor’s profit margin, but to what degree or if it will happen is uncertain, Mangum said.
Good News Ultimately
“We doubt that Global Payments would be able to charge ISOs higher fees, resulting in further potential margin degradation in the ISO business,” Koning noted in a research report. “The impact to Global Payments’ revenue and margin will depend on how much of the interchange differential their ISOs decide to keep.”
Global Payments says its operating margin, which reflects the profitable percentage of each transaction, was 19.6% in the fiscal 2011 second quarter, down from 21.7% a year earlier but up slightly from 19.4% in the fiscal 2011 first quarter.
Whatever happens, should the cap go into effect in July as proposed, Garcia expressed optimism about the company’s prospects to weather the change.
“There isn’t a scenario that this isn’t good news for us ultimately,” he said. “Even if you make a dollar, it’s a dollar more than you [would] have made.”
Meanwhile, Garcia does not view the potential effects of pending U.S. debit interchange regulation as necessarily having a potential negative effect for Global Payments.
“I have said from Day One interchange will do down. Interchange is going to go down,” Garcia said during the call. “That is good for all of the acquirers.”
Those acquirers not passing along their entire change in debit-interchange costs will see a pick up in revenue, Garcia said. “We’re going to be very cautious because it is not only a very competitive market, you don’t want to invite any regulations of something.”
At least one Global Payments competitor says it will pass along the entire reduction, Garcia told analysts during the call.
For now, Global Payments is pretty pleased with its performance.
The company reported a $53.5 million profit for the quarter ended Nov. 30, down 14.8% from $62.8 million during the same period last year. Revenue increased by 8.4%, to $443.5 million from $409 million.
“Revenue came in better than expected,” Darrin Peller, an analyst at Barclays Capital in New York, tells ISO&Agent Weekly. Analyst consensus anticipated the company would report $435 million in second-quarter revenue.
A Great Model
ISOs working with Global Payments are having an influence on the company’s revenue in the United States. Second-
quarter U.S. revenue was up 11.2%, to $245.7 million from $220.9 million a year earlier.
“The year-over-year growth continues to be fueled by strong ISO growth,” Baird’s Koning noted in his report.
“ISOs are a great model,” Garcia said during the call. “ISOs are a great revenue generator.”
Global Payments is looking at the ISO model as one tool to boost its Canadian standing, though revenue from Canada was up 4.2%, to $81.5 million from $78.2 million.
“Canada was a lot better than expected,” Peller says. In his view, Global Payments has been challenged in Canada because it raised prices there, but the situation may be stabilizing.
Garcia acknowledged during the call that the quarter was a difficult one for the processor’s Canadian operations. “During September, we made a difficult decision to eliminate over 70 positions in Canada to match our investment levels to the near-term economic opportunity in that market,” Garcia said.
To address the “opportunity,” Global Payments intends to increase the revenue coming from ISOs, Jeffrey S. Sloan, the company’s president, said during the call. “A core part of our strategy is to grow our share on the pie up in Canada,” Sloan said.
Besides eliminating jobs, the payment processor is looking at ways to grow revenue in Canada, he says. Having a competitive price is part of that growth strategy, Sloan says.
“But gaining share with existing customers (and) adding new customers, including additional ISOs, is part of our strategy in the business,” he said.
