Last month's banking consolidation involving several of the industry's biggest
players, appears likely to alter the debit processing landscape.
Citigroup Inc. announced Monday it would buy Wachovia Corp.'s banking operations, just days after JPMorgan Chase & Co. purchased Washington Mutual Inc.'s banking arm. The deals could continue to shift the balance of power between
MasterCard Inc. and Visa Inc. and offers MasterCard an opportunity to regain some
of the ground it has recently lost to its rival.
The deals also put more bargaining power in the hands of two of the three
largest issuers, Citi and Chase, which must decide how to brand the portfolios they
would be absorbing.
But observers said the portfolio consolidation could have the biggest effect on
processors like First Data Corp. and Total System Services Inc., which stand to lose
at least some of their business if Citi and Chase take more of their processing work
in-house.
The processors' business models already are being affected by a slowdown in
consumer spending and a shift to debit at the expense of more profitable credit transactions, observers said. In addition, the market is anticipating even more competition from Visa and MasterCard, which are ramping up in debit processing.
"None of it is really good news for the processors," says Red Gillen, a senior analyst
at Celent LLC. The portfolio consolidation will yield a situation where "there
are just fewer customers who have a lot more negotiating leverage."
The payment networks have recently signaled their intent to expand in debit processing. MasterCard introduced a debit processing system in April that can handle several types of transactions, and National City Corp. said last month that it would move some of its debit processing to Visa from First Data, which currently processes all the Cleveland issuer's credit and debit transactions.
"The networks themselves, Visa and MasterCard, are a lot more aggressive than
they used to be about selling debit processing services," said Gwenn Bezard,
research director at Aite Group LLC. Gillen says processors are facing an "increased supply" of their services. "And in terms of a customer base, you have decreased demand. You have more people fighting for less business — that's going to have an impact on pricing. It's Economics 101."
First Data, a Greenwood Village, Colo.-based unit of Kohlberg Kravis Roberts &
Co., and TSYS have been affected by both the economic environment and the events of the last month. First Data said in a regulatory filing last month that it lost $230.6 million of a $2 billion revolving credit facility as a result of Lehman Brothers'
bankruptcy filing.
A few days after the filing an affiliate of the failed investment bank "declined to
participate in a request for funding under our revolving credit agreement," though
First Data said "we believe we have sufficient other funding sources to meet our
short-term and long-term liquidity needs."
The WaMu and Wachovia deals could also affect the processors' bottom lines.
First Data said Monday that both institutions, as well as Citi, are currently its clients.
TSYS said Tuesday that it processes the credit card transactions "and provides other related services" for WaMu and Wachovia. "TSYS processes various credit portfolios for Citi and Chase," Cyle Mims, a spokesman for the Columbus, Ga.-based processor, wrote in an e-mail. message "Chase also licenses a version of our consumer credit processing system."
WaMu's credit cards are expected to bring in about $30 million of revenue for
TSYS, he says. "The company's expected to earn about $1.5 billion this year."
But Craig Maurer, an analyst at Credit Agricole Group's Calyon Securities, took a
dismal view of the potential impact on TSYS.
He downgraded its stock last week to "neutral," from "buy," after the Wamu deal
was announced. The deal "will likely represent a meaningful loss of business, as JPM is a licensing partner of TSYS and does not use them for actual processing," Maurer wrote in a note to investors.
He and others said a shift in consumer spending to debit may also affect the
processors. Processors "get paid more for a credit card transaction than for" debit
transactions, he said.
Maurer wrote that the increased debit growth rate and the slowdown in credit
growth in the United States would affect TSYS, which "does not have a material
debit processing business."
Jody Soper, a spokeswoman for First Data, wrote in an e-mail message Monday
that "it is much too early to speculate on the impact of the recent banking consolidations."
Adil Moussa, an analyst at Aite Group, says the events of last month are "changing
the payments landscape even more dramatically than what appears," especially in
debit. "It's really going to make the landscape change completely in the back end
of things," where the networks are "pushing their networks" instead of processors.
Wachovia is Visa's fourth- largest U.S. debit issuer, according to SourceMedia's
PaymentsSourceWeb site.
But even before the Citi-Wachovia deal was announced, the balance of power between the two payment networks had been rapidly shifting, especially in debit.
And if Citi, which issues mostly MasterCard debit, converted Wachovia's debit portfolio to MasterCard, the company could regain some of the ground it has lost against its rival.
Last month, Visa announced a deal to handle the U.S. and UK debit business of
Royal Bank of Scotland Group PLC. Its Citizens Financial Group Inc. is
MasterCard's fourth-largest U.S. debit issuer. Also, WaMu was MasterCard's top
debit issuer.
Chase, which mostly issues Visa debit cards, said it has not made any brand decisions yet.
Both Chase and Citi said it is too soon to discuss brand decisions for their cards.
A Visa spokesperson would not discuss the matter, while MasterCard said it has "a
long-standing credit and debit relationship" with Citi.
