'New' First Data Shifts To an Industry Focus

  By early next month, First Data Corp. expects to complete its planned spin-off of Western Union, the company's well-known and historically profitable remittance subsidiary. Once that deal is complete, a "new" First Data will emerge focused less on consumer markets and more on meeting the needs of players in the payments industry.
  "We will focus exclusively on the customers and markets we serve," says Henry C. "Ric" Duques, who returned as First Data's chairman and chief executive a year ago. "Our focus will be on growing the merchant acquiring, credit card issuing, and ATM and debit card businesses, both in the United States and throughout the rest of the world, and on driving innovation into those businesses."
  First Data is an industry behemoth. The Greenwood Village, Colo.-based transaction processor reported second-quarter net income of $436.4 million, up 11% from $391.9 million for the same three-month period last year. First Data's revenues were $2.9 billion, up 12% from $2.6 billion in 2005's second quarter. Commercial Services, the division that works with merchants to accept debit and credit card payments, reported an operating profit of $277 million, up 27% excluding integration expenses from 2005. Revenues were $1 billion, up 11% excluding reimbursable debit network fees.
  Financial Institution Services, which oversees domestic card processing, reported an 11% decline in operating profit to $95 million. Revenues were $452 million, down 6%, affected by the loss of three large card-processing accounts-JPMorgan Chase & Co., Fleet Financial and People's Bank. Western Union reported an operating profit of $352 million, up 9% from same three-month period a year ago. Revenues were $1.1 billion, up 15%.
  First Data recently made news when it reached an agreement with Discover Financial Services to sell Discover card acceptance to small and mid-size merchants. Now the processor is offering merchants a single, bundled rate that includes Visa, MasterCard and Discover acceptance. The addition of AmEx cards may not be far away. First Data also is planning a pilot that would enable billers to accept PIN-debit transactions for recurring payments that would complement its offering of Star PINless-debit transactions for certain billers.
  Cards&Payments Editor Jeffrey Green recently spoke with Duques to gather his views on First Data's future as well as the trends he sees in the marketplace that could affect many payments-industry players.
  Q. First Data is bundling a package that enables independent sales organizations and others that sell its merchant-processing services to offer Visa, MasterCard and Discover card acceptance at a single, fixed fee. Can you provide some details?
  A. It will be available to all of our sales channels-banks, alliance partners and ISOs. Regional merchants have a difficult time dealing individually with Visa, MasterCard, Discover and America Express. This is the first step where we can bundle Visa, MasterCard and Discover into one contract with one rate, one consolidated statement and one customer-service number.
  Q. What are the primary benefits to merchants and to Discover?
  A. We won't discuss the discount rate, but it certainly will lower their administrative fees, and it will simplify the process greatly for them. The biggest benefit of all is one statement, where all charges are right there. Discover wants this because it wants to add small and medium-size merchants. It's important as they talk to banks about co-branding with Discover. Discover wants to make sure acceptance is as broad as it can be.
  Q. Can we expect American Express acceptance to be added to the bundling any time soon?
  A. We're having discussions, but we don't have anything specific to announce. They're evaluating their approach to go to market now. Amex would like banks to brand the American Express card, so it would be helpful to them, I'm sure, to have greater acceptance of their cards among small and mid-sized merchants.
  Q. Since First Data elected to retain the Financial Institution (card issuing) piece of its business and spin off Western Union, what are your plans to grow this business segment?
  A. If you can stop the marketplace from consolidating, I'd appreciate your help there. But seriously, we're trying to retain the customers we have, and we're going to try to increase the sales to those customers. And we will try to sell to new clients. We have very rich debit and credit card processing capabilities that I think would be of benefit to them.
  Q. Is the focus on expanding merchant processing a means to offset reduced business on the issuer-processing side?
  A. I wouldn't say it's to offset the slow growth in card processing. They are different businesses. Merchant processing for us in the new First Data will be the largest business segment we have. It will be more than $4 billion in revenue annually out of approximately $7.5 billion in total. It's a business we like, and it's one we're benefiting from through the secular change from cash and checks to electronics.
  Q. Is the merchant-processing business easier to grow?
  A. There are increasing numbers of merchants launching businesses, and they need to start out with a card processor. So it is easier to get new clients in the merchant area. Some parts of the world are less advanced in credit cards than in the U.S., so we've been growing very strongly outside the U.S., particularly in the merchant area. Also, while we have some big-name merchant clients, the loss of one individual client does not have as big of an effect on revenue as the loss of one large issuing client. When you lose big issuing clients, it's painful.
  Q. What are First Data's plans to offer bill payment solutions for U.S. utilities?
  A. That's a pretty crowded market. Our focus is more on the printing of bills and the mailing of bills for utilities. That's the initial thrust of the Peace software we bought. In the past Peace was sold to utilities to use in-house. We will use it as a service offering, running it for the utilities that are not handling that service in-house. Then we might get into bill-payment processing.
  Q. First Data recently reached an agreement with PayFlex Systems to oversee processing for flexible-spending accounts and other heath care financial transactions. What does this mean for your business?
  A. We're embossing the card and electronically processing the transactions. There are about 1 million electronic transactions on the PayFlex system.
  Q. It seems like merchants are winning the war with debit card issuers, as PIN-debit transactions are growing faster than signature-debit ones. Are you seeing this?
  A. Merchants are now promoting PIN-based debit because it's more economical, but consumers will be the ultimate deciders. Some people like PIN debit because they feel it's more secure, others like signature debit because it doesn't hit their account as fast or they may be getting rewards benefits like points from the issuer. We like either one of them. If you support both as a merchant acquirer, there are more transactions per month from each cardholder.
  Q. For the past couple of years, First Data has hinted that it is working to develop a means to enable online merchants to accept PIN-based Star transactions. What's holding things up?
  A. It's the risk attached to that. We're piloting a recurring bill-payment channel that will use PIN debit technology, but I can't tell you details or when that will come to pass. It's in the exploratory phase. We've had some success allowing consumers to make PINless-debit bill payment offerings.
  Q. What issues in the U.S. are influencing First Data's efforts to grow its processing business in other markets?
  A. Increased consumerism in other markets, China being one. There are many emerging payment options, including gift cards, prepaid cards and loyalty cards of various kinds. There also are radio frequency identification devices, which are going to be lodged in cell phones or in fobs on key chains. At the end of the day, the options are going to make it easier for consumers to select the form of payment they want at the point of sale. We're just trying to be responsive, as electronic payments globally are projected to double at the point of sale by 2010.
  Q. Which global markets are the hottest and why?
  A. Brazil and China are probably the No. 2 and No. 3 credit card markets. France also is a big debit market. We operate in 35 countries already. We just made an acquisition in Germany to do issuer processing for a number of banks in Germany. In Europe, credit card issuance grew 47% from 2002 to 2004, when the total reached 240 million cards. So Europe is starting to get the credit bug, if you will.
  Q. First Data and Visa recently settled their legal dispute over the First Data Net "on-us" processing platform that enabled your customers involved as both the issuer and acquirer in a transaction to bypass the VisaNet switch. How many customers used this platform, and what prompted the settlement?
  A. Very few customers bypassed Visa. We put the capability together to bypass VisaNet, and Visa sued us for trying to do that. We just felt we could do more together with Visa than to battle them on that issue. Also, the big customers of Visa are big customers of ours, and they don't want to see us squabbling.
  Q. As part of the agreement, Visa said it would provide financial support for various product and business-development initiatives. Any examples of where this funding is being used?
  A. Right now it's under the umbrella of 'things that can improve the industry to benefit consumers, merchants, issuers and acquirers.' We don't have any specifics. But we did agree that the CEO of Visa, myself and some of our senior folks would discuss how we can provide services to improve the industry. That could be security, fraud prevention, new products Visa puts out. But we don't have any specifics as of yet.
  Q. Bank of America recently hinted that it would consider launching its own network and card brand. Is this something First Data, as a large card and merchant processor, would have the means to do as well?
  A. Bank of America would have a very tough time and it would be very expensive. Could they do it? Yeah, probably. Could we do it? Yeah, probably. But they would need a lot of customers to get that going, and Bank of America does have a lot of customers. We'd have to have more customers before we got into that.
  Q. At the end of the second quarter, First Data successfully converted the Citibank/Sears Retail Private Label and the Citi/Sears MasterCard accounts onto the First Data processing platform. What does this mean for your business?
  A. Retail cards produce far less revenue for First Data than do Visa and MasterCards because they're used much less frequently. Right now we have more retail cards on file than Visa and MasterCard cards. We are the largest processor of retail store cards. We have more than 530 million cards domestically. That's up 100 million because of the Sears deal and other conversions. Citi now plans to give us their petroleum cards, which now run on an in-house platform. In early 2007, Citi will convert over to our system. But it's not as big as Sears. Sears was the biggest conversion in history. No one ever converted that many cards before.
  Henry C. "Ric" Duques rejoined First Data Corp. as the transaction processor's chairman and chief executive in November 2005 after his predecessor, Charles T. Fote, resigned. Duques, who had appointed Fote as his replacement, also served as First Data's chairman and CEO from 1992 to 2001. Before joining First Data, he was president and CEO of the Data Based Services Group at American Express Co. Two years after joining AmEx, in 1989, the American Express Information Services Corp. was formed from the group, and Duques served as its first president. Duques holds a bachelor of business administration degree in accounting and a master's of business administration in accounting and finance from George Washington University in Washington, D.C.
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