Consumers are starting to spend again, which is helping Total System Services Inc., or TSYS, grow its payment card processing services after a tough year during which it lost several clients.
The Columbus, Ga.-based company, which manages banks’ card-issuing operations and processes transactions for merchants, said signs of economic improvement should bring it more volume.
“I really believe we ended a very challenging 2010 stronger than originally expected,” Phil Tomlinson, TSYS chairman and chief executive, said during a Jan. 25 earnings conference call.
The company, like others in the payments industry, faces a number of unknown factors that could deliver further setbacks–and opportunities–such as the Federal Reserve Board’s proposed caps on debit card interchange and mobile-payments technology that could displace some traditional players.
Still, TSYS executives were upbeat about their prospects for this year, pinning their hopes on efforts to grow the merchant acquiring side of its business.
Earlier this month, the company announced it paid $169.6 million to buy the remaining 49% stake in First National Merchant Solutions LLC from First National Bank of Omaha (
“We will continue to build scale as a direct acquirer with more focus on sales,” Tomlinson said. “We hope to continue to have meaningful acquisitions in that area. It’s an area that we want to continue to grow.”
On the card-issuing side of its business, which handles the mailing of plastic cards, the processing of cardholder transactions and other activities, North American transactions grew during the fourth quarter by 9.7% from a year earlier to 1.73 billion. International transactions grew by 12.8% to 357.9 million (
It processed 343 million accounts for clients as of the end of 2010, down 0.5% from 344.7 million a year earlier.
Overall, TSYS revenue grew by 1.7% in the fourth quarter to about $440 million. Net income attributable to common shareholders was $47.2 million, down 21.7% from a year earlier.
Despite the Fed’s proposed cap on debit card fees that acquirers pay to card issuers and pass along to merchants as part of the discount rate, TSYS executives do not expect it to hurt its processing volume because debit transactions are a small portion of its business.
Tomlinson said he hopes to land new, large debit-card issuing clients and does not see banks “getting out of the debit business.”
“It’s still a great product,” Tomlinson said. “I think they’re just going to have to figure out a way to reprice it if it stands as it is today. I think some people will move to prepaid and to credit cards primarily because it’s just a better package, if you’re not interested in having a debit card.”
Greg Smith, a managing director who follows TSYS at Duncan-Williams Inc., says the so-called Durbin amendment to the Dodd-Frank Act that instructed the Fed to set limits on debit card fees could be “incrementally positive” for TSYS.
TSYS has little exposure to issuer debit processing, and if banks do push credit and prepaid cards at the expense of debit, that would help the company, Smith says.
That TSTS has grown its merchant-acquiring business would also be a boon in light of the debit interchange caps because “they may not pass on 100% of the reduction” from lower interchange to retailers, Smith says.
Troy Woods, TSYS president and chief operating officer, said in a Jan. 26 interview that the company expects to be able to retain some of the cost savings but noted it still has to contend with competitors.
“You still have got to be competitive,” Woods said. “It’s a little bit early to tell exactly how it’s going to play out.”
The debit interchange caps could also spark interest in a “hybrid” card product TSYS is pushing to banks that enables consumers to pay for purchases using different accounts tied to a single card. For instance, they could pay for purchases less than $50 out of a checking account and for higher purchases with credit, Woods said.
“It gives customers a lot of convenience and selectability, and it rides the credit rails,” which give banks higher interchange than debit cards, Woods said. “It is a credit product.”
TSYS is in discussion with some issuers for the hybrid card, but none offer it today, Woods said.
TSYS also is the card processor for Barclaycard US, the Barclays PLC subsidiary that is working with AT&T Inc., T-Mobile USA and Verizon Wireless on developing a mobile payments network known as Isis (
Woods would not discuss investments TSYS may be making in conjunction with that project other than to say it has “undertaken support of their needs and commitments.”
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