First Data Corp. plans to support the Federal Reserve Board’s proposed new debit interchange rules with a two-tiered pricing structure for its Star PIN-debit network, and it expects slow but steady revenue growth ahead, company executives told analysts Feb. 2.
The two-tiered system would mean different debit rates would apply for issuers above and below $10 billion in assets. The final version of the proposed regulations, scheduled to be published April 21, “could look different” than the proposed rules, so it is too early to provide specifics on pricing or how new network-exclusivity rules will affect the industry, Ray Winborne, First Data chief financial officer, said during the call to discussing fourth-quarter earnings.
“We believe the effects of the regulations will be neutral to positive for us,” Winborne said, adding that First Data plans to implement “the most competitive interchange that market conditions will allow.”
The payments-processing giant’s losses narrowed during the fourth quarter as it continued digging out from debt associated with its costly 2007 takeover by Kohlberg Kravis Roberts & Co. and is beginning to see the effects of an improving economy, said Jonathan Judge, the company’s new CEO.
Despite short-term challenges to its business model caused by the Fed’s new debit regulations, Winborne told analysts he believes the new rules could “unlock” opportunities for First Data.
“The recent regulatory changes and alternative payment schemes, including mobile, could profoundly change the (payments) landscape,” Winborne said, suggesting that emerging mobile-payment technologies represent a significant opportunity for First Data to capture business in new channels.
“Mobile is a game-changer,” Winborne said, noting that First Data possibly may profit by developing technologies for existing customers that would extend loyalty programs to mobile-payment channels, including electronic coupons.
The sluggish economy continues to dog First Data’s performance. Transaction-ticket sizes shrank in certain categories during the quarter, such as in the restaurant industry, where cards comprise a growing share of low-ticket purchases, Winborne said.
Moreover, the company’s total number of credit cards on file declined during the quarter from a year earlier because of economic and regulatory changes, he said.
But the card-file loss “seems to be stabilizing” as the economy improves, Winborne said, noting that First Data has “well over 800 million” bankcards in its files, including more than 1 billion prepaid cards.
The net loss for the quarter ended Dec. 31 was $179.2 million, down from a $368.6 million loss a year earlier. Revenue increased 5.4%, to $2.73 billion from $2.59 billion, which the company attributed to debit-network fee increases and overall transaction growth. Adjusted revenue was $1.69 billion, up 1.2% from $1.67 billion.
Earnings during the quarter before interest, taxes, depreciation and amortization were $563.8 million, up 6.4% from $530.1 million.
By segment, Retail and Alliance Services produced $872.8 million in revenue, up 6.5% from $819.5 million, boosted by sales of prepaid cards and point-of-sale terminals and equipment, Winborne said.
Financial Services revenue increased 1.4%, to $357.8 million from $352.9 million, partly because of pricing pressures, customer losses and a 2% decline in active card accounts on file, he said.
International segment revenue fell 2.7%, to $439.5 million from $451.8 million, hurt by lower demand in markets abroad.
