First Data Ponders Options for Its Shrinking Card-Issuing Business

In a move that could lead First Data Corp. to sell its shrinking card-issuing operation, the Denver-based processor announced today it has hired investment banker Morgan Stanley to investigate options for the unit. The card-issuing business, one of three principal processing operations at First Data, has been rocked in recent months by pricing pressures and the defections of major banking clients. Transaction-processing revenue for the unit, which processes credit and debit card accounts for some 1,500 issuers, plunged 12% in the third quarter, to $387.4 million, from the year-ago period. Processing revenue for the first nine months came to $1.19 billion, down 4%. Meanwhile, First Data's other two major processing units–Western Union and merchant services?have been growing, with the merchant-processing business recording an almost 10% increase in year-to-date transaction revenue through the third quarter. In announcing the decision to engage Morgan Stanley, First Data's chief executive cited the drag on growth the card-issuing unit has created for the company. “The business continues to dampen the growth rates of the entire company, and maximizing shareholder value over the long term remains our top priority,” said Charlie Fote in a statement. First Data also said it expects the card-issuing unit to depress the company's growth rate through the middle of next year, “based on the timing of any actions within the card segment.” Although the announcement does not spell out the options First Data could consider, the decision to bring in an investment bank has touched off speculation among analysts that the card unit could go on the block. The unit has lost seven key clients in the past year, including Bank One and JPMorgan Chase & Co., which merged and this summer moved their consolidated card portfolio to rival Total System Services Inc. (TSYS). Meanwhile, Wells Fargo & Co. and Wachovia Corp. earlier moved their debit card portfolios to Visa USA's Interlink network from Star System Inc., which First Data acquired in 2004 as part of its acquisition of Concord EFS Inc. At the same time, the card unit is adding mostly private-label portfolios, which contain more inactive accounts and so carry lower revenue than bank cards, according to First Data's latest quarterly Securities & Exchange Commission filing. So-called retail accounts now make up 58% of the unit's account base, compared to 43% a year ago, while bank cards account for 19%, down from 38%. Of the 47 million accounts the company added in the first nine months of the year, most were retail, the company says in its filing. Of some 100 million accounts it had in its pipeline as of Sept. 30, “the majority…are retail private label and private-label cobranded [accounts],” the company says. Indeed, one of the largest deals of the year was with Citigroup Inc. and included processing for the bank's Sears, Roebuck private-label portfolio. The filing says the company was processing for 402.5 million cards domestically as of Sept. 30, up from 389.4 million a year ago. Depending on the action First Data takes, the company may be able to concentrate more resources in its merchant-processing unit, which is generating more profit for the company than the card business. Merchant services has acquired five merchant portfolios this year, including Citicorp Payment Services Inc., which processes for 15,000 merchants.