Newly Private iPayment Logs Profit Jump, Points to CardSystems Fallout

The final quarterly filing from iPayment Inc. as a public company contains a report of a double-digit gain in profit at the Nashville, Tenn.-based merchant acquirer as well as a terse reference to what amounts to continuing fallout from the huge data breach last year at Atlanta-based merchant processor CardSystems Solutions Inc. The company, which was taken private in a management-led buyout that became final last week, logged an 11% jump in net income in the first quarter over the year-ago period, to $7.62 million, on a 5% rise in revenue, to $170.9 million. Interchange, which accounts for 63% of the independent sales organization's costs, totaled $98.1 million in the quarter, up 1.2% as a result, the company says, of rate increases effective last spring. Interchange as a fraction of total revenues declined to 57.4% in the quarter from 59.3% because the company stopped serving a number of low-margin merchants it had picked up in an acquisition. In the Form 10-Q filing to the Securities and Exchange Commission, iPayment also reported that Merrick Bank, one of its sponsor banks, notified it last September that it would hike iPayment's reserve requirement from $500,000 to $1.4 million. The increase came as a result of fines assessed by Visa USA and MasterCard International against CardSystems, a note in the filing says. CardSystems was a processor for iPayment as well as for some 26 other ISOs and also was a registered agent for South Jordan, Utah-based Merrick Bank. The company says in the note that Merrick Bank has released $600,000 of the reserve, leaving the company to record the remaining $800,000 as restricted cash on its consolidated balance sheets. “We have worked with Merrick Bank to obtain information regarding the increase [in the reserve requirement] and the fines against CardSystems Solutions, and have not been able to determine what, if any, contingent liability we may have for such fines,” the note says. “We intend to vigorously defend our business against any such fines and/or seek proper indemnification from third parties as applicable.” A security lapse at CardSystems allowed hackers last year to gain access to information on some 40 million card accounts, an incident that resulted in the theft of data on an estimated 200,000 accounts. In the wake of notices from Visa USA and American Express Co. that the networks intended to shut off the processor's links to their systems, San Francisco-based Pay By Touch Inc. acquired the assets of CardSystems in October (Digital Transactions News, Oct. 17, 2005). An aggressive buyer of merchant portfolios over the past several years, iPayment sells its services through 100 direct salespersons as well as 850 smaller ISOs and serves more than 140,000 mostly small merchants for both card-present and card-not-present transactions. Its chief executive, Gregory S. Daily, made an offer for the company a year ago, triggering a series of events that led to last week's endorsement by shareholders of the move to private ownership by Daily and Carl A. Grimstad, president, in a deal valued at $770 million when it was approved by the company's board in December. The company also ceased trading last week on the NASDAQ National Market.