Heartland Reports a Loss, While Carr Decries a MasterCard Fine

The top two executives of merchant acquirer Heartland Payment Systems Inc. on Thursday painted a picture of a company on the mend in the wake of the big data breach it disclosed in January. But the recession and the far-from-over effects of the breach still took a toll on the first-quarter bottom line, with Heartland reporting a $2.5 million loss. Same-store sales declined by an “unprecedented” 7.6% in the quarter, according to executive chairman and chief executive Robert O. Carr. Heartland also recorded a $12.6 million pre-tax charge to cover breach-related costs. Carr noted that more than half of the one-time charge stemmed from a MasterCard Inc. fine that Heartland's earnings release says was “due to our allegedly not taking appropriate action subsequent to learning of the possibility of the breach.” Carr strongly disputed that, telling analysts that Heartland responded appropriately and “considers the fine to be in direct violation of both the MasterCard rules and applicable law … .” A MasterCard spokesperson could not be reached for comment. Another part of the charge came from a breach-related fine of less than $1 million from Visa Inc., which Carr said Heartland's sponsor banks also are contesting. The rest of the charge was for legal and related expenses. And referring to the numerous breach-related lawsuits filed against Heartland, Carr said, “we intend to vigorously defend any claims made against us.” Carr also said unnamed competitors exploited Heartland's situation, “admittedly with some success,” and some lured merchants away on false claims that they would face fines by sticking with Heartland while it was briefly off of Visa's list of processors compliant with the Payment Card Industry data-security standard (PCI). But breach-related attrition was minimal because of a massive retention effort by Heartland's employees, whom Carr repeatedly praised. The retention effort, however, took a toll on new merchant signings, he added. Princeton, N.J.-based Heartland still hasn't revealed the number of card numbers compromised in the 2008 breach that it reported Jan. 20. But with hundreds of credit and debit card issuers having reissued cards either as a precaution or because of confirmed fraud linked to the breach, it is likely one of the biggest ever in the payment card industry (Digital Transactions News, March 17). Heartland president and chief financial officer Robert H.B. Baldwin Jr. noted that the company's ultimate costs aren't known yet. That means more charges in future quarters are likely. But in response to an analyst's question, Baldwin said that Heartland has a “healthy amount” of insurance and can tap other financial resources to cover breach costs. Meanwhile, Carr indicated Heartland's efforts to improve card-industry data security are in high gear. The company's planned end-to-end transaction encryption effort is set for launch in the third quarter. When asked about the reaction of the card networks to that?a Visa executive recently noted that end-to-end encryption, while it has advantages, isn't a panacea (Digital Transactions News, April 24)?Carr said “actually, we've been getting good cooperation” from the card brands. Heartland is talking with three out of the four major card networks about encryption, but Carr didn't identify them. He also noted that Heartland is working with about 20 payment processors to develop better security methods. While Heartland has unique challenges in recovering from the data breach, it is far from alone in taking hits from the weak economy. Both Visa and MasterCard last week reported soft credit card volumes in their latest quarterlies. Carr said merchant closures among Heartland's payroll-processing customers were up 51% from year-earlier levels, and probably up by about the same amount among card-processing merchants. There were bright spots, however, with debit card volumes growing in the double-digits, helping to offset declines in credit cards. Total first-quarter transaction processing volume grew 17.4% from a year earlier to $15.5 billion, though most of that increase came from the petroleum retailers and other merchants that Heartland picked up last year when it bought Alliance Data Systems Corp.'s Network Services division. Total first-quarter revenues hit $372.2 million, up 9.6% from $339.6 million a year earlier. In one development initiative, Heartland is rolling out one-stop acceptance of American Express Co. and Discover Financial Services cards to its merchants.