With Revenue Stuck in Neutral, First Data Looks to New Top Brass to Kickstart Growth

First Data Corp.’s net loss widened in the second quarter on overall revenue that barely budged from the year-ago period, the huge transaction processor reported on Tuesday. The results throw into relief questions swirling around the Altanta-based company about whether its new top brass can kick-start growth.

The company’s $189 million loss for the quarter is up $32 million from 2012’s second quarter, though much of the shortfall is attributable to a change in the provision for income taxes, the company says. More significant is that total revenue for the quarter, after adjustments, came in at $1.7 billion, flat with the same quarter last year. “Revenue growth has been anemic,” industry analyst Eric Grover, principal at Minden, Nev.-based Intrepid Ventures, tells Digital Transactions News. “Globally, they are growing slower than the global payments markets.”

While it remains the world’s largest processor with stakes in both acquiring and issuing, First Data faces emerging challenges in particular on the merchant-services side of its business, which includes its acquiring alliances with banks and accounted for 54% of second-quarter revenue.

Last week, the European Commission recommended interchange caps of 0.2% for debit and 0.3% for credit, well under the Durbin ceiling for debit in the United States. Asked by analysts during a conference call on Tuesday how this might impact First Data’s European acquiring business, chief financial officer Ray Winborne said it will take “years” to realize the full effect of the caps. Still, “I’d say we’re on the lesser end of the impact.” This is because only half of the company’s European business lies in acquiring, he said.

Interchange caps can cut income for merchant processors, since they charge fees on top of interchange. In so-called interchange-plus plans, these fees are spelled out along with the interchange component, allowing merchants to exert pressure for lower fees as interchange declines. In bundled pricing plans, which are typically offered to small merchants, the interchange component is less transparent.

Winborne said 85% of First Data’s transactions are on interchange-plus plans. But, he added, there’s nothing new about price compression for First Data. “Pricing transparency is not a new trend,” he said. “If you look at our rate compression, this is not a new phenomenon.”

Another challenge comes from the recent move by Chase to form an acquiring operation using software from Visa Inc. to gain access to the backbone VisaNet processing system. Analysts questioned Winborne about the possibility banks that have formed acquiring alliances with First Data could pull out of those agreements to follow Chase’s example. Winborne was dubious. “Whether banks feel this is a strategic opportunity to start acquiring, I haven’t heard any of that noise in the market,” he said.

Now the question is whether new management can spur growth. Frank Bisignano came from JPMorgan Chase & Co. this spring to take over as chief executive. Earlier this month, he hired fellow Chase executive Guy Chiarello as president. On the conference call, Winborne said there is a palpable difference in the atmosphere. “We feel we’ve picked up some first-round draft choices here,” he said of the new top executives. ‘The level of intensity has picked up a few clicks. There’s a real sense of urgency. The only thing that has changed is the intensity and the focus on execution.” Bisgnano did not participate in the call.

A major challenge for Bisignano and Chiarello will be one that has confronted previous top First Data executives: the books are saddled with $23.1 billion in debt left over from its 2007 acquisition by leveraged-buyout specialist Kohlberg Kravis Roberts.