Attrition Among Profitable Small Businesses Takes a Toll on First Data’s Merchant Unit

Despite 7% transaction growth, First Data Corp. on Monday reported that revenue in the company’s North American merchant-processing business declined 2% in the first quarter.

In an early-morning conference call with analysts, First Data executives several times blamed attrition among small and mid-sized North American businesses, or SMBs, in its Global Business Solutions (GBS) segment. “I’d say the core, primary issue is really SMB attrition,” said chief financial officer Himanshu Patel.

But when questioned by an analyst, Patel indicated that attrition rates have not spiked. “I wouldn’t characterize the attrition in that business as being any different than what it’s been for a while,” he said.

So apparently what’s happening at First Data is that, despite its historical strength in signing new merchants, the company is losing tenured small and mid-size merchants that have graduated from low sign-on pricing. In its earnings report, the Atlanta-based processor said the “blended yield,” a term for profitability, declined despite the transaction growth.

“It’s not like we signed up new merchants at a rate that’s dramatically different than where the market is, but, obviously merchants that have been with you a while are oftentimes at a different price point,” Patel said.

Even a slight reduction in attrition could improve First Data’s profitability by reducing sales expenses and retaining more revenue from higher-margin merchants. First Data has had a plan in place for more than six months to achieve that goal by better management of the merchant portfolio, but results won’t start showing up until 2016’s second half, chief executive Frank Bisignano said.

The plan has four major components, according to Bisignano: getting more merchant referrals from First Data’s approximately 70 bank partners; cross-selling those merchants with other services beyond merchant processing, including gift cards and debit processing from First Data’s Star network; expanding First Data’s digital presence with its bank partners, including through the Clover.com site for its Clover line of point-of-sale hardware and software, and segmenting its sales force to generate more revenues over merchants’ life cycles.

“We’ve set the foundation for that business,” Bisignano said. Clover, now First Data’s main POS equipment line for small businesses, recently surpassed 200,000 unit deployments.

North American merchant transactions increased 7% to 10.7 billion while international transactions increased 14% to 1.77 billion. GBS’s revenues totaled $955 million, down 1% from 2015’s first quarter but up 2% on a constant-currency basis. North America brought in $737 million of the segment’s revenues, off 2%, or 0% if merchant revenues from another First Data segment, Network & Security Solutions, are included. GBS’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were $376 million, up 4%.

While the merchant business had mixed results, First Data’s once-struggling issuer-processing business called Global Financial Solutions (GFS) continued its rebound. North American bank and retail card accounts on file increased 13% to 814 million and the international card count grew 12% to 151 million. Segment revenues increased 8% to $386 million, and adjusted EBITDA grew 30% to $155 million.

Meanwhile, Network and Security Solutions posted an 8% increase in transactions, to 4.76 billion, through debit card issuers, Star, and prepaid cards. The unit saw a 5% increase in revenues to $352 million, and adjusted EBITDA increased 16% to $151 million.

According to Patel, Star is broadening its debit card authentication services for client financial institutions. It already offers PINless debit, and “we will be in market with signature shortly,” he said. He added that “there are a few key big deals that we’re circling.”

In all, First Data reported revenues of $2.78 billion, up 3%, or 5% on a constant-currency basis. The company posted a net loss—a figure that includes debt service and expenses from its October 2015 initial public offering—of $56 million versus a $112 million loss a year earlier.