First Data Turns a Profit But Is Still Working To Lower Small-Merchant Attrition

Leading payment processor First Data Corp. on Monday reported positive net income for the fourth quarter and all of 2016, a turnaround from losses for both periods a year earlier, but it’s still working to improve mediocre revenue growth in its merchant-acquiring business.

Atlanta-based First Data posted net income of $192 million in the fourth quarter versus a $1.22 billion loss a year earlier. For the year, the company reported net income of $420 million compared with a $1.48 billion loss in 2015.

The bottom-line improvements came as the still heavily leveraged company continued to reduce net debt—which is down about $1 billion but still ended 2016 at $18.2 billion—and its interest expense while boosting its core processing operations. First Data’s second-largest segment, Global Financial Solutions, which provides processing and related services to credit and debit card issuers, continued a long-term recovery and saw fourth-quarter revenues rise 5%, or 10% when adjusted for currency impacts, to $415 million.

But sluggish growth continues to plague First Data’s biggest segment, the Global Business Solutions merchant-processing unit. GBS generated $1.03 billion in revenues, down 1% from 2015’s fourth quarter though up 2% when adjusted for currency fluctuations and the recent sale of First Data’s Australian ATM business, which is now owned by Cardtronics plc.

The North American part of GBS, which generated $805 million in fourth-quarter revenues, flat from a year earlier, in particular remains a laggard, and within it the SMB Direct unit providing direct services to small and mid-sized merchants. Only SMB Direct experienced a decline in revenues; the distribution channels for bank joint ventures, e-commerce, independent sales organizations and large merchant units “are performing fine,” chief financial officer Himanshu Patel said on a conference call with analysts.

First Data continued to chip away at SMB Direct’s high merchant-attrition rate, which was in the mid-30s in terms of percentage points in the third quarter. That was about 10 points above the industry average. “Our attrition rates improved by about 100 basis points [1 percentage point] sequentially, Q3 to Q4, and several hundred basis points year over year,” Patel said.

GBS North America’s transaction count grew 7% in the fourth quarter, but revenue per transaction declined in the mid-single-digits on a percentage basis because of changes in the merchant mix as well as lower pricing for some merchants. Still, GBS’s overall revenue picture is improving, Patel said.

The North American merchant unit bagged some notable wins recently, according to Patel and chief executive Frank Bisignano. They included retailer PetSmart as a new large merchant and Cleveland-based KeyBank as a bank partner. First Data also established a new division to provide merchant services to independent software vendors (ISVs).

“We feel very very good about the [ISV] community’s receptivity to us,” Bisignano said. He also said that merchants continue to embrace First Data’s Clover line of tablet-based point-of-sale products. The company has shipped about 300,000 Clover Station, Mobile, and Mini units. It’s also shipped about 200,000 Clover Go units, which are EMV chip card-reading dongles for mobile phones, according to Patel.

Meanwhile, First Data’s Star electronic funds transfer network is adding to its product mix. PINless debit card processing “has performed well for us,” and coming soon is signature-based debit processing, according to Bisignano. Signature processing will make the PIN-based Star network more of a direct competitor to Visa Inc. and MasterCard Inc. in debit processing.

“You should expect signature, full signature, to be in the market during the course of this year,” Bisignano said.

First Data reported total revenues of $2.94 billion in the fourth quarter, down 1% although up 1% when adjusted for currency changes. For all of 2016, revenues increased 1% to $11.6 billion and were up 2% on a constant-currency basis.