First Data’s Bailis Ponders His Strategy for Debit Cards, Services

Few people know First Data Corp. better than David P. Bailis. Starting in 1989, he worked on everything from health-care payments to e-commerce and held titles as diverse as general counsel and chief administrative officer. He retired in 2001 to dabble in his own financial-services consulting businesses. But he came back in December at the request of Henry C. “Ric” Duques, who himself had recently rejoined First Data as chief executive and was trying to determine what to do with the slow-growing cardholder processing unit called Card Issuing Services. The previous boss, Charles Fote, had branded the unit a drag on earnings. First Data ultimately decided to keep Card Issuing Services and spin off its star performer, Western Union, to company stockholders (Digital Transactions News, Jan. 26). Duques named Bailis as president of one of the three major units of a reorganized First Data, First Data Financial Institution Services. That division will include the credit card account-processing services of the former Card Issuing Services, retail cards, the Remitco remittance-processing service, debit cards, including the Star PIN-debit brand, and the VisionPlus processing software business. Bailis's assignment is to ignite a division whose original credit card franchise faces serious challenges, despite having 105 million new accounts confirmed to come onto its system soon. Bank card growth in the U.S. is stagnant, and some of the surviving big issuers are taking their business in-house. And while First Data is huge in retail cards?some 258 million accounts on file?store and gas cards aren't as profitable as bank cards. One move Bailis could make is to better cross-sell First Data's lengthy menu of services. For instance, First Data has a card-activation business that cardholders of client issuers can call to get their new cards approved for use. First Data could get more mileage out of it by seeking business from issuers that don't use other FDC services. “That was always a thriving business but it was never marketed,” says Theodore Iacobuzio, managing director at consulting firm TowerGroup. Speaking to Digital Transactions magazine, Bailis doesn't argue that point. “We have not been aggressive, and I think you'll find us in the short term to be very much on the offensive in core products,” he says. Then there are debit cards, which are growing much faster than credit cards. First Data claims 112.4 million debit card accounts on file, and debit services produced $470 million in revenue last year. In 2004, First Data bought Concord EFS Inc., whose Star network was the nation's largest PIN-debit network. Visa's Interlink, however, has come on strong and won some key issuer contracts of late. While refusing to give details, Bailis says “there are a lot of interesting discussions going on” for expanding the Star brand. “We will drive volume here [with] issuers looking for something other than an association-branded rail to ride on,” he says. Another challenge, though, lies in store-branded cards. Now comprising 56% of First Data's accounts on file, retail cards could portend lower profits. In a December 2005 report, Adam B. Frisch, an analyst with UBS Investment Securities LLC, estimated that bank cards generate five times the revenue that retail cards do, “as well as much higher absolute margin dollars.” While it may be true that retail cards aren't cash cows like bank cards, Bailis notes that First Data has as clients the two store card issuers that have bought many big private-label portfolios from retailers and oil companies in recent years, Citigroup Inc. and General Electric Co.'s GE Consumer Finance unit. Coming onto FDC's system soon from rival Total System Services Inc. (TSYS) will be the Citi-owned Sears store and MasterCard files, with about 20 million active accounts. In February, GE bought the 3.1-million-cardholder portfolio of Canada's venerable Hudson's Bay Co. “We are aligned in the retail business with the industry consolidators,” says Bailis, adding that First Data is mulling ways to sell more services to retailers. Duques is projecting zero revenue growth for Financial Institution Services this year but believes it can be rehabbed into a producer of 8% to 10% annual growth in revenues and profits by 2008. And in his report, issued before the review was over, UBS's Frisch said the cardholder unit was a keeper, given its still-good earnings?as long as customer fences were mended and expenses kept under control. Bailis sums up his most important mission as serving existing clients well while keeping in mind that First Data at its core was and will be a high-volume, recurring-revenue processor. “We're going back to the future,” he says.