Retention of Small and Mid-Sized Merchants Continues To Vex First Data

By Jim Daly
@DTPaymentNews

Most of First Data Corp.’s cylinders fired on cue in the second quarter, but its U.S. small and mid-size business customers again proved to be drag on revenue growth. In response, the giant payment processor is holding off on merchant price increases and ramping up service, its top brass said Monday.

The topic of troublesome SMBs came up numerous times during an early-morning conference call with analysts, as it did three months earlier. At that time, chief executive Frank Bisignano said First Data was implementing a multipart plan to improve small-merchant retention and profitability. He reiterated that point today, saying the company is making “solid progress,” but added that it will take time to produce results. Atlanta-based First Data also is exercising price restraint with its directly signed smaller U.S. merchants.

“The ground war which we take on and are laser-focused on is in the SMB,” Bisignano said. “Over the last couple quarters we’re talking about no price increases. Historically we raised prices in this sector constantly. We’ve decided we’re going to win on good product, good service, good sales.”

Bisignano expects results to start showing up in the second half. In the quarter ended June 30, revenue in First Data’s merchant unit, Global Business Solutions, declined 2% year over year to $1 billion. North American revenues slipped at a similar rate to $815 million despite a 7% increase in transactions.

While SMBs held back revenue growth, they constitute less than 25% of GBS’s North American revenues, according to chief financial officer Himanshu Patel. Bisignano said relationships with large merchants remain strong, and that First Data recently signed merchant-acquiring contracts with four sizable banks—BBVA Compass, First Tennessee, Zions, and Silicon Valley Bank.

The shining star in Global Business Solutions was Latin America, where second-quarter revenue increased 44% as merchant volumes boomed in Brazil and Argentina.

On the card-issuing side, First Data’s Global Financial Solutions segment continued its strong recovery, with revenues up 12% from 2015’s second quarter (14% adjusted for currency fluctuations) to $395 million. Driven by new accounts on file (up 14%) and EMV chip card production, North American revenues grew 14% to $236 million.

First Data’s third major segment, Network & Security Solutions, which includes the Star electronic funds transfer network, debit card processing, security services, and prepaid cards, saw revenues increase 3% to $366 million. EFT network revenue, however, slipped 1% to $122 million due to price compression in long-term Star contract renewals, and the year anniversaries of some new Star contracts that had pumped up growth rates over recent quarters.

In all, First Data posted revenues of $2.93 billion, up 2% from $2.87 billion in 2015’s second quarter. Net income swung to $152 million versus a $26 million loss a year earlier.

First Data, which had an initial public offering last October after eight years as a portfolio company of buyout firm Kohlberg Kravis Roberts & Co., still has $19 billion in debt on its books. The company, however, paid off $300 million in debt in 2016’s first six months and is now generating enough free cash flow to steadily reduce borrowings and interest expense going forward, according to Patel.

“First Data’s capital structure has now clearly reached escape velocity,” he said.