Consumers are spending again and that is helping Total System Services Inc. build up its payment card processing services after a year when it lost a handful of big clients.
The Columbus, Ga., company, which manages banks' card-issuing operations and processes transactions for merchants, said economic improvement should bring it more volume.
"I really believe we ended a very challenging 2010 stronger than originally expected," Chairman and Chief Executive Phil Tomlinson said in an earnings conference call Tuesday.
The company, like others in the payments industry, faces a number of unknowns that could lead to further setbacks — and opportunities. The factors include the Federal Reserve's proposed caps on debit card swipe fees and mobile payments technology that could displace some traditional players.
Still, TSYS executives were upbeat about 2011, pinning their hopes on efforts to expand the merchant acquiring side of its business.
Earlier this month the company announced it paid $169.6 million to buy the remaining 49% stake in First National Merchant Solutions LLC from First National Bank of Omaha. It bought a 51% stake in the joint venture, which it has renamed TSYS Merchant Solutions, for $150.5 million in April.
"We will continue to build scale as a direct acquirer with more focus on sales," Tomlinson said. "We hope to continue to have meaningful acquisitions in that area. It's an area that we want to continue to grow."
On the card issuing side of its business, which handles the mailing of plastic cards, the processing of cardholder transactions and other activities, North American transactions grew in the fourth quarter by 9.7% from a year earlier, to 1.73 billion. International transactions grew by 12.8%, to 357.9 million.
It had 342.9 million accounts on file as of the end of 2010, down 0.5% from a year earlier.
Revenue overall rose 1.7% in the quarter, to $440 million. Net income attributable to common shareholders fell 21.7% year over year, to $47.2 million.
TSYS executives say they do not expect the Fed's proposed cap on debit card fees that merchants pay to banks to hurt processing volume at TSYS, because debit transactions are a small portion of its business.
Tomlinson said he hopes to land new large debit-card-issuing clients and that he does not foresee banks "getting out of the debit business."
"It's still a great product," he said. "I think they're just going to have to figure out a way to reprice it if it stands as it is today. I think some people will move to prepaid and to credit cards, primarily because it's just a better package, if you're not interested in having a debit card."
Greg Smith, a managing director who follows TSYS with Duncan-Williams Inc., said the Durbin amendment to the Dodd-Frank Act that instructed the Fed to set limits on debit card fees could be "incrementally positive" for TSYS.
TSYS has little exposure to debit processing on the card issuer side of its business, and if banks do push credit and prepaid cards at the expense of debit, that would help the company, Smith said.
The fact that it has grown its merchant acquiring business would also be a boon in light of the debit interchange caps because "they may not pass on 100% of the reduction" from lower interchange to retailers, Smith said.
Troy Woods, TSYS' president and chief operating officer, said it does expect to be able to retain some of the cost savings but noted it still has to contend with competitors. "You still have got to be competitive," Woods said in an interview Wednesday. "It's a little bit early to tell exactly how it's going to play out."
The debit interchange caps could also spark interest in a "hybrid" card product TSYS is pushing to banks. It allows a consumer to pay for purchases using different accounts tied to a single card. For instance, purchases under $50 could be paid for out of a checking account and higher purchases could be paid for with credit, Woods said. "It gives customers a lot of convenience and selectability and it rides the credit rails," which give banks higher interchange than debit cards, he said. "It is a credit product."
TSYS is in discussions with some issuers for the hybrid card, but none offer it today, Woods said.
TSYS is also the card processor for Barclaycard US, the Barclays PLC subsidiary that is working with AT&T Inc., T-Mobile USA and Verizon Wireless to develop a mobile payments network known as Isis.
Woods would not discuss investments TSYS may be making in conjunction with that project other than to say it has "undertaken support of their needs and commitments."
