First Data Corp. is the $26 billion, dominant processor in the transactions industry. Continued growth seems assured with its proposed takeover of Concord EFS. Here, CCM profiles the multi-faceted First Data.
Number one. Top gun. King of the hill. World champion. Leader of the pack. The big enchilada.
First Data Corp. has set a new standard for the card industry by becoming the largest cardholder processor, the largest merchant processor, and the dominant processor of consumer money transfers.
The Greenwood Village, Colo.-based firm with a market capitalization of $26.1 billion last year generated earnings of $1.3 billion on revenues of $7.6 billion. Its 29,000 employees served three million merchants, 325 million card accounts and 1,400 card issuers. It conducted 1,127 transactions per second, was the second-largest customer of the U.S. Postal Service, and had partnerships or affiliations with nine of the top 21 merchant acquirers in the U.S. Its Western Union division moved $700 billion worldwide.
It's only a small exaggeration to say the transaction industry has been rocked with two tsunamis in 2003. One is the settlement of the merchants' multibillion-dollar class-action suit against Visa USA and MasterCard International. The other is First Data's proposed acquisition of Concord EFS Inc.
First Data isn't glamorous. It doesn't trot out million-dollar "brand awareness" ads during the Super Bowl. Its corporate headquarters is an anonymous office block in the suburbs south of Denver.
First Data does the work that banks don't want. It sends out the bills and sorts the checks. It sells and services point-of-sale terminals. It collects the dollars in a Chicago storefront and ensures the Rupees are available at a shop in Bangalore.
Recently, First Data has been the Michael Jordan of outsourcing. It ranked 242 on the Fortune 500 of U.S. corporations in 2002, jumping 42 spots from 284. Internationally it has aspirations to bend it like David Beckham, the English soccer (or football) star. Business Week ranked it 119 of the World's Top 200 Companies this year.
In April, FDC proposed taking the transaction industry to the next level with its planned all-stock acquisition of Concord, the Memphis, Tenn.-based electronic funds transfer processor and Star network owner.
CCM decided to take a big-picture look at First Data during this transition year. For the article, First Data gave CCM access to most of its top executives, though Charles T. Fote, chairman and chief executive, declined to talk while the Concord acquisition was pending.
As it grows, First Data must battle to keep its diverse units working together. That means integrating the company so that the parts mesh, cross-selling opportunities become standard, and the firm builds on its massive foundation.
"The greatest challenge is hitting on all six cylinders in the card business," says Jeffery B. Baker, an analyst who follows First Data for U.S. Bancorp Piper Jaffray in Minneapolis.
David Roberts, senior vice president of global business development, is in the thick of making a cohesive whole out of First Data's many parts. The thinking has to be, "How can we help our customers be more successful?" says Roberts. Individual units have to "stop thinking just my product."
Bigger, Smarter
Competitors must be nimble to grab business from the firm, says Paul R. Garcia, chairman, president and CEO of First Data rival Global Payments Inc. "They might be bigger, maybe even smarter. But if you work hard, you can compete," he says.
Atlanta-based Global processed $58 billion for its merchant accounts in 2002, making it a major acquirer but relatively small compared to First Data. "If we go head to head, I'm going to lose," says Garcia.
The Concord deal awaits the approval of the U.S. Justice Department, which is mulling over the antitrust implications. The decision isn't easy. Star processes about 56% of personal identification number-based debit transactions while First Data's NYCE network processes about 10%.
The possible Concord purchase dovetails with the settlement of the merchant suit where Visa and MasterCard agreed to drop their honor-all-cards policies. Experts predict retailers will encourage consumers to use their PIN-based debit cards, a payment device that has been growing at over 30% the last few years ("The Retailers' Home Run," July).
Concord is also the largest driver of automated teller machines in the U.S., with about 95,000 contracts. NYCE has about 11,000 ATMs under contract. If the deal is approved, First Data would have under contract about 30% of the estimated 352,000 ATMs deployed in the U.S., according to CCM's sister publication, ATM&Debit News.
Not everything works out for First Data. Back in 1997, it got in early on online bill payment by forming TransPoint LLC with Microsoft Corp. The firm never gained traction and First Data took a write-down of $142.8 million in 2001. This year, major client Bank One Corp. said it would move its card processing to First Data's archrival Total System Services Inc. (TSYS) by June 2004.
That puts pressure on Fote and company to ensure the Concord deal goes through. "First Data's success in completing and integrating (Concord) and gaining operational efficiencies will change its role in the payments infrastructure," says Franco Turrinelli, an analyst with William Blair & Co. in Chicago. "You connect more consumers at the point of sale with their accounts and enable merchants to offer more payment options."
Both Turrinelli and Baker see First Data positioning itself to possibly compete with MasterCard and Visa as a network for electronic transactions. Company officials decline to predict future moves.
But Concord has its problems too. Prior to the takeover announcement, rumors were circulating that its bank customers weren't re-signing contracts with Star. And Concord, with revenues of $2 billion last year and worth an estimated $7 billion, won't come cheap. Under the current plan, First Data will pay about $6.7 billion and Concord shareholders will end up owning about 21% of the combined companies.
Some are passing the word that First Data could begin to compete with its customers. Vital Processing Services rolled out an ad campaign this year called "The Power of Pure Commerce" to highlight its role strictly as a third-party payments processor for merchants. That contrasts with First Data's joint merchant-acquiring "alliances" with banks. Tempe, Ariz.-based Vital is co-owned by Visa and TSYS.
With or without Concord, First Data touches many aspects of the payments business. It is an amalgamation of parts. Its primary focus is serving business customers, except for its largest unit, Western Union Financial Services, which primarily serves consumers.
FDC's core principal is the power of electronic payments, but its TeleCheck unit has found success by making it easier to cash checks at the point of sale. And First Data's Card Issuing Services division serves banks while its Merchant Services group serves the merchant side, two sometimes competing groups.
Incarnation
First Data Resources was the first incarnation of the company in the modern era. It began in 1976 as the first processor of Visa and MasterCard bank-issued credit cards. In 1980, American Express Co. bought 80% of the company, and purchased the remainder over the next three years.
James D. Robinson III, then the leader of AmEx, urged his board to make the purchase, even though bank cards were the competition.
"My point was that Visa and MasterCard were going to be around and this could be a terrific investment as they grew," says Robinson. He recalls AmEx paid $85 million for FDR.
In 1992, AmEx decided to spin off First Data through an initial public offering. Banks had begun the shift to outsourcing but they weren't comfortable giving their card processing business to First Data as long as AmEx was its parent, Robinson says.
Robinson praises Henry C. "Ric" Duques, First Data's former chairman and chief executive, for expanding the company during his 10 years at the helm. (Duques retired in 2003 but remains on the board.) An important step was the merger with Western Union's owner, First Financial Management Corp., in 1995.
Current leader Fote is "a superb executive, sure-footed and he's delivered," says Robinson, who also remains on the board.
First Data's stock has risen 183% since 1998 when stock splits are included, according to Citigroup Inc. The S&P 500 Index by comparison gyrated during that time, but hovers near the same value of five years ago (chart).
The company's growth has been good for the entire payments business, says Garcia. "The tide has lifted all ships. First Data has brought a lot of investor interest to this industry," he says.
First Data competes through four major divisions--Payment Services, Merchant Services, Card Issuing Services and Emerging Payments.
Payment Services, which includes Western Union, is the largest, accounting for $3.18 billion or 40% of the parent's revenues last year. Profits grew 28% to $1.05 billion.
Western Union has a global network of 151,000 agent locations--70% are outside the U.S.--with plans to expand to 200,000 by year-end 2004. First Data has said that the international market could support 500,000 agents in the next decade with many of them located in Asia.
Western Union and its huge on-the-ground presence would appear to offer the best opportunity for First Data to cross-sell its products. But the concept remains in neutral. For now, First Data points to an agent company in Jamaica that is also marketing TeleCheck.
One new product that uses various First Data strengths is a prepaid Western Union MasterCard card that was introduced this spring. Consumers can load from $30 to $2,500 on the card, which costs $19.95 and is issued by Sioux Falls, S.D.-based BankFirst Corp.
Western Union's international strength has an Achilles' heel, however. The war on terrorism put international money transfers under the microscope of regulators. They found the company was deficient in transaction reporting and agent supervision.
To settle the issue, Western Union agreed to pay a total of $11 million to New York State and the U.S. Treasury Department, while not admitting or denying guilt.
Meanwhile, the unit faces competition in Mexico as Wells Fargo & Co. and Bank of America rolled out money-transfer programs that compete on price. However, neither can match the 35,000 agent locations in the country. "We're everywhere. People know where to go," says Christina Gold, Western Union's president.
Division number two is Merchant Services. Profits rose 25% last year to $737 million on revenues of $2.7 billion.
Merchant Services has aggressively acquired or partnered with financial institutions to prevail in the market. Its alliances include deals with top acquirer Chase Merchant Services, along with Wells Fargo, FleetBoston Financial Corp., and a 47% stake in Paymentech, which is majority owned by Bank One. Last year, it signed deals with SunTrust, Huntington Bank and Wachovia Bank.
First Data Merchant Services processed 10.2 billion transactions in 2002. If the Concord purchase goes through, its acquiring arm would add the 2.9 billion transactions Concord processed in 2002.
Put them together, says Piper Jaffray's Baker, and First Data will have a hand in 45% of all U.S. credit card transactions and about 70% of PIN-based debit card transactions.
Fact is, First Data has been on an acquisition tear. At the end of 2001, First Data paid $283 million to complete its purchase of Cardservice International, a major independent sales organization specializing in online merchants.
Old Timer
The 2001 purchase of TASQ Technology for $176 million in cash began to pay off with sales growing by $42.8 million last year. TASQ provides the nuts and bolts that merchants need to accept cards at the point of sale. It markets hardware and software through purchase or lease, refurbishes the terminals, and provides training along with help-desk support.
TeleCheck is a relative old-timer, coming on board in 1995 when First Data bought First Financial. The unit aims to make it easier for merchants to "electronify" checks at the point of sale. TeleCheck transactions were valued at $172 billion last year.
That impressive list of subsidiaries and products gives Merchant Services a huge advantage when knocking on a potential client's door, says Diane Vogt, executive vice president, strategic market development. "I offer services based on our breadth and expertise," says Vogt. "The client may have to go to five different vendors" to match that.
The one division that appears to be struggling is the old First Data Resources, now called Card Issuing Services, a mainstay that provides outsourcing of card account handling. Card Issuing enrolls the consumer and sends out the plastic, handles the monthly statements and processes the cardholder's transactions.
Clients include J.P. Morgan Chase, Bank of America and Citi Commerce Solutions, the private-label card division of Citigroup Inc.
In 2002, profits rose 8% to $373 million while revenues dropped 2% to $1.92 billion. First Data attributes the results to price competition and the free fall of the subprime market. It predicts it will have 340 million card accounts by year-end 2004, a slight 4.6% growth rate over the next 18 months.
The division spent $116 million last year in a system makeover that will give issuers greater flexibility in working with their cardholders, says Kim Bishop, senior vice president, client development.
Hard Hit
Card Issuing Services was hit hard by Bank One's decision to shift its 50 million cards to TSYS, though Fote told analysts the account, worth an estimated $150 million in revenues, was "non-profitable." Philip Heasley, chairman and chief executive of Bank One Card Services, said that TSYS would better serve the requirements of his bank's design-your-own card campaign which allows consumers to select their card's color, payment date and rewards program.
Card Issuing Services is operating without its own leader since the departure last February of Eula Adams. He had been the company's point man in its fight with Visa over First Data Net ("The Closed-Loop Battle of the Giants," December 2002).
First Data Net was meant to take advantage of First Data's direct connection between its Visa-member clients that are both issuers and merchant acquirers. Clients that sent their transactions through First Data Net would bypass Visa's VisaNet authorization, clearing and settlement system, and avoid some of the San Francisco-based association's fees.
In April 2002, Visa sued to block expansion of First Data Net, claiming transactions that it didn't "see" in VisaNet were at greater risk for fraud and other problems. First Data counter-sued, charging anti-competitive practices, breach of contract and trade libel. Lawyers have been working through the discovery process this year.
Some observers have suggested that Card Issuing Services could be sold off but Turrinelli disagrees. "It's struggling but I never subscribe to that. It's important First Data is on both the merchant and issuer sides," he says.
FDC's Paris-based First Data International markets merchant and cardholder processing services. The goal by 2007 is for 33% of First Data's revenues to be from its international group. In 2002, 25% of its revenues came from outside the U.S.
"We are drawn to a market depending on its size and maturity," says Pamela Patsley, International president. "China is not a mature market but if you consider its size, we have to be there."
Last October, First Data opened a data center and satellite office in Shanghai to serve China. In contrast, Europe is a mature market where the opportunity is in the near term, says Patsley.
One idea is leveraging Western Union's connections to form alliances, says Patsley. "A large part of Western Union agents are banks and financial institutions," she says. "Banks may be acquirers, they may have a card program and they may need our services."
Patsley also is looking to purchase local acquirers. "A greater percent of our growth will come from acquisition. We want to consolidate and get scale," says Patsley.
The company's fourth major division is Emerging Payments, a group devoted to government, wireless, and business-to-business transactions.
First Data started the division in October 2000 with the iFormation Group, a consortium of investors that includes the Goldman Sachs Group, the Boston Consulting Group, and General Atlantic Partners. First Data owns 75% and iFormation the rest.
"We're the innovation engine. One of our charters is to strike out in completely new areas," says Garen K. Staglin, Emerging Payments president and chief executive.
Revenues grew 62% last year to $147.2 million, while the unit lost $16.6 million. "We expect to be positive in 2005. Some (investments) make sense. Some lose," says Staglin.
The most promising area is the electronic payment of state and local taxes and other services, Staglin says.
The govOne Solutions and GovConnect units took a step last year towards company integration. GovOne processed 40 million tax payments from two million businesses. GovConnect provides home health-care and child-support payments.
Striking a Balance
Last October, the two teamed with Western Union to allow parents in Rhode Island to make child-support payments in branches. Another project enables health-care providers in Connecticut to pick up their government checks at WU locations.
Another potential giant is business-to-business payments. First Data joined with MasterCard in June to market electronic invoicing and the Purchase, N.Y.-based association's e-P3 corporate purchasing card.
The market is worth an estimated $32 trillion, according to MasterCard's Philip J. Philliou, vice president, e-business and emerging technologies. "By partnering, this will be quicker, faster and sooner," says Philliou. "Some might think we are competitors. But in business-to-business, our goals are aligned."
Many of First Data's projects and alliances appear great on paper. But the danger is overextending until the company loses its focus.
Roberts, the firm's chief strategy guide, suggests that First Data must combine the machine-like precision it demonstrates when processing billions of transactions with an individual approach to each customer.
"That's the trick. You can't be one-size-fits-all when serving a global market. But you can't do everything unique because you need scale," he says. "It's customization vs. scale."
Can a $26 billion company walk that balance beam? It has so far.
