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The Green Sheet Online Edition

July 14, 2008 • Issue 08:07:01

Looking ahead, moving forward

First Data Corp. is on the move. In its continuing effort to provide state-of-the-art products and services to ISOs, merchant level salespeople (MLSs) and their clients, the world's leader in payment processing has forged alliances that reflect new philosophies and a shift toward greater customer focus.

The company lined up some heavy hitters recently, especially since its acquisition by global asset manager Kohlberg Kravis Roberts & Co. in September 2007.

Ahead of the curve

The behemoth now known as First Data Corp. formed in 1969 as the Mid-America Bankcard Association, a nonprofit bankcard processing cooperative. First Data Resources incorporated in June 1971 as a for-profit organization providing processing services to MABA.

In 1976, FDR became the first processor of Visa Inc. and MasterCard Worldwide bank-issued credit cards. First Data and its partners is now the industry's largest acquirer, with markets on six continents. Following are some company milestones:

  • 1980: Sold 80 percent of FDR to American Express Co. (remaining 20 percent purchased in yearly 5 percent increments until 1983).
  • 1991: Began card processing operations in the UK.
  • 1992: Spun off from AmEx and went public. Began electronic funds transfer in Australia.
  • 1994: Began providing card processing services in Mexico.
  • 1995: Merged with First Financial Management Corp., which included Western Union Holdings Inc., and became First Data Corp. Introduced stored-value gift card program via ValueLink.
  • 1996: Announced two-for-one stock split. Formed First Data Merchant Services.
  • 1998: Introduced electronic check acceptance service via TeleCheck.
  • 2000: Formed eONE Global to focus on emerging payment technologies.
  • 2003: Acquired German POS terminal provider TeleCash Kommunications-Service GmbH.
  • 2004: Acquired Concord EFS, adding STAR network and PIN-based debit for nearly 2 million ATM and retail locations.
  • 2006: Spun off Western Union. Opened processing facility in Scotland. Entered partnership with Standard Chartered Bank PLC, and established Merchant Solutions Pte Ltd. to provide merchant acquiring services initially across Asia.
  • 2007: Acquired by KKR for approximately $29 billion; became a private equity company. Launched POSNet in Canada. Completed acquisition of Brazilian processor Check Forte Processamento de Dados Ltda.
  • 2007: Signed processing services agreement with Moskommertsbank in Russia. Acquired Poland-based Polcard SA.
  • 2008: Dissolved partnership with JPMorgan Chase & Co.; absorbed 49 percent of Chase Paymentech's acquiring business. Agreed to acquire 50 percent of Eufiserv's interbank processing business. Signed processing agreement with Indian financial conglomerate Kotak Mahindra. Launched AIB Merchant Services in Ireland.

At that time, Michael D. Capellas, formerly of Verizon-owned MCI Inc. and Hewlett-Packard Co., became the company's new Chairman and Chief Executive Officer. He replaced Henry C. (Ric) Duques, who stepped down after 18 years at First Data's helm.

Tagar Olson, a KKR executive involved in the acquisition, said, "We are very pleased to have invested in First Data, one of the pioneering companies in electronic commerce and payment solutions.

The company has leading market positions, with exciting growth potential, and we are actively supporting Michael Capellas and his management team as they further build the value of the company."

Relationships with organizations like InComm Holdings Inc. and Eufiserv, an initiative of the European Savings Banks Group, coupled with investment in merchant acquiring, mobile commerce solutions and next-generation POS products, underscore First Data's commitment to ratcheting up its offerings and expanding its footprint globally. It aims to offer the most comprehensive suite of payments solutions in the marketplace.

"If you look at the historic view of First Data externally, some might say we're the 800 pound gorilla in the living room - big and bureaucratic," said Ed Labry, President of First Data USA. "But if I wrote your headline it would say, 'Wow! The new First Data - delivering technology solutions tailored to our customers' needs.'

"More than half of the transactions in this country are still not electronically processed, so we have a tremendous opportunity for electronification of payments in market segments that haven't been fully penetrated. ... We realize we have to differentiate ourselves from the other players and put together comprehensive programs around fraud, security, data analytics and loyalty.

Across the pond

First Data expanded its European presence this year with an agreement to acquire 50 percent of Eufiserv's processing business and help it develop the continent's interbank processing.

Eufiserv is the network of automated teller machines owned mainly by European savings banks in 12 countries. It is also the largest - and only - international savings bank-owned interbank network in Europe.

Together, First Data and Eufiserv will provide support for ATM and POS transactions from multiple payment schemes delivered through a single proprietary platform, as well as achieve compliance with the Single Euro Payments Area (SEPA) cards framework.

According to David Yates, President of First Data International, SEPA will turn 27 individual European Union national payment areas into a single market, and "this will be achieved by establishing continentwide technical standards, having a consistent legal framework and requiring all European transactions to be priced as domestic."

Yates believes this will only increase competition between banks and processors.

"A key requirement of SEPA is that payment scheme management and transaction services should evolve as separate markets," he said.

"And First Data is uniquely positioned due to its scale and ground presence across Europe. We are also brand neutral, as we do not combine the role of payment scheme with processing, and this distinguishes us from Visa and MasterCard."

A move toward true pan-European interbank processing is behind First Data's consolidation in this sector and is the rationale for the joint venture with Eufiserv.

Yates said that as SEPA develops and banks and retailers begin operating outside the historic national operating model, the partnership's importance in the market will increase.

Beyond prepaid

In April 2008, First Data heralded its acquisition of InComm, a manufacturer and distributor of stored-value gift cards and prepaid wireless products, including reloadable debit cards, digital music downloads, games, software and bill payment solutions.

"I would first offer that First Data has some great products independently, including ValueLink, which is our closed-loop prepaid product, as well as our Money Network Solutions that include the general purpose reloadable product and payroll card in the U.S.," Labry said.

"Our acquisition of InComm combines a holistic view of prepaid to the industry that substantially increases our location footprint in the U.S., Canada and the UK, and creates a network that allows us to service the underbanked and unbanked in the market," he added. "They also have one of the best third-party gift card malls, with approximately 200 companies distributing their products."

According to Brian Mooney, President of First Data Merchant Services, the company's broadened prepaid offerings via the InComm addition enable merchants and businesses to increase sales and participate in a much larger payments stream because of the greater variety of products and payment types available.

"We've been able to demonstrate to our ISOs, MLSs, and merchants that by having more products and services and a wider selection in their stores on payment types and products, the more they look technologically capable, and the more traffic they're going to get because of the superior options available," Mooney said.

Inside proprietary terminals

To stay in step with evolving payment technology, First Data developed a line of next generation POS terminals tailored for diverse merchants' needs and budgets. Some of the new features on these proprietary terminals are color display screens, significantly more memory, and all-in-one card transaction and electronic check processing.

The FD50 is designed for merchants who want to update their legacy systems and avoid shopping in the refurbished terminal marketplace. It contains 32 megabytes of memory, connects by Internet Protocol (IP) and dial-up, and can hold up to 450 credit and debit - as well as 300 gift card and TeleCheck - transactions.

"The FD50 is really geared toward your smaller merchant," said Russell Bird, Senior Vice President, Terminals and Hardware Division at First Data. "We have also improved its end-to-end capabilities, so data that travels over the Internet is never in the clear."

For merchants who want to accept checks as well as card transactions, the FD200 is the newest generation of First Data's Eclipse terminal. It is scheduled for release in October 2008. "The check imaging capabilities are far superior," said Steve Mathison, Vice President, Terminals and Hardware. "The FD200 actually has two printers: a thermal for all reporting needs and then an inkjet printer to do the franking of the check."

The FD400, also due out in 2008, is a proprietary wireless device with a color display screen, which First Data noted is competitive in price with monochrome devices. "We are all excited about the new line of terminals coming out," Mathison said. "They are being well received by the ISO and agent community and continue to gain momentum in the marketplace."

On top of m-commerce

When it comes to the teen to 25-year-old demographic, First Data believes this generation will swiftly embrace mobile commerce and alternative payment technology, including near field communication (NFC) and radio frequency identification (RFID).

"Of all the different markets, the mobile market looks like the one that could really be the most explosive, certainly in the next five to 10 years," Mooney said.

"After that, who knows? However, clearly between now and 2015, there is no doubt the mobile market is going to take off.

"The younger generation coming into the market - as consumers - will obviously adopt this [mobile commerce] technology at an incredible rate, and if you think about it, this is a generation that can't imagine a world without the Internet. Consequently, we are committed to and are investing heavily in this space."

First Data reported that its proprietary GO-Tag Solutions suite employs alternative form factors, like key fobs, stickers and wristbands, that have the capacity to make contactless prepaid payments at the POS. The company indicated that GO-Tag Solutions use NFC and RFID technologies to conduct transactions safely and securely at the POS and can enhance closed-loop prepaid and loyalty applications by converting gift cards into spending cards, encouraging auto-reloads and enhancing loyalty programs.

According to Dom Morea, Senior Vice President of First Data Mobile Commerce Solutions, the "chief hurdle has been the chicken and the egg" of contactless acceptance.

"Growth of merchant acceptance continues at an aggressive pace in key market sectors like convenience, petroleum, grocery, quick service restaurants and high-volume retail," Morea said.

"The other part of the equation - contactless issuance - has been growing too. Nearly 20 million contactless cards have been issued worldwide, yet consumers may not even realize they have one in their wallet.

"So First Data is aggressively encouraging the use of GO-Tag Solutions to help merchants convert their gift card programs into spending card programs and a customer loyalty tool. Additionally, we are supporting the deployment and integration of readers at market-leading merchant locations in key market segments."

Expanding in Canada

First Data, which entered the Canadian market in 2000, expanded its presence there when it launched the merchant acquiring business POSNet in October 2007. It offers Canadian merchants end-to-end POS management solutions and will be compliant with EMV (Europay, MasterCard and Visa) chip standards by the end of 2008.

"First Data has been in Canada a long time. They just haven't operated under their own brand," said Attorney Adam Atlas, who is President of the Canadian Acquirers Association.

"We have so few banks in Canada, so any increase in competition will only make the marketplace more attractive, and will create new opportunities for the Canadian acquiring business.

"The fact that First Data is entering the market and aggressively looking for ISOs means that other processors will have to improve their game - in terms of attracting the talent that is up here - to solicit merchants."

From division comes unity

In May 2008, First Data made news in the payments arena when the company agreed to split Chase Paymentech Solutions LLC, its joint venture with JPMorgan Chase & Co. By the end of 2008, First Data will integrate 49 percent of the joint venture's assets and assume management of the full-service ISO and agent bank, incorporating them into its existing merchant acquiring business by the end of the year. The decision to terminate operations with JPMC and divide the assets of Chase Paymentech raised collective eyebrows in the industry, especially with ISOs and MLSs affiliated with the two financial institutions (FIs).

However, with the evolution of technology and the demand for more comprehensive services, First Data concluded merchant acquiring is core to its strategies, and its share of the joint venture should be operated independently. Company executives believe this will help First Data continue to expand its payment operations, ISO channel and FI partnerships.

"Our alliance bank partners, our FIs and our ISO channel partners are going to be key drivers in terms of how we look at the marketplace and deliver our products and suite of services," Mooney said. He believes the Chase Paymentech breakup only strengthens First Data's reputation as the ISO and MLS "go-to" place.

"We had a great 11-year relationship with JPMC, but in the end, each side had a slightly different vision of where the businesses were going, and it made sense for us to take our share in-house," Mooney said. "We're going to bring some merchant portfolios into First Data and combine the ISO businesses they had with us, allowing us to become even more focused on delivering value to the ISO and agent community."

By transitioning from the joint venture slowly, First Data expects to minimize customer disruption and have ample time to look at other strategic processing partners. "From a relationship and customer standpoint, the way in which we plan to do things directly gives us opportunities to cross-sell First Data solutions like prepaid, electronic check acceptance and e-commerce," Labry said.

Around the globe

In the relatively mature Western European and Scandinavian markets, consolidation among banks has created large-scale outsourcing opportunities around issuing, acquiring and ATM processing.

Additionally, Yates noted, international card schemes are losing the war on cash, but there are still opportunities to win the battle against coin, which Yates believes is inefficient and expensive.

"The retail environment in Western Europe represents a fantastic opportunity for our Retail Solutions Group," Yates said. "In the past 18 months we have worked hard to make our assets and solutions, which represent exciting new armory for this conflict, relevant to retailers.

"To that extent, we have some new form factors, like our prepaid mobile solution GO-Tags, as well as our loyalty, prepaid and gift card malls."

Other areas getting First Data's attention include the Middle East, Russia, Turkey, Thailand, Vietnam, India, and Central and Eastern Europe. "We feel confident that we have the skills and solutions relevant to the needs of these markets," Yates said.

Back to basics

Mooney stressed First Data's role as a company committed to delivering new value and services to ISOs and MLSs. "This is what we do, what we are about, what we think about every single day," he said. "The industry is going to be more explosive as the digital age grows and evolves, so First Data will continue to invest in customer-facing folks and provide world class service."

Labry feels the bottom line for value in the payments industry comes from a desire to remain an industry expert and educate a sales force on all revenue opportunities available.

"Business is about relationships, and if you are going to be successful in this industry, you've got to get back to basics and take care of your customers," he said. end of article

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