2014 ended roughly for some of the biggest payment companies, and 2015 will bring even more challenges from rapidly changing technology and nimble startups.
American Express and eBay are cutting thousands of jobs, while Discover Financial Services' income plunged 33% in the fourth quarter, due to a charge tied to the firm's mortgage business and a previously announced revision to its flagship credit-card program.
The job cuts at Amex and eBay follow earlier announced cuts at Softcard, the telco-led mobile wallet initiative that is also rumored to be an acquisition target of Google. Softcard, formerly called Isis, is cutting 60 employees, estimated to be up to 30% of its workforce.
EBay, which is in the process of spinning off its PayPal business, cut 2,400 jobs (about 7% of its workforce) worldwide across eBay Marketplaces, eBay Enterprise and PayPal. Its troubles stemmed from a significant drop in traffic and a stronger dollar affecting cross-border trade.
"These are not excuses and this is not business as usual," John Donahoe, eBay's CEO said in a Jan. 21 conference call to discuss fourth-quarter earnings. "In this environment we need to sharpen our strategic focus and execute better."
At eBay, the drop in traffic was partially blamed on eBay prompting shoppers to reset their passwords following the disclosure of a cyber-attack, and a change to Google search engine optimization that hurt traffic to eBay listings. EBay's most loyal customers came back after resetting their passwords, but its occasional customers did not resume their previous level of activity.
"In total, we simply underestimated the combined effect of these events on eBay's ecosystem," Donahoe said. "And these events occurred in a more competitive environment, where e-commerce and omnichannel players are upping their game."
Donahoe emphasized that PayPal has several positive trends, and he expects it to benefit from its pending separation from eBay. During the holiday season, PayPal added 4.6 million active accounts and its payment volume grew 24% in the fourth quarter. And Venmo, the person-to-person payment app PayPal owns as a result of its acquisition of Braintree, "is on fire," Donahoe said.
EBay also entered a standstill agreement with activist investor Carl Icahn, whose efforts prompted eBay to agree last year to split off eBay. As part of the agreement, eBay is adding Icahn Capital executive Jonathan Christodoro to its board of directors. EBay's revenue rose 9%, to $4.9 billion, in the fourth quarter from a year earlier. Its net income rose 10%, to $936 million.
Industrywide, some of the labor softness is the effect of years of investments as the payment companies added technology to spur the growth of mobile and other channels, said Richard Crone, a payments consultant. As this buildout matures, some of these companies find themselves to be overstaffed, he said.
"There has been very robust investment over the past several years," he said. "It's not unlikely to see a rationalization from time to time."
Despite the down quarter for these companies, the growth of mobile commerce remains an opportunity, Crone said. "I don't think this is a trend that makes payments any less attractive for investors."
Amex is also cutting thousands of jobs in a companywide restructuring.
"The actions we are taking will impact more than 4,000 people at a cost of $313 million in the quarter," Jeffrey Campbell, executive vice president and chief financial officer, said during a Jan. 21 conference call. "Total employee headcount will decline by a smaller amount, as certain of those reductions will partially be offset by jobs created elsewhere in the company ... the actions we are taking largely represent the continuation of our strategy to further increase the overall efficiency of our organization."
The gains from Amex's sale of Concur will offset the costs of its restructuring, the company said. Amex's revenue rose 7%, to $9.1 billion, and its net income rose 11%, to $1.4 billion.
Though Amex was upbeat about Concur, it was uncertain of how its co-brand partnership with Costco U.S. will play out. Amex lost the Costco account in Canada, leading to speculation that the card brand might also lose the account in the U.S., one that represents the company's second largest co-brand partner behind Delta Airlines (which it renewed last month).
Campbell did not provide details about the status of the Costco relationship, but did acknowledge the importance of the Costco deal, which has been in place since the 1990s.
Campell cited positive signs from OptBlue , the company's small-business acquiring program, though it did not show in Amex's fourth-quarter earnings.
"We are really pleased since we rolled out the program, with the acceptance in the acquirer world and signing up new merchants," Campbell said. "But this is a multi-year effort. It is proceeding really nicely and is right on track to make significant strides on merchant coverage over the next few years."
Discover did not announce any job cuts, but it shared other bad news during its Jan. 21 conference call. The Riverwoods, Ill.-based firm reported quarterly net income of $404 million, which was down from $602 million during the same period a year earlier. Adjusted net income, which excluded non-recurring items, was $553 million, or 8% lower than the previous year.
Discover cited three nonrecurring factors as drivers of its lower earnings. First, the company took a $178 million charge related to its decision to make it easier for credit card holders to redeem their cash rewards. Those changes were announced last year, so the one-time charge was anticipated by investors.
Second, Discover said that it took a $27 million impairment of the goodwill that was realized with its acquisition of the Discover Home Loans platform.
Third, Discover said that it took a charge related to its classification of a payment network that it owns, Diners Club Italy, as held-for-sale.
Discover launched its mortgage business in 2012 after acquiring assets from Tree.com. Last October, CEO David Nelms acknowledged that the move had not gone according to plan. He attributed the struggles to higher regulatory costs and the steep industry-wide decline in mortgage financing.
While there are many challenges to payment companies, the overall market will likely not face softness, said Jim Van Dyke, CEO of Javelin Strategy & Research.
"There's no question that we'll have ongoing upheaval, because the legacy industry is facing more challenges from upstarts than ever before, from both the mobile consumer in the case of Apple Pay and Square in the case of mobile point of sale," Van Dyke said.