An amendment that would give the Federal Reserve Board authority to control debit card interchange rates could have a “neutral to slightly positive” impact on First Data Corp., an executive at the Atlanta-based payment processor told analysts during a May 14 conference call to discuss first quarter earnings.
The U.S. Senate approved the amendment May 12 (see story). The amendment is part of the Restoring American Financial Stability Act being considered by the Senate.
Because First Data does not earn revenue from interchange, Ed Labry, president of retail and alliance services, expects the legislation, if approved, to have a minimal impact on the processor. “It’s a bill that’s not law yet, and it’s subject to probably many changes along the way,” he said. “We’ve always stated that interchange is not a component of our revenues, and right now, as we look at it, [the amendment] could be neutral to slightly positive for First Data.”
Labry also does not see the amendment negatively affecting consumer choice for debit cards, noting it actually might spur more debit card use. “It’s too early to tell, and we’ll see what happens,” he said.
Even if the Fed cuts debit interchange rates, there is no guarantee First Data would reduce the discount rate it charges merchants to process debit transactions that includes interchange and processor fees, suggests David J. Koning, a senior research analyst at Milwaukee-based Robert W. Baird & Co. The amendment does not address discount rates.
“First Data might not reduce the total merchant discount fee it charges merchants by the entire reduction in interchange, meaning First Data potentially could earn more revenue from a merchant,” Koning says.
First Data’s first-quarter results suggest consumer spending at merchants is improving, even without the legislation. The processor says the number of transactions processed by its retail and alliance services business grew 9% during the quarter compared with the same period last year, but it did not provide actual transaction tallies.
Revenue per transaction was down during the quarter because of price compression and because transaction growth among national merchants and independent sales organizations outpaced growth among First Data’s direct merchants, the company says.
For the three-month period ended March 31, First Data generated $2.4 billion in revenue, up 14.3% from $2.1 billion during the same quarter a year ago. The primary driver for the revenue growth was from the Bank of America Merchant Services LLC joint venture it has with Charlotte, N.C.-based Bank of America (see story).
The processor, however, reported a $240.1 million loss for the quarter, up slightly from the $231.3 million it reported losing a year earlier. First Data’s financial results point to a 28.7% increase, to $759.1 million from $589.6 million, in its expenses for reimbursable debit network fees.
All but one of First Data’s divisions experienced revenue growth during the quarter. The company’s retail and alliance services unit, which includes its direct and independent sales organization business, earned $737.2 million in revenue, up 6.7% from $691.2 million.
First Data says it added 14 referral partners and 21 ISOs and garnered three revenue-sharing agreements during the quarter. The processor works with more than 700 ISOs, according to Brian Goudie, First Data senior vice president of partner sales.
First Data’s international business revenue grew by 15.1%, to $391.7 million from $340.2 million.
The financial services division, which processes transactions for issuers, experienced a 7.1% decrease in revenue, to $346.1 million from $372.6 million. First Data attributed the decline to the termination of a services agreement with Washington Mutual Inc.