All U.S. merchant processors likely will benefit from anticipated reductions in debit card interchange rates once the Federal Reserve Board next year finishes its rate-setting task mandated by the Dodd-Frank financial-reform bill President Obama signed into law last week. But they will need to be careful in how they share their savings, Paul Garcia, chairman and CEO of Global Payments Inc., told analysts July 27 while discussing the company’s fiscal fourth quarter earnings.

Merchant acquirers and processors include interchange as part the discount rate they charge retailers for card acceptance that also takes into account processing, risk-management and assorted other service expenses. Should the interchange portion of the processors’ expenses drop, merchants will expect their discount rates to drop as well.

Competition among the hundreds of service processors will dictate to what extent merchants will receive the benefits of lower interchange rates, Garcia said. “It’s clear that big merchants, especially those with pass through (no processor margin), will get it all. Smaller merchants are not going to get as much,” he said. “If someone gets greedy, I will take their business; if I get greedy, they will take mine.”

Though both signature- and PIN-debit rates likely will drop, signature-debit rates likely will be affected the most, and that represents 50% of the U.S. processing volume, Garcia predicted. “PIN-debit already is highly competitive,” he said. “The bigger pony” is in the signature-debit market.

Card issuers will decide what changes subsequently result in consumer card use, Garcia said. “I’m not suggesting this, but they may offer additional benefits for people to use a credit card, but not necessarily, and so that’s another piece of this that needs to work through,” he said. “The merchant only has so much opportunity to actually influence the consumer payment; that’s the big fallacy in this whole discussion. … At the end of the day, the consumer’s going to pick, and what’s in their wallet may be more determined by their financial institution. So there’s a little more chapter to be played out there.”

Also during the call, Garcia disclosed an extension of Global Payments’ merchant-processing agreement with CIBC in Canada, where the processor expects to complete the conversion to its G2 front-end authorization service from its legacy system by the end of fiscal 2012. The conversion in the U.S. should be complete by September, resulting in $6 million in annualized cash savings, with annual depreciation expense of about $3 million, he said, noting the conversion to the G2 system in the UK should be finished by the middle of 2013.

Garcia also announced that Global Payments expects to begin providing China UnionPay card-acquiring services to Chinese merchants by the end of this summer.

As a company, Global Payments reported net income for the quarter of $45.9 million, down 31.5% from $34.9 million. Revenue totaled $425.1 million, up 15.5% from $367.9 million. Global Payments sold its funds-transfer business in May, using the $85 million in proceeds to repurchase company stock.

North American Merchant Services Revenue totaled $323.7 million, up 17.7% from $275 million. U.S. revenue totaled $243 million, up 17.7% from $206.5 million. In Canada, revenue grew by 17.8%, to $80.7 million from $68.5 million.

International Merchants Services revenue totaled $101.4 million, up 9% from $93 million. Revenue from Europe totaled $72.2 million, up 2.8% from $70.2 million. Asia-Pacific revenue totaled $29.1 million, up 28.2% from $22.7 million.

In a research report Darrin D. Peller, an analyst at Barclays Capital, cited as positives for Global Payments favorable revenue trends in the U.S. and Asia and the new referral arrangement with CIBC in Canada, “which alleviates some uncertainty around growth and attrition in Canada.” However, the downsides include continued growth challenges and margin pressure in Canada and the loss of a material merchant client in the U.S. business, he said. Garcia did not disclose the merchant’s name.

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