Payment processor First Data Corp. reported late Wednesday that it has extended its joint venture with Wells Fargo & Co.’s Wells Fargo Bank, which is one of the nation’s largest merchant acquirers and an important contributor to First Data’s payment volume and profits, until the end of 2024.
Wells Fargo Merchant Services handled $400 billion in processing volume last year to rank No. 5 among acquirers, according to data from Omaha, Neb.-based consultancy The Strawhecker Group. Under the joint venture, First Data provides processing technology while Wells provides merchant leads, sales support, and sponsorship for numerous independent sales organizations.
“Wells Fargo is a great institution and together we will ensure that WFMS continues to provide cutting edge technology and best-in-class service to clients,” Frank Bisignano, chief executive of New York City-based First Data, said in a news release. “We look forward to driving growth.”
Danny Peltz, head of Treasury, Merchant, and Payment Solutions at San Francisco-based Wells Fargo, said in the same release that “we are pleased to extend our long-standing relationship with First Data. Together, we are committed to delivering the best services and technology to merchants of all sizes.”
While another First Data joint venture, Bank of America Merchant Services with partner Bank of America Corp., had more volume last year, $780 billion, according to The Strawhecker Group, the Wells Fargo partnership is important enough financially for First Data that the processor breaks out key numbers about it in its annual report to the Securities and Exchange Commission. It’s the only one of First Data’s several bank joint ventures that gets such treatment, because it generates more than 20% of First Data’s pre-tax earnings from continuing operations.
According to the filing, Wells Fargo Merchant Services had net income of $438.2 million last year, down 16% from $523.4 million in 2016. Revenues net of interchange and payment card network fees fell 7% to $845.8 million from $906.2 million in the prior year. Some 60% of 2017’s net income, $262.9 million, went to Wells, while 40%, or $175.3 million, when to First Data.
The filing gives no reason for the revenue and profit decline at Wells Fargo Merchant Services, but it notes that so-called equity earnings through all of First Data’s merchant-alliance partners totaled $222 million last year, down almost 15% from $260 million in 2016. The decrease was “due to a decline in the results of our North American joint ventures driven by significant decline in leadflow,” the report says.
That’s a reference to reduced merchant referrals from bank partners, a problem First Data executives have discussed on recent quarterly earnings calls and say they’re addressing, in part through digital onboarding of new merchants. In a separate filing, First Data says equity earnings in affiliates rose 5% year-over-year to $60 million in the quarter ended June 30.
Banks remain one of the most important and profitable sales channels for merchant processors despite the rise of integrated software vendors and other sources of new merchant accounts in recent years, according to Jared Drieling, senior director of business intelligence at The Strawhecker Group.
“Although slightly decreasing over the last three years, bank-sourced merchants represent almost a third of all new merchants in the industry,” Drieling tells Digital Transactions News by email. “In addition, bank-channel merchants outperform other non-bank channels in key performance metrics such as attrition or growth. Most importantly, the bank channel’s merchant lifetime net revenue is twice that of non-bank channel.”