A Down-Market Strategy Can Revive First Data?And Maybe the Industry

10 Tipping Points for the Payments Industry

Part 9

The very existence of 17,000 financial institutions in this country defies most conventional economic logic, which says efficient markets usually consolidate and concentrate around the biggest and best participants. But in the payments realm, bigger is not always better. That's why 60% of the nation's demand-deposit accounts are in the hands of smaller banks and credit unions?still?while the top 10 players dominate most payment sectors, signature-based cards in particular.

The banking small fry tend to more than hold their own when it comes to deposits?which, after all, drive 90% of retail banking profits. And survey after survey shows consumers and small businesses alike relish the specialization and nurturing treatment they get from them. As the DDA has grown to become the center of the universe for payment streams, the opportunity for community banks and credit unions to stay in the game is the best it's been in years.

What's missing is help from a few, powerful friends. Oh, sure, Fiserv Inc., Metavante Corp., Fidelity Information Services Inc., and Online Resources Corp. have been equipping their banks and credit unions with small arms and tactical firepower to be competitive in payments. But the smaller banks still aren't getting much in the way of big weapons that can make a real difference?particularly in alternative payments where the eventual outcome is still in doubt.

When it comes to a “few, powerful friends,” the name on everyone's mind these days is good old First Data Corp. For more than a decade, the company has?for better or worse?pursued the elusive vision of being a technology-infrastructure provider that could balance the interests of both banks and merchants.

The banking portion of this vision has proved to be a disappointment. That's because the big banks realized they could process and manage their own transactions without First Data's help, and rejected the idea of leveling the playing field?a “service” they get in spades from regulatory agencies and the Fed. Although the company has moved down-market to offer more services to smaller financial institutions, the biggest weapon in its payments arsenal?the Star debit network?remains largely on the sidelines, often reacting to market changes instead of driving them.

Meanwhile, until recently, First Data also pursued big merchants as a primary focus. But the biggest merchants have banked their industry-changing fervor in favor of cutting individual deals with the bank card associations. They've left the fight for structural change in industry pricing and other competitive-market fixes to their smaller brethren, which are battling for survival in the courts. And they're pounding processors for more and more price breaks. So the other half of the First Data vision has suffered, too.

But with its reorganization just a year ago, the company placed renewed emphasis on the independent sales organization channel. Small wonder. This channel commands 20% of the industry's card transactions but produces as much as 65% of acquirers' gross profits.
Ed Labry, president of First Data Commercial Services, showed the way forward, crafting and deploying a successful breakout strategy focused on smaller merchants. “These guys generate a lot of margin, but they typically don't get treated very well,” Labry says. “Well, that's all changed now. We're going to show them that we care about them, and treat them like we value their business.”

Among several innovative initiatives Labry has introduced is a new ISO-oriented terminal that has Visa, MasterCard, American Express, Discover, PIN-debit, and Internet access all built in. It's being peddled to ISOs and agents across the country as the simplest, most complete way yet to accept electronic payments. And, it will enable the smallest merchants to migrate as easily as possible to new payment types and form factors.

Labry's down-market focus has First Data's merchant business humming with upside results. And there are signs of progress on the issuing side, too, including a bevy of stored-value programs that leverage the deposit relationships of local banks, customized rewards programs built around the DDA, and Star's recent aggressiveness in areas like PIN-less debit for bill payments and other new-channel applications.

But over the next few months, the question of whether First Data can lead the industry to a comprehensive new focus on products and services for everyone else in payments will hang in the balance as the company struggles to pick its next chief executive. The first priority, it would seem, is to pick a new boss who realizes that First Data's original vision didn't pan out with bigger players, but might still work with the rest of the industry. Selecting a business-as-usual chief executive, on the other hand, could keep this processing giant stuck in neutral, and could doom future profitability and innovation for the rest of the industry.

Prognosis: Years of effectively milking First Data and its acquisitions have done little to fuel its growth or improve its stock price. Investor demands for a breakout strategy to capture the company's rightful share of global growth in payments are reaching a crescendo. Wanted: A chief executive who can run with the ball in the open field. Wildcard: First Data's largest shareholders are talking up a leveraged buyout to better unlock the potential value and power of its assets. Imagine a First Data (and industry) set free from the shackles of unrealistic market expectations for a vision that didn't really fail, but was just aimed at the wrong target!
–Steve Mott