Back at First Data’s Helm, Duques Faces Major Growth Challenges

The new chief executive of First Data Corp. is likely to bring renewed focus to the processing giant's merchant-acquiring business and move quickly to resolve the drag on growth represented by the company's processing business that supports card issuers, say industry observers. At the same time, Henry C. (Ric) Duques, who took over yesterday after Charles Fote abruptly resigned the post, faces a difficult challenge sparking growth at the company he led for a decade until turning the helm over to Fote in January 2002, experts say. “First Data is a big, lumbering company having a difficult time keeping up with the payments industry,” says Steve Mott, principal at BetterBuyDesign, an industry consultancy in Stamford, Conn. Fote, 56, stepped down for what the company characterized as “personal reasons.” He remains chairman until year's end and a board member until the 2006 annual meeting. He will also stay on as a consultant for 18 months. The long-time First Data veteran had come under increasing fire from investors this year as the company's stock languished. Most recently, First Data cut its earnings guidance for the year, further riling Wall Street, as the impact of major client defections in its card-issuing and PIN debit businesses began to be felt. Among Duques's first moves, say observers, will be to unload the card-issuing business, probably through a spin-off or an outright sale. “I don't think Ric will take a year to resolve the issuing business,” says Richard N. Speer, chief executive of Speer & Associates Inc., an Atlanta consultancy. First Data earlier this month brought in Morgan Stanley to review options for the business, which processes 400 million card accounts for 1,500 issuers but has been hit by major bank defections and has taken on an increasing share of lower-margin private-label accounts (Digital Transactions News, Nov. 9). While transaction-processing revenue for First Data's other businesses is growing, that for the card business shrank 4% in the first nine months of 2005, to $1.19 billion. Profit in the unit fell 11% over the same time, to $344 million. “At the end of the day, Fote was under tremendous pressure because he had a very problematic card-issuing business that has been a drag on them and a drag on their strategic direction,” says Speer. In a conference call with analysts after taking over, Duques said the review of the issuing business will continue as planned , but conceded he may push things along. “If anything I will accelerate that process,” he said during the call. “It has been a drag on growth.” The acquiring business, by contrast, he characterized as “more than fine,” adding he plans to changes to the “current structure” of that business, in which transaction-processing revenue grew 10% this year through Sept. 30, to $2.22 billion. But Speer figures changes are on the way in First Data's acquiring business. “With Fote's departure you'll see a crisper focus on the acquiring business,” he says. “Merchant acquiring has remained very healthy [for First Data] but it's very competitive. [Duques] has got to be able to grow the thing internationally to grow shareholder value.” Still, First Data and its Merchant Services unit can rely on scale advantages, both Mott and Speer point out. First Data now holds a 49% stake in the giant Chase Paymentech Solutions LLC processing operation, a result of the merger of two acquiring ventures it held interests in with JPMorgan Chase & Co. and Bank One Corp., which merged last year. First Data's acquiring alliances with banks, a strategy the company embarked on in the early 1990s, have been successful for the company, Speer says, and there may be more such deals in the offing as banks look for ways to return to the acquiring business. “The alliance strategy at the end of the day was a brilliant strategy, brilliantly executed,” Speer says. But the 62-year-old Duques, who has signed on to run First Data for two years while the company searches for a permanent successor to Fote, may have to act fast to put together a growth strategy, something Mott says Fote could not do. “Duques knows the business, but a lot of things have changed since he left in 2002,” says Mott (Duques remained a member of the company's board of directors until 2004). And, though First Data has been an aggressive buyer of related businesses under Fote, execution following the acquisitions wasn't always evident, says Speer. “They've done a very poor job of integrating those kingdoms and fiefdoms,” he notes. First Data now must contend with a host of issues that have sprung up just in the past two years or so, including a spreading merchant revolt over interchange fees, new payment technologies at the point of sale and online, and challenges from competing processors in the high-growth PIN debit business, in which First Data owns a major stake through its 2003 acquisition of Concord EFS, whose Star network has lost several major debit issuers. The defections of the Star clients depressed third-quarter revenue growth for the company's merchant-services unit. “It will be interesting to see where [Duques] comes out [on these issues],” Mott says. “If he doesn't articulate some strategies that put First Data back in first gear, people are going to say nothing happened.” For his part, Duques in the conference call indicated he plans few major changes at First Data, but any that happen will come soon. “I'm up to my eyeballs in 2006 planning,” he said. Still, he sounded dissatisfied with First Data's current position in its various processing markets. “I'm focused on growing this business, on getting back to where we've got some trust and confidence in our business in the marketplace,” he said. He quickly added the loss of confidence was largely unwarranted, a result of misperceptions in the investment community about the company's card-issuing business, about increasing competition in the money-transfer business (First Data owns Western Union), and about the integration of the Concord operation.