First Data’s Acquisitions Perk Up as Processor Hunts for Revenue-Generating Tech Partners

Leading payment card processor First Data Corp. on Tuesday announced it had bought Perka Inc., a startup that provides smart-phone-based loyalty programs for merchants. The Perka buy comes just a few weeks after First Data unveiled a tablet-based point-of-sale system from Clover Network Inc., another startup that it quietly bought last December.

The recent acquisitions mark a sharp change for First Data, which once was a big buyer of independent sales organizations and merchant portfolios. The processor scaled back its acquisitions after its 2007 leveraged buyout loaded it up with more than $20 billion in debt. But now First Data is prowling Silicon Valley and other places where it might buy tech companies that can help it bring new products and services to market in a hyper-competitive merchant-acquiring industry.

Speaking with analysts Tuesday morning at First Data’s third-quarter earnings call, chief financial officer Ray Winborne said the Perka buy is one of the first fruits of a strategy by First Data’s new senior-management team headed by chief executive Frank Bisignano to grow revenues through acquisitions of promising startups. Bisignano, a former top executive at JPMorgan Chase & Co., in July named former JPMorgan Chase chief information officer Guy Chiarello as company president.

“The connections [Chiarello’s] got, certainly on the West Coast, have been incredibly beneficial,” said Winborne. “We are developing product with companies that, you know, two, three years ago might not have known who First Data was because we didn’t have that kind of interconnectedness with some of these smaller startups. So that’s been a big improvement and it’s really going to help us as we move forward on that top line.”

First Data’s acquisition of Clover for $56.1 million actually pre-dated the arrival of Bisignano. Still, the processor was not exactly top of mind at Perka, a two-and-a-half-year-old company with operations in Portland, Ore., and New York City, until First Data approached Perka this summer, chief executive Alan Chung tells Digital Transactions News. “I never thought much about First Data; First Data is not a household name unless you’re in the [payments] business,” he says.

But Chung, who previously sold startups to Sun Microsystems, AOL, and Facebook, says he was “pretty excited” by “this new, innovative First Data.” And he also was excited by First Data’s potential ability to vastly expand his client base, which currently consists of about 1,000 merchants with close to 1,400 locations in all 50 states and a few foreign outposts, notably Ireland and the United Kingdom.

“It makes my job a lot easier,” Chung says. “They have existing relationships with 6.2 million merchants, and a good number of them are in the SMB [small and mid-sized businesses] space—and that’s our sweet spot.”

Perka provides loyalty programs that merchants can offer to their customers, including the Perka Punchcard and Perka Flexpoints for retailers and sit-down restaurants. The programs run on Android smart phones and Apple’s iPhone. Perka’s systems also work on older mobile phones through text messaging. The applications also provide analytics to the merchant, with pricing set on a monthly or annual basis starting at $35 per month.

First Data and Perka did not reveal financial terms of the acquisition. Perka will operate as a standalone subsidiary of the Atlanta-based processor. “That’s part of First Data’s new vision of being innovative and agile; it’s the same way Clover has been operating,” says Chung. “It’s a very attractive structure.”

Meanwhile, First Data reported a third-quarter loss of $219.5 million, up 4% from a $212 million loss a year earlier, on revenues of $2.17 billion, up 1% from $2.67 billion. But adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 3% to $627 million. The company paid $566 million in cash interest on its massive debt.

Pricing pressures and other factors caused revenues in First Data’s biggest segment, Retail and Alliance Services, which includes its big merchant-acquiring operations, to increase just 1% to $917 million even though transaction volume grew 7%. Average revenue per transaction fell 6%, but total prepaid card processing revenues increased 12%.

Rival acquirer Vantiv Inc. this month reported that it will be doing some merchant processing for First Data client Wal-Mart Stores Inc., the world’s largest retailer. But Winborne said he expects no serious financial harm from the move, which he attributed mostly to Wal-Mart’s desire to have a back-up processor should First Data’s service be disrupted. “Most of these guys [large retailers] would like to have a redundant processor … that part is not a surprise to us,” he said.

Revenues were flat at $346 million in First Data’s Financial Services unit, which provides processing and related services for card issuers, but segment EBITDA increased 9% to $163 million. Debit card issuer transactions, including gateway transactions, totaled 2.9 billion, off 4% from 3 billion in 2012’s third quarter.