First Data’s Alliance with BofA Helps Fuel Surge in Transactions

Boosted by its big new merchant alliance with Bank of America Corp., First Data Corp.’s transaction count surged 41% in the second quarter, the leading payment processor reported Tuesday. Factoring out the BofA alliance, First Data’s transaction volume from existing merchants grew a much less spectacular but still respectable 9%, while its processing business for card issuers continued to struggle.

Atlanta-based First Data processed 8.72 billon domestic merchant transactions in the quarter ending June 30 compared with 6.17 billion a year earlier. The alliance with BofA, called Banc of America Merchant Services LLC, or BAMS, was born in late June 2009. BAMS is largely filling the hole created when JPMorgan Chase & Co. ended the huge Chase Paymentech Solutions joint venture of which First Data owned 49% (Digital Transactions News, May 27, 2008).

First Data also reported that it now owns 51% of BAMS, and BofA 49%, because the unidentified controlling owner of a small partner in the original transaction, Rockmount Investments LLC, exercised its right to cash out. Rockmount owned a non-voting 5% stake in BAMS. The buyout required $213 million in net cash payments from First Data, which owned a 40% non-controlling interest in Rockmount.

Among First Data’s non-BAMS merchants, PIN-debit transaction growth slightly exceeded growth in signature-based debit and credit card volumes in the second quarter. PIN-debit’s lower average sale pushed down the average ticket 1% to $69.50. At a conference call with analysts, chief financial officer Ray Winborne said the decline was more the result of a change in the consumer spending mix than an actual cutback.

Revenues in the merchant segment, called Retail and Alliance Services, grew 13% to $853.7 million from $755.4 million in 2009’s second quarter. Core merchant services, which account for 70% of segment revenue, grew 9% while revenues from prepaid cards jumped 51% to $66.6 million. The unit that includes point-of-sale equipment and mobile payments saw revenues grow 19%. Even First Data’s check-processing revenues grew 12% to $93.2 million thanks mostly to new business from national merchants offsetting the decline in consumer check writing. First Data also says it added business from 13 independent sales organizations in the second quarter as well as five referral agreements and one revenue-sharing pact. Segment earnings before interest, taxes, depreciation and amortization (EBITDA) grew 6% to $344.9 million fro $325.9 million a year earlier.

Things weren’t so rosy over at the Financial Services division, which serves credit, debit and retail card issuers. Thanks to price compression to win and keep customers, and with credit card issuers still cautious, revenues fell 7% to $351.4 million and EBITDA dropped 28%. Some $40 million of the revenue decline came from the loss of the Washington Mutual card portfolio now owned by JPMorgan Chase. Domestic active bank and retail card accounts on file fell 2% to 113.8 million, though total domestic cards on file increased 4% to 674.4 million. Debit issuer transactions, adjusted for the loss of WaMu, increased 5%.

In all, First Data reported a net loss of $171.2 million in the second quarter, an improvement from its $195.9 million loss a year earlier, on total revenues of $2.61 billion, up 18% from $2.21 billion.

First Data, which was taken private in a huge leveraged buyout by Kohberg Kravis Roberts & Co. in 2007, announced last week that it is seeking permission from its lenders to restructure its debt. Part of the plan includes a $3.5 billion bond sale. First Data says it has $25.2 billion in debt that will mature from 2014 to 2016, including $12.1 billion in 2014 alone.