New Retirement Funding Plan Latest Effort by Loss-Racked First Data To Control Costs

In an effort to free up cash to rebuild its struggling business, payment processor First Data Corp. will stop funding its 24,000 employees’ retirement plans with cash and instead provide stock grants to all employees.

New First Data chief executive Frank Bisignano announced the change Monday in a memo to employees. “Given our challenged current profitability, it is necessary at this time and will allow us to fund investment in innovation and new product development,” Bisignano said in the memo, whose distribution was first reported today by The Wall Street Journal.

A spokesperson for Atlanta-based First Data confirmed the changes, which take effect Jan. 1. “Frank has said he intends to turn around FDC’s performance; the company lost $700 million in 2012, after tax,” the spokesperson says by e-mail. First Data also lost $516.1 million in 2011 and $1.02 billion in 2010, according to its 2012 annual report.

First Data’s U.S. employees currently get a 3.5% company match for their 401(k) retirement plans. Next year, American workers will get restricted stock awards while their foreign counterparts, except in a small number of countries where equity grants may be illegal, will get restricted stock units.

Employees won’t be able to sell their retirement-plan stock until three to six months after First Data, which is owned by legendary Wall Street buy-out firm Kohlberg Kravis Roberts & Co., has an initial public offering for the processor.

Compensation experts told the Journal that broad-based stock compensation rather than mostly cash funding for retirement plans is unusual. But the changes will free up an estimated $60 million in cash for First Data next year and up to $100 million by 2017.

While it’s by far the payment industry’s largest processor by revenues—$10.7 billion last year—First Data has struggled to make a buck since its $29 billion leveraged buyout in September 2007 by KKR. The ink on that deal was hardly dry when the economy went bust, crimping revenue-generating transaction volumes. Transaction growth has since recovered, but industry competition, always intense, is tougher than ever with a new corps of tech-oriented online- and mobile-payments companies now on the scene.

Plus, First Data has $23.1 billion in debt on its books as a result of the KKR buyout, according to securities-rating agency Fitch Ratings. Debt service will require cash interest payments of $1.8 billion this year and a similar amount next year, according to a presentation First Data provided with its first-quarter earnings report. The company, however, faces no big principal repayments until 2016, when $5.24 billion in debt matures.

Jason Paraschac, a senior director at New York City-based Fitch Ratings who assesses First Data’s debt securities, says Bisignano’s plan to direct more cash into the development of new payments products is a good one, especially if it results in services that attract smaller merchants, which generate higher per-transaction margins for processors than larger ones. “I think that’s an important part of their business going forward,” Paraschac tells Digital Transactions News. “It’s something they need to do because they are facing increased competition. Smaller merchants are really where the payment processors make most of their profit.”

But even with new products, payment processors traditionally have struggled against a mindset of their customers—merchants, independent sales organizations, and financial institutions—focused mostly on pricing. “The nature of the processor business is the race to have the lowest cost structure,” Gil Luria, a managing director at Los Angeles-based Wedbush Securities who follows the processing industry, says by e-mail. “There is limited differentiation of the service and so FDC’s advantage has been its scale and cost structure. In that light, [it is] not too surprising they are finding new ways to cut costs.”

The First Data spokesperson would not say if or when an IPO would occur, although former chief executive Jonathan Judge told Digital Transactions magazine last September that the company needed to have a “de-levering event” at some point.

The spokesperson describes employee reaction to the change as “mixed—enthusiasm for ownership; concerns from U.S. employees about the 401(k) suspension in 2014.”

The memo came just days after First Data hired Guy Chiarello as president. Chiarello, like Bisignano, was a senior executive at JPMorgan Chase & Co. He could receive at least $13.5 million in salary, bonuses, and incentive payments in his first two years at First Data. His pay includes a $6.5 million signing bonus subject to a so-called clawback provision if he resigns or is fired for cause within 24 months.