U.S. EMV Conversion Boosts First Data’s Acquiring and Issuing Segments

By Jim Daly

First Data Corp. on Wednesday reported modest second-quarter growth in its merchant-acquiring and issuer-processing segments thanks in part to the U.S. conversion to EMV chip card payments and reduced expense growth.

In all, First Data reported a net loss of $26 million, a 24% improvement from the $34 million loss in 2014’s second quarter. Revenues grew 1% to $2.87 billion. Cost of services fell 2% to $655 million and total expenses were flat at $2.46 billion.

The heavily leveraged processor, which is controlled by buyout firm Kohlberg Kravis Roberts & Co. and has $21.7 billion in long-term borrowings on its balance sheet, announced earlier this month that it is considering an initial public offering of stock that would reduce its debt. First Data is now in a quiet period as it prepares to sell the possible IPO to Wall Street, and two company executives made no mention of it in a brief conference call Wednesday to review the second-quarter financial results.

First Data has reorganized its operating units and no longer breaks out its international division separately. The company’s largest unit remains its merchant-acquiring operation, now known as Global Business Services. GBS brought in $1.06 billion in the second quarter, up 2% as reported and up 5% on a constant-currency basis, and accounted for 60% of First Data’s $1.77 billion in total segment revenues.

North America, meaning the United States and Canada, generated $835 million in revenues, or 75% of all GBS revenues, a 3% increase due largely to more hardware sales. Many U.S. merchants are installing EMV chip card readers in advance of the card networks’ Oct. 1 EMV liability shift. Also, merchants are buying more suites of First Data products, according to Michael Neborak, executive vice president and director of finance.

First Data paid $161 million in commissions to independent sales organizations in the quarter, up 7% from $150 million a year earlier. ISOs are major distributors of First Data products and services to small and mid-sized merchants.

The company’s segment that processes credit card accounts for banks and credit unions is now known as Global Financial Solutions. GFS generated $353 million in the second quarter, down 3% on a reported basis but up 3% when adjusted for currency changes. Some 59% of segment revenues came from North America and about a third came from the Europe-Middle East-Africa region.

North American revenues of $207 million were up 5% thanks to internal growth and more EMV card personalization income. U.S. credit and debit card issuers are sending customers hundreds of millions of chip cards this year.

“Our EMV production has picked up from the first quarter as the liability shift in October moves closer,” Neborak said.

A third segment called Network & Security Solutions, which includes the Star electronic funds transfer network, prepaid cards, and the TransArmor data-protection system and other services, generated $356 million in revenues, up 6%. All but 1% of NSS revenues come from North America, according to Neborak. Due to new business, EFT network revenues rose 6% to $123 million.