First Data stumbles again in the US (FDC)

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While First Data posted better-than-expected results in its third quarter as a public company, revenue in the largest US-based payments processor's Global Business Solutions (GBS) unit was flat year over year (YoY) on a constant-currency basis.

That's a worrying sign because GBS is First Data's biggest segment and challenges in North America, its largest market, were to blame for the lackluster performance. 

North American revenue isn’t improving despite transaction growth.

• The segment is declining. In both Q1 and Q2 2016, First Data's transactions in the North American segment grew by 7%, but revenue declined by 2% constant currency YoY as a result of lower implied revenue per transaction. This reflects underperformance in the company's direct small and mid-size business (SMB) portfolio relative to other parts of GBS. It’s problematic that despite increased card usage and growing transaction totals, the firm’s revenue in its largest segment isn’t improving. 
• That could indicate that ongoing issues are broader than they were in the past. In Q1, First Data CEO Frank Bisignano noted that the firm’s North America declines were largely due to attrition within its small-business portfolio, which pushed First Data to focus on US small business initiatives to grow. But the firm’s consistent mediocre results in the segment might point to broader issues in the way First Data works with its merchant partners in the US.

But First Data continues to focus on an SMB turnaround plan, which should improve North American merchant business in the second half. Bisignano identified a few of the firm’s plans:  

• Lower attrition: First Data invested in better contact center technology in order to improve its customer service offerings and better serve the merchants with which it works.
• Merchant activation: First Data has seen “high single-digit” growth in newly activated merchants in the first half of 2016, as a result of increased sales productivity, lower attrition, improved activation rates, and new partnerships, according to Bisignano. The firm also appears to be moving into new merchant segments — for example First Data recently launched a mobile point-of-sale (mPOS) and software program targeted at sports and entertainment vendors, which could help them try to dominate market share in that segment.  
• New partnerships:  First Data added four acquiring partners — BBVA, First Tennessee, Zions Bank, and Silicon Valley Bank (SVB). The SVB partnership in particular, which expands First Data’s relationship with SVB clients to include e-commerce and cross-border processing, could give the bank access to key clients in the fast-growing tech space. And in addition to offering potential volume increases, it also gives First Data a behind-the-scenes look at trends in the tech space, which could help the firm build unique products that serve merchants in new ways.

First Data is one player in a much larger payments ecosystem, which includes acquirers and processors, issuers, card networks, gateways, and more.

Evan Bakker and John Heggestuen, analysts at BI Intelligence, have compiled a detailed report on the payments ecosystem that drills into the industry to explain how a broad range of transactions are processed, including prepaid and store cards, as well as revealing which types of companies are in the best and worst position to capitalize on the latest industry trends.

Here are some key takeaways from the report:

• 2016 will be a watershed year for the payments industry. Payments companies are improving security, expanding their mobile offerings, and building commerce capabilities that will give consumers a more compelling reason to make purchases using digital devices.
• Payments is an extremely complex industry. To understand the next big digital opportunity lies, it's critical to understand how the traditional credit- and debit-processing chain works and what roles acquirers, processors, issuing banks, card networks, independent sales organizations, gateways, and software and hardware providers play.
• Alternative technologies could disrupt the processing ecosystem. Devices ranging from refrigerators to smartwatches now feature payment capabilities, which will spur changes in consumer payment behaviors. Likewise, blockchain technology, the protocol that underlies Bitcoin, could one day change how consumer card payments are verified.

In full, the report:

• Uncovers the key themes and trends affecting the payments industry in 2016 and beyond.
• Gives a detailed description of the stakeholders involved in a payment transaction, along with hardware and software providers.
• Offers diagrams and infographics explaining how card transactions are processed and which players are involved in each step.
• Provides charts on our latest forecasts, key company growth, survey results, and more.
• Analyzes the alternative technologies, including blockchain, which could further disrupt the ecosystem.

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