Who is First Data?
First Data Corporation, headquartered in Atlanta, Georgia, is a financial services company responsible for the processing and acceptance of domestic debit transactions. First Data’s STAR network is the largest interbank network in America, allowing it to dominate the financial sector. As of July 29, 2019, First Data was acquired by Fiserv, a Fortune 500 company specialized in financial services to banks.
First Data handles an estimated 45% of all card-based transactions in the United States, including those of gift cards. It processes an estimated 2800 transactions each second, transferring $2.2 trillion each year. In particular, they dominate a massive 80% of the market in both gas and groceries as of 2014, making them one of the most prevalent payment processors in the country. The company reports a net annual income of $1.47 billion with $12.05 billion in annual revenue based upon their 2017 data.
First Data Payment Processing History
Founded in 1971, First Data has gone through several overhauls and plenty of growth. Beginning as a payment processing service to the Mid-America Bankcard Association, it was the first processor of Visa and MasterCard credit cards by 1976.
In 1980, 80% of First Data was purchased by American Express Information Services Corporation, while purchasing the remaining 20% in 5% increments for the next several years. By 1983, First Data was owned by American Express.
In 1992, First Data Corporation separated itself from American Express and instead went public, selling shares to anyone who wanted to purchase them. By 1995, it merged with First Financial Management Corp., at which point, it was separated into three business units to serve all parts of the payment processing field. They served card issuers, the merchants that wanted to process card-based transactions, and consumers who wanted to use cards to pay for their transactions.
2001-2005 brought a major period of expansion while First Data began acquiring companies around the world. It managed to acquire several companies around the world, including PaySys in 2001, the STAR Network in 2004, and the decision to spin off Western Union into an independent company.
This period was followed by the privatization of the company in 2007 when Kohlberg Kravis Roberts bought out the company, causing the stock to be removed from the New York Stock Exchange. It was a highly leveraged purchase, financed with $24 billion in debt, but by 2015, First Data had its first profitable quarter in 29 quarters, the first since privatization.
In October of 2015, First Data returned to the public sector, selling 160 million shares at $16 each, to raise $2.56 billion. As debt was cleared out, they had more room for investments, and from 2016 on, focused on allowing more POS technology to be implemented via mobile device, allowing for card payments to be processed via tablets or mobile phones.
In January of 2019, First Data announced that Fiserve was acquiring the company via an all-stock transaction with a value of $2.2 billion to be finalized later in 2019. This finished processing on July 29, 2019.
What First Data Does
First Data is responsible for payment processing and settlement with debit and credit cards. Because only roughly 30% of transactions are paid in cash, it has become increasingly prudent for businesses, both large and small, to accept card payments. First Data provides this capability, allowing people to go to the store and move money from their accounts to that of the business as easily as possible.
First Data Payment Processing
Payment processing is the process by which money is moved from the buyer’s bank account to the seller’s bank account at the time of purchase via debit, credit, or gift card. It can happen either via direct card processing, relying on the customer’s plastic card to take the information, or it can happen indirectly via digital wallets kept on smartphone apps. While most retailers will take direct card payments, it is starting to become more common for indirect processing to be accepted as well.
The process by which this happens is simple: The cardholder initiates the transaction using their card or the unique combination of digits that refer to that specific card. This links the cardholder’s bank with that of the merchant–the business selling the goods that is being paid. The payment processor, in this case First Data, allows that transaction to be securely processed and captured by the merchant’s point-of-sale (POS) device to the bank responsible for the customer’s card.
When the cardholder’s information is entered into the merchant’s POS terminal at checkout, the data is encrypted for protection and sent to the payment processor. The processor then routes that data to the bank via the card association’s network, at which point the bank confirms that the cardholder has a sufficient balance to cover the sale while verifying the cardholder’s identity. Then, either an approval or a decline is sent back from the bank to the payment processor to be communicated to the merchant’s POS terminal.
With an approval, the transaction goes through and the sale is successful. However, before the money moves, the transaction must be settled. To settle, the merchant’s POS terminal then sends the approval to the payment processor so the processor can then reconcile the transaction. To do this, the processor deposits the transaction amount in the merchant’s bank, minus any fees, while deducting the purchase amount from the card-issuing bank. The card-issuing bank then removes the amount from the customer’s account to complete the process.
Fiserv’s Acquisition of First Data
In January 2019, First Data was purchased by Fiserv in one of the largest acquisitions in the financial technology sector. During the trade, shares of First Data went up 17.1%. In this trade, Fiserve shareholders held 57.5% of the company with First Data shareholders holding the remaining 42.5%.
The purpose of this acquisition was to allow Fiserv to benefit and combine leading technology capabilities, allowing for further development. Through merging, financial technology could be pushed further and become more streamlined. The primary benefits of this merge were both strategic and financial.
- Merge of merchant and cash management capabilities between Fiserv and First Data to allow for a more cohesive, streamlined experience as they are linked.
- Enhanced payment capabilities granting merchants the capability to accept several different forms of payment.
- Both companies already have complementary products that combine well to provide more solutions for businesses, merchants, and consumers.
- The merge is expected to create at least $500 million in revenue over a 5-year period, with incremental growth expected due to increased client benefits.
- The transaction was believed to boost adjusted earnings per share by over 20% the first year after closing.
- There should be significant free cash flow generated, with upwards of $4 billion by the third year after closing.
- By merging, there is an expected $900 million in savings over five years due to being able to eliminate and merge redundant corporate structures to allow for further optimization and improvement.
Upon closing, the combined entity was known as Fiserv. Jeffery Yabuki, the Fiserv President remained as the Chief Executive Officer of the new company, while Frank Bisignano, the CEO for First Data received the role of President and Chief Operating Officer.
First Data has several competitors, but the primary ones are WorldPay and TSYS. 2019 saw three major financial mergers. Fiserv purchased First Data for $22 billion while Global Payments purchased TSYS for $21.5 billion. FIS purchased WorldPay for $43 billion.
Like First Data, both WorldPay and TSYS offer the ability to process and settle payments. All three seek to hedge against the rapidly-growing agile startups that offer similar services on smaller scales, such as Square, PayPal, and other payment processors. They are the top three global networks for payment processing on the market.
WorldPay is one of the largest worldwide direct payment processors, with a major presence in 40 countries. Using this payment processor allows for merchants to process and settle payments. It is known for working with businesses of all sizes to provide a means of card-based transactions safely, securely, and easily.
Worldpay offers options for both small businesses and large enterprises, allowing products for businesses of any size. They are scalable and international, allowing for users to process payments easily and all within one single system. They offer acceptance for many different types of cards, as well as digital wallets, and offer both online and in-store terminals for purchases.
Like First Data, TSYS offers a method of processing payments quickly. As a global provider for financial services, this company processes payments, provides prepaid debit cards, payroll cards, and demand deposit accounts. TSYS claims the role of the largest third-party processor for banks in the US. They cover both front-end and back-end processing, managing payments for both cardholders and merchants.
TSYS offers a comprehensive processing solution that will manage the entire process for you. However, this comes at a cost. They do not disclose their pricing online, meaning that contracts must be written up to negotiate the charges, and they may have additional fees.