KKR-Controlled First Data May Escape Harm From Lower Fees, Analyst Says

First Data Corp., the payments processor controlled by KKR & Co., faces “generally neutral” impact from new U.S. rules that may cut debit-card transaction fees 84 percent, according to Credit Suisse Group AG.

A potential drop in revenue that the Atlanta-based company collects from retailers on the most profitable types of transactions may be offset by increasing its share of total fees, and by rules that may increase First Data’s ability to compete against Visa Inc., the world’s biggest payments network, wrote Arun Seshadri, a Credit Suisse analyst.

“Overall, the impact to FDC appears generally neutral,” Seshadri said in his Dec. 20 note to clients.

The Federal Reserve proposed earlier this month to cap so- called interchange fees at 12 cents per transaction. Networks now charge merchants an average of 1 percent of the purchase price, regardless of cost, and pass that money to banks that issue cards. The average debit interchange fee last year was 44 cents per transaction, or 1.14 percent of the purchase price, according to a draft of the proposed rules.

Interchange is part of the overall fees First Data charges merchants for electronic debit payments processing, the analyst wrote. Even with the reduction in interchange fees, First Data may be able to bolster revenue by increasing its share of the total fees charged to merchants, Seshadri said.

Market Share

New rules may also curb exclusivity agreements, which may help First Data improve its market share of 20 percent for debit-card transactions done with personal identification numbers, Seshadri’s report said. Visa’s network has half the market, he wrote.

Revenue may be reduced in other ways, Seshadri said. Because the Fed rules don’t distinguish between debit transactions authorized by PIN numbers and more lucrative purchases authorized by signature, the regulation “could create accelerated incentives for issuers as well as retailers to steer more transactions to PIN, which is significantly less profitable for FDC,” he wrote.

Chip Swearngan, a spokesman for First Data, and Steven Vames, a spokesman for Credit Suisse, declined to comment on the report. First Data said Dec. 16 it was still assessing the impact.

First Data’s $2.4 billion of 11.25 percent notes due in March 2016 traded yesterday at 86 cents on the dollar, up from 79.5 cents on the dollar on Dec. 1, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net

To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net; Rick Green in New York at rgreen18@bloomberg.net.

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