Filed by First Data Corporation
pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12
of the Securities Exchange Act of 1934
Commission File No: 001-31527
Subject Company: Concord EFS, Inc.
This communication is not a solicitation of a proxy from any security holder of
First Data Corporation or Concord EFS, Inc., and First Data Corporation and
Concord EFS, Inc. will be filing with the Securities and Exchange Commission a
definitive joint proxy statement/prospectus to be mailed to security holders and
other relevant documents concerning the planned merger of Concord EFS, Inc. with
a subsidiary of First Data Corporation. WE URGE INVESTORS TO READ THE DEFINITIVE
VERSION OF THE JOINT PROXY STATEMENT/PROSPECTUS AND ANY OTHER RELEVANT DOCUMENTS
TO BE FILED WITH THE SEC, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION.
Investors will be able to obtain the documents free of charge at the SEC's
website, www.sec.gov. In addition, documents filed with the SEC by First Data
Corporation will be available free of charge from First Data Investor Relations,
6200 S. Quebec St., Suite 340, Greenwood Village, CO, 80111. Documents filed
with the SEC by Concord EFS, Inc. will be available free of charge from Concord
Investor Relations, 2525 Horizon Lake Drive, Suite 120, Memphis, TN, 38133.
First Data Corporation and its directors and executive officers and other
members of its management and employees, may be deemed to be participants in the
solicitation of proxies from the stockholders of First Data Corporation in
connection with the merger. Information about the directors and executive
officers of First Data Corporation and their ownership of First Data Corporation
stock is set forth in the proxy statement for First Data Corporation's 2003
annual meeting of stockholders.
THE FOLLOWING IS A TRANSCRIPT OF A CONFERENCE CALL OF FIRST DATA CORPORATION
HELD ON THURSDAY, JUNE 12, 2003:
David Banks: Good afternoon, everyone and welcome. I'm David Banks, Senior
vice president of Investor Relations for First Data. We're glad to see
that many of you were able join us here in London for our Second
Annual International Investor Day. This is about twice the attendance
we had last year. If we can equate those growth rates to growth rates
of First Data, we'll be in good shape.
With me today are Charlie Fote, our Chairman and CEO, Pam Patsley,
President of First Data International, and Bill Thomas, President of
Western Union, International.
At lunch, you may have met some of our other Executive Committee
Members, as well as people who help manage our international
businesses. Charlie and Pam will introduce some of them, momentarily.
These individuals will be available for a few minutes of informal
Q-and-A, at the conclusion of this presentation. We'll also have
several members of our management team at dinner, tonight, for those
of you who are joining us, there.
Please note in the information you were provided with that our dinner
venue has changed. We're now dining at the Bluebird Restaurant. I
understand that that's between 20 and 30 minutes from here. We'll
start cocktails at 6.30 and we'll have dinner immediately following. I
want to add one quick reminder, here. We will release our 2nd quarter
earnings on July 17th. I'd mentioned that, at one point, but I still
have been getting some questions on that. It's July 17th.
1
Today's call is being recorded. Our presentation is available on our
website, at www.FIRSTDATA.COM. A replay will be available beginning at
8 AM Eastern Time tomorrow. We'll file a transcript of the call with
the SEC.
All statements made by First Data officers on this call are the
property of First Data, and subject to copyright protection. Recording
replay or distribution of any transcription of this call is
prohibited, without the express written consent of First Data.
I want to remind you that our comments include forward-looking
statements. I ask that you refer to the cautionary information in our
2002 10K. Or find a complete copy at the back of today's presentation
deck.
This communication is not a solicitation or proxy from any security
holder of First Data or Concord EFS. The companies will be filing a
joint proxy with the SEC to be mailed to security holders. You'll see
a complete version of the non-solicitation language in today's
presentation deck.
Now let me walk you through the agenda for the day. Since a sizeable
portion of the audience here is just getting acquainted with the First
Data Story, Charlie asked that I spend a few moments providing a
quick, basic overview of First Data and our primary businesses. For
you First Data veterans, I'll try to move quickly.
Charlie will spend a few minutes briefly introducing the team, and
providing a business update. Bill Thomas will spend about 10 minutes
highlighting just a few things about how our Western Union
International business is performing, and illustrating how our Western
Union team around the world is working in tandem with First Data
International, to pursue joint opportunities.
Pam Patsley will then build on this discussion, and provide a broad
update on the First Data International business she's been leading for
a little more than a year, now. Then we'll open it up to questions.
Joining us at that time will be Christina Gold, President of Western
Union, and Scott Betts, President of our Merchant Services unit. Scott
is also leading the integration efforts for our pending Concord
merger. We've allotted about two-to-two and a half hours for today's
presentation and Q-and-A. We should finish sometime between 3 and
3.30, local time. By that time, hopefully our friends in the US who
were unable to join us in person today will be working on their second
cup of coffee.
To the business. In simple terms, First Data provides millions of
access points around the world to enable the movement of money. From
consumers to other consumers, from consumers to businesses, from
businesses to governments. For transactions that occur in real-time on
a prepaid basis, through online and offline mechanisms, or with a
built-in float period. We are absolutely positioned for future growth.
For those of you who are familiar with us, you've seen this chart a
lot. It speaks to the strong runway ahead of us. This "secular trend"
is an event that is forever changing the payments landscape around the
world. Today, about 32% of all payment transactions in the US at the
point-of-sale are electronic. Our share of that 32% last year equated
to 10.2 billion merchant transactions. By the year 2010, some
estimates call for that 32% electronic share to grow to better than
50%. In the US, expect more of that growth to occur in the stored
value and debit card processing markets. Recent industry events may
well accelerate this
2
activity. This increased point-of-sale electronic usage bodes well for
First Data. Some 70% of the revenues in our Merchant Services segment
results from the mere occurrence of electronic transactions,
regardless of the dollar volume related to those transactions.
Another significant trend impacting our business is worldwide
migration. As Christina Gold shared with you last month, the
International Monetary Fund sized the worldwide remittance market at
$138 billion. Based on the face value of the consumer-to-consumer
money transfers we moved through Western Union International and
Mexico last year, we think about 88% of that $138 billion is still
available to us in the future. This remittance market continues to be
driven largely by the need for people to find prosperity outside of
their native country, and then use that prosperity to meet the basic
needs of their families back home. The UN reports 175 million people
live outside their country-of-origin. That's around 3% of our world
population. These two underlying trends, the movement away from cash
and checks to electronic forms of payment, and worldwide migration,
drive our business.
Now let me break that growth down into the business segment. We
recognize four of them, which are illustrated here. Payment Services,
Merchant Services, Card Issuing Services (also known as Outsourcing
Services) and Emerging Payments--our eONE Global Business. This chart
breaks down the relative revenue contribution of each of those
businesses.
Now, let me go through them separately. Payment Services is the
largest, generating revenues of $3.2 billion, last year; about 40% of
our total revenue base. That revenue base grew by 18%, and has been
growing at an annual average of 18% from 1999 to 2002. We moved nearly
$700 billion in money transfers, official checks, money orders and
other payment instruments in 2002. This segment accounts for about
half of First Data's profits. Margins have stayed consistently in the
low 30s. This segment is driven largely by the ongoing success of one
of the world's most-recognized consumer brands--Western Union, which
accounts for about 80% of the segment revenue.
The heart of Western Union is more than 159,000 agent locations, where
consumers can wire money around the world. We're growing this agent
network by about 20% annually. We expect to end this year with about
180,000 worldwide agent locations. We think the right number,
eventually, is somewhere between 300,000 and 500,000 worldwide. Today,
about 51,000 of our agents are located in the US and Canada. The
balance operate outside of those two countries, through about 400
super-agent relationships. In North America, where Western Union is
the "super agent", about 47% of our agents operate out of supermarkets
and convenience stores, with another 14% operating out of
check-cashing outlets. Bill will provide you some international agent
statistics when he speaks. Most of these agent contracts are
multi-year in nature. These agents know the markets they serve. They
speak the language, and they drive the business. The commissions they
earn from Western Union help drive their motivation to succeed on
behalf of Western Union. These agents facilitate the movement of more
than 100 million transactions every year.
The Payment Services product offerings range from money transfers to
bill payment to official checks and money orders and prepaid services.
We generate 80% of the segment revenues from C2C and C2B money
transfers. The remaining 20% comes from official checks, money orders
and prepaid services such as ValueLink. We generate revenues on
3
the ValueLink product from both an initial sales fee when consumers
purchase the cards, and from subsequent transaction fees each time the
card is used by the consumer.
The prepaid market opportunities are dramatic. Certain estimates say
that the global prepaid wireless market is $125 billion, growing to
$250 billion by 2005. Bain & Company estimated that US consumers spent
some $38 billion in stored-value cards last year--up 20% from the
previous year. ValueLink's stored value product is a great example of
how we're leveraging our millions of merchant relationships in our
Merchant Services segment, which I'll talk about, now.
In 2002, Merchant Services generated $2.8 billion in revenue; about
34% of First Data's consolidated revenue. Annual growth there has held
consistently in the 20s, with a strong focus on expanding into
vertical markets and new, international arenas, by making strategic
acquisitions. More than a third of First Data's profits come from this
segment. While historically under pressure from 3-5% pricing
decreases, 2002 profit margins were in the high 20s.
We generate revenues and profits there by providing point-of-sale
transaction and processing services at some 3 million merchant
locations, and for millions of their consumers. Last year, First Data
processed 10.2 billion merchant transactions, through brick-and-mortar
locations, via the internet, and over the phone. We're on a run rate
to process 12.8 billion transactions in the next 12 months.
While 65% of our sales volume occurs at large merchants, that is,
those with more than $70 million in annual processed sales, we derive
only 20% of our segment revenues from these large merchants. We go to
market here through a host of bank-based alliance partnerships. Chase
Merchant Services, Wells Merchant Services, Paymentech, to name three
of our largest. These partnering arrangements, again, are long-term in
nature. Our longest-term alliance relationships with Wells Fargo is 10
years old. Our go-to-market strategy in the Merchant segment also
includes fully-owned entities such as PayPoint and CSI.
We provide a host of services to merchants through this business.
Primary among them are our point-of-sale processing and settlement of
credit and debit card transactions, both offline and online. While you
may see consumer spending going up or down over time, we remain
extremely agnostic to the size of those consumer spends. Because
again, directionally, about 70% of our revenues in this segment result
from transactions--not from the dollar volume of those transactions.
We also provide terminal and equipment sales and rentals to those
merchants, as well as back-office services such as chargebacks, risk
management and call center services.
In this segment, we also derive about 14% of our revenues through our
TeleCheck verification and guarantee business. We know that the shift
from check and cash to electronics is slowing the overall check
growth. The TeleCheck and the merchant relationship we have there
provide a key strategic framework, as those merchants enable the
consumer shift to electronic payments. ECA, TeleCheck's electronic
check-acceptance product, is helping enable that shift.
4
Our third-large segment is Card Issuing Services. Many of you now know
this as Outsourcing Services. This segment generated revenues of about
$1.9 billion in 2002, or about 25% of our First Data revenue. About
$500 million of this revenue represents reimbursables such as postage
and telecom. This segment accounts for about 18% of First Data
profits. If you back out the impact of the zero margin reimbursable
revenue, margins are in the 20s. We service 324 million bank card,
debit and retail-based accounts for some 1,400 card-issuing clients.
We have nearly 90 million card accounts, mostly retail-based today, in
our pipeline which we expect to convert by the end of next year.
Again, like our other businesses, the contracts here are long-term in
nature, generally running 5-10 years.
We provide a variety of services for card-issuer clients. Primary
among them are authorization and processing of card-based
transactions. We also produce millions of plastics each year, and
print and mail cardholder statements. Additionally, we provide
back-office support functions such as fraud protection and account
resolution. We spent more than $200 million over the last 3 years
improving our system, to handle these and other client-driven
needs--either as stand-alone functions, or in tandem with other
services. Excluding the pass-through reimbursables, about 70% of the
revenues we create in this segment are account-based, with the
remaining 30% based on transactions and other items.
eONE Global is our final segment, known as our Emerging Payments
business. Emerging Payments is on a run rate to generate almost $200
million in revenue this year. The focus here primarily is on two
businesses. We derive most of the revenue in this segment from
business tax payments to governmental entities at the federal, state
and local level. We're working with a host of telecom partners to
develop the next wave of payment options that will eventually enable
your cell phone to work as a payment device. I'll explain more of its
structure in a moment.
eONE's vision here is to create the future of global payments, today.
Its mission is to develop, commercialize and operate emerging payment
technology companies in the business, government and mobile
marketplaces. Financially, the objective is to deliver 50% revenue
growth to First Data, and to provide a $0.02 to $0.03 accretive EPS
contribution to First Data by 2005.
Strategically, EONE is focused on emerging payment technologies in the
mobile, government and enterprise marketplaces. It leverages the
strengths and resources of both First Data and our partner iFormation
group. It's focused on becoming the e-payments authority in each
industry it serves. eONE Global was formed in late 2000, out of a
partnership between First Data and iFormation Group. iFormation is a
partnership of Boston Consulting, Goldman Sachs and General Atlantic.
This chart shows you the primary business structure. It includes the
govONE business, focused on government payments, Encorus, focused on
developing the wireless payment market, and the newly created
Velosant, focused on the enterprise marketplace. These four businesses
combine to create the payments powerhouse that is First Data. At the
consolidated level, we generated $7.6 billion in revenue last year--a
growth of 15%. We have a record of generating strong, consistent
earnings as well as consistent cash flow that we use to reinvest in
the business, buy back our own stock and make strategic acquisitions.
It leads to our 2003 estimated 14-17% top line growth and EPS guidance
of $1.87 to $1.93. It also leads to our continued confidence in
attaining our overall
5
objectives of 14-17% growth on both the top line and the bottom line,
over the longer term.
So that's our story. Now I'll turn it over to Charlie, who'll do the
introductions, provide a brief business update and give you a little
flavor of how he's thinking about our future.
Charles Fote: Thanks, David. Good afternoon and welcome to London,
everyone. As always, David got a little long-winded, so I'll get us
back on schedule. [laughter] By the way, I'm not sure your
spell-checker was working, David, but I know that the team here helped
run it through the English version of English.
First, I want to formally introduce the members of our Executive
Committee who are with us, today. Scott Betts serves as President of
Merchant Services. Scott's been lucky enough also to pick up the
Concord transition team. Christina Gold leads our Western Union
business. Kim Patmore, as most of you know, is our CFO. Mike Whealy is
our Chief Administrative Officer. Bill Thomas leads Western Union
International. Mike Yerington heads up our Western Union North America
operations.
Pam leads our First Data International team. We have a very special
guest with us, today--Garen Staglin, who runs our eONE Global
business. He and his lovely wife, Sherri are mixing business and
pleasure as they celebrate their 35th wedding anniversary. Could all
stand up and let's get you guys recognized.
Audience: [applause]
C Fote: You'll hear from Bill Thomas and Pam, shortly. Then I'll be giving
you a detailed presentation of what's going on around the world.
First, by design...First Data is the leader in the markets we serve.
Our mission is to make commerce around the world secure, efficient and
convenient for consumers and businesses, alike. We have an
extraordinary infrastructure, and a tremendous worldwide distribution
base. We have a strong record of flawless execution, both
operationally and financially. It's that record of execution we are
using to take advantage to develop the future payments infrastructure.
Part of being that leader is to continue to keep you updated on the
statistics that keep the payments industry ticking. As we've done in
our other face-to-face meetings this year, let me give you a little
flavor for how we're performing quarter-to-date. Our merchant
transaction growth remains strong through the first part of June, at
around 25%. When normalized for last year's PayPoint acquisition, it
will come in a little lower. Remember that in the first quarter, we
had 23% transaction growth. After adjusting for PayPoint, it was 15%.
Transaction growth in Western Union, consumer-to-consumer money
transfer business quarter-to-date is a strong 20%. A quick reminder
here--this quarter we'll lap the Paymap and ECG acquisitions that we
made in payment services last year. Both of them were about the same
size, from a revenue standpoint, at $35-40 million, when we bought
them, on a run rate of 2001. Also remember these adjustments when
you're looking at our second quarter results.
Before getting into the international business, I want to spend a
little time taking you through how we see the payments industry moving
in the next few years. The industry has always been subject to
external forces. Today, we're seeing four major forces
6
exerting increasing pressure on our business. They're converging and
driving us to operate under a new model. The four are slower growth
and consolidation in the US markets, international and US government
pressure, technological advancements, and for sure, consumer demand.
Let me quickly review how these drivers of change, are impacting our
industry, and where we think they're pointing us, on a going-forward
basis.
Economics are driving PIN debit's growth over signature. PIN debit
transactions will continue to grow even faster, based on today's price
scenario. It's easy to understand the decline of checks and the growth
in debit transactions, from a merchant's standpoint. Today's signature
debit model is almost twice the cost of accepting a check or a PIN
debit. This cost differential is driving merchants to drive consumer
usage of PIN debit.
Another major factor is consolidation. As issuers, acquirers and
merchants continue consolidating, the pressure to maintain acceptable
market and EPS growth will intensify. Pricing pressures in all
segments of the payment industry will increase. This naturally has an
impact on how the associations are governed, as well. In response to
these pressures, there are many in the industry looking for the next
marketing silver bullet that will drive new consumer demand. This
innovation will likely combine or add features to customer accounts,
well beyond simple access to the cash reserves they have today. It
will require a payments industry model is data-friendly, very flexible
and very, very market-driven. While we're searching for this marketing
silver-bullet, the top line pricing pressure and the need to grow the
bottom line is forcing all of us to look for new ways to remove
unnecessary costs from the system.
Major international issues combined with US events reveal a broad and
consistent pressure on our existing payments model. Let me just give
you a list of a few of these. Australia's Central Bank forced Visa and
Master Card to lower interchange rates by 40%, starting this year.
Visa and Master Card settled a merchant take-all-cards lawsuit. The
suit was based on interchange rate differential between signature and
PIN debit.
London and British authorities--let me repeat that--London and British
authorities say they will cut MasterCard rates unless the association
does it voluntarily, by amounts sufficient to promote consumer
benefits, under the Competition Act of 1998. The European Commission
forced Visa to lower its rates 20% on cross-border transactions. The
US Department of Justice is taking actions against Visa and MasterCard
rules that prohibit member banks from issuing American Express and
Discover cards. Regardless of our opinion on these issues, the ways
that fees and rules are made have caught the attention of cardholders,
merchants and regulators in Australia, Europe and the US. This will
pressure the industry to change, and for the most part, change is
always good.
Many of the long-standing "givens" in our industry are in flux,
including the dominant role of US-based payments in the global
picture. In 2001, the US had less than 45% of the world volume in
branded cards. As more countries adapt to and grow their
cardholder-based payments, the global payment system is bound to
evolve differently than it has in the past.
The bottom line is--this change means events, markets and governments
outside of the US will have more impact on the US payments system. For
example, I personally believe global merchant acquiring will be here
sooner rather than later. Technology changes will have no less of a
role than the economy or politics. Our ability to transmit,
7
compute, store and manipulate information is growing faster than ever
before. From a technology standpoint, our industry's evolution looks a
lot like the phone industry. Growth in capabilities has made the need
and cost for centralized switch and batch processing go the way of the
telephone operator. We need basic data structures and rules to ensure
interoperability, but at the same time, we need to compete on feature
and functionality. There are inefficiencies and redundancies that need
to be resolved, and I'll touch on this a little later.
Finally, the last of our four major forces, and maybe the most
important one, is consumer demand. Consistent with the growth in
technology I mentioned is the proliferation of consumer account access
devices. The rate of growth of these devices and their capabilities
suggests we are not in the card business, anymore. Rather, we are in
the business of facilitating consumer information and value exchange
on the fly. Naturally, the proliferation of account access devices
creates the same growth, acceptance in devices and distribution
channels. Consumers are dictating to merchants how and when they want
to do business. Like all good business people, we need to respond in
the most efficient way.
What are the results of these forces? A new model for the payments
industry. In short, the industry has grown too complex to be managed
centrally by a few entities. Consumers, merchants, issuers and
acquirers need an open and competitive market that allows rapid
innovation, while simultaneously giving everyone the power to keep
costs down. The effect is that the industry will have to allow product
decisions to be made separately from processing options. Merchants,
consumers, issuers and acquirers will choose best-in-class options
more than ever before, and the new technology allows them to
pick-and-choose on a real-time basis.
Let me give you an example. Using the current model, the typical
credit card transaction requires 24 steps to process it from
point-of-sale to delivery to the consumer, and then the process of
payment.
Consider if processes were allowed to settle transactions which
originate and post within their own systems. With this model, using
existing technology and communication lines, processors could save
nearly half of the steps needed to complete a transaction.
Additionally, security and/or liability rules would not have to
change. This is an estimated $0.03 to $0.04 savings per transaction
under this scenario, just from this phenomenon alone.
Similar savings would be available if major processors were allowed to
expand the exchange transactions between each other. Yes, we'd be
exchanging transactions with our competitors. This is the same model
banks use for checks drawn on themselves and those with whom they have
exchange agreements. For sure, it begs the question, "How do we
achieve significant reductions in paper transactions and compete with
electronic transactions such as ACH processing at the US Federal
Reserve Bank?" Naturally, like the Fed model, if the settlement would
best be achieved using a third party, then that's what would happen.
Again, no risk or liability changes--just choice of best-in-class
processing.
Not only does the new model cut costs, it also allows the flexibility
for participants to create their own forms of transactions. Issuers
can provide new, unique cards to
8
customers that leverage a bank-issuer's marketing knowledge, give
special merchant offers and reward loyal customers based on existing
payments industry expertise. For example, banks could create a
uniquely branded consumer gift card that works not just at one
retailer, but rather, at a variety of retailers.
For the banker or the merchant with choice, there is more of an
opportunity to think out of the box and create options suited to the
marketplace. Both can pick the brands they want to associate with, and
competition will make sure costs stay low.
We believe the pressures on the industry are real and compelling.
Competition is increasing, and product differentiation and costs are
key. Global political pressures will force a change that we can lead
but cannot stop. Technology changes are making the old model obsolete.
Finally, consumer demand is driving change in account access and
acceptance levels.
The market is huge, and it's changing rapidly. Consumers, merchants,
issuers and acquirers are no longer homogenous groups. Being able to
respond will help us get more than our fair share of this payments
market. We believe that those of us in the payment industry today must
build a new model that inspires greater innovation, allows choice, and
embraces competition. One that provides the flexibility and
efficiencies that organizations need to grow and remain profitable.
Reinventing this payments model has brought us to where we are today,
and will ensure our place in the future of the payments industry.
First Data is and will continue to be the payments paradigm system
leader.
With that, now let me provide you just a little setup to our
international presentations. We continue to have a three-pronged
growth strategy that starts with our core internal growth, which last
quarter was in the low double-digits. We build on that by extending
our global reach. That's obviously the focus of our meeting, today.
I'll provide you with just a bit more color on that in a moment.
Secondly, by leveraging our enterprise capabilities, by introducing
new products and technologies to the marketplace using our existing
channels and partners, and creating new channels around the world.
Fourthly, by making acquisitions that fit into our core competencies.
As David mentioned earlier, all this helps us achieve our long-term
objective of 14-17% on both the top and bottom lines.
We'll spend the day today focusing primarily on the first of these
three strategies--extending our global reach. Last year we got about
25% of our revenues from international sources. This quarter, it may
actually be more like 27% because of our first-quarter acquisition of
German-based TeleCash and from internal growth around the world. If
you apply our historical compounded growth, this percentage would grow
to about 36% by 2007, and in the last 12-18 months, we have structured
the organization to help accelerate the growth so we'll end up closer
to 40. That's what led us to our 40% goal initially.
Again, though we don't want to be accused of jumping the gun in our
Concord merger, I do want to remind you that of the 1.1 billion in
revenues that Concord would have brought to us in 2002, virtually all
of that revenue is focused in the US. When we combine revenues with
ours, our target will be to have about one-third of our revenues
coming from international sources in 2007. We'll generate these
revenues through a combination of a build-and-buy strategy. Most of
our growth in Western Union International business will result from
continuing to build that business internationally.
9
Plus-or-minus 60% of our international revenue in 2007 will come from
Western Union International. First Data International, on the other
hand, will rely more heavily on acquisitions to reach its 2007 revenue
objective of plus-or-minus $2 billion. Pam will provide you with
plenty of color on that business.
One thing I did want to note though is that while our First Data
International's stand-alone revenue for the full year of 2002 was
relatively flat, first-quarter growth was 30%, and full-year estimated
revenue growth was north of 40. I think what Pam and her team are
doing is certainly gaining traction.
One way we continue to build internationally is by making sure we're
where we need to be. We as an employee body represent our customers
from a diversity standpoint. You'll see in this graph that not only
are we in locations that span the globe, but we represent some 70-plus
nationalities and speak 75 different languages.
Before I turn this over to my distinguished colleagues, let me review
with you significant accomplishments from around the world, since last
year's international meeting. These are the establishment of First
Data International headquarters in Paris--including the relocation of
Pam Patsley and her family. The reorganization of First Data
International into five operating regions. The growth of Western Union
International agents from about 80,000 locations to over 110,000. The
signing of key accounts around the world, including HBOS, BMW Bank,
WestPac Banking Corp., Alberta Treasury Bank, CUETS and Scotia Bank.
The lowering of ownership in our Japan joint venture from 35% to 9%,
to coincide with the slower-than-anticipated spin-up of card
activities in Japan.
The integration of our software platform, then called PaySys into the
reorganized regions. Western Union International volume exceeding 5
million transactions per month, for the first time in history. The
acquisition of TeleCash during the first quarter, along with several
other successes. In the near future we'll be adding more agents in the
Middle East, including expansion into Afghanistan and also the
expansion into Iraq. You put it all together and we're right
on-schedule, again, with our plan of achieving our financial
objectives for all of our businesses around the world--including the
US. As a leader, I'm extremely proud of our international associates.
Speaking of that, let me introduce to you Bill Thomas, President of
Western Union International.
Bill has been at First Data a little more than three years now. He's
truly a globally-focused executive, and we're very fortunate to have
him on our team. He makes us all proud of the Western Union
International group. He and his Western Union team have done a
tremendous job around the world, particularly in the emerging markets
such as Eastern Europe, Asia, Russia and Latin America. Bill?
Bill Thomas: Thank you, Charlie. You know, it's been three years, and
that's the first time you've called me a "distinguished guest," so I
guess you're happy with the results.
As Charlie emphasized, Western Union will remain absolutely a key
factor in achieving First Data's overall growth. We have been growing
transactions at a compound growth rate of 37%, between 2000 and 2002.
As I'll show you today, we're not resting on our laurels, here. We're
off to a great start, this year, we've got a lot of good initiatives
in place. I think the formula for success is pretty straightforward,
here, if I can explain it.
10
We continue to open locations in strategic corridors around the world.
Then we advertise at a very local level, to drive
street-corner-to-street-corner transactions. And that's the simplicity
of connecting the global market.
With China, for example, this involves opening locations throughout
China first, getting the network in place, and then marketing to the
Chinese diaspora around the world such as Chinatowns of New York,
Chicago, San Francisco, Milano, London, Frankfurt and others. And
another important key for the Chinese market is dedicated locations
where they feel comfortable walking into a banking-like environment to
send and receive money.
Between Western Union and our agent partners around the world, we'll
invest about $300 million in marketing and advertising the Western
Union brand. A large portion of this, as I said, has been very
localized in community-based campaigns targeting our ethnic diaspora
where we need to. I think we continue to become very highly effective
at focusing and reaching this diaspora population as we build the
additional networks around the world. In fact, I think we're writing
the book on this kind of marketing, and our success is clearly evident
of that.
We continue to make more new-product services available through our
global distribution network. Customers can now send or receive
payments with direct-to-bank services, ATMs, at home on the Internet,
or with our home-delivery services, or via our unique Western Union
cash card. As David mentioned in his description of the business, we
expect to end this year with about 180,000 locations around the world.
Which is a growth rate of 20%. This year's growth has come primarily
from locations in China, India, Eastern Europe, Asia Pacific,
including Australia. And we'll continue to make more of our products
and services available throughout this entire expanding network.
About three-quarters of our agent locations are either banks or post
offices. In many countries outside the US, a post office is, in
itself, a bank offering a range of financial services. Our bank
partners range from the Industrial Bank of Korea to Standard Chartered
Bank, our new regional partner in Africa, to American Express foreign
exchange locations, which owns the banking license in a country like
Norway. These extensive banking relationships across the globe provide
a great entry point for the First Data International team. Pam and I
will talk more about those opportunities.
Now this graph, the next one actually, illustrates- I want to make a
couple of points, here. Over a four-year period, the percentage of our
in-bound, receive-side transactions, and how that's changed. And
again, these are the receiving regions of transactions around the
world. First, you can clearly see that we have a much more balanced
base of inbound transaction activity. If you go back to 1998, you've
got to conclude we had a lot of eggs in the Latin America-Mexico
basket.
Secondly, as we've been saying for some time, now, our Western Union
business to Mexico, while still important to us, has shifted in terms
of its overall importance--it's less. And again, as we build more and
more countries and corridors, the great thing about this business is
that you have fewer eggs in any one basket. So for example, one year
ago when we had the economic problems in Argentina, we could easily
offset that kind of an issue. Where as five years ago it would have
been much more difficult.
11
There's another trend that's not on this slide. I'll just comment on.
That's from an outbound standpoint. And again, there are two large
outbound regions, if you think about it - North America and Western
Europe. If you go back five years, the US outbound business would have
been up here, and Western Europe, here. There is much more of a
balance in place, now. Again, the stronger growth today is still
coming from Western Europe.
Now, let me drill down and provide some commentary on how this year is
unfolding, and some of the events we're seeing. First of all, we are
on track with our financial expectations and we're on track to achieve
the total international location growth. Some specifics for you--India
and China will meet their combined-location target of 25,000. Pakistan
will add about 2,000 locations this year. Up from just 125 a year ago.
With the addition of the Pakistan Post and the National Bank of
Pakistan, these events have kind of thrust this market into what I
call my "first-tier market opportunities" when you are talking about a
population of 148 million. We now have a service entry there that can
handle that population.
Along with Pakistan, Turkey is moving up fast. Again, with a
population of 90 million people, we now are starting to get critical
mass in our network, there. We'll have about 1,200 locations sometime
in the third quarter, with the addition of Zirat Bank, which is the
largest bank in Turkey. We've also added 3,000 locations in Australia,
with the Post Office in the first quarter. And we can now I think tap
into the full outbound potential of that country because they have an
ethnic population in the range of around 25%--even higher than Canada.
The US-outbound corridor to Brazil is the single fastest-growing flow
of transactions forming this year. A big part of what's driving that
growth is dedicated locations in the U.S. I would say 10-15 dedicated
locations are driving about 35% of that corridor growth, right now.
Mexico continues to exceed expectations-- up over 30% in the first
quarter. It continues to come on strong. The Philippines - our most
mature Asian market - even after a decade of operations there, is up
more than 70%. And I expect it will finish this year around 73%.
Again, that's against some very tough competition. This isn't a new
market, by any means, for money transfer.
Russia, which has been a star-growth inbound market over the last
three years, is already in the top 20 outbound markets, as a result of
the strength of the Russian economy and many of the people from the
CIS countries going back into Russia to work. And Romania is now one
of our strongest inbound countries, we're getting excellent growth out
of our Italian-to-Romania corridor. And last, the US-to-India is
already in my top-20 corridor. And I think we have just begun to tap
the potential in that diaspora.
So let me move on now to how we can leverage the equity of Western
Union to help First Data International. Some of our joint
cross-selling efforts with First Data include bringing card and
issuing and merchant services to our banking partners. For example,
we're currently in talks with Banco Azteca, which is a member of the
Elektra Group in Mexico. And again as you know, Elektra is one of our
largest agents, there. They have a broad retail network and are now in
the banking business. We're also looking to bring the card processing
solutions to Banco Azteca. It was really the Western Union
relationship that allowed that door to open pretty quickly for the
merchant group.
12
Another good example of what we're doing to help our super-agents
branch out is in the UK. There, our super-agent is FEXCO. Here, the
Irish-based super-agent for instance is in partnership with First Data
International through the OmniPay solution. And Pam will talk more
about that, later. In Spain, where FEXCO is also a super-agent, First
Data Iberica is installing its mobile prepaid popup service in FEXCO's
locations. Our colleagues from First Data Iberica are now talking to
our agents in Italy, to offer the same service. I'm confident that's
going to be a big winner, because the Italian prepaid phone market,
per capita, is the largest in the world. In Jamaica, Grace Kennedy has
been our agent there for 13 years. We're expanding our TeleCheck
business, we're launching First Data gift cards and stored-value
cards, using VisionPLUS software, and we're preparing to introduce
cross-border utility bill payments, as well. So, look for us to get
more specific about these enterprise-wide deals as we move through the
remainder of the year. They're exciting, and I think there's great
potential, there.
So with that, it's my pleasure to introduce Pam Patsley, who will give
you more color on First Data International. Pam . . .
Pam Patsley: Thank you, Bill. Thanks to all of you who are with us, today.
We do have a great turnout from our international-based investors, as
well as many from the States. It's terrific to see you all here,
today. I've been leading First Data International or FDI, as we call
it, for a little more than a year, now. I'm very positive about the
progress we've made and the success ahead in the global card issuing,
merchant acquiring and electronic payments businesses. We have our
structure defined, our strategy is taking shape. One that we've really
tailored to each region around the world, and that includes a
combination of building and buying, as Charlie mentioned. And we are
executing. With the revised, integrated approach to geographic
markets, our existing businesses are gaining real traction. We're
working hard to build new partnerships and to find new acquisitions
that fit--and with, of course, the right economics.
You saw some of that at the end of last year. You've seen more of it
this year with our TeleCash transaction. Expect to continue to hear
from us on the acquisition front in the future. We have some
aggressive goals to reach our overall financial objectives for 2007.
As Charlie said, while expected percentage of revenue from total
international operations is somewhat smaller due to Concord, our
dollar objective remains the same. We're currently on target with
growth toward that revenue objective. To get into position for this
growth, we've organized our First Data International group so that we
have the right teams in place focused on the right things. We have our
core international growth platform, and we're focused on leveraging
their respective strengths in each of our regions. We're beginning to
see the benefits of our efforts, and expect this to continue to
support our 40%--plus-or-minus a little here and there--growth levels
for the next 3 to 5 years.
I'd like now to take a moment to contrast where we were as a business
a year ago and where we are today. A year ago, I showed you the chart
on the left. We were segmented by business line - issuing, acquiring,
processing, merchant alliances, and software sales with VisionPLUS. We
are now organized by geographic region. You see that on the right. In
each region, our leadership and sales and business development teams
present a total solution to each market. They are not focused on
issuing alone or acquiring alone or just software sales. They look for
opportunities to deploy the right solution to meet clients' needs in
each market--whatever that may be. This approach is opening up a
13
world of opportunity, and creating the best environment to again, as
Bill mentioned, leverage Western Union relationships.
In the middle ring on the right, you see the name of four platforms.
These are our solutions to the global marketplace. Today, there is
much I would like to share with you. But as time is short, I will
focus on four key things. A little more on how we're organized, the
great worldwide opportunity before us, our strategy to take advantage
of that and achieve our growth targets, and lastly, how we are already
executing against that strategy around the world.
First, our organization. FDI was created a little more than a year
ago. In short, to position us for growth. It combines our different
products and service lines under a strong leadership team, with
integrated end-to-end solutions. While our international headquarters
is located in Paris, our operations are found on every continent with
except of course, Antarctica. In many cases, we're co-located with our
Western Union colleagues, taking advantage of First Data's global
infrastructure. In total, our FDI team is made up of about 3,800
employees. Gerald Hawkins, President of the EMEA region, is based here
in the UK. Gerald is with us today, and many of you may have had the
opportunity to meet him.
Heading our China and North Asia region is Henry Tsuei. Henry recently
moved to Shanghai after being part of our Card Issuing Business group
in Omaha for a number of years. In Japan, Kozo Watanabe is heading our
efforts there to establish a presence. Greg Nash serves as President
of our Australia, New Zealand and South Asia regions, with Peter
Harrington leading our growing business in Latin America and Canada.
Peter is also here with us, today so I hope you get a chance to meet
him, as well. It's a strong leadership team, executing hard each day
against our strategy.
Now, I'll focus on our global opportunity. Among the factors driving
this growth are the increased use of electronic payments, such as
debit and credit cards, around the world, the migration to
EMV-compliant cards, the growth in global commerce and the continued
shift toward e-commerce solutions.
The US continues to dominate the landscape, with almost half of the
global transactions conducted there. But the real growth engines are
more concentrated in Asia and Europe.
One example that is interesting to note, though it seems a long time
ago now, is the 1988 Summer Olympic Games in Seoul, South Korea. Those
games served as a catalyst for South Korea to electronify, if you
will, payments at the point-of-sale, and that trend continues. Today,
South Koreans use their cards, on a percentage basis, more than any
other country in the world. We believe this experience is a likely
precursor to the experience the Chinese will have in preparing for the
2008 Olympic Games in Beijing. The current China card market is barely
in the worldwide denominator for card usage, with about 500 million
cards, and less than 3% of merchants there in China equipped to accept
them.
Now let's look at a few specific examples. Let's look at the UK, to
see what's happened here, as this is a relatively mature market.
Electronic transactions have been and continue to be on the rise. The
chart on the left shows electronic payments at just under 50% of
14
non-cash transactions, in 1986. According to APACS, their prediction
of what this will look like in 2011, is dramatically different, and
it's depicted on the right. While the electronic share is growing, we
must also recognize the total number of all non-cash transactions is
growing, as well.
Now, let's look at yet another example--Latin America. Overall an
emerging market. You can see here year-over-year comparisons by
several measures, in total dollar volume, transactions and cards all
showing strong growth--particularly in some of the largest markets.
With that context, I want to tell you a little bit now about our
strategy. There are five key elements to our growth strategy. First
and foremost, as I've mentioned, we're growing as a single enterprise.
It almost goes without saying that we will seek the best talent
available. To expand the business five-fold in a five-year period
requires a lot of great talent. We're using new products and a new
geography to provide solutions around the world. As always, it is our
global goal to retain the trust of our customers, and we continue to
focus on flawless execution.
Finally, we're focused on deploying our technologies to the best
advantage. I'll expand just a little bit now on this last point, to
give you a little more detail on how we are positioning the platforms
I'd mentioned earlier. Because our markets are different around the
world, we're deploying a combination of platform solutions to cater to
their specific needs. Through Equasion, OmniPay and VisionPLUS, we are
driving growth and reach globally.
Many of you have seen this slide before, but I think it's worth
repeating. We provide an unmatched continuum of payment solutions that
support almost every type of payment transaction, from point-of-origin
to point-of-settlement. First, let's look at Equasion. This was
derived from a copy of our US platform, taken in 1992 and customized
for the specific needs of the UK market. It is FDI's largest
processing platform, serving 23 million accounts and 1 billion
transactions annually. It's both a merchant acquiring and card issuing
solution used in Europe and in the Middle East.
Like the re-architecture effort in North America in the Omaha
platform, Equasion has gone through its own re-architecture. Over the
last three years, we've invested about $50 million in upgrading that
system. We will continue to make ongoing investments to maintain that
platform's leading position in its markets. For example, we've just
launched PIN CVM in the UK, and this has given us the opportunity to
build and integrate EMV, the new Pan-European chip standard required
in 2005, into our platform. We believe we are the first third-party
processor to have achieved this. As you can see, this is the leading
platform in the markets we serve. Our clients include premier
financial institutions such as HSBC, Lloyds TSB, Dresdner Bank, HVB
and EGG.
Now the platform I'd like to highlight is VisionPLUS. Some consider
this to be the premier software platform for card processing. It is
present in at least 36 countries across six continents. We estimate
approximately 200 million accounts worldwide run on VisionPLUS. We
acquired this platform with the PaySys acquisition in 2001. Our
revenues are still primarily software license fees, maintenance fees
and professional services, but our objective is to migrate to a
service bureau environment. In fact, this is the solution installed
and running in our Shanghai data center.
15
The key here is its flexibility. We were able and are able to use this
platform to deploy a single software module for our clients through to
full outsourcing. This provides our business development teams a
unique opportunity to tailor the solution to a client's exact needs,
to fit their specific market. As with Equasion, our client list is
extensive. Clearly, VisionPLUS is used around the world to effect
electronic commerce. Some of these names are likely candidates to
migrate to a processing environment.
OmniPay--a merchant-acquiring platform, provides an unparalleled,
multi-currency, multi-lingual capability for acquiring clients around
the world. We have a majority stake in OmniPay. And again have
utilized our Western Union relationship, as we are a partner with
FEXCO here, as well. It's an incredibly flexible global platform, with
the ability to add a new language in less than a week, and develop
domestic message formats for different markets in less than eight.
Like VisionPLUS, it provides significant flexibility and
speed-to-market. It's a young platform and a recent addition to our
capability, and we're just beginning to explore its potential.
One example is the introduction of the sharp niche product that
OmniPay has, called Dynamic Currency Conversion. Clients here include
some of the world's largest acquiring banks. Those acquirers,
retailers and their customers also benefit. Some of the larger
retailers using the product here include Avis, Budget, Waterford, and
of course, Harrod's right here in London.
I'd like to spend just a minute more on the Dynamic Currency
Conversion product. DCC is a new service for overseas cardholders to
pay for purchases in their own currencies. Wherever and whenever a
non-domestic cardholder presents their Visa or Master Card for
payment, they have an option, if the DCC product is deployed there, to
select their home currency at the point-of-sale. This creates
significant value-add for the cardholder, with no surprises on their
statement. We're finding DCC is truly a door-opener for us. When
speaking with acquirers and merchants, and it certainly is a great
product. It's a solution that differentiates us and our clients in the
marketplace. After the presentation, there are some OmniPay and FEXCO
folks here with us today that would be happy to demonstrate this
innovative product for you.
Now I'll spend just a couple of minutes going through just a brief
world tour, and showing you how we're executing against our strategy.
We begin our world tour in our largest region, comprised of Europe,
the Middle East and Africa - what we call EMEA. We are well
established in the European market. We are the leading independent,
third-party card processor in Europe, both issuing and acquiring. We
offer traditional third-party outsourcing, as well as our VisionPLUS
software. Through our joint venture, First Data Iberica, we have a
significant presence in Spain with fuel card processing and a
successful mobile top-up product.
As Bill mentioned that we're currently installing this into our
super-agent FEXCO Spain, and expect this business to continue to grow.
Through merchant alliances with HBOS, Lloyds TSB, PostBank, as well as
our merchant processing banks, we service more than 330,000 merchants.
Europe constitutes our largest region, both in terms of revenue,
near-term growth potential, and employees--about 3,000, here. I would
like to highlight France and Germany, for your information, today, as
just two of our key target markets. Today in
16
France, in-house processing dominates. As the trend moves from checks
to cards at the point-of-sale, as issuers with 25 million
private-label cards are considering being co-branded and as new
competition enters the market, we're well positioned to take advantage
of these trends. We're working with a large number of large
institutions in France to develop solutions to fit their needs in this
very significant market. It's a combination of processing
private-label cards or Visa and MasterCards. Of course, too, our DCC
products, which we'll soon be installing in partnership with a
significant bank in France, for its merchants who handle a large
amount of international traffic.
Germany is a vast market, with 108 million cards issued--predominantly
debit. However, nearly 70% of point-of-sale transactions are still
done in cash. So there is significant growth potential, here. We're
focused on Germany, and our recent acquisition of TeleCash really
broadened our presence, bringing more than 165,000 terminals in the
market. TeleCash is an electronic payment network operator, or the
front-end authorization provider. TeleCash also provides prepaid
mobile top-up services. With agreements already in place, with
Vodaphone and T-Mobile in `02, we'll look to grow this business
aggressively. Last month, we signed Wal-Mart as a new client for
TeleCash, again further expanding our business with a US customer. Our
operations in Germany include Nuremberg, Stuttgart, Berlin and
Frankfurt. Customers include the German Postbank Alliance, the Western
Union agent, Dresner Bank, HBB, and we recently signed a deal with BMW
Bank.
Moving to the Middle East and Africa. We've been serving clients in
this region for nine years. Again, we have a presence here through
outsourcing on Equasion and VisionPLUS software sales. Again, we
tailor our proposition to the specific needs of our clients and their
regions. Recent signings include the National Bank of Kuwait, Kuwait's
Finance House, and Arab National Bank. VisionPLUS is the software
platform of choice for major retailers in South Africa. Our clients
here include Woolworths, Trueworths, Forshini and Edgar's--with about
14 million accounts on file. We have a processing partnership with a
solutions provider in South Africa, and we're working today on a
structure to enable us to migrate these existing portfolios to a
service bureau mode, thus creating recurring revenue for First Data.
Now let's look at China and North Asia. There is already growing
acceptance of our software platform, VisionPLUS, in mainland China,
with two of the largest banks being established clients. Industrial
and Commercial Bank of China, and Agricultural Bank of China. We
opened our data center in Shanghai in 2002. We're taking a measured
approach to this market, spending at a monthly rate of only about USD
$50,000. In addition, we've also sold the software to Bank of China
International in Hong Kong. With our headquarters in Shanghai and a
presence in Beijing, we are becoming well-known and understood in the
marketplace. In fact, we're hopeful that we're at the final stages of
signing our first customer in Asia to run on our Shanghai data center.
We see this as significant. Not so much in terms of size of this
portfolio, but in this environment, we feel we're actively
participating at the beginning of the purchasing cycle for outsource
solutions.
As you know, this is a diverse region. With a population close to 1.3
billion, and an emerging middle class, China sees the introduction of
general-purpose credit cards as a way to stimulate economic growth.
We're also focused on opportunities in South Korea. I've mentioned the
size of that market, Taiwan and Hong Kong and we now have sales people
in all of those markets.
17
Japan--In Japan, as Charlie mentioned, we've recently modified our
approach. The latest figures place Japan's population at 127.5
million. The card market is sophisticated and well established, with a
long history. Despite difficult economic conditions there, credit
cards issued in 2002 were actually 245 million, an increase of close
to 6% on the previous year. To take advantage of this changing
economic landscape and the long-term opportunities, we established a
strong sales presence in Tokyo, to continue to look for card and
merchant opportunities. This team was helpful in the expansion of the
ValueLink Starbucks card in to Japan, as well. In my view, of all of
the markets, this is the one that requires the most patience. However,
we're continuing to work hard at building relationships and creating
the right dynamics for success.
The next region -- Australia, New Zealand and South Asia. With offices
in Sydney, Melbourne and Auckland, First Data operates the largest
independent payments-processing network in that region. We're
beginning to transition this business from EFT processing to one that
handles a complete array of issuing and acquiring products and
services. We service 400 clients, processing over 500 million
transactions in that region. We have nine software clients in the
region, and we've secured our first credit card and merchant
processing contract using VisionPLUS with WestPac Banking Corporation,
in a ten-year contract. Again, a step in our migration of taking
VisionPLUS to a recurring revenue model. The flexibility of VisionPLUS
enhances the sales effort in this diverse region--literally, from
India through Indonesia to New Zealand.
Our final stop on the world tour is Latin America and Canada. In
Canada today, we are a leading merchant-acquiring processor. We also
have a significant acquiring presence in the Caribbean. In the
near-term, we're looking to expand this business into Mexico. With
VisionPLUS, our strategy is to actively transition our software
business, largely based here in Latin America, to an outsourcing
model. This migration in the region will most likely involve
partnering with an entity already running VisionPLUS. With more than
57 million accounts on the software in Latin America, the potential is
certainly there.
The processing customers mentioned here are predominantly in Canada
and in Mexico, and they run on the platform in Omaha. We're already
seeing success in this region with new client agreements, such as the
ones we've signed with CUETS, Scotia Bank and Banco Popular. Among our
recent achievements has been the successful migration of a very
significant portfolio for C&A in Brazil to VisionPLUS version 8.0.
We're planning six more conversions of this type this year.
Finally, as Bill mentioned earlier, we are beginning to explore
opportunities with Western Union agents in this region, and are very
excited about our prospects here. So, as you can see, we have big
opportunities in front of us, and plenty to do. Again, I want to thank
you so much for your interest in what we're doing. You know I've lived
in Paris and worked with the international team for about a year. I've
seen what it's like to do business globally from Brazil, France,
Japan, Poland, Greece--it's really different. But I'm encouraged by
our progress so far, and I believe we have the right and the necessary
products and services, and we're positioned to deliver.
First Data's depth of knowledge, our experience and our reputation in
this space is clearly recognized worldwide and that puts us in a very
strong competitive position. We're building relationships, and again
I'm excited by our prospects and very positive about our success in
the coming years. With that, again, I thank you for your interest and
your
18
participation today. I'll turn it back over to David, now, to direct
the Q-and-A. Thank you very much.
David Banks: Thanks, Pam. We're now going to open up the session for your
questions. I'd like to ask Charlie, Bill, Christina and Scott to join
us on stage. We'll take your questions from those in the audience, and
anyone who might queue in from the phone lines. For those of you in
the room, please wait for the microphone before asking your questions
so that people on the webcast and phone lines can hear you. For those
on the phone, please press *1 to ask a question. There may be a few
moments of silence while we're getting the microphone to people here
in the room.
Jeffery B Baker : Jeff Baker from Piper Jaffray. Charlie, over here the
last couple of days--yesterday in the Financial Times, there was a
very flattering article about Mexico, and their equivalent of the Fed,
and the Fed in the US striking a deal to enable banks to send money at
the cost of $0.60 a transaction. Talks about Mexico keep coming up,
and I'm sure there are questions on peoples' minds on the competitive
landscape, there. Can you address that? They said it's a very similar
relationship that we have with Canada. Maybe you could talk about what
happened when that agreement was signed, with money transfer in
Canada?
C Fote: Christina, why don't I take the beginning of that, and you can fill
in the blanks, here? Remember what the product is. You go into a
Western Union agent and cash a check dated today, today. You move
money to your mother before you leave the location. You go to a bank
in the United States and take a check dated today, put it in the bank
and wait four days for the funds to become good. Then you move the
money to your mother.
The products are different. We have the electronic transfer product of
ATM-to-ATM. We've allowed Banamex to do that, and even when we owned
MoneyGram since 1988, they were doing electronic transfers. Citigroup
owns Banamex. Banamex is our super-agent in Mexico, today. With all
the interactive systems plus the Fed [inaudible], Canada Fed,
[inaudible] through the States, the product offering is a touchy-feely
product. The agent is very important in the transfer. Christina? Any
follow-up there? We're not seeing that kind of growth like that in the
cards?
C Gold: We're seeing really strong growth in Mexico. I think also our
consumers really trust us and have a relationship with Western Union.
Really, the number of locations and the ability to send quickly to
Mexico from anywhere in the world really is the power of our brand. We
feel very comfortable with our position in that market.
J Baker: Does this change if you send without cash? With a check? If I come
in to send in cash?
C Fote: 70% of our senders have checking accounts. Let me just stay in the
US, for a minute. It's close to 0% that have a checking account on the
other side. If you go to some of the towns that we deliver money to in
Mexico, 80% of the mail can't get delivered. Then the other 20% are
plastic that have no type of security tied to them. Those probably all
get delivered somewhere. Right? It's a different product. That doesn't
mean it's not going to happen. We're doing electronic transfers in
Western Union, we do agent-to-ATM, ATM-to-agent, ATM-to-ATM,
agent-to-agent, PC at home-to-agent-to-ATM. I think we have the
product offerings. Let me just reinforce this. On a day when we do
over
19
500,000 Western Union transfers, I don't think we've had one day
exceed 5,000 in any type of automation. Last year in the ATM business,
I think you've heard this before, it's up to I believe 11 transactions
on ATMs, and 10 of those were tests. It's just not a product that has
any traction. That could change over time, and we think we're well
positioned, there. The brand certainly is out there. When you look at
Banamex and City Group all being related, then when we see the growth
coming, it's been good for us.
Speaker: Let me give the mike back to David.
C Fote: Yes. It's pretty bad when one of these guys keep a mike. [laughter]
David Togut: Thanks. David Togut with Morgan Stanley. Charlie, last year
you talked about potentially major structural changes in banks over
here, as providing an opportunity similar to what you saw in the US
ten years ago, in terms of card-processing, outsourcing and acquiring
merchant portfolios. Can you update us on what you see, in terms of
structural changes, and how big an opportunity that might be for you
in the next couple of years?
C Fote: Pam, jump in any time you want here. I think what you're seeing
though is in the European market, let me talk about Europe for a
moment. I'd say that Asia with the card business is, they're not
starting from scratch, scratch, but they're in their infancy in
accepting cards at merchant locations. The test markets are so huge,
though. There are 400 middle-class people in China that are probably
good consumer candidates for some type of payment plastic. But they
don't have a merchant distribution base. Even in Shanghai. Shanghai's
the only city I know of in China that has even started a credit
bureau. Their common database of who's good and bad is just starting
to be developed, over in China.
The European market which has been around awhile. Including the UK,
we're seeing activity where credit card departments that we had in the
US years ago that were members of associations, they migrated their
merchant and card-holding portfolio and management structure and then
the merchant side of the business was spun off what we now know as
ISOs. Over time, they became partners back in our alliance program,
for example, and they wanted ownership. I think we were right when we
said a year ago. I think you're seeing financial institutions on this
side of the pond that are going to skip the stage of selling and then
buying back later on. I think you'll see a lot more alliances coming
out of First Data in the next 12 months, David. The point is, we do
have activity going on. I think you'll see more alliance structures
around the world, too--not just in the US.
Pam, do you have any follow-up comments there?
Pam Patsley: Yes. I would just add that I think Charlie summed it up very
well. Particularly on the acquiring side, here in Europe, and in
Europe on the issuing side which touches a little bit on the acquiring
side as I was telling someone at lunch, it is the most analogous to
the United States years ago--10 to 15 years ago. When the United
States had all the different regional association processors. That's
what you find in most of Europe. In-country processors, co-owned,
jointly-owned by some or all of the banks in that region.
20
There are things like EMV requirements or banks beginning to look for
ways to differentiate themselves. Those are things that kind of cause
or serve as a catalyst to cause banks to rethink that positioning and
look for perhaps better and alternative solutions. Certainly, as
Charlie mentioned, it's cost-structure, as well. I think our timing is
good and patience is necessary.
C Fote: Ownership percentages. I think as you look at the European market
against the US, it could be different because of tax issues. VAT tax
issues--that's directly related to how much you own of an entity. So
you could see different ownership percentages based on where we move
throughout the world. In most cases, that's not directly related to
what we're doing in the markets as much as what the tax structures
look like.
D. Banks: Bryan, did you have one?
Bryan C Keane: Brian Keane, Prudential Securities. Nobody's asked it yet,
so I'll ask - can you'll give us an update on the Concord merger and
the timing of the comments back from the DoJ.
C Fote: Second request, I'm sorry, second filing of the Harts Scott Rodino,
remember we put one in, then we withdrew it. Then we put another one
in. That expires tomorrow. We haven't heard anything, but based on the
complexity of the deal and the amount of people working on it, I'd be
keeping your eyes open. We might see another request, here. Call it a
second request. But I don't think we'll see a refiling. That would add
some time to the process, but we still expect a third-quarter or maybe
early fourth-quarter close.
B Keane: Second question is on the language of the finalized Wal-Mart
retailer settlement. How much participation did FCC have in the
language of that settlement? Secondly maybe, why or how do you see it
being positive for First Data, going forward?
C Fote: From a participation standpoint, Bryan, I think we were more of a
glossary of terms. We were, "What does this mean?" We weren't in there
negotiating the deal, for sure. How does it affect - and we wouldn't
want to be. We have partners in all sides of those debit relationships
and credit card relationships. It probably wouldn't have been wise for
us to help them through those transactions, just because we were in
the middle of an acquisition.
From a "What's it do for us?" standpoint, it's neutral-to-positive.
We've dug pretty deep and haven't been able to come up with a
negative.
B Keane: I just have one more last question for Scott. Scott, do you think
in signing up with the networks to some of the banks, there are a lot
of questions about the ATM networks and the point-of-sale networks
will be set up with the banks. Do you think you'll end up having to
pay for a lot of the market share when you negotiate with the banks?
What have your conversations been with the banks on a combined
Concord/STAR/NYCE relationship?
21
S Betts: I know I got a lot of questions on this at lunch, too. Certainly
within the limited scope that we're able to operate in right now,
we're waiting for this deal to close. We really can't answer any of
those questions, now. In a lot of cases, I don't know and can't get
the data to be able to answer those questions at this time. I will say
that we continue to operate our NYCE business out in the marketplace,
and we try to be as competitive as we possibly can, there. I think
we're going to have to wait a little while to get the answers to that.
D. Banks: We need the mike over here.
Dris Upitis: Thank you Dris Upitis at CSFB. Could you talk a little bit on
the Merchants Services side? If there acquisitions of size
internationally that could give you scale? Obviously, not approaching
what you have domestically, yet, but some real scales to get out of
the gates, on that?
P Patsley.: You're exactly right on the latter part of your question's
statement, there. Finding any one thing with the scale of things that
we have bought in the past in the US is going to be a little bit more
difficult. Quite honestly, there aren't many processors that reach
across countries. Given that the larger countries are still in, kind
of, their infancy--when you look at China and things like that. We are
looking at acquisitions very aggressively. I think our TeleCash
acquisition and those types of acquisitions are hopefully what we'll
continue to be able to find. That was a perfect fit, and again, if
you're familiar with First Data for a number of years, I think the
best way, again, to think about that was when First Data was rolling
up and consolidating authorization front-end networks in the US,
again, a number of years ago. It also gives us a platform to provide
unique products.
D Upitis: Okay; thanks. Then on the Western Union side, you talked about
some of the enterprise deals that you signed recently. Are there other
major countries where you can make a big gain, like the Pakistan
example, going from a couple hundred to two thousand in short order,
with some major enterprise signing? Thanks.
C Fote: Christina, do you have any thoughts there?
B. Thomas: I think there is still room for large enterprise signings
throughout Asia. We're a long way from penetrating that market, from a
location standpoint. There's more to come.
C Fote: Remember when you're thinking about going around the world with
that product and that brand. In the US in 1995, I think we had 17,000
domestic agents and transaction growth rates were about 4.5% a year.
Now it's 51,000 or 52,000 US agents, and transfers within the US are
running about 9% or a little more per year. You take the US outbound
and it gets you in to the low teens from a growth standpoint. Remember
what we did. We added agents, painted buildings, signage, painted
buses and added new products. We have a variety of prepaid products.
If you think of the business, the whole segment is a prepaid company.
People come in and put money on the counter. They pick it up somewhere
else, feeling secure that it's
22
going to arrive, and that's the credibility of the brand. They also
put money on phone cards, they put it on stored value cards. We manage
those monies for those consumers one transaction at a time, or at the
account level.
That whole global opportunity we haven't even touched on, other than
the transfer business around the world. So long runway - after we get
the 500,000 locations, after we have every money transfer there is in
the world that we can get our hands on, we'll put more some products
out around the marketplace. Experience tells us the brand on certain
products--mainly prepaid products--means a lot.
D. Banks: I think we have one up front. Adam, here.
Adam Frisch: Hi. Adam Frisch from UBS. Charlie, you made a pretty clear
case that the market was kind of ripe for a new payment system. If
anyone can do it, I guess it's you guys, based on your scale. You
still seem a little far ways away from repeating what Visa or Master
Card has on a global basis. Can you discuss if your plan for an
alternative payment system are geared more toward the US, or if you
are going global?
Then on a related note, if you could give us the status of the lawsuit
for Visa against First Data Net and the counter lawsuit? Where are we
in the process? When can we expect resolution on that?
C Fote: From the payment-systems standpoint, we're not going to let go of
what we have. That's for sure. It's going to take a long time to get
to a new payment system. Even as one part of the world changes
overnight, other parts of the world will take 30-40 years. The
implication isn't that everything we have is no good and we're going
forward; we're going to be critical in that paradigm. We have a
distribution network of 3.1 million merchants. We have 200 million
credit card accounts running on VisionPLUS. We have 340 million
accounts going to 340 million accounts in the US. We certainly have a
distribution-based effect and lead changes in the payment system.
When you start thinking about debit, maybe some of you know there's a
method to our madness. When you start thinking about debit, every
merchant in the world is an acquirer. Just by accident. If you think
it all the way through to its lowest level, the technology is about
the credit card business and the debit card business as it exists
today. In the very old days, and that wasn't too long ago when you
think about years, you embossed a card, you gave it to a merchant,
they'd swipe it on one of those old [inaudible] machines, and they'd
mail the sales ticket into the bank, put money into their checking
account, someone keyed in the data and the transaction ended up on a
bill in effect, as a receivable basically.
Today, what's happened over time with that product, is we've taken
that data capture and moved it all the way out to the point-of-sale.
We've put mag strips and chips on cards and we've eliminated
tremendous amounts of cost out of the system. The accuracy of the read
now, as the transaction, is as good as the merchant is honest. Right?
Everything is standard. [inaudible]. So you have a very low-cost
payment system.
23
Now you drive your expenses into fraud control. Is a merchant
conspiring to do bad transactions with cardholders? Is the mag strip
made up? Is the chip card phony? Is counterfeiting going on? You've
taken costs and changed the whole cost structure. Now as more and more
payments occur, using touch-tone phones, using cellular phones, using
fingerprints, using biometrics and so on--the whole registration
process is going to change to validate who you are. Then the cost per
transaction is going to go down. We are involved in that.
That doesn't mean tomorrow we're not going to emboss a card and use
cellular phones at the point of sale. What it does mean, though, is
that somebody's going to get out ahead of it, and we think we're the
ones to do it.
A Frisch: Comment on the FDC Net?
C Fote: The FDC Net? You won't see anything happen there for five or six
year's I'd suspect. So, if it happens, the more debit transactions you
have...I'll just give this group of stats. When you go to a city or a
network in the United States, only because I'm not familiar with the
debit network outside of the United States, although the banks outside
of the United States do immediate exchange. They do bank-to-bank cross
exchanges on a lot more frequent basis than they do in the US. When
you go into a city in the United States, over 90% sometimes 96% of the
transactions are regional. In the US, you've got a phenomenon called,
"national credit card issuers that use regional merchants." When they
aren't on the payment system, they were very, this is kind of an
oxymoron because you'll see what's going to happen to this over time.
They were national issuers, going to retail merchants. That's the way
it works in the credit card business.
Initially, when the associations were started, there were banks
getting together like when you come here, you have countries that are
really local associations. In the US, you had Atlanta, GA who had
merchants and cardholders, and the same bank would sign up merchants
and cardholders.
Then you go to New York and you go to New Jersey. You ended up with
national associations like Eastern States Bankcard Association, New
England Bankcard Association, Western States Bankcard Association and
so on. Over time, the banks became national issuers. The national
issuers established their own sets of rules and regs, saying, "We'll
have discount rates on factoring rates for receivables on a national
basis, where the issuer sets the rate for all merchants in the
country."
On that, two things have happened. One, the associations for the
efficiency of processing aren't required [inaudible] which was good
for us for several years, because we bought most of them. The second
issue is, the merchant business was one that the banks cashed in on in
the US. That's where they sold for 100% and they established the
alliance relationship later, because the banks for sure liked the
checking accounts.
In the debit card world, it's a whole different story. In the debit
card world, 96% of the transactions are regional based. So 96% of the
time, when you use your debit card in a network, it stays in that
network. In other words, it goes to a merchant in that network that
has the global brand on it, like the NYCE brand. It also goes to a
cardholder in that
24
network that has the NYCE brand on their card. So the NYCE brand is on
merchants' storefronts and on the back of the cards.
Those transactions are very concentrated. You need local exchange.
That's how you improve your efficiency. International or national
networks move transactions around the world,makes absolutely no sense.
You'll see more and more local networks popping up. The debit card
issuers today are doing that within themselves. They go from one NYCE
bank to another NYCE bank, for example--and only when it's out-of-area
do you need to send it to another checking account bank.
If I'm over here using my NYCE card and it's going to be .0004% on my
checking account activity or my deposit account activity, it will be
on my NYCE card from Europe. It's just a different payment structure.
I think that with our distribution network as big as it is, we should
be part of that payment channel.
Adam Frisch: Last question on the merchant side. You mentioned transaction
growth is still strong--around the 25% range. What's happening there
with the margins? Are you seeing pressure because of pricing,
increased costs or anything like that?
C Fote: Scott, I'll comment on some of the costs. You might want to comment
on some of the pricing issues.
S Betts: We're continuing to stay right in the range we have been. We've
talked about this over the last couple of times we've been together,
we've seen about 3-5% price compression--probably at the lower end of
that, so far this year.
C Fote: I think we've seen some downtick in margins over the quarter. We're
really investing in that business. So when you see this, we should
have explained this earlier to you. Don't forget, when you see any
margin change in those businesses...First Data International is being
carried by the product offerings of the other segments. We do not have
a First Data International segment.
When you see new business coming on that's a push, it's not, it's a
little accretive, it's not 20% accretive, but when you see business
coming on that's a push--remember the other businesses that are in the
segment. The Card segment, the Merchant segment, and IPS segment. The
card example, those businesses, those new development costs are being
carried by the segments in which they're reported. That's why you'll
sometimes say, "What's happening to the merchant volume or margin?"
That's part of it. The other part of it is that we're heavily
investing in the merchant business, on the exception processing side.
Then when you have a complaint on your cardholder statement, you can
key it in on your home PC and communicate with your issuer from your
home PC to get your account credited, settle the dispute, and charge
the merchant with one transaction.
25
A charge back on average, with exception, is about $115. Anyway we get
into a $113 cost and get paid for it is certainly something we want to
do. We're doing some investing, there. I'll tell you the segments are
supporting the individual products.
For example, Pam's whole business. Any time she does something new
that's non-dilutive or a little accretive, the margin will get pulled
down into the segment reporting. That has nothing to do with and is
not indicative of the business really.
Speaker: Yes, John. I think we had a question.
John [Mathis]: John [Mathis], Goldman Sachs. Charlie, first, thanks for
finding a place outside of New York that at least has some sunshine.
Surprising that it's London.
Audience: [laughter]
John Mathis: You didn't touch on the card-issuing business-the outsourcing
services and how it's tracking this quarter. Can you touch on that?
C Fote: Yes; I'm sorry. It looks like it has revenue growth because postage
is in the number. Call it flat maybe a little down. Maybe a little
up--we'll see how the rest of the quarter goes. That business, I'm
focusing on getting...I'm running that thing, so that's part of the
problem.
Audience: [laughter]
C Fote: We have 90 million accounts, we're tracking those every morning.
You saw the GE deal last week. That starts the first account
conversion of GE. Remember, we haven't converted the GE accounts that
Wal-Mart and J C Penney have. We have some good things going there.
I'm telling you its a couple of years your not going to see it be a
big plus or minus in anything we're doing from a financial standpoint.
J Mathis: Pam, if I could direct a question to you. How has your strategy
changed over the last year? What have you learned about the
international and European marketplace? How have you adjusted things?
Attached to that question, what would be the inflection points around
either a new outsourcing pipeline or new acquisition opportunities?
For example, if the banks and consortiums were looking to monetize
their processing assets?
P Patsley: I guess our strategy really changed when we formed First Data
International. So I would say it's just really now been in place not
quite a year. When I met with you last year, I think I'd had this
position about three or four weeks. Over the summer, we really worked
hard to do the reorganization and put together the strategy.
I think one of the single-most important things we did was to
consolidate all of our product offerings. I know you've heard First
Data talk about the one briefcase approach,
26
and putting things together. Quite simply, we needed to do that just
within the card and merchant business and the software sales. Since
that was put in place and finessed over the several months--last
summer I wouldn't say there's been a change.
I think what we are seeing is there are cultural differences that I
personally have come to understand and appreciate as it relates to
decision-making and things like that. I think clearly acquisitions
will continue to play a very significant part of our growth, going
forward, as Charlie mentioned and I mentioned, as well.
I feel very good about the strategy. It's a little different
region-to-region, because the markets are different. With regard to
the second part of your question, what's kind of that inflection
point, if you will, for new outsourcing opportunities or pipeline or
acquisitions? Let me see if I understand that correctly, what you're
trying to get at.
I think there are a lot of things in the marketplace - there are
external factors and internal efficiency issues and differentiation
issues that will cause people to look for alternatives. Our primary
objective, is particularly in markets where we have solutions today or
near-ready to, we want to be there at all of those opportunities, and
talking with those kinds of players.
I'm not sure - did that get at what you were looking at?
John Mathis: You made the point. Like you said--that acquisitions are such
an important part and the way the international market seems to be
structured is banks control the processing assets. It looks like the
U.S. did some years ago.
P Patsley: Correct.
John Mathis: What makes them want to all of a sudden partner or to sell
those assets?
P Patsley: I think it's not much different at all than what made the U.S.
banks re-look at that. It was again a focus and a specialization. You
know our depth of knowledge as these markets move from being simple
products like deferred debit or direct debit to more complex products,
incorporating [inaudible] 2005 and looking at investments, upgrades
and remediate systems to accommodate those changes that are regulated.
Are all going to be things that play on that.
I think pressure on earnings. It's those sorts of dynamics that I see
as really the same. On the merchant side, where we can go in and help
show our experience in running a sales force. And helping a bank
aggressively grow that business for what it is. That's what sets us
apart and causes them to rethink keeping everything in-house, or with
a regional processor that they may have a part-ownership in.
C Fote: I think you'll see competitors sharing information on the fly that
they never talked about sharing, before. Think about transactions that
move so they can be recaptured and show
27
up at the other end. If a merchant takes a card, they do their thing.
This bank pays that merchant. Sometimes it goes to the same bank, and
sometimes it goes to another bank in their area. When it goes to
another bank in their area, they've got to recapture the transaction,
double costs, and if they don't want any of the data to move around, I
think you'll have standards and record formats that say, "touch it
once," and let's get it out of here. Settle it quickly. Canada does a
lot of that. They have a pretty good system from a [inaudible]
standpoint and from an exposure standpoint when it comes to fraud,
called Interact. So, it's not in many banks in Canada, but it's for
sure that the system from a technology standpoint works.
Speaker: Go ahead, Jim.
James F Kissane: Jim Bear Stearns. Pam, just following up on that, what's
your sense of the internal growth out of international? Do you have a
multi-product or multi-platform strategy? How do you go to market
there? Does it make sense to consolidate at some point?
And a question for Charlie. So many U.S.-based services companies have
tried to crack the international market, including ADP and DST. Very
few have been successful. Why is First Data going to be different?
C Fote: Thanks.
P Patsley: Do you want to go first? Okay. Internal growth...we don't break
all this out. You could look at the near plus-or-minus a little bit
here and there each year around the 40% that we are targeting in
revenue growth to get to our objectives that we've set out there. The
larger part of that will come from acquisitions. I'll just leave it at
that.
On the platform question and the fact that we have multiple platforms
today, let me first answer one part of the question - How do we know
what to sell, or how do we come to that decision? The fact, again,
that we have put that all together under a common structure -common
sales force makes that decision very easy. The same sales person is
going to get compensated for getting the sale done. Which means
they're going to pick the right solution, as opposed to getting just
that one product sold that they previously were compensated on, which
may have been competing with really the right solution still within
First Data.
The notion of, "Is it good that we have multiple platforms?" Do we
ever envision that those should consolidate? A little bit of that is
how we've grown, how we've grown up, and functionality. I think for
the near term and the immediate years ahead, you won't see us doing
any big major consolidation of those platforms.
They're really very discreet in the market space served. I would say
EMEA is the only place where there's really any kind of competing
processing platforms. That's because Equation is already
up-and-running. It's so entrenched and so accepted. It has great
performance here in the UK and in Germany, today. So we will look to
what is the best alternative, based on functionality and cost.
28
As we go to new markets, VisionPLUS is our global platform if you
will, for issuing. OmniPay is primarily our global platform for
acquiring. Though there will be times, particularly in the Caribbean
and Mexico, where we have the advantage of using the U.S. platform. We
will continue to always make the best choice.
C Fote: It depends on the application, too. In the private-label business,
you might see one platform over another versus a bankcard customer.
You have different settlements. You get [inaudible]. Which means you
take three types of cards, ten types of card and when you can go
around the world you'll find that a lot of retailers have multiple
terminals. Japan's like that. You have ten terminals for ten different
issuers. Sometimes you have two terminals for Visa issuers on
different banks. Whatever the best solution is for some of those
countries is what we'll deliver as the endpoint.
On the second part of the question, "What makes you think you'll be
successful this time around?" You can put us on that list too, by the
way. It's 160 million in Hong Kong and the credit bureau business and
some other things we did weren't real smart. This time around, it's
small [inaudible].
By the way, that was very polite not to use us in the question. In the
Shanghai data center, it costs us about $65,000 a month for
[inaudible]. It's not $160 million to get in there. We have the
VisionPLUS software that came with the purchase. That whole company
cost us less than $140 million--the whole company. We spent more than
that just on the Hong Kong disaster.
I think we're just doing it smarter. Some of us have been here before,
and we're not going to lose this game twice. We're staying real focus
on what's going on around the world. Technology says that this is an
international buy-and-sell kind of company. It should handle
buy-and-sell around the world. The Internet allows that to happen. We
stepped out a little [inaudible] and said, "We have to play in those
markets and come back with serious solutions that will help us," in
this paradigm that we talked about earlier, and that I tried to
communicate earlier.
I don't have the exact answers, but I know this--we're focusing on it
every morning on the 6:30 phone calls. We just don't let analysts in
on that call.
Audience: [laughter]
Speaker: We've got some calls on the line. We have Pat Burton.
Patrick M. Burton, CFA: Good morning or good afternoon over there. My
question relates to the Dynamic Currency Conversion product, and it's
for Pam. With the lawsuits that the associations have been hit with
over their foreign currency exchange--is this product getting promoted
more now at the point-of-sale? Then I have a follow-up question.
29
P Patsley: I think the main thing, Pat, about DCC is that it's very
transparent to the consumer at the point-of-sale. There can be no
question in the consumer's mind as to what they're paying. They can
select to change it to their home currency or to the local currency of
where they're shopping. It is a product that we're aggressively using
to get in front of banks and acquirers and processors, to find some
way to get the door opened and show a differentiation for ourselves.
And as I said it turn, to allow them to differentiate in the
marketplace.
P Burton: The follow-up question relates to the Western Union International
agent base. How are you finding the potential to cross-sell the rest
of First Data services? Particularly, on the merchant side? I know you
had the Grace Kennedy announcement last year, but it seems we haven't
seen too many since then. Could you give us an update there, please?
Thanks.
S Betts: Actually, we've got a number of initiatives underway right now. I
guess several of them I really don't think have been worthy of major
announcements, but it really is setting business models in place. I
think the big announcement is when we get those ready-to-go and roll
them out regionally or into multi-countries. Anything else, Pat?
P Burton: So we should expect some announcements on that front over the
next 12 months?
S Betts: I would say so, for sure.
P Burton: Thank you very much.
C Fote: Just a couple follow-ups. First thing, you'll probably see DCC in
the largest market in the U.S.--being Las Vegas--to handle all the
consumers that go to Las Vegas for gambling. Then they can
pick-and-choose the currency that they're putting on their cards, for
their meals and hotel statements. More important than that, Western
Union has been in the DCC business for years. The point-of-sale system
is run at the agent location--not at the merchant point-of-sale
location, like it is with merchants in the credit card business.
From an experience standpoint and the management of the cash and the
currency conversions and the hedgings that we do on the currencies
around the world--we've been doing that for years. This is a concise
product that sits on a point-of-sale and a very small footprint that
accommodates the bulk of merchants and cardholders. At the end of the
day, the cardholder is getting the benefit, here.
Speaker: I think we've got another caller. Dirk Godsey?
Dirk Godsey: Yes. Good afternoon. Just a quick question for you, Charlie,
related to the Visa merchant settlement. A couple of the reactions
we've seen in the marketplace, from at least one bank, turning off
their PIN option on their card. There's also been some discussion
about various banks moving more towards Visa. There have even been
some discussions of interlink only-type strategies. I wonder if you
view these as kind of one-off events, or do you see a trend emerging,
here?
30
C Fote: I saw the letter that the bank sent out to turn off the PIN debit.
It was kind of like this--"We're not going to let you use your card at
merchants." That was a checking account mailing in the U.S. for this
bank. I don't know if it was a statement itself or a message on the
statement that said, "Your PIN card will no longer be good at
retailers. It will only be good at ATMs."
If you want a PIN card, the implication is that you'll have to do
offline PIN only, at merchants. The interchange rate to the issuer
would maintain its strength, at least from a volume standpoint. There
would be more transactions at the higher rate.
Then when you used your card, the bank just wanted to remind
you--although it was your money you were trying to use--a letter when
out after the checking account mailing that said, "I told you not to
use your money. So, if you want to have an account, please reapply and
we'll give you a PIN-based account." That's kind of what happened,
there. I don't think you'll see a trend, there. I think that was one
bank's reaction.
Now there are some banks in country, the U.S., for example, that said,
"This is going to cost me $25-30 million in interchange fees, and we'd
like systems or a method of getting some of that consumer's money
back." That's as deep as it goes. In fact, the settlement that you
referred to, I think I still have drafts. I don't think those were
signed, yet.
[David Banks]: They weren't signed, for sure. I don't know [inaudible]
C Fote: The drafts had Favorite Nations clauses in them. It was thought
that one of the associations got a better deal than the other
associations. It worked out that whatever one got, if it was better
than what the other one got in the negotiations, the other one got
that same deal. It sounds to me like there's no trend going on, yet.
People and the issuers are trying to sort out what they're going to
do, going forward.
Look at the American Express model, for a moment. They have a whole
assortment of cards. There's the green card, which they call the
personal card. They have gold and platinum. They have black, blue, and
a [inaudible] card. They have a contract or a relationship with the
user or consumer, based on the plastic that the consumer wants. The
green card is a personal card. That might cost you $10 a year, if we
want to be dramatic, here. For that, you get two miles on your loyalty
program with American Express every time you use your green card for
$1. If you have a gold card, you pay $200 a year for it. You might get
20 miles for every time you charge $1. That type of relationship has
nothing to do with the merchant.
The merchant takes all the American Express tickets at the end of the
night, with some exceptions, based on the average ticket. They put
them in an electronic [inaudible] and says, "My discount rate is X."
In the case of the bankcard, they all look the same, but you pay
different amounts. That was really the issue.
I think over time you'll see a different relationship between the
issuer and the consumer in the bankcard world than you do, today.
31
P Burton: Thanks, Charlie. Just a follow-up on this 1/3 of revenue by 2007
target. Would you expect that the primary contributor to that or
probably even more than half of that growth would come through the
Western Union Franchise? Or do you expect an equal contribution from
the card issuer services business and the merchant services
businesses?
C Fote: I'll roughly say it will be 60%, plus-or-minus, coming from Western
Union. That will be mainly what I'll call internal growth. Sales and
knocking on doors. Putting merchants on and doing advertising and
getting transaction volume. Christina--is that about right, would you
say?
C Gold: Yes.
C Fote: Then Pam's business will be 40% of the total. That will come from
knocking on doors, and so on. I'll tell you that more than half of
that will come from acquisitions. We want to sell at the presence.
Those acquisitions will have to fit into the core competencies of what
we do best, or we're going to pass on them.
Speaker: Craig, I think you've got a mike.
Craig A Peckham, CFA: Craig Peckham with Jefferies. A question on the
domestic side. There was a question earlier about what the banks'
reaction has been to the settlement, as well as the Concord merger.
Charlie, what are you hearing from the merchant customers and their
perspectives here on the combined companies?
C Fote: The merchants? It depends on the size of the merchant. We know that
some have been contacted that are customers. They're going to respond
as they see fit to respond to this pending deal. There's been no
decision on ramming networks together. There's been no decision on
keeping networks apart. No one's asked us to divest of anything or to
change ownership percentage or anything like that. We'll just leave it
where it is until we see it rolled out in the next few days and over
the next couple of months.
C Peckham: One follow-up. With respect to international card processing,
has there been any change in tone over the last few months or quarters
regarding increased prospects for getting more outsourcing business
and moving off of software modules, etc. How much of that's related to
underlying economic fundamentals that have had these card issuers
offshore?
P Patsley: I assume when you say getting in getting off of software
modules, you're specifically referring to where we have VisionPLUS
customers running our software in-house. I would say we have made a
very concerted effort last year to accelerate those kinds of
conversations. There are a number of activities. One other place is
Shanghai data center. It is up and running, and as I mentioned, we're
keeping our fingers crossed. We may have a contract soon with the
First Asian Bank to run on that data center. In pockets around the
world, Brazil where we have just such a large concentration of
customers using that platform. Chile, Central America--a number of
conversations--looking to
32
partner as I mentioned in many cases or to acquire into maybe it's a
processor that's running that platform, and running our software
today.
C Fote: When you get global, we're taking opportunities internally with
some of our data centers around the world. We have small data centers
in Ireland. We have [inaudible] in Ireland that we're running T1
platforms on. We can run merchant platforms in those data centers.
There's a lot of opportunity for us to be doing stuff around the world
in a service bureau mode, using the infrastructure we already have in
place. That just supports no big Hong Kong move that will drive
everyone nuts, and so on.
P Patsley: I mentioned Shanghai. Another one that I think is a huge success
is WestPac Banking Corporation. A ten-year contract and again using
VisionPLUS, but more in an outsourcing model. That's for Card and
Merchant, there in Australia.
Speaker: I think we've got a couple more on the phone. Let's go to John
Kraft. John, are you still there?
John Kraft: Yes, I'm here. Good afternoon. Just a question about the B2B
payment space with the Velosant name change and all the recent press.
It appears that there's sort of an increasing focus on this space.
What response are you seeing in the U.S., maybe relative to what
BillingZone saw with the old owners? And maybe what is the potential
internationally? Thanks.
C Fote: We have Garen here--Garen, nod your head from the audience so I'm
giving the right story, because we've got to live with it after I say
it.
We just had a conference out in eONE headquarters with a series of
different constituencies from the B2B world. Although most B2B deals
have suffered, we got pretty deep on the data-gathering, here. The
world has taken on B2B as a viable approach for payment movement, in
the invoice-presentation of payment movement.
I wish I had the stats with me. If everyone said three years ago,
"It's going to be 60% of all payments by 2004." Directionally, it's
going to be about 19% or something. It's not from a dollar standpoint.
So it's moving, it's just not moving along the original draft. Garen,
is that kind of directionally what's happening? Okay.
That's what's happening in B2B. As it relates to international
payments, I'm going to tell you that if it's at First Data and we
adopt B2B, we're going to use it around the world. There are no
boundaries when it comes to paying your bills. You take 40% of our
company and we'll grow at 13% a year through 2007 or 14% a year
through 2007. David, isn't the number like $17 billion?
David Banks: Yes.
33
C Fote: $16.9 if I remember so it's $17 billion at 14% growth; right? So
our expenses, if we run a 20% margin would be--I can figure this out;
I know I can do this on the fly--about $13.5 or $14 billion. We pay
$14 billion worth of bills through B2B system, so we wouldn't pay $8
billion and $6 billion. Because if you run two systems over time with
two infrastructures, you're not going to get the expense savings you
counted on to begin with--or the inventory control, betterments--or
whatever comes with B2B. I would tell you once the company's in it,
they're in it globally. It's not just a localized system.
D. Banks: I think we've got Greg Smith on the line. Greg?
Gregory Smith: Yes; hi. Good afternoon. Charlie, you gave an update on the
card issuance processing business, but you didn't talk about any of
the kind of new outsourcing opportunities. You said before that you
had some deals that looked like they were getting past the 50-yard
line. Any update we can get, there?
C Fote: We have statement processing deals that we're converting. I don't
want to talk about individual customer contracts, but I will tell you
that we have very significant opportunities in the private-label
business, including all private-label customers as it relates to
leveraging up our fixed expense. We'll take advantage of centers
around the world that we haven't been able to take advantage of,
before, now that we have this GE contract firmed up. So that's an
example of doing more than just receivable processing.
G Smith: Then one last question. It looks like American Express may have
the opportunity to partner banks, pending some litigation, here. I'm
just wondering what opportunities or challenges that may pose on the
card-issuance processing side for First Data.
C Fote: I think it's an opportunity. There's always challenges. I think
it's an opportunity. We used to do this 20 years ago, 15 years ago
with American Express. This is another oxymoron of what's coming out
of the industry, today. Banks used to issue the American Express
revolving credit card. The gold card, years ago, which had revolving
features on them, were issued by banks. You would get your green card
bill, but it was a gold card. The gold card revolving credit line was
supported by banks. When you got your bill, you'd say, "I want to
revolve X percent of my balance or my entire balance." You would sign
a draft, that would go to the bank, and you would get issued a loan
from the bank on a revolving basis for the revolving part of your
American Express account.
So gold cards used to have American Express on them as you see them
today. But instead of Centurion Bank, which is the bank that American
Express owns, who issues the cards. They would be issued by a bank, a
bank's name would be on those cards the credit was the bank's credit.
We used to do processing for those revolving accounts for some of the
banks that issued the cards. So the opportunity, I suspect, is that
when you have a bank card and you have an American Express card, if
that comes to pass, we'll be aggressive in a sales effort to say to
our bank customers with American Express, "You would like to have one
customer service department. You would probably want one interface
with the dispute systems" and so on. So it makes sense to load those
accounts up in our systems. Time will tell how successful we'll be, if
this comes down.
34
G Smith: Okay. Thanks a lot.
D. Banks: Bill.
Bill Cross: Bill Cross, Eaton Vance. Given the importance of debit in most
international markets, and given Concord's expertise in debit
admittedly really within the confines of the US, is there anything in
terms of technology or processing expertise or approaches to marketing
or anything else that Concord can offer the international card team?
If so, what is it?
C Fote: Don't forget, we're strong in brand. Right? Our brand is strong.
The Western Union brand is strong around the world. That, you've got
to just put on the table. It certainly tips the scale a little bit.
The second thing is the distribution network on the merchant side.
There's nothing that says the merchant can't take everything
poke-and-play. You turn on merchants around the world by saying, "The
first time I see a transaction with this logo on it that I've never
seen from this merchant point-of-sale device before, I'm going to turn
that point-of-sale device on for all future transactions."
We're really merchant-centric and we're really issuer-centric on this.
We think it should be a free-for-all and let the guy with the best
product win in the marketplace day in and day out.
If my 96%, depending on the network, but call it north of 90, I
haven't seen one less than 90, If my 90%-plus in local markets is
correct, the banks are competing like sons of guns to get the deposit
base. Right? The interchange, and letting money move from Point A to
Point B in a very cooperative environment can only be good for
everybody.
If you can drive down costs in a utility if I may, and if you get
caught very low and if you don't want to play in the network, that's
okay. You might have to play in a different network. But you want
those deposits. For you to attract the deposits that compete on the
amount of money, you pay for a deposit. Then you can go make loans so
you can make money as a bank or financial institution. I think you're
going to be encouraged to go with the low-cost producer.
From a First Data standpoint, and by the way, this includes NYCE, this
includes STAR. So when I talk about networks, I'm not just talking
about bankcard brands or competitor brands. I'm saying we own some
brands, right? We want to compete on a low-cost basis, and let the
banks go get deposits and do what they do best, and let us run a
common network.
D. Banks: Jeff, do you have another one?
35
Jeff Baker: Charlie, you gave us a slide that had Starbucks and Borders,
and there was no Visa or MasterCard Logo on there. It essentially
implied to me a potential beginning of perhaps a merchant network. If
that is the case, can you give us the overall benefit to a bank that's
willing to forego their interchange to enable something like that to
happen? What are the opportunities for First Data in that situation?
C Fote: Let me stay away from the, "Forego the interchange." No matter if
it has a logo on it or not, the loyalty cards being good at multiple
merchants is a good thing, if you want to play that game. Now you take
regional debit networks, and you use your card at a lumber yard and a
grocery store. In your local club, you don't have to let in the
competitors, all lumberyards in that area. I think you'll see local
clubs have loyalties. There'll be local clubs coming up in regional
areas, and it might even get down to shopping center levels. It would
be very seldom in my example that you'd see two lumber yards in the
same shopping center. There is cooperation on loyalty points, so they
could keep you coming back to the same location. You'd keep walking
through the same mall and that's creating foot traffic for the mall
that will keep you buying at that mall. So, I think you'll see a lot
of opportunities. I don't think you'll see Starbucks and Dunkin Donuts
get together, but you'll get Starbucks and Home Depot. That'd be kind
of an example.
Speaker: Greg Gieber.
Gregory E. Gieber: Gregory E. Gieber from A G Edwards. Two questions for
Pam, and then a few for Bill. First, can you talk about as you move
into Europe, you can here a year ago. What did you see in the way of
competitive structure for other processors, as pieces coming over
here? What are companies like [inaudible] and EDS doing in the way of
seeking out processing accounts?
Then could you also comment on Eastern Europe? I don't think you said
much about that in your remarks. Is the financial structure there such
that you can move forward into Eastern Europe? Are there things there
that you could acquire there?
P Patsley: I'll take the last part first, because it's a shorter answer.
While I didn't mention it, I think I might have said, "Poland,"
somewhere along the way. We have a number of discussions underway in
looking at Eastern Europe. Several of those are in conjunction or
emanated from our Western Union agents, there. Again, it's not as
mature. So the opportunity for growth and as the processors and banks
are looking for solutions as they get more aggressive in the issuance
business. We think there is a good opportunity for us. VisionPLUS
would most definitely be the software we're looking at there.
There have been a couple of acquisitions that have come, and then been
pulled back, and different things so we are there and know of them. We
very much would like to have a presence in Eastern Europe, and we see
that as a growth opportunity.
The first part of your question, with regard to competition, who are
we seeing--I took it that you meant not just EMEA, but around the
world?
G Gieber: Mostly in Europe, but also around the world. But Europe is my
primary interest.
36
P Patsley: In EMEA, Total Systems does, I think you mentioned them, have
some presence here today. I guess the best way to describe it is, and
I certainly don't want to come across as arrogant or overly-confident,
but it is more "spotty" competition, and it's not always the same
folks around, even within that region. Everyone has a little different
approach to the market, in terms of what they're willing to do and how
they're willing to structure a transaction.
Probably there aren't many if any. I can think of probably just one of
the regional in-country processors that has made any forays into going
outside their country. Otherwise, they kind of stay within the
country-of-origin, if you will.
Around the world, again, I think I alluded to this. This is where
First Data is in a very unique position. The presence through the
VisionPLUS software distribution around the world, our presence with
Western Union, our knowledge of local markets, activity and
substantial operations in different parts of the world, already. There
really isn't any one other competitor--particularly not in the list
you named--that is approaching all the different markets, that we can
see consistently each place that we are.
C Fote: We're facing competition throughout the world [inaudible].
P Patsley: It's different.
C Fote: Yes. We're not the only player out there, as you know. When we
thought we were, we lost the biggest account we ever had outside the
US. So for sure, there's competition.
G. Geiber: I have a question for Bill. If you had to break down your number
of Western Union Agents instead of doing it on a US versus foreign, is
there any way you could break it down into those agents that are
primarily handling outbound movement versus those handling inbound?
What's the sort of split is like, and how are you growing it?
B Thomas: In terms of total numbers, I'd say the US, which is in the range
of 50,000, is primarily domestic and outbound. Western Europe, I want
to say, is probably in the range of 85% outbound. The number of agents
in Western Europe now is in the probably 20,000-25,000 range. I might
be a little conservative there, but those are the approximate numbers.
C: I can give you a little, Christina I don't know if you have it off the
top of your head so if my range is too [inaudible] tell me on that. I
think Western Europe outbound went by or is close to US outbound from
a revenue standpoint. Not quite as many transactions, because we have
a little more flexibility in Europe than we do in the US. Isn't that
right? I think western Europe outbound is close to the US outbound as
gone by from a revenue standpoint.
I think we were anticipating November of last year for that to occur.
If I had the stats in front of me, I'd give you the numbers.
37
G Gieber: Just one final question on Western Union. If you go to a country
like India or China, is there much intra-country money transfer, or is
it all international? Do you see any potential for intra-country
transfers in, say China?
B Thomas: I'll tell you a story on one of our first trip into China, about
a year and a half, two years ago, now. We were making our pitch to the
China Post, at the time. We were bragging, saying, "We're doing 90
million transactions around the world." These guys looked at each
other and said, "Well, we're doing 220 million intra." So there's a
huge market, there. Again, it's a very different price model and
structure. It's not something that's on my priority list, today--maybe
in the future. We are in discussions with a couple of our partners in
India, to look at the possibility of doing domestic transactions.
D. Banks: We'll take two more. One right here.
Steve Wharton: Yes. Steve Wharton, Loomis Sayles. I just wanted to ask
Charlie mainly about what looks to be the fairly imminent passage of
the Check 21 Act--the Check truncation, and what effect that may or
may not have on debit growth, going forward in the US?
Separately, the potential use of other technologies--like say jet
conversion by large retailers at the point-of-sale to try to use the
ACH network, and bypass interchange-oriented payment devices all
together?
C Fote: I'll comment. I'll take them in order. The first one is Check 21;
we're all over it. I don't think financial institutions should all be
buying the gear to do check truncation with imaging and all the banks
being inefficient at it. As soon as you don't have it full and have a
little capacity to handle your big day, then every one has extra
capacity for the big day's volume. Then you end up very inefficient.
Some of the manufacturers in software and system providers in that
business are trying to reach out into the outsourcing business, for
check capture and check processing. We've been doing it for years.
We'll compete as hard as we can and we'll stay on top of that
business.
Today, check truncation can be done in bulk. You can do remittance
check truncation, you can pick a checking account in the US and say,
"I'm going to pay $5 to get my checks back and $2 not to get my checks
back." You can control that with technology today. We take it all the
way to the lowest level.
I was talking about card capture at the point-of-sale, earlier. Using
a mag strip or a Smart Card, you can do that with a magnetic line, a
check number, even if it's [inaudible]. You can truncate every check.
You can make every merchant a check truncator if I may, by just keying
in and doing a capture with a touchtone telephone, like we've done in
the credit card business for years. Then you have authorizations with
credit card follow-up.
38
You think of that and you think of cards-not-present in merchant
business. We put fraud systems in over time to make sure that no
matter where the check capture is done, we can catch the bad guy. If
we can't catch the bad guy, we just don't pay anything. We can't have
a system for a segment of the market, we just don't pay the merchant
for his transactions until we know they're good.
With Check 21 is going to do is allow images to move around, on top of
the electronic capture. It takes a lot of room to move an image. It
takes a lot of data. I don't know if it's all going to happen with the
authorization, or it's going to happen with the first check capture or
if it's going to happen with an imager at the point-of-sale because we
have imagers at the point-of-sale today in our TeleCheck business. But
to transfer every record on-the-fly in total is a challenge. I think a
company like us can at least bring economies to large check
processors.
In fact, we process as many checks in Denver as some of the largest
banks in New York. It just makes sense for us to move in that
business. If we could truncate our own checks around the country
[inaudible] in the US, which is a platform to go forward on. When you
get outside the U.S., check penetration isn't as great. If we could
truncate our own checks, it would be significant for First Data.
The second part of the question.
Steve Wharton: On the check conversion, some big retailers are trying to
pursue that further.
C Fote: I know where you're going. In electronic capture, if a merchant is
paying a nickel or a dime for an online transaction, and $2 discount
rate for offline debit, and the Fed and the US charges us 6/10 of a
cent to do a transaction through a bank, why aren't people just using
ACH transactions for settlements? You can.
We do that in TeleCheck. We truncate transactions and send them
through the ACH world. Now, when it's a verified transaction,
[inaudible] not guaranteed, but we use a database. We go out there and
say, "This is a good check." Then we tell the merchant it is a good
check. And the merchant's of any size. Some of them will initiate ACH
transactions through the Fed, through their bank and through the Fed.
We don't do that. We only do them for check guarantee transactions. If
it's $0.06 or if it's a dollar or a penny and they beat a deal with
their local institutions to do it for $0.04, they think it's a pretty
good transaction.
Now in the truncated business where we guarantee the check. That has a
discount rate that's very similar to credit card discount rates. The
merchant isn't really paying 6/10 of a cent--they're paying something
higher that says we guarantee the check; you'll never see a bad check
come back [inaudible].
Even though it looks like 6/10 of a cent, when you weighed it all and
put it in a pile and stir it up and you'll come up with something that
might be a lower discount rate--but it's not a penny. The total cost
of taking a check, paper-based, is more than it looks from the bank
deposit cost list.
39
D. Banks: Let's make this the last question, back here.
Richard Thoma: Richard Thoma, ADN Conseil. Pam, you mentioned growing with
acquisitions. There've been a couple articles in the centralized press
in France about your acquisition of the [inaudible] Payment Systems.
Could you comment on that?
P Patsley: We don't comment on rumors. That would be my comment.
C Fote: What comment?
P Patsley: I didn't hear a comment. Did you comment? I didn't.
C Fote: I know that hit the press somewhere--some local press. It didn't
hit back in the US, but we don't comment on rumors. Are we ready to
wrap up?
D. Banks: Okay, let's.
C Fote: I just want to say to everyone, listen, thanks. For you to come
over, just makes us feel good on its own. Thanks for spending the
time. The team around the world is doing great. The team in the US is
doing great. I know a lot of you have been long-term owners, and for
sure, we appreciate it. Thanks for having us here. We enjoyed it.
Audience: [applause]
D. Banks: The Dynamic Currency Converter demo will start in just a couple
of minutes. If anybody is interested in staying, they can hear that.
Audience: [applause]
[Music]
[End of conference]
40