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First Data: We were surprised, too

By David Milstead, Rocky Mountain News (Contact)

Published April 15, 2008 at 7:30 p.m.

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First Data says it was as surprised as anyone when customer Frontier Airlines declared bankruptcy Thursday night.

Frontier blamed Greenwood Village-based First Data, its credit-card processor of just a few months, for the filing. Frontier said First Data demanded a sudden and unexpected jump in collateral, which meant a sharp reduction in cash flow from credit-card proceeds.

Frontier's finger-pointing has led investors and business leaders to question why First Data would knowingly send a customer into bankruptcy.

Spokeswoman Staci Busby said Tuesday, "We were taken by surprise when Frontier Airlines filed for bankruptcy. In our numerous conversations with them, they never informed us that filing for Chapter 11 was even a consideration."

Frontier spokesman Joe Hodas declined Tuesday to discuss the specifics of his company's dialogue with First Data.

First Data is a "processor," which works with the bank that issued a credit card and the merchant that accepts it. When a consumer uses a credit card, the processor takes the money from the bank that issued the credit card and deposits money in the merchant's bank account.

A restaurant, which delivers its moderately priced product to the consumer before the transaction is rung up, poses little risk. An airline, where the customers pay hundreds of dollars well in advance of their flights, is much riskier. If Frontier is unable to fly, and First Data is unable to get the money back from Frontier, it - not the bank that issued the credit card - is on the hook for the refund.

About 70 percent of Frontier's revenue comes through First Data, Hodas said. The remaining 30 percent comes from cash, check, and the cards that do their own processing - American Express and Discover.

The increase in withholding was too much of a cut in cash to bear, Frontier said. First Data told Frontier April 8 it wanted to raise Frontier's collateral from $55 million to $130 million, and the withholding would increase from 45 percent to 50 percent, then to 100 percent May 1, in order to build it up.

The evaluation of risk and setting of collateral happens at every processor, said Adil Moussa, a processing-industry analyst for the Aite Group.

"Merchants are divided into buckets by risk, and they do a comprehensive risk analysis," he said. "This is not First Data reading the newspapers, and this is not based on rumors."

The newspapers now have an avalanche of bad publicity for First Data, which has more than $8 billion in annual revenue and ranked among Colorado's biggest public companies before going private last year.

"Other (processors), their direct competitors, have already started using this as a selling point not to go to First Data," Moussa said. "They're saying, 'Hey, do you want to partner with someone who will push you into bankruptcy?' "

Comments

  • April 16, 2008

    1:43 a.m.

    Suggest removal

    SteveM writes:

    Mr. Moussa, according to your story does not work for either company. It's unclear, therefore, what value his comments add to the story. Next, if the writer, Mr. Milstead, found Mr. Moussa's comments so valuable why did he either not ask or fail to write about the obvious question on everyone's minds, "Why just Frontier and not all small airlines or why not all airlines if 'Merchants are divided into buckets by risk, and they do a comprehensive risk analysis. This is not First Data reading the newspapers, and this is not based on rumors." Frontier, if anything, was doing everything expected by Wall Street to weather these economically turbulent times. If you are going to use the excuse to raise feeds and rick collateral that small airlines are a risk because 3 went out of business in the span of a week, they you would have to put all small airlines in the same bucket. Meanwhile, how does the size of the airline matter? Presumably the giant carriers go bankrupts--United did so most recently. So shouldn't all carriers be put into the same bucket then, if that's how it works? And isn't an airline that was just in bankruptcy a bigger risk than one that never has? There's something rotten in Denver.

  • April 16, 2008

    9:27 a.m.

    Suggest removal

    Wookie writes:

    Poor FirstData. Surprised that their actions would push Frontier into even more negative cash flow than the price of fuel is doing. Not smart enough to understand what the average person on the street immediately gets. I can't blame their competitors for jumping on this one. FirstData left the door wide open for competitors to use this against them. You reap what you sow, FirstData. Enjoy.

  • April 16, 2008

    12:35 p.m.

    Suggest removal

    BKindel writes:

    I can understand a credit card processor's need to have a "cushion" against a default by the carrier. I was stunned to see that they were already tapping HALF the cash flow to create that cushion, but SHOCKED to think they would have the chutzpah to take it ALL as of May 1st.

    The article notes that FirstData processes some 70% of Frontier's income. Airlines don't operate on the kind of margins that could tolerate such a huge hit, so that left Frontier with very little recourse. That FirstData was "surprised" is a strong indicator of how little they actually understand (or are willing to work with) their customers. DUH!

  • April 16, 2008

    2:54 p.m.

    Suggest removal

    bmb527 writes:

    I, as an employee of Frontier hope that Frontier takes every avenue to rid themselves of the maggot, bottom feeders that are First Data. Many of us recently started with Frontier and have spent thousands to relocate to the Denver area, committed to mortgages etc., to have our company rocked by the unfair business practices of First Data. I truly hope that any small business owners that accept credit cards use or change to a processor other than First Data.

  • April 17, 2008

    9:30 a.m.

    Suggest removal

    namatta writes:

    OK, a little logic: Is it First Data's fault that ATA, Aloha and Skybus also filed for bankruptcy? bmb527's post says it all..."I'm personally affected by this because I work for Frontier...So First data sucks."

    Frontier's sad attempt to blame their financial carelessness on a third party won't harm First Data.