First Data 2007 Annual Report Download - page 37

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Adoption of SFAS 123R
The Company adopted Statement of Financial Accounting Standards No. 123R, "Share-Based Payment" ("SFAS 123R"), following the modified
prospective method effective January 1, 2006. SFAS 123R requires all share-based compensation to employees to be recognized in the income statement
based on their respective grant date fair values over the corresponding service periods and also requires an estimation of forfeitures when calculating
compensation expense. Refer to Note 15 of the Company's Consolidated Financial Statements in Item 8 for a complete discussion of the Company's stock-
based compensation plans and the adoption of SFAS 123R.
Segment Discussion
First Data Commercial Services Segment
The First Data Commercial Services segment is comprised of businesses that provide merchant acquiring and processing, debit network acquiring and
processing, check verification, settlement and guarantee, and prepaid card services. Merchant acquiring operations are the largest component of the segment's
revenue, facilitating the merchants' ability to accept credit and debit cards by authorizing, capturing, and settling merchants' credit, debit stored-value and
loyalty card transactions. Many of the segment's services are offered through joint ventures and other alliance arrangements.
Commercial Services continues to grow in credit, signature debit and PIN-debit processing through the strength of its merchant alliances, focused sales
force efforts and the development of new POS technologies and payment methods. The Company continues to expand its merchant alliance program and has
one alliance that met the Securities and Exchange Commission's significant subsidiary test in the predecessor period. The alliance may not meet the
significant subsidiary test in 2008. Financial results of the merchant alliance strategy appear both in the "Transaction and processing service fees revenue" and
"Equity earnings in affiliates" line items of the Consolidated Statements of Income. The Company also continues to expand its association with Independent
Sales Organizations ("ISO") along with the merchant alliance program to sign-up new merchants. The segment's growth also benefited by the recent
acquisitions of Datawire and Instant Cash.
Commercial Services segment revenues are driven most significantly by the number of transactions as well as dollar volumes. Consumers continue to
increase the use of credit, debit and stored-value cards in place of cash and paper checks, with the decrease in use of checks negatively affecting the
Company's check verification, settlement and guarantee business. The Company expects that if, for example, consumer-spending increases in correlation to an
improved economy, the Company will experience a relatively proportionate increase in transactions. Internet payments continue to grow but account for a
small portion of the segment's transactions. While transactions over the internet may involve increased risk, these transactions typically generate higher profits
for the Company. The Company continues to enhance its fraud detection and other systems to address such risks.
The Company experienced transaction growth in the PIN-debit market in 2007 that exceeded the growth in the credit market and the Company expects
this growth trend to continue. Trends in consumer spending between national, regional and boutique merchants impact revenue and operating margins as
revenue per transaction and operating margins from national merchants are typically less than regional and boutique merchants. The segment has historically
experienced three to five percent annual price compression on average, with price compression for the national merchants being higher. The Company
currently mitigates the impact of a trend of consumers to a type of merchant through having a mix of national, regional and boutique merchants across a
diverse industry set. Expense reductions and enhanced product offerings also help mitigate this impact.
The purchase and sale of merchant contracts is an ordinary element of the Company's Commercial Services business as is the movement of merchant
contracts between the Company and its merchant alliances, its ISO partners and other third parties. The Company periodically evaluates its merchant
portfolios. The Company or a merchant alliance may purchase or sell a portfolio of contracts outright. Other times a partner may purchase the Company's
interest in a merchant alliance. This gives the partner 100% ownership in the underlying merchant contracts as compared to a partial interest in a joint venture
alliance that owns the contracts. Other times the formation of a merchant alliance involves the sale or purchase of an interest in a portfolio of the Company's
merchant contracts to the joint venture partner for cash. Management considers these transactions to be in the ordinary course of managing the Company's
business, and therefore, the gains from selling these revenue-generating assets are included within the "Product sales and other" component of revenues.
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