First Data 2007 Annual Report Download - page 39

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The IPS segment businesses generate investment income from investing funds pending settlement from the sales of official checks and money orders or
fee revenue from check processing or other payment management services. As noted above, the Company is in the process of winding-down the official check
and money order business. During 2007, funds pending settlement were invested in tax free instruments issued by municipalities to minimize exposure to
credit risks. Such investments were repositioned from long-term to mostly short-term during the year as noted above. In 2008, these investments, were further
repositioned into mostly short-term taxable investments, the majority of which were in commercial paper and bank certificates of deposits, as well as some
long-term auction-rate securities, the balance of which was approximately $661 million as of February 29, 2008. The Company pays its agents commissions
based on short-term variable rates and the balance of outstanding checks or money orders. The Company nets the commissions paid to agents against the
revenue it earns from its investments. Prior to the portfolio repositioning discussed above, the Company managed interest rate risk through the use of interest
rate swap agreements, which converted the fixed rate investments into variable rate, thus hedging the impact of market valuation of the long-term investments.
The interest impact of the interest rate swaps associated with the investments were also netted against the revenue earned from the investments during the
period which the interest rate swaps qualified for hedge accounting.
All Other and Corporate
All Other and Corporate is comprised of the Company's business units not included in the segments noted above as well as the Company's Corporate
results. Other than the impact of the merger, the acquisition of Intelligent Results and the buyout of the minority interest in FDGS as discussed above, there
were no significant developments within All Other and Corporate during 2007.
Industry
Bank industry consolidation impacts existing and potential clients in FDC's service areas. The Company's alliance strategy could be impacted
negatively as a result of consolidations, especially where the banks involved are committed to merchant processing businesses that compete with the
Company. Conversely, if an existing alliance bank partner acquires a new merchant business, this could result in such business being contributed to the
alliance. Bank consolidation has led to an increasingly concentrated client base in the industry, resulting in a changing client mix for Financial Institution
Services as well as increased price compression.
The Company believes the following are the three most significant trends driving growth of electronic payments:
The Shift to Electronic Payments: The electronic payments industry in the United States continues to benefit from the consistent migration from cash
and checks to electronic payments. This migration is being driven by customer convenience, card issuer rewards and new payment forms. Additionally,
broader merchant acceptance in industries that did not typically accept electronic payments in the past, such as quick-service restaurants, is helping to drive
the migration. However, the decrease in the use of checks will negatively affect the Company's check verification, settlement and guarantee business, as well
as remittance processing, and therefore partially offset the growth opportunities.
International Expansion: Many of the trends that have historically driven growth in FDC's industry in the United States are contributing to growth in
international markets as well. International growth has been driven by the increased use of electronic payment instruments, an increased propensity of
institutions to outsource payment processing, and regulatory initiatives that favor outsourced payment solutions. Electronic payment penetration is
considerably lower outside of the United States as most transactions are still done in cash. In addition, many international financial institutions currently in-
source their card processing functions. The Company believes there is a trend towards more outsourcing of such non-core services to third-party processors.
Further, regulatory initiatives in international markets are creating additional growth opportunities for the electronics payments industry.
Industry Innovation: The electronic payments industry has experienced rapid technological innovation. New payment technologies such as prepaid
cards, mobile commerce, contactless payments, payroll cards, biometric authentication and innovative POS devices facilitate the increasing adoption of
electronic payments. The continually increasing demand for new and more flexible payment options creates a significant opportunity for growth in the
electronic payment processing industry.
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