First Data 2007 Annual Report Download - page 6

• Processing fees charged to unconsolidated alliances discussed below;
• Processing fees charged to merchant acquirers who have outsourced their transaction processing to the Company;
• Equity earnings from unconsolidated alliances;
• Selling and leasing POS devices; and
• Debit network fees.
Commercial Services provides merchant and debit network acquiring and processing, check verification, settlement and guarantee, and prepaid card
services to merchants operating in approximately 3.7 million merchant locations across the United States. Commercial Services provides full service merchant
processing primarily on Visa and MasterCard transactions and PIN-debit at the point of sale.
Growth in the Commercial Services business is derived from acquiring new merchant relationships, new and enhanced product and service offerings,
cross selling products and services into existing relationships, the shift of consumer spending to increased usage of electronic forms of payment and the
strength of its alliances with banks and other institutions. The Company's alliance structures take on different forms, including consolidated subsidiaries,
equity method investments and revenue sharing arrangements. Under the alliance program, the Company and a bank or other institution form a joint venture,
either contractually or through a separate legal entity. Merchant contracts may be contributed to the venture by the Company and/or the bank or institution.
New merchant business generally is solicited by the alliance's (and in some cases, the financial institution's) sales force. Each alliance requires successful
management of the relationship between the Company and the alliance partner. The Company benefits by providing processing services for the alliance and
its merchant customers, while the alliance partner's merchant banking relationship is benefited. Alliance institutions generally provide card association
sponsorship, clearing, and settlement services. These institutions typically act as a merchant referral source when the institution has an existing banking or
other relationship. The Company provides transaction processing and related functions. Both partners may provide management, sales, marketing, and other
administrative services. The alliance strategy could be affected by further consolidation among financial institutions.
The alliance strategy with bank partners provides the Company with broad geographic coverage, regionally and nationally as well as a presence in
various industries. The alliance structure allows the Company to be the processor for multiple financial institutions, any one of which may be selected by the
merchant as their bank partner. Additionally, bank partners provide brand loyalty and a distribution channel through their branch networks which increases
merchant retention.
There are a number of different entities involved in a merchant transaction including the cardholder, card issuer, card association, merchant, merchant
acquirer, electronic processor for credit and signature debit transactions, and debit network for PIN-debit transactions. The card issuer is the financial
institution that issues credit or debit cards, authorizes transactions after determining whether the cardholder has sufficient available credit or funds for the
transaction, and provides funds for the transaction. Some of these functions may be performed by an electronic processor (such as the Financial Institution
Services business) on behalf of the issuer. The card association is Visa or MasterCard, a debit network (such as STAR Network) or another payment network
(such as Discover) that routes the transactions between the Company and the card issuer. The merchant is a business from which a product or service is
purchased by a cardholder. The acquirer (such as the Company or one of its alliances) contracts with merchants to facilitate their acceptance of cards. A
merchant acquirer may do its own processing or, more commonly, may outsource those functions to an electronic processor such as the Commercial Services
segment. The acquirer/processor serves as an intermediary between the merchant and the card issuer by:
(1) Obtaining authorization from the card issuer through a card association or debit network;
(2) Transmitting the transaction to the card issuer through the applicable card association, payment network or debit network; and
(3) Paying the merchant for the transaction. The Company typically receives the funds from the issuer via the card association, payment network or
debit network prior to paying the merchant.
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