First Data 2007 Annual Report Download - page 7

A transaction occurs when a cardholder purchases something from a merchant who has contracted with the Company, an alliance partner or a
processing customer. When the merchant swipes the card through the POS terminal (which is often sold or leased, and serviced by the Company), the
Company obtains authorization for the transaction from the card issuer through the card association, payment network or debit network, verifying that the
cardholder has sufficient credit or adequate funds for the transaction. Once the card issuer approves the transaction, the Company or the alliance "acquires"
the transaction from the merchant and then transmits it to the applicable debit network, payment network or card association, which then routes the transaction
information to the card issuer. Upon receipt of the transaction, the card issuer delivers funds to the Company via the card association, payment network or
debit network. Generally, the Company funds the merchant after receiving the money from the card association, payment network or debit network. Each
participant in the transaction receives compensation for processing the transaction. For example, in a transaction using a Visa or MasterCard for $100.00 with
a merchant "discount rate" (i.e., fee) of 1.5%, the card issuer will fund the association $98.50 and bill the cardholder $100.00 on its monthly statement. The
card association will retain assessment fees of $0.10 and forward $98.40 to the Company. The Company will retain $0.40 and pay the merchant $98.00. The
$1.50 retained by the card issuer is referred to as interchange and it, like assessment fees, is set by the card association. The $0.40 is the merchant discount
and is negotiated between the merchant and the merchant acquirer.
The Company and its alliances, as merchant acquirers, have certain contingent liabilities for the transactions acquired from merchants. This contingent
liability arises in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder's favor. In such a case, the
transaction is "charged back" to the merchant and the disputed amount is credited or otherwise refunded to the cardholder. The Company may, however,
collect this amount from the card association if the amount was disputed in error. If the Company or the alliance is unable to collect this amount from the
merchant, due to the merchant's insolvency or other reasons, the Company or the alliance will bear the loss for the amount of the refund paid to the
cardholder. In most cases, this contingent liability situation is unlikely to arise because most products or services are delivered when purchased, and credits
are issued on returned items. However, where the product or service is not provided until sometime following the purchase (e.g., airline or cruise ship tickets),
the risk is greater. The Company often mitigates its risk by obtaining collateral from merchants considered higher risk because they have a time delay in the
delivery of services, operate in industries that experience chargebacks or are less creditworthy.
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