First Data 2007 Annual Report Download - page 8

Debit network acquiring and processing services
Debit network acquiring and processing services include ATM processing, STAR Network access, and acquired debit card transaction processing
services such as authorization and settlement for acquirers. In the merchant acquiring process flow described above, STAR Network represents a debit
network. The STAR Network represents a telecommunications network which is connected to thousands of financial institutions, merchants, payment
processors, ATM processors, and card processors that participate in the network. When one of these participants acquires a STAR Network transaction, it
sends the transaction to the network switch, which is operated by the Company, which in turn routes the transaction to the appropriate participant for
authorization. STAR Network's fees differ from those presented in the example above in that the debit network charges less for PIN-debit transactions than do
the card associations for credit and signature debit since there is substantially less risk involved in the PIN-debit transaction because the transaction is not
approved unless there are sufficient funds in the customer's bank account. STAR Network's revenues are earned primarily on a fee-per-transaction basis. In a
situation in which a PIN-secured debit transaction uses the Company's debit network and the Company is the acquiring payment processor for the merchant,
the Company receives (1) a fee from the merchant for acquiring the transaction and (2) a network acquirer fee from the merchant for accessing the network.
There are other possible configurations of transactions that result in the Company receiving multiple fees for a transaction, depending on the role which the
Company plays.
Prepaid card services
First Data Prepaid Services develops, implements and manages prepaid stored-value card issuance and processing services (i.e. gift cards) for retailers
and others. The full-service stored-value/gift card program offers transaction processing services, card acquisition and customer service for over 200 national
brands and several thousand small and mid-tier merchants. During 2006, the Company began providing support to the card issuer in the distribution of a co-
branded STAR Network and Visa gift card bearing the retailer's name, as well as the STAR Network Gift Card that is available in certain gift card malls.
In June 2007, the Company announced a strategic partnership with Discover Financial Services to issue Discover Network payroll cards provided by
Money Network Financial, LLC, a First Data Company. The Money Network Payroll distribution service enables paperless pay options for employers as an
alternative to paper checks for their employees.
Check verification, settlement and guarantee services
Check verification, settlement and guarantee services use the Company's proprietary database system to assist in verifying that a check writer is a
reasonable credit risk for a merchant, or to guarantee that approved checks presented to merchants for payment will be collectible. These services include risk
management services, which utilize software, information and analysis to assist in deposit, payment, and identity fraud prevention and reduction. Revenues
are earned primarily by charging merchant fees for check verification or guarantee services. The majority of the Company's services involve providing check
guarantee services for checks received by merchants. Under the guarantee service, when a merchant receives a check in payment for goods and services, the
transaction is submitted to and analyzed by the Company. The Company either accepts or declines the check for warranty coverage under its guarantee
service. If the Company approves the check for warranty coverage and the merchant accepts the check, the merchant will deposit the check in its bank
account. If the check is returned unpaid by the merchant's bank and the returned check meets the requirements for warranty coverage, the Company is
required to purchase the check from the merchant at its face value. The Company then owns the purchased check and pursues collection of the check from the
check writer. As a result, the Company bears the risk of loss if the Company is unable to collect the returned check from the check writer. The Company earns
a fee for each check it guarantees, which generally is determined as a percentage of the check amount.
The Company provides check guarantee and settlement services utilizing the Company's Electronic Check Acceptance service ("ECA"), which converts
a paper check written at the point of sale into an electronic item, enabling funds to be deposited electronically to the merchant's account and deducted
electronically from the check writer's account.
Under the verification service, when a merchant receives a check in payment for goods or services, the transaction is submitted to and analyzed by the
Company, which will either recommend the merchant accept or decline the check. If the merchant accepts the check, the merchant will deposit the check in its
bank account. If the check is returned unpaid by the merchant's bank, the Company is not required to purchase the check from the merchant and the merchant
bears all risk of loss on the check. The Company earns a fee for each check submitted for verification, which is generally a fixed amount per check.
7