First Data 2013 Annual Report Download - page 25

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First Data Corporation (“FDC” or “the Company”), with principal executive offices in Atlanta, Georgia, operates electronic commerce businesses
providing services that include merchant transaction processing and acquiring services; credit, retail and debit card issuing and processing services; prepaid
card services; and check verification, settlement and guarantee services.
 On June 29, 2011, the Federal Reserve Board announced the final rules governing debit card interchange fees and routing and
exclusivity restrictions as well as a proposed rule governing the fraud prevention adjustment in response to Section 1075 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (“Dodd-Frank Act”). Effective October 1, 2011, the Federal Reserve Board capped debit interchange rates for card
issuers operating in the U.S. with assets of $10 billion or more at the sum of $0.21 per transaction with an ad valorem component of 5 basis points to reflect a
portion of the issuer’s fraud losses plus, for qualifying issuers, an additional $0.01 per transaction in debit interchange for fraud prevention costs. In
addition, the new regulations contain non-exclusivity provisions which ban debit payment card networks from prohibiting an issuer from contracting with
any other payment card network that may process an electronic debit transaction involving an issuer’s debit cards and prohibit card issuers and payment
networks from inhibiting the ability of merchants to direct the routing of debit card transactions over any network that can process the transaction. Beginning
April 1, 2012, all debit card issuers in the U.S. were required to participate in at least two unaffiliated debit payment card networks. On April 1, 2013, the
ban on network exclusivity arrangements became effective for prepaid card and healthcare debit card issuers, with some leeway for prepaid cards issued
before that date. However, upon a challenge to the amount of the interchange fee and the non-exclusivity rules by retailers, a federal district court ruled that the
interchange fee and the non-exclusivity provisions established by the Federal Reserve Board are invalid and inconsistent with the statutory language in the
Dodd-Frank Act and has ordered the Federal Reserve Board to issue new rules. The action is currently on appeal in a federal appeals court, and at this time it
is unclear whether the current interchange fee cap and non-exclusivity rules issued by the Federal Reserve Board will remain in effect.
The Company’s consolidated and segment results benefited in 2012 compared to 2011from the impact of the Dodd-Frank Act as discussed in the
“Consolidated results” and “Segment results” sections below. Within the Retail and Alliance Services segment, the Company experienced benefit due mostly to
lower debit interchange rates as discussed in the Retail and Alliance Services segment results section below. Within the Financial Services segment, the
implementation of the Dodd-Frank Act resulted in a net increase in debit issuer transactions in 2012 compared to 2011 with minimal impact to revenue as
discussed in the Financial Services segment results section below.
 In 2009, the Company and Bank of America N.A. (“BofA”) formed the BAMS alliance.
When the alliance was formed, the intent was to shift processing for merchants contributed to the alliance by BofA from three existing bank platforms to FDC.
After evaluating the conversion strategy, the Company and BofA jointly decided to have FDC operate BofA’s legacy settlement platform and provide the
necessary operational support for legacy BofA merchants. The transfer of ownership was effective October 1, 2011.
The shift of processing to FDC as described above increased the Retail and Alliance Services segment revenue and segment EBITDA for 2012 compared
to 2011. This benefit did not impact consolidated revenues because the BAMS alliance is consolidated by the Company. Consolidated expenses decreased in
2012 as a result of cost efficiencies resulting from the shift of processing to FDC. Beginning October 1, 2011, costs incurred related to the transfer and
operation of the platform were billed to the BAMS alliance resulting in a portion of the costs being attributed to the BofA noncontrolling interest.
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 The Retail and Alliance Services segment is comprised of businesses that provide services which facilitate the
merchants’ ability to accept credit, debit, stored-value and loyalty cards and checks. The segment’s merchant processing and acquiring services include
authorization, transaction capture, settlement, chargeback handling and internet-based transaction processing and are the largest component of the segment’s
revenue. A majority of these services pertain to transactions in which consumer payments to merchants are made through a card association (such as VISA or
MasterCard), a debit network (such as STAR or Interlink), or another payment network (such as Discover or American Express). Many of the segment’s
services are offered through alliance arrangements. 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 Operations. The Company evaluates the Retail and Alliance
Services segment based on the Company’s proportionate share of the results of these alliances. Refer to “Segment results” below for a more detailed discussion.
Merchant processing and acquiring revenues are driven most significantly by the number of transactions, dollar volumes of those transactions and
trends in consumer spending between national, regional and local merchants. Consumers continue to increase
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