First Data 2013 Annual Report Download - page 49

 . With respect to the merchant acquiring business, the Company’s merchant customers
(or those of its unconsolidated alliances) have the liability for any charges properly reversed by the cardholder. In the event, however, that the Company is not
able to collect such amounts from the merchants due to merchant fraud, insolvency, bankruptcy or another reason, the Company may be liable for any such
reversed charges. The Company’s risk in this area primarily relates to situations where the cardholder has purchased goods or services to be delivered in the
future such as airline tickets.
The Company’s obligation to stand ready to perform is minimal in relation to the total dollar volume processed. The Company requires cash deposits,
guarantees, letters of credit or other types of collateral from certain merchants to minimize this obligation. Collateral held by the Company is classified within
“Settlement assets” and the obligation to repay the collateral if it is not needed is classified within “Settlement obligations” on the Company’s Consolidated
Balance Sheets. The amounts of collateral held by the Company and its unconsolidated alliances are as follows:

  
Cash and cash equivalents collateral $479.4 $470.0
Collateral in the form of letters of credit 106.0 120.9
Total collateral $585.4 $590.9
The Company also utilizes a number of systems and procedures to manage merchant risk. Despite these efforts, the Company historically has
experienced some level of losses due to merchant defaults.
The Company’s contingent obligation relates to imprecision in its estimates of required collateral. A provision for this obligation is recorded based
primarily on historical experience of credit losses and other relevant factors such as economic downturns or increases in merchant fraud. Merchant credit
losses are included in “Cost of services” in the Company’s Consolidated Statements of Operations. The following table presents the aggregate merchant credit
losses incurred compared to total dollar volumes processed:

  
FDC and consolidated and unconsolidated alliances credit losses (in millions) $ 53.7 $ 50.0 $63.6
FDC and consolidated alliances credit losses (in millions) $48.3 $43.3 $54.3
Total dollar volume acquired (in billions) $1,778.9 $1,725.4 $ 1,643.2
The reserve recorded on the Company’s Consolidated Balance Sheets only relates to the business conducted by its consolidated subsidiaries. The
reserve for unconsolidated alliances is recorded only in the alliances’ respective financial statements. The Company has not recorded any reserve for estimated
losses in excess of reserves recorded by the unconsolidated alliances nor has the Company identified needs to do so. The following table presents the aggregate
merchant credit loss reserves:

  
FDC and consolidated and unconsolidated alliances merchant credit loss reserves $26.8 $26.1
FDC and consolidated alliances merchant credit loss reserves $24.1 $23.4
The credit loss reserves, both for the unconsolidated alliances and the Company, are comprised of amounts for known losses and a provision for losses
incurred but not reported (“IBNR”). These reserves primarily are determined by performing a historical analysis of chargeback loss experience. Other factors
are considered that could affect that experience in the future. Such items include the general economy and economic challenges in a specific industry or those
affecting certain types of clients. Once these factors are considered, the Company or the unconsolidated alliance establishes a rate (percentage) that is calculated
by dividing the expected chargeback (credit) losses by dollar volume processed. This rate is then applied against the dollar volume processed each month and
charged against earnings. The resulting reserve balance is then compared to requirements for known losses and estimates for IBNR items. Historically, this
estimation process has proven to be materially accurate and the Company believes the recorded reserve approximates the fair value of the contingent obligation.
The majority of the TeleCheck Services, Inc. (“TeleCheck”) business involves the guarantee of checks received by merchants. If the check is returned,
TeleCheck is required to purchase the check from the merchant at its face value and pursue collection from the check writer. A provision for estimated check
returns, net of anticipated recoveries, is recorded at the transaction inception based on recent history. The following table presents the accrued warranty and
recovery balances:
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