First Data 2013 Annual Report Download - page 5

may outsource those functions to an electronic processor such as the Retail and Alliance 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.
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 an interchange rate of 1.5% (effective October 1, 2011, the cap on certain debit transactions changed to $.21 per transaction plus an ad valorem
component of 5 basis points to reflect a portion of the issuer’s fraud losses plus, for qualifying issuers, an additional $.01 per transaction in debit interchange
for fraud prevention costs), 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 approximately $0.10 and forward $98.40 to the Company. The Company will retain, for example, $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/processors, 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.
Prepaid services. First Data Prepaid Services 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 issuance and customer service for over 200 national
brands and several thousand small and mid-tier merchants. The Company also provides program management and processing services for association-
branded, bank-issued, open loop, stored-value, reloadable and one time prepaid card products.
Money Network offers prepaid products to address the needs of employers, employees, merchants and unbanked individuals. Money Network
provides open loop electronic payroll distribution solutions that reduce or eliminate an employer’s expense associated with traditional paper paychecks as well
as other prepaid retail solutions.
Check verification, settlement and guarantee services . TeleCheck offers check verification, settlement and guarantee services using the
Company’s proprietary database system to assist merchants in deciding whether accepting checks at the point of sale is a reasonable risk, or, further, to
guarantee checks presented to merchants if they are approved. These services include risk management services, which utilize software, information and
analysis to assist the merchant in the decision process and include 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
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