Western Union 2011 Annual Report Download - page 21

We own patents and patent applications covering various aspects of our processes and services. We have been,
are and in the future may be, subject to claims and suits alleging that our technology or business methods infringe
patents owned by others, both in and out of the United States. Unfavorable resolution of these claims could
require us to change how we deliver services, result in significant financial consequences, or both, which could
adversely affect our business, financial condition and results of operations.
Risk Management
Our Company has a credit risk management department that evaluates and monitors our agent-related credit
and fraud risks. We are exposed to credit risk related to receivable balances from agents in the money transfer,
walk-in bill payment and money order settlement process. We also are exposed to credit risk directly from
consumer transactions particularly through our online services and electronic global business payment channels,
where transactions are originated through means other than cash, and may therefore be subject to “chargebacks,”
insufficient funds, or other collection impediments, such as fraud. Our credit risk management team performs a
credit review before each agent signing and conducts periodic analyses. As a result, our losses associated with
bad debts have been less than 1% of our annual revenue in each of the last three fiscal years.
We are exposed to credit risk in our Business Solutions business relating to: (a) derivatives written by us to our
customers and (b) receivables from certain customers for which beneficiaries are paid prior to receiving cleared
funds from the customer (known as “early release”). For the derivatives, the duration of these contracts is
generally nine months or less. The credit risk associated with our derivative contracts increases when foreign
currency exchange rates move against our customers, possibly impacting their ability to honor their obligations to
deliver currency to us or to maintain appropriate collateral with us. For early release customers, collection
ordinarily occurs within a few days. To mitigate risk, we perform credit reviews of the customer on an ongoing
basis, and, for our derivatives, we may require certain customers to post collateral or increase collateral based on
the fair value of the customer’s contract and their risk profile.
To manage our exposures to credit risk with respect to investment securities, money market fund investments
and other credit risk exposures resulting from our relationships with banks and financial institutions, we regularly
review investment concentrations, trading levels, credit spreads and credit ratings, and we attempt to diversify
our investments among global financial institutions.
A key component of the Western Union business model is our ability to manage financial risk associated with
conducting transactions worldwide. We settle accounts with the majority of our agents in United States dollars or
euros. We utilize foreign currency exchange contracts, primarily forward contracts, to mitigate the risks
associated with currency fluctuations and to provide predictability of future cash flows. Limited foreign currency
risk arises with respect to the agent settlement process because the majority of money transfer transactions are
paid within 24 hours after they are initiated and agent settlements occur within a few days in most instances.
Our financial results may fluctuate due to changes in interest rates. We review our overall exposure to floating
and fixed rates by evaluating our net asset or liability position in each, while also considering the duration of the
individual positions. We manage this mix of fixed versus floating exposure in an attempt to minimize risk,
reduce costs and improve returns. Our exposure to interest rates can be modified by changing the mix of our
interest-bearing assets, as well as adjusting the mix of fixed versus floating rate debt. The latter is accomplished
primarily through the use of interest rate swaps and the terms of any new debt issuances (i.e., fixed versus
floating). We use interest rate swaps designated as hedges to increase the percentage of floating rate debt, subject
to market conditions.
International Investment
No provision has been made for United States federal and state income taxes on certain of our outside tax basis
differences, which primarily relate to accumulated foreign earnings of approximately $3.7 billion as of
December 31, 2011, as we expect to reinvest these earnings outside the United States indefinitely. We intend to
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