First Data 2007 Annual Report Download - page 40

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Segment Realignment
As a result of the merger discussed above, beginning in 2008, the Company's new chief operating decision maker ("CODM"), who is the Company's
Chief Executive Officer, will make strategic and operating decisions with regards to assessing performance and allocating resources based on a new segment
structure. A summary of the new segments follows:
• The Merchant Services segment will be comprised of businesses that provide services which facilitate the merchants' ability to accept credit, debit,
stored-value and loyalty cards. The segment's processing services include authorization, transaction capture, settlement, chargeback handling, and
internet-based transaction processing. Merchant services also provide POS devices and other equipment necessary to capture merchant transactions. A
majority of these services are offered to the merchants through joint ventures or other alliance arrangements primarily with financial institutions and
pertain to transactions in which consumer payments to merchants are made through a card association (such as Visa or MasterCard), a debit network, or
another payment network (such as Discover).
• The Financial Services segment will provide issuer card and network solutions and payment management solutions for point of sale and recurring bill
payments. Issuer card and network solutions include credit and retail card processing, debit card processing and network services (including the STAR
Network), and output services for financial institutions and other organizations offering credit cards, debit cards and retail private label cards to
consumers and businesses to manage customer accounts. Payment solutions include check verification, settlement and guarantee services (including
TeleCheck) and other payment options that support merchants and online retailers, businesses, and government agencies. The segment's largest
components of revenue consist of fees for account management, transaction authorization and posting, network switching, check acceptance and
warranty, as well as reimbursable postage. In addition to issuer card and core payment solutions, Financial Services will offer services to improve
customer communications, billing, online banking and consumer bill payment, and analytics.
• The Prepaid Services segment will consist of businesses that provide a wide range of open and closed loop stored-value products and processing
services. The closed loop operations comprise the largest component of the segment's revenue, providing gift card processing services to large national
merchants as well as fleet services to trucking companies. The open loop products are the fastest growing component of the segment driven primarily
by employers' adoption of the Money Network payroll product.
• The International segment will be comprised of businesses that provide the following services outside of the United States: credit, retail, debit and
prepaid card processing; merchant acquiring and processing; ATM and point-of-sale ("POS") processing, driving, acquiring and switching services; and
card processing software. The largest components of the segment's revenue are fees for facilitating the merchants' ability to accept credit, retail and
debit cards by authorizing, capturing, and settling merchants' credit, retail, debit, stored-value and loyalty card transactions as well as for transaction
authorization and posting, network switching and account management.
• The Integrated Payment Systems segment's operations involve the issuance of official checks and money orders by agents which are typically banks or
other financial institutions. Official checks serve as an alternative to a bank's own disbursement items such as cashiers or bank checks. Revenue is
principally earned on invested funds which are pending settlement.
Components of Revenue and Expenses
The following briefly describes the components of operating revenues and expenses as presented in the Consolidated Statements of Income.
Descriptions of the revenue recognition policies are included in Note 1 of the Consolidated Financial Statements.
Transaction and processing service fees—Transaction and processing service fee revenue is comprised of fees related to merchant acquiring; check
processing; credit, retail and debit card processing; output and remittance processing; the issuance of official checks and money orders by agents; and
payment management services. Revenues are based on a per transaction fee, a percentage of dollar volume processed, accounts on file or some combination
thereof. These revenues represent approximately 68%, 69% and 69% of FDC's 2007 successor, predecessor and pro forma revenue, respectively, and are most
reflective of the Company's core business performance. Merchant services revenue is comprised primarily of fees charged to merchants and processing fees
charged to alliances accounted for under the equity method. Merchant discount revenue from credit card and signature debit card transactions acquired from
merchants is recorded net of interchange and assessments charged by the credit card associations. Check services revenues include check verification,
settlement and guarantee fees which are charged on a per transaction basis or as a percentage of the face value of the check. Card services revenue related to
credit and retail card processing is comprised primarily of fees charged to the client based on cardholder accounts on file, both active and inactive. In addition,
delivery of output services consists of printing statements and letters and embossing plastics. Debit network processing service fees are typically based on
transaction volumes processed. Other services revenue includes all other types of transactional revenue not specifically related to the classifications noted
above.
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