First Data 2008 Annual Report Download - page 44

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Merchant Services segment revenues are driven most significantly by the number of transactions as well as dollar volumes of those transactions.
Consumers continue to increase the use of credit, debit and stored-value cards in place of cash and paper checks. Internet payments continue to grow but
account for a small portion of the segment's transactions. While transactions over the internet may involve increased risk, these transactions typically generate
higher profits for the Company. The Company continues to enhance its fraud detection and other systems to address such risks.
The Company experienced declines in transaction and volume growth during the second half of 2008 and the Company expects this trend to continue
into 2009 with a weakened economy. Transactions and dollar volumes will decline primarily due to the termination of the Chase Paymentech Solutions
alliance effective November 1, 2008. Prior to November 1, 2008, reported results included 100% of alliance transactions and dollar volumes. Post termination,
FDC will only report transactions and dollar volumes related to its 49% proportionate share of the joint venture's assets. The Company experienced shifts in
transaction volumes from smaller, more profitable merchants to some nationwide discounters and wholesalers in the second half of 2008 due to the weakened
economy. Trends in consumer spending between national, regional and boutique merchants impact revenue and operating margins as revenue per transaction
and operating margins from national merchants are typically less than regional and boutique merchants. The segment has historically experienced three to five
percent annual price compression on average, with price compression for the national merchants being higher. Expense reductions and enhanced product
offerings help mitigate this impact.
Financial Services Segment
The Financial Services segment is comprised of businesses that provide credit, debit and retail card processing; debit network services; check
verification, settlement and guarantee services; output services, such as statement and letter printing, embossing and mailing services; remittance processing
services; and other payment options that support merchants and online retailers, businesses, and government agencies. This segment also provides other
payment services such as remote deposit, clearing services and processing for payments which occur in such forms as checks, ACH, wire transfer and stored-
value cards. The segment's largest components of revenue consist of fees for account management, transaction authorization and posting, network switching,
debit network acquiring and processing, and check verification, settlement and guarantee services as well as reimbursable postage.
Credit and retail based revenue is derived primarily from the card processing services offered to financial institutions and other issuers of cards.
Revenue from these markets is driven primarily by accounts on file, with active accounts having a larger impact on revenue than inactive. Retail account
portfolios typically have a lower proportionate share of active accounts than credit account portfolios and product usage is different between the card types
resulting in lower revenue per active retail account. In addition, contract pricing at the customer level is dependent upon the volume of accounts, mix of
account types (e.g. retail, credit, co-branded credit and debit) and product usage.
The Company continues to see a shift to the use of debit cards from credit cards, checks and cash, with the decrease in use of checks negatively
affecting the Company's check verification, settlement and guarantee business. Domestic debit issuer transactions have been the fastest growing type of
transaction.
The underlying economic drivers of card issuance are population demographics and employment. Strengthening in the economy typically results in an
improved credit risk profile, allowing card issuers to be more aggressive in their marketing campaigns to issue more cards. Conversely, a weakening in the
economy typically results in a tightening of the credit market with fewer consumers qualifying for credit.
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