First Data 2008 Annual Report Download - page 47

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Industry
Bank industry consolidation impacts existing and potential clients in FDC's service areas. The Company's alliance strategy could be impacted
negatively as a result of such consolidations, especially where the banks involved are committed to merchant processing businesses that compete with the
Company. Conversely, if an existing alliance bank partner acquires a new merchant business, this could result in such business being contributed to the
alliance. Bank consolidation has led to an increasingly concentrated client base in the industry, resulting in a changing client mix for Financial Services as
well as increased price compression. Bank consolidations are expected to impact the Company, specifically the Financial Services and Merchant Services
segments, during 2009.
The Company believes the following are the three most significant trends driving growth of electronic payments:
The Shift to Electronic Payments: The electronic payments industry in the United States continues to benefit from the consistent migration from cash
and checks to electronic payments. This migration is being driven by customer convenience, card issuer rewards and new payment forms. Additionally,
broader merchant acceptance in industries that did not typically accept electronic payments in the past, such as quick-service restaurants, is helping to drive
the migration. However, the decrease in the use of checks will negatively affect the Company's check verification, settlement and guarantee business, as well
as remittance processing, and therefore partially offset the growth opportunities.
International Expansion: Many of the trends that have historically driven growth in FDC's industry in the U.S. are contributing to growth in
international markets as well. International growth has been driven by the increased use of electronic payment instruments, an increased propensity of
institutions to outsource payment processing, and regulatory initiatives that favor outsourced payment solutions. Electronic payment penetration is
considerably lower outside of the U.S. as most transactions are still done in cash. In addition, many international financial institutions currently in-source their
card processing functions. The Company believes there is a trend towards more outsourcing of such non-core services to third-party processors. Further,
regulatory initiatives in international markets are creating additional growth opportunities for the electronics payments industry.
Industry Innovation: The electronic payments industry has experienced rapid technological innovation. New payment technologies such as mobile
commerce, contactless payments, payroll cards, biometric authentication and innovative POS devices facilitate the increasing adoption of electronic payments.
The continually increasing demand for new and more flexible payment options creates a significant opportunity for growth in the electronic payment
processing industry.
Components of Revenue and Expenses
The following briefly describes the components of operating revenues and expenses as presented in the Consolidated Statements of Operations.
Descriptions of the revenue recognition policies are included in Note 1 of the Company's Consolidated Financial Statements in Item 8 of this Form 10-K.
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 66% of FDC's 2008 revenue and are most reflective of the Company's core business performance. Merchant
related services revenue is comprised
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