First Data 2009 Annual Report Download - page 38

FIRST DATA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
creditors of First Data nor its other subsidiaries. The majority of the clients of this business deconverted during
2008 and there will be no new official check and money order business beyond April 2010. IPS also offers
payment processing services and such other services will continue after the wind down of the official check and
money order business. On October 1, 2009, IPS assigned and transferred to The Western Union Company
(“Western Union”), among other things, certain assets and equipment used by IPS to issue retail money orders
and approximately $860 million of cash to satisfy all outstanding retail money orders. As of the closing date
noted above, Western Union assumed IPS’s role as issuer of the retail money orders.
Segment Discussion
Retail and Alliance Services Segment
The Retail and Alliance Services segment is comprised of businesses that provide services which facilitate
the merchants’ ability to accept credit, debit, stored-value and loyalty cards and checks. The segment’s merchant
processing and acquiring services include authorization, transaction capture, settlement, chargeback handling and
internet-based transaction processing and are the largest component of the segment’s revenue. A majority of
these services pertain to transactions in which consumer payments to merchants are made through a card
association (such as Visa or MasterCard), a debit network (such as STAR or Interlink), or another payment
network (such as Discover). Many of the segment’s services are offered through alliance arrangements.
Retail and Alliance Services generally looks to the strength of its merchant alliances, independent sales
organizations (“ISO’s”) and referral partners, and focused sales force efforts as ways to grow credit, signature
debit and PIN-debit processing. Financial results of the merchant alliance strategy appear both in the
“Transaction and processing service fees revenue” and “Equity earnings in affiliates” line items of the
Consolidated Statements of Operations. Beginning in the third quarter 2009 the Company began evaluating the
Retail and Alliance Services segment based on the Company’s proportionate share of the results of these
alliances. Refer to “Segment Results” below for a more detailed discussion.
Merchant processing and acquiring revenues are driven most significantly by the number of transactions, dollar
volumes of those transactions and trends in consumer spending between national, regional and local merchants.
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 dollar volume growth during the second half of 2008
and into 2009 due to a weakened economy. The Company experienced shifts in transaction volumes from
smaller, more profitable merchants to some nationwide discounters and wholesalers in the second half of 2008
and throughout 2009 due to changes in consumer spending patterns. Trends in consumer spending between
national, regional and local merchants impact revenue and operating margins as revenue per transaction and
operating margins from national merchants are typically less than regional and local merchants. The segment has
historically experienced three to five percent annual price compression on average, with price compression for
the national merchants being higher.
In addition, Retail and Alliance Services provides check verification, settlement and guarantee services. 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. The
segment also manages prepaid stored-value card issuance and processing services (i.e. gift cards) for retailers and
others.
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