First Data 2010 Annual Report Download - page 28

Table of Contents
FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Industry
The payments industry has come under increased scrutiny from lawmakers and regulators. As discussed above, in July 2010, the Dodd-Frank Act was
signed into law. Such changes in laws and regulations could impact the Company's operating results and financial condition.
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 impacted the Company, specifically the Financial Services and Retail and Alliance Services
segments, during 2010 and 2009. In 2010 and 2009 the Financial Services segment was negatively impacted by the consolidation of JPMorgan Chase and
Washington Mutual which is discussed in more detail in the "Segment Results" discussion below. The Retail and Alliance Services segment and Financial
Services segment were positively impacted by The PNC Financial Services Group ("PNC") and National City Corporation consolidation. If bank
consolidations continue in 2011, the Company could be impacted positively or negatively depending on its relationship with the bank.
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 to 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; 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 60% of
FDC's 2010 revenue and are most reflective of the Company's core business performance. "Merchant related 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. "Card services" revenue for output services consists of fees for printing statements and letters and embossing
plastics. Debit processing and network service fees included in "Card services" revenues 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.
Product sales and other. Sales and leasing of POS devices in the Retail and Alliance Services and International segments are the primary drivers of
this revenue component, providing a recurring revenue stream. This component also includes contract termination fees, royalty income and gain/loss from the
sale of merchant portfolios, all of which occur less frequently but are considered a part of ongoing operations. Also included within this line item is revenue
recognized from custom programming and system consulting services, software licensing and maintenance revenue generated primarily from the VisionPLUS
software in the International segment, software licensing and maintenance revenue in All Other and Corporate and investment income generated by invested
settlement assets, realized net gains and losses and, if applicable, impairment losses from such assets within the Retail and Alliance Services, Financial
Services and International segments and All Other and Corporate. This revenue is recorded net of official check agents' commissions.
Reimbursable debit network fees, postage and other. Debit network fees from PIN-debit card transactions acquired from merchants are recorded
gross with the associated network fee recorded in the corresponding expense caption, principally within the Retail and Alliance Services segment. In addition,
the reimbursable component and the offsetting expense caption include postage, telecommunications and similar costs that are passed through to customers
principally within the Financial Services segment. Reimbursable debit network fees, postage and other revenue and the corresponding expense are not
included in segment results.
Cost of services. This caption includes the costs directly associated with providing services to customers and includes the following:
telecommunications costs, personnel and infrastructure costs to develop and maintain applications, operate computer networks and provide associated
customer support, losses on check guarantee services and merchant chargebacks, and other operating expenses.
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