First Data 2011 Annual Report Download - page 25

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
First Data Corporation ("FDC" or "the Company"), with global headquarters and principal executive offices in Atlanta, Georgia,
operates electronic commerce businesses providing services that include merchant transaction processing and acquiring services;
credit, retail and debit card issuing and processing services; prepaid card services; and check verification, settlement and guarantee
services.
Regulatory reform. On June 29, 2011, the Federal Reserve Board announced the final rules governing debit card interchange
fees, and routing and exclusivity restrictions as well as a proposed rule governing the fraud prevention adjustment in response to
Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). Effective October 1, 2011,
debit interchange rates for card issuers with more than $10 billion of assets are capped at $.21 per transaction with an ad valorem
component of 5 basis points to reflect a portion of the issuer's fraud losses plus, for qualifying issuers, an additional $.01 per
transaction in debit interchange for fraud prevention costs. In addition, the new regulations ban debit payment card networks from
prohibiting an issuer from contracting with any other payment card network that may process an electronic debit transaction involving
an issuer's debit cards and prohibit card issuers and payment networks from inhibiting the ability of merchants to direct the routing of
debit card transactions over any network that can process the transaction. On April 1, 2013, the ban on network exclusivity
arrangements becomes effective for non-reloadable prepaid card and healthcare prepaid issuers. Additionally, each debit card issuer
must participate in 2 unaffiliated networks beginning April 1, 2012 and each debit payment card network must comply with applicable
exclusivity requirements by October 1, 2011. These regulatory changes create both opportunities and challenges for the Company.
Increased regulation may increase the complexity of operating, both domestically and internationally, creating an opportunity for
larger competitors to differentiate themselves both in product capabilities and service delivery. The ban on network exclusivity also
will enhance competition to allow the Company to compete for additional business. At the same time, these regulatory changes may
cause operating costs to increase as the Company adjusts its activities in light of compliance costs and customer requirements. Within
the Retail and Alliance Services segment the Company experienced some transitory benefit due mostly to lower debit interchange
rates, however, the overall impact on the Company is difficult to estimate as it will take some time for the market to react and adjust to
the new regulations.
Banc of America Merchant Services, LLC ("BAMS"). On June 26, 2009, Bank of America N.A. ("BofA") and the Company,
together with Rockmount Investments, LLC ("Rockmount"), an investment vehicle controlled by a third-party investor, formed a new
company, BAMS. BAMS provides clients with a comprehensive suite of acquiring and processing payment products for credit and
debit cards as well as merchant loyalty, prepaid, check and e-commerce solutions. The Company owns 51% of BAMS. For details
surrounding the formation of BAMS refer to Note 3 to the Company's Consolidated Financial Statements in Item 8 of this Form 10-K.
When the BAMS alliance was formed, the intent was to shift processing for merchants contributed to the alliance by BofA from
three existing bank platforms to FDC. After evaluating the conversion strategy, the Company and BofA jointly decided to have FDC
operate BofA's legacy settlement platform and provide the necessary operational support for legacy BofA merchants. The transfer of
ownership was effective October 1, 2011. The Company believes this operating structure simplifies and accelerates the conversion.
The Company anticipates the shift of processing to FDC as described above will increase the Retail and Alliance Services
segment revenue and, to a lesser extent, segment EBITDA for the first three quarters of 2012 compared to 2011. This benefit will not
impact consolidated revenues because the BAMS alliance is consolidated by the Company. Consolidated expenses are expected to
increase, most significantly in 2012 and 2013, as a result of costs incurred to transfer the platform and associated operational support
as well as ongoing costs to operate the platform. Beginning October 1, 2011, these costs are being billed to the BAMS alliance
resulting in a portion of the costs being attributed to the BofA noncontrolling interest.
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. 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. The Company
evaluates 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.
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