First Data 2012 Annual Report Download - page 23

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 two unaffiliated networks beginning April 1, 2012 and each debit payment card network must comply with
applicable exclusivity requirements by October 1, 2011.
The Company’s consolidated and segment results benefited from the impact of the Dodd-Frank Act as discussed in the
“Consolidated results” and “Segment results” sections below. Within the Retail and Alliance Services segment, the Company
experienced benefit due mostly to lower debit interchange rates as discussed in the Retail and Alliance Services segment results
section below. Within the Financial Services segment, the implementation of the Dodd-Frank Act resulted in a net increase in debit
issuer transactions in 2012 compared to 2011 with minimal impact to revenue as discussed in the Financial Services segment results
section below.
Banc of America Merchant Services, LLC (“BAMS”). In 2009, the Company and Bank of America N.A. (“BofA”) formed
the BAMS alliance. When the 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 shift of processing to FDC as described above increased the Retail and Alliance Services segment revenue and segment
EBITDA for 2012 compared to 2011. This benefit did not impact consolidated revenues because the BAMS alliance is consolidated
by the Company. Consolidated expenses decreased in 2012 as a result of cost efficiencies resulting from the shift of processing to
FDC. Beginning October 1, 2011, costs incurred related to the transfer and operation of the platform were 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 or American Express). 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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