First Data 2012 Annual Report Download - page 5

identity fraud prevention and reduction. Revenues are earned primarily by charging merchant fees for check verification or guarantee
services.
The majority of the Company’s services involve providing check guarantee services for checks received by merchants. Under
the guarantee service, when a merchant receives a check in payment for goods and services, the transaction is submitted to and
analyzed by the Company. The Company either accepts or declines the check for warranty coverage under its guarantee service. If the
Company approves the check for warranty coverage and the merchant accepts the check, the merchant will either deposit the check in
its bank account or process it for settlement through the Company’s Electronic Check Acceptance service. If the check is returned
unpaid by the merchant’s bank and the returned check meets the requirements for warranty coverage, the Company is required to
purchase the check from the merchant at its face value. The Company then owns the purchased check and pursues collection of the
check from the check writer. As a result, the Company bears the risk of loss if the Company is unable to collect the returned check
from the check writer. The Company earns a fee for each check it guarantees, which generally is determined as a percentage of the
check amount.
The Company’s Electronic Check Acceptance service, which converts a paper check written at the point of sale into an
electronic item, enables funds to be deposited electronically to the merchant’s account and deducted electronically from the check
writer’s account.
Under the verification service, when a merchant receives a check in payment for goods or services, the transaction is submitted
to and analyzed by the Company, which will either recommend the merchant accept or decline the check. If the merchant accepts the
check, the merchant will deposit the check in its bank account. If the check is returned unpaid by the merchant’s bank, the Company is
not required to purchase the check from the merchant and the merchant bears all risk of loss on the check. The Company earns a fee
for each check submitted for verification, which is generally a fixed amount per check.
Retail and Alliance Services segment competition. The Company’s Retail and Alliance Services business competes with
several service providers and financial institutions that provide these services to their merchant customers. In many cases, the
merchant alliances also compete against each other for the same business. The check guarantee and verification products compete
principally with the products of four other national competitors as well as the migration to other non-check products.
The most significant competitive factors relate to price, brand, strength of financial institution partnership, breadth of features
and functionality, scalability and servicing capability. The Retail and Alliance Services segment is further impacted by large merchant
and large bank consolidation, card association business model expansion, and the expansion of new payment methods and devices.
In both the Retail and Alliance Services and Financial Services segments, the card associations and payment networks—Visa,
MasterCard and Discover—are increasingly offering products and services that compete with the Company’s products and services.
Retail and Alliance Services seasonality. Retail and Alliance Services’ revenues and earnings are impacted by the volume
of consumer usage of credit cards, debit cards, stored value cards and checks written at the point of sale. Retail and Alliance Services
generally experiences increased POS activity during the traditional holiday shopping period in the fourth quarter, the back-to-school
buying period in the third quarter, and significant holidays.
Retail and Alliance Services geographic mix and revenues. Revenues from external customers for the Retail and
Alliance Services segment are substantially all earned in the U.S. Merchant revenues outside of the U.S. are managed and reported by
the Company’s International segment. Within the U.S., revenues from external customers are spread across the country since Retail
and Alliance Services has merchant customers and alliance partners across geographic regions and a large percentage of its
transactions occur at national merchants.
Retail and Alliance Services significant customers. The Retail and Alliance Services segment does not have any
individually significant customers; however, the Company has two significant merchant alliance relationships with financial
institutions.
Financial Services segment. The Financial Services segment is comprised of:
(1) credit and retail card processing services;
(2) debit network and processing services;
(3) output services; and
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