First Data 2013 Annual Report Download - page 4

provide POS devices and other equipment necessary to capture merchant transactions. A majority of these services are offered to the merchants through
contractual alliance arrangements primarily with financial institutions, relationships with independent sales organizations and other referral/sales partners.
The segment’s processing services include authorization, transaction capture, settlement, chargeback handling, and internet-based transaction processing. The
vast 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, or another payment network (such as Discover).
Revenues are generated from, among other things:
· discount fees charged to a merchant, net of credit card interchange and assessment fees charged by the bankcard associations or payment
networks (VISA, MasterCard or Discover). The discount fee is typically either a percentage of the credit card transaction or the interchange fee
plus a fixed dollar amount;
· processing fees charged to unconsolidated alliances discussed below;
· processing fees charged to merchant acquirers who have outsourced their transaction processing to the Company;
· selling and leasing POS devices; and
· debit network fees.
Most of this segment’s revenue is derived from regional and local merchants. The items listed above are included in the Company’s consolidated
revenues and, for equity earnings from unconsolidated alliances, the “Equity earnings in affiliates” line item in the Consolidated Statements of Operations.
The Retail and Alliance Services segment revenue and EBITDA are presented using proportionate consolidation, accordingly, segment revenue also includes
the alliance partner’s share of processing fees charged to consolidated alliances. In addition, segment revenue excludes debit network fees and other
reimbursable items.
Retail and Alliance Services provides merchant acquiring and processing services, prepaid services and check verification, guarantee and settlement
services to merchants operating in approximately 3.9 million merchant locations across the U.S. and acquired $1.7 trillion of payment transaction dollar
volume on behalf of U.S. merchants in 2013. Retail and Alliance Services provides full service merchant processing primarily on VISA and MasterCard
transactions and PIN-debit at the point of sale.
Retail and Alliance Services approaches the market through diversified sales channels including equity alliances, revenue sharing alliances and referral
arrangements with more than 400 financial institution partners, more than 1,500 non-bank referral partners, and approximately 600 independent sales
organization partners, as of December 31, 2013. Growth in the Retail and Alliance Services business is derived from entering into new merchant relationships,
new and enhanced product and service offerings, cross selling products and services into existing relationships, the shift of consumer spending to increased
usage of electronic forms of payment and the strength of FDC’s alliances and relationships with banks and other entities. The Company’s alliance structures
take on different forms, including consolidated subsidiaries, equity method investments and revenue sharing arrangements. Under the alliance and referral
programs, the alliance/referral partners typically act as a merchant referral source. The Company benefits by providing processing services for the
alliance/referral partners and their merchant customers. Both the Company and the alliance may provide management, sales, marketing, and other
administrative services. The alliance strategy could be affected by consolidation among financial institutions.
The Company’s strategy with banks, independent sales organizations and referral/sales partners provides the Company with broad geographic
coverage, regionally and nationally, as well as a presence in various industries. The alliance/referral partner structure allows the Company to be the processor
for multiple financial institutions, any one of which may be selected by the merchant as their bank partner. Additionally, bank partners provide brand loyalty
and a distribution channel through their branch networks which increases merchant retention.
There are a number of different entities involved in a merchant transaction including the cardholder, card issuer, card association, merchant, merchant
acquirer, electronic processor for credit and signature debit transactions, and debit network for personal identification number (“PIN”) debit transactions. The
card issuer is the financial institution that issues credit or debit cards, authorizes transactions after determining whether the cardholder has sufficient available
credit or funds for the transaction, and provides funds for the transaction. Some of these functions may be performed by an electronic processor (such as the
Company’s Financial Services business) on behalf of the issuer. The card associations, VISA or MasterCard, a debit network (such as STAR Network) or
another payment network (such as Discover) route transactions between the Company and the card issuer. The merchant is a business from which a product
or service is purchased by a cardholder. The acquirer (such as the Company or one of its alliances) contracts with merchants to facilitate their acceptance of
cards. A merchant acquirer may do its own processing or, more commonly,
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