First Data 2014 Annual Report Download - page 25

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During the first quarter of 2014, we renamed our Retail and Alliance Services segment to Merchant Solutions to better reflect our transformation from a
processor to a solutions and technology provider.
On October 1, 2014, we announced the expansion of our Management Committee. We are evaluating the changes to our reporting that may be made as a
result of the expansion, to best assist the chief operating decision maker (our Chief Executive Officer) in monitoring and managing the businesses. Should the
reporting change, we will retroactively revise our segment disclosures.
The Merchant Solutions 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 payment network (such as VISA or MasterCard), a debit
network (such as STAR Network, which is owned by us), or other payment issuers/networks (such as American Express and 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” and “Equity earnings in affiliates” line items of the Consolidated Statements of Operations. We evaluate the Merchant Solutions
segment based on our proportionate share of the results of these alliances. Refer to “Segment results” below for a more detailed discussion.
Merchant processing and acquiring revenues are driven most significantly by the number of transactions, dollar volumes of those transactions, and trends in
consumer spending between national, regional, and local merchants. Consumers continue to increase the use of credit, debit, and stored-value cards in place
of cash and paper checks. Internet payments continue to grow and are becoming a larger portion of our transactions. While transactions over the internet may
involve increased risk, these transactions typically generate higher profits for us. We continue to enhance our fraud detection and other systems to address
such risks.
In addition, Merchant Solutions provides check verification, settlement, and guarantee services. We continue to see a decrease in the use of checks which
negatively affects our check verification, settlement, and guarantee business. The segment also manages prepaid stored-value card issuance and processing
services (i.e. gift cards) for retailers and others.
The Financial Services segment provides issuer card and network solutions and payment management solutions for card-based
payments. Financial Services also offers services to facilitate customer communications, billing, online banking, and consumer bill payment. Issuer card and
network solutions includes credit, retail, and debit card processing, debit network services, and output services for financial institutions and other
organizations offering credit cards, debit cards, and retail private label cards to consumers and businesses to manage customer accounts. Output services
include statement and letter printing, embossing (including EMV chip-card personalization), and mailing services. The segment also provides remittance
processing services, information services, and other payment services such as remote deposit, clearing services, and processing for payments which occur in
such forms as checks, ACH, wire transfer, and stored-value cards. The segment’s largest components of revenue consist of processing services including
account management, transaction authorization and posting and network switching.
Credit and retail based revenue is derived primarily from the card processing services offered to financial institutions and other issuers of cards. Revenue from
these markets is driven primarily by accounts on file, with active accounts having a larger impact on revenue than inactive accounts. Retail account
portfolios typically have a lower proportionate share of active accounts than credit account portfolios and product usage is different between the card types
resulting in lower revenue per active retail account. In addition, contract pricing at the customer level is dependent upon the volume of accounts, mix of
account types (e.g. retail, credit, co-branded credit and debit) and product usage.
Debit processing revenue is derived mostly from the processing of transactions where we could receive multiple fees for a transaction, depending on our role.
We continue to see a shift to the use of debit and credit cards from checks and cash. The shift to debit cards negatively affects our remittance processing
business.
The underlying economic drivers of credit card issuance are population demographics and employment. Strengthening in the economy typically results in an
improved credit risk profile, allowing card issuers to be more aggressive in their marketing
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