First Data 2014 Annual Report Download - page 9

increase in debit and credit card usage, growth from existing clients and sales to new clients, and the related account conversions.
The Financial Services segment had more than 3,500 domestic client relationships. We have relationships and many long-term customer contracts with card
issuers providing credit and retail card processing, output services for printing and embossing items, debit card processing services, and STAR Network
services. These contracts generally require a notice period before the end of the contract if a client chooses not to renew. Additionally, some contracts may
allow for early termination upon the occurrence of certain events such as a change in control. The termination fees paid upon the occurrence of such events
are designed primarily to cover balance sheet exposure related to items such as capitalized conversion costs or signing bonuses associated with the contract
and, in some cases, may cover a portion of lost future revenue and profit. Although these contracts may be terminated upon certain occurrences, the contracts
provide the segment with a steady revenue stream since a vast majority of the contracts are honored through the contracted expiration date.
Credit and retail card issuing and processing services Credit and retail card issuing and processing services provide outsourcing services to financial
institutions and other issuers of cards, such as consumer finance companies and retailers. Financial Services clients include a wide variety of banks, savings
and loan associations, group service providers, retailers, and credit unions. Services provided include, among other things, account maintenance, transaction
authorizing and posting, fraud, and risk management services and settlement.
We provide services throughout the period of each card's use, starting from a card issuing client processing an application for a card. Services may include
processing the card application, initiating service for the cardholder, processing each card transaction for the issuing retailer or financial institution, and
accumulating the card's transactions into monthly billing statement, and posting cardholder payments. Our fraud management services monitor the
unauthorized use of cards that have been reported to be lost, stolen, or which exceed credit limits. Our fraud detection systems help identify fraudulent
transactions by monitoring cardholders' purchasing patterns and flagging unusual purchases. Other services provided include customized communications to
cardholders, information verification associated with granting credit, debt collection, and customer service.
Revenues for credit and retail card issuing and processing services are derived from fees payable under contracts that depend primarily on the number of
cardholder accounts on file. More revenue is derived from active accounts (those accounts on file that had a balance or any monetary posting or authorization
activity during the period) than inactive accounts.
Debit network and processing services We provide STAR Network access, PIN-debit and signature debit card processing services, and ATM processing
services, such as transaction routing, authorization, and settlement as well as ATM management and monitoring. The STAR Network represents a debit
network that is connected to thousands of financial institutions, merchants, payment processors, ATM processors, and card processors that participate in the
network. When a merchant acquirer or ATM owner acquires a STAR Network transaction, it sends the transaction to the network switch, which is operated by
us, which in turn routes the transaction to the appropriate participating financial institution for authorization. To be routed through the STAR Network, a
transaction must be initiated with a card participating in the STAR Network at an ATM or POS device also participating in the STAR Network. STAR
Network’s fees differ from those presented in the example above in the Merchant Solutions segment description. Fees for PIN-debit transactions are generally
lower than those conducted through other customer authentication methods due to the lower amount of risk in the transaction.
Revenues related to the STAR Network and debit card and ATM processing services are derived from fees payable under contracts but are driven more by
monetary transactions processed than by accounts on file. We provide services that are driven by client transactions and are separately priced and negotiated
with clients. In a situation in which a PIN-secured debit transaction uses our debit network and we are the debit card processor for the financial institution as
well as the processor for the merchant, we receive: (1) a fee from the card issuing financial institution for running the transaction through the STAR Network,
recognized in the Financial Services segment; (2) a fee from the card issuer for obtaining the authorization, recognized in the Financial Services segment;
(3) a fee from the merchant for acquiring the transaction, which is recognized in the Merchant Solutions segment; and (4) a network acquirer fee from the
merchant for accessing the STAR Network, which is recognized in the Financial Services segment. There are other possible configurations of transactions that
result in us receiving multiple fees for a transaction, depending on the role we play.
Output services Output services consist of statement and letter printing, card embossing, chip card personalization, and mailing services. Services are
provided to clients that process accounts on our platform as described above and for clients that process accounts on alternative platforms. We provide these
services primarily through in-house facilities. Revenues for output services are derived primarily on a per piece basis and consist of fees for the production
and materials related to finished products. The mailing services drive a majority of our postage revenue.
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