ITEM 1.      BUSINESS

 

General

 

First Data Corporation (we or our) is a global provider of electronic commerce and payment solutions for merchants, financial institutions, and card issuers with operations in 34 countries, serving approximately 6.2 million merchant locations. We were incorporated in Delaware in 1989 and were the subject of an initial public offering in connection with a spin-off from American Express in 1992. On September 24, 2007, we were acquired through a merger transaction with an entity controlled by affiliates of Kohlberg Kravis Roberts & Co. (KKR) that resulted in our equity becoming privately held.

 

We have operations and offices located within the United States (U.S.) (domestic) and outside of the U.S. (international) where sales, customer service and/or administrative personnel are based. Revenues generated from processing domestic and international transactions, regardless of the segments to which the associated revenues applied, were 85% and 15% of our consolidated revenues for the year ended December 31, 2014 , respectively. Long-lived assets attributable to domestic and international operations as percentages of our total long-lived assets as of December 31, 2014 were 88% and 12% , respectively. No individual international country is material to our total revenues or long-lived assets. Further financial information relating to our international and domestic revenues and long-lived assets is set forth in Note 13 "Segment Information" to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

 

Products and Services Segment Information

 

We are organized in three segments: Merchant Solutions, Financial Services, and International.

 

The segments’ profit measure is a form of EBITDA (earnings before net interest expense, income taxes, depreciation, and amortization). A discussion of factors potentially affecting our operations is set forth in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K. We do not have any significant customers that account for 10% or more of total consolidated revenues. Refer to the following segment discussions, which address significant customer relationships within each segment.

 

Merchant Solutions segment

The Merchant Solutions segment is comprised of merchant acquiring and processing services, prepaid services and check verification, settlement, and guarantee services.

 

The following table presents Merchant Solutions information as a percentage of total segment and All Other and Corporate:

 

Description of Merchant Solutions segment operations Merchant Solutions businesses facilitate the acceptance of consumer transactions at the point of sale (POS), whether it is a transaction at a physical merchant location, over the Internet or through a mobile (i.e. phone or tablet) device.

 

Merchant acquiring and processing services Merchant acquiring services facilitate the merchants’ ability to accept credit, debit, stored-value and loyalty cards by authorizing, capturing, and settling the merchants’ transactions. Acquiring services also provide POS devices and other equipment necessary to capture merchant transactions. 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 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).

Revenues are generated from a variety of sources:

 

 

 

 

 

 

Most of Merchant Solution’s revenue is derived from regional and local merchants. The items listed above are included in our consolidated revenues and, for equity earnings from unconsolidated alliances, the “Equity earnings in affiliates” line item in the Consolidated Statements of Operations. The Merchant Solutions 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. Throughout the document we use the word “partner” to describe situations where we have a contractual relationship with another company. These relationships do not include equity ownership.  In situations where equity ownerships are involved, we generally refer to the arrangement/entity as an affiliate. 

 

Merchant Solutions provides merchant acquiring and processing services, prepaid services and check verification, guarantee, and settlement services to merchants that operate 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 2014 . Merchant Solutions provides full service merchant processing primarily for transactions of VISA, MasterCard and a variety of personal identification number (PIN) debit networks at the POS.

 

Merchant Solutions approaches the market through diversified sales channels including equity alliances, and its other contractual revenue sharing and/or referral arrangements with more than 400 financial institution partners, more than 1,700 non-bank referral partners, and more than 600 independent sales organization partners, as of December 31, 2014 . Growth in the Merchant Solutions business is derived from entering into new merchant relationships, reducing the turnover in existing 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 our alliances and relationships with banks and other entities. Our alliance structures take on different forms, including consolidated subsidiaries, equity method investments, and contractual revenue sharing and/or referral arrangements. Under the alliance and referral programs, the alliance/referral partners typically act as a merchant referral source. We benefit by providing processing services for the alliance/referral partners and their merchant customers. Both we and the alliance may provide management, sales, marketing, and other administrative services. The alliance strategy could be affected by consolidation among financial institutions.

 

Our strategy with banks, independent sales organizations, and referral/sales partners provides us with broad geographic coverage, regionally and nationally, as well as presence and expertise in various industries. The alliance/referral partner structure allows us 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.

 

In 2014, Merchant Solutions rolled out Small Business Solutions (SBS), a program designed to help small to medium sized businesses (SMBs) better manage their business. The new SBS is integrated into Clover Station, our proprietary tablet-based hardware solution, and allows SMBs to manage inventory, track revenues, and generate reports that distill transaction data into powerful intelligence. Merchants can customize and grow their Clover Station’s capabilities by adding applications from the Clover App Market. The SBS also includes features such as analytics, TransArmor, a transaction processing encryption and tokenization technology, and Perka, a cloud-hosted mobile loyalty marketing program.

There are a number of different entities involved in a merchant transaction including the cardholder, card issuer, card network, merchant, merchant acquirer, electronic processor for credit and signature debit transactions, and debit network for 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 our Financial Services business) on behalf of the issuer. The card networks, VISA or MasterCard, a debit network or another payment issuer/network route transactions between ourselves and the card issuer. The merchant is a business from which a product or service is purchased by a cardholder. The acquirer (such as us or one of our alliances) contracts with merchants to facilitate their acceptance of cards. A merchant acquirer may do its own processing or, more commonly, may outsource those functions to an electronic processor such as our Merchant Solutions segment. The acquirer/processor serves as an intermediary between the merchant and the card issuer by:

 

 

 

A transaction occurs when a cardholder purchases a product or service from a merchant who has contracted with us, an alliance partner or a processing customer. When the merchant swipes the card through the POS device (which is often sold or leased, and serviced by us), we obtain authorization for the transaction from the card issuer through the payment or debit network, verifying that the cardholder has sufficient credit or adequate funds for the transaction. Once the card issuer approves the transaction, we or the alliance acquire the transaction from the merchant and then transmit it to the applicable payment or debit network, which then routes the transaction information to the card issuer. Upon receipt of the transaction, the card issuer delivers funds to us via the payment or debit network. Generally, we fund the merchant after receiving the money from the payment or debit network. Each participant in the transaction receives compensation for processing the transaction. For example, in a credit card transaction using a VISA or MasterCard for $100.00 with an interchange rate of 1.5%, the card issuer will fund the payment network $98.50 and bill the cardholder $100.00 on their monthly statement. The card network will retain assessment fees of approximately $0.10 and forward $98.40 to us. We will retain, for example, $0.40 and pay the merchant $98.00. The $1.50 retained by the card issuer is referred to as interchange and it, like assessment fees, is set by the card network. The $0.40 we receive represents our spread on the transaction, and is negotiated between the merchant and us.

We and our alliances, as merchant acquirers/processors, have certain contingent liabilities for the transactions acquired from merchants. This contingent liability arises in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor. In such a case, the transaction is “charged back” to the merchant and the disputed amount is credited or otherwise refunded to the cardholder. We may, however, collect this amount from the card network if the amount was disputed in error. If we or the alliance is unable to collect this amount from the merchant, due to the merchant’s insolvency or other reasons, we or the alliance will bear the loss for the amount of the refund paid to the cardholder. In most cases, this contingent liability situation is unlikely to arise because most products or services are delivered when purchased, and credits are issued on returned items. However, where the product or service is not provided until sometime following the purchase (e.g., airline or cruise ship tickets), the risk is greater. We often mitigate our risk by obtaining collateral from merchants that are considered higher risk because they have a time delay in the delivery of services, operate in industries that experience chargebacks or are less creditworthy.

 

Prepaid services First Data Prepaid Services manages prepaid stored-value card issuance and processing services (i.e. gift cards) for retailers and others. The full-service stored-value/gift card program offers transaction processing services, card issuance, and customer service for over 200 national brands and several thousand small and mid-tier merchants. We also provide program management and processing services for association-branded, bank-issued, open loop (a card that can be used at multiple merchants), stored-value, reloadable, and one time prepaid card products. Revenues are generated from a variety of sources including processing fees for transactions processed and fees for card production and shipments.

 

Money Network offers prepaid products to address the needs of employers, employees, merchants, and unbanked individuals. Money Network provides open loop electronic payroll distribution solutions that reduce or eliminate an employer’s expense associated with traditional paper paychecks as well as other prepaid retail solutions. Revenues are generated from a variety of sources including network interchange revenue from use of cards and certain cardholder transaction fees.

 

Check verification, settlement, and guarantee services TeleCheck offers check verification, settlement, and guarantee services using our proprietary database system to assist merchants in deciding whether accepting checks at the POS is a reasonable risk, or, further, to guarantee checks presented to merchants if they are approved. These services include risk management services, which utilize software, information, and analysis to assist the merchant in the decision process and include identity fraud prevention and reduction. Revenues are earned by charging merchant fees for check verification or guarantee services.

 

The majority of our services involve providing check guarantee services for checks received by merchants. Under the guarantee service, when a merchant receives a check as payment for goods and services, the transaction is submitted to and analyzed by us. We either accept or decline the check for warranty coverage under our guarantee service. If we approve 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 our 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, we are required to purchase the check from the merchant at its face value. We then own the purchased check and pursue collection of the check from the check writer. As a result, we bear the risk of loss if we are unable to collect the returned check from the check writer. We earn a fee for each check we guarantee, which generally is determined as a percentage of the check amount.

 

Electronic Check Acceptance service converts a paper check written at the POS into an electronic item and 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 us. We 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, we are not required to purchase the check from the merchant and the merchant bears all risk of loss on the check. We earn a fee for each check submitted for verification, which is generally a fixed amount per check.

 

Merchant Solutions segment competition Our Merchant Solutions business competes with several third-party processors and financial institutions that provide these services to their merchant customers in the U.S. In many cases, our merchant alliances also compete against each other for the same business. The check guarantee and verification products compete principally with the products of one other national competitor 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 Merchant Solutions segment is further impacted by large merchant and large bank consolidation, card network business model expansion, and the creation of new payment methods and devices.

 

In the Merchant Solutions segment, the card payment networks—VISA, MasterCard, and issuers/networks—American Express and Discover—are increasingly offering products and services that compete with our suite of solutions.

 

Merchant Solutions seasonality Merchant Solutions’ revenues and earnings are impacted by the volume of consumer usage of credit cards, debit cards, stored value cards, and checks written at the POS. Merchant Solutions 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.

 

Merchant Solutions geographic mix and revenues Revenues from external customers for the Merchant Solutions segment are substantially all earned in the U.S. Merchant revenues outside of the U.S. are generally managed and reported by our International segment. Within the U.S., revenues from external customers are spread across the country because Merchant Solutions has merchant customers and alliance partners across geographic regions and a large percentage of its transactions occur at national merchants.

Merchant Solutions acquisitions We have recently made the following acquisitions and product developments.

Clover ^TM In 2012, we acquired Clover Network, Inc. (Clover), a provider of payment network services. In 2013 we unveiled Clover Station—a reliable and easy to use POS and business management solution for merchants. With security and reliability coupled with the flexibility of cloud-based storage, Clover Station is a comprehensive solution with respect to meeting SMB owners’ needs.

Perka ^TM In 2013, we acquired Perka, Inc. (Perka), a mobile marketing and consumer loyalty platform that helps small to medium-sized merchants engage their customers with location-based smartphone applications. Perka is an easy-to-use alternative to paper-punch cards. Business owners can deliver custom messages and special offers directly to customers’ phones that encourage repeat visits and additional sales.

Gyft ^TM In 2014, we acquired Gyft, Inc. (Gyft), the leading digital platform that enables consumers to buy, send, manage, and redeem gift cards using mobile devices. Gyft’s exceptional capabilities, combined with our long-standing leadership in prepaid solutions, create a distinct combination in a rapidly growing market for virtual gift cards.

Financial Services segment

The Financial Services segment is comprised of:

 

 

 

 

The following table presents Financial Services information as a percentage of total segment and All Other and Corporate:

 

Description of Financial Services segment operations Financial Services provides issuer card and network solutions for credit, retail, and debit card processing, debit network services (including the STAR network), output services to financial institutions and other organizations offering credit, debit, and retail cards to consumers and businesses to manage customer cards. Financial Services also provides PIN debit network services through the STAR Network which enables PIN-secured debit transaction acceptance at over 2 million automated teller machine (ATM) and retail device locations in the U.S. as of December 31, 2014 . Financial Services also offers payment management solutions for recurring bill payment and services to improve customer communications, billing, online banking, and consumer bill payment. Revenue and profit growth comes primarily from an

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.

 

Other services Other services consist of our remittance processing, online banking and bill payment services, and Interactive Voice Response (IVR) services. The remittance processing business processes mail-in payments for third-party organizations. Revenues for remittance processing services are derived primarily on a per transaction basis and consist of fees for processing consumer and business payments. Other services consist primarily of online banking and bill payment services and voice services.

 

Financial Services segment competition Our Financial Services segment competes with several other third-party card processors and debit networks in the U.S., as well as financial institutions with in-house operations to manage card issuance and maintenance. We also face significant competition from regional and national operators of debit networks.

 

The most significant competitive factors are price, system performance and reliability, breadth of features and functionality, disaster recovery capabilities and business continuity preparedness, data security, scalability, and flexibility of infrastructure and servicing capability. The Financial Services business is impacted by financial institution consolidation.

 

In the Financial Services segment, the payment networks—VISA, MasterCard, and issuers/networks-American Express and Discover—are increasingly offering products and services that compete with our products and services.

 

Financial Services seasonality Financial Services revenues and earnings are impacted by the volume of consumer usage of credit, retail, and debit cards. Such volumes are generally impacted by increased activity during the traditional holiday shopping period in the fourth quarter, the back-to-school buying period in the third quarter, and significant holidays.

 

Financial Services geographic mix and revenues Revenues from external customers for the Financial Services segment are substantially all earned in the U.S. Card issuing revenues outside of the U.S. are reported by our International segment. Within the U.S., revenues from external customers are geographically dispersed throughout the country.

 

International segment

The International segment is comprised of:

 

The following table presents International information as a percentage of total segment and All Other and Corporate:

 

International has operations in 33 countries. The International acquiring services facilitate the merchants’ ability to accept credit, debit, and stored-value cards. 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.

The International issuing services provide issuer card, output services, ATM services, and professional services. Issuer card and network solutions includes credit, retail, and debit card processing 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 and mailing services, and call center services. ATM services include processing, acquiring, and switching services. Additionally, the International issuing services provide licensing for card processing software, and professional services.

The International segment revenue drivers are similar to the Merchant Solutions and Financial Services segments described above. The International acquiring services revenues are driven most significantly by the number of transactions, dollar volumes of those transactions and trends in consumer spending. The International issuing services revenues for issuer card and network solutions are driven primarily by accounts on file, with active accounts having a larger impact on revenue than inactive

accounts. Additionally, the International segment revenue is impacted by foreign exchange rate movements as well as the macroeconomic forces within countries where the services are being sold.

 

International segment competition and seasonality Competition and seasonality within the International segment are similar to that of the Merchant Solutions and Financial Services segments for the respective product and service offerings. A noted difference from the U.S. operations is that generally there are a greater number of competitors, and smaller ones in particular, due to the International segment’s global span.

 

International geographic mix The following countries accounted for more than 10% of the segment’s revenues from external customers for the periods presented:

 

No individual international country was material to our consolidated revenues.

 

All Other and Corporate

The remainder of our business units are grouped in the All Other and Corporate category, which includes Integrated Payment Systems (IPS), First Data Government Solutions (FDGS), and smaller businesses as well as corporate operations.

 

IPS primarily engages in money transmission services. Historically, the principal IPS business was official check services. Until May 2010, IPS issued official checks, which were sold by agents that were financial institutions. Official checks served as an alternative to a bank’s own items such as cashiers or bank checks. We have exited the official check line of business, yet continue to support these outstanding payment instruments until they are presented for payment, or are escheated to local governments. The majority of the clients of this business deconverted during 2008 and there was no new official check and money order business beyond May 2010. IPS will continue to use its licenses to offer payment services that fall under state and federal regulations.

 

FDGS operates payment systems and related technologies in the government sector. For instance, FDGS provides electronic tax payment processing services for the Electronic Federal Tax Payment System.

 

Corporate operations include administrative and shared service functions such as the executive group, legal, tax, treasury, internal audit, finance, accounting, human resources, information technology, and procurement. Costs incurred by Corporate that are directly related to a segment are allocated to the respective segment. Administrative and shared service costs are retained by Corporate.

 

All Other and Corporate competition The operations within All Other and Corporate have various competitors. No single competitor would have a material impact on our operations.

 

All Other and Corporate significant customers During 2014 , we had a significant relationship with one client whose revenues represented approximately 50% of All Other and Corporate revenue for the year ended December 31, 2014 .

Intellectual Property

 

We own a global portfolio of many trademarks, trade names, patents, and other intellectual property that are important to our future success. The only intellectual property rights that are individually material to us are the FIRST DATA trademark and trade name, and the STAR trademark and trade name. The STAR trademark and trade name are used in the Financial Services segment. The FIRST DATA trademark and trade name are associated with quality and reliable electronic commerce and payments solutions. Financial institutions and merchants associate the STAR trademark and trade name with quality and reliable debit network services and processing services. Loss of the proprietary use of the FIRST DATA or STAR trademarks and trade names or a diminution in the perceived quality associated with these names could harm the growth of our businesses.

Employees and Labor

 

As of December 31, 2014 , we employed approximately 23,000 persons, approximately 97% of which were full-time employees. The majority of the employees of our subsidiaries outside of the U.S. are subject to the terms of individual employment agreements. One of our wholly owned subsidiaries has approximately 1,600 employees in the United Kingdom, a portion of whom are members of the Unite trade union. Employees of our subsidiaries in Vienna, Austria; Frankfurt, Germany; and Nürnberg, Germany are also represented by local works councils. The Vienna workforce and a portion of the Frankfurt workforce are also covered by a union contract. Certain employees of our Korean subsidiary are represented by a Labor-Management council. In Brazil every single employee is unionized and covered by the terms of industry-specific collective agreements. Employees in certain other countries are also covered by the terms of industry-specific national collective agreements. None of our employees are otherwise represented by any labor organization in the U.S. We believe that our relations with our employees and the labor organizations identified above are in good standing.

 

Available Information

 

Our principal executive offices are located at 225 Liberty Street, 29th Floor, New York, NY 10281, telephone (800) 735-3362. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available free of charge to shareholders and other interested parties through the “Investor Relations” portion of our website at http://investor.firstdata.com as soon as reasonably practical after they are filed with the Securities and Exchange Commission (SEC). The SEC maintains a website, www.sec.gov, which contains reports and other information filed electronically with the SEC by us. Various corporate governance documents, including our Audit Committee Charter, Governance, Compensation and Nominations Committee Charter, and Code of Ethics for Senior Financial Officers are available without charge through the “About Us” “Investor Relations” “Corporate Governance” portion of our investor relations website, listed above.

 

Government Regulations

Various aspects of our service areas are subject to U.S. federal, state, and local regulation, as well as regulation outside the U.S. Failure to comply with regulations may result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of service, and/or the imposition of civil and criminal penalties, including fines. Certain of our services also are subject to rules promulgated by various payment networks and banking authorities as more fully described below.

 

Dodd-Frank Act In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) was signed into law in the U.S. The Dodd-Frank Act has resulted in significant structural and other changes to the regulation of the financial services industry. Among other things, Title X of the Dodd-Frank Act established a new, independent regulatory agency known as the Consumer Financial Protection Bureau to regulate consumer financial products and services (including some offered by our customers). Separately, under the Dodd-Frank Act, debit interchange transaction fees that a card issuer receives and that are established by a payment card network for an electronic debit transaction are now regulated by the Federal Reserve Board (Board) and must be “reasonable and proportional” to the cost incurred by the card issuer in authorizing, clearing, and settling the transaction. Effective October 1, 2011, the Board capped debit interchange rates for card issuers operating in the U.S. with assets of $10 billion or more at the sum of $0.21 per transaction and an ad valorem component of 5 basis points to reflect a portion of the issuer’s fraud losses plus, for qualifying issuers, an additional $0.01 per transaction in debit interchange for fraud prevention costs. In addition, the new regulations contain non-exclusivity provisions that 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. Beginning April 1, 2012, all debit card issuers in the U.S. were required to participate in at least two unaffiliated debit payment card networks. On April 1, 2013, the ban on network exclusivity arrangements became effective for prepaid card and healthcare debit card issuers, with some leeway for prepaid cards issued before that date.

 

Effective July 22, 2010, merchants were allowed to set minimum dollar amounts (not to exceed $10) for the acceptance of a credit card (while federal governmental entities and institutions of higher education may set maximum amounts for the acceptance of credit cards). They were also allowed to provide discounts or incentives to entice consumers to pay with an alternative payment method, such as cash, checks or debit cards. In addition, the Dodd-Frank Act created a new entity, the Financial Stability Oversight Council, and authorizes it to require that a nonbank financial company that is deemed to pose a systemic risk to the U.S. financial system become subject to consolidated, prudential supervision by the Board. At this point it is unclear whether we would be subject to additional systemic risk related oversight.

 

Association and network rules We are subject to rules of MasterCard, Visa, INTERAC, PULSE, and other payment networks. In order to provide processing services, a number of our subsidiaries are registered with Visa and/or MasterCard as service providers for member institutions. Various subsidiaries of ours are also processor level members of numerous debit and electronic benefits transaction (EBT) networks or are otherwise subject to various network rules in connection with processing services and other services we provide. As such, we are subject to applicable card association, network, and national scheme rules that could subject us to fines or penalties. We are also subject to network operating rules promulgated by the National Automated Clearing House Association (NACHA) relating to payment transactions processed by us using the Automated Clearing House (ACH) Network and to various state and Federal laws regarding such operations, including laws pertaining to EBT.

 

Cashcard Australia Limited (Cashcard) is a member of the Australian Consumer Electronic Clearing System (CECS), which is a debit payment system regulated by network operating rules established and administered by Australian Payments Clearing Association Limited, and is a member of the ATM Access Australia Limited and the eftpos® Access Australia Limited that respectively administers reciprocal access and interchange arrangements for ATMs and Electronic Funds Transfer at Point of Sale (eftpos®) in Australia. The network operating rules, ATM Access Code and eftpos® Access Code impose a variety of sanctions, including suspension or termination of membership and fines for non-compliance. Cashcard also operates its own network of members, regulated by rules promulgated by Cashcard. To enable Cashcard to settle in CECS direct with banks and financial institutions, Cashcard maintains an Exchange Settlement Account (ESA) which is supervised by the Reserve Bank of Australia (RBA), and that requires Cashcard to adhere to conditions imposed by RBA.

 

Our subsidiary in Germany, TeleCash GmbH & Co. KG, is certified and regulated as a processor for domestic German debit card transactions by the Deutsche Kreditwirtschaft (DK), the German banking association. Failure to comply with the technical requirements set forth by the DK may result in suspension or termination of services.

Banking regulation Because a number of our subsidiary businesses provide data processing services for financial institutions, we are subject to examination by the Federal Financial Institutions Examination Council (FFIEC). The FFIEC examines large data processors in order to identify and mitigate risks associated with significant service providers.

FDR Limited (FDRL) in the United Kingdom is authorized and regulated by the Financial Conduct Authority (FCA), the regulatory authority for the full range of financial services in the United Kingdom. FDRL is authorized by the FCA to carry on an insurance mediation business for the purpose of arranging insurance to its issuer customers’ cardholders and is required to meet certain prudential and conduct of business requirements.

As a result of the implementation of the Payment Services Directive 2007/60 EC in the European Union, a number of our subsidiaries in the International segment hold Payment Institution Licenses in the countries where such subsidiaries do business. As Payment Institutions, we are subject to regulation and oversight in the applicable member state, which includes amongst other things, the requirement to maintain specified regulatory capital.

First Data Trust Company, LLC (FDTC) engages in trust activities previously conducted by the trust department of a former banking subsidiary of ours and is subject to regulation, examination, and oversight by the Division of Banking of the Colorado Department of Regulatory Agencies. Since FDTC is not a “bank” under the Bank Holding Company Act of 1956, as amended (BHCA), our affiliation with FDTC does not cause us to be regulated as a bank holding company or financial holding company under the BHCA.

TeleCheck Payment Systems Limited (TPSL) in Australia holds an Australian Financial Services License under Chapter 7 of the Australian Corporations Act 2001, which regulates the provision of a broad range of financial services in Australia. The license, issued by the Australian Securities and Investments Commission, entitles the Australian operations of TPSL to deal in and provide general financial product advice about its check guarantee and check verification product and requires that TPSL’s Australian operations issue product documents that comply with specific content requirements and follow prescribed procedures.

 

Further, in our International segment, several subsidiaries provide services such as factoring or settlement that make them subject to regulation by local banking agencies, including the National Bank of Slovakia, the National Bank of Poland and the German Federal Financial Supervision Agency.

 

Privacy and information security regulations We provide services that may be subject to various state, federal, and foreign privacy laws and regulations, including Gramm-Leach-Bliley Act and Directive 95/46/EC, the Australian Privacy Act, the Personal Information Protection and Electronic Documents Act in Canada, the Personal Data (Privacy) Ordinance in Hong Kong, the Malaysian Data Protection Act 2010, and the Singapore Data Protection Act 2012. These laws and their

implementing regulations restrict certain collection, processing, storage, use, and disclosure of personal information, require notice to individuals of privacy practices, and provide individuals with certain rights to prevent use and disclosure of protected information. These laws also impose requirements for the safeguarding and proper destruction of personal information through the issuance of data security standards or guidelines. Certain federal and state laws impose similar privacy obligations and, in certain circumstances, obligations to notify affected individuals, state officers, the media, and consumer reporting agencies, as well as businesses and governmental agencies that own the information, of security breaches affecting personal information. In addition, there are state laws restricting the ability to collect and utilize certain types of information such as Social Security and driver’s license numbers.

 

Credit reporting and debt collections regulations TeleCheck is subject to the Federal Fair Credit Reporting Act and various similar state laws based on TeleCheck’s maintenance of a database containing the check-writing histories of consumers and the use of that information in connection with its check verification and guarantee services.

 

The collection business within TRS Recovery Services, Inc. (TRS) is subject to the Federal Fair Debt Collection Practices Act and various similar state laws. TRS has licenses in a number of states in order to engage in collection in those states. In the United Kingdom, FDRL has a license under the Consumer Credit Act of 1974 (CCA) to enable it to undertake, among other things, credit administration and debt collections activities on behalf of its card issuing customers through calls and correspondence with the cardholders. FDRL is also licensed under the CCA to carry on the activity of a consumer hire business for the purpose of leasing devices to merchants.

 

TeleCheck and TRS are subject to regulation, supervision, and examination from the Consumer Financial Protection Bureau. Further regulations may be imposed in the future as state governments and federal agencies identify and consider supplementary consumer financial protection, including laws regulating activities with respect to current or emerging technology such as automated dialers or pre-recorded messaging or calls to cellular phones, which could impair the collection by TRS of returned checks and those purchased under TeleCheck’s guarantee services. Moreover, reducing or eliminating access to and use of information on drivers licenses, requiring blocking of access to credit reports or scores, mandating score or scoring methodology disclosure and proscribing the maintenance or use of consumer databases could reduce the effectiveness of TeleCheck’s risk management tools or otherwise increase its costs of doing business.

 

In addition, several subsidiaries in our International segment are subject to comparable local laws regarding collection activities and obtaining credit reports.

 

Anti-money laundering and counter terrorist regulation We are subject to anti-money laundering laws and regulations, including the Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001 (collectively, BSA). The BSA, among other things, requires money services businesses (such as money transmitters, issuers of money orders and official checks, and providers of prepaid access) to develop and implement risk-based anti-money laundering programs, report large cash transactions and suspicious activity, and to maintain transaction records. Our subsidiary Money Network Financial LLC is a provider of prepaid access for various open loop prepaid programs for which it is the program manager and therefore must meet the requirements of the Financial Crimes Enforcement Network, the agency that enforces the BSA.

 

We are also subject to certain economic and trade sanctions programs that are administered by the Treasury Department’s Office of Foreign Assets Control (OFAC) which prohibit or restrict transactions to or from or dealings with specified countries, their governments, and in certain circumstances, their nationals, and with individuals and entities that are specially-designated nationals of those countries, narcotics traffickers, and terrorists or terrorist organizations.

 

Similar anti-money laundering and counter terrorist financing and proceeds of crime laws apply to movements of currency and payments through electronic transactions and to dealings with persons specified in lists maintained by the country equivalents to the OFAC lists in several other countries and require specific data retention obligations to be observed by intermediaries in the payment process. Our businesses in those jurisdictions are subject to those data retention obligations.

 

Money transmission and payment instrument licensing and regulation We are subject to various U.S. federal, state, and foreign laws and regulations governing money transmission and the issuance and sale of payment instruments, including some of our prepaid products.

 

In the U.S., most states license money transmitters and issuers of payment instruments. Many states exercise authority over the operations of our services related to money transmission and payment instruments and, as part of this authority, subject us to periodic examinations. Many states require, among other things, that proceeds from money transmission activity and payment instrument sales be invested in high-quality marketable securities before the settlement of the transactions. Such licensing laws also may cover matters such as regulatory approval of consumer forms, consumer disclosures and the filing of periodic reports

by the licensee, and require the licensee to demonstrate and maintain levels of net worth. Many states also require money transmitters, issuers of payment instruments, and their agents to comply with federal and/or state anti-money laundering laws and regulations.

 

Escheat regulations We are subject to unclaimed or abandoned property (escheat) laws in the U.S. and abroad that require us to turn over to certain government authorities the property of others held by us that has been unclaimed for a specified period of time such as, in the Integrated Payment Systems business, payment instruments that have not been presented for payment or, in the Merchant Solutions segment, account balances that cannot be returned to a merchant following discontinuation of its relationship with us. A number of our subsidiaries hold property subject to escheat laws and we have an ongoing program to comply with those laws. We are subject to audit by individual U.S. states with regard to our escheatment practices.

 

Indirect Regulatory Requirements A number of our clients are financial institutions that are directly subject to various regulations and compliance obligations issued by the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency and other agencies responsible for regulating financial institutions. While these regulatory requirements and compliance obligations do not apply directly to us, many of these requirements materially affect the services we provide to our clients and us overall. To remain competitive, we expend significant resources to assist our clients in meeting their various compliance obligations, including the cost of updating our systems and services as necessary to allow our clients to comply with applicable laws and regulations, and the cost of dedicating sufficient resources to assist our clients in meeting their new and enhanced oversight and audit requirements established by the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, and others. We expect to expend significant resources on an ongoing basis in an effort to assist our clients in meeting their legal requirements.

 

Other Stored-value services we offer to issuers in the U.S. and internationally are subject to various federal, state, and foreign laws and regulations, which may include laws and regulations related to consumer and data protection, licensing, escheat, anti-money laundering, banking, trade practices and competition, and wage and employment. These laws and regulations are evolving, unclear, and sometimes inconsistent and subject to judicial and regulatory challenge and interpretation, and therefore the extent to which these laws and rules have application to, and their impact on, us, financial institutions, merchants or others is in flux. At this time we are unable to determine the impact that the clarification of these laws and their future interpretations, as well as new laws, may have on us, financial institutions, merchants or others in a number of jurisdictions. These services may also be subject to the rules and regulations of the various international, domestic and regional schemes, networks, and associations in which we and the card issuers participate.

In addition, the Housing Assistance Tax Act of 2008 included an amendment to the Internal Revenue Code that requires information returns to be made for each calendar year by merchant acquiring entities and third-party settlement organizations with respect to payments made in settlement of payment card transactions and third-party payment network transactions occurring in that calendar year. Reportable transactions are also subject to backup withholding requirements. We could be liable for penalties if we are not in compliance with these regulations.