Can ONE COMPANY help buy dinner, wire a car payment,
and expand economic opportunity in China?




FIRST DATA CORPORATION ...
ABSOLUTELY.
/// The reason I’m so emphatic is that First Data is,
    in fact, the one payments company that can
    execu...
FIRST DATA’S CORPORATE
CULTURE EMPHASIZES
FLAWLESS EXECUTION,                                                 Following We...
Highlights :
                                                                    FINANCIAL




                           ...
A BUSINESS MODEL THAT DEFINES THE INDUSTRY




HERE by
DESIGN.
                                                          p...
WE’RE ALWAYS LOOKING
FOR NEW BUSINESS, BUT WE’RE
ALSO INTENSELY FOCUSED ON
CREATING MORE VALUE FOR
THE CUSTOMERS WE HAVE.
...
WE COMPETE ACROSS A BROAD RANGE OF PAYMENT MARKETS:


                            FORMAT                    MODE          ...
LEVERAGING ENTERPRISE-WIDE CAPABILITIES TO CAPTURE GROWTH




UNDIVIDED
ATTENTION.
                                       ...
PUT MONEY IN
ANY WAY YOU WANT,
TAKE MONEY OUT
ANY WAY YOU WANT.


             In our merchant business, for example,
    ...
eONE Global is an example of gaining      Union. Through all those agent locations—in
share in new markets. It is only by ...
THE RELENTLESS PURSUIT OF FLAWLESS EXECUTION




PERFORMANCE
                                                             ...
OUR CORPORATE CULTURE
HONORS INTEGRITY,
COMMITMENT AND A
DETERMINATION TO EXCEL.
      execution characterize First Data’s...
TRUE BELIEVER:
                                                      SCOTT MITCHELL, WHO LEADS FIRST DATA’S
              ...
OUR ALLIANCE STRATEGY REMAINS AN ESSENTIAL COMPETITIVE ADVANTAGE




FILL your
DANCE CARD.
           /// One reason First...
OUR CUSTOMERS
NEED US, BUT WE’RE NOT THEIR
ONLY CHOICE.

                            In our Card Issuing business we are
 ...
56
                                                     81                     DEBIT

                                    ...
GLOBAL EXPANSION PLUS POINT-OF-SERVICE INNOVATION




FOLLOWthe
  LEADER.
  /// In every business—but especially in ours—t...
world over desire and demand. China is a good      business, then we generate awareness through
                          ...
official checks, money orders and other                    customers convenient access to Western
                        ...
FIRST DATA is
THE INDUSTRY
LEADER for
GOOD REASON.




EXECUTIVE COMMITTEE




                      GUY BATTISTA         ...
BOARD OF DIRECTORS


  Alison Davis                                     Robert J. Levenson                          Joan E...
OPERATIONAL
REVIEW.
                      20%                                                 25%
                        ...
MERCHANT SERVICES


                                                               agement control in a number of merchant...
Management’s Responsibility for Financial Reporting
                               29

                               30  ...
MANAGEMENT ’ S RESPONSIBILITY FOR FINANCIAL REPORTING


                                                                  ...
SELECTED FINANCIAL AND OPERATING DATA



The following data should be read in conjunction with the Consolidated Financial ...
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



                                 ...
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



    FDC makes acquisitions that c...
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



2002 that have been identified by ...
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first data annual reports 2002

  1. 1. Can ONE COMPANY help buy dinner, wire a car payment, and expand economic opportunity in China? FIRST DATA CORPORATION 2002 Annual Report
  2. 2. ABSOLUTELY. /// The reason I’m so emphatic is that First Data is, in fact, the one payments company that can execute these seemingly unique tasks. Globally. Seamlessly. And flawlessly. First Data has the financial strength, the reach and the scalable infrastructure to promote and facilitate commerce in growing economies like China, while simultaneously enhancing the convenience of consumers making purchases or payments just about anywhere else. In a rural U.S. town. A central European country. Around the world. As an organization, we are unified behind a common vision and committed to the pursuit of flawless execution, continual improve- ment and ongoing innovation. Examine our performance, take a close look at our culture, see the scope of our capabilities and then objectively assess both our position and our strategy for growth. I think you’ll understand why our company will continue to create tremen- dous value for all the people we serve—customers, shareholders, partners and employees. The numbers remain strong: First Data’s 2002 earnings per share from recurring opera- tions increased 18 percent to $1.66. Revenue increased 15 percent to $7.6 billion, driving net income of $1.3 billion. Cash flow from opera- tions, always an indicator of earnings strength, reached $1.9 billion. All of this is good news, and First Data’s 29,000 employees deserve the credit because they make it happen every day. Our people and the corporate culture they’ve created are driving our growth. But I also
  3. 3. FIRST DATA’S CORPORATE CULTURE EMPHASIZES FLAWLESS EXECUTION, Following Western Union’s entrance into CONTINUAL PROCESS China, we announced plans to open operations IMPROVEMENT and and administrative offices in Shanghai. First Data will bring the technology, distribution network SUPERIOR FINANCIAL and expertise to provide support for the emerging PERFORMANCE. China payments market. Many believe this will undoubtedly contribute to economic development in the world’s most populous nation. want to underscore the other factors—the LONG-TERM RUNWAY foundation points—of First Data’s success and sustainability as a world-class corporation. First Data enjoys extensive opportunity to capture and sustain growth. Western Union represents part of that growth equation. Add to FRANCHISE STABILITY that the millions of electronic transactions con- Western Union, the largest component of the ducted daily by our clients’ 300-plus million Payment Services segment, is the revenue-gener- card holders at the three million merchant loca- ating engine that powers First Data’s continued tions we serve, and you have a runway that growth. Payment Services represents nearly extends far into the future. It’s an interesting 40 percent of our total revenue. That total will image. The nature of our business is best continue to grow as we strategically expand the understood in the smallest value amounts and Western Union® agent network around the world. shortest time increments—pennies and seconds— Those agent locations now number and yet the structure of the business—invest- 151,000, nearly 70 percent of them located out- ment in scalable technology and contractual side the United States. We actively support and relationships—is vast and long-term, measured promote this formidable brand through exten- over years, even decades. sive advertising, product and service innova- We manage the business day-to-day, tions, and committed reinvestment in the busi- but we focus on the long term. Our leadership ness to strengthen our agents’ capabilities in team is intimately involved in ongoing opera- serving customers. tions. We discuss issues, opportunities and unre- Wherever you travel, from Chicago to solved problems on a daily conference call, Calcutta, the familiar black and yellow logo is an and we discipline ourselves to daily, weekly and integral part of the urban landscape. We estimate monthly projections. that the global market could sustain 300,000 to We don’t like surprises, which is why the 500,000 Western Union agent locations. We’re management team keeps such close track of activ- strategically moving in that direction, identifying ities and spending. That doesn’t mean we’re afraid high-growth corridors, and building the infra- to spend money. We just insist on spending it intel- structure to support and sustain such expansion. ligently. Consider that we made capital expendi- At the same time, we are investing aggressively in tures of $418 million in 2002 to strengthen our the Western Union brand, which already has a infrastructure and support long-term growth. long legacy of trust and convenience. We’re Together with our Western Union expanding the brand further by taking advantage agents, we invested in excess of a quarter of a of a host of cross-sell opportunities through First billion dollars this year to build and strengthen Data International. These opportunities are espe- the Western Union brand throughout the world. cially vibrant among financial institutions in We have and will continue to invest heavily in Western Union’s international agent network. highlighting the brand. 02
  4. 4. Highlights : FINANCIAL 18% 14% $7.6 $1.66 23% CAGR CAGR 21% $6.7 20% $1.41 $5.9 $1.19 ‘00 ‘01 ‘02 ‘00 ‘01 ‘02 ‘00 ‘01 ‘02 in billions ) •• OPERATING PROFIT MARGINS (2) •• REVENUE ( •• EARNINGS PER SHARE RECURRING OPERATIONS EPS (1), (2) (1) See page 104 for reconciliation of recurring operations to GAAP results. (2) Excluding goodwill amortization as required by SFAS 142 deliver flawless and reliable service, which is why ONE COMPANY I try to begin and end each day by calling a cus- The hallmarks of First Data’s success remain the tomer so I stay connected and in touch with commitment to flawless execution, operational their needs. excellence and relentless attention to detail. We And that takes me back to First Data’s continue to strengthen and emphasize these people. We continue to add to the management attributes as we leverage talents and capabilities team. We have extremely strong line leaders and from throughout the entire organization to spur an equally strong bench team. Leadership depth growth and drive innovation. is a very high priority here, and as the organiza- Strong cash flow enables us to reinvest tion’s leader I am actively involved in recruiting in the business to improve and expand our and attracting the best and brightest minds to already remarkable technology and distribution our global enterprise. infrastructure. On the management side, we’re I’m extremely proud of First Data’s forming teams from different disciplines to more people, especially their can-do spirit and tireless effectively knit together skills and applications so commitment to excellence. They make First Data we can maximize the potential inherent in this a great place to work and to grow. My job is to company. And there is enormous potential. Our help them by creating long-term opportunities, challenge is to harness and unify First Data’s full and by constantly increasing shareholder value. capabilities to reach and serve customers in As I like to say, I’m just here to oil the tracks. better, more complete ways. Your confidence in our vision and productive Keep in mind that today First Data is activity is deeply appreciated. unmatched as a single-source provider of inte- grated, end-to-end payment solutions. Tomorrow, and in the countless days that follow, First Data will be focused on perpetuating its innovative and creative capability. I like to remind those around me that our customers need us; however, we are not their Charles T. Fote only choice. Our customers rely on our ability to Chairman and Chief Executive Officer 03 — FIRST DATA CORPORATION 2002 ANNUAL REPORT
  5. 5. A BUSINESS MODEL THAT DEFINES THE INDUSTRY HERE by DESIGN. personal expenditures, according to The Nilson Report. Instead of money changing hands, information is verified, accounts are credited and payments are reconciled, all in a matter of seconds, almost everywhere people conduct commerce. And the one company leading the /// Imagine life without your credit cards. You’d industry is First Data. The business model for the payments get by, but putting gas in the car, or traveling industry is quite interesting. There are three on business, or a hundred other experiences essential factors necessary for success: 1) a would be more of a hassle. And you’d spend global distribution network; 2) robust and scal- a lot more time running to the bank for cash. able computing infrastructure; and 3) commit- While the banks would probably appreciate ted managers and employees able to reliably the business, they would not necessarily like deliver flawless and totally secure service. First the foot traffic. So be happy that electronic Data brings all three to market in the best way, commerce is something you can take for which is why we have long believed that our granted. It’s part of life, like running water, or business model is, in fact, the industry model. air conditioning. Think of it. Thirty-six billion card and electronic transactions were executed in 2001 in the U.S., representing 31 percent of all 04
  6. 6. WE’RE ALWAYS LOOKING FOR NEW BUSINESS, BUT WE’RE ALSO INTENSELY FOCUSED ON CREATING MORE VALUE FOR THE CUSTOMERS WE HAVE. First Data serves three million merchant locations, 1,400 card issuers and millions of consumers around the world. We have 29,000 employees who provide card issu- ing, money transfer and merchant processing services, as well as Internet services and next- generation payment innovations. Through Western Union’s 151,000 worldwide locations, we provide reliable, highly efficient money transfer and payment services. Our distribu- tion network is unmatched, and First Data has an unparalleled history of investment in strengthening its distribution channels and cre- ating next-generation payment services. Equally impressive is First Data’s computer capability. Our infrastructure is extraordinary both in its scope and scalability. We run the business, and account for our performance, one transaction at a time. The scale and strength of our infrastructure, along with the professional expertise of First Data’s people, enable the company to serve customers DAVE ROBERTS, with flawless execution and total reliability. FIRST DATA’S SENIOR Last year we handled more than VICE PRESIDENT OF GLOBAL BUSINESS 10 billion merchant transactions in North DEVELOPMENT, LEADS America alone. Such performance takes enor- AN ENTERPRISE-WIDE INITIATIVE TO ADAPT mous effort and a total commitment to constant AND DELIVER NEW, improvement. We strengthen and enlarge upon VALUE-ADDED SERVICES TO MERCHANTS, First Data’s many capabilities by directing cash BANKS AND OTHER flow right back into the company. CUSTOMERS.
  7. 7. WE COMPETE ACROSS A BROAD RANGE OF PAYMENT MARKETS: FORMAT MODE SIZE TIMING CASH FACE-TO-FACE MICRO PAYMENT PAY LATER (CREDIT) OFFICIAL CHECK PAPER EVERYDAY PAY SOON TRANSACTION (CHECK) MONEY ORDER WIRED POS MAJOR PURCHASE PAY NOW (CASH, DEBIT) CHECK WIRED DEVICE PAY IN ADVANCE (STORED VALUE, ESCROW) CREDIT CARD INTERNET OFF-LINE DEBIT MOBILE PHONE OUR FLEXIBLE SYSTEMS CAN ACCOMMODATE ANY ONLINE DEBIT MOBILE DEVICE COMBINATION OF PAYMENT FORMAT, MODE, SIZE AND TIMING. STORED VALUE But the most dramatic point of differ- And that is why hardly anyone ever ence separating First Data from its competitors notices how extensive and far-reaching First is the level of talent and industry expertise we Data’s influence really is in the commercial have on staff. Talented management goes deep world. It’s been said many times that First into the organization, and corporate culture Data, as the industry leader, enables com- stresses performance and measurement. What’s merce. That is true because the company has measured is what gets done and what gets done been built, strengthened and unified in ways gets rewarded. People make the difference, and that allow our clients and their customers to First Data’s people routinely deliver the highest experience the full benefits of commerce more levels of convenience, reliability and secure, conveniently, efficiently and securely. flawless transaction services. 07 — FIRST DATA CORPORATION 2002 ANNUAL REPORT
  8. 8. LEVERAGING ENTERPRISE-WIDE CAPABILITIES TO CAPTURE GROWTH UNDIVIDED ATTENTION. selling opportunities are significant because we are indeed able to deliver an ever-improv- ing stream of systems and methods that make transactions more secure, more convenient, /// It’s axiomatic in business to concentrate on more efficient. The idea, from a strategic your core business, but industry leaders take perspective, is to enable and empower those that discipline a step further. First Data is we serve. unmatched as a single-source provider because How can we utilize our talent and we define the possibilities of our core business. technology to improve our clients’ business? The more we concentrate, the more opportu- Employees are thinking about the enterprise in nities we discover. And growth potential in our a more global context. They’re seeing where industry is very strong. synergies exist, which enables First Data to The Nilson Report estimates show that transcend the boundaries of its business units. by the end of the decade, 62 percent of the dollar volume of all payments in the United States will be executed with some form of elec- tronic transfer, either through credit, debit or stored-value cards as well as through the Internet. Worldwide market potential is even stronger, which is why our “one company” strategy makes such good sense. The cross- 08
  9. 9. PUT MONEY IN ANY WAY YOU WANT, TAKE MONEY OUT ANY WAY YOU WANT. In our merchant business, for example, we’re bringing a variety of integrated services to the point of sale. These include point-of- sale options that connect to debit, credit and stored-value vehicles. In such ways, we’re able to become the merchant’s advocate and champion, finding and delivering ways to accelerate and improve the transaction process. And we’re taking what we know to new and existing markets. In existing markets, with alliance partners, and by making strategic invest- ments, we’re expanding service-level poten- tial with stronger back-office technologies, sales and marketing expertise—even online dispute resolution. HODGES MARSHALL AND LIZA URBINA ARE TWO OF THE TALENTED PROFESSIONALS WHO ENABLE FIRST DATA TO LEVERAGE ITS CAPABILITIES IN PURSUIT OF GROWTH. 10
  10. 10. eONE Global is an example of gaining Union. Through all those agent locations—in share in new markets. It is only by leveraging established and emerging markets throughout technology and expertise that we’re able to com- the world—and alternative distribution chan- mercialize payment methods for government nels, we’re bringing customers better and better agencies, as well as the mobile and enterprise payment options and payment methods, as well marketplaces. First Data serves more than two as unfailing money transfer capability. The million taxpaying business customers moving idea is to brand and channel through Western 40 million payments totaling more than $1 Union new and existing products in the trillion annually. consumer-to-business market, such as just-in- Potentially, the most dramatic vehicle time bill payment, mortgage accelerators and for First Data’s “one company” strategy is Western other recurring payment alternatives. 10.2 8.8 8.0 ’00 ’01 ’02 in billions ) •• NORTH AMERICA MERCHANT TRANSACTIONS ( OUR SCALABLE SYSTEMS, AND THE PEOPLE WHO RUN THEM, ENSURE THAT WE HANDLE AN EVER-INCREASING NUMBER OF TRANSACTIONS WITH MINIMAL DOWN TIME. 11 — FIRST DATA CORPORATION 2002 ANNUAL REPORT
  11. 11. THE RELENTLESS PURSUIT OF FLAWLESS EXECUTION PERFORMANCE ART. /// On Wall Street, and in the seminar rooms of the great business schools, there is endless discussion about the increasing significance of corporate culture. First Data’s ability to deliver shareholder value stems from its consis- tent performance. Its position as the defining company in its industry is directly attributable to its managers and employees. This may seem The growth First Data continues to an obvious point because you can have the best attain, the performance many come to expect strategy, the finest equipment, the most up-to- as routine, is a function of a disciplined and date technology and still turn in a poor tireless approach to business. We are intensely performance. Fortunately, because of our customer-centric, and we are intimately employees, that has not been our experience. involved in day-to-day operations. For the company’s leaders, it all begins with the morn- ing call. Issues are discussed, projects updated, problems identified and quickly addressed. Scores are kept every day so there are no month-end surprises. But there is more to it than personal accountability and close attention to detail. First Data is blessed with the greatest concen- tration of industry expertise and professional experience in our field. Our people form the culture and drive performance. Ceaseless process improvement, relentless attention to efficiencies and a commitment to flawless 13 — FIRST DATA CORPORATION 2002 ANNUAL REPORT
  12. 12. OUR CORPORATE CULTURE HONORS INTEGRITY, COMMITMENT AND A DETERMINATION TO EXCEL. execution characterize First Data’s most First Data is committed to being essential business practices. We uphold and a learning organization, employing Six Sigma® techniques to constantly improve sustain the highest ethical standards; we treat everyone with respect and dignity; and and enhance the company’s structures, its we diligently serve our clients’ best interests technology and business processes, and the by consistently exceeding their expectations. talent and abilities inherent in its 29,000 Our thinking—our approach to the employees. The focus of all this progressive marketplace—centers on improving efficiency, energy is, of course, to satisfy our customers, maximizing convenience, ensuring security sharpen our competitive advantages and and delivering high-quality service in all make the entire organization smarter, more things related to payment services and agile and capable of sustaining its position as money transfer. the industry leader. In other words, we follow consumer Last year we used Six Sigma method- behavior. But we don’t follow empty-handed. ology to address several areas of operations. We come prepared with a full array of One effort sparked a remarkably successful products and services that are immediately cross-sell program in our Merchant Services deployable when consumers demand faster division. As a result, the cross-sell team capi- service and greater convenience. talized on new ways to generate revenue and What enables First Data to deliver will continue to be focused on new opportu- on this promise is its unmatched infrastruc- nities in the future. ture and distribution network. Coupled with The system redesign that we’re imple- those assets, we have assembled teams of menting in our Card Issuing Services business talented, forward-looking professionals who is another example of our commitment to devise products and services that we channel continual improvement. This effort is provid- through our existing businesses. We’ve ing the company with best-in-class operating aligned our capabilities in such ways as to systems that bring customers greater control, constantly drive innovation and deliver faster access to information and greater insight convenience-enhancing products. for more effective decision making. 14
  13. 13. TRUE BELIEVER: SCOTT MITCHELL, WHO LEADS FIRST DATA’S SIX SIGMA INITIATIVES, KNOWS THAT CONTINUAL IMPROVEMENT IS A SOURCE OF PRIDE AND A POWERFUL DRIVER OF PERFORMANCE. 15 — FIRST DATA CORPORATION 2002 ANNUAL REPORT
  14. 14. OUR ALLIANCE STRATEGY REMAINS AN ESSENTIAL COMPETITIVE ADVANTAGE FILL your DANCE CARD. /// One reason First Data is successful is evident in our relationships with banks and merchants. We’re a partner and an ally to both, and our continued growth depends on our ability to expand and strengthen such working arrange- ments. On both sides of this equation we’re reaching out to new customers and working First Data’s size and scale are enabling us to hard to do more for those we currently serve. strengthen our already successful alliance strat- Because our infrastructure is so sound, and egy. This bank-centric model gives merchants our people so attuned to providing services, the ability to more closely align their needs we’re able to bring bankers and merchants with the right bank, in turn allowing us greater together for the advantage of everyone, ability to expand our referral relationships especially their customers. and enhance sales efficiencies. This activity is proving to be good for everybody’s business performance. We see greater cost efficiencies and higher retention rates among our clients. 17 — FIRST DATA CORPORATION 2002 ANNUAL REPORT
  15. 15. OUR CUSTOMERS NEED US, BUT WE’RE NOT THEIR ONLY CHOICE. In our Card Issuing business we are pushing hard to make the most of our business model, which, by the way, many inside and outside the industry envy. What we’re doing involves converting the existing card accounts now in the conversion pipeline while simulta- neously developing new growth-oriented prod- ucts. Our strategy is to grow our existing client base and secure new business by leveraging First Data’s recognized capabilities. No one is better at maintaining accounts and flawlessly processing transactions. Card Issuing Services is a long-term business. We seek customer contracts that last between five and 10 years and provide predictable, recurring revenue streams. Clients increasingly need and demand greater control, faster and easier access to infor- mation, and more streamlined decision making. We understand our clients, and we keep them happy by anticipating precisely what is needed in terms of new products and more robust services. They also want higher profits. Completion of our system redesign will dramatically help us meet and exceed those objectives. Our operat- ing environment will be “best in class” and “built for tomorrow.” Our customers need it, and we’re committed to providing nothing less MING-REN SHIU WITH WESTERN UNION INTERNATIONAL AND CLARA RUIZ WITH CHASE MERCHANT SERVICES KEEP THINGS RUNNING SMOOTHLY FOR THEIR CLIENTS BY EMPHASIZING OPEN AND TIMELY COMMUNICATIONS. 18
  16. 16. 56 81 DEBIT RETAIL in millions ) CARD ACCOUNTS ( WE HANDLE 325 MILLION CARD ACCOUNTS ON OUR SYSTEM TODAY. A TOP PRIORITY THIS YEAR IS 188 TO CONVERT A SIGNIFICANT NUMBER OF ACCOUNTS than the world’s leading transaction and infor- CREDIT CURRENTLY IN THE CONVERSION PIPELINE. mation processing. Upgrading and consolidating our operating infrastructure, through a nearly com- pleted multi-year system redesign, is enabling First Data to move more effectively into serving customers even better. There is something else. Besides reaching out to new customers with products and services, we’re able to expand on 83% our “one company” approach by doing more for existing customers. We’re also leveraging POINT-OF-SALE SERVICES MERCHANT REVENUE MIX knowledge and expertise from throughout MERCHANT SERVICES the company to deliver greater value, new and GENERATES 83 PERCENT OF 17% varied products, more quality and increased ITS REVENUE FROM POINT-OF-SALE SERVICES. savings to those we serve. OTHER One might think that a leader would stand alone and apart, but we’ve found the opposite to be true. First Data leads by acting in concert and in alliance with an expanding circle of partners. 19 — FIRST DATA CORPORATION 2002 ANNUAL REPORT
  17. 17. GLOBAL EXPANSION PLUS POINT-OF-SERVICE INNOVATION FOLLOWthe LEADER. /// In every business—but especially in ours—the ating by the end of 2003. At the end of 2004, leader is the customer. Our fundamental we expect to have more than 200,000 agent approach in building and maintaining a global locations providing Western Union’s products brand is to make Western Union increasingly and money transfer services. Full, worldwide relevant, reliable and convenient to people market penetration (using the U.S. market wherever they encounter the familiar black and as a model) could sustain an estimated 300,000 yellow logo. to 500,000 Western Union agent locations. We have a proven track record of accu- From our perspective, Western Union’s rately identifying money transfer corridors and ongoing success is a direct consequence of two locating agents that support those corridors. We ongoing initiatives: agent expansion and relent- have the opportunity to give agents access to less brand-building. It’s a relatively easy formu- First Data’s complete “briefcase” of point-of- la, but its execution is complex. sale offerings that emphasize speed, reliability We expect there will be 180,000-plus and convenience—three things customers the Western Union agent locations open and oper- 20
  18. 18. world over desire and demand. China is a good business, then we generate awareness through example. There, Chinese consumers are just advertising. Last year we invested about $250 now getting acquainted with the convenience million in advertising, promotions and brand offered by credit cards. First Data brings the communications. Our agents spent nearly $40 infrastructure and business expertise to facili- million of their money to promote awareness. tate electronic commerce. Western Union, the largest component As we expand into that developing of Payment Services, is the undisputed king of market, we strengthen our outlets in the revenue generation within First Data. Nearly Chinatowns of major cities such as New York, 40 percent of First Data’s revenues stream Chicago and San Francisco. Once the corri- from the money moved through this segment dors are identified and the agents are open for (nearly $700 billion in money transfers, CHRIS MCGEE, LEFT, IS HELPING VALUELINK GAIN ITS SHARE OF THE RAPIDLY GROWING STORED- VALUE MARKET. OCTAVIO GONZALEZ, RIGHT, KEEPS AGENTS INFORMED AND UP TO SPEED AS A WESTERN UNION ACCOUNT MANAGER. 22
  19. 19. official checks, money orders and other customers convenient access to Western payment instruments in 2002). Domestically, Union’s money transfer system. we saw healthy money transfer growth, while These and other offerings, such as international money transfers (including U.S. stored-value options, will multiply as First outbound, for example to China, India or Data leverages talent and technology through- Russia) grew 32 percent in 2002. out the company to create a steady stream of innovations. ValueLink®, our stored-value Besides traditional money transfers, Western Union offers customers in the U.S. a product, is worth special mention. Market variety of branded service options through analysts estimated industry-wide stored-value storefronts, kiosks, ATMs and online services sales at $38 billion in 2002, a 20 percent at westernunion.com. This variety of outlets offers increase over the previous year. WE ARE HIGHLY SKILLED AT IDENTIFYING MONEY TRANSFER CORRIDORS. 151 120 101 82 55 ’98 ’99 ’00 ’01 ’02 in thousands ) •• LOCATIONS ( WESTERN UNION HAS INCREASED ITS AGENT LOCATIONS BY 175 PERCENT SINCE 1998, A COMPOUND ANNUAL GROWTH RATE OF 29 PERCENT. 23 — FIRST DATA CORPORATION 2002 ANNUAL REPORT
  20. 20. FIRST DATA is THE INDUSTRY LEADER for GOOD REASON. EXECUTIVE COMMITTEE GUY BATTISTA SCOTT BETTS CHRISTINA GOLD KIM PATMORE CHIEF INFORMATION OFFICER PRESIDENT PRESIDENT CHIEF FINANCIAL OFFICER MERCHANT SERVICES WESTERN UNION FINANCIAL SERVICES AT-LARGE MEMBERS RICH AIELLO TONY HOLZAPFEL DAVID BANKS BOB MYERS MYRON BEARD CHARLIE O’ROURKE KIM BISHOP DAVE ROBERTS C. STEVE YOUNG 24
  21. 21. BOARD OF DIRECTORS Alison Davis Robert J. Levenson Joan E. Spero* (Director since 2002) (Director since 1992) (Director since 1998) Former Chief Financial Officer Managing Member, President, Doris Duke Charitable Barclays Global Investors Lenox Capital Group L.L.C. Foundation Former Executive Vice President, Henry C. (Ric) Duques First Data Arthur F. Weinbach* (Director since 1992) (Director since 2000) Chairman, eONE Global James D. Robinson III Chairman and Chief Executive (Director since 1992) Former Chairman and Chief Officer, Automatic Data Processing Inc. Executive Officer, First Data General Partner and Co-Founder, RRE Ventures * Member of the First Data Audit Committee Charles T. Fote (Director since 2000) Charles T. Russell (Director since 1994) Chairman and Chief Executive Officer, First Data Former President and Chief Executive Officer of Visa International Courtney F. Jones* (Director since 1992) Bernard L. Schwartz (Director since 1992) Former Chief Financial Officer, Merrill Lynch & Co. and Treasurer of Chairman and Chief Executive Officer, General Motors Corporation Loral Space & Communications Ltd. PAM PATSLEY BILL THOMAS JACK VAN BERKEL MIKE WHEALY MIKE YERINGTON PRESIDENT PRESIDENT EXECUTIVE VICE PRESIDENT CHIEF ADMINISTRATIVE PRESIDENT FIRST DATA INTERNATIONAL WESTERN UNION HUMAN RESOURCES OFFICER AND WESTERN UNION INTERNATIONAL GENERAL COUNSEL NORTH AMERICA 25 — FIRST DATA CORPORATION 2002 ANNUAL REPORT
  22. 22. OPERATIONAL REVIEW. 20% 25% 40% 1998 2002 TARGETED FOR 2007 FIRST DATA CONTINUES TO EXTEND ITS GLOBAL FOOTPRINT. OUR GOAL IS TO HAVE 40 PERCENT OF TOTAL REVENUES TOUCHING SOURCES OUTSIDE THE U.S. BY THE END OF 2007. PAYMENT SERVICES and more than 5,000 locations in China. In 2003, the The company’s largest business segment, and home to EXPAND WORLDWIDE AGENT LOCATIONS BY company expects to expand its network by an addi- Western Union, accounts for nearly 40 percent of 20 PERCENT tional 30,000 locations. First Data’s revenue. Outstanding operating results Innovative offerings that add convenience also have come to be the norm for this unit, which posted DIVERSIFY CHANNELS AND SERVICES contributed to Payment Services’ strong growth. an 18 percent increase in annual revenues, totaling ValueLink, the company’s prepaid stored-value service, $3.2 billion at year-end. Western Union continues to BUILD THE BRAND continues to gain in popularity. Two acquisitions, execute on its key strategies of expanding First Data’s CROSS SELL FIRST Paymap Inc. and E Commerce Group Products Inc., global distribution network, increasing the number of DATA SERVICES further enable the company to develop and market branded products and services that increase the con- innovative electronic payment services and strengthen venience of commerce, and accelerating the strength Western Union’s bill payment offerings. of Western Union’s global brand. Other high points include agreements with Adding more than 31,000 new agent locations in Wal-Mart Argentina; post offices in Australia, Pakistan, 2002, Western Union expanded its total worldwide net- Tajikistan, United Arab Emirates and LaPoste in work to approximately 151,000 agent locations. That France; Industrial Bank of Korea; Agricultural Bank of figure represents a 26 percent year-over-year increase. China and Credit Lyonnais throughout Africa. These Nearly 70 percent of Western Union’s agent network agreements all further Western Union’s efforts to operates outside the U.S. in approximately 195 coun- extend its reach across the globe. tries and territories, including 10,000 locations in India 26
  23. 23. MERCHANT SERVICES agement control in a number of merchant alliances. The core capabilities of this business unit include GROW INTERNATIONALLY We’re extending our referral relationships and anywhere-anytime payment acceptance, settlement, GAIN MARKET SHARE enhancing sales initiatives. The alliance strategy funds transfer and risk management services. IN NEW MARKETS continues to satisfy market needs by lowering attrition Merchant Services achieved strong results with a LAUNCH NEW BUSINESS and increasing First Data’s value proposition for 22 percent increase in revenue and an 11 percent IN ADJACENT MARKETS merchants, which of course maximizes this segment’s increase in profit. We also strengthened this financial performance. Continuous operational business unit for the long term by concentrating LEVERAGE PREMIER SERVICE improvement and cost containment enable us to on three market-centric strategies. First, we made provide top-level customer care, and also expand our significant investments in point-of-sale (POS) and presence in new and emerging markets. back-office technologies. PayPoint solidified First Finally, Merchant Services continued its expansion Data’s position in online (PIN-based) debit processing into international markets through agreements with CU at the point of sale. We also introduced an online Electronic Transaction Services, Halifax Bank of dispute resolution service that increases merchant Scotland, Bank of Nova Scotia and Ireland-based efficiency and improves retention. OMNIPAY, in which it became the majority owner to In addition, First Data strengthened its successful enhance its multi-currency capabilities. alliance strategy by increasing its ownership and man- CARD ISSUING SERVICES This business unit stands out as the world’s largest third- contracts with Westpac Banking Corporation in CONVERT PIPELINE party credit card processor and accounts for 25 percent Australia, CU Electronic Transaction Services, Kuwait GENERATE STRONG of First Data’s total revenue. With more than 325 million Finance House, Industrial & Commercial Bank of CASH FLOW card accounts on file, Card Issuing Services is in the China and Samsung Card Co., Ltd., in Korea. MAXIMIZE SYSTEM process of converting its existing pipeline of retail, debit These agreements underscore our focus on inter- CAPACITY and bankcard accounts. A multi-year contract exten- national growth and the implementation of 21st-century sion was signed with JPMorgan Chase Bank that con- technology to extend and strengthen our position as the SIGN INTERNATIONAL BUSINESS tinues the provision of debit card processing services, leader in the card issuing industry. and internationally the company signed important EMERGING PAYMENTS First Data continues to invest in its eONE Global MOBILE PAYMENTS business, which is centered around government and GOVERNMENT mobile payments and includes govONE Solutions, PAYMENTS GovConnect, Taxware, BillingZone and Encorus Technologies. To do that we develop, commercialize and operate technologies that integrate into First Data’s global distribution network. In 2002, eONE Global reported $147 million in revenues. Investments in this operation continue as we expand services. 27 — FIRST DATA CORPORATION 2002 ANNUAL REPORT
  24. 24. Management’s Responsibility for Financial Reporting 29 30 Selected Financial and Operating Data Management’s Discussion and Analysis 31 62 Consolidated Statements of Income FIRST DATA CORPORATION 63 Consolidated Balance Sheets FINANCIAL REPORT 64 Consolidated Statements of Cash Flows 65 Consolidated Statements of Stockholders’ Equity Notes to Consolidated Financial Statements 66 103 Independent Auditors’ Report 105 Corporate Data 28
  25. 25. MANAGEMENT ’ S RESPONSIBILITY FOR FINANCIAL REPORTING The Audit Committee of the Board of Directors, composed The management of First Data Corporation is responsible for the solely of outside directors, meets regularly with the internal auditors, preparation and fair presentation of its financial statements. The management and independent auditors to review their work and financial statements have been prepared in conformity with discuss the Company’s financial controls and audit and reporting generally accepted accounting principles appropriate in the cir- practices. The independent auditors and the internal auditors cumstances, and include amounts based on the best judgment of independently have full and free access to the Committee, without management. The Company’s management is also responsible for the presence of management, to discuss any matters which they feel the accuracy and consistency of other financial information includ- require attention. ed in this annual report. In recognition of its responsibility for the integrity and objectivity of data in the financial statements, the Company maintains a system of internal control over financial reporting. The system is designed to Charles T. Fote ensure the reliability of the Company’s financial statements. Chairman and Chief Executive Officer The internal control system includes an organization structure with clearly defined lines of responsibility, policies and procedures that are developed and disseminated, including a Code of Conduct to foster an ethical climate, and the selection and training of employees. Internal auditors monitor and assess the effectiveness of Kim Patmore internal control systems, and report their findings to management Executive Vice President and the Audit Committee of the Board of Directors throughout the and Chief Financial Officer year. The Company’s independent auditors are engaged to express an opinion on the year-end financial statements and, with the coor- dinated support of the internal auditors, review the financial Greenwood Village, Colorado records and related data and the internal control system over January 22, 2003 financial reporting. 29 — FIRST DATA CORPORATION 2002 ANNUAL REPORT
  26. 26. SELECTED FINANCIAL AND OPERATING DATA The following data should be read in conjunction with the Consolidated Financial Statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations included elsewhere in this annual report. The Notes to the Consolidated Financial Statements contain additional information about various acquisitions (accounted for as purchas- es), dispositions and certain charges and benefits resulting from restructurings, impairments, litigation and regulatory settlements, investment gains and losses and divestitures, which affect the comparability of information presented. Certain prior years’ amounts have been restated to conform to the current year presentation. 2002 Year Ended December 31, 2001 2000 1999 1998 (in millions, except share amounts or otherwise noted) INCOME STATEMENT DATA $ 7,636.2 Revenues(a) $ 6,651.6 $ 5,922.1 $ 5,776.4 $ 5,309.5 5,981.9 Expenses, net of other income/expense (a) 5,591.7 4,724.6 3,996.7 4,597.9 Income before income taxes, minority interest, equity earnings in affiliates and cumulative effect 1,654.3 of a change in accounting principle 1,059.9 1,197.5 1,779.7 711.6 432.2 Income taxes 336.8 378.7 625.7 246.2 (102.8) Minority interest (32.4) (24.5) (38.7) (35.8) 118.6 Equity earnings in affiliates 183.9 135.3 84.4 36.1 Income before cumulative effect of a change 1,237.9 in accounting principle 874.6 929.6 1,199.7 465.7 Cumulative effect of a change in accounting principle, — net of $1.6 income tax benefit (2.7)(b) — — — $ 1,237.9 Net income $ 871.9 $ 929.6 $ 1,199.7 $ 465.7 $ 538.5 Depreciation and amortization $ 638.4 $ 588.8 $ 617.8 $ 591.1 PER SHARE DATA $ 1.63 Earnings per share – basic (c) $ 1.12 $ 1.14 $ 1.40 $ 0.52 1.61 Earnings per share – diluted (c) 1.10 1.12 1.38 0.52 0.07 Cash dividends per share (c) 0.04 0.04 0.04 0.04 (AT BALANCE SHEET DATA YEAR-END) $26,591.2 Total assets $21,912.2 $17,295.1 $17,004.8 $16,587.0 16,688.5 Settlement assets 13,166.9 9,816.6 9,585.6 9,758.0 22,434.9 Total liabilities 18,392.3 13,567.4 13,097.1 12,831.1 16,294.3 Settlement obligations 13,100.6 9,773.2 9,694.6 9,617.0 2,581.8 Borrowings 2,517.3 1,780.0 1,528.1 1,521.7 552.7 Convertible debt 584.8 50.0 50.0 50.0 4,156.3 Total stockholders’ equity 3,519.9 3,727.7 3,907.7 3,755.9 SUMMARY OPERATING DATA At year-end – 325.2 Card accounts on file (in millions) 312.2 309.9 259.8 211.9 For the year – $ 562.5(d) North America Merchant dollar volume (in billions) 491.1(d) 451.7(d) 328.3 (e) 252.2 (e) $ $ $ $ 10.2(d) North America Merchant transactions (in billions) 8.8(d) 8.0(d) 6.4 (e) 5.0 (e) — Money Transfer transactions (in millions) (f ) — — 73.5 61.4 67.8 Consumer-to-consumer money transfer transactions (g) 55.8 44.6 — — 173.1 Consumer-to-business transactions (h) 141.0 100.9 — — (a) In January 2002, the Company adopted Emerging Issues Task Force (“EITF”) 01-14 (“EITF 01-14”), “Income Statement Characterization of Reimbursements Received for‘Out-of-Pocket’ Expenses Incurred,” which requires that reimbursements received for“out-of-pocket”expenses be characterized as revenue. All periods presented have been restated for the adoption. (b) Represents the transition adjustment for the adoption of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.” (c) In March 2002, the Company’s Board of Directors declared a 2-for-1 stock split of the Company’s common stock to be effected in the form of a stock dividend. Shareholders of record on May 20, 2002 received one share of the Company’s common stock for each share owned. The distribution of the shares occurred after the close of business on June 4, 2002. All share and per share amounts have been retroactively restated for all periods to reflect the impact of the stock split. (d) North America merchant dollar volume includes Visa and MasterCard credit and off-line debit and PIN-based debit at point-of-sale. North America merchant transactions include Visa and MasterCard credit and off-line debit, processed-only customer transactions, and PIN-based debit at point-of-sale. (e) IncludesVisa and MasterCard volume only from alliances and managed accounts. (f) Beginning in 2002, the Company began analyzing results due to the acquisition of Paymap and E Commerce Group as described in (g) and (h) below. Prior to 2000, reliable information was not available, as such, 1999 and 1998 amounts were not restated to conform to the presentation noted below. (g) Consumer-to-consumer money transfer transactions include North America and International consumer money transfer sevices. (h) Consumer-to-business transactions include Quick Collect, Easy Pay, Phone Pay, Paymap’s Just-in-Time and Equity Accelerator services, and E Commerce Group’s Speedpay. The amounts for 2002, 2001, and 2000 include transactions for E Commerce Group and Paymap as if they were consolidated subsidiaries as of January 1, 2000, to provide a more meaningful comparison. 30
  27. 27. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PaySys International, Inc. (“PaySys”), a global provider of credit BUSINESS OVERVIEW card transaction processing software and transaction processing First Data Corporation (“FDC” or “the Company”) operates in services to banks, retailers and third-party processors; and other four business segments: payment services, merchant services, card services including business solutions in the areas of risk and fraud issuing services and emerging payments. The Company continues management and information verification services. to focus on enhancing these core business areas and to assess how The emerging payments segment consists of a majority interest best to serve its customer base. Among the actions the Company in eONE Global (“eONE”), which includes govONE Solutions, LP believes are necessary to continue its leadership position is a focused (“govONE”), a provider of electronic payment services for govern- effort to expand internationally, develop new products and services ments; GovConnect, Inc. (“GovConnect”), a provider of professional and to enhance its processing platforms in response to Company consulting services, service delivery technologies, operational growth, client requirements, changing technology and expanding support and payment processing for government customers; e-commerce initiatives. Encorus Technologies (“Encorus”), which provides software for the Payment services primarily consists of its consumer-to-con- mobile payments industry and is developing an interoperable global sumer money transfer business, which includes: Western Union mobile payment standard and related payment processing platform; Financial Services, Inc. (“Western Union”), a provider of domestic and BillingZone, LLC (“BillingZone”), which provides outsourcing and international money transfer services, Orlandi Valuta, which for invoice presentment and payment services for businesses. provides money transfer services from the United States to Mexico The remainder of the Company’s business units are grouped in and certain other countries in Latin America, and its consumer-to- the “all other and corporate” category, which includes Teleservices, business bill payment services that includes: Paymap Inc. (“Paymap”), a provider of voice-center services to telecommunications and which transmits mortgage payments from a customer’s account financial services industries, Call Interactive, a provider of Interactive directly to their mortgage lender; E Commerce Group Products Inc. Voice Response (“IVR”) services, and Corporate operations. (“E Commerce Group”), known for it’s Speedpay service, which allows companies to receive electronic bill payments and other BUSINESS DEVELOPMENTS services such as transferring payments from consumers to utility companies, collection agencies, financial companies and other The Company’s growth strategy is focused on internal revenue institutions. Also included in the segment are Integrated Payment growth, supplemented by acquisitions. The strategy calls for the Systems (“IPS”), a leading provider of official checks and money Company to continue extending its global reach, leveraging its orders to the financial services industry, and ValueLink and Gift enterprise capability, and continuing to introduce new products and Card Services, which offer prepaid stored-value card issuance and technologies to the marketplaces the Company serves around the processing services. world. The Company also seeks strategic acquisitions that fit within The merchant services segment is comprised of: First Data its core competencies, allow expansion into adjacent markets, or Merchant Services (“FDMS”), a provider of merchant credit and provide entry into new international markets. debit card transaction processing services in the United States, Part of leveraging the Company’s enterprise capabilities includes including: TASQ Technology Inc. (“TASQ”), a leading provider of growth through cross-selling opportunities. For example, a new point-of-sale (“POS”) devices and other products and services used enterprise agreement between TeleCheck and Grace, Kennedy by merchants to accept transactions; PayPoint Electronic Payment Remittance Services, Western Union’s agent in Jamaica, expands the Systems (“PayPoint”), a leading POS transaction processor of relationship with one of the Company’s long-standing agents. This online debit card transactions, i.e., those requiring use of a personal agent will be a reseller of TeleCheck verification services to affiliates identification number (PIN); TeleCheck Services, Inc. (“TeleCheck”), and other companies in Jamaica. a leading check acceptance company that provides electronic check A significant portion of the Company’s internal growth comes acceptance, check guarantee, check verification and collection serv- from growth in transactions and dollar volumes generated by exist- ices; NYCE Corporation (“NYCE”), an operator of an ATM ing customers. This internal growth, combined with long-standing network and provider of PIN-based debit services; and First Data client relationships and contracts, generates the recurring revenues Financial Services (“FDFS”), the majority owner of Global Cash on which the Company’s business model largely is based. The length Access, which provides credit card, debit card and cash availability of contracts varies across the Company’s business units, but most are services to gaming establishments and their customers. for multiple years. Western Union agent contracts generally run Card issuing services consists of First Data Resources (“FDR”), from three to five years; most alliance agreements, which account for First Data Europe (“FDE”) and First Data Resources Australia a significant portion of the Company’s merchant services business, (“FDRA”), which provide a comprehensive line of products and have terms between five and ten years; and card issuing services con- processing services to financial institutions and others issuing Visa tracts generally have terms between five and ten years. A majority of and MasterCard credit cards, debit cards and oil/fuel cards, the Company’s contracts are renewed and many significant business retail/private label cards, stored-value cards and smart cards; relationships have extended far past their initial terms. 31 — FIRST DATA CORPORATION 2002 ANNUAL REPORT
  28. 28. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FDC makes acquisitions that complement existing products and Western Union continues to expand its delivery channels, now services, enhance the Company’s product lines and/or expand its allowing customers to perform money transfer transactions at an customer base. The Company leverages its existing brands, alliance agent location over the Internet, direct to a bank account, through branding relationships and infrastructure (e.g., established sales an ATM or over the telephone. In addition to the above, payment force, distribution channels, including its 151,000 worldwide Western services also completed strategic acquisitions of Paymap and Union agent locations and approximately 3.0 million merchant E Commerce Group (discussed in the next section) during the year, locations, etc.) to complement and introduce the acquired company’s which provide additional products and services that can be offered products to new markets, customers and geographic areas. Due to to existing Western Union customers. the complementary nature of the acquisitions, FDC expects to Western Union operates in a very competitive environment. enhance the revenue and earnings potential of acquired companies The Company continues to experience vigorous competition in the soon after acquisition. traditional money transfer arena and also is encountering expand- ed competition from banks and ATM providers that are targeting money transfer services with new product offerings. To effectively PAYMENT SERVICES compete with these new channels, the Company continues to Payment services, which primarily is comprised of Western Union, develop new services and distribution channels as noted above. continues to focus on international growth through agent network The Company continues to invest significant amounts in advertising expansion around the world. A significant portion of Western Union’s and marketing to build the Western Union brand. growth centers around this expansion by adding locations in areas of The Company’s U.S. domestic money transfer business remains the world where money transfer services were not available in the very strong. Recently a multi-year contract extension was signed with scope offered by Western Union. However, the Company’s strategy Western Union’s largest agent, Kroger, which includes the addition goes beyond agent location expansion; it also encompasses new of approximately 500 locations in Texas, California and Indiana. products, increased brand awareness, and creation of unique deliv- During the course of an examination of Western Union by the ery channels. The Company has been successful with internal New York State Banking Department (the “Banking Department”), development of new products and the successful integration of the Banking Department identified alleged deficiencies relating to strategic acquisitions completed during 2002. transaction reporting and agent supervision requirements under fed- Western Union currently has approximately 151,000 agent eral and state regulations. The alleged deficiencies were due in part to locations in more than 195 countries and territories. During 2002, the limitations of a cumbersome legacy compliance system and in part Western Union signed several significant new international agents, to difficulties encountered in the ongoing migration from that legacy including Wal-Mart in Argentina, and renewed important con- system to a more automated compliance system and the centralization tracts such as First Bank of Nigeria, Agricultural Bank in Ghana, of the compliance function in connection with the system change. To the German PostBank and Telecomunicaciones de Mexico. In resolve the matter without further action and without an admission of December 2002, Western Union concluded a joint venture agree- wrongdoing by Western Union, on December 18, 2002, Western ment with a subsidiary of the French Post Office, which will allow Union and the Banking Department entered an agreement related to a significantly expanded presence of Western Union’s services Western Union’s enhanced regulatory compliance program requiring throughout France. In January 2003, Western Union concluded a a monetary payment of $8.0 million to the Banking Department. As global agreement with American Express Travel Related Services, part of the agreement, Western Union submitted its enhanced com- pursuant to which American Express offices will offer Western Union pliance program to the Banking Department for approval. Western money transfer services throughout their network in over 20 Union also has been working with the U.S. Department of the countries. Two countries with significant long-term potential for Treasury (the “Treasury Department”) regarding the Treasury the Company are China and India. Western Union has agreements Department’s determinations related to filings required under the with the post offices in both China and India, as well as agreements BSA for transactions occurring throughout the United States. Without with a number of other banks in China and banks and retail loca- admitting or denying the Treasury Department’s determinations, on tions in India. Currently, Western Union has approximately 5,000 March 6, 2003, Western Union entered into a Consent to the agent locations in China and 10,000 agent locations in India. Like Assessment of Civil Money Penalty and Undertakings with the most other Western Union international locations, these typically Treasury Department (the “Consent Agreement”) to achieve a nation- require between three to five years to realize their potential. wide resolution of Western Union’s liability under the BSA arising out The Company continues to drive new product development. of the facts set forth in the Consent Agreement. Pursuant to the SwiftPay, a prepaid payment service, is an example of this product Consent Agreement, Western Union agreed to pay a monetary development. It was launched in November 2000 and experienced payment of $3.0 million to the Treasury Department and, by June 30, strong growth in 2002. In addition, the launch of ValueLink in 1998 2003, to (I) conduct additional testing of its systems by conducting continues to be a catalyst for growth in the future. The Company has further research to identify suspicious activity in 2002 reportable other new product offerings that have succeeded in reaching the mar- under the BSA and file additional reports as appropriate,(II) file ketplace, and others that are currently in the developmental stage. additional reports of certain currency transactions that occurred in 32
  29. 29. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2002 that have been identified by Western Union, (III) ensure that all who continue to operate may pose a competitive disadvantage to the of its money services business products will be subject to an effective Company. The Company believes that the trend toward additional system of review for reporting suspicious transactions under the regulation will continue. BSA, and (IV) establish an enhanced nationwide due diligence policy to monitor its agents for BSA compliance. Western Union continues MERCHANT SERVICES to coordinate with certain state regulators which may result in addi- tional filings or monetary assessments. Within merchant services, the Company continues its commitment Western Union’s money transfer business to, from or within a to its merchant alliance strategy, growing the international business country may be affected by a number of political and economic fac- and expanding into adjacent markets. This strategy was strengthened tors. From time to time, transactions within or between countries may during the year through changes to some existing alliances and the be limited or prohibited by law. Additionally, economic or political formation of several new alliances. As further discussed below instability may make money transfers to, from or within a particular under “Acquisitions,” the Company acquired a controlling interest country impracticable, as when banks are closed, devaluation of the in three existing merchant alliances and entered into a new agree- currency makes it difficult to manage exchange rates, or civil unrest ment with SunTrust Banks, Inc. (“SunTrust”). This previously makes access to or from Western Union agent locations unsafe. existing agreement expands a long-standing relationship with Foreign and domestic governments may impose new rules on SunTrust, strengthening the Company’s presence in the southeast payment instruments, including regulations that (I) prohibit transac- and mid-Atlantic states. tions with, to or from certain individuals, entities or countries; The banking industry has seen dynamic changes during the past (II) impose additional reporting requirements; (III) limit the entities few years; these developments are expected to continue. Further capable of providing the services; (IV) limit or restrict the revenue consolidation among financial institutions could negatively impact that may be generated from transactions, including revenue derived FDC’s alliance strategy, especially where the banks involved are from foreign exchange; or (V) limit the number or value of money committed to merchant processing businesses that compete with the transfers that may be sent to or from the jurisdiction. Company. On the other hand, the acquisition of new merchant The Company’s money transfer business is subject to regulation in business by an existing alliance bank can also result in such business the United States by the federal government and most of the states. In being contributed to the alliance. addition, the money transfer business is subject to some form of New merchant alliances with CU Electronic Transaction regulation in each of the over 195 countries and territories in which Services (“CUETS”) in Canada and Halifax Bank of Scotland such services are offered. The Company has developed compliance (“HBOS”) expanded the Company’s international merchant programs to monitor regulatory requirements and developments, services business. The Company’s international expansion was and to implement policies and procedures to help satisfy these also furthered by the acquisition of the Bank of Nova Scotia’s requirements. It is important to recognize, however, that the (“ScotiaBank”) Canadian merchant business by Paymentech, an Company’s money transfer network operates through independent existing alliance between FDMS and Bank One. agents in most countries, and the Company’s ability to directly control The Company continues to make other investments in its inter- such agents’ compliance activities is limited. However, the Company national merchant business, e.g., the acquisition of a controlling has developed compliance programs focused on agent training and interest in OMNIPAY, whose multi-currency processing software monitoring to help ensure legal and regulatory compliance by its enhances the Company’s international processing capabilities through agents. Additionally, the Company continues to enhance its compli- Dynamic Currency Conversion and other products. ance policies and programs to help augment its compliance efforts. The Company continues to strengthen its merchant services seg- Notwithstanding these efforts, the number and complexity of ment through investments in adjacent markets such as POS business regulatory regimes around the world pose a significant challenge to and technology. One such investment is PayPoint. It expands the the Company’s money transfer business. A violation of law may Company’s capability to serve several growing transaction processing result in civil or criminal penalties or a prohibition against a money markets, including gas stations, supermarkets, quick service restaurants transmitter and/or its agents from providing money transfer servic- and various PIN-based debit merchants. These expanded capabilities es in a particular jurisdiction. Following the events of September 11, complement the capture of debit transactions through the NYCE 2001, the United States and certain other countries have imposed or network, which is majority-owned by the Company. An increasingly are considering a variety of new regulations focused on the detec- competitive environment for PIN-based debit transactions has created tion and prevention of money transfers to or from terrorists and other pricing competition, which could negatively impact margins. criminals. The Company participated in drafting some of these Merchant services segment revenues largely are driven by the regulatory plans and continues to implement policies and proce- number of transactions (and, to a lesser degree, dollar volumes) dures to help satisfy these requirements. These additional efforts processed by the Company; therefore, this segment is the least insu- increase the Company’s cost of doing business. In addition, com- lated from economic slowdowns. Continued softness in consumer petitors who may not satisfy these regulatory requirements but spending will negatively impact the financial performance of this segment. Counterbalancing this negative impact is consumers’ 33 — FIRST DATA CORPORATION 2002 ANNUAL REPORT

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