You should read the following discussion in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements contained in the Management's Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in other sections of this Annual Report on Form 10-K. See "Risk Factors" and "Forward-looking Statements."

Overview

We are a leading provider of money movement and payment services, operating in three business segments:
• Consumer-to-Consumer - The Consumer-to-Consumer operating segment facilitates money transfers between two consumers, primarily through a network of third-party agents. Our multi-currency, real-time money transfer service is viewed by us as one interconnected global network where a money transfer can be sent from one location to another, around the world. Our money transfer services are available for international cross-border transfers - that is, the transfer of funds from one country to another - and, in certain countries, intra-country transfers - that is, money transfers from one location to another in the same country. This segment also includes money transfer transactions that can be initiated through our websites and account based money transfers.

• Consumer-to-Business - The Consumer-to-Business operating segment facilitates bill payments from consumers to businesses and other organizations, including utilities, auto finance companies, mortgage servicers, financial service providers, government agencies and other businesses. This segment consists of United States bill payments, Pago Fácil (bill payments in Argentina), and international bill payments. The significant majority of the segment's revenue was generated in the United States during all periods presented.

• Business Solutions - The Business Solutions operating segment facilitates payment and foreign exchange solutions, primarily cross-border, cross-currency transactions, for small and medium size enterprises and other organizations and individuals. The majority of the segment's business relates to exchanges of currency at the spot rate which enables customers to make cross-currency payments. In addition, in certain countries, we write foreign currency forward and option contracts for customers to facilitate future payments. Travelex Global Business Payments ("TGBP"), which was acquired in November 2011, is included in this segment.

All businesses that have not been classified in the above segments are reported as "Other" and include our money order, prepaid services, mobile money transfer, and other businesses and services, in addition to costs for the investigation and closing of acquisitions and represented 2% of consolidated revenue during the years ended December 31, 2012, 2011 and 2010.
Our previously reported segments were Consumer-to-Consumer, Global Business Payments, and Other. The changes in our segment structure primarily relate to the separation of the Global Business Payments segment into two new reportable segments, Consumer-to-Business and Business Solutions. All prior segment information has been reclassified to reflect these new segments.

Significant Financial and Other Highlights

Significant financial and other highlights for the year ended December 31, 2012 included:

• We generated $5,664.8 million in total consolidated revenues compared to $5,491.4 million in the prior year, representing a year-over-year increase of 3%. The acquisition of TGBP contributed approximately 4% of consolidated revenue growth.

• We generated $1,330.0 million in consolidated operating income compared to $1,385.0 million in the prior year, representing a decrease of 4%. The current year results include $42.8 million of integration expenses resulting from the acquisition of TGBP and $30.9 million of expenses related to productivity and cost-savings initiatives. The prior year results include $46.8 million of restructuring and related expenses and $4.8 million of TGBP integration expenses. For additional information on TGBP integration and restructuring and related expenses, refer to "Operating expenses overview."

• Our operating income margin was 23% during the year ended December 31, 2012, compared to 25% in the prior year. The current year results include TGBP integration expenses; investments in our strategic initiatives, including westernunion.com; increased compliance program costs; and productivity and cost-savings initiatives expenses. The prior year results include the restructuring and related expenses and TGBP integration expenses, as mentioned above.

• Our effective tax rates were 12.2%, 8.6% and 20.5% for the years ended December 31, 2012, 2011 and 2010, respectively. The significant decrease in our effective tax rate for the years ended December 31, 2012 and 2011 is primarily due to an agreement with the United States Internal Revenue Service ("IRS Agreement") resolving substantially all of the issues related to our restructuring of our international operations in 2003. We continue to benefit from a significant proportion of our profits being foreign-derived, and therefore taxed at lower rates than our combined federal and state tax rates in the United States. For the years ended December 31, 2012, 2011 and 2010, 92%, 67% and 87% of our pre-tax income was derived from foreign sources, respectively. While the income tax imposed by any one foreign country is not material to us, our overall effective tax rate could be adversely affected by changes in tax laws, both foreign and domestic. Certain portions of our foreign source income are subject to United States federal and state income tax as earned due to the nature of the income, and dividend repatriations of our foreign source income are generally subject to United States federal and state income tax.

• Consolidated net income was $1,025.9 million and $1,165.4 million for the years ended December 31, 2012 and 2011, respectively, representing a year-over-year decrease of 12%. Results for 2012 include $30.7 million and $20.2 million of TGBP integration and productivity and cost-savings initiatives expenses, net of tax, respectively. The prior year results include a $204.7 million tax benefit related to the adjustment of reserves associated with the IRS Agreement. Results for 2011 include $32.0 million and $3.1 million in restructuring and related expenses and TGBP integration expenses, net of tax, respectively. In addition, for 2011, we recognized gains of $12.7 million and $18.3 million, net of tax, related to our acquisitions of Finint S.r.l ("Finint") and Angelo Costa S.r.l ("Costa"), respectively, and $13.5 million, net of tax, related to foreign currency forward contracts entered into to reduce the economic variability related to the cash amounts used to fund acquisitions of businesses with purchase prices denominated in foreign currencies, primarily for the TGBP acquisition.

• Our consumers transferred $79 billion and $81 billion in Consumer-to-Consumer principal for the years ended December 31, 2012 and 2011, respectively, of which $71 billion and $73 billion related to cross-border principal, respectively, which represented a decrease of 2% and 3%, respectively, in Consumer-to-Consumer principal and cross-border principal over the prior year.

• Consolidated cash flows provided by operating activities were $1,185.3 million and $1,174.9 million for the years ended December 31, 2012 and 2011, respectively. Cash flows provided by operating activities for the year ended December 31, 2012 were impacted by tax payments of $92.4 million made as a result of the IRS Agreement.

Our key strategic priorities are focused on:

• Strengthening consumer money transfer - We are implementing key actions in an effort to drive renewed growth in our consumer money transfer business, including: improving the consumer value proposition by making pricing investments in key corridors and enhancing services and the consumer experience; continuing to expand the digital and electronic account based money transfer channels; and further expanding our agent network. We began to implement increased strategic fee reductions and actions to adjust foreign exchange spreads in certain key corridors in the fourth quarter of 2012. We continued such increased fee reductions and actions in the first quarter of 2013 and anticipate further fee reductions and foreign exchange actions in 2013. Fee reductions and foreign exchange actions were approximately 1% of revenue for full year 2012. These actions are expected to increase to approximately 5% of total revenue for full year 2013, if all actions are implemented as contemplated. We also plan to continue connecting the cash and digital worlds for our consumers. Digital and electronic account based money transfer channels delivered strong growth and new customer acquisition in 2012, and actions are planned to accelerate usage in 2013 through added capabilities, enhanced value propositions, and expanded reach.

• Driving growth in customers and usage in Western Union Business Solutions - In Western Union Business Solutions, we are working to increase product offerings, expand to new markets, and improve sales force effectiveness to drive new customer acquisition and growth opportunities with existing customers.

• Generating and deploying cash flow for shareholders - We currently anticipate continuing to return capital to our shareholders in 2013 through dividends and share repurchases.

Significant factors affecting our financial condition and results of operations include:

• Transaction volume - Transaction volume is the primary generator of revenue in our businesses. Transaction volume in our Consumer-to-Consumer segment is affected by, among other things, the size of the international migrant population, individual needs to transfer funds, and global and regional economic trends. For more information, refer to the Consumer-to-Consumer segment discussion below.

• Competition - We continue to face robust competition in each of our segments. In the year ended December 31, 2012, competitive pressures, including with respect to pricing in certain key corridors, adversely impacted our Consumer-to-Consumer segment.

• Consumer Value Proposition - Revenue is also impacted by our overall value proposition, including with respect to our consumer experience, the fees we charge consumers, the principal sent per transaction and the variance in the exchange rate set by us to the customer and the rate at which we or our agents are able to acquire the currency.

• Regulatory Compliance - Our services are subject to an increasingly strict set of legal and regulatory requirements. The number and complexity of regulations around the world and the pace at which regulation is changing are factors that pose significant challenges to our business. We have made, and continue to make, enhancements to our processes and systems designed to detect and prevent money laundering, terrorist financing, and fraud and other illicit activity. These and other enhancements have resulted in, and in coming quarters we expect them to continue to result in, changes to certain of our business practices and increased costs. Some of these changes have had, and we believe will continue to have, an adverse effect on our business, financial condition and results of operations. See "Operating Expense Overview - Enhanced Regulatory Compliance" for more information.

• Cost Structure - As described earlier, in the fourth quarter of 2012, we began implementing additional initiatives to improve productivity and reduce costs. We expect to implement additional productivity and cost-savings initiatives throughout 2013, and we expect to incur approximately $45 million of expenses related to these initiatives in 2013. These initiatives are expected to result in approximately $30 million of estimated cost savings in 2013 and approximately $45 million of estimated cost savings in 2014, if all actions are implemented as contemplated. Much of our cost structure is comprised of agent commissions, which are generally variable and fluctuate as revenues fluctuate. However, we expect agent commissions as a percentage of revenue to increase in 2013 primarily due to the renewal of certain strategic agent agreements. We also expect to increase expenses in 2013 related to investments to support initiatives to continue expanding the digital and account based electronic channels for money transfers for consumers and to increase product offerings. In addition, we expect increased expenses related to compliance program costs.

• Exchange Rates - Fluctuations in the exchange rate between the United States dollar and other currencies impact our transaction fee and foreign exchange revenue. The impact to earnings per share is less than the revenue impact due to the translation of expenses and our foreign currency hedging program.

Spin-off from First Data

We were incorporated in Delaware as a wholly-owned subsidiary of First Data on February 17, 2006. On September 29, 2006, First Data distributed all of its money transfer and consumer payments businesses and its interest in a Western Union money transfer agent, as well as its related assets, including real estate, through a tax-free distribution to First Data shareholders ("Spin-off").

Basis of Presentation

The financial statements in this Annual Report on Form 10-K are presented on a consolidated basis and include the accounts of our Company and its majority-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated.

Components of Revenues and Expenses

The following briefly describes the components of revenues and expenses as presented in the Consolidated Statements of Income. Descriptions of our revenue recognition policies are included in Part II, Item 8, Financial Statements and Supplementary Data, Note 2, "Summary of Significant Accounting Policies" in our Consolidated Financial Statements.

Transaction fees - Transaction fees are fees that consumers pay when they send money or make payments. Consumer-to-Consumer transaction fees generally vary according to the principal amount of the money transfer and the locations from and to which the funds are sent and received. Transaction fees represented 74% of our total consolidated revenues for the year ended December 31, 2012.

Foreign exchange revenues - In certain Consumer-to-Consumer money transfer and Business Solutions payment transactions involving different currencies, we generate revenues based on the difference between the exchange rate set by us to the consumer or business and the rate at which we or our agents are able to acquire the currency. In our Consumer-to-Consumer business, foreign exchange revenue is primarily driven by international Consumer-to-Consumer cross-currency transactions. Also, as a result of the acquisition of TGBP, our foreign exchange revenues have increased. Foreign exchange revenues represented 24% of our total consolidated revenues for the year ended December 31, 2012.

Other revenues - Other revenues primarily consist of investment income primarily derived from interest generated on Consumer-to-Consumer money transfer, money order and payment services settlement assets as well as realized net gains and losses from such assets, and fees we receive in connection with the sale of money orders. Other revenues represented 2% of our total consolidated revenue for the year ended December 31, 2012.

Cost of services - Cost of services primarily consists of agent commissions, which represent approximately 70% of total cost of services, and expenses for call centers, settlement operations, and related information technology costs. Expenses within these functions include personnel, software, equipment, telecommunications, bank fees, depreciation, amortization and other expenses incurred in connection with providing money transfer and other payment services.

Selling, general and administrative - Selling, general and administrative primarily consists of salaries, wages and related expenses paid to sales and administrative personnel, as well as certain advertising and promotional costs and other selling and administrative expenses.

Interest income - Interest income consists of interest earned on cash balances not required to satisfy settlement obligations and in connection with loans previously made to certain existing agents.

Interest expense - Interest expense represents interest incurred in connection with outstanding borrowings, including applicable amounts associated with interest rate swaps.

Derivative gains/(losses), net - Represents the portion of the change in fair value of foreign currency accounting hedges that is excluded from the measurement of effectiveness, which includes (a) differences between changes in forward rates and spot rates and (b) gains or losses on the contract and any offsetting positions during periods in which the instrument is not designated as a hedge. We also include in this line item changes in the fair value of derivative contracts, consisting of forward contracts with maturities of less than one year entered into to reduce the economic variability related to the cash amounts used to fund acquisitions of businesses with purchase prices denominated in foreign currencies. Although the majority of changes in the value of our hedges are deferred in accumulated other comprehensive income or loss until settlement (i.e., spot rate changes), the remaining portion of changes in value are recognized in income as they occur. Derivative gains and losses do not include fluctuations in foreign currency forward contracts intended to mitigate exposures on settlement activities of our Consumer-to-Consumer money transfer business or on certain foreign currency denominated cash positions. Gains and losses associated with those foreign currency forward contracts are included in "Selling, general and administrative expenses." Derivative gains and losses also do not include fluctuations in foreign currency forward and option contracts used in our Business Solutions payments operations. The impact of these contracts is classified within "Foreign exchange revenues" in the Consolidated Statements of Income.

Other income, net - Other income, net is comprised primarily of equity earnings from equity method investments and miscellaneous income and expenses. Other income, net also includes gains on revaluation of equity interests.

Results of Operations

The following discussion of our consolidated results of operations and segment results refers to the year ended December 31, 2012 compared to the same period in 2011 and the year ended December 31, 2011 compared to the same period in 2010. The results of operations should be read in conjunction with the discussion of our segment results of operations, which provide more detailed discussions concerning certain components of the Consolidated Statements of Income. All significant intercompany accounts and transactions between our segments have been eliminated.

During the year ended December 31, 2011, we reached an agreement with the United States Internal Revenue Service ("IRS") resolving substantially all of the issues related to the restructuring of our international operations in 2003. As a result of the IRS Agreement, we recognized a tax benefit of $204.7 million related to the adjustment of reserves associated with this matter. For additional information, refer to "Income taxes."

The following table sets forth our consolidated results of operations for the years ended December 31, 2012, 2011 and 2010.

                                                                                            % Change
                                                   Year Ended December 31,              2012         2011
(in millions, except per share amounts)       2012          2011          2010        vs. 2011     vs. 2010
Revenues:
Transaction fees                           $ 4,210.0     $ 4,220.2     $ 4,055.3         -  %         4  %
Foreign exchange revenues                    1,332.7       1,151.2       1,018.8        16  %        13  %
Other revenues                                 122.1         120.0         118.6         2  %         1  %
Total revenues                               5,664.8       5,491.4       5,192.7         3  %         6  %
Expenses:
Cost of services                             3,194.2       3,102.0       2,978.4         3  %         4  %
Selling, general and administrative          1,140.6       1,004.4         914.2        14  %        10  %
Total expenses                               4,334.8       4,106.4       3,892.6         6  %         5  %
Operating income                             1,330.0       1,385.0       1,300.1        (4 )%         7  %
Other income/(expense):
Interest income                                  5.5           5.2           2.8         6  %        86  %
Interest expense                              (179.6 )      (181.9 )      (169.9 )      (1 )%         7  %
Derivative gains/(losses), net                   0.5          14.0          (2.5 )     (96 )%         *
Other income, net                               12.4          52.3          14.7       (76 )%         *
Total other expense, net                      (161.2 )      (110.4 )      (154.9 )      46  %       (29 )%
Income before income taxes                   1,168.8       1,274.6       1,145.2        (8 )%        11  %
Provision for income taxes                     142.9         109.2         235.3        31  %       (54 )%
Net income                                 $ 1,025.9     $ 1,165.4     $   909.9       (12 )%        28  %
Earnings per share:
Basic                                      $    1.70     $    1.85     $    1.37        (8 )%        35  %
Diluted                                    $    1.69     $    1.84     $    1.36        (8 )%        35  %
Weighted-average shares outstanding:
Basic                                          604.9         630.6         666.5
Diluted                                        607.4         634.2         668.9


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Revenues overview

The majority of transaction fees and foreign exchange revenues were contributed by our Consumer-to-Consumer segment for all periods presented, which is discussed in greater detail in "Segment Discussion."

2012 compared to 2011

Consolidated revenue increased 3% during the year ended December 31, 2012 due to the acquisition of TGBP, which contributed approximately 4% to consolidated revenue growth for the period, and Consumer-to-Consumer transaction growth of 2%, partially offset by the strengthening of the United States dollar compared to most other foreign currencies and slight price reductions. The strengthening of the United States dollar compared to most other foreign currencies negatively impacted revenue growth by approximately 2% in the year ended December 31, 2012.

Foreign exchange revenues increased for the year ended December 31, 2012 compared to the same period in 2011 primarily due to the acquisition of TGBP.

Fluctuations in the exchange rate between the United States dollar and currencies other than the United States dollar have resulted in a reduction to transaction fees and foreign exchange revenues for the year ended December 31, 2012 of $93.8 million over the previous year, net of foreign currency hedges, that would not have occurred had there been constant currency rates.

2011 compared to 2010

Consolidated revenue increased 6% during the year ended December 31, 2011 due to Consumer-to-Consumer transaction growth and the weakening of the United States dollar compared to most other foreign currencies, which positively impacted revenue, offset by slight price reductions. The weakening of the United States dollar compared to most other foreign currencies positively impacted revenue growth by approximately 1% in the year ended December 31, 2011. The acquisition of TGBP contributed approximately 1% to consolidated revenue growth for the year ended December 31, 2011.

Foreign exchange revenues increased for the year ended December 31, 2011 compared to the same period in 2010 primarily due to increasing foreign exchange revenues in our Consumer-to-Consumer segment, driven primarily by the increased amount of cross-border principal sent. Additionally, foreign exchange revenues were positively impacted by the acquisition of TGBP and revenue growth experienced in our existing Business Solutions business.

Fluctuations in the exchange rate between the United States dollar and currencies other than the United States dollar resulted in a benefit to transaction fees and foreign exchange revenues for the year ended December 31, 2011 of $38.0 million over the previous year, net of foreign currency hedges, that would not have occurred had there been constant currency rates.

Operating expenses overview

TGBP integration expenses

During the years ended December 31, 2012 and 2011, we incurred $42.8 million and $4.8 million, respectively, of integration expenses related to the acquisition of TGBP. TGBP was acquired on November 7, 2011. TGBP integration expense consists primarily of severance and other benefits, retention, direct and incremental expense consisting of facility relocation, consolidation and closures; IT systems integration; amortization of a transitional trademark license; and other expenses such as training, travel and professional fees. Integration expense does not include costs related to the completion of the TGBP acquisition. In 2013, we expect to incur additional integration expenses resulting from the acquisition of TGBP.

Restructuring and related activities

On May 25, 2010 and as subsequently revised, our Board of Directors approved a restructuring plan (the "Restructuring Plan") designed to reduce our overall headcount and migrate positions from various facilities, primarily within North America and Europe, to regional operating centers. As of September 30, 2011, we had incurred all of the expenses related to this Restructuring Plan. Total expense incurred under the Restructuring Plan for the period from May 25, 2010 through December 31, 2011 was $106 million, consisting of $75 million for severance and employee related benefits, $5 million for facility closures, including lease terminations, and $26 million for other expenses. Included in these expenses are $2 million of non-cash expenses related to fixed asset and leasehold improvement write-offs and accelerated depreciation at impacted facilities. Total cost savings of approximately $70 million and $55 million were generated in 2012 and 2011, respectively.

There were no restructuring and related expenses incurred during the year ended . . .