TrendWatchTrendWatch 2.02.0

Payments System Industry Synopsis Q2 2008

Notice: Materials contained in this document are drawn from several media sources and Dorado Industries is not responsible for their accuracy. Opinions expressed herein are presented without warranty.

© 2008 Dorado Industries, Inc. Editorial Comment

Well, it wasn’t quite as dreary as last quarter, but Q2 MasterCard and American Express settled on $1.8 billion 2008 didn’t overwhelm us either. M&A and Private in compensation while Discover continues to press for Equity activities were healthy but nothing earth-shattering $6.0 billion in lost returns from Visa and MasterCard. It occurred. could be a long summer.

On the legislative front, we got to see how sausage is Alternative payments continued to gain legitimacy. made as the House Judiciary Committee marked up H.R. MasterCard and Obopay teamed up to provide fully- 5546, the Credit Card Fair Fee Act of 2008 resulting in a integrated on-demand person-to-person mobile measure that has little chance of being enacted. In the payments while Visa’s decision to conform its signature meantime, a group of legislators attached an amendment and PIN debit operating rules may add fuel to the to the housing bail out bill that requires merchant growing marketplace for PIN-less debit. acquirers to report debit and credit volume to the IRS beginning in 2010, a real source of heartburn for Finally, there was an interesting and largely overlooked acquirers and ISOs. concession made by one of the preemptive leaders in mobile payments this quarter. In May, 2008, a Citibank threw in the towel on its decades old program of spokesman for NTT DoCoMo lamented that only one in building its own ATMs and in the process enabled five owners of m-commerce enabled phones operating Nautilus Hyosung to be considered a legitimate threat to on its network actually use them for POS purchases. It Diebold and NCR (both the big guys will also participate doesn’t appear to be an issuer/user challenge since in the new Citibank ATM upgrade, however.) there are nearly 30 million subscribers involved. Rather the problem is on the retailer side where DoCoMo has Investors in Visa, MasterCard, Discover and several only enticed 600,000 merchants to become NFC- other payments processors fared better than those enabled. This ratio of millions of users and thousands of holding a basket of Dow or S&P. acquirers has plagued the payments industry from the beginning, leading some of us to observe that new payment forms take twice as long to break even as was forecast and, unfortunately, cost twice as much. So it Dorado Industries goes. (310) 544-1316 655 Deep Valley Drive, Suite 125-P 2 [email protected] Rolling Hills Estates, CA 90274 www.doradoindustries.com Table of Contents

TrendWatch Scorecard/Summary 4 Earnings Roundup 5 Mobile Banking and Payments – Road to Legitimacy? 6 Our Rant on Interchange – Making Sausage 8 Interesting Quarterly News That Got No Respect 9 M&A/Alliances Activity 10

Dorado Industries (310) 544-1316 655 Deep Valley Drive, Suite 125-P 3 [email protected] Rolling Hills Estates, CA 90274 www.doradoindustries.com TrendWatch Scorecard/Summary – Q2 2008

t c Positive l a d e p e t v h c e m c a L I n p Mixed y e m Industry Players To Watch ty r tr I i t r v s n e Merchant Acquirers: Given the slackness in the US economy, there may ti u E y Negative c d a A In P be another wave of consolidation at all size tiers. First Data Corp.: So far, the changes made by KKR amount to window Med 1. New Payment Forms dressing. Pretty shortly the company will have to address the “what do High 2. ATM Restructuring we do about Star?” question. mFoundry: Lots of PE and strategic money has been invested suggesting Med 3. POS Volume Trend that sooner or later these sources are going to want to see some returns. Nautilus Hyosung and Triton: Two ATM manufactures – one on the rise, High 4. Legal/Regulatory Issues the other declining. Either could create a deep ripple in the ATM equipment market. Low 5. Prepaid Card Growth H.R. 5546: There’s no telling what can happen to this legislation. If effort to gain passage aren’t successful this year, it could resurface in Med 6. Earnings Announcements another form. Case in point, the recently enacted Housing Bill inclusion a provision that requires merchant acquirers to report retailer debit and Med 7. Industry Investments credit volume to the IRS. PIN-less Debit Networks/Players: Visa’s concession with the Department Market & Industry Situation of Justice could result in acceleration of applications for consumer PIN- 1 – Lighthouse retailers are gradually adopting alternative payment less debit transactions leading to a siphoning off of standard interchange schemes – Bill Me Later, eBillme, 2Checkout, etc. transactions. 2 – MoneyPass, Cardtronics, and others are inter-stitching in the surcharge-free zone. 3 – Recent debit studies suggest a slowing in growth rates but still double digit. 4 – HR 5546 made it through one subcommittee. More to come. 5 – Split-tender transactions are in the bull’s eye. 6 – With the Dow and S&P posting negative two-digit yields, staying ahead of the curves isn’t all that tough. Yet a few fell off the rails. 7 – PE money is gradually returning to payments. Dorado Industries (310) 544-1316 655 Deep Valley Drive, Suite 125-P 4 [email protected] Rolling Hills Estates, CA 90274 www.doradoindustries.com Q1 2008/Q2 2008 Earnings Roundup

The S&P and Dow Jones indices have dropped 14.1 and 13.5 percent respectively so far this year so the fact that half of our fourteen monitored payments companies did better than the indices is reassuring (better performers are highlighted). It is interesting to note that the three card brands pace the group with positive YTD yields. Before you ask, American Express didn’t fare so well, posting a negative 21 percent yield YTD. July 30 and 31 will see a host of Q2 earnings reports. Perhaps we’ll see a rebound in share prices soon thereafter.

Industry Player Q1 Revenue Q1 Earnings Revenue U Earnings U YTD 2008 Yield

Cardtronics $ 120.6 $ (4.6) 61.9% -32.9% -25.2% Global Cash Access Holdings $ 143.5 $ 1.8 -2.9% -78.5% -1.0% TRM Delisted by NASDAQ Alliance Data Systems (Q2/08) $ 507.2 $ 61.9 5.0% 20.0% -21.3% Discover Financial Services (Q2/08) $ 612.1 $ 234.1 -4.0% 11.9% 7.2% Euronet Worldwide $ 247.1 $ (6.8) 45.0% -171.6% -44.3% Fidelity National Information Services $ 1,290.0 $ 70.5 21.0% 18.5% -50.6% Note Fiserv Inc. $ 1,310.0 $ 329.0 39.0% 128.5% -11.9% Heartland Payment Systems $ 339.6 $ 9.0 19.5% 30.4% -15.8% Jack Henry & Associates (Q3) $ 187.9 $ 26.6 11.2% 0.8% -11.5% MasterCard Worldwide $ 1,180.0 $ 446.9 29.2% 108.0% 32.9% Metavante $ 424.6 $ 35.0 10.0% -29.0% -6.2% Total System Services $ 461.7 $ 56.6 8.0% -1.2% -18.3% Visa $ 1,453.0 $ 314.0 27.6% 22.0% 32.9% Wright Express $ 92.9 $ 14.5 29.0% 74.7% -32.2%

Note: M&A, PE, Spin out, or IPO activity announced/closed Sources: Company releases, Morningstar.com, Bloomberg.com 2008 YTD yield excludes dividends

Dorado Industries (310) 544-1316 655 Deep Valley Drive, Suite 125-P 5 [email protected] Rolling Hills Estates, CA 90274 www.doradoindustries.com Mobile Banking and Payments – Road to Legitimacy?

Subject Source/Date Substance PSCU and Financial Service Credit Union Journal • PSCU, a card processor owned by its credit union customers, and FSCC, a shared Centers Cooperative March, 2008 branching services provider with a similar ownership structure, plan to collaborate to create a mobile platform supported by FSCC’s linkages to 5,000 credit union branches across the country. When launched, the service will offer account access, bill pay and account transfer functionality. A 2008 roll-out is anticipated.

Mobey Forum Presentation materials • Mobey Forum, a syndicate of bankers, processors, network operators, and software June, 2008 vendors concluded in their recent announcement that “to achieve a successful business ecosystem, the Key Stakeholders (banks, mobile operators, and merchants) must work together to agree on a sustainable business model acceptable to all.” Another blinding glimpse of the obvious was offered, “over the air programming (OTA) processes are currently rather fragmented. Optimally there should be one standard process for banks to enroll their applications to all handsets, secure elements, and mobile network operations.” Sounds familiar – PIN debit circa 1984. MasterCard and Obopay Press release • MasterCard and Obopay announce a relationship that allows the former card June, 2008 association to offer P2P payments via its MoneySend service using a registered cardholder’s mobile phone. This initiative is an adjunct to the company’s PayPass program which includes 28 million cards in circulation and 190,000 accepting merchant locations.

NTT DoCoMo Cardline • NTT DoCoMo, Japan’s mobile network operator with 28 million contactless mobile May, 2008 phones in circulation laments that only one in five subscribers uses the phone to make payments. Apparently merchants have been slow to adopt the new technology that DoCoMo launched in 2004. As of March 2008, there are but 608,000 terminals that accept payments from phones. “We need to show them the actual benefit. Otherwise, they will move to the other new technologies,” a DoCoMo spokesperson elucidated.

Dorado Industries (310) 544-1316 655 Deep Valley Drive, Suite 125-P 6 [email protected] Rolling Hills Estates, CA 90274 www.doradoindustries.com Mobile Banking and Payments – Road to Legitimacy?

Our (Radically Altered) Point of View: We give up! Even occasional TW readers have observed a bias on our part against mobile banking and payments. Although we wouldn’t dare to think that our ramblings would have an impact on this emerging payment form, we thought a bit more clarity could be infused within the evolutionary process.

Instead, each new day brings announcements from this or that bank or credit union touting the launch of their new mobile banking platform. And, through the courtesy of the good folks at Aite Group (see adjacent chart), we get the sense that the TrendWatch mailbox will continue to be inundated with more of the same.

Market research conducted by several excellent payments consultancies produce widely varying estimates of mobile payments volume. Perhaps the wide spread in volume estimates is tied to the number of NFC-equipped merchants which Dove Consulting puts at 5 percent by 2010. Juniper We continue to believe that our three self-examination Research estimates that $75 billion in NFC payments will be questions for bankers considering a foray into mobile made by 2013 on a global basis. Since the US alone banking and payments are legitimate and publish them produces electronic transactions with values measured in here for the last time. trillions of dollars, we conclude that there’s a long way to go • How will the revenue sharing agreements with your before mobile payments will be considered a legitimate new partner impact existing customer profitability? payment system. So, we’re giving up. Why rile against • Have the operational issues involved in failed something that isn’t going to amount to much even if its wildly payment or transfer transactions been thoroughly successful? worked out? • Is your customer documentation sufficiently re- worked to protect everyone? Dorado Industries (310) 544-1316 655 Deep Valley Drive, Suite 125-P 7 [email protected] Rolling Hills Estates, CA 90274 www.doradoindustries.com Publisher’s Rant: The Interchange Wars – Making Sausage

It doesn’t take much to be under whelmed by our And the sausage maker continues to grind. Mitch congressional leaders. On July 16th, the House Judiciary Goldman, famous for his waytoohigh.com site and blog Committee approved H.R. 5546 by a 19-16 margin. organized a protest against interchange rates at a gas Along the way to this decisive action, the Committee: station in southern California. Thirteen people showed up – seems there were free donuts. • Neutered the bill’s ability to resolve impasses by eliminating the three-judge FTC tribunal. • Tossed a bone to small banks and credit unions by Then Visa announced its new interchange system for exempting them from the act – whatever that means. fuel which it seems generates more interchange on • “Ensured” that merchant savings generated by the act purchases under $30 than the old plan. Sometimes you will be passed on to consumers or employees – can take this “transparency” thing a bit too far. whatever that means. We never liked the three-judge panel in the first place but In the meantime, it seems that Sheila Bair, the FDIC if Congress wants to force banks and retailers into group chairman, got whacked for $6 in foreign ATM and negotiations (by giving the merchants and issuers broad surcharge fees and didn’t like it one bit. Consistent with exemptions from antitrust laws), shouldn’t there be a her anemic track record thus far, Ms. Bair is calling for mechanism in place to settle loggerhead situations? regulations designed to curb bank and deployer fees on Perhaps a furious game of rock-paper-scissors will off-us transactions. Noting that her own agency has no suffice. Of course, neither the Department of Justice nor authority (thank heavens) to mess with market forces, the Federal Trade Commission thought much of H.R. she’s suggested that the Federal Trade Commission 5546 and said so in writing. The Committee members might have the spare time to investigate – and, we hope, apparently took no heed to these objections and handed get her six bucks back. conflict resolution over to the DoJ. Brilliant. Cheeseburger, please.

Dorado Industries (310) 544-1316 655 Deep Valley Drive, Suite 125-P 8 [email protected] Rolling Hills Estates, CA 90274 www.doradoindustries.com Interesting News This Quarter

Subject Source/Date Substance Dynamics, LLC Company presentation • Dynamics, LLC, a start-up operation, is touting its new card form with an imbedded March, 2008 integrated circuit card that flexes. The IC creates a dynamic card number each time it is utilized. A 2010 real product launch is forecast.

Bank of America Cardline • Bank of America announces that its “Keep the Change” program has generated $1 May, 2008 billion in round-up and bank-matched funds since the scheme was launched in October 2005. In addition to these monies, participating customers have transferred $9 billion of their own funds into the savings accounts. Deluxe PayBeforeNews • Deluxe, the checking printing firm that spawned eFunds by way of a spin out, has re- May, 2008 entered the electronic payments realm. Most recently the printer has partnered with Bancorp Payment Solutions Group to provide prepaid card solutions to its bank and credit union customers. Branded as “DeluxeCard,” the program is designed to operate on a turnkey basis. Information Card Foundation PaymentsNews • Equifax, Google, Microsoft, Novell, Oracle, and PayPal join forces with others to June, 2008 create the ICF, a group that plans to promote the rapid build-out of Internet-enabled digital identities using information cards, an approach to user identity protection thought to be better than username and password sign-ins used today. Notably absent are the names of financial institutions as members of the foundation. Citibank Cardline • Citibank, once known for manufacturing its own touch screen ATMs (CATs) in a June 2008 facility based in Marina del Rey, California has cut a deal with Nautilus Hyosung America for the manufacture of ATMs for the bank. This is an effort on the bank’s part to upgrade its entire fleet of machines. NCR and Diebold will share in the contract with Nautilus. From the same bank that is building its own cell phone. Go figure. Green Sherpa Net Banker • Green Sherpa is another new personal financial management site designed to help July 2008 consumers accumulate wealth, spend, and cash flow information and is scheduled to go live in September. Early participants/sponsors include Wells Fargo, WaMu, and BofA.

Dorado Industries (310) 544-1316 655 Deep Valley Drive, Suite 125-P 9 [email protected] Rolling Hills Estates, CA 90274 www.doradoindustries.com M&A/Alliance Activity Buyer Target Payments Emphasis Possible Strategy

Heartland Payment Alliance Data Systems’ Merchant Services Processing ADS sells Network Services, a Systems Network Services business specialist in petroleum distributor line consumer payments to Heartland for $77.5 million. Network Services handles 2.6 billion transactions per, complementing Heartland’s existing volume handle of $52 billion annually.

First Data Eufiserv European interbank processing unit First Data pays an undisclosed amount to acquire 50 percent of Eufiserv, the Brussels-based processor owned by savings banks located in nine countries as Sepa redefines payments within the EU. Catalyst Fund LP iSend Underserved market lender and payments processor Catalyst Fund LP, a part of Progress Financial Corp Center for Financial Services Innovation, invests in two companies focused on the underserved market. iSend is a payment remittance processor while Progress lends from $500 to $5,000 to Hispanic immigrants through four locations in California.

Dorado Industries (310) 544-1316 655 Deep Valley Drive, Suite 125-P 10 [email protected] Rolling Hills Estates, CA 90274 www.doradoindustries.com M&A/Alliance Activity - Continued Buyer Target Payments Emphasis Possible Strategy Venrock, Total IP Commerce Payment platform integration software IP Commerce raises $17 million Technology Ventures, in Series C financing raising its Meritage Funds, Appian Ventures, and total outside funding to $34 Iron Gate Capital million. Carlyle Group De La Rue’s Cash Cash handling devices Carlyle pays $701 million of the Systems business line De La Rue division and adds it to the already-owned Open Solutions acquisition. De La Rue refocuses its effort in the security documents and printing realms. Global Cash Access Cash Systems Casino-focused ATM deployer GCA acquires a rival for $33 million or $0.50 per share and gains 120 customers in the deal raising its total casino count to 1,100. This is CGA’s second acquisition this year; the company bought Certegy Gaming Services in April 2008. Bain Capital Ventures, LinkedIn Online networking service for business professionals The investor group raised $53 Sequoia Capital, million in a fourth round of Bessemer Venture Partners, and funding that gives the company Greylock Partners an estimated valuation of just over $1 billion.

Dorado Industries (310) 544-1316 655 Deep Valley Drive, Suite 125-P 11 [email protected] Rolling Hills Estates, CA 90274 www.doradoindustries.com M&A/Alliance Activity - Continued

Buyer Target Payments Emphasis Possible Strategy eTelCharge.com PaymentOne Corp. Telephone-based billing service Buyer, a regional player in Inc. telephone billing services pays $12.8 million for a larger rival with a national footprint. The Billing Resource, PaymentOne’s parent, is in bankruptcy. Espirito Santo TxVia, Inc. Prepaid card processing systems The investors up their original Ventures, Village ante by $8.5 million in this start- Ventures, and High up prepaid card processor Peaks Venture platform designer. TxVia was Partners originally named TxCore when it launched late last year.

MPOWER Companies focused on the Payments and lending Roy and Bertrand Sosa, founders Ventures, LP underserved market of NetSpend, launch a $100 million investment fund to support innovation in the underserved immigrant market. Bayside Capital Pendum ATM cash and management support Bayside makes a “major investment” to acquire a majority interest in Pendum, a business created awhile ago by combining BankTek West and Efmark’s Premium Armored assets. Proceeds will reduce existing debt and finance growth. Dorado Industries (310) 544-1316 655 Deep Valley Drive, Suite 125-P 12 [email protected] Rolling Hills Estates, CA 90274 www.doradoindustries.com M&A/Alliance Activity - Continued Buyer Target Payments Emphasis Possible Strategy NetSpend Skylight Financial Corporate payroll and government benefit cards The consumer-focused prepaid reloadable debit card company will merge in the assets of Skylight to augment its position in corporate and government sectors. Terms were not disclosed. Banc of America mFoundry Mobile banking and payments systems BofA makes an investment in Strategic mFoundry and joins PayPal, Investments Motorola, NCR and several other venture firms. mFoundry has extensive links to processors and banks (Citibank, for instance) in mobile banking and payments. US Bank, and Mpayy eCommerce and mobile commerce solutions UB Bank and others invest an others undisclosed amount in Series B financing in this online, mobile and widget based payments company which launched in Q1 2008.

PlaySpan PayByCash Alternative payments processor PayByCash emphasizes the gaming and social networking website sector. PlaySpan, backed by $5 million in venture funds provided by Easton Capital, Menlo Ventures, STIC and Novel TMT is a gamer’s commerce network..

Dorado Industries (310) 544-1316 655 Deep Valley Drive, Suite 125-P 13 [email protected] Rolling Hills Estates, CA 90274 www.doradoindustries.com M&A/Alliance Activity - Continued

Buyer Target Payments Emphasis Possible Strategy Sovereign Wealth CellCard Cell phone based payments, marketing, and rewards Here’s one for your 401(k). Corp Multimedia Solutions Sovereign is a shell with Endless Rewards holdings in South Africa and (licensing agreement) other ports of call. Paying an undisclosed amount for two relatively non-descript companies in mobile payments and picked up a licensing agreement with an AU firm. One enables retailers to send customized messages to customers’ phone to which the customer can purchase the products or services being promoted. The other supports MMS (multimedia messaging service communications. A trifecta to be sure.

Dorado Industries (310) 544-1316 655 Deep Valley Drive, Suite 125-P 14 [email protected] Rolling Hills Estates, CA 90274 www.doradoindustries.com M&A/Alliance Activity – Some things didn’t go right

Buyer Target Payments Emphasis Possible Strategy First Data JP Morgan Chase Merchant acquiring As expected, FDC and Chase split the sheets on Chase Paymentech with the bank keeping 51 percent of the ventures assets and most of its employees. FDC will continue to provide processing services. Pipeline Innovative Resource Prepaid cards Announced in November, 2007, Alliance Pipeline put the IRA deal on hold until certain merchant portfolio acquisitions are consummated.

Dorado Industries (310) 544-1316 655 Deep Valley Drive, Suite 125-P 15 [email protected] Rolling Hills Estates, CA 90274 www.doradoindustries.com M&A/Alliance Activity - Summary

Merger and acquisition continues to be a significant factor in payments. We continue to use a three-way model for distilling M&A activity since it seems to capture market activity pretty well.

1.Money Plays 2.Product Plays 3.Infrastructure/Distribution Plays

As noted on the following page, infrastructure and distribution acquisitions out-distanced all others.

Dorado Industries (310) 544-1316 655 Deep Valley Drive, Suite 125-P 16 [email protected] Rolling Hills Estates, CA 90274 www.doradoindustries.com M&A/Alliance Activity - Summary

Money (or lack Infrastructure / thereof) Plays Product Plays Distribution Plays

• Catalyst Fund/iSend/Progress • Heartland/ADS • Carlyle/De La Rue • PE/IP Commerce • First Data/Eufiserv • NetSpend/Skylight • PE/LinkedIn • GCA/Cash Systems • PlaySpan/PayByCash • PE/TxVia • eTelCharge/Payment • MPOWER One • Bayside/Pendum • US Bank/Mpayy • BofA/mFoundry • Sovereign

Dorado Industries (310) 544-1316 655 Deep Valley Drive, Suite 125-P 17 [email protected] Rolling Hills Estates, CA 90274 www.doradoindustries.com