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.