trendwatch · new payment forms atm restructuring pos volume trend i n d u s r y i m p a c t...

© 2006 Dorado Industries, Inc.

TrendWatchTrendWatchPayments System Industry Synopsis

Q2 2006

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

2Dorado Industries655 Deep Valley Drive, Suite 125-PRolling Hills Estates, CA 90274

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www.doradoindustries.com

Executive Abstract

• The din surrounding VC funded start-up players and their new RFID and Near Field (cell phone) payments systems observed in Q1 has abated somewhat as segment competitors begin to concentrate on building consumer usage and merchant acceptance.

• Meanwhile, considerable attention has been paid in Q2 to alternative payment forms: the re-launch of BidPay (now part of Cybersource), PayPal Mobile, and Google’s online entry –Checkout.

• Interchange rates continue to draw attention in the US and internationally. Congress plans to study the matter through public hearings (Senate Judiciary Committee) while new information on the impacts of UK and Australian regulator actions suggest the presence of unintended consequences. At the state level, a bill has been introduced in the New York legislature that would cause interchange amounts to be calculated on purchases only, rather than today’s practice of including applicable taxes.

• Bank/merchant ATM co-branding for non-surcharge acceptance continues while at least two ATM ISOs contend with financial peril.

• M&A activity leaning in the direction of Europe as US players attempt to cash in on suspected market upheaval associated with implementation of SEPA.




Possible Q3 Events of Interest

• Results of Senate hearings on interchange.• Results of analysis performed on Visa Operating Rules when they are released to selected

merchants and third party processors later in the quarter.• Market reaction to First Data absent Western Union.• Announcements regarding new FIs issuing American Express and/or Discover cards.• Announcements regarding other processors joining with Discover Network.• Sale of a card management outsource processor.




Table of Contents

TrendWatch Scorecard/Summary 5Activities and Trends 6New/Enhanced Product Announcements 13Key Competitor Activities 14M&A/Alliances Activity 16Industry Personnel Changes 20Appendices 21




TrendWatch Scorecard/Summary

Activit

y Lev

el

Entre

nche

d

Payer

Impa

ct

Prepaid Card GrowthLegal/Regulatory Issues

New Payment FormsATM RestructuringPOS Volume Trend

Indu

stry I

mpact

Earnings Announcements Industry Players To WatchUS Bank/NOVA/Elan: Continues to be acquisitive in CU portfolios (160 to this point); unifying its 12,000 ATMs into a single network Fidelity Information Services: Waiting for results on formation of its own debit network.FDC: Analyst consensus suggests a more formidable competitor without WU. Fiserv: Aggressively pushing its non-surcharge network; first to accept PIN debit transactions through the Pay By Touch ATM Direct system.Bank of America: May launch a competing network brand, may not.Discover/PULSE: Issuers lining up, business products launched, FDC to acquire Discover transactions, major earnings turnaround.

Industry Investments

HIGH

HIGH

HIGH

Med.

HIGH

HIGH

Low

Positive

Mixed

Negative

Net Income (Millions)

Q/Q% Change

Visa n.a. n.m.Euronet 9.4$ 162.0%Fiserv 116.2$ -16.4%eFunds 10.7$ -10.4%Discover (Q2/06) 541.0$ 106.0%Alliance Data 56.4$ 56.7%Global Payments 30.1$ 29.3%Fidelity Information Serivces 39.4$ -11.7%MasterCard 126.7$ 35.9%American Express 873.0$ -7.7%First Data 373.7$ -0.2%Source: Morningstar.com, company earnings statements

Payments Company Financial Results - Most Recent Quarter

Market & Industry Situation1 – Significant non-FI activity in Internet and money transfers2 – FI-Retailer-ISO ventures blunt surcharges, raise volume3 – Contactless, signature, and PIN volume trends all positive4 – Congressional interchange queries accelerating;

Wal*Mart/Home Depot ILCs likely to occur5 – All major providers have been acquired; insurance

companies chasing HSA/FSA with banking charters6 – Mixed financial performance (top right table); M&A a

major contributor7 – Venture funding in payments subsiding for now




Activities and Trends - ATM

Emerging Shift in Market Structure• Over 8,000 ATMs included under new

agreements between banks and deployers for non-surcharged co-branding.

• US Bank now the second largest FI deployer of ATMs through Genpass acquisition.

• Provident Bank (Baltimore) signs up with US Bank’s MoneyPass network for non-surcharge access.

Major ISO Problems• TRM (17,000 units) sells part of its UK

operation, reports significant losses, and restructures its bank debt with GSO Capital Partners, a leveraged asset lender and fund.

• Global Axcess (5,000 units) retains investment banker to find a buyer; stock trades below $0.75. First Data liquidates 534,500 GAXC shares @ ~$0.70, reducing its holdings to 4.3 percent.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2/2/2005 6/22/2005 7/25/2005 10/18/2005 11/23/2005 3/28/2006 4/4/2006 4/7/2006 4/19/2006 5/19/2006 6/13/2006

150PNC

CardtronicsWalgreen

246JPMC

CardtronicsDuane Reade

100Amcore

Welsh SystemsWalgreen

33HuntingtonCardtronicsWalgreen

170CommerceCardtronics

CVS

900Sovereign

CardtronicsCVS

5,500Citibank

7-11

59HSBC

CardtronicsWalgreen

64BB&T

CardtronicsWalgreen

484Sovereign

CardtronicsCVS

Total units: 8,023

317JPMC

CardtronicsWalgreen

Multi-party Agreements for Surcharge FreeCardholder Access

An Alternative Approach

• Several FIs including TD Northbank and WAMU are waiving foreign fees and reimbursing surcharges.




Activities and Trends – Cards/Acceptance

Subject Source/Date SubstanceEnhanced Bill Payment American Banker

June 19, 2006• Yodlee launches a new bill payment service aimed at attracting

consumers seeking debit-based rewards. The new service, Yodlee BillPay, enables consumers to handle remittances through debit and credit cards along with traditional methods – ACH or check where necessary. As well as consumer benefits associated with rewardsprograms, FIs also gain interchange revenue through the use of the service. (The July 5, 2006 edition of American Banker reports that CheckFree has retaliated with a comparable product offering.)

Pay By Touch CardlineJune 6, 2006

Digital Transaction News

June 5, 2006Cardline

July 5, 2006

• Pay By Touch inked J. Paul Co., a promotional products provider as the first online merchant to use the company’s ATM Direct software to enable consumers to make PIN-debit purchases on the Internet.

• ACCEL/Exchange, the ATM/POS network owned by Fiserv, agrees to accept PIN-debit transactions processed over the Internet using ATM Direct capabilities.

• Zions Bank has installed Pay By Touch in twelve of its Utah branches for government and payroll check cashing.

Obopay American BankerJune 9, 2006

• Cingular Wireless LLC has opted to ignore PayPal’s Text to Buy m-commerce solution in favor of that offered by Obopay because of the provider’s unique revenue sharing arrangement with the carrier. Obopay charges 10¢ per text message payment and Cingular receives an undisclosed cut of the fee.





Subject Source/Date SubstanceFirst Data/Metavante Cardline

May 9, 2006Payment News

June 6, 2006

• Both processors announce new teaming agreements with healthcare specialty companies to emphasize FSA/HSA servicing.

• First Data and Medem, Inc., while offer the iHealth card, a combined health payments and eligibility tool using prepaid debit technology. First Data and PayFlex Systems USA will combine their respectivetechnology and benefit plan administration resources to offer a PayFlex card to large scale employers.

• Metavante has established a relationship with Value Eyecare Network, a marketer of eyeglasses over the Internet. Value Eyecare will use a Metavante prepaid card for eligibility and payment.

Home Depot Credit Union Journal

June 8, 2006

Insurance JournalJuly 5, 2006

• Home improvements giant Home Depot launches MiCash, a money transfer program utilizing two cards, one for loading cash to a prepaid account inside of HD stores and the second used by the recipient of the funds either in the US or offshore. Home Depot is also waiting on approval of its application to purchase Enerbank, an ILC presently owned by CMS Energy Corporation.

• Home Depot and Wal*Mart are notable inclusions in the list of 14companies seeking approval from the FDIC to operate ILCs. Othernotables on the list include Blue Cross/Blue Shield, Berkshire Hathaway, Ford, DaimlerChrysler AG, and Ceridian.





Subject Source/Date SubstanceNACHA Digital

TransactionsMay 8, 2006

• In a move seen as extending the life of paper checks, NACHA has approved a new form of electronic check conversation that allowsretailers to turn bundles of checks into ACH debits in a central location. By creating the BOC transaction, NACHA enables retailers to avoid the cost of lane upgrades and has effectively lowered the cost of merchant acceptance of paper checks.

Global Cash Access American BankerMay 8, 2006

• GCA, a processor for debit and credit transactions conducted at casinos has launched a private label credit card branded as “Arriva.” The account will allow cardholders to draw down the entire amount ofavailable credit as an advance and is designed to provide an alternative to general purpose cards that limit the amount permitted for cash advances. The private label card also allows Global Cash Access to avoid interchange and other fees associated with the gaming industry. CIT Bank will issue the cards and fund the receivables.





Subject Source/Date SubstanceBank of America American Banker

March 22, 2006

Various

• BofA and China Construction Bank enter into a bi-lateral agreement that permits each bank’s cardholders to utilize the other’s ATMs on surcharge-free basis. Bank of America is 9 percent investor in CCB.

• Based on the CEO’s comments first reported in the Wall Street Journalon April 24, 2006 there has been broad speculation that the bank may create a new network to compete against Visa and MasterCard. Ken Lewis subsequently back peddled from his earlier statement indicating that his comments were over-emphasized in the article.

Morgan BeaumontCompetisysDiscover Financial Services

ATM MarketplaceJune 13, 2006

• Morgan Beaumont, Competisys, and Discover will offer prepaid debit cards – gift, payroll, remittance and general spending – via kiosks through the Mexican American Grocer’s Association. Competisys will be the network operator, Morgan Beaumont the issuer and Discover the brand and product engine.

Debitman American Banker Online

May 22, 2006

• HSBC agrees to a strategic alliance with Debitman Card, Inc. HSBC will issue Debitman cards on behalf of its retailer customers and will support associated loyalty plans.

• HSBC also participated in a funding consortium with Cardinal VC and Selby Venture Partners to raise $8.7 million in Series B funding.





Subject Source/Date Substance

First Data/Visa CardlineJuly 5, 2006

• First Data and Visa agree to settle 2002 litigation over FDC’s practice of operating First Data Net as a closed system, avoiding VisaNet for “on us” transactions acquired and authorized by the processor. First Data will migrate its FDN relationships back to VisaNet.

PayPal American Banker Online

May 25, 2006

• GE Consumer Finance will issue the PayPal credit card, replacingWAMU Card Services. The new offering will be superior to that offered previously by WAMU because of rewards and single sign on attributes.

PayPal Payments NewsMay 25, 2006

• Yahoo! selected PayPal as its exclusive electronic wallet for use in paying for services purchased through the Yahoo! Websites. The move is seen as attempting to blunt the expected impact Google’s new Internet payments engine (Checkout) will have on web-based content purchases.





Conclusions Drawn: Issuers and their agents are striving to expand electronic payments into every corner of consumer behavior in an attempt to exploit existing interchange and customer revenue sources and to find new ones. QSR may have been the last “killer application” left, forcing experimentation in more sparsely populated arenas. We foresee more emphasis on:• PIN-less debit applications• No-signature and contactless debit• Form factor modifications and new applications beyond ring tones and other “light” content

Observed Trends: New, non-FI, competitors continue to target payments for market entry. Payment aggregation systems like PayPal (Mobile or otherwise) and Google’s Checkout may serve to disintermediate banks by incenting consumers to accumulate funds in electronic wallets designed for specific use with online retailers.

Despite the fact that retailers have yet to invest in the technology at the rate as card issuers, the huge numbers of contactless cards being rolled out by JPMChase, KeyBank, Citibank, and Wells Fargo (among others) should be sufficient to stimulate merchant deployments of contactless terminals.

Stored value card applications continue to expand as the health industry moves to adopt the technology for both claims adjudication and payment. United Healthcare and Blue Cross/Blue Shield are setting the future direction through creation of special purpose banks for funding and account management.




New/Enhanced Product Announcements

• American Express launches a butterfly mini card/key ring card.• MasterCard renames itself MasterCard Worldwide and launches a new three-ring corporate logo. • Discover Financial Services initiates a Business Card equipped with quarterly and annual online

statements, customizable limits, and monthly spend reporting attributes. Users also receive “PurchaseChecks” for use with suppliers who do not accept credit cards. Cardholders receive a 5 percent rebate on office products and 2 percent on gasoline.

• CheckFree offers aBreeze, a processing service allows a consumer to pay his monthly rent via a property management website; settlement occurs through the ACH.

• BMW Financial Services’ subsidiary, Mini FS, launches the Visa Minicard with a 1:$1 reward program on regular purchases and a 2:$1 benefit for purchases associated with motoring – gasoline, car washes, and highway tolls.

• National Health Partners announces its MasterCard branded CARExpress prepaid debit card program designed to support access to, and payment for, health care coverage for uninsured and self-employed individuals.

• CO-OP Financial Services signs a processing agreement with RewardsNOW to enable debit rewards support for those credit unions processed by the network.

• Fishback Financial, Transend, and Aliasware each announced new plans for delivering prepaid card solutions to the underserved market. Transend and Aliasware intend to include bill payment services tied to the new card and accessible via IVR, wireless, and web channels. DineroYa is the fourth such offering this quarter. Bank sponsor is BankFirst, network is Green Dot, issuer is the Florida chapter of the League of United Latin American Citizens.

• Wells Fargo will issue contactless credit cards in two formats: Visa Signature and Visa Platinum.• JPMorgan Chase will rollout 1.8 million contactless debit cards in the NY, NJ, and CT market; 30,000

merchants in the market now accept the new technology.• Financial Service Centers Cooperative will utilize 7-Eleven Vcom terminals for shared branch

applications including cash withdrawals, money transfers and deposits.




Key Competitor ActivitiesFirst Data/Star

Apr 25 2006: FDC and Wal*Mart partner to offer no-fee check cashing.Jun 20 2006: FDC begins debit and credit card processing for the 407 stores in the A&P grocery store chain.Jun 21 2006: Star re-signs Golden 1, the sixth largest CU in the US to a long-term network access and PIN debit processing agreement.Jun 22 2006: Extended its debit card processing relationship with The Golden One Credit Union.Jun 28 2006: First Data and ADP announce a strategic alliance to market TotalPay, a co-branded payroll card program.

Metavante/NYCEMay 1 2006: ATB Financial (Alberta) joins the NYCE Cross-Border Debit program, adding 420,000 cards to the Canada/US POS scheme.Jun 14 2006: Fifteen community banks in the Chicago area join NYCE.Jun 29 2006 Metavante agrees to acquire Vicor to support commercial bank wholesale lockbox and imaging operations.

.Fidelity Information Services

Nothing noteworthy announced.

FiservJun 1, 2006: Becomes the first payments network to accept PIN POS transactions conducted over the Internet.Jun 22 2006: Extended its network processing and switching agreement with Armed Forces Financial Network through 2009.

VisaApr 11, 2006: Announces new rate structure to attract small ticket retailers and its “No Signature Required” program for transactions under $25.Apr 28, 2006: Visa names four independent directors to its Board.May 17, 2006: Interlink posts a 43 percent increase in Q1 transaction volume.Jul 3, 2006: Visa and First Data settle litigation over First Data Net and on-us transaction processing.

MasterCardApr 20, 2006: Files suit against FIFA for its defection to Visa for World Cup sponsorship.May 25, 2006: MasterCard stock is priced at $39.00 and begins trading on the NYSE.Jun 28, 2006: Adopts the name MasterCard Worldwide and launches a new corporate logo.

American ExpressMay 25 2006: Increases dividend by 25 percent and offers to buy back 200 million additional shares.Jun 28 2006: Bank of America launches co-branded AXP cards and is dismissed under pending litigation.




Key Competitor Activities - Continued

Discover Financial ServicesJun 15 2006: Announces that four issuers have joined Discover Network – Alliance Data Systems, First Bank & Trust (Brookings, South Dakota), West Suburban Bancorp and Palm Desert National Bank.Jun 8 2006: Security Service Federal Credit Union, the nation’s tenth largest CU, renews its processing agreement with PULSE EFT Association.Jul 14 2006: Announces that First Data Corporation will acquire and route Discover credit card transactions and provide merchant support. Discover is rumored to have reduced its sales force by 50.

CO-OP NetworkApr 5 2006: United Heritage CU of Austin Texas selects CO-OP Network for ATM and debit card processing.May 6 2006: Announces patronage dividend of $10.4 million, a historical record.May 25 2006: Announces new corporate identity – CO-OP Financial Services.Jul 1 2006 Enroll $2.5 billion Randolph-Brooks FCU (Texas) for network and processing services.




M&A/Alliance Activity

Buyer Target Payments Emphasis Possible Strategy

Cardtronics TRM Corp. ATM Network RUMOR: On June 1, 2006, The New York Post reported on street rumors regarding the potential acquisition of troubled TRM by Cardtronics, the largest deployer of ATMs in the US. Any potential deal would be 3-4 months in the future.

Management Group

iPayment Merchant acquirer A group of executives led by the company’s CEO acquired the outstanding shares of iPayment for $43.50 per share and took the company private.

Coinstar Inc. Travelex Money Transfer Ltd

Money Transfer The acquisition gives Coinstar entry into the money transfer segment and 17,000 locations in 138 countries. Coinstar paid $27 million in cash.




M&A/Alliance Activity -ContinuedBuyer Target Payments Emphasis Possible Strategy

Sallie Mae Upromise College education savings plans SLM Corporation paid an undisclosed amount for Upromise, a consumption-based savings plan tied to 529 college savings accounts.

Link Interchange Network, Ltd. (UK)

Prepay Technologies, Ltd (UK)

Prepaid technology platform and card programs. Link buys a 17 percent interest in Prepay to capture a portion of the burgeoning prepaid card market in the United Kingdom. Financial terms were not disclosed.

Total Systems Card Tech (UK) Card management software TSYS pays $54.5 million for a software developer to expand its position in Europe. Card Tech has 190 customers in 70 countries.

Management Group ACE Cash Express Provider of underserved market services including check cashing, payday loans, money transfer services and prepaid card issuing.

Management group supported by JLL Partners Fund V L.P. offers $30/share (14 percent premium) for all the shares of ACE Cash Express. Imputed value of the transaction is $450 million.




M&A/Alliance Activity -Continued

Buyer Target Payments Emphasis Possible StrategyInComm Airtime Technologies Marketer of POS prepaid card and processes debit

transactions.InComm acquires a majority interest In Airtime, its third transaction in six months.

Online Resources Princeton eCom Online bill payment services. ORCC pays $180 million for Princeton eCom to capture a larger share of the EBBP market led by CheckFree. The transaction is expected to be dilutive to earnings in the $0.07-$0.10 range.

Stored Value Systems, Inc.

Gift Card Solutions Prepaid cards (closed system) SVS, a division of Comdata Corp., acquired the remaining 80 percent of GCS that it did not own. SVS supports open and closed system prepaid card programs.




M&A/Alliance Activity -Continued

Buyer Target Payments Emphasis Possible StrategyTransaction Systems Architects, Inc.

eps Electronic Payment Systems AG

EFT payments software TSAI adds eps to its stable of EFT software solutions and adds transaction processing, testing, as well as chargeback management tools. Aggregate purchase price is 28.2 million euros.

First DataBank of AmericaBB&TJPMorgan ChaseWachoviaWells Fargo

Primary Payment Systems DDA abuse and fraud detection First Data has re-syndicated its 80-plus percent ownership interest in Primary Payments resulting in a dilution. The resulting enterprise – Early Warning Services LLC will be owned by FDC and five large banks. The rumoredconsideration involved is $200 million.




Industry Personnel Changes

• Walter M. Macnee is named president of MasterCard WorldWide’s Americas region.• Christina Favilla has been named president of Discover Bank.• Ron Congemi will temporarily fill the position held previously by Debra Janssen.




Appendix

Materials presented on the following pages have been sourced through Yahoo Finance. Changes in the price of the common shares of First Data (FDC), MasterCard (MA), American Express (AXP) are compared against the same metric for the Dow Jones Industrial Average in the first chart. Total Systems (TSS), Euronet (EEFT), and Fiserv (FISV) are compared in the same way in the second chart while eFunds (EFD), Transaction Systems Architects, Inc (TSAI), and Fidelity Information Services (FIS) are tracked in the third chart.

Significant market events and/or announcements have annotated where a potential causal relationship is thought to exist between the events and share price movement.




Market Announcements/Impacts

05/25/06: MasterCard (MA) IPOs at $39.00.

06/29/06: BofA launches co-branded American Express cards.

04/24/06: AXP announces 18 percent net income growth.

05/23/06: First Data re-syndicates PPS to form Early Warning Services with five large banks.

04/24/06: Fiserv posts 23 percent increase in quarterly net income

06/14/06: Euronet wins money transfer licenses in Texas, Florida, and New Jersey.

1

2

3

4

1 234

5

56

6




Market Announcements/Impacts

05/03/06: eFunds (EFD) announces flat Q1 earnings.

04/25/06: TSAI announces 34 percent increase in Q2 EPS.

11

2

2

Observations:• Essentially a quiet quarter for all the payments players.

• Little in the way of M&A or new product announcements.

• Up- and down-ticks in earnings were greeted in an expected manner.

• Only TSAI, AXP, and Fiserv demonstrated consistent growth in share price (along with consistent earnings).

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