Dorado Trend Watch Q1 2011


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Cheeky quarterly electronic payments industry synopsis

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Dorado Trend Watch Q1 2011

  1. 1. TrendWatch 2.0 Q1 2011 Payments System Industry SynopsisNotice: Materials contained in this document are drawn from several media sources and Dorado Industries is not responsible for their accuracy. Opinions expressedherein are presented without warranty. Brand names are the trademarks of their respective service offerors.
  2. 2. Editorial Comment Random Thoughts BFD: Bernanke Fails Durbin and the rest of the financial Duck, duck, goose. So, the highly regarded consumer products services industry by warning that the agency will not meet the testing outfit, Consumers Union, decided to determine what’s the April 21 date for the Fed’s final rulings on how Senator Durbin’s best form of purchasing financial services for the paycheck-to- amendment is going to be implemented. So issuers, networks, paycheck consumer – prepaid cards or low balance, low fee and processors won’t see the final specifications any time soon checking accounts with some of the nation’s better known banks and but everyone needs to be compliant by July 21, 2011? Seems credit unions. like a tall order to us, Ben. Their conclusion? Go with the bank account over prepaid cards We’re from the Federal government; we’re here to help. The every time. Interesting, but we wonder if Consumers Union Obama administration has released its strategy to protect considered these thoughts: consumer and business identities by launching its National – How many of the theoretical test population actually have Strategy for Trusted Identifies in Cyberspace. This “Identity enough in cash reserves to meet the minimum deposit and Ecosystem” embodies a single identity credential that would be balance maintenance thresholds? As the economy continues software-based for storage on smartphones, smart cards, or in a to flounder, we suspect the number will shrink. token and is designed to replace the multitude of IDs and – In light of recent legislative changes, how long will today’s passwords we use every day. Right! Guess how many published rules and fees associated with low balance/low fee governmental agencies lost our personal data records between accounts remain intact? 2003 and 2006 – nineteen separate agencies including the Office of Homeland Security, Social Security Administration, – If CU’s findings are accurate, why aren’t banks and credit unions abandoning this type of account in favor of prepaid Department of Veteran Affairs, and the Department of cards? We can find only one noteworthy FI with plans to Commerce (which also has lost 1,137 laptop computers chase this segment with prepaid. containing personal information on Americans since 2001). Any chance we can opt out of this one? Probably not. – In light of the research findings, how does CU explain the dearth of low-balance/low-fee accounts on the books of banks Speaking of the government, what are we missing here? and credit unions? Could it be that a goodly amount of the The US Postal Service announces plans to sell gift cards at consumers considered under the research don’t want to do 2,000 USPS branches beginning in May. To add allure to the business with mainstream FIs in the first place? Might change product, the organization will also sell greeting cards. Is it just the outcome a tad if considered. us, or does the thought of going to a post office to pick up the ACH do over. One year ago we ranted over the need for ACH interchange. same “gift” that hangs on J-hooks literally everywhere in the U.S. 2010 growth rate in consumer initiated WEB payments? Another 7.4 sound a little far-fetched? Watch for postal rates to rise soon to percent! A word to the wise. cover the cost of this debacle. Until next time.Dorado Industries (310) 544-1316655 Deep Valley Drive, Suite 125-P 2Rolling Hills Estates, CA 90274
  3. 3. Table of Contents 2011 Predictions 4 TrendWatch Scorecard/Summary 5 2011 Payments Industry Yields 6 Interesting Quarterly News That Got No Respect 7 M&A/Alliances Activity 10 Useful Links for More Information 16Dorado Industries (310) 544-1316655 Deep Valley Drive, Suite 125-P 3Rolling Hills Estates, CA 90274
  4. 4. 2011 Predictions • Despite good efforts to the contrary and Visa’s plan to support dual interchange schedules, exempt debit card issuers will suffer major product profitability declines as a consequence of Durbin. Mar. 11: Won’t know until the end the year. Sit tight. • A major retailer will take first-mover action to propel mobile payments out of its holding pattern in cottage industry land – doesn’t include early players McDonald’s, Starbucks, Coca Cola, or Jack in the Box. Mar. 11: Major retailers at the Alternative Payments Systems Innovation conference stated that they wanted lower costs, shorter lines, strong security, dial tone reliability, easy implementation, and low maintenance in mobile payments. A tall order; might not happen this year. • Isis, the mobile payments consortium, will launch to a lukewarm response. Mar. 11: Didn’t see any skyrockets when Isis announced its 2012 (really?) transportation pilot in Salt Lake City. • Major retailer profits will grow in the second half of 2011 but we will not be able to cite Durbin as the reason. (And, if the issue is raised, the MPC will brush it off.) Mar. 11: Waiting to see what happens in Q3 and Q4. • Having lost the pricing advantage between their products and POS debit, two providers of alternative payments schemes will fold or sell out cheap. Mar. 11: Again tied to the Fed’s final rules – which won’t be ready by April 21 as required. Nice. • Starbucks will selectively open use of its proprietary prepaid card to retail partners. Target, with its 1,000 in-store coffee facilities, might be first. Mar. 11: Nothing yet but it’s going to happen!Dorado Industries (310) 544-1316655 Deep Valley Drive, Suite 125-P 4Rolling Hills Estates, CA 90274
  5. 5. TrendWatch Scorecard/Summary – Q1 2011 Industry Players To Watch Large Issuers: Particularly those doing bonehead things like limiting transaction amounts for debit. Loss of market share predicted. Facebook: Bought two mobile-related companies in Q1 and formed a payments subsidiary. Is the Bank of Facebook coming soon? MPC: Quiet all quarter – something’s brewing. ct Positive m d pa el ct r I che Stripe: Very stealthy mobile payments processor that claims its approach ev Im pa Mixed yL en “doesn’t suck.” Catchy tag line. y P a tr str it En Negative tiv ye du FSV Payments Systems: FSV raises its second round of privatelyAc In funded equity funding and might be posturing itself for a serious equityMed 1. New Payment Forms run. Prepaid Program Managers: Green Dot and NetSpend hammered byMed 2. ATM Restructuring the market – both guys and the other GPR guys may need to do something quickly.Low 3. POS Volume Trend The Fed: Failure to delivery Durbin rulings on time will frustrate issuers and networks. Look for an appeal by Bernanke to roll off the 7/21 date.High 4. Legal/Regulatory IssuesMixed 5. Prepaid Card Growth Market & Industry Situation 1 – Sqwizz, Stripe, Android/VeriFone; it’s getting ugly out there.Med 6. Earnings Announcements 2 – Lots of talk around wireless and ATMs. Might change the game. 3 – Q1 doldrums and tax season blues have set in.Low 7. Industry Investments 4 – TCF litigation, Fed’s failure to deliver final rules, Tester delay bill. 5 – IRS and other agencies working hard to strip out paper from the system. 6 – Mortgage mess and OD opt-in requirement deliver a one-two punch. 7 – VC activity was down seven percent quarter over quarter.Dorado Industries (310) 544-1316655 Deep Valley Drive, Suite 125-P 5Rolling Hills Estates, CA 90274
  6. 6. 2011 Payments Industry YTD Yields The secular rally begun in Q3 2010 continues to chug along making pretty much everyone but those in the prepaid space (they’ve been Durbin-ed) pretty happy. The Dow Jones and S&P yardsticks put up returns in the 4-6 percent range while several of our payments basket of equities posted 2X and 3X yields. Please, Mr. President, fewer speeches and more trips abroad for 2011. Industry Player 12/31/2010 3/31/2011 Price  Cap Value  YTD 2011 Yield Alliance Data Systems $ 71.03 $ 85.89 $ 14.86 $ 884.2 20.9% Cardtronics $ 17.70 $ 20.35 $ 2.65 $ 107.9 15.0% Discover Financial Services $ 16.68 $ 24.12 $ 7.44 $ 3,577.9 44.6% Euronet Worldwide $ 17.44 $ 19.33 $ 1.89 $ 95.3 10.8% Fidelity National Information Services $ 27.39 $ 32.69 $ 5.30 $ 1,011.2 19.4% First Data (Future Use) Fiserv Inc. $ 58.56 $ 62.72 $ 4.16 $ 648.5 7.1% Global Cash Access Holdings $ 3.19 $ 3.27 $ 0.08 $ 6.2 2.5% Green Dot $ 56.74 $ 42.91 $ (13.83) $ (563.6) -24.4% Heartland Payment Systems $ 15.42 $ 17.53 $ 2.11 $ 78.9 13.7% Jack Henry & Associates $ 29.15 $ 33.89 $ 4.74 $ 397.7 16.3% MasterCard Worldwide $ 224.11 $ 251.72 $ 27.61 $ 3,572.7 12.3% NetSpend $ 12.82 $ 10.52 $ (2.30) $ (201.9) -17.9% Online Resources $ 4.65 $ 3.78 $ (0.87) $ (25.8) -18.7% TNS $ 20.80 $ 15.57 $ (5.23) $ (131.3) -25.1% Total System Services $ 15.38 $ 18.02 $ 2.64 $ 521.1 17.2% Visa $ 70.38 $ 73.62 $ 3.24 $ 2,740.7 4.6% Sources: Company releases,, 2011 YTD yield excludes dividends; based on 3/31/11 and 12/31/10 closing pricesDorado Industries (310) 544-1316655 Deep Valley Drive, Suite 125-P 6Rolling Hills Estates, CA 90274
  7. 7. Interesting News This Quarter Subject Source/Date Substance PayPal PayPal Blog • Happen to have a couple hundred thousand American Airlines, US Airways, or Aeroplan miles February getting dusty (or worse, about to expire)? Now you can convert them into a funding source for your PayPal account through a new relationship between PayPal and Yet another example of how a shadow currency is moving into the light. FB Credits is the other. Facebook Digital Transactions • Facebook quietly files incorporation papers in Florida in December 2010 for the formation of March Facebook Payments, Inc. and has recently advertised for a unit controller. Apparently FB is inching up on monetizing its already lucrative Credits program (FB takes 30 percent of all digital media sales). You may have seen that Warner Bros. now accepts FB Credits for movie purchases and rentals. Total Systems Paybefore News • Generally known for its sleepy demeanor, Total Systems has been posting some company first’s February of late. Just eight months after cutting a JV deal, it swooped into the merchant acquiring business by buying out its joint venture partner First National of Omaha. TSYS is now in the mobile payment, loyalty and e-commerce business through a partnership with CASSIS International. Our advice to Mr. Thain Yee Chua, CEO at CASSIS, is to stay alert. Xipwire PaymentsSource • Not all forms of P2P and other mobile payments are gearing up to be the darlings of the iTunes January app store. Take, for instance, Xipwire pronounced “zip wire,” a Philadelphia start-up that uses standard text message formatting to allow payments on virtually any mobile device, not just smartphones. Because of its low-tech approach, the company asserts that the barriers to use and acceptance are lower – and to prove the point, the company is targeting restaurants and smaller retailers. American Express Finextra • People waiting to see how American Express plans to recoup its $300 million purchase of March Revolution Money can now relax. AMEX has launched “Serve,” a digital payments and commerce platform that allows consumers (note the missing reference to “members”) to make purchases and conduct P2P transfers online and via mobile phones. Ticketmaster, Concur and Flipswap are the initial retailers in the program. Secure follows the PayPal model to a close degree and any number of bank accounts, credit, debit and charge cards are supported. In making this move, AMEX has aligned itself for the moment with Visa and MasterCard in challenging PayPal’s dominance in electronic and mobile commerce. The other market player, Discover, has opted to align itself with PayPal via its Money Messenger service. Should be good theater.Dorado Industries (310) 544-1316655 Deep Valley Drive, Suite 125-P 7Rolling Hills Estates, CA 90274
  8. 8. Interesting News This Quarter – Continued Subject Source/Date Substance Acculynk American Banker • Not long after Acculynk took on the decades old (but unofficial) ban on PIN debit transactions over January the Internet, the company has developed PaySecure Mobile. The security method used in the mobile version is similar to the online version using a virtual PIN scrambling key pad for entry of secure information. No issuers have stepped in to endorse PaySecure Mobile but the company claims to be closing in on a few big fish. ProPay American Banker • ProPay launches Zumogo, a new social media payments tool for mobile phones. The Zumogo app February searches a local market for participating merchants using on-board GPS technology. Participating merchants use in-app messages to offer coupons and sales incentives to the user. Like other mobile app start-ups, ProPay has targeted the restaurant industry because of the social nature of dining. For now, merchant participants are located in Park City, Utah. Other markets to follow we’re told. NFC Data American Banker • NFC Data, a Chicago start-up launched by Ken Mages, recently late of HomeATM, plans to launch March Sqwizz, a keychain fob that essentially converts non-NFC enabled phones into payments makers. Moreover, the device includes an LED screen and key pad for PIN entry. An on-board connector works with the audio jack on most phones enabling fob-to-cell communications. The jury panel hasn’t even been formed on Sqwizz as yet so we may not even see this the product come to market. includes a cool photo of the device but not much else. Google Finextra • Search giant Google has cut a deal with MasterCard and Citibank to enable Android handsets to March communicate with specially designed terminals built by VeriFone. Google is paying for the terminals and doesn’t intend to take a cut of resulting transaction fees. Instead, Google will recoup its investment by selling customer behavior data to participating retailers and by targeting ads to users strolling past merchant locations. Internal Revenue Service/ PaymentsSource • The Federal government continues its attack on paper checks. Starting with the 2010 tax year, the IRS Green Dot January will offer MyAccountCard, a prepaid debit card being offered in lieu of a paper refund check. Bonneville Bank, the financial institution Green Dot is attempting to acquire, will issue the cards. The IRS issues 45 million refund checks each year at a cost of $40 million. MyAccountCard is structured as a GPR to avoid Durbin constraints on pricing. Not surprisingly, Green Dot will administer the program.Dorado Industries (310) 544-1316655 Deep Valley Drive, Suite 125-P 8Rolling Hills Estates, CA 90274
  9. 9. Interesting News This Quarter – Continued Subject Source/Date Substance Isis NFC News • Isis has selected Salt Lake City to launch a mid-2012 pilot of its mobile payments offering. Isis and the April Utah Transit Authority will collaborate to allow NFC-phone enabled consumers to make purchases and use the city’s mass transit system with their handsets. Isis is a JV consisting of AT&T, T-mobile, Verizon, Barclaycards, and Discover. SLC is a good place to start; although ranked 43rd in terms of city population within the U.S., the city’s mass transit ridership ranks 18th. HP Press Release • HP, the world’s largest seller of PCs and printers, launches HP Prepaid Card Services as part of its Card March and Payments Services division. HP entered the payments market through its 2008 acquisition of EDS and lays claim to processing for 68 million credit cardholder accounts and 3.1 million merchant relationships. A bank in Australia is the first to sign with the new HP unit. Gratio Capital American Banker • Gratio is a start-up two years in the making and flush with $4.0 million in investor funds including a slug January of it from Bertrand and Roy Sosa, founders of NetSpend and Mango Financial. The company issues its GoalPack cards for use by recipients to begin or add to a savings/investments plan. Card funds can be redeemed online, through a handful of credit unions, or at the Mango store in Austin, Texas and are invested in one of three mutual funds or a savings program. The target audience is that segment of the underserved market interested in longer term savings or retirement. Minimum loads at $25. NACHA/FIS Digital Transactions • Nacha and FIS (the processor that brought you SCAN and ChexSystems) launches Terminated Originator April Database (TOD) a service designed to identify businesses that banks have cut off from ODFI service access because of high risk or past fraudulent activities. This collaborative network is similar to Member Alert to Control High Risk (MATCH) used in the card acquiring space. Sounds like a right-time/right place situation given the recent growth in ACH transactions. Perhaps interchange might change things?Dorado Industries (310) 544-1316655 Deep Valley Drive, Suite 125-P 9Rolling Hills Estates, CA 90274
  10. 10. M&A/Alliance Activity Buyer/Investor Target Payments Emphasis Possible Strategy Sequoia Capital Square Mobile merchant services Sequoia leads while Khosla and others return for Khosla Ventures another $27.5 million in funding that puts Others Square’s valuation at approximately $240 million. Q1 transaction volume of $40 million has been estimated by insiders. Meanwhile Jack Dorsey, Square’s founder and “CEO for life,” has returned to Twitter to head product and as executive chairman. BlueRun Ventures Kabbage eBay seller capital advance Institutional investors plunk down $6.65 million to UPS Strategic enable start-up Kabbage to expand its cyberspace Enterprise Fund retailer advance line business tied, for now, to eBay. This tranche increases Kabbage funding to $8.85 million. Kabbage advances aren’t cheap; 6 to 16 percent fees are standard. Then again, where can eBay sellers go for financing? TomorrowVentures Mozido Mobile payments processor Dallas-based Mozido secures an unspecified amount of financing through TomorrowVentures. The company provides white-labeled mobile transaction services targeted at the under-served market segment. The company operates in a pretty stealthy manner for being over five years old.Dorado Industries (310) 544-1316655 Deep Valley Drive, Suite 125-P 10Rolling Hills Estates, CA 90274
  11. 11. M&A/Alliance Activity - Continued Buyer/Investor Target Payments Emphasis Possible Strategy American Express Payfone Mobile payments What’s very interesting about the latest $19 million Verizon Investments investment in Payfone is that American Express has the Rogers Ventures lead. This is the second departure from standard behavior posted by AMEX this quarter (see our note on the card company’s “Serve” P2P offering.) Both the Payfone investment and Serve platform illustrate a new willingness for AMEX to play in the entire payments arena, not merely at the higher end. Ingenico Hypercom US POS terminals/systems Hypercom snubs ViVOtech and selects French EFTPOS payment system operator Ingenico as the buyer of its US payment system business business. Ingenico will pay merely $54 million in cash for the right to battle VeriFone for market share. VeriFone is paying $485 million for all of Hypercom but doesn’t want the DOJ hassle over antitrust issues in the U.S. InterWest Partners Aria Systems On demand billing and Aria Systems adds $30 million to its existing $14 Hummer-Winblad subscription management million in funding to expand its online transaction Venrock processing service for providers like Disney, DreamWorks, Roku and VMware. Aria provides behind-the-scenes subscription billing and management applications for payment processors like, Chase Paymentech, PayPal, and WorldPay. Wright Express rapid! PayCard Prepaid card program operator Wright Express, the 800 pound gorilla in fleet fuel and related prepaid programs, acquires rapid! PayCard (clunky name, don’t you think?), a provider of e-payroll and e-wallet solutions. Cash plus incentives involved.Dorado Industries (310) 544-1316655 Deep Valley Drive, Suite 125-P 11Rolling Hills Estates, CA 90274
  12. 12. M&A/Alliance Activity - Continued Buyer/Investor Target Payments Emphasis Possible Strategy Bessemer Venture BillGuard Billing error/fraud detection system BillGuard, a private beta start-up, uses Partners proprietary algorithms and user submitted data IA Ventures Others to aggregate, analyze, and report on service subscriber credit card activity. The service claims to be able to detect the incidence of hidden fees, scams, and fraudulent transactions existent in (for now) credit card accounts. Institutional and private investors have provided $3.0 million in angel funding. Core Innovation Plastyc Online and mobile money management The investment partner of the Center for Capital Financial Services Innovation invests $2.0 million in Plastyc, a firm specializing in providing prepaid card services to the underbanked and teen market segments. The company’s iBankUP platform provides mobile banking, e-check writing, prepaid phone top- ups and Facebook access positioned as a premium service for underserved segments. FIS GIFTS Software Cash management and international Integrated banking services processor, FIS, banking ASP pays an undisclosed amount for GIFTS Software, a specialist in AML, cash management and international services provider. GIFTS claims relationships with seventy multi-national banks including BBVA, China Merchants, and National Bank of Canada.Dorado Industries (310) 544-1316655 Deep Valley Drive, Suite 125-P 12Rolling Hills Estates, CA 90274
  13. 13. M&A/Alliance Activity - Continued Buyer/Investor Target Payments Emphasis Possible Strategy TomorrowVentures Twitpay Social management and mobile Twitpay uses Twitter’s mobile messaging platform to CompuCredit payments provide a platform-as-a-service (PaaS) function to non- profits seeking donations and social gaming developers. In addition, Twitpay has partnered with InComm, the US- based transaction processing provider to enhance its prepaid settlement and fulfillment services. The amount of funding has not been disclosed but being able to link payments processing with social media should fetch a pretty sweet deal for all parties. Visa PlaySpan Cyberspace payments platform Visa pays $190 million plus earn-out potential for PlaySpan, a premier provider of transaction processing services for purchase of digital goods, a $25 billion segment in 2010. We first noted PlaySpan in 2008 when its institutional funding reached $24 million and its distribution network for its PayByCash product had reached 200,000 outlets. Coupled with Visa’s 2010 Cybersource acquisition, the card company is undeniably the payments leader in the currency-to-game credits realm. Nine individuals FSV Payment Prepaid card program manager The FSV management team roster – past and present – Systems reads like the Who’s Who of payments system veterans. Nine investors ponied up $6.0 million in an equity placement – its second such offering in less than two years. FSV provides branded payroll, rebate, GPR, and gift card programs to a wide range of retail market segments.Dorado Industries (310) 544-1316655 Deep Valley Drive, Suite 125-P 13Rolling Hills Estates, CA 90274
  14. 14. M&A/Alliance Activity - Continued Buyer/Investor Target Payments Emphasis Possible Strategy North Bridge Venture Paydiant Mobile payments Yes, folks, we have yet another mobile payments start-up Partners in our midst. Paydiant is currently operating in stealth General Catalyst Partners mode and says it will launch later this year. The company’s three founders are ex-Edocs veterans and a couple have a smattering of experience with SMS mobile payments as well. The two venture firms are funding $7.6 million in upfront development monies. Paydiant’s landing page slogan might reveal something about their plans – “Your brand, your customer, your mobile payments.” White label mobile payments? Pass the Advil. Metamorphic Ventures Fuze Prepaid reload network A couple of prepaid industry veterans launch Fuze Kickstart Seed Fund (highly over-used brand name, IMO), a provider of card reload site information coupled with a walk-in bill pay network. Metamorphic and Kickstart put up $1.2 million in seed money to finance growth. Fiserv M-com P2P mobile payments and Fiserv and M-com partnered in 2008 to develop banking ZashPay, the newish P2P offering being promoted by the integrated banking processor. Fiserv has now acquired its partner and integrated the offering into its CheckFree online payment service. Terms were not disclosed. PayPal’s founders and Stripe B2B and B2C payments Super-stealthy start-up Stripe raises $2.0 million in funds others from some very respected Silicon Valley investors. No one is talking about what Stripe will do or why it’s better than Square but you can visit to sign up for future updates.Dorado Industries (310) 544-1316655 Deep Valley Drive, Suite 125-P 14Rolling Hills Estates, CA 90274
  15. 15. M&A/Alliance Activity - Continued Buyer/Investor Target Payments Emphasis Possible Strategy Fiserv Maverick Network Prepaid card program Fiserv pays a sum reported to be less than $8.0 million Solutions operator for Maverick and its ten employees. Sale of the late term start-up left the state of Delaware and other investors holding a partially empty sack. While details are murky, it appears that only late entry investors made out okay while Delaware took a 60 percent haircut. Maverick operates branded GPR card programs for FIs and others. eBay GSI Commerce e-commerce and eBay pays a 51 percent premium over GSI’s trading interactive marketing price to acquire this integrated provider of merchant service and fulfillment functions. GSI’s account base totals 180 including well known retailers Toys r Us,, and Ralph Lauren. These and other retailers cover 14 merchandise categories, adding to eBay and PayPal positioning in virtual storefront operations and e- payments. Total consideration exceeds $2.4 billion based on current market prices. Bottom line (and to quote the Vice President): this is a BFD – Big Financial Diversification play.Dorado Industries (310) 544-1316655 Deep Valley Drive, Suite 125-P 15Rolling Hills Estates, CA 90274
  16. 16. Useful Links for More Information We threw a lot of new names out again this quarter. Here’s a list of links for you to learn more. Company Role Link Xipwire Plain vanilla mobile payments ProPay Social media/local merchant payments NFC Data Non-NFC mobile payments Isis Mobile payments consortium Gratio Capital Prepaid card based investment/savings Kabbage Retailer merchant advances Mozido Mobile payments – underserved Aria Systems Billing/subscriptions management Plastyc Online and mobile payments Twitpay P2P/C2B mobile payments Paydiant Mobile payments www.paydiant.comDorado Industries (310) 544-1316655 Deep Valley Drive, Suite 125-P 16Rolling Hills Estates, CA 90274