This document summarizes trends in the prepaid card industry, focusing on Green Dot and NetSpend as leaders. While both companies' stocks have struggled, they have continued growing revenue significantly through 2011. Green Dot relies on retail partnerships like Walmart for distribution, while NetSpend partners with check cashers and payday lenders. Both companies face challenges from increased competition from retail banks entering prepaid cards, as well as from American Express and partnerships like Kroger/U.S. Bank. Overall regulation is also increasing for the prepaid industry.

1. Safeway’s decision to IPO a minority stake of Blackhawk Network is yet another milestone in the evolution of the prepaid industry given its unique distribution
role in the broader value chain. Green Dot and NetSpend serve as bell weathers for the market value of program managers in the prepaid value... More
Figure 1 is the September Payments Industry Stock Price Tracker. The chart measures
current stock prices and market caps (as of September 28th, 2012) as well as movement
over the last 30 days, and year-to-date. Most companies across the payments value
chain experienced a strong September after mixed results in... More
September 2012
Payments Industry Stock Price Tracker
1 of 9 © 2012 First Annapolis Consulting, Inc.September 2012 Navigator
It has been two years since Green Dot and NetSpend went public after establishing themselves as early leaders in general purpose reloadable (GPR) prepaid
with unique distribution advantages. Today, both companies are still leaders in a prepaid market that is increasingly competitive. As such, we take a quick look
at trends and developments at Green Dot and NetSpend as well as the implications for the prepaid market.
Performance Trends
While the stocks of both companies have given investors pause, both Green Dot and NetSpend have continued to deliver meaningful revenue, generating $467
MM and $306 MM, respectively, in 2011. As... More
Revisiting Prepaid in the Context of Green Dot and NetSpend
Published by First Annapolis Consulting, Inc.
Navigator
Amidst Regulation, Unbanked Population Grows
The FDIC recently released its 2011 report from the second National Survey of Unbanked and Underbanked Households. Based on its survey of over 45,000
households, the FDIC found that the percentage of households that are unbanked has increased roughly 0.6% since 2009.
These research findings are consistent with First Annapolis’... More
Historically, debit card reward programs were employed by issuers to increase penetration, activation, and usage of debit cards among DDA customers.
However, the enactment of the Durbin Amendment dramatically changed debit economics and prompted issuers to reevaluate their debit product and deposit
account offerings. In an effort to control cost... More
Finalized in 1999, the Prompt Payment rule was designed to ensure that federal agencies pay vendors in a timely manner. The rule, enacted due to the
increased use of electronic payments in the government and the private sector, assesses interest charges against agencies that are late on their vendor
payments... More
The Prompt Payment Rule & Federal Agency Commercial Card Programs
Many aspects of the card payments business have remained relatively unchanged
for twenty years. Sure we saw the migration to EMV, the emergence and growth of
e-commerce, and the integration of loyalty and branding partners, each a significant
evolution, but the business of issuing a consumer card or processing a... More
Planning for Disruptive Change is an Imperative in the
Payments Industry
Blackhawk IPO and the Value of Prepaid Distribution
First Annapolis Fall Industry Events
Oct. 4
Commercial Payments
International
London Joel Van Arsdale
Oct. 8
BAI Retail
Delivery
D.C. Lee Manfred
Oct. 15
ABAAnnual
Convention
San Diego Josh Gilbert
Oct. 22
Money 2020
Expo
Las Vegas Lee Manfred
Oct. 23
Chicago Fed
Payments
Chicago Paul Grill
Nov. 7
FFIEC Payment Systems
Risk Conference
Arlington Ray Carter
Nov. 8
Commercial Payments
International
Chicago Frank Martien
Nov. 27
Co-Brand Partnerships
Conference
San Diego
David
Woynerowski
Debit Card Rewards – Not Quite Dead Yet
Apple’s iPhone 5 debuted September 21st after several months of fanfare and, as usual,
rumors that this might be the iteration that includes NFC technology for payments. These
theories were refuted in the days leading up to CEO Tim Cook’s keynote address at the
fall media event on September 12th... More
Apple’s Actions Spur Mobile Payments Speculation,
Present Opportunities

2. 2 of 9 © 2012 First Annapolis Consulting, Inc.September 2012 Navigator
Source: Company SEC Filings and Investor Presentations
Green Dot NetSpend
2009 2010 2011
2012
Q2
2009-
2011
CAGR
2009 2010 2011
2012
Q2
2009-
2011
CAGR
Operating
Revenue
$258.50 $363.90 $467.40 $136.70 34%
Operating
Revenue
$225.00 $275.40 $306.30 $85.30 17%
Operating
Margin
26.90% 19.00% 17.90% 13.80% n/a
Operating
Margin
15.90% 15.00% 18.70% 20.40% n/a
Net Income $40.60 $42.20 $51.50 $11.90 13% Net Income $18.20 $22.70 $33.20 $10.20 35%
# of Active
GPR Cards
2.7 3.4 4.2 4.4 25%
# of Active
GPR Cards
1.9 2.1 2.1 2.2 5%
Gross Card
Volume
($B)
$5.80 $10.40 $16.10 $4.00 67%
Gross Card
Volume
($B)
$7.60 $9.80 $11.20 $3.00 21%
Figure 1: Key Metrics of Green Dot and NetSpend
2009-2012 (Millions, unless noted)
Revisiting Prepaid in the Context of Green Dot and NetSpend
By Nirnay Sinha
It has been two years since Green Dot and NetSpend went public after
establishing themselves as early leaders in general purpose reloadable (GPR)
prepaid with unique distribution advantages. Today, both companies are still
leaders in a prepaid market that is increasingly competitive. As such, we take
a quick look at trends and developments at Green Dot and NetSpend as well
as the implications for the prepaid market.
Performance Trends
While the stocks of both companies have given investors pause, both Green
Dot and NetSpend have continued to deliver meaningful revenue, generating
$467 MM and $306 MM, respectively, in 2011. As indicated in the table below,
Green Dot has delivered strong growth in revenue, active cards, and gross
purchase volume. However, Green Dot’s operating margins have gradually
declined year over year in light of continued pricing pressure as well as
increased revenue share payments to distribution partners. Nonetheless,
Green Dot generated over $3,800 in purchase volume and $111 in revenue
per active card during 2011, increasing from $3,000 volume per card and
$107 revenue in 2010. To date, Green Dot has relied on a retail distribution
model highlighted by its partnership with Wal-Mart, as well as partnerships
with Walgreens, CVS, Rite-Aid and others.
NetSpend, in contrast, has shown steady growth in operating revenue and
gross card volume while increasing operating margins. Specifically, net
income has improved by 35% from 2009 to 2011, largely driven by the growing
number of customers that use direct deposit to reload their cards. NetSpend
generated $5,300 in purchase volume and $145 in revenue per active card in
2011, compared to $4,700 and $131 respectively in 2010. It has been a leader
in ‘meeting the underbanked consumer where they are’ and earns 60% of its
revenue through alternative financial service partnerships with check cashers,
payday lenders, and tax providers. The largest of these alternative services
partnerships is with ACE Cash Express. In addition, NetSpend has diversified
its card distribution approach through partnerships with Experian, Creditcards.
com, BET Network and others.
Potential Challenges to Industry Incumbents
Retail banks have historically been skittish on establishing a broad presence
in the prepaid market, but the Durbin Amendment has expanded their interest
as a means to replace a portion of lost debit card revenue. BB&T and Regions
were amongst the first large banks to offer a GPR prepaid card and have since
been joined by several others including the highly publicized product launch
of “Liquid” by Chase. While it is too early to judge the latest prepaid efforts of
banks, their actions alone will put pressure on pricing and other areas such as
distribution/customer access. As an example, Chase’s new “Liquid” product
poses a significant threat given the reach, deep pockets, and marketing
muscle of Chase. Chase recently completed piloting the program and is in
the process of rolling the Liquid card out across its network of 5,500 branches
and 17,500 ATM locations. Coupling its physical network with its Smartphone
remote deposit capabilities, Chase Liquid has the potential to provide greater
access to customers for both deposits and withdrawals avoiding reload and
ATM fees in the process.
Incumbents in the prepaid market will need to adapt to other threats brought
upon by increased competition. American Express has invested heavily in its
prepaid product suite and secured several attractive distribution arrangements.
Prepaid is highly strategic to American Express as an entry product and brand
building vehicle to new customer classes notably the younger demographic.
Taking note of the Walmart Money Card strategy, Kroger and U.S. Bank are
partners with the potential for a powerful “one-two punch” given the reach of
Kroger’s distribution and the strength of the U.S. Bank franchise. The grocery
channel is the most attractive channel for closed-loop gift cards and is well-
positioned for open-loop success given the foot traffic and frequency of visit
dynamics.
Finally, the prepaid market is not immune to the regulatory scrutiny sweeping
the financial services industry. The Consumer Financial Protection Bureau
recently announced an “advanced notice of proposed rulemaking”, and
is seeking input on a range of topics including cardholder terms and fee
structures. The implications on the industry are yet to be determined, but
prepaid will certainly face more regulatory scrutiny than it has in the past if for
no other reason than its growth.
Longer Term Stakeholder Implications
Irrespective of their recent stock market challenges, Green Dot and NetSpend
have advantages in prepaid that others have yet to replicate and that may be
the real wake up call for the industry given the number of niche specialists in
the segment. To state the obvious, both Green Dot and NetSpend have built
franchises that generate hundreds of millions of dollars in revenue. Behind that
revenue is scale, distribution, and insights into customer and product behaviors

3. that are extremely valuable and unique in the prepaid space. Both companies
have made investments to diversify their businesses in different ways. Green
Dot built a reload network, acquired Bonneville Bank (renamed Green Dot
Bank) and Loopt, [a mobile services platform] while NetSpend diversified into
payroll cards several years ago with the Skylight Financial transaction. Both
companies are top of mind when others are seeking partnerships for program
management.
You would be hard pressed to identify a market segment that was any hotter
than prepaid in recent years. Venture capital and private equity investment
was rampant; buyers were routinely rebuffed by potential sellers; start-ups
were prevalent across the value chain; thousands attend conferences far and
wide; use cases seemed like an endless stream of growth and international
markets were icing on the cake. We are still bullish on prepaid as a product,
but would not be the least bit surprised if there was a shake-out in the
market. Payments businesses are scale-based with a long track record of
consolidation over time across the value chain. While there is a spotlight on
the stock market performance of Green Dot and NetSpend, the bigger story
may be the implications for many other industry stakeholders as it relates to
their ability to achieve scale, deliver shareholder returns, and address a new
set of industry challenges.
For more information, please contact Nirnay Sinha, nirnay.sinha@firstannapolis.
com; John Grund, john.grund@firstannapolis.com; or Josh Gilbert, josh.gilbert@
firstannapolis.com
3 of 9 © 2012 First Annapolis Consulting, Inc.September 2012 Navigator
Blackhawk IPO and the Value of Prepaid Distribution
By John Grund
Safeway’s decision to IPO a minority stake of Blackhawk Network is yet
another milestone in the evolution of the prepaid industry given its unique
distribution role in the broader value chain. Green Dot and NetSpend serve
as bell weathers for the market value of program managers in the prepaid
value chain, but the importance of distribution is evident in their respective
business models. However, the two largest distribution players – Incomm
and Blackhawk – are privately/closely held (although Warburg Pincus recently
made a minority investment in Incomm) and among the most interesting
companies in prepaid. It is important to note that both Incomm and Blackhawk
are more than pure play distribution entities given the technology, products/
services, and platforms resident in each company. That being said, both enjoy
highly advantaged positions in the prepaid value chain given the dynamics of
distribution and as an affiliate of Safeway, Blackhawk is particularly unique in
that regard.
Any IPO (or investment in the case of Incomm/Warburg Pincus) is
fundamentally a story about future growth which begs the question on the
direction of third party distribution. Will consumers adopt mobile in a way that
shifts card acquisition from physical distribution in any meaningful way? Will
Blackhawk and Incomm be major players in the mobile wallet space and be
able to transfer their strengths in physical distribution to the digital space? Can
physical distribution be leveraged in ways beyond prepaid to open up entirely
new growth vectors? Is the runway for international growth robust? Will
entirely new third party distribution models emerge with the likes of Facebook,
Groupon, Amazon, etc.? Can a retailer-led initiative such as MCX (Merchant
Customer Exchange) eventually be a platform for gift card distribution? Will
some combination of forces drive distribution margins down over time? The
market will be the ultimate judge, but to date, distribution-based business
Founded/Launched • Launched in 2001 as a division of Safeway, Inc.
Distribution Reach
• 72,000 retail outlets
• Over 90% of store locations of the Top 50 grocers in North America
Geographic Markets Served
• Offices in the United States, Australia, Canada, France, Mexico and the United Kingdom
• Operates in 17 countries with plans to enter China and Brazil
Channels
• Retail Stores
• Online (www.giftcardmall.com)
• Mobile (www.gowallet.com)
• International
• B2B
Core Products/Service
• Closed-Loop Card Distribution
• Open-Loop Card Distribution
• Program Management
• Financial Services
• Secondary Prepaid Market Platform (Recent Acquisition)
• Telecom Products
• Digital Content
Sample Branded Offerings
• PayPower: Open-Loop Visa Prepaid Card
• GoWallet: Online and Mobile Digital Wallet
• REloadit Network: Reload Prepaid Cards
Financial Metrics
• 2011 Operating Revenue $752M (+30%)
• 2011 Pre-tax Income: $62M (+64%)
• 2011 Adjusted EBITDA: $78M (+30%)
Figure 1: Blackhawk at a Glance
Source: Goldman Sachs 2012 Global Retailing Conference, company websites and press releases, and Safeway 2011 Annual Report

4. 4 of 9 © 2012 First Annapolis Consulting, Inc.September 2012 Navigator
Debit Card Rewards – Not Quite Dead Yet
By Emma Causey and Stephen Dye
Historically, debit card reward programs were employed by issuers to increase
penetration, activation, and usage of debit cards among DDA customers.
However, the enactment of the Durbin Amendment dramatically changed
debit economics and prompted issuers to reevaluate their debit product and
deposit account offerings. In an effort to control cost, many eliminated debit
rewards programs. This is observable by comparing the number of debit
rewards programs in the market before and after the enactment of the Durbin
Amendment. In 2009, 52 of the Top 100 debit issuers offered a rewards
program. Today, only 37 maintain such programs.
The elimination of rewards programs between 2009 and 2012 was not evenly
distributed across debit issuers. As demonstrated below, issuers regulated by
the Durbin Amendment dropped rewards programs with greater frequency.
The rise in rewards programs among exempt institutions suggests smaller
debit issuers may have positioned themselves for the post-Durbin fallout by
either retaining existing rewards programs or initiating new programs designed
to capture customer migration away from larger banks. There is now almost an
even split of rewards programs between regulated and exempt issuers.
Of the 37 existing rewards programs, 22 are points-based, 12 are cash-back
programs, and 3 are miles-based. Additionally, seven issuers offer discount
programs such as Visa Discounts and MasterCard Marketplace; however,
these were not considered traditional debit reward programs for this study.
Though many of the recent reward program investments were made by smaller
issuers, 19 of the 37 active rewards programs are offered by institutions
regulated by the DurbinAmendment (>$10 billion in assets).The affordability of
these programs may be the direct result of fee structure changes and minimum
balance requirements implemented in the period following the passage of
the Durbin Amendment. Only 15 of the debit rewards programs currently in
market are associated with free checking accounts (i.e., no minimum balance
requirements or card usage commitments). Several issuers have restructured
reward-eligible accounts and added fees and/or balance/usage requirements.
PNC, for example, offers a no-fee account without rewards alongside a more
robust account with rewards and associated fees.
Despite the elimination of programs over the past several years, predictions
proclaiming the death of debit rewards appear to be premature. Durbin-exempt
issuers are increasingly viewing rewards as an opportunity to differentiate
their products while some regulated financial institutions continue to find value
in offering debit rewards. This dynamic will be interesting to observe over
the coming months as issuers of all sizes continue to fine tune their debit
strategies in a post-Durbin world.
For more information, please contact Emma Causey, Senior Analyst
specializing in DepositAccess, emma.causey@firstannapolis.com; or Stephen
Dye, Analyst specializing in Deposit Access, stephen.dye@firstannapolis.com
Assets 2009 2012 Change % Change
>$10B 37 19 -18 -49%
<$10B 15 18 3 20%
Total 52 37 -15 -29%
Source: First Annapolis Consulting research and analysis
Source: First Annapolis Consulting research and analysis
Figure 1: Debit Rewards Programs across Regulated
and Exempt Issuers
Figure 2: Prevalence of Debit Rewards Programs by Type
models have been resilient and impressive. According to management,
Blackhawk generated $62 million in pre-tax income for 2011, a 64% increase
over the previous year, and even stronger metrics are anticipated for this year.
Safeway’s decision to take Blackhawk public is a classic case of unlocking
value given the P/E differential between a grocer and a high growth, high
margin company with low capital intensity. Blackhawk has an enviable market
share with over 72,000 distribution locations and drove just under $7 billion
in load value in 2011. Blackhawk has a commanding share of grocery
distribution and, ironically, has successfully established relationships with
direct competitors of Safeway. The reach of its distribution network and share
of the grocery channel allowed Blackhawk to secure certain relationships on
an exclusive basis at attractive margins. Over the course of time, the cost
of and debate over third party distribution is always high on retailer agendas
given their thin margins and different views on incremental sales but to many
it is a cost of doing business unless and until the market changes.
While overall market conditions have improved for IPOs in general, Green
Dot’s recent earnings miss and lowered guidance have given pause to
investors that have been riding the wave of prepaid. That said, Blackhawk has
a unique model with large-scale distribution, access to millions of customers
a day in foot traffic, a self-managed line of open-loop prepaid products, and
distribution arrangements with market leaders across verticals. In our view,
distribution remains the most defensible link in the prepaid value chain as
even the best products cannot overcome weak distribution.
For more information, please contact John Grund, Partner specializing in
Credit Card Issuing, john.grund@firstannapolis.com

5. By Josh Gilbert and Emma Causey
The FDIC recently released its 2011 report from the second National Survey
of Unbanked and Underbanked Households. Based on its survey of over
45,000 households, the FDIC found that the percentage of households that
are unbanked has increased roughly 0.6% since 2009.
These research findings are consistent with First Annapolis’ analysis of the
retail banking market after the final Durbin Amendment rules were published.
At that time we predicted that 1.7% of debit customers would eventually leave
the formal banking system over the next five years as a result of regulation-
induced account re-pricing. More specifically, our analysis suggested that FIs
subject to debit interchange regulation would need to add or increase account
fees while increasing minimum balance requirements. Given that these factors
are frequent deterrents to opening and maintaining a bank account, it is not
surprising that the unbanked population is on the rise. We expect the unbanked
percentage to steadily increase over the coming years as financial institutions
continue to re-price deposit accounts in response to the low interest rate
environment and regulatory pressures on historical revenue sources.
Amidst Regulation, Unbanked Population Grows
Figure 1: Percent of U.S. Households that are Unbanked
Source: FDIC National Survey of Unbanked and Underbanked Households, 2009 and 2011
For more information, please contact Josh Gilbert, Principal specializing in
Deposit Access, josh.gilbert@firstannapolis.com; or Emma Causey, Senior
Analyst specializing in Deposit Access, emma.causey@firstannapolis.com
5 of 9 © 2012 First Annapolis Consulting, Inc.September 2012 Navigator
The Prompt Payment Rule & Federal Agency Commercial Card Programs
By Brian Rutland
Finalized in 1999, the Prompt Payment rule was designed to ensure that
federal agencies pay vendors in a timely manner. The rule, enacted due to
the increased use of electronic payments in the government and the private
sector, assesses interest charges against agencies that are late on their
vendor payments. The rule also provides federal agencies with guidance on
when to make payments for their government commercial purchasing card.
By comparing the early payment rebate escalators offered by commercial card
program providers with the government’s Current Value of Funds (CVF) rate,
federal agencies can maximize their theoretical savings. The CVF rate is the
simple interest rate charged on overdue federal government receivables. In
summary, if the early payment rebate escalator offered by the card provider
is greater than the cost of funds based on the CVF rate, agencies should pay
as early as possible. If the rebate escalator is less than the cost of funds,
agencies should wait until the payment due date to make the payment.
Suppose a provider offers 0.015% (i.e., 1.5 basis points) more in rebate on
spend per day of earlier payment, and the CVF rate is 6% – meaning the
government earns 1.67 basis points [(6% / 360 days in a year) * 100] for each
day it delays paying the card provider. In this scenario, and according to the
Prompt Payment rule, the agency should wait until the payment due date to
pay in order to allow the government to continue to earn higher interest on
its funds. Assuming $10,000 in debt owed and a maximum early pay rebate
offering of 1.06% from the provider, a federal agency could save $61 by waiting
until the last possible day to pay, as opposed to just $56 by paying early. This
is further illustrated in Figure 1 below.
Agencies have access to an online rebate spreadsheet that automatically
calculates the savings to help determine when they should pay. Savings can
be calculated by entering the amount of money owed to the card provider,
the maximum rebate, and the daily rebate offered by the provider into the
spreadsheet. Providers who want to be paid faster have the option to increase
their rebate escalator based on average payment days to just above the CVF
rate, which is calculated quarterly and is only adjusted if it changes by two
percentage points from the prior quarter.
Payment date analysis can be beneficial to both government agencies and
card providers. Government agencies can maximize savings by paying at
the right time; and providers who want to be paid faster can impact payment
timings via days payment rebate escalators.
For more information, please contact Brian Rutland, Analyst specializing in
commercial payments, brian.rutland@firstannapolis.com
Figure 1: Prompt Payment Rule Calculation Example
Equation
$ Rebate [$10,000*(1.06% – 0.015%*(30 – days to pay))]
$ Cost of Borrowing (6%*$10,000)*(days remaining to pay/360)
Days Remaining to Pay 0 15 30
$ Rebate $61.00 $83.50 $106.00
$ Cost of Borrowing $00.00 $25.00 $50.00
Net Savings $61.00 $58.50 $56.00
Source: United States Department of the Treasury, http://www.fms.treas.gov/prompt/rebate.html and http://www.fms.treas.gov/cvfr/index.html

6. 6 of 9 © 2012 First Annapolis Consulting, Inc.September 2012 Navigator
Planning for Disruptive Change is an Imperative in the Payments Industry
By Marco Mazzonetto and Joel Van Arsdale
“It is not the strongest species that survives. It is the one that is the most
adaptable to change” Charles Darwin.
Many aspects of the card payments business have remained relatively
unchangedfortwentyyears.SurewesawthemigrationtoEMV,theemergence
and growth of e-commerce, and the integration of loyalty and branding
partners, each a significant evolution, but the business of issuing a consumer
card or processing a payment for a merchant in a POS environment looks
relatively similar to what it did in 1990. The same will not be said about the
next twenty years, or even the next decade. The innovators dilemma, a theory
developed by Clayton M. Christensen, states that incumbent businesses
can be destroyed by disruptive innovations because these disruptions tend
to be low-end or small in scale at their inception (therefore uninteresting to
incumbents), but in the long-run, they come to represent entirely new orders of
business allowing new entrants to overtake incumbents. There are a number
of disruptive forces at work in consumer electronic payments and it behooves
all payment services providers, both consumer and merchant facing, to both
understand and have a plan to adapt to them.
E-commerceishardlynew,butitsimpactsasaforceofdisruptionhavebecome
more readily apparent in recent years. In the U.K. this year, the majority of all
card payments will be card-not-present transactions (with the majority of these
being e-commerce) and effectively all of the card growth is now coming from
e-commerce. PayPal has clearly been among the pack of innovators which
have used the e-commerce disruption to steal market share and to establish
a strong competitive position. PayPal’s success arose primarily because the
company exploited a series of niches ignored by incumbents. First among
these was U.S. P2P payments (which PayPal positioned for with a simple and
easy digital solution while incumbent banks rested with yesterday’s solution
– checks); second was payment acceptance services for micro-businesses
(which legacy bank providers considered too risky); third was security
concerns related to card e-payments in various markets and customer
segments (in Europe in particular), and fourth was cross-border e-commerce
(again, mostly for small business). In each of these four cases, the incumbents
failed to recognize that this market niche was significant and attractive in the
long run, or they simply failed to prioritize action. PayPal, with an arguably
basic and simple solution, has built several billion dollars of shareholder value
by exploiting these opportunities created by the disruption of the internet and
e-commerce.
More recently, Square (and others emulating Square), has taken a solution
which some incumbents deemed unsafe or unnecessary and created a
company worth several billion dollars. Square’s value proposition is to use a
standard smart phone to enable card payment acceptance, with the process
and service merchandising surrounding the technology representing some of
the greatest innovation. Incumbents in payment acceptance viewed micro-
merchants as too risky or of too little value to pursue, when in fact, it is a
sizable customer segment, but one which requires a different way of marketing
and operating.
Finally, M-Pesa in Kenya and other Sub-Sahara African markets has used
simple, mobile text-based services to penetrate deeply a segment of unbanked
customers which traditional banks struggled to serve. Sixteen percent of the
Sub-Sahara African population now uses mobile money transfers. African
banks have fought back against this disruption, with some success, primarily
using politics and regulation to position themselves in the mobile money value
chain (arguably hindering the development of simple and elegant solutions in
the process). Specifics aside, the M-Pesa example reinforces that engaging in
traditional banking in many parts of the world is simply not appropriate relative
to customer needs, and that it is the non-traditional, the disruptive competitors
that are most likely to innovate and thrive.
As shown in Figure 1, mobile phone technologies are just one among many
potential forces of disruption at work in the marketplace. Completely different
generational behaviors, cloud-based technologies, and new market entrants,
among others, are all forces re-shaping the payments marketplace and
Macro-Category Examples of Disruption Forces
Socio-Economic Disruptions
• Gen C is quick to adapt to new technologies, digital inclusiveness
• Drive for financial inclusion among the unbanked (but not necessarily by banks)
Disruptions At POS Level
• ePOS (integrated systems) gain POS market share, stand-alone payment terminals fade
• NFC POS becomes mainstream
• Authentication technologies evolve beyond PIN and signature (towards device recognition, biometrics, etc.)
• Card volumes shift from card present to card not present
• Merchants demand an integrated, multi-channel payment service
Mobile Technology Disruptions
• Mobile technologies (devices + apps) change the way in which consumers and merchants engage in commerce
generally, payments follow
• Mobile wallets change the consumer payments landscape and who owns the customer
• Consumer mobile devices (smart phones, iPads) become POS acceptance devices and a gateway into merchants
Open and Cloud Based Technology
Disruptions
• POS environment increasingly “thin” and cloud based, not local
• Payment schemes and service providers “open” up their platforms to attract developers and service providers (a
clear scale advantage)
• Mobile phone operating systems become standard for POS devices
New Market Entrants
• Google, Apple, Amazon, Facebook, and other new entrants enter the payments marketplace with new business
models
Regulatory Disruptions
• PCI changes the operating role of merchants in payments
• SEPA, PSD and similar regulatory regimes reduce barriers to entry
Figure 1: Forces of Disruption in the Payment Industry
Source: First Annapolis Consulting research and analysis

7. 7 of 9 © 2012 First Annapolis Consulting, Inc.September 2012 Navigator
creating risk for incumbent product and service providers.
Today’s incumbent payment product and service providers must be prepared
for change. This task is made difficult by traditional ways in which companies
plan for the future and by the underlying curse of the innovators dilemma.
Most companies have strong annual and medium-term planning processes,
but these processes generally fail to consider longer-term disruptions. The
traditional approach to strategic planning consists of setting goals, developing
a strategy, planning for major investments, and developing budgets on a one
to three year basis. This planning considers incremental changes in market
conditions (macro-environment, major changes to competition, foreseen
losses of customers, etc.) but it rarely considers disruptive change and long-
term positioning. Management teams also too often lack the incentive to look
beyond their own business unit, product, or customer segment. Unfortunately,
with traditional planning, companies are naturally reactive (and typically late)
to disruptive change when it happens, rather than taking advantage of the
openings created by it.
Scenario-based planning focused on disruptive forces helps management
take into account a more dynamic and longer-term view of market conditions
and how to optimize the positioning of the company in the long-term. This
type of planning process forces management outside of their daily duties and
comfort zones to think about a future world which is uncertain and dramatically
changed. Beyond just thinking about the future more distant and different, a
scenario-planning based approach helps to engrain a degree of awareness
and flexibility into a company’s strategy which traditional budgeting and
strategic planning do not. Even if the scenarios envisioned never come to
pass, management benefits from the creative experience and new ways of
thinking about the business.
First Annapolis has developed a three-phased approach to assist our clients
with scenario-based strategic planning:
1. In the first phase, we work with management to brainstorm and to
organize the management team’s thinking on forces of change. What is
changing or could change that would dramatically impact our business?
We then work with management to understand the nature of each of
these forces – is it hype? Is it reality? How will it impact us? Etc.
2. In the second phase, the objective is to further understand, prioritize and
focus the planning by developing disruption scenarios. Forces of change
typically do not act in isolation and the scariest scenarios typically involve
several forces acting in concert to disrupt a marketplace. For example,
it’s not just the release of the Google Wallet that could be disruptive; it’s
the combination of changing consumer usage patterns, integration of
services with mobile devices, and creation of new services and business
models on top of a Google Wallet that could prove disruptive to payment
service providers. At the culmination of this second phase of planning,
management has a short-list of scenarios which focuses on those which
are most disruptive.
3. In the final phase of planning, we work with management to develop
strategic responses to the disruptive scenarios. This involves first
diagnosing the impact (financial impacts, geographic impacts, customer
segments, etc.) and the probability of such an outcome (along with key
drivers of this probability). Secondly, we help management to develop
an improved sense of awareness about how and when disruptions are
developing (for example, you will know the scenario is potentially real
when consumer adoption hits __% and when Visa and MasterCard do
XYZ). Lastly, management should develop strategic responses to each
disruptive scenario outlining an executive level strategic roadmap (what
new acquisitions, products, partnerships etc. will position the company to
minimize the damage or to take advantage of the disruption?).
Figure 2 is a highly simplified example of a disruptive scenario that could
have been predicted and planned for five years ago. This is an over-simplified
example, but hopefully the point is clear. Strong, forward thinking scenario
based planning can be a strong tool for positioning a company for long-term
success and to prevent major disruptions to current business models.
The payment industry is set for material change in the next decade and
visionary leaders should ensure that their organizations are prepared for
tomorrow’s disruptions. Scenario planning for market disruption can be an
effective tool for positioning a company for future success.
For more information, please contact Marco Mazzonetto, Manager specializing
in Merchant Acquiring and European initiatives, marco.mazzonetto@
firstannapolis.com; or Joel Van Arsdale, Partner specializing in Merchant
Acquiring and European initiatives, joel.vanarsdale@firstannapolis.com
Figure 2: Simplified Example of a Disruptive Scenario
Current Position
• Company is a leading U.S. mid-market acquirer (30% market share)
• Company uses direct sales as their primary sales channel
• 20% of revenue arises from terminal and terminal based services
Disruptive Scenario (simplified)
• Merchants migrate from stand-alone terminals to ePOS systems
• ePOS developers (i.e., VARs) integrate into payments
• Open and cloud-based ePOS systems accelerate these shifts (lowering ePOS costs, and easing the path to
payments integration)
• Acquirers which respond slowly to the VAR channel lose market share
Impact Given Status Quo Response
• 4% loss in market share
• 20% reduction in terminal and terminal VAS revenues
• Flat profit growth
Scenario Planned Response
• Develop an open front-end (simple APIs, etc.) into the platform which allows VARs to easily integrate
• Develop a commercial structure for using VARs as distribution partners
• Develop a roster of reporting and other value-added services designed to integrate effectively and easily in
an ePOS environment
Source: First Annapolis Consulting research and analysis

8. 8 of 9 © 2012 First Annapolis Consulting, Inc.September 2012 Navigator
By James Watts and Dara Khan
Apple’s iPhone 5 debuted September 21st after several months of fanfare and,
as usual, rumors that this might be the iteration that includes NFC technology
for payments. These theories were refuted in the days leading up to CEO
Tim Cook’s keynote address at the fall media event on September 12th. The
speculation on whether Apple will enter the increasingly crowded mobile
payments space is fueled by a number of activities. These include:
1. PassBook, which digitally stores tickets, loyalty and gift cards;
2. EasyPay, a self-checkout tool;
3. Express Checkout, which enables online purchases with in-store pickup;
4. NFC patents filed by Apple, and;
5. Mobile security acquisitions
Apple’s long-term intentions are still unclear. Retailers, issuers, the card
networks, and other payments players can benefit from understanding Apple’s
capabilities and evaluating how best to incorporate similar features into new
and existing offerings.
Merchants can learn from how Apple uses mobile commerce to facilitate
process improvement. PassBook is one example. It can help merchants
reduce friction related to boarding, check-in, or going into various applications
to access mobile payments or marketing. This includes airlines and other
travel entities that support mobile ticketing and retailers that scan QR codes
for gift cards, loyalty cards, and coupons. PassBook can be used to improve
convenience by allowing merchants to utilize time and proximity features to
simplify mobile payments or check-in. For example, loaded payments cards
or airline tickets can appear on the lock screen of the phone when nearby a
store or before a flight begins boarding, respectively. Balances, points, and
other data can also be presented and updated in real-time. Target, Starbucks,
United Airlines, and MLB.com are already integrated, and other merchants
are expected to support their payments, ticketing, and marketing products in
PassBook.
Apple utilizes EasyPay and Express Checkout to enable quicker transactions
using the payments credentials customers already have linked to their iTunes
accounts in stores. Similar technology can be utilized by other merchants.
Some already enable online or remote mobile purchases with pickup in-store,
Apple Actions Spur Mobile Payments Speculation, Present Opportunities
but self-checkout is less common. Issuers and retailers could position their
co-brand and private label cards as the default payment method in similar
self-enabled checkout tools. These services could also be integrated with
merchant or issuer-developed wallets already in the market. As the holiday
shopping season approaches, merchants that expect to offer a mobile point of
sale (POS) solution for line-busting should consider whether a self-checkout
option for their customer base makes sense, and how they can integrate the
functionality into their existing mobile apps.
Several of Apple’s submitted patents are now publically available. Though
the iPhone does not have NFC, the patents make clear that the technology
is top-of-mind for the company. These documents envision NFC being used
to redeem offers and interact with products in stores. The patents also hint
at P2P and top-up capabilities, functions commonly associated with mobile
prepaid. Apple has other mobile payments-related technologies in the works.
Earlier this year, Apple acquired mobile security developer Authentec for $356
million. The company specializes in fingerprint scanning and has several
patents related to mobile payments authentication. These capabilities could
help solve for any outstanding security concerns surrounding a future mobile
payments play.
Regardless of how Apple’s approach to mobile payments unfolds, its history
suggests it is a fast-follower and will wait to develop a product that is tailored
to meet customer needs. The mobile payments, wallet, and marketing
landscapes are complex and consumers are not currently adopting solutions
in large numbers. Whether the company is successful will be a function of
whetherApple can successfully deploy its existing assets such as its user base
and control over the mobile experience, create a better solution for payments,
marketing, and shopping tools, all while offering customers a compelling
enough value proposition to adopt.
For now, retailers and issuers should consider not only short term opportunities
to gain early adopters, but also what long-term implications may be for existing
payment and marketing practices. Mobile presents several opportunities for
merchants to capitalize on in the near-term. Following what innovators like
Apple and the other new entrants into the payments space are doing can
help retailers and issuers improve existing processes in the near-term. Early
adopters may be in the best position to reap benefits as mobile payments
develop. Creating convenience for customers before competitors and
developing more sophisticated merchandising and marketing strategies will
be key to success.
For more information, please
contact James Watts, Senior
Consultant specializing in Credit
Card Issuing, james.watts@
firstannapolis.com; or Dara Khan,
Associate specializing in Emerging
Payments and Credit Card Issuing,
dara.khan@firstannapolis.com
Figure 1: Apple Mobile Payments and Marketing Applications
Source: Apple

9. 9 of 9 © 2012 First Annapolis Consulting, Inc.September 2012 Navigator
By Collin Bauer
Figure 1 is the September Payments Industry Stock Price Tracker. The
chart measures current stock prices and market caps (as of September
28th, 2012) as well as movement over the last 30 days, and year-to-date.
Most companies across the payments value chain experienced a strong
September after mixed results in August and have maintained an average
YTD increase of over 25% relative to the broader market’s 13% gain thus
far in 2012.
In summary:
The issuing sector continued to see significant gains in September,
edging up 6% on average this month with positive results for nearly every
issuer tracked. Gains were felt throughout the sector earlier this month on
the heels of increased certainty surrounding European financial markets.
The ECB laid out a bond-buying program to give countries extra time to
sort out financial matters, while also decreasing the near-term risk of a
European breakup. Bank of America and Citi posted double-digit gains
this month behind the news, but currently all have ‘hold’ recommendations
from analysts. In September, Bank of America joined Discover on the list
of issuers who have realized gains of over 50% since January. Discover’s
stock hit record highs this past month after the announcement of a new
partnership with PayPal, whose recent strong performance has spurred
investor confidence.
The processor / acquirer sector posted mixed results in September.
Global Payments’ stock price leveled-out this month, despite being down
13% on the year partly driven by a data breach in March that resulted
in the compromise of nearly 1.5 million card accounts. Fiserv was the
biggest gainer in the processor / acquirer sector over the last 30 days
after announcing recent partnerships with Oak Bank and MidFlorida CU.
Conversely, Vantiv’s stock price dropped 4% in September with the loss
likely attributed to the expiration of its IPO lockup towards the end of the
month.
The networks also posted big gains in September; in aggregate, the
sector was up 6% from 30 days ago. Visa and MasterCard prices rose
earlier this month on the heels of a $7 billion settlement over swipe fees.
Network revenue growth is forecast to slow through the end of the year
due to uncertainty in global consumer spending.
Payments Industry Stock Price Tracker
Figure 1: Monthly Average Stock Price Tracker
Companies
Sep. 28,
2012
30 Day Δ YTD Δ
Current Market
Cap ($Billions)
Acquirers/ Processors
TSYS $23.70 3% 19% $4.51
Fiserv $74.03 6% 26% $9.96
FIS $31.22 -1% 17% $9.57
Global Payments $41.83 1% -13% $3.43
Heartland $31.68 4% 30% $1.25
Vantiv $21.55 -4% N/A $2.91
Average - 1% 16% -
Issuers
American Express $56.86 -1% 18% $66.09
Bank of America $8.83 11% 52% $98.66
Capital One $57.01 1% 30% $33.45
JPMorgan Chase $40.48 9% 16% $155.08
Citi $32.72 12% 15% $98.21
Discover $39.73 3% 64% $19.66
U.S. Bank $34.30 4% 24% $64.49
FleetCor $44.80 4% 47% $3.69
Wright Express $69.72 8% 28% $2.67
Average - 6% 33% -
Networks
MasterCard $454.8 6% 23% $56.31
Visa $134.61 6% 31% $89.64
Average - 6% 27% -
Market Index
S&P 500 $1,440.67 2% 13% -
Source: Yahoo Finance, First Annapolis Consulting research and analysis
Founded in 1991, First Annapolis is a specialized advisory firm focused on electronic payments. Our market
coverage is international in scope with a primary focus on North America, Latin America, and Europe. First
Annapolis is headquartered in the Baltimore / Washington, D.C. corridor and Europe is served through our
office in Amsterdam. In total, we have over 70 professionals across our practice areas giving us one of the
largest and strongest advisory teams focused exclusively on electronic payments.
Card Issuing
Deposit Access Payments Strategy
Merchant Acquiring
Retailer Services
Mobile Commerce Alternative Payments
Commercial Payments
Practice Areas
Management Consulting
Partnership Finance
Strategic Sourcing
Portfolio Management
Strategy Development / Implementation
Loyalty Program Support
Commercial Risk Compliance
M&A Advisory Services
End-to-End Transaction Support
Valuations
Fairness Opinions
Diligence / Negotiation Support
Services
For more information, please contact Collin Bauer, Analyst specializing in Credit
Card Issuing, collin.bauer@firstannapolis.com