Where Are We All Going Next? The Future of Payment Markets. Joel Van Arsdale

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2 Where Are We All Going Next? The Future of Payment Markets Joel Van Arsdale

3 Topics of discussion: Payments are migrating rapidly to CNP Payment channels are converging (multi-channel) Payments will be more integrated into the broader commerce experience. Maybe even buried into the commerce value-chain? New and disruptive competitors could redefine the market More focus on convenience, quick and easy service, and micro merchants Software development capabilities will help to define winners and losers in payment services Banks will be less relevant Payments will be more x-border and more global Convenience and security can both prevail "Big Data" services linked to payments become commercially viable Profitability declines in mature businesses, remains robust in new market segments

4 Growth in mature cards markets, such as the U.K., is now virtually all card-not-present. E-Commerce Card Volume as a % of Total (CP + CNP) Card Volume, 2011 E-Commerce Volume Growth vs. Face-to-Face Volume Growth, estimated 27% e-comm card vol CAGR F2F card vol CAGR 25% 13% 9% 12% 15% 18% 8% 4% 2% 3% 2% U.K. US France Brazil U.K. US France Brazil Source: First Annapolis Consulting market analysis

5 Merchants are increasingly offering a multichannel experience to consumers. Source: First Annapolis Consulting market analysis

6 In fact, the majority of CNP merchants are multi-channel. E-Commerce Merchants by Type (% Online Merchants, EU 27, 2010) Multi-Channel Retail Sales (as % of total, UK) 35% Pure Play 24% 23% Multi-Channel 76% 5% 11% Source: Eurostat, First Annapolis Consulting research and estimates Source: Webloyalty

7 Payment service providers are adapting to multi-channel demands. Merchant POS Gateway Acquirer Schemes E-commerce Environment Web developers & Online shopping carts Multi-Channel ELV Face-to-Face Environment Source: First Annapolis Consulting market analysis

8 e/m channels will drive 1/3 of all U.K. consumption by 2016 (including cash and other tenders). Channel Growth and Convergence U.K. Retail Consumption 2011 U.K. Retail Consumption 2016 Physical POS / MOTO 700 B 145 B e-commerce Physical POS / MOTO 600 B 200 B e-commerce (traditional) Mobile Commerce 15B Note: bubble sizes are not to necessarily to scale. 100B Mobile Commerce Note: bubble sizes are not to necessarily to scale. Source: First Annapolis Consulting estimates

9 Payment services are increasingly integrated into epos systems and influenced by VARs. 100% epos Penetration by # of POS VARs (examples) 80% 60% 40% 20% 0% N. America UK W. Europe APAC (excl. CH) CEEMEA Latin America China Integrated epos Solutions Stand-alone POS Terminals

10 Payments are also increasingly integrated into checkout and merchant loyalty. Integrated Check-Out Card Vaults Integrated Payment & Loyalty

11 In-app payments are tightly integrated into the broader commerce experience. Proprietary Retail Wallets Pay by phone for parking Integrated order and pay taxi app Cloud-based payment at the POS Interactive Ordering App for iphone

12 In fact, traditional payments are arguably buried in advance commerce use cases. Over 400 million cards on file; more than any bank or acquirer Now allows payment for physical goods in Apple Stores worldwide via itunes Available in the U.S. and, as of 2011, the U.K. and Germany Quietly developing technology for mobile payment enablement or even the extension of itunes into an open-loop payment scheme Amazon has 164 million active accounts, including 162 million Amazon.com customers and 2 million Marketplaces sellers. Merchant adoption of Checkout has not gained traction, however

13 Commerce platform providers (i.e., shopping carts), are key influencers of payment services payment modules

14 e/m wallet check-out buttons do not necessarily require a PSP or an acquirer. Shoppers at Buy.com have the option to bypass the traditional account log-in and pay with a selection of e-wallet accounts

15 New competitors, disruptive competitors, will enter the market with new product and business models.

16 The market will continue to see an insurgence of new PSPs and acquirers with reduced barriers to entry. PSD Payment Institution / e-money License Open Schemes New Payment Service Providers

17 The future is quick and easy. Fields Required on New Merchant Application 238 Full Merchant Application Individual / Basic Application Traditional Bank Acquirer

18 Mobile POS, and micro merchants, are real. Square 20% growth in U.S. POS izettle - 20% growth in Swedish POS PayPal distributed 200,000 PayPal Here devices in 6 weeks Potential Growth in Acceptance from Mobile POS Non Accepting Merchants 56% Existing Card Acceptors 22% New Mobile POS Acceptors 22%

19 Mobile POS is not just micro; the traditional POS on the High Street could also change radically. "JCPenney CEO Wants To Ditch Traditional Checkout By 2013" "Nordstrom Sees Sales Boost From Mobile POS Devices" "Starbucks and Square to Team Up"

20 Software, no longer hardware, drives product and service value. Traditional Acceptance Environment Wireline Terminal Dial-up Network Acquirer Card Schemes Settlement Account epos Host System Fraud Prevention Services Today s Acceptance Environment Terminal / PED Web Shop Mobile Channels Advanced Telecom Payment Gateway Acquirers Payment Schemes Settlement Accounts Loyalty Services Reporting & Data Services

21 Banks are losing market share to more focused and technically capable monolines and PSPs. European Merchant Acquiring Market Share* by Type of Provider (projected) Local Banks 30% Multi- National Banks 35% MSPs (PSPs / ISOs) 2% Local Banks 26% Multi- National Banks 29% MSPs (PSPs / ISOs) 5% Local Banks 21% Multi- National Banks 25% Inter- Bank Acquirers 15% Monoline s 20% Inter-Bank Acquirers 11% Monolines 32% Inter-Bank Acquirers 10% Monolines 39% * Analysis excluded local debit volumes from Germany, Norway, Denmark, and Portugal Sources: ECB, Local National Banks and Card Associations, First Annapolis Consulting Market observations and estimates

22 % of Individuals (Europe) X-border growth is 2x domestic growth in payment services. 60% 50% 40% 30% 20% 10% 0% E-commerce and Penetration of EU Consumers 20% 26% 40% 4% 8% 28% 46% 4% 8% 50% 5% 9% 34% 36% Non-EU Merchant EU Merchant Domestic Merchant 16% 14% 12% 10% 8% 6% 4% 2% 0% X-Border Penetration by Channel (CNP vs. CP) 15% 5% Card Not Present Card Present Source: European Commission, Community survey on ICT usage in households and by individuals, 2010

23 Payments are not just x-border, they are increasingly global. NOTE: not a comprehensive display of payment methods Source: GlobalCollect website. Plus Direct debits in 9 countries Bank transfers in 59 countries Cheques and Invoice services

24 Convenience means new fraud tools, but not necessarily diminished results. Lost Security Checks New Security Checks Signature Panel Biometrics Card Hologram Device Fingerprinting Embossed Name and Account Number Static CVV (in Mag Stripe) Offline or Online EMV/Chip Location Data Dynamic CVV (in Chip/Applet) Mobile Wallet Password / Passcode

25 Card Fraud Losses e-commerce fraud rates, for example, are steadily declining (in the U.K.). U.K. Fraud Losses by Type of Loss Card-not-present All other 120 Source: Financial Fraud Action, UK Payments Administration

26 Data services are increasingly valuable. Elavon's Merchant Connect Premium offers even more data, such as interchange qualification reports Amex Business Insights: Detailed customer behavior analysis (Biz Insights)

27 Business fundamentals shift, favoring some models over others. Performance of Various Classes* of European Payments Processors Key Performance Metric (* ) Acquirers Mixed (Acquiring + Issuing) PSPs (all) ipsps (e-comm) Only NSPs Wholesale Processors Software Vendors OEMs Transaction Growth (*CAGR) N/A N/A N/A Revenue Growth (*CAGR) 2010 Revenue per Transaction ( ) Revenue per Transaction Growth (*CAGR) 0.19 N/A N/A N/A N/A N/A N/A EBITDA Growth (*CAGR) 2010 EBITDA Margin EBITDA Margin Growth (*CAGR) 26% 23% 23% 28% 23% 20% 13% 12% 0% * Classes are further defined in the appendix along with a listing of providers included in the class within the study sample Notes: Transaction and EBITDA calculations are limited to companies that provided sufficient information; all figures are based on weighted averages within each respective class Sources: Nilson Report, Various domestic trade registries or other public filings, First Annapolis analysis

28 Company Summary Service Offerings Proven Founded in 1991 Global HQ in Washington DC; European HQ in Amsterdam Professional Expertise Focus exclusively on payments Circa 90 employees Balanced combination of industry, functional, and consulting experience Market Leadership Advise market leaders: Financial institutions Payment schemes Transaction processors Technology providers Retailers and leading global brands Acceptance & Acquiring Credit Issuing & Retailer Services Deposit Access Commercial Payments Mobile & Alternative Payments Global Coverage Management Consulting Mergers & Acquisitions Sourcing & Partnerships FA Offices Representative Clients Full Service Advisory Support EXPERIENCED COMMITTED OBJECTIVE Baltimore-Washington Amsterdam

29 First Annapolis Consulting M&A Advisory Services Keizersgracht 313-I 1016EE Amsterdam The Netherlands Phone: Fax: Elkridge Landing Road #400 Linthicum, Maryland United States of America Phone: Fax: Joel Van Arsdale, Partner

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