Dorado Industries TrendWatch Q4 2014

TrendWatch 2.0 Q4 2014

Payments System Industry

Synopsis

Notice: Materials contained in this document are drawn from several media sources, and Dorado Industries is not responsible for their accuracy. Opinions expressed

herein are presented without warranty. Brand names are the trademarks of their respective service offerors.

cir·cum·vent verb \sər-kəm-vent\

: to avoid being stopped by (something, such as a law

or rule): to get around (something) in a clever and

sometimes dishonest way

col·lab·o·rate verb \kə-la-bə-rāt\

: to work with another person or group in order to

achieve or do something

part·ner verb \pärt-nər

: to join or associate with another as partner

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Random Thoughts

Finally, we may be heading the right way!

Long before B-schools taught us to “connect the dots,” we learned

to build things and ideas using Tinker Toys™. Not sure if it’s

through complex dot-connecting or simple configuring of sticks and

spools using our 100 year old toy, but it looks like we’re learning

that, by collaborating and partnering, we can build consumer-

friendly payment schemes that circumvent conventional wisdom and

systems.

We believe that we’re long past the days when new market

challengers can take on the established providers of payments

“convenience and security” alone. Issuers without acquirers (and

vice versa) don’t work. Neither do front-end solutions without a

strong back-end. Unsettled transactions don’t generate income (and

tick off consumers, big time.) To make the point, this quarter’s TW

issue includes a smattering of notable partnering arrangements

executed by established players who have come to realize that going

it alone won’t cut it in 2015.

Hacks and data breaches are a way of life. Deal with it.

We once considered data breaches, ATM and POS skims, and other

security intrusions as anomalous and sort of amusing. Going

forward, however, TrendWatch 2.0 will be leaving the posting and

blogging about these non-trivial, yet continuous, events to experts

like Brian Krebs who not only keeps us up to date but also imparts

valuable information while doing so. Clearly, Brian has a job for

life now that the Internet of Things is upon us.

We’re not talking much about Apple Pay, either.

Why bother? Every human on the planet has an opinion about the

future of Apple Pay and is quite willing to write, speak or YouTube

about it. We will make note of special milestones and consequences

of the system’s success (or failure) but more along the lines of

industry impact rather than gloating over our 2014 prediction.

2

Speaking of the Internet of Things . . .

Does anyone else wonder why it is that we tend to take things and

systems designed for one purpose and corrupt them into something else?

For instance, today we use the Automated Clearing House for

everything from crediting Social Security recipients with their benefits

(the original intent) to debiting the same people for their medication

purchases at the local pharmacy (never the intent.) The ACH is also

used for telephone ad hoc payments, newspaper subscriptions, and

infomercial products. In short, the ACH has become a vital part of

every person’s and business’s way of life when conducting commerce.

And yet, we price the ACH as if it was a public commodity, which is

ain’t. We don’t mind mid-stream course corrections, but if there’s value

created in the process, maybe one or the other party ought to get paid?

The same might be said for the IoT. As we head pell-mell toward using

DARPA’s invention (sorry, Mr. Gore) for dimming our lights,

monitoring our children, and locating our lost pets rather than

facilitating collaboration between academic researchers and scientists

(the original intent), shouldn’t we be thinking about a way to

compensate folks for the value delivered? Interchange may have

become today’s four-letter word but it sounds right to us.

Sorry for being tardy again this

quarter; some things are just

more important than payments

(but not many.)

Until next time.

Dorado Industries



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Table of Contents

2015 Predictions 4

2014 Predictions Post Mortem 5

TrendWatch Scorecard/Summary 8

2014 Payments Industry Yields 9

Interesting Quarterly News That Got No Respect 10

Q4 M&A/Investor Activity 16

Useful Links for More Information 23

Back in the Day! 24

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2015 Predictions

• While a Herfindahl index analysis of the third party EFT processor segment might suggest no further mergers

would pass the DoJ sniff test, that’s not the case for merchant services players. There should be room for two

more major M&A transactions. One will occur in 2015.

• Two digital wallet providers will fold up their tents and return to the desert.

• At least one mobile network operator (MNO) will leave the playing field for the sidelines.

• Trade and popular press scribes will hail the three joint ventures that will occur in 2015 between issuers (or their

processors) and retailers.

• A truly viable mobile payments solution for owners of Android phones will arrive late in 2015 to compete with iOS

(and Apple Pay.)

• Try as it might (e.g., Buy With Twitter) to reverse its waning fortunes, Twitter’s year on year growth will be one-half

its current rate of 30 percent.

• There is a deal to be had between MCX (CurrenC) and a banking consortium and it will be announced late in

2015.

• Clinkle will disappear; but in a blaze of glory.

4

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2014 Predictions Post Mortem

• Beacons of all variety and stripe will gain considerable traction and ink. Department, mid-to-high end clothing

stores, and the hardware trade will lead the way.

Mar: Lots of new and old players joining the fray; so far, no privacy complaints.

Jun: Still no privacy issue complaints from customers at American Airlines; bag fee bitches, yes.

Sep: Let’s call this one done and move on.

Dec: Frequent travelers to Miami International will attest to the pervasiveness of the network of beacons in place

throughout the entire airport.

• HCE will be anointed as an equal amongst the other mobile payments options – NFC, 2D barcodes, etc.

Mar: V/MA have fallen into line. Waiting to see what the real NFC bigots have to say. Isis? Not sure yet.

Jun: Popular press has picked up HCE, a good sign for the industry.

Sep: While there’s no real reason for it doing so, Apple’s adoption of NFC has pushed HCE to the back burner.

Dec: The Apple Pay versus HCE/Android wars are just heating up. Should be an interesting 2015.

• The Target and Neiman Marcus hacks will light a fire under the U.S. EMV rollout (albeit for all the wrong reasons)

and one of the combatants will blink.

• Mar: Was it the breaches or the unified front put up by DNA? Anyway, things are moving haltingly ahead.

Jun: Target REDcard to get chips and PINs plus a MasterCard logo. Sam’s Club rolling out EMV terminals.

Sep: Let’s call this one done and move on. The hacks keep coming – thanks HD, Kmart, and Chase – and BofA is

issuing. Game over.

Dec: A winning prediction if there ever was one!

5

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• MCX will announce a roll-out plan and schedule that will leave more than a few pundits confused.

Mar: [Sound of crickets] Come on, guys.

Jun: MCX selects Walmart and a few stores to alpha test? A start, perhaps.

Sep: CurrenC is here. But so is Apple Pay. The InComm connection should help smaller retailers but there’s still

the non-MCX big guys to watch. So far, we’ve only seen the under-card in this championship bout.

Dec: Confusion still reigns!

• Regulation II will remain virtually unchanged.

Mar: Nothing wrong with a favorable Appellate Court ruling every now and then. Merchants were probably hosed

but time will tell on the routing rule front.

Jun: Retailers have until August 21 to appeal to the Supreme Court. Curious what the Sups will do with this hot

potato.

Sep: October’s here so we’ll see if the Sups take up the appeal. In the meantime, issuers still wear Bambi-like

expressions when asked about their plans of EMV and debit.

Dec: As of today (1/19/15), the Sups are keeping us guessing. Update: No go, Joe. Issuers win, for now.

• Regulators will take a serious look at Visa Authorized PIN Debit.

Mar: This one’s a stretch but someone ought to take a look-see at its effects on PIN debit networks.

Jun: Lots of EFT traffic redirected by VAPD, but no uproar yet.

Sep: Visa may have set off a smoke bomb with its Visa Token Service, another opportunity for blue, white and

gold to siphon off transactions and fees. Might this may wind up being a case of double-dipping?

Dec: Visa postponed its own Token Service is favor of Apple Pay support. We won’t see VTS until mid-2015 and

Visa is waiving fees until January 2016. Playing nice might keep the regulators at bay.

6

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• FRB will announce plans for a pan-industry working group to sort out the “US Payments System Improvement”

initiative. Won’t happen until late in the year.

Mar: May not happen at all based on the highly PC-packed responses filed by 200 respondents – “yes, but have

you thought about . . . .”

Jun: Done. Three years or so will tell the tale (government work, after all.)

Sep: Can’t knock the Fed for trying; it’s getting air time at every payments conference where more than four folks

attend. Some FIs – US Bank, for one – are starting to promote their “evolutionary, not revolutionary” talking

points.

Dec: It’s pretty obvious now that Nacha and The Clearing House don’t plan to let the Fed grab this real estate

without a fight. So much for pan-industry collaboration. Faster Payments is likely DOA because it won’t arrive.

• Apple will enter the payments industry in a big way.

Mar: January patent for NFC-compliant WiFi/Bluetooth in-store payments suggests a move is underway.

Jun: AAPL payments launch in Japan doesn’t count. Perhaps waiting for iPhone 6 and iOS 8. Late third quarter

seems to be the launch timeframe.

Sep: Shut the front door, a winner! October 20th is the rumored switch-on date.

Dec: Apple Pay works and users use it. Enough said; another winner!

2013 Holdovers:

• One of the remaining EFT networks will change ownership.

Dec: A broken clock is right twice a day; in this case, it’s an empty hour glass. Maybe 2015.

• One or more of the non-traditional dongle-centric merchant services providers will be acquired by a mainstream

POS terminal industry leader.

Dec: Another really bad prediction. Someone must have disproved the “greater fool” theory.

7

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TrendWatch Scorecard/Summary – Q4 2014

Market & Industry Situation 1 – What’s to be done about Apple Pay? Compete or capitulate?

2 – Cardless ATMs and (failed) Bitcoin devices gaining attention.

3 – Holiday sales were up; share of electronic payments up by twice.

4 – Still waiting for the Regulation II (Durbin) shoe to drop.

5 – Lots of new money coming to fund second and third rounds of growth.

6 – Q4 2014 retail bank earnings will be spectacular, sadly market trading

movements caught the big guys off guard. Short is the new long?

7 – VCs invested $48.3 billion in 2014 (highest since 2000) and payments

got its fair share.

8 – Almost goes without saying, but security is becoming the new currency.

Industry Players To Watch Retailers: Merchants are starting to segregate themselves into the Apple

Pay and CurrenC camps. Should make for an interesting Venn diagram.

Coinbase: Key BTC market intermediary Coinbase is reportedly poised to

raise another $60 million in expansion capital. Update: Raised $75M.

PayPal and eBay: When the divorce is final who keeps the silver?

Clinkle: Incarnation III positions Clinkle was a winner-take-all lottery, a

new twist on loyalty. Don’t hold your breath.

Bitcoin: Does it really matter that BTC is valued at less than 1/5 of its

January 1, 2014 level? Digital Transactions (Jan. 2015) thinks not.

Visa: Ugly outcome to the SEPA interchange negotiations and MasterCard

has cut a deal with Putin. Next steps?

5. New Venture Growth

4. Legal/Regulatory Issues

1. New Payment Forms

2. ATM Restructuring

3. POS Volume Trend

High

Med

Med

Low

High

Med

High

Positive

Mixed

Negative

6. Earnings Announcements

7. Industry Investments

8. Payments Industry Security High

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2014 Payments Industry YTD Yields

Sources: Company releases, Morningstar.com, Bloomberg.com, Coinbase.

2014 YTD yield excludes dividends; based on 12/31/13 and 12/31/14 closing prices.

Fortunately for those long in payments equities, Q4 brought the annual “Santa bounce” and we

pretty much recovered from the Q3 bloodbath. Even though the Dow and S&P out-performed the

average holdings shown here by posting 2014 gains of 7.5 and 11.4 percent, respectively, our

basket of nuggets did pretty well considering the controversy the industry faced. Now, if we could

just get the price of oil back to where it belongs, 2015 could be a banner year – those long in

Bitcoins, excepted.

Industry Player 12/31/2013 12/31/2014 Price r Cap Value r YTD 2014 Yield

Alliance Data Systems 262.93$ 284.05$ 21.12$ 1,256.6$ 8.0%

American Express 90.73$ 93.03$ 2.30$ 2,478.6$ 2.5%

Blackhawk Network Holdings 25.26$ 38.92$ 13.66$ 714.4$ 54.1%

Cardtronics 43.45$ 38.58$ (4.87)$ (198.2)$ -11.2%

Discover Financial Services 55.12$ 65.50$ 10.38$ 4,991.7$ 18.8%

Euronet Worldwide 47.85$ 54.90$ 7.05$ 355.3$ 14.7%

Fidelity National Information Services 53.68$ 62.21$ 8.53$ 1,627.5$ 15.9%

First Data (Future Use)

Fiserv Inc. 59.05$ 70.97$ 11.92$ 3,033.5$ 20.2%

Global Cash Access Holdings 9.99$ 7.17$ (2.82)$ (217.3)$ -28.2%

Heartland Payment Systems 49.84$ 53.94$ 4.10$ 153.3$ 8.2%

Jack Henry & Associates 59.21$ 62.14$ 2.93$ 245.8$ 4.9%

MasterCard Worldwide 84.36$ 86.18$ 1.82$ 2,930.2$ 2.2%

MoneyGram International 20.78$ 9.09$ (11.69)$ (676.4)$ -56.3%

Total System Services 33.28$ 33.95$ 0.67$ 132.3$ 2.0%

Western Union 17.25$ 17.91$ 0.66$ 375.4$ 3.8%

Vantiv 27.94$ 33.95$ 6.01$ 1,490.4$ 21.5%

Visa 222.68$ 262.20$ 39.52$ 33,430.0$ 17.7%

.

Bitcoin Closing Price 747.56$ 315.95$ (431.61)$ -57.7%

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Interesting News This Quarter

Subject Source/Date Substance

Mobile Transaction Volume Finextra

January

“It will be a long while before the majority of us can jettison our physical wallets.” So says, the

Deloitte firm on the heels of its latest forecast of in-store mobile NFC-enabled transactions. That

said, the firm says that 2015 volume will grow 1,000 percent over last year so long as “multiple

prerequisites for mainstream adoption - satisfying financial institutions, merchants, consumers and

device vendors - have been sufficiently addressed.” Really? Who’d have thought?

PARTNERS:

Virgin Money & Monitise

Pymnts.com

December

Virgin, well-known for its airline franchise and mobile telephone network, cuts a deal with

Monitise to launch a digital mobile banking service. Virgin Money, the publicly traded financial

services player (read: issuer) links up with Monitise which, among other things, is an acquirer.

Bingo, symmetry is created along with the usual B-school terms, synergy and symbiosis. Looks like

a better than decent way to kick-start a new service.

PARTNERS:

CashStar & PayPal

Business Wire

December

CashStar is a leading provider of digital gift cards while PayPal continues to exploit is role as an

acquirer of digital transactions and, through eBay Marketplace, a distributor of packaged and digital

goods. CashStar retailers will be able to use PayPal’s growing distribution system channel for eGfit

cards. PayPal gains access to repeat users of the digital channel for gift card issuance and

redemption. Win-win.

PARTNERS:

Snapchat & Square

Finextra

November

The math here is pretty simple. Snapchat has over 100 million users. Square Cash doesn’t have

that many. The two firms partner to enable Snapchat users to create P2P transactions using Square

Cash. Moreover, Square lends Snapchat its reputation for security, a dire need for Snapchat. Since

neither company seems to have any problem raising capital (i.e., no “weak sister” in the

partnership), this seems like a match made in heaven.

Softcard PayBefore

November

Colorado and Washington residents with the 3:00 a.m. munchies and an Android smartphone can

now use Softcard to placate their hunger in drive-thru lanes at McDonald’s restaurants.

(McDonald’s and Softcard have been collaborating on in-store payments since 2013.) Drive-thru

volume (and profits) can be significant for most fast food franchises so solving the proximity issue

for mobile payments is a big step forward. (Munchie sufferers in all states can do the same thing –

we’re just poking the hemp-hyping states for effect.)

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Interesting News This Quarter – Continued


UnionPay Finextra

October

Investors long in Visa and MasterCard received a nice valuation bump last quarter when UnionPay

began preparing to end the monopoly it holds on clearing debit and credit card transactions in China.

Not that these plans come as the result of new enlightenment on China’s part; the World Trade

Organization found that UnionPay was discriminating against U.S. companies. Yet another example of

how the “go it alone” approach can result in burnt fingers.

Visa Finextra

November

For every uptick, there’s a downtick. Visa believes that the price point of its call option to acquire Visa

Europe could be as high as $10 billion. Unfortunately for the company, it is required to value its call

(and Visa Europe’s put) each quarter and report the results. The swelling of the call price has put a bit a

damper on the network’s ability to raise investor funds for acquisitions and is capping its valuation. (So

much for the value of transparency.) Meanwhile, there are about 10 billion reasons for the European

bank owners to exercise their right to sell when the time comes. We’re pretty sure that the financing

would be a slam-dunk, but not cheap.

European Union Payment Eye

December

Price fixing is price fixing whether done unilaterally (e.g., Durbin and Reg. II) or among multiple parties

across a negotiating table. In the latter case, Visa and MasterCard blinked and the European Union

won. Effective six months after all the I’s are dotted, cross-border EU debit transactions will entail a 20

bps interchange rate while credit card transactions will be swapped at 30 bps. There is also a five-year

phase-in scheme for domestic debit and credit interchange which will be higher initially but will

ultimately settle under the intra-EU cap rates. Discover and American Express skate under the

agreement because of their unique issuer/acquirer roles within the EU.

Google Finextra

January

Speaking of interchange, Google has gone to court with litigation against Visa and MasterCard over

interchange rates. The cyber search firm had opted out of the July 2012 settlement that spreads $7.5

billion to parties to the underlying class action suit. While Google is seeking unspecified, but “actual

damages,” Walmart, another opt-out merchant, stepped up in March and asked for $5.0 billion in

damages. Here we go again, please pass the popcorn.

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FIS PayBefore

January

Major third party transaction processor, FIS, has secured a deployer for its cardless ATM system. It will work

with Wintrust Financial to equip 200 Chicago ATMs with the technology to enable access to cash via a

smartphone app. Users will open the Wintrust app, establish the withdrawal amount, and then scan a QR code

displayed on the ATM. FIS and Wintrust claim the transaction time is 8 seconds compared to 47 seconds under

the traditional approach. Faster transactions and the absence of card skimming are the key selling points, we

hear. Meanwhile, it appears that Chicago will become the hub for cardless ATMs as FIS states that other area

banks are in the midst of active deployment. Sounds like Cash Station all over again except without buttons.

Discover Pymnts.com

November

Discover decides enough is enough and sues Visa over anti-competitive dealings. There are more central points

to Discover’s suit than a cow has stomachs; here’s the short list: a) pushing signature debit over the more secure

PIN debit, b) prohibiting issuers of signature debit cards to also deploy signature debit cards on other networks

like Discover, c) instituting PAVD to steer transactions away from other debit networks, and d) encouraging

retailers to consolidate transactions for better pricing under its FANF program. Discover is attempting to

protect its PULSE network from harm caused by Visa’s alleged actions. Frankly, most of us will be retired (or

dead) before this one gets resolved. More popcorn, please.

Apple Pay Paymnts.com

November

It would take more pages to write, and free time to read, then most folks have to spend on the unique set of “me

too players” following the trail of corn that Apple Pay is leaving in its wake. Yet, here are two bellwether

companies that think they know a good thing when they see it. SpotHero, the Chicago-based parking spot finder

and payment scheme, has updated its mobile app to accept Apple Pay. Frustrated car owners in New York,

Chicago, Washington, Boston, Philadelphia, Newark, Denver, Baltimore, Milwaukee, Minneapolis, and New

Orleans can take advantage of the updated application now. Apartment dwellers around the country who

currently use RadPad to pay their rent can now access Apple Pay with the company’s updated app. Hard to

believe, but RadPad claims 90 million renters have utilized its app to make rent payments but, that in the first

four weeks of mobile operation, only $256,000 in rents were processed. Just the tip of iceberg, we suspect.

Fiserv PayBefore

November

Fiserv leverages its POPmoney asset, A2A technology, and bill payment systems to launch its “NOW Network”

(not to be confused with “Negotiable On Withdrawal account,” an artifact from the 1980s). The NOW Network

enables Fiserv customers to offer their depositors instant, same-day, or next day funds movement. Nice to see

the private sector taking a serious run at real-time payments.

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13


United Airlines Presser

November

Road warriors, take heed. In a blatant attempt to skinny down its balance sheet liability for unused Mileage Plus

miles, United Airlines is allowing its 95 million frequent fliers to redeem miles for crap you find in airports. So far,

this pestilence is constrained to the UAL Newark hub but is rumored to be ready to spread soon. For a mere 4,150

miles (i.e., farther than LAX/JFK) you can order up a salmon entrée at one of the airport restaurants. Want a bottle of

Fiji Water to wash it down? That’s a mere 430 miles (LAX/SAC). Harder beverages like a Sidecar will set you back

2,000 miles (LAX/ORD.) And you thought that Bitcoin’s devaluation was bad? Oh, please, UAL.

American

Express

Finextra

October

The points-for-purchase rant continues as American Express announces that Reward Points can be used to buy your

Big Mac, fries and a shake at McDonald’s. The exchange rate is laggardly at 100:$1 so a $4 meal will cost you 400

points. Then again, if you used your Amex card to buy a $400 ticket to JFK on United, you could treat yourself to a

salmon dinner and a Big Mac lunch using Mileage Plus and Rewards Points generated by the same transaction.

Sweet; except for that five hour flight part.

WorldRemit Mobile Payments

Today

November

The U.S. continues to be the leading sender of international remittances so it’s logical that WorldRemit, a UK-based

MTS provider, would enter our market to compete against Western Union, MoneyGram, and Xoom. WorldRemit’s

marketing edge is variable pricing based on destination country and a claimed broader global reach than others. So,

WorldRemit has one side of the equation covered but lags in terms of its U.S. base of remitters (folks like you and

me.) Armed with $40 million in new expansion funds from Accel Partners, the company hopes to attract a following

once it receives its MTS license in all of our 50 states. WorldRemit might consider a partnering arrangement with a

banking consortium and perhaps it will, once the $40 million runs out. Just saying. Update: partners with MTN to get

access to Africa. There you go, guys.

Xoom Finextra

January

Speaking of Xoom, the beefy MTS processor has been forced to take a $30.8 million one-time (it hopes) charge to

earnings resulting from a fraudulent set of money transfers. Seems that the fraudsters impersonated one or more

Xoom employee and convinced the company’s finance department to ship out millions of transfers to bogus overseas

accounts. Since the “recall” button didn’t get the job done, Xoom investors have to swallow the company’s gullibility

pill.

Bendigo and

Adelaide Bank

ATM

Marketplace

January

Australian financial services industry watchdogs take extreme umbrage over actions by Bendigo and Adelaide Bank

to charge customers for use of the bank’s own ATMs. AU is often looked upon as a Petri dish for innovation by U.S.

regulators who should take note that the bank has imposed the ATM on-us fee to compensate for lost revenues related

to the Reserve Bank of Australia’s hatchet job on POS interchange over five years ago. In the meantime, other Oz

bankers are raising their foreign ATM fees considerably and now charge between $1.63 and $4.08, depending on the

bank and type of ATM used. The current U.S. rate for off-us ATM use is $2.77.

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14


Partnership:

PayPal Here &

Microsoft Surface

Pymnts.com

January

Sometimes 1+1=1½. This might be the case with the new PayPal Here and Microsoft Surface business line

combination. Both face stiff headwinds from Apple Pay and the iPad. Both want to circumvent direct head-to-

head competition and have struck upon this venture to capture the imagination and gilt of non-Apple SMBs and

to offer alternative payment options for merchants seeking Apple Pay alternatives. While a seemingly good

option for both parties, constructing a solution that works solely for merchants who would never take Apple Pay

or consider an iPad POS solution might narrow the marketplace somewhat.

Apple Pay Finextra

October

Top of wallet is the biggest challenge facing financial institutions, regardless of the digital wallet selected for

use by customers. Wells Fargo is trying to avoid being an also-ran in the Apple Pay land rush and is paying its

credit card customers $20 for signing up while debit and prepaid cardholders will get $10 credited to their bank

statements. The WF offers seems a whole lot better than the free Jamba Juice smoothie that the Softcard crowd

is offering. Oh, wait. Apple Pay launched with enrolled card issuer partners, the other guys didn’t.

MCX Various

October

There probably have been over a million words written about the challenges MCX faces as a consequence of

Apple Pay joining the digital wallet fray. Rather than repeat all the folderol, here’s thumbnail sketch: 1) Yes,

the MCX email system was hacked and some data was compromised. So far, no harm, no foul. 2) Yes, there

are exclusivity agreements in place between MCX and its participants but many expire in 2015 or early 2016.

3) Yes, MCX merchants cannot accept Apple Pay but one retailer, Meijer, has dug in its heels. 4) Yes, there’s a

good chance that CurrenC merchants will also accept Apple Pay in the future (if they’re smart, they’ll that all

wallets; consumers are a fickle lot). And, yes, it’s no coincidence that the MCX CEO had a speaking role in

virtually every payments conference held in 2014; expect the same in 2015. Remember, new payments

initiatives cost twice as much and take twice as long as budgeted.

EMV Business

Intelligence

November

EMV naysayers might shudder at the latest statistic drawn from Visa and MasterCard earnings reports. Looks

like there are 3.6 million EMV-ready terminals deployed in the U.S. at 55,000 merchant locations. Back of the

envelope accounting suggests that we’re at 25 percent penetration and counting. Sure, ubiquity is a long ways

away and local bodegas and farmers’ markets may never make it to full EMV compliance. Yet, at this point,

waiting for EMV to “arrive” doesn’t appear to be a good strategy for issuers or merchants.

Dorado Industries



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15


Transaction Security Payment Eye

November

Despite our earlier announcement that hacks and data breaches will no longer be highlighted, here are a couple of

interesting ideas that may take the industry a step or two beyond EMV. MasterCard is partnering with Norwegian

firm Zwipe for launch of a contactless payment card with a built-in fingerprint sensor. The cardholder’s fingerprint

is actually stored on the card, not in a cloud, adding some security to the device itself. The fingerprint takes the

place of a PIN. Pretty slick, if it (and the economics) works. Meanwhile, a relatively new company, Bionym, is in

trial with a new wearable dubbed Nymi Band. The trial involves authentication of payments using ECG technology

as the bracelet recognizes the user’s unique electrocardiogram signature and sends the authentication to POS devices

via Bluetooth. So far, Bionym has raised $14 million for the production of 10,000 Nymi Bands. Also pretty slick

but you do the math on the device cost.

Faster Payments Various

December

“WTF II” was a TrendWatch 2.0 rant published in Q4, 2013. The angst reflected then asked the question “Why The

Fed?” and discussed its efforts to create a real-time payments system in the U.S. Well, it seems we shouldn’t have

worried because the “nature hates a vacuum” thereom has kicked in. Two logical candidates to operate a real-time

payments scheme have stepped forth. NACHA, still reeling from its failed attempt to launch a quasi real-time

system three years ago, has proposed making same day ACH transfers a reality. Funding for the effort is thought to

be sourced through a fee (dare we say “interchange?”) paid by the ODFI to the RDFI. Since the largest ODFIs are

the country’s largest banks, those on the receiving end of ACH transactions, there’s likely to be some hand-wringing

and smoke-filled room discussions before NACHA gets its way. Meanwhile, The Clearing House, itself, an ACH

processor (and Fed competitor), is streaking forward with its planned multi-year program to build its own version of

real-time funds movement. We’re not sure which of these alternatives to the Fed has more merit but we prefer

either one merely because the governance model used by both is far more transparent and hopefully, more

responsive to constituent needs. End of sermon. Oh, wait. Real-time payments isn’t a slam-dunk even for small

kingdoms like Australia. Its New Payments Platform (NPP) launch was just rolled back to 2017 after five of the

country’s well known but smaller players (HSBC, PayPal, BofA/Merrill, Suncorp, and Bank of Queensland) pulled

away from the Reserve Bank of Australia-backed scheme. IT deficiencies got the blame; want to bet that

governance issues were the real culprit? We do.

Dwolla Dwolla Blog

October

An then there’s Dwolla and its FiSync real-time payments scheme. This legacy system circumvention approach has

attracted another major bank – BBVA Compass – as a user of its open API. Throw in near or full real-time

approaches offered by FIS, Fiserv and a couple others, and the Fed may wind up with a real fistfight to address.

Wonder who plans to write the interoperability rules?

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M&A/Alliance Activity

Buyer/Investor Target Payments Emphasis Possible Strategy

MasterCard,

Wellington

Management,

Sheikh Nahyan (UAE),

Others

Mozido Mobile payments Mozido closes out 2014 as the country’s top-funded private mobile

payments operation. $185 million of a $400 million commitment has

been funded by some very serious investors as Mozido expands its

installed base via acquisitions in China, India, Africa, Latin America

and the Middle East. Seems like cloud-based mobile payments has a

healthy future for investors. Not so sure about issuers and legacy

processors yet.

Verizon, Digicel, Storm

Ventures, True

Ventures

Flint Mobile POS mobile payments Flint Mobile began life as a startup built around snapping photos of

consumers’ payment cards rather than swiping them. Verizon and

returning investors have injected $9.4 million to aid Flint in its efforts

to further leverage the Internet with its Sell Online payments service.

The new Flint system enables existing and future merchants to embed

payments acceptance in existing websites for eCommerce and

omnichannel fulfillment. Pricing for POS services remains

uninspiring: 195 bps for debit, 295 for credit.

Route 66 Ventures D3 Banking Online banking and

transaction services New-comer, D3 Banking, delivers online banking services to FIs for

use by their customers on virtually any platform available today and

in the future. Route 66 Ventures invested $7.0 million on October

23, 2014 and the following day a $10.0 million PE round was funded.

Using the old “follow the money” rubric, D3 may be the company for

regional banks and credit unions to follow for digital omnichannel

transaction processing.

Crowdfunding Bitreserve Bitcoin wallet With Bitcoins currently valued at way less that $300, it seems

implausible that Bitreserve, a Bitcoin wallet gambit, would gin up

£6.3 million in crowdfunding yet we all remember what P. T.

Barnum said (if you’re under 40, Google it).

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M&A/Alliance Activity - Continued


Ingo Money Fuze Network Payment card load network Ingo Money is a mobile check deposit capture firm; hence the “Ingo” handle.

Fuze Network is a technology company which, among other things, provides

access to cash via a string of retailers thereby building symmetry with Ingo.

Fuze had raised almost $4.0 million in early rounds and is staffed and

advised by a list of old payments professional as long as your arm. Terms

were not disclosed but the logic of the transaction speaks for itself.

Structure Capital Draper Associates Green Visor Capital

Kash Retailer mobile payments Kash raises $2.0 million in seed funding to develop, market, and expand its

mobile payments acceptance system for retailers. The Kash system

circumvents (there’s that word, again) traditional card networks by accessing

customer funds directly. Merchant pricing benefits are a critical component

of the Kash offering; transactions flow for a mere 25 bps and some types are

free. Kash is in beta with a number of retailers throughout the San Francisco

Bay area with hopes of coming to town near you, soon.

MasterCard TNS Payment

Gateway

Payments gateway business

line

Now owned by PE house Siris Capital, TNS sells its eCommerce and card

present payments gateway to MasterCard. The buyer intends to combine the

acquired services with DataCash, the unit it paid $520 million for in 2010.

The former TNS gateway will give MasterCard added eCommerce clout

throughout the Americas hemisphere. Terms were not disclosed but we’re

guessing it wasn’t cheap.

Sequoia Capital TransferWise MTS provider London-based startup, TransferWise, scores another $50 million in PE funds

on top of the $33 million raised in the past three years. The TransferWise

system circumvents (concept sounds familiar) bank fees by performing P2P

currency exchanges at a blended market rate. MTS volume for TransferWise

exceeds £1.0 billion. An earlier investor is Richard Brandon who must be

pleased that this tranche elevates TransferWise valuation to about $1.0

billion.

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Buyer/Investor Target Payments

Emphasis

Possible Strategy

Worldpay SecureNet

Payment

Systems

Cloud-based

payments processor

PE-owned Worldpay acquires SecureNet, another processor owned by PE firm

Sterling Partners, out of Chicago. SecureNet professes to be a market leader in

multi-channel commerce and POS transaction processing. Worldpay gains 17,000

merchant relationships and a string of 100 ISO relationships with the SecureNet

deal. PE houses being tight-lipped as they are, terms were not disclosed. How

many single-digit returns have we seen from PE transactions, lately? Right; this

was a rich deal.

Welsh, Carson, Anderson & Stowe; others.

Revel Systems

iPad POS platforms WCAS pours $65 million directly into Revel and provides another $25 million

equity line of credit. Other strategic investors added $10 million for good measure.

Revel is on a roll with its iPad POS systems; it recently captured Dairy Queen,

Goodwill, and Smoothie King. Revel solutions couple iPad mobility with iOS

access to cloud processing and integrate with third party enhancements. Can’t be

good for established POS terminal guys, we think. (Revel also nabbed $1.2 million

in funds from Invest Northern Ireland to open an office in Belfast; clever devils.)

Bessemer Venture Partners, others

Raise Gift card buy/sell exchange

It’s been a bit of time since we’ve heard much from the gift card segment. Now,

Bessemer and others invests $18.l million in Raise, operator of an online exchange

for buyers and sellers of unwanted gift cards. For instance, Raise might pay you

$42 for your $50 BestBuy gift card and sell it to someone else for $46. Pardon the

Biblical reference, but Raise works somewhat like the moneychangers in Matthew

21:12. Seems to be working for Raise, which has attracted $25 million in new

equity so far. One man’s trash is another’s treasure, they say.

New Enterprise Associates and Sequoia Capital

Forter Payments antifraud Consumer and merchant fraud victims, help is on the way. Israeli startup, Forter,

raises another $15 million for a U.S. office launch and segment expansion. Started

by three former PayPal antifraud execs, Forter plans to offer services to the big

dogs in eCommerce and card present vending. Forter systems generate a simple

yes-no response and come with a no chargeback guarantee. Slick!

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19


Dead Pool Google In-app wallet payments Google admits to another mis-step with its Wallet application and plans

to discontinue its in-app payments solution on March 2, 2015. Mobile

purchases will continue to be supported through the Google app store

but shoppers dealing with eCommerce houses that have not pulled out

the API before the shutdown date will receive the dreaded “Error 404”

code, machine talk for “someone screwed up but it wasn’t us.”

Skrill Group Ukash Prepaid online payments Skrill Group, owners of paysafecard since 2013, takes a step toward

broadening its global presence in the prepaid virtual card realm by

acquiring Ukash, a UK-based provider of similar services. Paysafecard

offers load access through a network of 450,000 outlets in 39 countries

while Ukash brings a strong presence in Europe to the party; another

example of collaboration, albeit through takeover rather than partnering.

Softbank Capital, Telstra Ventures, American Express

Bigcommerce eCommerce technology With 70 percent of its eCommerce customers based in the U.S.,

Bigcommerce needs a hand in other parts of the world. Softbank brings

its Asia roots to the party and Telstra is based in Australia. American

Express operates globally with brick and mortar and eCommerce

retailers. These three will add their marketing savvy and $50 million in

Series D funding to keep the Bigcommerce growth curve on an upward

slope.

Thrive Capital Khosla Ventures Founders Fund General Catalyst Partners Sequoia Capital

Stripe Merchant services Hot off its surprising anointment as a “highly recommended” partner for

Apple Pay, its role as the power behind the Twitter “buy” button, and a

sweetheart deal with Alipay, Stripe secures a Series C round of $70

million from new and returning investors. The new investment doubles

the Stripe valuation to $3.5 billion. See what partnering can do for you?

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20


Capital One Level Money Money management app Despite money management being considered boring by most, its value to

consumers persists. Or, so thinks Capital One as it acquires Level Money for

an undisclosed amount. 700,000 people have downloaded the app since

launch in October 2013 and active users account for $12 billion in

transactions. Capital One will integrate Level Money into its family of card

products; another testament to the adage that boredom can lead to creativity.

Bain Capital, Spark Capital, Devonshire Investors, others

PeerTransfer International tuition payments

It’s no secret that U.S. universities attract sizeable numbers of foreign

students. PeerTransfer eases the family burden of making tuition payments by

circumventing the traditional wire transfer channel and foreign exchange

headache. Investors pour another $22 million into PeerTransfer for market

expansion and in recognition of the year-on-year doubling of firm revenues.

The service is free to participating universities and fees paid by students are

generally one-half those paid through traditional methods. For the record, 52

percent of PeerTransfer volume comes from China, India, and South Korea,

all serious payments system innovators.

Undisclosed investors

Altpay Mobile payments Altpay claims to have released its mobile payments solution six months prior

to Apple Pay. The service specializes in smaller retailers within the grocery,

pharmacy, and convenience store verticals. Consumers without bank accounts

are the prime focus on the payer side. The technology is token-based and

takes advantage of smartphone tools to determine purchase location and time.

Not sure of its “we beat Apple Pay” claim, but the service looks good to us

and those who plopped $1.0 million into the company for another look-see.

Mozido CorFire Mobile payments CorFire’s former owner, SK C&C, will retain a minority interest while

Mozido gets the lion’s share. CorFire is best known for its role as the engine

behind Dunkin’ Donuts wildly successful in-store payments app. Couple this

deal with the recent “partnering” arrangement with MasterCard, and Mozido

looks to be well on its way toward “world-beater” status.

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21


Payment Data Systems

Akimbo Financial GPR services General purpose reloadable provider PDS acquires all the assets of

Akimbo Financial, a competing GPR operator, for $3.0 million. The

purpose is that of market share growth and leverage brought by

Akimbo’s social payments twist.

Dead Pool Square/Starbucks Mobile payments While Starbucks remains an investor in Square, and the coffee shop

uses the company for debit and credit processing, customers can no

longer use Square’s wallet for their daily jolts of caffeine. Instead,

Starbucks is toying with its own order-ahead app with plans to

rollout the service to a blurry-eyed national market in 2015.

Starbucks invested $25 million in Square in 2012. So it goes.

UniRush WEX Payroll card services UniRush, issuer of Russell Simmon’s Rush Card and other prepaid

card consumer solutions, launches a diversification gambit by

acquiring the rapid! PayCard business line from WEX (aka Wright

Express.) The rapid! integration with RushCard should prove

interesting as users of PayCard are encouraged to swap their payroll

disbursement device for a general purpose card. Time will tell.

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22


Heartland Payments Systems

XPIENT Restaurant POS software HPY makes another move toward fuller systems integration in

selected market verticals by acquiring XPIENT, software service

provider for eleven of the top twenty-five quick service restaurant

brands. XPIENT systems handle not only payments but kitchen

management, front counter sales and mobile apps. More of the “do

more for our customers” strategy from Heartland.

JetPay Corp. ACI Merchant Services

Debit and credit card processing

Payroll, debit/credit, and prepaid card processor JetPay, acquires

ACI Merchant Services through a combination of debt, preferred

stock sales, and common stock. The combination is a market share

play resulting in combined annual transaction volume of over $20

billion and 14,000 business relationships. Oldsters will recall that

JetPay is headed up by Bipin Shah, a formidable competitor.

Established market leaders ought to be checking their rear view

mirror frequently.

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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

Coinstar Digital gift cards www.coinstar.com

WorldRemit MTS provider www.worldremit.com

Xoom MTS provider www.xoom.com

Zwipe Fingerprint authentication www.zwipe.no

D3 Banking Online banking www.d3banking.com

Kash Mobile payments www.withkash.com

Revel Systems Merchant services systems www.revelup.com

Forter Antifraud systems www.forter.com

Bigcommerce eCommerce technology www.bigcommerce.com

http://www.coinstar.com/

http://www.worldremit.com/

http://www.xoom.com/

http://www.zwipe.no/

http://www.d3banking.com/

http://www.withkash.com/

http://www.revelup.com/

http://www.forter.com/

http://www.bigcommerce.com/

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Back in the day!

24

Congratulations to Q3 Back in the Day contest winner John Stewart from

Digital Transactions. John spotted the Pay By Touch terminal and knew

that PBT entered the Dead Pool in 2008. You, too, could be sporting

Dorado Industries gear by being the first to respond by email with answers

to this quarter’s contest.

?

Shortly after the Earth cooled, the EFT payment processing industry was led

by Deluxe Data Systems, part of the Deluxe Electronic Payment Systems

business line for Deluxe, the check printing company. DDS delivered EFT

processing through Connex software running on Tandem Non-Stop

computers. This quarter’s trivia question is two-fold:

1. What company owned Deluxe Data Systems originally, and

2. What was/is the seller’s principal line of business?

(Former DDS employees over the age of 50 need not reply.)

Acquisition Spin-out Acquisition

Dorado Industries TrendWatch Q4 2014

Business

Transcript of Dorado Industries TrendWatch Q4 2014