Merchant Acquiring

Industry Overview

PREVIEWSTRICTLY CONFIDENTIAL.

For discussion purposes only.

This Report, and all information, analysis andconclusions hereunder, is in all respectssubject to and governed by the terms andprovisions of the Engagement Agreementbetween The Strawhecker Group and theClient.© Copyright 2013. The Strawhecker Group.All Rights Reserved.

Confidential. For discussion purposes only.

© Copyright 2013. The Strawhecker Group. All Rights Reserved.

Report Overview

2

The Global Payments Marketplace Page 3

U.S. Consumer Payments Breakdown: Electronic vs. Cash/Check Page 4

U.S. V/MC Payment Volume Trends & Projections Page 5

Electronic Payments Still Significant Growth Opportunity – V/MC Bankcard Volume Est. % of Non-Durable Consumer Spending Q1 1991-Q1 2013 Page 6

U.S. Merchant Breakdown: Acquiring Opportunities – 2012 est. Page 7

Estimated Number of SMB V/MC Accepting Merchant Locations by Merchant Tier // Estimated Percent of SMB V/MC Volume by Merchant Tier Page 8

Estimated Number of SMB V/MC Accepting Merchant Locations by SIC Code // Estimated Percent of SMB V/MC Volume by SIC Code Page 9

Payments Companies Vs. S&P 500 Page 10

Merchant Portfolio – Average Dollar Volume Attrition & Growth Performance // Merchant Portfolio – Average Net Revenue Attrition & Growth Performance Page 11

Section 1: Growth of Electronic Payments

Full Report Includes the Following Content:

Reasons to Purchase:

• All encompassing guide to Merchant Acquiring – useful to new entrants and veterans alike

• Relevant, timely data – fresh information useful for current decision-making

• Unmatched – TSG holds many data points unknown to the industry due to Associate knowledge and TSG’s vast database

• Quantity & Quality – Priced competitively with the market, the professionally presented, tangible data in this report far surpasses the initial cost

Confidential. For discussion purposes only.

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Report Overview

3

Merchant Acquiring Services are Associated with Enhanced Performance in Small Business Banking Relationships Page 13

Traditional Merchant Acquiring: Clearing & Settlement Overview Page 14

Merchant Acquiring Value Chain & Business Models Page 15

Chain of Companies Involved in a Cardholder Transaction & Approximate Revenue Each Receives Per Transaction Page 16

New Entrant Value Chain Structure Compared to Incumbent Acquirers/ISOs Page 17

The Merchant Acquiring Ecosystem Page 18

Evolution of the Top 10 U.S. Acquirers – Bank Card $ Volume Market Share (1988 - 2012) Page 19

Reported Top 50 U.S. Merchant Acquirers (#1 - #50) Page 20-21

Merchant Acquiring – Sales Strategies Pages 22

Acquirer Vertical Sales Specialization Page 23

Emerging Markets Page 24

Signature/PIN Debit Transaction Economics: Pre-Durbin vs. Post-Durbin // Lift Provided to Merchant Acquirers Post-Durbin Interchange Provision Page 25-27

Other Happenings Impacting The Payments Industry // Payments Company Evolution – More Products/Services Page 28-30

Outside Influences on the Merchant Acquiring industry Page 31

Section 2: Market Landscape

Impact of Square on Incumbent Acquirers Page 33

Square Threat Using Price – Total “All-in” Cost to Merchant – Bankcard Volume Only Page 34

Monthly Attrited Account Gross Dollar Volume Attrition – 3 Month Rolling Averages Page 35

ISO Examples Assuming a Price Neutral Scenario Using Size/Complexity as variables Page 36

The U.S. Merchant Market (Est.) Page 37

Section 3: Mobile Payments

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Issuing Bank

Card Brand

Sponsor Bank

Processor

Acquirer / ISO

Channels

Total Trans $0.11

Total Trans $0.08

Total Trans $1.41

Card Swipe Fee Income –Typical $100 Credit Card Transaction

with a swipe fee rate of 2.36%

Total Trans $0.02

$97.64Revenue to Merchant

Indirect / Traditional

ISODirect Sales

POS Developers /

VARs

Trade Associations /

Other

Total Trans $0.74

Channel Share

Section 2: Market Landscape – Example SlidesThe following chart illustrates the economics of a $100 card transaction and the estimated revenue to each player in the value chain.

5Confidential. For discussion purposes only.

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Issuing Bank

Card Brand

Sponsor Bank

Processor

Acquirer / ISO

Channels Indirect / Traditional ISO

Direct Sales Agent Banks Telemarketing

POS Developers / Value-Added

Resellers

Trade Associations

/ Other

Revenue to Merchant

New entrants like Square have similar value chain structures to incumbent Acquirers/ISOs, resulting in increased competition versus outright disintermediation and substitution

Section 2: Market Landscape - Example Slides

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Section 2: Market Landscape - Example SlidesThe Changing Payments Ecosystem

The Merchant Acquiring Ecosystem Comments

This chart shows the blurred lines between competitors and partners in the payments industry

— For example, First Data is a Processor for many ISOs and Acquirers, while it is also an acquirer on its own behalf through alliances and internal sales channels

An Acquirer is classified as: a Bank or processor that provides an in-house processing platform (front-end and/or back-end), other product technology, back-office services and sales functions for its own acquiring needs

An ISO is classified as: an organization whose primary mission is a merchant sales function and may provide some limited additional functions such as back-office customer services

Tech. SolutionsPayment Brands

POS Providers, VARs, ISVs

3rd Party

Processors

Banks

Gateways

Acquirers

ISOs

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Industry LandscapeSection 2: Market Landscape - Example Slides

7

M e r c h a n t A c q u i r i n g

Outside Trends affecting Merchant Acquiring

Mag-stripe cards aren’t going away soon. While the U.S. is the last

major market to migrate to EMV, all regions of the world are still in

migration status with varying levels of EMV Chip cards (contact &

contactless) and varying levels of EMV equipped POS.

Influences of interchange regulation are beginning to be felt throughout

the payments value chain. Regulatory enforcement by rule vs.

legislation is beginning to occur. FTC, FED and CFPB are seeking to

deputize all industry players to reign in perceived bad actors. Payday lending may become a target.

Deliberate ignorance will no longer be a defense for lack of action.

Payments related Data Breaches -post Target - have become top of

mind for consumers and government. It is logically true that

card data will be safer with a full implementation of EMV at the point-

of-sale, however this solution has shortcomings as well, such as Card

Not Present (CNP) transactions which will be unaffected by this technology change, which today

accounts for 8% of U.S. card payments.

Data Security Breaches Government Oversight EMV

In the recent past, many outside influences have affected the merchant acquiring ecosystem

As consumers AND merchants embrace the emerging purchase

model, the tipping point is closer to being reached. A recent study

performed by Shopper Sciences Inc. for Google found that consumers

typically are influenced by more than 10 different information sources

prior to making a purchasing decision

Both predominant networks are expanding their reach within the

payments ecosystem buying gateways and marketing companies. Both

networks are looking at prepaid, the unbanked and commercial products as

growth areas. These actions may create attractive new industry verticals.

Bitcoin certainly has some of the characteristics of successful money -

it is becoming fairly widely acceptable, even if it is not generally

so. The big problem with Bitcoin, however, is that it is an unreliable store of value and price volatility. Not part of the future, short-term.

Bitcoin Visa & MasterCard Emerging Purchase Model

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Comparable Company AnalysisAbout TSGThe Strawhecker Group (TSG) is a management consulting company focused on the electronic payments industry.

TSG’s Service GroupsPayments Strategy - Payments Strategy encompasses the full spectrum of advisory services within the Payments Industry. The depth of these services is built on deep industry knowledge - the Partners and Associates of the firm have an average of over 20 years of industry experience. With clients from card issuers to merchant acquirers, TSG has the experience and expertise to provide real-time strategies.Transaction Advisory - Whether buying or selling, seeking investment funding, or planning your company’s exit strategy, TSG’s experience can be critical to achieving success. TSG has performed more than 100 Payments Company Valuation and/or Business Assessments in the past three years - ranging in value from $1 million to $1 billion.TSG Metrics - TSG Metrics, the strategic research and analysis division of TSG, provides the Payments Industry with highly focused research and industry-wide studies. TSG Metrics takes data, boils it down to information, transforms it to knowledge and presents it to provide wisdom to its client partners.

TSG’s Unparalleled ExperienceTSG consists of Industry leaders with extensive experience leading teams through explosive growth periods, mergers and acquisitions, and international and domestic expansion within the Payments Industry. Both Partners and Associates of the firm have held key senior management positions at leading industry companies including First Data / First Data International, Visa Inc., MasterCard, TSYS, Humboldt Merchant Services, WorldPay, Heartland Payment Systems, Cardservice International, iPayment, Alliance Data, RapidAdvance, Accenture Consulting, Redwood Merchant Services, Chase Paymentech, as well as other leading financial institutions and Payments companies.

TSG’s Influence Shapes the Payments IndustryOver the last three years, TSG has completed over 400 projects for more than 200 different clients including financial institutions, merchant acquirers, card issuers, card associations, technology providers, ISOs, processing companies and the investment community. Additionally, the firm and its Associates sit on several industry committees whose focuses range from emerging product development to governmental regulation advisement.

Other recent TSG reports and analysis include (Click for more information):

Should Merchant Acquirers Beware of

Square?

TSG Analysis: TSYS Acquisition of NetSpend

What Benefits Me By Paying a Credit Card

Swipe Fee

TSG Mobile Payments Infographic

ETA/TSG Q1 2013 Economic Indicators

Report

For more information, contact TSG at info@thestrawgroup.comSubscribe to TSG's NewsFilter * PaymentsPulse.com * Follow TSG on Twitter * Follow TSG on LinkedIn * TheStrawGroup.com