All Things Payments & EMV. /

www.TheStrawGroup.com / www.PaymentsPulse.com

History and major payments milestones

Merchants having the ability to accept card brands is the

foundation of the merchant acquiring industry

1920

Companies such as oil

companies and hotel

chains issued their own

credit cards

1946

First bank card

“Charg-It”

is introduced

1949

Diners Club

card

introduced

1951

Franklin National Bank

issues the first bank

credit card

1958

American Express

introduces its first

credit card

1959

Financial institutions

introduce a revolving

balance option

1966

BankAmericard (now

Visa) and InterBank Card

Association (now

MasterCard) are

established

1986

Discover Card, originally

part of the Sears

Corporation. Its first card

was unveiled at the 1986

Super Bowl

1998

PayPal is founded

2006/2008

MasterCard and Visa go

public; previously owned

by member FIs now

regard themselves as

payment companies

Section 1: Payments Primer

The Changing Payments Ecosystem

Section 1: Payments Primer

Tech. Solutions

Payment Brands

POS Providers, VARs, ISVs

3

rd

_Party

Processors

Banks

Gateways

Acquirers

ISOs

The typical transaction flow

Traditional

Merchant

Acquiring:

Clearing &

Settlement

Overview

Payments

Network remits

funds to the

acquiring bank

If authorization occurs, the

Issuing Bank withdraws and

remits funds through the

Payments Network

Acquiring bank credits

Merchant’s account, net of

fees paid to the Issuing

Bank, Payments Network

and Merchant Acquirer

Merchant submits transaction

information to its Merchant

Acquirer

Acquirer transmits

transaction, via 3

_Party

Processor, to the

appropriate Payments

Network

Payments Network

directs transaction to the

respective Issuing Bank

for authorization

Authorization

Settlement

Merchant

3

_{Party Processor}

Payments Network

Issuing Bank

1

2

3

4

5

6

$

Consumer

$

Merchant

ISO/Bank/Acquirer

In recent years,

payments companies

have evolved to provide

more products to

merchant clients, with

recent products and

service offerings

including business

management software,

marketing tools and

analytics, as well as

mPayments (mobile

payments)

Small

Merchants

Market

Large

Merchants

Mid-Sized

Merchants

Products / Services

Indirect /

Traditional ISO

Direct Sales

Agent Banks

Telesales

POS Developers /

ISVs and VARs

Trade Associations

/ Other

Sales Distribution

Check Processing

& ACH

Pre-Paid Services

& Loyalty

Solutions

Credit / Debit

Card Processing

Virtual/Physical

POS Terminal

Sales

Grocery /

Supermarkets

Restaurant

(Table / QSR)

Hotels

Representative

Verticals

Specialty /

Mass Retail

Convenience /

Fuel

Healthcare

Property

Management

Education

Data Security /

PCI

Retail Direct

Selling

Business

Management

Software

Marketing Tools

& Analytics

Electronic payments companies are the driver of commerce in the U.S.

In 2015, there will be

$4.9 Trillion

of Volume on Cards in the U.S.

$408 Billion Per Month

$13 Billion Per Day

$560 Million Per Hour

$9 Million Per Minute

$155 Thousand Per Second

In 2015, there will be

82 Billion

Transactions on Cards in the U.S.

7 Billion Per Month

224 Million Per Day

9 Million Per Hour

156 Thousand Per Minute

2.6 Thousand Per Second

U.S. Consumer

Spending:

$10.5 Trillion

(2015)

For context

U.S.

GDP:

$16 Trillion

(2015)

Federal

Government:

collected $2.5

Trillion in taxes

(2012)

Section 2: The Opportunity & Data Metrics

Total Visa/MasterCard credit & debit payment volume is estimated to reach nearly $4 trillion by 2015

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

Source: Visa & MasterCard earnings releases

2012 data annualized YTD Sept. 2012 totals 2013, 2015 trended using 2012-2016 CAGR

$674

$743

$808

$824

$764

$809

$889

$959

1,042

$1,237

$1,405

$554

$643

$726

$817

$883

$1,054

$1,152

$1,096

$1,155

$1,217

$1,283

$472

$509

$548

$547

$477

$479

$508

$524

$567

$613

$663

$146

$216

$269

$309

$327

$333

$393

$443

$484

$529

$578

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Visa Credit

Visa Debit

MasterCard Credit

MasterCard Debit

$1,846

$2,111

$2,351

$2,497

_$2,451

$2,675

$2,942

$3,021

$3,248

$3,596

$3,929

(Volume in $ billions, debit is signature and PIN)

+8% CAGR

The chart below displays the performance of a $100 investment in an index of selected payments companies which represent the “TSG Payments Index” - this

index is calculated on a value weighted basis using market capitalization and is compared to the S&P 500 which is also calculated using the same methodology.

A $100 investment in the TSGPX in Q1 2007 would now be valued at $346, as compared to $146 if invested in the S&P 500.

The chart above displays the performance of $100 investment in an index of the following listed companies which represent the “TSG Payments Index” - this index is calculated on a value weighted basis using market capitalization and is compared to the S&P 500 which is also calculated using the same methodology. This analysis does not include affects of re-invested dividends. While some of the companies listed in TSG’s Payments Index do not meet the requirements to be a S&P 500 listed company (S&P listed companies have a market cap of at least $3 billion), the S&P 500 served to be the best comparable index to TSG’s Payments Index since it is one of the most commonly used benchmarks for the overall U.S. stock market. In fact, many consider it to be the definition of the market. The companies included in TSG’s Payments Index met the criteria that at least 50% of their revenues were produced from electronic payments products or services. Ingenico and Gemalto have been removed due to inclusion of NetSpend and Cardtronics as well as their being traded on non-US exchanges. As of Q4 2011 Fundtech has been removed due to an acquisition and Tier Technologies’ name has been changed to Official Payments. Vantiv was added to the index as of Q1 2012. 3PEA International was added in Q1 2013. LML Payment Solutions and Transaction Network Services were removed as of Q1 2013 due to acquisition.

U.S. Merchant Breakdown: Acquiring Opportunities – 2015 est.

Sources: Morgan Stanley estimates and TSG estimates

National

Merchants

> $1 Billion

Annual Bankcard Volume

Large

Merchants

$1 Million - $1 Billion

Annual Bankcard Volume

Mid-Sized

Merchants

$100,000 - $1 Million

Annual Bankcard Volume

.005%

Merchants

2%

Merchants

12%

Merchants

50%

Sales Volume

30%

Sales Volume

12%

Sales Volume

25%

Revenue

30%

Revenue

5%

Revenue

Estimated Number of Bankcard Accepting U.S. Merchants: 8 - 10 Million

Total V/MC Bank Card Sales Volume: $3.9 Trillion

Total Acquirer Net Revenue: $11 Billion

Small

Merchants

< $100,000

Annual Bankcard Volume

86%

Merchants

8%

Sales Volume

40%

Revenue

Small and medium size merchants make up the majority of the opportunity for most merchant acquiring companies

40% of the *net revenue opportunity

*Net Revenue = Gross Revenue + Other Income – Cost of the Trans.

Section 2: The Opportunity & Data Metrics

If you’re not doing payments, you’re missing out on

big money. If you are doing payments, do what it

takes to get all your customers processing with you.

In the recent past, a deluge of inside changes have affected the merchant acquiring ecosystem

Mobile

Technology Companies Compete

eCommerce

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

Trend: Mobile Payments. Payments made via a mobile device in the world – 2010 – 2015 estimates

Source: IE Market Research

$240

$379

$600

$634

$670

$100

$200

$300

$400

$500

$600

$700

$800

2011

2012

2013

2014

2015

11,161

13,204

15,622

18,482

21,866

0

5,000

10,000

15,000

20,000

25,000

2011

2012

2013

2014

2015

2.9%

3.1%

2.2%

3.8%

3.4%

% Mobile Payments

Global Consumer Electronic Payments $ Volume via Mobile Device

2011-2015 est. (in billions)

Global Card Payments $ Volume

2011-2015 est. (in billions)

Section 3: Trending

Trend: Technology Companies Competing

Square and PayPal’s influence has been immense in that they helped created a new,

card accepting micromerchant market – see chart below. With this new market,

merchant acquiring is not a zero sum game.

The U.S. Merchant Market (Est.)

150 Largest Merchants

100,000 Large Merchants

250,000 Medium Merchants

6.5 Million Small Merchants

25 Million Micromerchants

% of Visa &

MasterCard Sales

Volume

50%

30%

12%

6%

<2%

Traditional

Merchant

Market

New

Merchant

Market

Square’s Market

Share

(~2 million merchants)

Section 3: Trending

Trend: Ecommerce

71%

18%

2%

1%

1%

1%

7%

Cards

Mobile wallets

Direct Debits

Mobile

Cash on delivery

Bank transfers

Other

eCommerce Share By Payment Type (U.S.)

8%

92%

eCommerce Sales

Other Bank Card

Payment Methods

eCommerce Share of Bank Card Volume (U.S.)

Section 3: Trending

The ecommerce space is an

important and growing opportunity

in the U.S. market. Currently, 8% of

Visa/MC volume is online. To

compete, merchant acquirers have

to have an ecommerce offering.

In the recent past, a deluge of outside influences have changed the merchant acquiring ecosystem

Data Security Breaches

EMV

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

Data Breaches Happen Frequently

_1,054

breaches last year in the U.S. alone

Data Breaches Cost Millions

_$54.M

is the average cost per company

Most Breaches Could Have Been Prevented

_89%

of breaches analyzed by the Online Trust

Alliance could have been avoided with basic

controls and best practices

Primary Breach Targets

Impact The Largest Merchants

45%

24%

9%

Retail

Food & Beverage

Hospitality

2013 broke the record (by nearly double) for the most records exposed:

822

million globally

The recent Target breach ranked only

fifth

in breach history for total records exposed

The average breach cost per record was

$188

in 2012

78%

of initial intrusions are rated as

low difficulty

Trend: Data Breaches

EMV

Major card brands support EMV because it:

• Reduces criminal attractiveness of card fraud.

• Reduces chargebacks due to counterfeit or stolen cards.

Fewer chargebacks

save merchants time and reduce the frustration typically involved with the

chargeback process.

• Helps merchants avoid the potential liability for card-present card fraud.

• Creates common cardholder experience.

Moving to the EMV standard in the

U.S. will make it easier for U.S. travelers using cards abroad. Likewise,

international travelers have peace of mind when conducting transactions in

the U.S.

• EMV also helps usher in the new technology and capability for contactless

transactions. EMV is the stepping stone to the future of payments due to its

dynamic data authentication (i.e. contactless, mobile).

What Is EMV?

Source: EMVCo; Smart Card Alliance; American Banker; Federal Reserve

EMV, named for the coalition of Europay, MasterCard, and Visa (the EMV Coalition or

EMVCo) that developed the specifications for the system in the 1990s, improves safety

through better card security and improved standards. EMV has become the world-wide

standard and both U.S. neighbors, Canada and Mexico, have EMV mandates impacting

U.S. multi-national retailers.

EMV Fraud Liability Shift Explained

October 2012

April 2013

October 2013

April 2015

October 2015

October 2016

October 2017

Visa

PCI audit

relief

Acquirers &

processors required

to support merchant

acceptance of EMV

transactions

3

_{party ATM}

acquirer

processors &

sub-processors

required to

support EMV data

Card-present

counterfeit

liability takes

effect excluding

automated fuel

dispensers (AFD)

ATM liability shift

Card-present

counterfeit liability

takes effect for

automated fuel

dispensers

MasterCard

Account data

compromise

(ADC) relief

(50%)

ADC

relief

(95%

-100%)

ATM liability

shift

Lost or

stolen

liability

shift for

AFD

Lost or

stolen

liability shift

Discover

PCI audit relief

American Express

Each card network's EMV deadline varies slightly, but these are the broad requirements put forth for

their implementation:

• April 2013 -

Merchant acquirers and card processors had to upgrade their systems to be able to

process chip card transactions.

• October 2015 -

Liability for magnetic stripe card fraud is shifted to the entity that does not support

EMV technology. The broad idea is that the merchant, issuing bank, or credit card processor that's not

on board with EMV would bear the responsibility when fraud occurs.

• October 2017 -

The liability shift goes into effect for organizations that sell fuel. These businesses have

much more expensive payment terminals and have more time to upgrade.

Liability Approaching

Source: EMV Migration Forum; TSG Analysis and Commentary; Federal Reserve; Retail Info Systems (RIS); Card brands

Who is ready (and who is not) for the transition to EMV in the U.S.?

Section 3: Trending

Three key impediments that are

stalling EMV at small merchants:

• Limited awareness

• Absence of a clear ROI

• A story they've heard

before

EMV: Not Coming To A Small Merchant Near You

There is a troubling reality for small-merchant EMV take-up.

• 4% of merchants with fewer than 20 employees have implemented EMV-compatible terminals.

• 72% have no plan in place to deploy the technology by the October 2015 liability shift.

4%

24%

35%

37%

Yes

No, but plan to do so prior to October 2015

No, but considering acceptance with no definite time frame

No, and no plans to do so

EMV Deployment at Merchants With Fewer

Than 20 Employees

Source: Yankee Group

The Value Added Benefits of EMV

Section 3: Trending

The Time is Right

• Smart phone usage and technology.

Given that phone manufacturers are gearing up to include NFC

capabilities, and the rapid replacement rates of smart phones by U.S. consumers (every 1.7 years on average), it

is predicted that over 50% of smart phones will be NFC enabled by 2015.

• Growing momentum of contactless.

Many major retailers have already implemented contactless

payments. While the technology being deployed in the U.S. is not fully dynamic, the growth in usage by

consumers indicates that the contactless payments will grow even more significantly in the more feature-rich,

dynamic mobile world.

• Changing shopping behaviors.

The number of consumers using online shopping aids, such as price

comparison and product review sites, is growing rapidly. However, there continues to be a missing, seamless

link with the payment at POS and online.

• The new ecosystem will increase consumer usability and spend.

Consumers are likely to use their

EMV-enabled devices more frequently and enthusiastically when they have a clear understanding of the

benefits - particularly around fraud prevention. EMV and the bridge to mobile will allow cardholders to

experience interactive, real-time experiences such as location-based services, online reviews and price

comparisons. The impact of consumers’ perception can be both significant and positive. In Latin America, for

example, card usage following EMV migration increased with the perception of stronger payment security.

EMV Lays The Foundation For A New Payment Ecosystem In The U.S.

EMV – The Bottom-Line

Section 3: Trending

An open, collaborative approach by all industry stakeholders will be the best way to develop

a comprehensive, thoughtful and innovative standard for the “next generation” secure

payment acceptance environment/infrastructure. What’s more, timelines must be realistic

for all stakeholders including issuers, acquirers, hardware manufacturers and merchants.

Collaboration Is Needed

Source: TSG Analysis and Commentary; Bank Info Security; Accenture

Sharing The Costs

• The costs of conversion are considerable, and will be borne by

merchants and FIs. As in prior EMV rollouts in other countries, if

the card networks were to help share the cost of the

technological transition, it could drive much faster adoption in

the U.S. The U.K. and Australian markets also were given

interchange concessions by the card networks, which helped

share the costs of purchasing and deploying new hardware and

software that will benefit many stakeholders.

The Future Of Payments

Card Brands

Card Readers & Apps

Technology Companies

The Future Of Payments

Technology companies that have the potential to be disruptors in the payments space:

• New entries into the market have the potential to be very disruptive, but lack

volume, acceptance and market share has limited any appreciable impact to

traditional payment models

• Often more marketing buzz than business impact

• Historically focused on technology focused consumers for P2P and P2B transactions

• Other Technologies to watch out for: Bluetooth LE and beacons

• Apple Loyalty

• Potential to be

Disruptive

• NFC

• iPhone 6 and Apple

Watch

• Secure

• Standard Rails

• Limited Use

• < 2% Merchants

• $6B Self Valuation

• Mass Aggregation

• Simple Boarding

• Not Profitable

• Underwriting

• Poor Security

• No Customer Service

• Evolving Model

• User Base

• Local Register

• Backed by

Amazon

• Incentives

• Billing &

Recurring

Payments

• 152 M

Customers

• Global

• Brand

• $27 B Mobile

• Home Depot

• Aged Platforms

• Developer

Preferred

Interface

• Recurring Billing

• Global

• Secure

• Cash Based Service

• <$10 Free

• Flat Fee

• Small (60 Employees)

• Unique Approach

• No Card Brand

Interactions

• US Only

www.TheStrawGroup.com / www.PaymentsPulse.com

Question & Answer

About TSG

The Strawhecker Group (TSG) specializes in

providing financial institutions, merchant

acquirers, card associations, ISOs, processing

companies, large merchants, and the

investment community with advisory services

to maximize their growth and profitability.

TSG is also a resource for consumer spending

data, industry research, benchmark studies,

and developing trends.

For more information please visit

www.TheStrawGroup.com

.

Chuck Fillinger, Senior Associate TSG /

[email protected]

402-964-2617

Mention Retail

IT to get 15%

off TSG’s EMV