Payment Processor Initiation

Transcription

1 Payment Processor Initiation Initiating Coverage The Computer Services and Software industry encompasses a broad array of companies that provide software and systems to help automate high-volume data processing tasks for third parties. This initiation piece on the Payment Processor sector within the Computer Services and Software space focuses on the processing of electronic payments, primarily for credit cards, debit cards, ATMs, and other Money Transfers. We are initiating coverage of three fundamentally sound companies with leadership positions in various segments within the group: Alliance Data Systems, Concord EFS, and First Data Corp. We are initiating coverage on the Payment Processing space due to its favorable fundamental characteristics and long-term growth outlook. The favorable industry forecast stems from the secular trend of consumer payments migrating from paper checks and cash to electronic form, specifically card-based methods. According to the Nilson Report, card-based payment systems are forecasted to represent 48% of total payments made in the U.S by 2020 from its current 29% share, which is double the percentage of payments from card-based systems in By 2015, the dollar volume of goods and services purchased with card-based methods is forecasted to surpass the entire dollar volume ($5.5 trillion) of all goods and services purchased with all consumer payment methods (cash, check, card-based, and electronic) last year. The companies under coverage are leaders in the industry (especially in specific niches within the industry) that should gain market share from weaker competitors, as well as grow through the secular trend in the payment sector away from paper checks and cash towards electronic forms. The companies should benefit from the high-barriers to entry and leverage associated with the industry, as they all have the infrastructure in place so that each additional transaction processed through a company s network brings incrementally more profit to the bottom line. Although we believe all three companies, Alliance Data Systems, Concord EFS, and First Data Corp., are fundamentally sound companies with nice growth prospects, we are currently recommending the purchase of Concord EFS and First Data Corp. Computer Services & Software Equity Research December 4, 2002 Initiation of Coverage Don McArthur, CFA (913) mcarthud@stifel.com Craig A. Richard (913) richardc@stifel.com Alliance Data Systems ADS/NYSE Market Perform (Disclosures: Page 29) Close 12/03: $18.57 Concord EFS CE/NYSE month target price $18-19 Buy (Disclosures: Page 29) Close 12/03: $15.58 First Data Corp. FDC/NYSE month target price $42 Buy (Disclosures: Page 29) Close 12/03: $36.21

2 TABLE OF CONTENTS Overview Page 3 Payment Processing Industry Page 5 Credit Cards and Debit Cards. Page 6 PIN vs. Signature Debit Debate... Page 9 Lawsuit: Merchants vs. Visa Page 11 Automated Teller Machines (ATM) Page 12 How Does a Payment Transaction Work?... Page 15 Merchant Acquirers. Page 17 Check Authorization (Guarantee & Verification) Page 18 Processors for Issuing Banks Card Files. Page 19 Retail Store Credit Cards.. Page 19 More Litigation: Visa vs. First Data (Net)... Page 21 Money Transfer Page 23 Alternative/Emerging Payments... Page 25 Electronic Check Conversion... Page 25 Person-to-Person / Account-to-Account... Page 26 Stored Value Cards... Page 27 Electronic Benefits Transfer. Page 27 Quick (Small Value) Payments Page 28 Stifel, Nicolaus, & Company, Incorporated 2 Payment Processing Industry

3 OVERVIEW According to the Nilson Report, cardbased payment systems are forecasted to represent 48% of total payments made in the U.S by 2020 from its current 29% share, which is double the percentage of payments from cardbased systems in We look favorably upon the secular macro-trends in the domestic and international electronic payment industry as well as the individual fundamentals of the companies under coverage. The basic driving force behind the growth in the payment processing industry is the general migration from paper-based payments to electronic methods, specifically card-based forms, including credit cards, debit cards, stored value cards, and electronic benefit transfer cards (EBT). According to the Nilson Report, card-based payment systems are forecasted to represent 48% of total payments made in the U.S by 2020 from its current 29% share, which is double the percentage of payments from card-based systems in By 2015, the dollar volume of goods and services purchased with card-based methods is forecasted to surpass the entire dollar volume ($5.5 trillion) of all goods and services purchased with all consumer payment methods (cash, check, card-based, and electronic) last year. Current Consumer Payments System 2001* Estimated Consumer Payments System 2020* Credit 18% Debit 9% Other 4% Other 19% Cash & Checks 35% Source: The Nilson Report Cash & Checks 69% Debit 26% Source: The Nilson Report * based on transactions *based on transactions Credit 20% Due to the interchange fees involved, certain transactions are not only safer, faster, and cheaper to perform for financial institutions than paper checks and cash, but more profitable as well. We believe that the companies under coverage are poised to benefit as consumers continue to reach for a credit or debit card instead of cash or a paper check at the merchant s point of sale (POS). Consumers are encouraged to utilize card-based methods of payment, as they are faster and safer for merchants to process than paper checks. Due to the interchange fees involved, certain transactions are not only safer, faster, and cheaper to perform for financial institutions than paper checks and cash, but more profitable as well. We believe the cost savings will eventually funnel down to the consumer, as merchants and financial institutions can operate at improved operating margins without raising prices. Additionally, we believe the demographic shift from the aging of the population (younger people are generally more familiar and comfortable with using credit and debit cards) and convenience of card usage should drive the consumer s appetite for card-based payment. As indicated in the chart below, we expect continued advances in the consumer s usage of cardbased payments, which should bode well for the specific companies under coverage. 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Card-Based Payments as % of Total Consumer Payments (Based on Number of Transactions) 14.4% 19.7% 28.6% 33.7% 39.3% 44.8% 48.2% E 2010E 2015E 2020E Source: The Nilson Report Stifel, Nicolaus, & Company, Incorporated 3 Payment Processing Industry

4 We believe all three companies under coverage have solid fundamentals as they generate significant cash flow, have solid balance sheets, and grow revenue and EPS at respectable rates. Other favorable investment characteristics include that they are industry leaders in their respective business lines, have long-term contracts, and maintain leveragable business models. On the negative side, revenue is based on transactions and is therefore dependent on the volume of activity across their systems, which can be affected by a number of issues including economic fluctuations, consumer preferences, and seasonality. Furthermore, the mix of business between large, national accounts, which carry lower operating margins (volume discounts) and smaller customers, brings shifts in the profitability of the companies. In general the pricing of general merchant acquiring (providing the processing for merchants to accept electronic payments) has been decreasing by 3-5% per annum. However, most companies are able to grow through the pricing pressure by gaining new revenues and processing them at incrementally lower costs. Alliance Data Systems products and services are centered around three core capabilities Credit Services, Transaction Services, and Marketing Services which represents 25%, 50%, and 25% of revenue, respectively. Credit Services operates over 50 private label credit card programs for retailers, with services including account acquisition and activation, receivables funding, card authorization, card issuance, statement generation, remittance processing, customer service functions, and marketing services. The Transaction Services segment s services include instantaneous authorizations, effective customer care, efficient payment authorization, processing and billing services. The majority of the Marketing Services segment is comprised of the Air Miles program in Canada. Somewhat similar to affinity programs offered by credit card companies in the U.S., which provide air miles on airline frequent flier programs for usage of the card, Alliance Data s Air Miles program in Canada allows consumers to earn Air Miles from a variety of sponsors for use on a multitude of reward suppliers. Concord EFS is a vertically integrated electronic transaction processor, providing credit card, debit card, and ATM processing services to banks and merchants. The Company acquires, routes, authorizes, captures, and settles virtually all types of electronic payment and deposit access transactions for financial institutions and merchants nationwide. Concord currently has two principal lines of businesses: Payment Services and Network Services. Payment Services, which contributes approximately 60% of revenue and 35% of gross profit, provides payment processing for over 400,000 merchants, including supermarkets, major retailers, petroleum dealers, convenience stores, trucking companies and independent retailers. Network Services, which contributes the other 40% of revenue and 65% of gross profit, provides terminal driving and monitoring of ATMs, transaction routing, and authorization for PIN-based debit transactions through its coast-to-coast debit network. Through several strategic acquisitions, the Company assembled the largest PIN-based EFT network in the country processing 58% of PIN-based debit transactions. The Star network, which combined the MAC, Cash Station and other regional EFT networks, connects to one million POS locations, 225,000 Star branded ATMs, 122 million cardholders and over 6,200 financial institution members. First Data Corp. is the largest electronic payments company in the world. The Company s business lines include Western Union, which processes 75-80% of domestic money transfers; First Data Merchant Services, which processes over 40% of merchant acquiring transactions (processing credit and debit cards at the merchants point-of-sale) in the U.S; and First Data Resources, which provides card issuing services for 1,400 institutions with 325 million card accounts on file. Additionally, First Data is developing emerging payment solutions through its interest in eone Global. Stifel, Nicolaus, & Company, Incorporated 4 Payment Processing Industry

5 PAYMENT PROCESSING INDUSTRY The basic driving force behind the growth in the payment processing industry is the general migration from paper-based payments to electronic, specifically card-based forms, including credit cards, debit cards, stored value cards and electronic benefit transfer cards (EBT). As consumers use fewer checks each year and the growth rates of credit and debit cards continue to outstrip the growth rate of cash by 2-3 times, more and more consumer payments will be made with electronic means. The Nilson Report forecasts that the dollar amount of transactions made with card-based methods in 2015 will eclipse the total amount of all consumer payments made today. Although the general method of processing a card-based payment for goods or services at a merchant location might appear relatively straight forward, most merchants outsource these functions to a third-party due to the benefits of scale. In an industry processing over 30 billion transactions a year, minor cost savings per transaction are significantly magnified. The companies in our Payment Processing coverage universe have the infrastructure in place and are poised, in our opinion, to benefit from the leverage inherent in their respective networks, as more and more transactions will need to be processed in the coming years Projected Number of Transactions in the U.S (In Billions by Method of Payment) E 2010E 2015E 2020E Credit Card Debit Card Cash Checks Source: The Nilson Report $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 Total Card-Based Payments in the U.S E 2010E 2015E 2020E Source: The Nilson Report Volume (Bil.) trans. (bil.) Stifel, Nicolaus, & Company, Incorporated 5 Payment Processing Industry

6 CREDIT AND DEBIT CARDS Over the next ten years we expect the growth of debit cards to continue at a double-digit annual pace. We expect the growth in debit cards to continue to outpace the growth in credit cards in the future. Over the next ten years we expect the growth of debit cards to continue at a double-digit annual pace. However, growth rates should decline over time as cards, card acceptance, and associated card usage edge closer to saturation in the market. We believe overall debit card transactions will grow at the mid-20% level next year, decreasing to the 16-18% range over the next three to five years, before settling into a 13-15% growth rate over a ten year time frame. We expect superior growth from PIN-based debit with growth in excess of 30% in 2002 and a forecast of a three to five year growth rate besting 20%. Although we do not believe the growth in credit card transactions and dollar volume associated with said transactions will increase at rates similar to debit cards, we do expect them to escalate at an admirable rate of nearly 10% over the next decade. Credit Cards The proliferation of credit cards during the past three decades has been driven by greater acceptance at the point of sale, the increased availability of affinity programs, the greater convenience and safety of making large payments, and the reduced stigma associated with outstanding credit card balances. A credit card transaction results in the financial institution that issued the credit card lending the funds to the consumer and reducing the consumer s pre-set credit limit by a like amount. Visa and MasterCard credit purchase transactions have increased at a CAGR of 11% since 1990 to 10.1 billion transactions a year in Due to the interchange rate involved (fee based on a percentage of the ticket amount) with credit cards, the boost in dollar volume for Visa and MasterCard is perhaps more important. The dollar volume for such transactions increased at a CAGR of nearly 13% during the same period from $432 billion to $1.0 trillion. We expect the trend to continue in the next two decades, albeit at a reduced rate closer to 10%. Interchange is the fee paid by merchants to issuers of the cards. Bankcard interchange fees are calculated by combining a percent of the total sales amount with a fixed fee per transaction. They are collected by the merchant s acquiring banks, and then forwarded to the card issuer s Visa or MasterCard settlement account. The average interchange rate for Visa/MasterCard brands that went to the card issuer was approximately 1.40% in However, the merchant pays a discount fee of % or more, which includes the interchange fee. The discount fee covers the processing costs from the merchant acquirer and the fee (roughly $0.10) from the bankcard association (Visa or MasterCard). Merchants pay a varying amount of a basis point spread over the interchange fee for processing services. We estimate that a mid-size merchant with $300,000 to $1 million in annual volume would pay 40 to 50 basis points, the largest mid-sized merchants may pay 20 to 40 basis points, and large national merchants pay around ten basis points. It is not unheard of in the industry for an extremely large merchant to pay five basis points or less. Small merchants are much more profitable to merchant acquirers as they can pay 75 to 100 basis points or more above the interchange rate for processing services. Debit Cards There are two types of general-purpose debit cards, signature-based (off-line) and PIN-based (online). A signature-based debit card transaction, involves a VISA Check Card or Debit MasterCard issued by members of the bank card associations and contain the hologram of either Visa or MasterCard. There were 158 million of these cards at the end of 2001, which are accepted at all merchants that honor Visa and MasterCard credit cards. The second type is the regional EFT system brand cards, which are commonly referred to as PIN-based debit or on-line debit cards. These cards are accepted at roughly 27% of the merchant outlets where payment cards are accepted. Regional EFT networks such as Star, NYCE, and Pulse, had 242 million debit cards in circulation at the end of 2001, 65% of which also carried the Visa or MasterCard Stifel, Nicolaus, & Company, Incorporated 6 Payment Processing Industry

7 hologram on the front of the card. When debit cards carry the Visa or MasterCard brand and hologram as well as an EFT system logo, transactions are cleared and settled through the EFT system s network if the cardholder enters a personal identification number (PIN). If no PIN is used, transactions are settled through the Visa or MasterCard networks. There is a wide discrepancy in the fees that merchants pay for signature-based and PIN-based debit transactions. Since a signature-based debit transaction is processed through the card association networks like a credit card, merchants pay the same % of the transaction amount averaging $ Merchants pay a fee of $0.19 to $0.45 for PIN-based debit transactions. As you can imagine, merchants, especially large merchants, prefer PIN-based transactions to signature-based ones, and financial institutions, which earn roughly 1.40% of the transaction value in interchange fees, prefer the opposite card type. Please read on to the The PIN vs. Signature Debit Debate section for more on the controversy and litigation surrounding this issue. Debit Card Transactions at the Point of Sale Billions E Signature-based (off-line) Debit PIN-based (on-line) Debit Source: Nilson Report & Stifel Estimates PIN-based debit (also referred to as on-line debit) is the fastest growing segment in the card payment industry, with transactions in the U.S. increasing at a CAGR of 32% over the past five years and the dollar volume of purchases (does not include cash back) in the U.S. escalating at a CAGR of nearly 35% during the same period. PIN-based debit (also referred to as on-line debit) is the fastest growing segment in the card payment industry, with transactions in the U.S. increasing at a CAGR of 32% over the past five years and the dollar volume of purchases (does not include cash back) in the U.S. escalating at a CAGR of nearly 35% during the same period. Last year, transactions increased slightly less than 29% to 3.9 billion, while dollar volume of purchases increased over 37%. We believe the robust growth rate of PIN-based debit transactions will continue in the foreseeable future. However, we see the growth slowing somewhat and expect growth to average 23-26% over the next three years. Although the saturation levels of PIN-based cards (currently over 240 million issued), has caused anemic card growth over recent periods (4.5% over the last five years), the number of outlets (up 25% over the past five years) and terminals (up 22% over the past five years) that accept PIN-based transactions continue to grow, albeit at a decreasing rate. We believe a favorable ruling in the Merchant vs. Visa/MC case (see page 12) could propel growth in PIN-based debit above current expectations as merchants not only continue to push PIN-based over signature-based debit transactions, but merchants may deter the use of signaturebased debit payment through new means, such as restrictions or fees. In 1990, there were over 200 regional EFT networks in the United States that operated as natural monopolies within a specific region. Shared regional Electronic Funds Transfer (EFT) networks such at Star Systems, NYCE, and Pulse, provide financial institutions and retailers with shared network services for automated teller machines (ATM), on-line (PIN-based) debit, and emerging payment solutions. If a financial institution wanted access to that region for its customers to access ATMs or POS terminals at merchants for PIN-based debit transactions, it needed an Stifel, Nicolaus, & Company, Incorporated 7 Payment Processing Industry

8 agreement with a regional network in that area. The industry has gone through considerable consolidation and change in ownership of these networks, which previously were owned by financial institutions or consortiums of financial institutions that were then members of the network. Previously, they were cost centers for banks and credit unions, which acted as not-forprofit entities with the intention to increase functionality to their customers, while reducing headcount at high-cost bank branches. Regional EFT networks have followed the path of credit cards, where three entities (American Express, MasterCard, & Visa) process 94% of the credit card purchases in the country. Today, four networks (Star, NYCE, Pulse, Interlink) transact 90% of the PIN-based debit transactions in the U.S. Changes in ownership, interchange, and the emergence of surcharging in 1996 has altered the operational landscape of the current regional networks, which 70% of the assets are now owned by publicly traded companies. With the increased ownership of regional (now with national scope) EFT networks has brought an increased focus on profitability and growth. This change brought a new stakeholder in the PINbased debit world, the merchant. Now the question isn t simply who will get paid for the electronic payment, but concerns have risen (see Wal-Mart lawsuit information on page 12), on who will pay and how much. A PIN-based debit transaction can be made at 1.3 million locations - 27% of the merchant outlets where payment cards are accepted in the U.S. - to purchase goods and services and receive cash back. The cash back feature is unique to a PIN-based debit, as the network also functions as an ATM network. The same card can also be used at the country s estimated 360,000 ATMs (end of 2002) to perform transactions. A PIN-based debit transaction is frequently called an on-line debit transaction referencing that all information needed for authorization, clearing, and settlement is contained in a single data message sent on-line to the card issuer. PIN-Based Shared Regional & National EFT Networks- U.S (Based on number transactions) STAR Systems (Concord EFS) 58% Interlink (Visa) 11% NYCE (First Data) 11% Other 12% Pulse Pay 8% Source: The Nilson Report We believe that much of the consolidation of regional EFT networks is over, as the largest four networks had an 88% share of transactions processed in the U.S in Over the past few years, Concord EFS has acquired Cash Station, MAC, and Star Systems (Star previously acquired HONOR) and is re-branding under the Star name. NYCE was formed by the merger of New York Switch Corporation and New England Network and later acquired Magic Line. The final sizable player is Pulse, which acquired the Money Station and TYME networks and is owned by a consortium of banks. Star is the dominant player in the industry with a 58% market share of transactions. Visa s Interlink is a distant second processing slightly over 11% of transactions, while NYCE, which is 64% owned by First Data Corp. (Citibank, J.P. Morgan Chase & Co., Fleet Boston Financial Corp., and HSBC Bank USA hold the balance), processes a like amount. Pulse rounds out the list processing 8% of PIN-based POS purchase transactions. Stifel, Nicolaus, & Company, Incorporated 8 Payment Processing Industry

9 Most networks were started by a consortium of banks that later sold the networks to payment companies to un-lock their value and enable the banks to better concentrate on their corecompetencies. However, several banks, such as the owners of Pulse and the 36% owners of NYCE want to maintain ownership of these networks to be able to influence pricing on PINbased debit transactions, in our opinion. We believe the reason for retaining an ownership is probably more to preserve the fees on signature-based debit than from a profitability standpoint of owning the EFT network. The PIN vs. Signature Debit Debate Today, most financial institutions offer both PINbased (on-line) and Signature (off-line) based debit products to maximize their card-issuance and interchange revenue-generating opportunities. Today, most financial institutions offer both PIN-based (on-line) and Signature (off-line) based debit products to maximize their card-issuance and interchange revenue-generating opportunities. In a PIN-based debit transaction, commonly called on-line debit, the consumer enters a four-digit PIN code at the point of sale (POS) to identify themselves as the owner of the card and associated checking account. The transaction can then be processed on one or more of the 16 active shared regional electronic funds transfer systems such as Star, NYCE or Pulse or to one of the national systems operated by VISA (Interlink) and MasterCard (Maestro). Signature-based debit transactions involve a VISA Check Card or Debit MasterCard issued by members of the bank card associations and are accepted at all merchants that accept Visa and MasterCard Credit cards. The consumer simply signs the receipt like a credit card transaction and the transaction is processed through the appropriate card association (VISA or MasterCard). The consumer is identified as the owner of the card and associated checking account through the matching of the signature on the receipt with the one on the card itself. There is increasing debate and litigation associated with which debit product (PIN-based or signature-based) to push. Financial institutions generally prefer signature based debit products due to the higher interchange fee associated with the transaction of roughly 1.40% of the transaction value going to the financial institution that issued the card. Conversely, merchants who pay the fee would rather promote a PIN-based solution, which carries a lower fee of $0.19- $0.45 per transaction versus an average of $ (but based on a percent of the transaction value) for a signature-based transaction. We believe that over time, we will see a convergence of fees associated with PIN and signature based debit products. Certain issuers (financial institutions) impose a fee on PIN-based debit transactions in order to encourage customers to use their debit cards by means of a signature rather than by entering one s PIN-code. According to a recent study commissioned by the Pulse EFT Association and Dove Consulting, 74% of financial institutions do not charge a fee for PIN-based debit, while 12% charge all customers and 14% charge only certain segments of their customer base. Financial institutions that charge a fee reported approximately 40% fewer monthly PIN-based debit transactions than their peers. We believe that the additional charge to consumers by financial institutions for PIN-based debit transactions will not become the norm, as the limited revenue produced by the fee is typically immaterial to the financial institution and the negative sentiment toward the financial institution created by the fee has the potential to adversely impact its business. Additionally, the use of a PIN-based debit card to make a purchase generally replaces the use of a paper check, which is more costly to process for the financial institution. Therefore, even if the financial institution does not make a considerable sum on fees for PIN-based debit transactions, it will save on its processing costs. Lastly, PIN-based transactions entail less fraud risk and maintain a lower cost of acquisition than signature-based debit transactions, as well as do not have any chargeback risk associated with them. In an effort to further encourage signature-based debit, Visa recently announced a program that will automatically involve all debit issuers, unless they opt out by Dec. 1. The program will award consumers points on the basis of credit and debit transactions authorized with a signature Stifel, Nicolaus, & Company, Incorporated 9 Payment Processing Industry

10 rather than a PIN. Under the Visa program, consumers will be able to pick reward merchandise from a catalogue or trade in point for movie tickets, video rentals, and other items. Previously, the Pulse EFT Association, which is owned by the financial institutions that use it, created a rewards program for signature debit purchases in order to increase the use of signature-based debit transactions over PIN-based. Additionally, in an effort to increase their fees from interchange through the increased usage of signature-based debit, Bank of America has a pilot program using airline miles and U.S Bancorp and Fifth Third have initiated programs using rebates. Generally, these programs apply only to signature-based debit cards and not for PINbased debit transactions. We believe there will be a convergence over time between the pricing of signature-based and PIN-based debit transactions. In March 2002, Interlink (owned by VISA) increased its PIN-based debit maximum fee to $0.45 from $0.20 for general transactions (volume discounts apply to certain qualifying merchants) and its flat fee for supermarket transactions to $0.22 from $0.15. The Star Network (owned by Concord EFS) followed suit the same month and raised its maximum fee to $0.34 and flat fee for supermarkets to $0.19. In April, NYCE (owned by First Data Corp.) decided to match the Star Network s fee structure. The fee increases don t come without a fight. Interlink originally planned to increase prices in October 2001, but halted plans when Wal-Mart Stores, Inc., Walgreen Co., and other merchants vowed to stop accepting payments processed through the network. Interlink delayed the rate increase and later appeased these larger merchants by offering them a tiered rate structure based on volume. The stakes are high in the industry with roughly 5 billion PIN-based transactions expected in this year. If there is even a seemingly invisible change in pricing of only a penny, this shifts industry revenue by $50 million. As you can imagine, the continuously shifting landscape between the players in the industry, financial institutions, regional EFT networks, consumers, and merchants, has high stakes between participants that have different motivations, and at times, opposing views. Logos of regional EFT networks have typically had co-residency or duality for branded coverage. Typically, a debit card with PIN-based capability will have either the Visa or MasterCard hologram on the front and two logos of EFT networks on the back. One logo is usually a regional brand, such as Star, Pulse, or NYCE, and the other is that of Interlink (Visa) or Maestro (MasterCard), which are the two national networks. There is much discussion in the industry as to how many regional networks a financial institution needs to accept, as the two of the three largest networks (NYCE & Pulse) have substantial coverage across the country, and one, the Star Network, has coast-to-coast coverage. A regional network cannot be called a national network due to Visa and MasterCard s bylaws. The Interlink and Maestro brands, which are respectively owned by Visa and MasterCard not only have national coverage, but have international reach, as well. Furthermore, in what we believe is a defensive move to better position themselves in PIN-based debit in the event of a unfavorable ruling in the Wal-Mart and other merchant s suit against Visa and MasterCard (see below), Visa and MasterCard are aggressively pushing their suite of debit processing capabilities including their nationwide PIN-based networks (Interlink and Maestro) to replace regional EFT networks with exclusive relationships with either Visa or MasterCard. It appears that Visa and MasterCard with their respective Interlink and Maestro networks are awakening to the fact that merchants and consumers are increasingly turning to PIN-based debit as a payment option. In April, MasterCard hired a new executive away from Comerica to spearhead its effort to gain market share in PIN-based debit, and in late September management stated that it was dedicating significant new resources to the growing North America debit arena. The timing seems apropos, as eight of the contracts for the members of the Star Network come up for renewal in Although we believe the established presence and functionality of the Star brand will allow it to retain the majority of its customers, we acknowledge that the pricing of said contracts should see compression as a result of market conditions, especially the push by Visa s Interlink and MasterCard s Maestro. Stifel, Nicolaus, & Company, Incorporated 10 Payment Processing Industry

11 This junction of price for signature-based and PIN-based debit transactions may be propagated by a settlement in the pending lawsuit of merchants vs. Visa and MasterCard. The Merchants vs. Visa and MasterCard Lawsuit Honor all Cards? The nation s largest retailers, led by Wal-Mart, Sears, the Limited, and Circuit City, filed a class action lawsuit in U.S. District Court in Brooklyn, charging that Visa (MasterCard is a codefendant in the suit) is trying to monopolize the debit card market with its Honor all Cards rule. Basically, it forces merchants who accept Visa credit cards to accept Visa s branded debit cards. Retailers charge that they are forced to pay inflated interchange rates. In June, the U.S. Supreme Court refused Visa s and MasterCard s petition to challenge the suit s class-action status. The plaintiffs (4-7 million total in the class action suit) argue that they are entitled to $13 to $15 billion in fees that Visa and MasterCard have wrongly charged them since Visa says the interchange fee (roughly 1.50% of the transaction value) not only covers the bank s cost of fraud, float and card issuance cards, but the costs of protecting a cardholder who wants to renege on a purchase. Visa calls the damage claim hugely inflated. A Brooklyn jury will begin hearing the case in April of A summary judgement hearing was recently delayed from December to January Lawsuit Implications: Although we do not believe that in most cases it is prudent for investors to wholly base an investment decision on the possible outcome of a lawsuit, we do believe it is important to discuss possible implications to an investment s performance based on the outcome of the case and associated ramifications. Although we do not believe that in most cases it is prudent for investors to wholly base an investment decision on the possible outcome of a lawsuit, we do believe it is important to discuss possible implications to an investment s performance based on the outcome of the case and associated ramifications. Investors, in our opinion, should be aware of the case, the motivations behind it, and the risk/reward associated with owning the shares of a company, which may be impacted by the outcome. That being said, the outcome is unknown, and if it will have any impact on our covered companies remains uncertain. We believe that there are varying degrees to what the outcome may be. On one hand, the honor all cards policy could remain intact, and the system would remain status quo. The other extreme could be a ruling that merchants have been paying inflated prices for accepting signature based debit cards, the merchants win a large damage award in excess of $10 billion (then who pays the damage award becomes an issue), and the price merchants pay for signature-based debit transactions falls closer to PIN-based debit rates (from a discount rate of % vs. a flat of $0.19 to $0.45). We believe that the most likely outcome is an agreement or verdict that will fall somewhere in the middle with any specific dollar damage not being the biggest ramification from the case to our covered companies. We believe in the end, a reduction in the fees associated with processing a signature-based debit transaction will be the largest implication of the case. Our position remains that due to the greater inherent fraud risk, cost of acquisition, and chargebacks associated with processing a signaturebased debit rather than a PIN-based debit transaction, the card associations and issuing banks should be compensated for taking on this risk. However, the pricing should be a market pricing rather than based off of existing monopolistic credit card pricing practices. Possible outcomes: Honor all cards policy could remain intact and the system remains status quo Visa could declare certain regional networks national competitors and require the removal of their bran off all Visa Cards. Visa and MaserCard agree to lower fees for accepting signature-based debit transactions to somewhere between PIN-based debit and credit card interchange rates if merchants agree to still accept signature-based debit transactions Stifel, Nicolaus, & Company, Incorporated 11 Payment Processing Industry

12 Dollar award not material, but merchants no longer have to abide by Visa s Honor All Cards rule Some merchants (especially larger ones) begin to deter the use of signature based debit or to only accept PIN-based debit transactions. Large dollar award to merchants, who no longer have to abide by Visa s honor all cards rule Some merchants (especially larger ones) begin to deter the use of signature based debit or to only accept PIN-based debit transactions Any combination of possible outcomes or separate agreement Who wins who loses? The easy answer is, The Lawyers Win! A cursory analysis would indicated that any ruling that benefits PIN-based debit would benefit Concord EFS, as the company processing 58% of all PIN-based debit transactions. A cursory analysis would indicated that any ruling that benefits PIN-based debit would benefit Concord EFS, as the company processing 58% of all PIN-based debit transactions. However, we believe that if fees for signature-based debit decreased, initially Concord s revenue may suffer more than some of its peers because it records it revenue gross (including) of interchange fees. We estimate that 15-20% of Concord s card-based transactions in its Payment Services area are signature-based debit. Hypothetically, if fees for signature-based debit decreased, Concord s revenue in its Payment Services segment would suffer. However, due to the pass-through nature of the interchange expense, we believe such a change would not have a material affect on operating income or EPS. Overall, due to its market share in PIN-based debit, we would expect a ruling that benefits PIN-based debit to benefit Concord s Star Network, which processes the majority of such transactions in the country. We speculate that First Data would see a minimal impact as a result of a decrease in signaturebased debit fees since it records its revenue net of interchange fees. We would expect the company to see a benefit from its NYCE network, which processes an estimated 11% of PINbased debit transactions. We would expect little impact on the operations of Alliance Data Systems from any ruling as its core-business should remain largely unaffected. We will continue to monitor the debate and litigation associated with PIN-based versus signature based debit cards and keep investors up-to-date with any new developments. Automated Teller Machines (ATM) The number of ATMs in the United States has increased at a CAGR of 14.6% over the past decade to 324,000 units at the end of The number of ATMs in the United States has increased at a CAGR of 14.6% over the past decade to 324,000 units at the end of The number of transactions has progressed at a substantially lower rate of 7.8% during the same period. Perhaps more importantly, transactions grew by a meager 4.9% annual rate over the past five years. The owners of EFT networks that process these transactions, such as Concord s Star network and First Data s NYCE network have benefited from this increase in transaction volume as they process more transactions across their respective networks each year, albeit at a slower rate of growth. Basically, there are three primary areas where a network can earn a fee, depending on which functions it handles. The ATM processor or driver of the ATM earns a processing fee of roughly $ per transaction, the EFT network that the transaction is processed across earns fees for network switch services and possibly gateway fees which can total another $ and the card processor can earn an authorization fee of roughly $0.10 per transaction. A network can earn all or a combination of these fees depending on how much of the transaction it processes. Additional monthly fees can be earned for driving and monitoring the ATM, as well Stifel, Nicolaus, & Company, Incorporated 12 Payment Processing Industry

13 as for telecommunication services. Although the domestic ATM arena is not a high growth industry for our covered companies, we view it as a modestly growing business with nice margins. More importantly, however, is the increased leverage of this existing network to drive more PIN-based debit transactions across it. Total U.S. ATM Transactions (In Billions) Source: American Bankers Association The ATM industry went through a substantial period of change since the national adoption of surcharging in The shift occurred when deployers of ATMs could generate a nice return from their ATMs in lower volume areas by charging the cardholder a direct fee. Prior to surcharging, the primary objective for an ATM was to lower the distribution costs for financial institutions, while improving customer service. Although it appears that the transactions per ATM each month had dropped substantially from 6,399 in 1996 to 3,494 in 2001, the number of transactions at on-premise (at the financial institution) ATMs has stayed relatively flat over recent years at roughly 4,500 transactions per month. The total ATMs among the top 10 ATM owners (generally on-premise owners), increased by less than 1% from 58,785 as of December 2000 to 58,886 as of December 2001, according to new survey results from the Card Industry Directory. The proliferation of off-premise ATMs has skewed the transaction per ATM metric as the decrease in transactions per ATM is predominately in the off-premise arena. As one can see from the graph below, the majority of new ATMs are of the off-premise variety that can survive on lower transaction volume due to surcharging. ATM Growth On and Off Premise 350, , , , , ,000 50, , , ,000 84,000 67,000 28,707 37,804 51,507 84,048 84,902 87,627 98, , , , , Source: American Bankers Association On Premise Off Premise Stifel, Nicolaus, & Company, Incorporated 13 Payment Processing Industry

14 Surcharges are levied by the bank or other ATM owner on all foreign cardholders who are not using a card from the bank that owns the ATM or in a surcharge alliance with the deployer. Americans paid $2.1 billion in surcharges last year. Banks currently receive two fees for each ATM transaction. The first is a bank-to-bank fee known as an interchange. In order to join an ATM network, a bank agrees to pay an interchange fee when its customers use an ATM owned by another bank in the system. Interchange fees are set by the network at a rate (typically $0.50 to $1.50) designed to cover the ATM owner's costs and yield a profit. Surcharges are a second fee for the same transaction. Generally, consumers pay a surcharge each time they use an ATM operated by a bank other than their own. Surcharges are withdrawn directly from the consumer's account at the time of the transaction. A typical surcharge ranges from $1.00 to $2.50 per withdrawal. The average surcharge is $1.45 for onpremises ATMs and $1.48 for off-premises ATMs. Surcharges are levied by the bank or other ATM owner on all foreign cardholders who are not using a card from the bank that owns the ATM or in a surcharge alliance with the deployer. Americans paid $2.1 billion in surcharges last year. To withdraw cash from an ATM terminal, a customer inserts an ATM/debit card, enters a personal identification number (PIN) that authorizes the financial institution to process the transaction, and specifies the amount of cash desired and the account from which it will be withdrawn. The request is routed by the ATM through a regional electronic payments network, such as Star, NYCE, or Pulse or through the national networks Cirrus and Plus, which are owned by MasterCard and Visa, respectively. The transaction is routed to the customer s financial institution and assuming there are sufficient funds in the account, an authorization is routed back through the same network and the cash is dispensed. In addition to withdrawing cash, customers can use many ATMs to conduct a balance inquiry, transfer funds between accounts, make deposits, and request mini-statements. Increased functionality at ATMs is being developed, such as purchasing stamps, re-charging pre-paid phones, and viewing advertising, but the increased functionality has yet to produce material changes in the economics or predominant use of an ATM. Average Monthy ATM Transactions ,496 4,675 4,479 4,269 4, ,797 1,857 1,918 2,142 2, E 2003E Source: Dove Consulting On Premises Off-Premises We believe ATM transaction growth will continue to be modest over the next 3-5 years ranging between 3-5% per annum. According to Card Industry Directory 2003 Editions, the largest EFT networks reported less than 5% growth in ATM transactions from 2000 through 2001, while the ATM volume growth among EFT networks from 1999 through 2000 was 5.8%. We believe ATM transaction growth will continue to be modest over the next 3-5 years ranging between 3-5% per annum. Stifel, Nicolaus, & Company, Incorporated 14 Payment Processing Industry

15 ... the federal government is contemplating allowing electronically imaged checks at ATMs to be treated the same as paper checks for presentment. If this were to occur, ATMs could be used for instant posting of deposited checks into bank accounts regardless of where the debit cardholder has an account and irrespective of which bank owns the ATM. ATMs increasingly compete with numerous other ways consumers can get cash, including the wide spread use among large retail chains of offering customers free cash back from PIN-based debit card point-of-sale purchases and the growing use of electronic checks for purchase and for getting cash. The mass purchase of PIN pads by retailers, greater use of giving consumers surcharge-free cash back with PIN-based POS purchases and more aggressive promotions of signature-based debit card use by financial institution issuers are key factors in steering consumers to use their debit cards instead of checks and cash from ATMs for purchases. However, several issues on the horizon could potentially re-accelerate the usage of ATMs. For instance, the delivery of financial services to unbanked (individuals who do not have a bank account) consumers and offering PIN-based payroll debit cards to employers as an efficient way to distribute unbanked employee s pay. Not only are the costs lower to the employer than processing a paper check, but it is more efficient for unbanked employee who often utilize checkcashing stores, which typically charge a percentage of the check value as a fee. Additionally, the federal government is contemplating allowing electronically imaged checks at ATMs to be treated the same as paper checks for presentment. If this were to occur, ATMs could be used for instant posting of deposited checks into bank accounts regardless of where the debit cardholder has an account and irrespective of which bank owns the ATM. We will closely monitor these and other developments for implications to our thesis on muted ATM growth and possible changes to our earnings models for covered companies. How Does a Payment Transaction Work? Although the basic process of purchasing a good or service at a merchant with a credit card appears relatively straight forward, there is actually a fairly complicated process going on behind the scenes that varies by which card is presented and where it is used. Basically, the process begins at the merchant location when the consumer pays for a good or service. The consumer gives the merchant a credit or debit card, which is swiped through a point of sale (POS) terminal and the transaction value is entered. In the case of a PIN-based debit, the consumer then enters his or her PIN code at the POS terminal. The transaction is processed through the card association (for credit and signature-based debit) or EFT network (PIN-based debit) to the bank that issued the card. Assuming there are funds available under the consumer s credit limit (credit card) or sufficient funds in his or her checking (DDA) account (debit card), an authorization is routed back to the merchant through the same network. Within a few seconds, the approval (if that is the case) is routed back to the merchant and the consumer signs the receipt (credit card and signature-based debit) and leaves the store with the merchandise. DIAGRAM OF A CARD PAYMENT TRANSACTION Consumer Pays Card Issuer Bills Consumer Card Issuer Possibly using a third-party Card Processor Merchandise Pays with card Merchant Transaction Information Authorization & Settlement Authorization & Settlement Transaction Information Merchant Acquirer Transaction Information Authorization & Settlement Stifel, Nicolaus, & Company, Incorporated 15 Payment Processing Industry Card Association

16 Credit Card or Signature-based Debit Card Estimated Discount Fee Breakdown for a $100 Purchase Merchant: Merchant Pays a Discount Fee of 2% to the Merchant Acquirer to Process the Transaction $ (2.00) Merchant Acquirer: (such as First Data, National Processing, or Concord EFS) Receives the Discount Fee from the Merchant $ 2.00 Pays the Network & Interchange Fees and Routes Transaction to MC/Visa $ (1.50) Merchant Acquirer Fee $ 0.50 Bank Card Association: (MasterCard or Visa) Receive Network Fee and Interchange Fee $ 1.50 Pays the Interchange Fee and Routes Transaction to Issuing Bank $ 1.40 Bank Card Association Fee (Network Fee) $ 0.10 Card Issuer: (Bank that Issued the Card such as Citigroup, MBNA, or Bank One) Receives the Interchange Fee $ 1.40 May Pay Card a Processor an Authorization Fee if Not Done In-house $ (0.20) If there is a Card Processor, the Issuer Keeps the Remainder of the Interchange Fee $ 1.20 Card Processor: (such as First Data or Total Systems) Card Processor (if any) Receives Authorization Fee for Managing the Issuer's Card File $ 0.20 Source: Stifel Estimates Pin-based Debit Estimated Discount Fee Breakdown for a $100 Purchase Merchant: Merchant Pays a Processing Fee of $0.34 to the Merchant Acquirer to Process the Transaction $ (0.34) Merchant Acquirer: (such as First Data, National Processing, or Concord EFS) Receives the Processing Fee from the Merchant $ 0.34 Pays the Network & Interchange Fees and Routes Transaction to EFT Network $ (0.22) Merchant Acquirer Fee $ 0.12 EFT Network: (Star, NYCE, Pulse, or Interlink) Receive Network & Switch Fee and Interchange Fee $ 0.22 Pays the Interchange Fee and Routes Transaction to Issuing Bank $ (0.18) EFT Netowork Fee (Network & Switch Fee) $ 0.04 Card Issuer: (Bank that Issued the card such as Citigroup, MBNA, or Bank One) Receives the Interchange Fee $ 0.18 May Pay Card Processor an Authorization Fee if Not Done In-house $ (0.03) Card Issuer Fee (Interchange Fee) $ 0.15 Debit Card Processor: (such as Star or NYCE) Card Processor Receives Authorization Fee from the Issuer $ 0.03 Source: Stifel Estimates Stifel, Nicolaus, & Company, Incorporated 16 Payment Processing Industry

17 Merchant Acquirers In 2001, the ten largest acquirers processed over 90% of the $1.1 trillion of goods and services purchased with Visa and MasterCard credit and debit cards in the U.S when including all partnerships and alliances. Merchant acquiring processors provide the systems and processing that allow retail clients to accept virtually any type of electronic payment, including credit card, debit card, electronic benefit transfer (EBT), prepaid, and proprietary cards as well as check-based options such as check verification and check guarantee services. Most processors provide turnkey solutions including POS terminal equipment, transaction capture, routing, authorization, as well as settlement and chargeback handling and sponsorship into all credit card associations (Visa, MasterCard, American Express, Diners, etc.) and debit networks (Star, NYCE, Pulse, etc.). In 2001, the ten largest acquirers processed over 90% of the $1.1 trillion of goods and services purchased with Visa and MasterCard credit and debit cards in the U.S when including all partnerships and alliances. By far, the largest acquiring processor is First Data, which processes 43% of the Visa and MasterCard volume or over $450 billion when including all of its strategic alliances. National Processing Company, which is 85% owned by National City Corporation, a financial holding company, is a distant second with 14% of said volume. NOVA, which is owned by U.S. Bancorp, Concord EFS, and Fifth Third Bancorp round out the top five merchant acquirers Top U.S. Bank Card Acquirers (Based on Purchase Volume on Visa & MasterCard Credit & Debit Cards (Partners included) National Processing 14% Source: The Nilson Report NOVA (U.S Bancorp.) 9% First Data Corp. 43% Other 9% Concord EFS 6% Fifth Third Bank 6% Bank of America 6% Global Payments 4% First of Omaha 2% Alliance Data Systems 1% Companies within the merchant-acquiring arena have focused on specific strategies to grow their businesses and differentiate themselves from their competition. For example, Concord EFS focuses on grocery stores (70% market share of lanes), petroleum stations, and retail segments. We look favorably upon its industry concentrations, as we believe the grocery store and petroleum station businesses are more shielded from economic fluctuations than many other industries due to individuals purchasing their non-discretionary items regardless of the economic environment. We estimate that 85% of First Data s merchant acquiring business comes from joint venture alliances with bank partners. Under its alliance program, First Data and a bank create a joint venture into which merchant contracts are contributed. First Data benefits by continuing to provide point of sale card processing for the contributed merchants and new merchants signed up by either the banks or by the venture s dedicated sales force, while the bank benefits by maintaining the merchant banking relationship. First Data reports significantly higher customer retention for customers in the alliance programs than from its merchant customers that are not part of an alliance program. Stifel, Nicolaus, & Company, Incorporated 17 Payment Processing Industry

18 Check Authorizations (Guarantee & Verification) The twenty largest firms that provide check verification and check guarantee services to merchants authorized nine billion checks written to retailers, which is slightly more than one out of every two such checks written. Although the number of checks written is forecasted to decline over time, we believe this is still a growth industry as the percentage of checks that will be verified or guaranteed is expected to increase. The Nilson Report forecasts that 90% of checks written at the point of sale will be authorized (verified or guaranteed) by According to its expectations, that would equate to over 15 billion checks a year. Checks Verified in the U.S. (Billions) CAGR = 30% Source: The Nilson Report Check Verification usually consists of examining if a check presented at the point of sale is on a negative file database of individuals with a history of writing bad checks. Merchants generally pay a fee based on the number of transactions for this service, usually between $ per check. Check Verification usually consists of examining if a check presented at the point of sale is on a negative file database of individuals with a history of writing bad checks. Merchants generally pay a fee based on the number of transactions for this service, usually between $ per check. The four largest firms are Scan (owned by efunds (EFDS/Nasdaq/$9.05), First Data s TeleCheck, International Payment Services, and Certegy (CEY/NYSE/$25.24). Together, these firms accounted for 87% of the check verification volume in the industry Checks Guaranteed in the U.S (Billions of Checks) CAGR = 13% Source: The Nilson Report Stifel, Nicolaus, & Company, Incorporated 18 Payment Processing Industry

19 A Check Guarantee service is exactly what it sounds like a firm will guarantee the value of the check and fully indemnify the merchant against 100% of uncollectable checks. A Check Guarantee service is exactly what it sounds like a firm will guarantee the value of the check and fully indemnify the merchant against 100% of uncollectable checks. Fees charged to merchants for check guarantee services are generally based on the dollar volume of transactions processed and typically range from 3-5%. Merchants which utilize a check guarantee service primarily have high-priced merchandise with higher profit margins and typically handle significantly fewer checks than mass merchandisers. The average amount of a guaranteed check is nearly $95, whereas the average check verification is for a $50-55 check. Due to the expense of a check guarantee (based on a percentage of the amount of the check) check verification is utilized nearly ten times as often as a check guarantee. The popularity of check verifications has risen much more rapidly than check guarantee services. Between 1990 and 2000 check guarantee services increased at a CAGR of 12-13%, while check verification services increased at a 30% clip. Processors for Issuing Banks Card Files Processors for card issuers provide a broad array of services to the issuers of credit and debit cards. The largest issuers of credit and debit cards in the U.S are financial institutions such as Citigroup, MBNA or Bank One, but many retail stores issue their own proprietary credit cards and process them in-house such as Sears, Target, and Federated Department Stores. Additionally, some retailers outsource their private label programs to firms like GE Card Services, Household, and Alliance Data Systems. The primary business of a credit card issuer is to hold outstanding consumer debt and earn a spread between their cost of funds and the interest they charge their customers. Additionally, issuers receive interchange fees (approximately 1.40% of the purchase amount) from merchants and other services fees, as well as financing charges from the consumer. Processing companies for general card (Visa & MC) issuers, such as First Data and Total Systems Services (TSS), provide the card issuers with services such as card issuance, authorization, settlement, processing account statements, and maintenance of cardholder databases. Other services include card marketing, database analysis, customer communication, and fraud detection. Revenue for card issuing services are derived from fees payable under contracts that primarily depend on the number of accounts or transactions processed, but are typically subject to minimum fees independent of transaction volume. Retail Store Credit Cards Another segment of the card issuing market is for Retail Store Credit Cards, which are credit cards generally issued by retail stores, carry the store s name on it, and typically can only be used at the store that issued the card. There are basically two ways to operate such a program: inhouse, or outsource the function to another firm. In an in-house program the retailers own their own store s card receivables. In an outsourced situation, also known as a private label program, the store card is offered by a third-party firm on behalf of the retailer. Generally, the operator of a third-party program, such as GE Capital or Alliance Data Systems owns the receivables generated by the credit cards they issue on behalf of clients whose name appears on the cards. Retail Store Private label programs cost an estimated 3%-4% of sales to run, which is paid by the retailer customer. The retailer can usually see a nice return on its investment since each private label cardholder tends to spend 2 2 ½ times the average amount spent by a customer. Much of the cost of the program comes from the merchant discount (2%-3% of sales), while other fees are derived from the processing of statements and cardholder accounts. As you can see from the graph below, the increased utilization of such programs is forecasted to continue for the foreseeable future. Stifel, Nicolaus, & Company, Incorporated 19 Payment Processing Industry

20 All Store Cards Volume (bil.) $250 $200 $150 $100 $50 $ E 2010E Source: The Nilson Report Largest Proprietary Card Programs In The U.S. for 2001 Active Total Percent Accounts* Accounts* Active GE Card Services % Alliance Data % Sears % Federated Dept. Stores % May Dept. Stores % Household Retail % Target Corp % Citigroup % Spiegel Group % Conseco Finance % * millions of accounts Source: The Nilson Report Based on the number of active accounts, GE Card Services is the clear leader in the private label card industry with 43.5 million active accounts. However, Alliance Data has rapidly moved up the rankings to the number two spot with the introduction of several new programs and the acquisition of a few existing portfolios within the past year. Alliance Data doubled its active account base in 2001 to 17.2 million from 8.2 million active accounts in We believe the trend towards outsourcing a retail store s credit card program should continue as retailers shed this line of business to concentrate on their core competencies. We believe the trend towards outsourcing a retail store s credit card program should continue as retailers shed this line of business to concentrate on their core competencies. Additionally, a retailer that wants to initiate a store credit card program can outsource it and have the cost be primarily variable in nature, thus avoiding large up front expenses and capital outlay. For the first time, private label firms who issue cards for retailers now own more receivables outstanding than stores which own and operate their own credit card portfolios. As one can see from the graph below, the forecasted growth in private label programs outstrips in-house programs by a wide margin in the next decade. Stifel, Nicolaus, & Company, Incorporated 20 Payment Processing Industry