Monday, September 8, 2008

Transaction Processing Companies Examined - Wall Street Transcript

Transaction Processor Companies Examined in Wall Street Transcript Business Services Report
67 WALL STREET, New York - The Wall Street Transcript has just published its Business Services issue, a report offering a timely review of the sector to serious investors and industry executives. This 55-page feature contains a roundtable forum and industry commentary through in depth interviews with CEOs from 7 firms and 3 analysts.

The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online®

Topics covered: Relative valuations, Stock performance year to date, Organic growth, Slowdown in outsourcing services, Outlook for transaction processors, Call centers and customer care, International business outlook, M&A activity, Growth in Eastern Europe, Indian IT vendor stocks, Accounting software space, End markets, China, India, Turnaround situations, Merchant acquirers, Investor interest, Stock picks, Stocks to avoid.

Companies include: Global Payments (GPN); Advent Software (ADVS); SEI Investments (SEIC); Heartland Payments (HPY); Fidelity National Information Services (FIS); MasterCard (MA); Visa (V); Alliance Data Systems (ADS); Yucheng Technologies (YTEC); Fiserv (FISV); Net 1 UEPS (UEPS); Ness Technologies (NSTC); VanceInfo (VIT); Cognizant Technology (CTSH); Sykes (SYKE); Genpact (G); TNS (TNS); Wright Express (WXS); CyberSource (CYBS); Jack Henry (JKHY); S1 (SONE); Robert Half International (RHI); MPS Group (MPS); Heidrick & Struggles (HSII).

In the following brief excerpt from the 55-page report, the analysts discuss the outlook for the sector and for investors.

TWST: Andrew, how has business been relative to what you had expected so far this year?

Mr. Jeffrey: I think it's been pretty strong although somewhat bifurcated relative to my expectations. I think what you've seen is that those companies with exposure to financial institution end markets have put up relatively mixed results, although on balance, I'd say maybe a touch better than what I'd anticipated to date, given the credit carnage in the financial markets. Those companies in payments which are touching the consumer, be that merchant acquiring or the network models, have actually done extremely well - if you think about MasterCard (MA) and Visa (V) and to some extent Global Payments (GPN), largely because they have good pricing power, they are taking share and they are in the sweet spots of their operating leverage curve. So on balance, I'd say things are in line to be a little better than expected.

And from a stock market standpoint, it is a question now of whether investors are willing to pay premium multiples for slowing growth, or whether they are digging around for value. It looks like maybe there is a bit of a rotation starting to take place toward more value oriented names in the space.

TWST: David, same question. How have things been relative to what you anticipated?

Mr. Koning: I'd say in the core processing group, it's interesting. There has been a lot of skepticism, given their end markets are the financial institutions that have struggled quite significantly, but because the systems they provide are so necessary for the banks, they really haven't seen much of an impact at all in spending. In fact, the overall market growth remains roughly in the mid-single digits, maybe 1% or so below where they would have seen growth in a normal environment, but overall, quite similar to a normal environment.

And then I would say in the call center area, we've seen some individual companies put up poor results. But overall, in the end, trends seem to be relatively intact. We've had different problems such as currency pressures or big client exposures hurting some of these companies, but overall demand is reasonably intact. So despite the market skepticism across several of these groups, the results have been reasonably as expected.

TWST: Tom, what's your take on what you've seen so far?

Mr. McCrohan: Results for the most part came in a little better than we were anticipating. I think we were postured pretty conservatively going into the quarter; we had some concerns on some of the merchant acquirers in particular, given the slowdown we've seen on credit, but they've all reported better than expected results.

There was one name that I follow that's really outside of payments called Advent Software (ADVS) that develops and sells portfolio accounting software for investment managers and hedge funds, and that name really had a good quarter for a software company. None of the software companies were saying they were seeing any slowdown, but we are of the opinion that you'll see it when you see it, and so we thought this was going to be a white-knuckle quarter for us, and in the end they had really strong bookings growth.

There's an important distinction within the software market; we don't follow a lot of software companies, this is kind of a one-off name for us. But the distinction is between those software companies that sell to the consumer (they have had some struggles) and those that are selling to institutional clients, such as Advent Software. Bookings growth and trends are staying really healthy for firms selling to institutions and for this company in particular, bookings growth has averaged about 50%.

TWST: Jamie, how have things turned out relative to what you anticipated?

Mr. Friedman: We've noticed in the second quarter that in IT services, stocks performed based on expectations, maybe even more pronounced this quarter than in the past. The Indian IT vendors stocks came under significant pressure. There's a significant deceleration in outsourcing relative to last year. There was some expectation mid-quarter that the companies' growth could recover. But their guidance was just too bearish and the stocks in general really sold off.

Exceptions appear in pockets, like outside of India, in Eastern Europe and China. There's a company called Ness Technologies (NSTC) that now does most of its revenue in Eastern Europe, which appears to me to be the healthiest IT outsourcing market in the world right now. Ness put up 70% year-on-year growth in Eastern Europe and that stock has really responded. The same is true in China, where VanceInfo (VIT) operates.

There does appear to be some disruption now in the third quarter related to the Olympics, particularly in the month of August, but it's a huge end market and the demand trends seem to be healthy. There's a small company in China called Yucheng Technologies (YTEC) that we cover. Their revenue appears to be far in excess of what we had anticipated. So it's been a mixed bag of slower growth in India, good growth in Eastern Europe, and steady growth in China.

TWST: Jamie, what's your thought as we look out? What's going to go on in the space given the economy?

Mr. Friedman: I just want to make sure we harmonize the conversation - business services is a broad space. There are a lot of different industries and companies. It sounds like the direction of the conversation is more toward the transaction processors. I may have been answering in terms of the outsourcing IT service consulting firms.

TWST: We're going to touch on all of them.

Mr. Friedman: Okay, let me start first with the IT outsourcing services. I think it's going to be the same trend. If you can, identify small cap value with good markets, with the thesis being that if you're in a good market it's easier to fix the business than if you're in a challenged market. I continue to like the themes that I am seeing, that I mentioned in the beginning in China and in Eastern Europe. NSTC is one, VanceInfo is another, and YTEC is a third. I may be the only guy here who has ever even heard of those companies, so that may be too obscure a subject! To open it up more generally, I'm still cautious about the overall demand trends domestically both on the corporate and the consumer side, though I do think there will be something of a budget flush if there's any budget left to flush by year-end. A company like Cognizant (CTSH), which is a larger cap vendor, they just came into the year with too high expectations and did have to reduce those, but it's a 15 multiple stock that now seems to have good visibility to a 30% plus growth year. 30% growth in a recession, although it may be much lower than their historic growth, is pretty good for a 15 multiple. So that gives you a mix of names - China, Eastern Europe and the US.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 55-page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online

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HomeATM's "PIN my Card" Solves Chip and PIN Problems

Two weeks ago I posted about the troubles American's were having when traveling overseas with their credit cards. "Credit Card Useless Overseas? PIN it With HomeATM's PIN My Card

Yesterday the Boston Globe did a story on the same subject.

As I stated in my post from two weeks ago, the problem is easily solved with HomeATM's patent-pending "PIN my Card" technology .

"PIN my Card" a technology created by HomeATM, assigns a PIN number to a credit card (or any card for that matter) in order to make the transaction both more secure and become a Card Present (CP) vs. Card Not Present (CNP) transaction in the case of online payments.

It occured to me, in theory at least, that HomeATM's "PIN my Card" technology would also be useful in overcoming problems American cardholders are experiencing when traveling globally. Since PIN's are required with the new Chip and PIN technology being rolled out across the globe, HomeATM's "PIN my Card" could be rolled out across America to solve the SNAFU's American's are experiencing when traveling overseas!

This recent flurry of publicity concerning the problems American's are having overseas creates a huge opportunity for HomeATM to, at the very least, garner some major publicity for their technology itself and quite ostensibly be the driving force behind it's launch. Stay tuned!

Here's the article from the Boston Globe:

US travelers face credit snafu

New global system declines the cards Americans carry

Much of the world - but not the United States - is switching to a new type of credit card. "Chip-and-PIN" cards, as they are called, have an embedded ID chip that requires users to enter a unique code before the transaction is approved. T

he procedure is similar to that for ATM cards, except that the latter draws money from a cash account, while chip-and-PIN cards charge credit systems such as Visa, MasterCard, or
American Express. Europe is quickly making the shift.

Nearly all the credit-card terminals in Britain, Ireland, Denmark, France, and Spain have been changed. Canada is scheduled to convert in 2010. And as many as 50 other countries around the world are converting.

The reason is obvious: A credit card requiring a PIN code is useless to a thief. European officials report that the system has significantly cut the credit-card fraud that grew after former Soviet bloc countries joined the European Union.

  • But US consumers cannot get these cards. (Editor's Note: Yes they can, they already have them, they just need to "PIN their Card"
  • No US card issuer offers them, ("PIN your card and it's a "non-issue") and according to the American Bankers Association,
  • there are no plans to adopt the technology. (well let''s call the ABA and let them know about our PMC technology)

"It would be costly to change all the transaction terminals in the US," says Don Rhodes, director of risk management policy at the ABA, "and right now the industry doesn't seem to feel the level of fraud justifies it."
(Editor's Note: Last week in the very same Boston Globe, the CEO of TJ Maxx said the US should switch to a Chip and PIN system)

In theory, overseas merchants are required to accept US cards (which are called "mag-stripe," for the magnetic stripe that identifies each card) if the cardholder can offer a suitable picture ID to authenticate a signature. "We have been quite clear that there are instances where a signature rather than a PIN should be accepted," says Sandra Quinn, a spokeswoman for the British payment processing council APACS, about a procedure called a PIN bypass. "But I have heard of problems."

Problems, indeed. Even Rhodes ran into trouble on a trip to London last winter.

Visa cards are rejected about half the time, and never accepted at automatic pay points where there was no live cashier. (Officials at Visa International, the world's largest payment network, declined to comment.)
So what can US travelers do when they are in chip-and-PIN countries?

Editor's Note: Just for the record...if they PIN their Card before they leave the problem is a non-issue.

Cash usually works. But carrying large amounts comes with the risk of theft or loss and forces travelers to bear costly foreign exchange fees. Also many businesses such as car rental agencies will not accept cash and require a credit card imprint before handing over the keys to a car, though such companies are the most likely to still accept mag-stripe cards.
Depending on the country, travelers checks are accepted in many places. Scandinavian merchants usually will not take them, and travel specialists have advised against them, as they are theft magnets. To use them you must find a bank that will cash them. And traveler's checks, like cash, do not offer the advantages of credit cards that appeal to frequent travelers: postponing payment for a month, an avenue to dispute charges, monthly and yearly expense tracking, and frequent flier miles.

Debit cards like the ones you use at ATMs (which are ubiquitous worldwide) usually can be substituted for credit cards. But relying on them means you must ensure there is plenty of cash in your account.

If you are planning a trip soon and want to use your credit cards, make sure you have several good picture IDs to back up your signature, a passport or a driver's license, for instance. IDs that have a scannable bar code, such as a passport, are best.

And despite what the payment-processing groups and card issuers say, many merchants will want payment with a code card, (PIN) period. "No code, no ticket," I was told in Copenhagen at Danish National Railways. "No exceptions."

This could be a huge market opportunity for HomeATM's PIN my Card Solution. Stay tuned!

Interact Prophecizes on the Making of a Profit

In a letter sent out by Catherine Swift of the CFIB, she warns merchants that Visa and MasterCard "want in" and are trying to convince Interac to interact (collude?) with them to bring "Debit American Style" to Canada. The full letter can be accessed and read here:

Here's an excerpt from that letter...

On the debit card side of the market, Canada has long operated with Interac, a cooperative venture among banks, credit unions, payment related companies and others, as the principal clearing house for debit transactions at comparatively reasonable cost to consumers and merchants. The growth in debit has been astronomical since its introduction in 1984.

VISA and MasterCard now want in on the action in Canada and are trying to convince the banks to support them with the promise of greater fee income. In the U.S., both VISA and MasterCard allow their credit cards to double as debit cards; in most cases, debit transactions also attract the “interchange rate” (a percentage of the transaction amount), not the flat fee charged by Interac. We believe that if VISA and MasterCard were to bring the same service to Canada, debit rates would go up dramatically. Therefore, VISA and MasterCard will make a great deal more money than has been charged in the past by Interac’s “flat fee” approach, with no extra value accruing to the merchant.

Currently, debit attracts a “cents per transaction” fee. If the credit card companies succeed, the market will move to a fee which is a percentage of the transaction size. For example, for a transaction of $1,000, a current common rate would be $0.065 (6.5 cents). In future, if the charge was to become 0.65 per cent (the current U.S. average), the fee would be $6.50—an increase of almost 10,000 per cent!

Well it looks like her insight was, well...insightful. Here's an article from Report on Business claiming that Interac is planning on ditching it's non-profit approach to payment processing: Interac seeks shift to for-profit status
The non-profit association that runs Canada's main payments network for automated banking machine and debit transactions is in talks with the Competition Bureau about a restructuring that would likely allow it to make a profit.

The Interac Association, created in the mid-1980s by a number of big banks and Desjardins Group, is about to embark on a major revamp to battle credit card companies, such as Visa Inc., that aim to invade Canada's debit market.

"We're quite aware that U.S.-based credit card companies are aggressively entering the debit marketplace in Canada, like they have done in most other countries around the world," Interac chief executive officer Mark O'Connell said. They are pushing into the sector "as we speak" and are "newly empowered as public companies," he said.

San Francisco-based Visa went public in the spring, two years after the successful initial public offering of Purchase, N.Y.-based MasterCard Inc.

Mr. O'Connell fears Interac risks falling behind as the industry rapidly innovates. There are already products, such as MasterCard's "tap & go" PayPass, that he would like Interac to be keeping up with. "The payments market is evolving every day," he said. "It's not just the U.S.-based credit card companies. You have PayPal, you have a number of unique payment companies in the marketplace, a number of new technologies. Look at mobile payments and its evolution in other countries around the world.

"Canada needs to ensure we can keep up and innovate in those areas," he added.

Interac direct payment, which allows consumers to pay for purchases with their debit cards, was made available to retailers across Canada in 1994. Canadians are now some of the world's most active debit card users.

But in the 1990s, the Competition Bureau went after Interac and nine of its members, accusing them of abusing their power in the payments sector. Interac signed an agreement in 1996 that it must be managed on a not-for-profit basis, and it can only charge fees that cover its costs. The agreement with the regulator, among other things, also placed rules on the makeup of Interac's board and its membership.

The agreement has constrained Interac's services over the past 12 years, Mr. O'Connell said. "We're in discussions with [the Competition Bureau] to amend the consent order to allow us to be more fast and nimble and efficient, to respond to the realities of the changing competitive marketplace," he said., adding that it is early days in the talks and no time frame has been established.

The discussions are one of a number of steps that Interac, which has already completed an internal reorganization, is taking as it seeks to keep up with the pace of change in the payments sector.

"There are many options with respect to governance and ownership, and there have been no decisions made on which path to go down and what model to employ, and that's the work that's beginning through the transition board," Mr. O'Connell said.

Asked whether Interac is considering an IPO, he said, "I think all options are being considered."

The battleground has changed now that Visa is public, with new funds and flexibility.

In most other countries, the major credit card companies also have debit products.

Visa long ago established the pricing, or fees, it would use for debit transactions in Canada. Any bank or financial institution that issues its credit cards has had the opportunity to offer its debit cards, but none bit.

Visa is hoping that will soon change, thanks to a number of industry developments, including the country's migration to the use of "chip" cards over the next couple of years. Chip cards use a microchip and a personal identification number (PIN), rather than a magnetic strip, and are expected to lead to a host of innovations in the card industry, possibly including combined debit-credit cards.

Some of these changes in the payments sector are concerning retailers, who fear the fees they pay to accept cards are going to rise.

The Retail Council is already up in arms over changes made to the fees that merchants must pay to accept credit card transactions, and it is actively pushing Ottawa to establish more oversight of the charges.

The only fees that Interac collects come from its members, largely banks and other financial institutions. The members can charge customers to use Interac services, and retailers and merchants pay a small fee - such as a nickel - to processing firms every time a customer pays with debit.

Mr. O'Connell said Interac recently established an independent board, which has "significant merchant representation," and will look at the issue of potential fee changes.

He noted that "being the low-cost provider has been a strategic advantage for this organization, and the merchant community is tremendously important to Interac."

The newly formed board is also examining five services that Interac currently offers: the ABM payments network, direct payment, e-mail money transfers, online payments, and its cross-border service, as the organization embarks on its overhaul.

It is still early days in its transformation and various possibilities are under consideration, Mr. O'Connell stressed. "We want to make sure that we do this right."

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