Links Related
to this Story:

• eoneglobal.com

White Paper: Research Report: Payments Revisited: Circa 2000

A uthors: Ric Duques, Chairman , First Data Corp., and Garen Staglin, Founder, President and CEO, eONE Global Date: 2000 Size: 12 Pages Relevance Rating: High Web Address: www.eoneglobal.com/whtpaper.html

Executive Summary

In case you haven't heard of First Data, here are some recent statistics on its operations: • POS transaction processor for approximately 2.8 million merchant locations

• Bankcard processor for more than 1,400 card-issuing banks, totaling 392 million customers

• Western Union agent network of 120,000 locations

So when FDC's Chairman, Ric Duques, invests the time to author and share his vision of the evolving payment landscape in the form of a white paper, ISOs need to have an understanding of this document.

When this white paper was authored two years ago, Duques believed his company was uniquely positioned to focus on leveraging its resources to become the hub of an e-commerce revolution. It was a launch pad built on traditional POS terminal networks, creating a global engine of value from three emerging technologies: the Internet, wireless access and smart devices.

Over the intervening two years, FDC has not slowed in its aggressive pursuit of this vision, with hundreds of millions of dollars in investments in the form of both internal R&D and acquisitions.

The paper starts with a description of the sheer magnitude and strategic importance of the e-payments market. By first giving us a broad definition of e-commerce and then moving on to share extensive research findings on the source and magnitude of payment volumes, it can quickly overwhelm a reader with its numbers.

In terms of national revenue, today's payments business represents a $115 billion market for banks, technology vendors and third-party transaction processors. Five years ago, a Federal Reserve study estimated that the U.S. had made 650 billion payments worth $22 trillion. Eighty-five percent of those transactions were made with cash.

FDC's definition of e-commerce encompasses all aspects of exchanging value for goods and services between consumer and supplier groups. The goal FDC sets forth is to provide an "infrastructure that makes it possible for anyone to make a payment to anyone else - anywhere and at any time."

Mention of more than a hundred million consumers on the Internet, trillions of dollars of business-to-business (B2B) cash flows and projected high compound annual growth rates of users of EFT transactions - this paper paints a picture of unprecedented opportunity for those of us in the payments business.

Of course, we now have the benefit of hindsight, and the dot-bomb experience has taught early investors like FDC that making profits off e-commerce is going to be much harder than anyone in 2000 could have imagined. With that said, there are valuable findings in the remainder of this document.

The next section goes on to define the new payment infrastructure needed for electronic value exchange. This architecture is displayed on a Web page listed at the end of this column. There are important insights contained in the list of requirements that ISOs can benefit from as they consider new EFT services:

• The fact that more and more buyers and sellers in the B2B marketplace are meeting online to set up transactions but move offline to exchange value in closing out those transactions.

• Given the 24/7 and global nature of Internet-based transactions, sellers are seeking expanded methods of payment that immediately translate into incremental sales.

• As experimental methods of payment emerge to satisfy this demand for more choice, this, in turn, quickly translates into user requirements for trust and security protections.

• The more things change, the more they remain the same. The FDC white paper states that digital payments need to provide fundamental controls now found in physical payments - such as disclosure, authorization, audit trails, signature capture and receipt print-and-retrieval capabilities.

• Consumer protection has evolved to a stage where all merchants are effectively providing satisfaction guaranteed each time they accept an e-payment.

• The Internet fraud experience, even two years ago, was noticeable and growing at an alarming rate relative to other card-based transactions. The resulting card association penalties have raised the effective cost of credit card transactions on the Internet to such a level that every merchant is looking for payment alternatives acceptable to customers.

This paper identifies wireless devices such as the cellular phone and personal digital assistants (PDAs) as a major catalyst for expanded demand for e-payment transactions. One significant difference between these wireless devices and the PC as an access device to the Internet is that each time the consumer activates a digital device, it is understood that the meter is running and costs are being incurred.

This fact makes it much easier to derive revenue from the consumer side of the wireless-originated transaction as opposed to only collecting revenue from the merchant - as is the case when the consumer originates a PC transaction.

The other significant dimension of wireless for FDC is the fact that this technology has found growth rates to be much higher in Europe and Asia than in the United States. This insight has caused First Data to emphasize its international operations over the past three years - increasing from 10% of its $6.5 billion corporate revenues to 25% today, a number projected to grow to 50% within the next decade.

Clearly, the highest margin segment of FDC's business originates from foreign-currency transfers across its network of more than 120,000 agent locations around the world.

The white paper closes with a description of how FDC plans to "Win the Payments Race." The plan is to execute a two-pronged strategy:

1. Exploit "First Mover Advantage" by creating a sense of urgency across the FDC enterprise that market share growth comes from early presence and focused global transfer.

2. Concentrate your R&D dollars in a single entity: eONE Global. This is the FDC arm that has sole responsibility for identifying, developing, commercializing and operating emerging payment systems and related technologies.

Executing this strategy has paid off handsomely for FDC stockholders. If you have been tracking FDC's stock performance over the past two years, with its double-digit compounded revenue/earnings growth and stock re-purchase history - you know that FDC is growing into a global giant that is large enough to face off against anyone, including Visa International.

Earlier this month, Visa filed suit against FDC for making services available to FDC's banking clients that violated Visa guidelines. Industry experts have long wondered how long it would be before FDC offered its clients the savings available to them from not passing transactions through the card associations when FDC owned both the merchant and card-issuer relationship. It looks as if FDC has grown to the stage where it feels ready to step into court and fight to share these savings with its customers. Highlights of White Paper Findings • The "pathway to profitability" for companies worldwide relies on electronic revenue generation and collection of payments from customers.

• Technology innovators and payment experts are re-engineering the entire electronic payment infrastructure to meet the changing requirements of the virtual world.

• Two overlapping technology revolutions are fueling the need for new forms of electronic payments: the unprecedented growth of the Internet and the increasing adoption of wireless-access technologies.

• In the past five years, all types of value exchange have moved rapidly into the electronic environment: person-to-person (P2P), B2B, B2C - even business-to-government (B2G).

• Forrester Research believes that Internet cell phones will penetrate 22 percent of U.S. households by 2003, growing to 45 percent of households by 2005. A Phoenix-based research firm, Semico, projects that Web-enabled phones will comprise 79 percent of Internet device volume within several years.

• There could be as many as 475 million transactions each year for the online auction vertical alone.

• Each component within the payments infrastructure has a unique role, with each component representing opportunity to make "pay as you may" a reality.

Web Sites for More Information on First Data & eONE Global

> www.firstdata.com/100.jsp First Data Corporation Home Page > www.firstdata.com/AR2001.jsp 2001 Annual Report for FDC > www.eoneglobal.com eONE Global Home Page > www.eoneglobal.com/blocks.html First Data's Architecture Design for Global e-Payments