• If Merchant Accounts are set up and maintained at Acquiring Banks, what role do ISOs such as the Company’s I.C.E. subsidiary play?
   
• Why don’t the thousands of agents that solicit new Merchant Account business throughout the U.S. go directly to the Acquiring Banks—why do agents need to go through I.C.E. or another ISO?
   
• Which Acquiring Bank sponsors I.C.E.?
   
• How does I.C.E. successfully compete for this business?
   
• Why does I.C.E. concentrate on the smaller merchant segment of the market?
   
• Isn’t it expensive to provide personal attention to smaller merchants?
   
• Doesn’t the fact that the ten largest providers in the industry already control 80% of the market severely limit International Card Establishment’s long-term opportunity?
   
• Is that why you are actively pursuing the acquisition of existing Merchant Account portfolios?
   
• Given the level of competition in the industry for existing Merchant Account portfolios, how will International Card Establishment succeed in acquiring portfolios at reasonable cost?
   

 
Q: If Merchant Accounts are set up and maintained at Acquiring Banks, what role do ISOs such as the Company’s I.C.E. subsidiary play?

A: As member/owners of the Visa and MasterCard Associations, Acquiring Banks originally did handle all Merchant Acquiring activities; soliciting new accounts from their business customers, and processing the applications when they came in. Some still do. However, most banks divested or outsourced their acquiring operations in the 1980s, effectively turning the industry over to third-party specialists that were better equipped to organize and manage broad-based sales and marketing activities. Today, most new Merchant Accounts are solicited by independent agents and Independent Sales Organizations (ISOs).
 

 
Q: Why don’t the thousands of agents that solicit new Merchant Account business throughout the U.S. go directly to the Acquiring Banks—why do agents need to go through I.C.E. or another ISO?

A: Although, at the grass-roots level, Merchant Acquiring is largely a function of marketing and sales, the business is still part of the financial services industry. Moreover, Merchant Accounts are very different from the ordinary checking or savings accounts that a business might open at their local bank. For one thing, Acquiring Banks assume a certain financial risk in the form of taking responsibility for merchants on all of their credit card transactions—i.e., the banks are responsible for making sure the merchants ultimately get paid after a customer leaves the premises with their purchase. Further, the establishment and administering of a Merchant Account involves a host of additional activities that aren’t needed in an ordinary account, including: Payment processing; risk management, including fraud prevention; account-data management and reporting; charge backs—i.e., the billing of merchants for the purpose of recovering charges that have been successfully disputed by a cardholder; and, collections. These are among the activities that the Acquiring Banks divested or outsourced years ago, and that are now largely handled through ISOs. And finally, ISOs and Acquiring Banks have formal relationships whereby the ISOs are sponsored by one or more Acquiring Banks to act on their behalf—agents have no such relationship.
 

 
Q: Which Acquiring Bank sponsors I.C.E.?

A: The Company’s I.C.E. subsidiary is sponsored by Wells Fargo Bank.
 

 
Q: How does I.C.E. successfully compete for this business?

A: We compete by offering the kinds of services that appeal to our target market—the agents and ISOs that focus predominantly on serving the smaller merchant segment of the market. More specifically, on the Merchant Account processing side, being powered by First Data Corporation enables us to utilize all of that company’s processing networks. On the customer service side, I.C.E. specializes in the kind of highly responsive personal attention that other providers—particularly the larger ones—are unable to match for a variety of reasons.

Ultimately, the electronic transaction processing industry is highly relationship-oriented, largely as a result of the interdependence that exists between the various types of entities that make up the industry. Accordingly, our marketing and sales efforts targeting the agent and ISO community are specifically designed to establish and reinforce the personal rapport that builds long-term loyalty.

 

 
Q: Why does I.C.E. concentrate on the smaller merchant segment of the market?

A: The simple answer is: that’s where the action is. More specifically, the consolidation that has taken place in the industry since the 1980s has created a large “service gap” as the bigger providers trended toward reliance on computerized operations to manage their vast portfolios of Merchant Accounts. Simply put, they no longer maintain enough customer service personnel to provide hands-on, flexible responses to the inquiries and technical issues that arise with smaller businesses—it is not worth it to them when measured against their larger customers. Instead, whatever personal interaction they do provide is often characterized by standard “formula-based” answers that often frustrate smaller customers. In a very real sense, the bigger providers have ceded the smaller merchant segment to smaller providers that are willing to fill the gap.
 

 
Q: Isn’t it expensive to provide personal attention to smaller merchants?

A: Yes, customer service operations are more costly when offered in a personal, flexible manner. However, smaller merchants still represent a very profitable segment, and smaller merchants generally pay higher transaction fees.



Q: Doesn’t the fact that the ten largest providers in the industry already control 80% of the market severely limit International Card Establishment’s long-term opportunity?

A: Not at all, for three important reasons:

1. Smaller merchants represent the largest and fastest growing segment in the market. According to U.S. Census Bureau estimates, for example, there are approximately 20 million businesses in the U.S. with average revenues under $1 million a year that collectively generate $1.7 trillion in annual sales. New businesses are launched every day, and existing businesses switch their Merchant Accounts to better service providers every day;

2. The Company’s rapidly growing customer base for merchant card services and equipment leasing represent a highly valuable foundation that supports the pursuit of additional revenue generating operations, such as I.C.E.’s Gift & Loyalty smart-card system; and,

3. Despite the fact that credit and debit cards have been in existence for over 30 years, the electronic transaction processing industry is still in its relative infancy. Worldwide, consumers make an estimated 2.3 trillion purchases of one form or another each year, of which only about 100 billion are made with credit or debit cards—just 4.3%. Another 100 billion or so are made with checks, leaving an estimated 2.1 trillion purchases paid for with cash. Given the universal appeal of convenience among consumers, there is little question that the trend toward electronic transactions will continue steadily for the foreseeable future. Even in the U.S., which is considered a relatively mature market in terms of credit and debit card usage, some industry analysts have projected that by 2005, credit and debit card transactions at the point-of-sale will double from the present level of 27 billion transactions to 54 billion transactions.

Of course, each of those transactions will generate a fee for the company that services the Merchant Account.



Q: Is that why you are actively pursuing the acquisition of existing Merchant Account portfolios?

A: Exactly—every account we acquire adds to our recurring revenue streams. In addition, however, the acquisition of existing portfolios also increases our economies of scale, while providing new opportunities for the sale of our other products and services—not least of which being our I.C.E.'s Gift & Loyalty system and equipment leasing services.

Q: Given the level of competition in the industry for existing Merchant Account portfolios, how will International Card Establishment succeed in acquiring portfolios at reasonable cost?

A: Competing effectively for choice Merchant Account portfolios is one of the reasons why we decided to become a public company. Certainly, there are advantages to being public when it comes to raising capital for such acquisitions. However, the Company’s stock is, itself, a very viable “currency”—i.e., another type of payment that can be utilized as an incentive for a given agent or ISO to do business with us. This is particularly appropriate when dealing with agents and ISOs that want to “monetize” their portfolios yet remain active in the business—i.e., they can fund their ongoing operations through the sale of a portfolio, while also having a chance to benefit stock-wise from any long-term success that the portfolio helps to bring about.

which is also one of the reasons we are pursuing a non-conversion portfolio acquisition strategy. In addition to the benefit of lower costs and reduced attrition rates that follow such an acquisition, we believe, and have confirmed, that the chance to retain a carried interest in the success of a portfolio after it is sold is a highly attractive incentive for sellers.