S p e c i a l R e p o r t

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1 S p e c i a l R e p o r t U.S. Economic Indicators Powered by This report is based upon information we consider reliable, but its accuracy and completeness cannot be guaranteed. Information provided is not all inclusive. All information listed is as available. For internal use only. Reproducing or allowing reproduction or dissemination of any portion of this report externally for any purpose is strictly prohibited and may violate the intellectual property rights of The Strawhecker Group. Copyright The Strawhecker Group & Electronic Transactions Association. All Rights Reserved.

2 Report Introduction The Electronic Transactions Association, in partnership with The Strawhecker Group, is pleased to release this special report on the U.S. economy, focused within the context of the electronic payments ecosystem. This report is a member benefit provided to the Electronic Transactions Association s 500+ worldwide member companies. REPORT CONTENTS U.S. Payment Card Spending (pg. 3) U.S. Merchant Concentration by Merchant Type (pg. 4) Performance of Public Payments Companies (pg. 5) Top Funded Payments Categories (pg. 6) FinTech Unicorns (pg. 7) Market Transaction Comparable Analysis (pg. 8) The Electronic Transactions Association is the leading trade association for the payments industry, representing 500 companies worldwide who offer electronic transaction processing products and services. The purpose of ETA is to influence, monitor and shape the payments industry by providing leadership through education, advocacy and the exchange of information. ETA s membership spans the breadth of the payments industry. ETA member companies touch, enrich and improve the lives of every consumer while making the global flow of commerce possible. For more information please visit electran.org. The Strawhecker Group (TSG) is a management consulting company focused on the global payments industry. The company specializes in providing financial institutions, merchant acquirers, card networks, ISOs, processing companies, large merchants, and the investment community with advisory services to maximize their growth and profitability. For more information please visit thestrawgroup.com. 2

3 Snapshot: U.S. Payment Card Spending U.S. consumer spending via electronic payments methods continues to be very strong Visa, MasterCard, American Express, and Discover aggregated volume has been consistently growing at 9% CAGR for the past 5 years This is because electronic payments have multiple growth drivers behind it: Feeds off of organic economic growth (inflation and GDP) Increased consumer usage Using cards for smaller transactions e.g. gum at gas stations, as well as larger ticket items, like school tuition Demographic changes millennials paying with cards or their phone; much less likely to use checks or cash Increased merchant acceptance New merchant types seeing the efficiencies of electronic payments acceptance e.g. B2B to improve receivables Est. Purchase Volume on U.S. General Purpose Cards $1.29 Tril. 15% 3% 29% $1.4 Tril. $580 Bil. $665 Bil. $700 Bil. $150 Bil. 12% 14% Percent Share 27% Visa Credit Visa Debit MasterCard Credit MasterCard Debit Amex Total Discover Total Sources: Public company filings, Statista, TSG estimates 3

4 Snapshot: U.S. Merchant Concentration by Merchant Type The U.S. has a diverse landscape of card accepting merchant types for example, Business Services in maroon accounts for 12% of the merchant outlets and 7% of the card volume in the U.S. Wholesale Airline & Hospitality Transportation & Utilities 2% 5% 12% Business Services Retail 19% 2 3% 10% 7% 7% 3% 15% 5% 9% Construction Eating & Drinking Places Outer Ring: Merchant Concentration Inner Ring: Dollar Volume Concentration $ Public Administration Personal Services 14% Manufacturing 7% 0% Healthcare 12% 15% 5% 4% 2% 4% 2% 3% Source: TSG AIM database of 3.5 million card accepting merchants ~$1 Trillion in annual volume 4% Grocery & Petrol 7% Educational & NPOs Entertainment & Rec. Farming & Ag. Finance & Real Estate Percent of U.S. Total in

5 Snapshot: Performance of Public Payments Companies Payments companies continually outperform the market The chart below displays the performance of a $100 investment in an index of selected payments companies which represent the TSG Payments Index. This index is calculated on a value weighted basis using market capitalization and is compared to the S&P 500 which is also calculated using the same methodology. A $100 investment in the TSGPX in Q would now be valued at $284, as compared to $155 if invested in the S&P 500. VS. TSGPX: $ % CAGR $100 S&P 500: $ % CAGR Q * NOTE: *Q1 16 closing prices as of 4/11/2016. This analysis does not include affects of re-invested dividends. While some of the companies listed in TSG s Payments Index do not meet the requirements to be a S&P 500 listed company (S&P listed companies have a market cap of at least $3 billion), the S&P 500 served to be the best comparable index to TSG s Payments Index since it is one of the most commonly used benchmarks for the overall U.S. stock market. In fact, many consider it to be the definition of the market. The companies included in TSG s Payments Index met the criteria that at least 50% of their revenues were produced from electronic payments products or services. The views expressed on this date are those of The Strawhecker Group (TSG) and are subject to change. They are shared for discussion purposes only. This is not a complete analysis of every material fact regarding any company or industry. The information is based upon information we consider reliable, but its accuracy and completeness cannot be guaranteed. The trademarks shown are registered and their own. This document has not been prepared, approved, or licensed by any entity displayed. 5

6 Snapshot: Top Funded Payments Categories Nearly $100 billion was invested into the payments ecosystem globally in 2015; certain payments sub-categories are receiving more attention from investors than others Mobile Payments POS Money Transfer B2B Social Commerce Loyalty Billing ecommerce Prepaid Gateways Security & Data Analytics Digital Currency Source: TSG Analysis 6

7 Snapshot: FinTech Unicorns The boom in startup funding has resulted in a growing crop of FinTech unicorns Over the past 5 years, private payments-company valuations have exploded, and payments startup companies valued at $1 billion or more have emerged in several markets. Unicorn is a term in the U.S. investment and venture capital industry that denotes a start-up company whose valuation has exceeded the somewhat arbitrary value of $1 billion. Ant Financial (Alipay) Lufax Social Finance Stripe Zenefits One97 Credit Karma Mozido Adyen Klarna Avant Prosper Marketplace Oscar Insurance Deem TransferWise Kabbage Coupa Software Funding Circle China Rapid Finance Global FinTech Unicorns by Valuation Lending Payments Other $0 $10,000 $20,000 $30,000 $40,000 $50,000 $ in millions Active Payments Unicorns Rank Company Country 1 China 2 U.S. 3 India 4 U.S. 5 Netherlands 6 Sweden 7 U.S. 8 U.K. Source: CB Insights, TSG Analysis, TechCrunch, Business Insider Intelligence 7

8 Annual Sales Volume - $Billions Snapshot: Market Transaction Comparables The payments industry is a highly active M&A marketplace, especially merchant portfolios & enterprises The chart below provides a historical and recent perspective on net revenue multiples of merchant acquiring companies The data shows that multiples drastically vary based on each company s characteristics every portfolio is akin to a snowflake Net Revenue = Gross Revenue + Other Income Cost of the Transactions Other Income Equipment revenue Lease revenue Additional service revenue Monthly fees Cost of the Transactions: Interchange Assessments and network fees Residuals paid to sub-isos Third Party Processing Costs Timeframe: Data Set: 95 Transactions Red Plots = AVERAGE ( ): 3.86x $300bil $150bil $50bil Net Revenue Multiple (Annual) Low Multiple Characteristics No sales channel/force included in sale Stagnant or declining growth High attrition Low net revenue margins No merchant account portability No competitive sales strategy High losses Little or no profitability Few cost synergies to buyer Sales channel/force included in sale Solid sales growth Low attrition Solid net revenue margin Strong management team High Multiple Characteristics Ease of merchant account portability Sustainable strategy or market niche Low losses Good profitability Good cost synergies to buyer Source: TSG internal data 8

9 ETA s stated mission is to fully serve its members and advance their profession by providing leadership through education, advocacy and the exchange of information. ETA s envisioned future is: to be the global leader in facilitating the growth and success of our members and the electronic transactions industry. electran.org The mission of The Strawhecker Group (TSG) is to provide the electronic payments ecosystem and its stakeholders with unmatched advisory services. TSG s unique offering is built on decades of focused expertise, powerful data, and the combined intangible value these provide. Our vision is to be admired for our people, partnership, and performance. thestrawgroup.com