An Introduction to

ACAP Security’s PINPAY

and the

Stored Value Card PINPAY Market

ACAP Security Inc. (ACAP) is athe global solutions provider ofleader in highly secure PIN-based prepaid cards, and stored value products, and ATM/bank cards for online payment solutions, PIN-based multi-factor access authentication, and secure data transfer. These products serve a wide range of vertical markets in both consumer, and commercial and government applications and are made available both to end users in the U.S. and internationally.

ACAP’s has developed a secure data transfer technology and service platform, ppn Technology™, is the basic platform thatwhich enables flexible product solutions that are configured and managed for a client’s success. In the area of PIN-based online payment solutions, ACAP offers thea superior online merchant payment solution, PINPAY™.

PINPAY

PINPAY is an online POS terminal software package which can be operated from a located on theany customer’s desk top or laptop computer any where in the world. All that is required to use this online virtual POS terminal is for the customer to have a computer with Iinternet access, plus a PIN and an associated plastic card, paper certificate, or e-card (virtual card) which is authorized for use at the merchant’s online store.

For a merchant to accept purchases from a any and all of these PINPAY enabled cardholders, the merchant must have a PINPAY merchant agreement with one of the PINPAY authorized card processors/issuers and have downloaded and installed a one or more PINPAY payment buttons on the merchant’s online store checkout webpage.

Consumer payment transactions products supported by PINPAY include pre-paid cards for teens; student and campus cards; general purpose gift cards for branded malls and/or multi-merchant applications, as well as for private merchants; virtual e-gift card accounts; travel money cards as alternatives to cash and travelers checks for foreign travel; relationship cards that serve family and small business needs; and money transfer services. PINPAY also supports plastic card, paper certificate and e-virtual pre-paid accounts. These accounts are not required, but may include ATM machine cash access features.

Commercial products supported by PINPAY include cards for insurance claim payments; payroll cards, employee expense reimbursement and relocation cards; employee incentive and reward cards; corporate gift cards; membership cards; and virtual or physical promotional cards used to replace paper rebates and refunds certificates.

Local, state and federal government agencies, along with the armed forces, can also take advantage of many of the same products that work for employers and insurance companies. Whether it's paying un-banked or under-banked government employees, or making travel funds conveniently available on a worldwide basis while still maintaining control on a centralized basis, or disbursing benefits electronically, PINPAY supported products and services can meet your requirements.

PIN-Card Market

Stored Value is the emerging payment method in the United States. It is an exciting concept whereby negotiable values such as cash, loyalty points, discounts, computer ISP access time, or telephone minutes are stored in either a database or on a delivery instrument for future use.

Stored Value products for the retail environment include gift cards, prepaid cash cards, loyalty cards, merchandise credits, electronic coupons, and multiple merchant frequent shopper cards.

Stored Value cards which utilize a highly secure PIN for Internet purchases at online stores is a major new market. With the introduction of PINPAY, and the online payment security which it provides, significant increases in Stored Value based shopping is forecast for the future.

The need for PINPAY is clealy evident in the results of a recent surevysurvey of the 50 major U.S. retailers, which found that although 100% of thoese surveyed offer Gift Cards, only 50% of theehse major retailers would accept their own Gift Card at their online store. They willould sell their Gift Card online but they willould not accepot it as online payment.

The reason for these results is the frear that online retiales have for the fraudlent use of the stored value card in online purchases. Even though the true liability for losses from fraudemtly use of the card is the gift cardolder’s loss, most online retailers are reimbesing the gidft cardholder for any fraud loss because the retailer does not want to lose the customer. The net result is the online merchants are accepting high farud loss risks in accepting gift cards for online paumants.

By adding PINPAY to an online merchant’s gift card program, the fraud loss risks are greatly reducednearly elimaited. The merchant can accept gift card payments without the fear of fraud losses. The result is increased online sales. because another simple to use payment option is provided to the online shopper.

AThere is another very important advantage to adding PINPAY as an online payment option is that ittion. All online mercahtns continue to seek allows the retailer to servemedans of proviting the under-abnkedbanked and non-banked individuals. a meand of shopping at the retail mechants online store. This large group of individuals, estimatedaaamted to exceed 125 million in the U.S., does not have an ATM/bank card, and do not have a credit card. Therefore, the only access that which this group has to shop online is to use a stored value card or a gift card.

By adding PINPAY the online merchant can accept stored value card and gift cards without the risk of fraud and thereby gains access to this major and important 125 million strong purchasing group.

Gift Cards

Sales and Marketing Points

By 2006, the U.S. stored-value (prepaid) card market will be worth USD 290 billion, according to Financial Insights, and will realize over USD 4 billion in revenues to service providers. While loyalty cards will also comprise 16 percent of stored-value card revenues by 2006, according to Financial Insights, single-merchant gift cards will garner the lion’s share of the market. Over half (58 percent) of top retailers already offer gift cards, according to industry estimates, but growth in this end of the merchant market may be restricted by existing processing. Plenty of opportunities exist in the “mom-and-pop” merchant market, however, where gift cards fit right in with the ISO’s retail merchant strategy and are not a business to be ignored.

Gift cards are an attractive and cost efficient means for merchants to replace an existing paper-based gift certificate program. More than $100 billion is spent annually on gift certificates in the U.S.

Program Description

A stored value gift card is a prepaid card with a merchant name or logo. The card can be issued in bulk to the merchant with predefined or unique value. The card can be used for payment of goods or services with the merchant(s) participating in the card program. The cards are activated and loaded by the merchant at the time of purchase and can be used until the card expires or the funds are fully depleted. Cards can also offer unique multimedia advertising when offered on CD-based multimedia stored value cards.

Common Features

· Unbranded stored value card

· Value is added to card upon activation

· Cards can be preordered in bulk with either predefined value or unique value

· Available on CD-based multimedia cards

· Personalized message available on card carrier

· Authorizations are restricted to participating merchants

· Remaining value on card not redeemable for cash

· Electronic-based processing eliminates paper

· Custom card design

· Turnkey program setup and management

Now with PINPAY online store access

Payroll Cards

Sales and Marketing Points

Some recent statistics provided by the American Payroll Association validate the is shift towards payroll cards:

· -As much as 30% of the U.S. population does not have a bank account (American Payroll Assoc.)

· -More than four million paychecks are lost or stolen each year (American Payroll Assoc.)

· -Lost paycheck replacement costs are estimated to be $48 million annually (American Payroll Assoc.)

· -Companies can save up to $1.25 per payment using electronic disbursement instead of checks (www.directdeposit.org)

· -The chance of having a problem with a check is 20 times greater than with Direct Deposit (www.directdeposit.org)

· -Studies show that employees may spend the equivalent of three work days each year going to the bank (www.directdeposit.org)

In the last decade, the payroll industry has experienced a tremendous increase in costs associated with processing checks. In an effort to save money on paper, printing and distribution costs, many employers are considering replacing traditional paychecks with pre-paid, re-loadable, debit cards. With the average cost of issuing a payroll check in the United States approximately $1.35 (not including mailing expenses), and the average cost to reissue a check approximately $12, payroll cards are a cost-effective alternative to printing and mailing payroll checks.

Program Description

Payroll cards are a cost effective alternative to printing, cutting, and mailing paper payroll checks. The payroll card is reloaded with the value of the employee’s wages, allowing the cardholder to use the card at ATM or POS terminals.

Common Features

· Re-loadable via batch file or ACH

· Branded with Visa or MasterCard logo or non-branded

· ATM and POS terminal access- and now with PINPAY online store access

· Custom card design

· Card personalized for account holder

· Activity and balance information available via Internet or IVR

· Turnkey program setup and management

Cash Cards

Sales and Marketing Points

Although cards are predicted to take a 47 per cent share in U.S. payments by 2010, and about 785 million cards are used today, paper payments comprised 63 per cent of payments in the U.S. in 2001, according to The Nilson Report. With over 6,000 U.S. credit card issuers dispensing cards, product differentiation is also moving up the agenda, in the form of novel card shapes, contactless and 'proximity payment' cards. "The biggest opportunity for card companies is their ability to replace cash payment with card payments", confirms Celent analyst, Ariana-Michele Moore, as "consumers don't like to scrounge around for pennies".

With approximately $30 billion spent annually in the United States on promotions, businesses, organizations and individuals, consumers need a cost effective alternative to carrying cash and checks.

Program Description

Cash cards are available as general use disposable cards or as reloadable cards that allow access at ATM and POS terminals. Cash card products include prepaid cash cards, refund cards for purchase returns, promotional cash reward cards, campus cards, cash cards for messengers or temporary help who need occasional access to funds.

Common Features

· Disposable or reloadable

· Branded with Visa or MasterCard logo or non-branded ATM card

· ATM and POS terminal access- and now with PINPAY online store access

· Custom card design

· Instant availability for non-branded ATM card

· Card carrier with PIN number available

· Value added through PASPort POS terminal, Internet or IVR

· Activity and balance information available through Internet or IVR

· Turnkey program setup and management

Incentive Cards

Sales and Marketing Points

Stored-value prepaid cards are “attractive to consumers because they are portable, secure and offer lower fee structures than traditional credit cards”, says Katherine Carson, of Performance Systems.

Most stored-value cards can be used at ATM machines to get cash, make money transfers, and to obtain the balance of a current account. By using the card’s PIN code, cardholders can access the Internet, make online purchases or conduct local and long-distance calls, while making purchases at any Visa or MasterCard retailer. With merchants now waking up to Point-of-Sale Activation (POSA) systems, vendors of stored-value products will be promoting their products via the POS systems of distributors and agents, using incentives such as the familiarity of an existing distribution network, and the reduction of inventory.

Program Description

Incentive cards are purchased by an employer and sent to the recipient as a reward for excellent performance. Cards can be either branded Visa or MasterCard or non-branded debit cards.

Common Features

· Visa or MasterCard branded or non-branded stored value card

· Internet and IVR access for card balance and activity inquiry

· Cards can be activated by cardholder through Internet or IVR

· Cards can be activated with unique value

· Cards can be personalized with cardholder’s name

· Personalized message available on card carrier

· Custom card design

· Turnkey program setup and management.

· Now with PINPAY online store access

Mall Cards

Sales and Marketing Points

Transactions on stored-value cards, the fastest-growing area of the payment card industry, will total USD 43 billion by 2005, according to Killen & Associates, largely due to low-risk and cost-efficient propositions. Since stored-value transactions run on current POS terminals, and are processed on the same networks, merchants and issuers can achieve solid profit margins by ‘piggybacking’ stored-value on their systems.

Gift cards, which grew 20 percent in 2002, to USD 38 billion, are also driving stored-value cards, which Bain & Co predicts to reach 2 to 4 percent of all retail consumer spending within the next decade. Mall cards offer an electronic alternative for shopping malls to replace their existing paper-based gift certificate programs.

Program Description

The mall stored value product is a prepaid card that displays a mall name or logo. The card can be issued in bulk with predefined value or unique value. The mall card is designed for a closed system and can only be used for payments of goods or services with those merchants who participate in the program. The card is activated by the participating mall at the time of purchase and can be used until the card expires or the funds are fully depleted.

Common Features

· Non-branded stored value card

· Value is loaded on card when activated

· Cards can be sold by merchants or at self-service kiosks

· Cards can be used at any participating retailer in the designated mall

· Cards provide card and transaction information to track usage at certain retailers

· Internet access and IVR for card balance and activity inquiry

· Authorizations are restricted to participating merchants

· Remaining value on card is not redeemable for cash

· Turnkey program setup and management

Now with PINPAY online store access

Loyalty Cards

What is a loyalty program? Ask a roomful of merchants what loyalty is and you will most likely get as many answers as there are people. The challenge of implementing loyalty programs is that the broad nature of their definition can make implementation a nightmare.

The Difference between Loyalty and Promotional, or Reward, Programs:

Loyalty- The key element of a loyalty program is that customer information is gathered and used to encourage activity over a long relationship with the customer. The impact of loyalty programs is long lasting. Even when loyalty programs are terminated, consumers may still feel loyal and may still base their actions on that loyalty.

Promotional or Reward- Promotional programs are designed to create an incentive for a specific activity. These are generally one-time campaigns. No relationship is established with the consumer; no information is generated as part of the promotional program. Merchants just beginning to implement loyalty can use the promotional program to kick-start their offering.

What Do You Collect From A Loyalty Program?

1. Current InterestRecentcy- Has this customer visited your store in the recent past?

2. Frequency- How frequently has a customer come to a location over a given period?

3. Money- How much money has a customer spent on each visit (or on average)?

4. Profiles- Information needs to be collected to help understand a customer's preferences. It is futile to have a database full of information about customers if it is not used to serve them better.

Adding Value for the Cardholder- Consumers respond well to programs that have some combinations of the following-

Cash Value Rewards: What the customer has to pay in cash to acquire the reward.

Aspiration Value: Rewards with psychological appeal that exceed their cash value. This is an important value used in successful programs. A trip to Disney World, for instance, has greater psychological appeal than free pet food for a year, even though the two may have the same cash value.

Choice Of Redemption Options: Not only is choice important, preferably at different cash and aspiration levels, but also the ability of the customer to control or influence the process is important. Customers need to perceive that they are in control.

Relevance: Redemption must be usable with the context of the customer's day-to-day activity. Free long distance calls may have a known cash value; however, the incentive only applies to that customer segment that makes many long distance calls.

Convenience: The redemption process must be simple.

Conclusion

In conclusion, PINPAY is the answer to the online payment industry’s immediate need for a PIN-based debit and stored value card payment system which provides both online customer convenience and high fraud prevention.

The worldwide market for PINPAY service is huge. Consider only the U.S. market and only Stored Value Cards, according to Financial Insights, by 2006, the U.S. stored-value (prepaid) card market will be worth USD 290 billion and will realize over USD 4 billion in revenues to service providers.

All of the financial industry experts are in full agreement that the next five years will see the use and the issuance of stored value cards far exceed the past. Clearly, with the security and benefits offer by PINPAY the use and acceptance of pre-paid gift cards, payroll cards and cash cards as a means of making online purchases will accelerate. This will be supported and even pushed by the ecommerce merchants who will enjoy reduced purchase transaction costs and the ability to reach the 15 million under-banked and non-banked individuals.

Stored value is the growth market of the future and PINPAY will be a key component to the online growth and success of the stored value card market.

Insert concluding paragraph that has a two sentence summary of PINPAY followed by a 2-3 sentence summary of the potential of stored value cards in the next 5 years.

PINPAY, ppn and ppn Technology are Trademarks of ACAP Security Inc.

By Glenn Gearhart, CEO, ACAP Security Inc., a provider of higher level security solutions to the financial industry and business community. glenn@acapsecurity.com.

White Paper: 062205 ACAP Security Inc.

Copyright 2005. ACAP Security Inc. all rights reserved. PINPAY, ppn and ppn Technology are Trademarks of ACAP Security Inc.

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