February 2004

Transaction Processing and Technology Services

Franco Turrinelli -- Principal, Senior AnalystBusiness Servicesfturrinelli@williamblair.com(312) 364-8166

Firm Overview

William Blair & Company

UniqueA research-driven, client-

focused investment philosophy managed by an employee-based ownership

structure

A history of experienced, career-oriented investment

professionals that have delivered continuity,

stability and low employee turnover

People

A consistent focus on high-quality, growth equities

throughout the history of the firm

Focused

Founded in 1935 and headquartered in Chicago, with global operations

100% active employee-owned; over 750 employees

Independent, full-service investment bank focused on the middle market and high-quality growth companies.

More than 100 Mergers & Acquisitions since 2000

10 Private Capital funds opened 1988-2001

Over $24 billion in client assets as of December 31, 2003

Wealth Management and Corporate & Executive services

Equity Research follow over 260 growth companies, taking a focused,selective, in=depth approach to coverage

Our focus on growth and emerging companies and the middle market differentiates us -- we are a recognized leader in growth equities

Sixty-nine year record of serving clients' financial needs

M&A Perspective - Public markets perception

A Well-Established Strategy

Mergers and acquisitions are a tried-and-true business strategy in the transaction processing arena

Two reasons

1. Scale matters (but not as much as most people think) leverage of fixed infrastructure costs and

overhead purchasing power market visibility and customer confidence cross-sales opportunities

2. Customer retention is very high

Transaction Processing Industry Structure

Transaction processing is dominated by “Supertankers” and “Jet skis”

Big! Use scale for cost efficiency as competitive advantage

Businesses evolve slowly need to start turning ahead of

time changes now affect future for a

long time strong momentum for positive

changes competitive advantages are

persistent large number of customers highly recurring revenue --

changes at the margin not immediately visible

Highly dependent on management Relatively stable environments

technology outsourcing decisions

Revenue model often transaction dependent

Small and nimble! Often use technology as competitive advantage

Businesses evolve quickly can turn on a dime can retrace steps have to win every day competitive advantages are

transient small number of customers revenue often less recurring

Highly dependent on management Best is rapidly changing

environments technology time-to-market decisions

Often use license fee model

Supertankers Jet Skis

Transition

There is an “awkward phase” when the successful “jet ski” grows too big to be a jet ski but is not yet a supertanker

Either:

have a long-term strategy for making it thorough this phase

get through the phase very quickly

have an exit strategy

M&A can be an essential component of any one of these three alternatives

Industry Environment

Changing Industry Landscape

We may be at a “Tipping Point”

Two fundamental powers/sets of interests in the payments industry are changing

Central role of the bankcard associations

Banks’ interest in the payments status quo

Increased attention (as a result of above) of new areas of electronic payments

Established methods receiving new life (e.g. ACH) and M&A is a big factor in these segments

4

Role of the Bankcard Associations

Bankcard associations’ (VISA and MasterCard) role changing Pressure from various sources

Multiple roles lead to conflicting interests

4

BankcardAssociations

First Data• Concord merger• FirstDataNet

DoJ• Duopoly lawsuit (AMEX)• Other initiatives

Wal-Mart settlementGovernment intervention

BankcardAssociations

As an independent entity

As representative of members

Risk of diminished role in:• market share (shift to Amex/Discover)• infrastructure (due to FDC routing

transactions away)• new product introduction (due to loss of

honor all cards rule)Loss of revenue due to lowered off-line

debit ratesLoss of revenue due to payments mix shift• credit/off-line debit shifting to online

debit• checks shifting to debit/credit

Payments at Financial Institutions

Payments are a vital source of financial institution revenue

4

Currently, between 30% and 50% of a bank’s revenue comes from

handling payments . . .

Source: First Annapolis

. . . but the payments mix is expected to change significantly

Cash43.0%

Check23.6%

Credit18.3%

Debit10.2%

ACH2.3%

Other2.7%

Cash41.4%

Check16.0%

Credit19.5%

Debit14.4%

ACH5.5%

Other3.1%

Source: Nilson Report

Consumer Payments 2002 Consumer Payments 2007

Payments at Financial Institutions

Severe pressure is likely on payment revenue1. Declining revenue from bankcard transactions

off-line debit lowered interchange rates and declining share (?)

credit cards online debit rate increases (?) fees to consumer

2. Checks become a challenge volume declines of 1% - 4% annually to 2007 are forecast

( 2 billion - 8 billion less checks) reduction in volume causes significant increase in per-unit

costs current revenue per check: $0.20 per check current: $0.06 - $0.10 per check (50%-66% margin) at projected volumes: $0.20 per check (0% margin)

4

Payments at Financial Institutions

Banks may abandon protectionism of checks Electronic bill payment and presentment

– Business to consumer; Business to business Deployment of electronic POS solutions

– POS check conversion; PIN terminals; Stored value cards?

Check imaging and electronification

– Check 21 Act; Lockbox conversion; ARC application

ACH applications Shift in payments may occur faster than projected Check outsourcing likely to benefit

4

Hot new segments

Stored Value is the hottest new area in payments

Surprising! (since previous initiatives unsuccessful)Olympics, New York trialmultiapplication/genericsmart-card based (need infrastructure)

Primary motivations for use very different dependent on application– replace existing paper-based systems (gift cards)– convenience (speed and avoid cash)– budgeting– loyalty (actual or associative affinity programs)

All-in cost less than other forms of prepaid– scratch-off cards/checks/vouchers or paper-based

certificates

4

Hot and Cold (Less M&A/More M&A)

4

Stored Value cards prepaid wireless other

Check electronification and imaging

ACH network applications New industries

mortgage insurance

Fraud and security inc. support for Verified by

Visa et al. Global commerce applications

dynamic currency conversion

Storage and compliance Email applications

Core processing applications

Aggregation EBPP ATM driving Online banking Wireless banking Person-to-person Merchant acquiring

(esp. consolidation)