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Feedback from mPOS World challenges some myths

● In our view, most investors are either ignoring or underestimating the structural risks to the payment industry from the disruptive impact of mobile phone-based point of sales solutions (mPOS). We attended the two-day, mPOS World conference in Frankfurt. The findings from our meetings with industry participants contradict some of the general perceptions which we think many financial investors have.

● Firstly, mPOS not only target the micro merchants, but constitute a multi-segment, multi-market product. Many of the investors we met believe that mPOS will have a contained impact on incumbents like Ingenico and Verifone since they will remain limited to micro merchants. Contrary to this perception, most of the companies we met had ambitions of targeting existing POS users, so there is a clear risk of new competition for the incumbents. We were also shown statistics which demonstrate that mPOS are already gaining traction beyond micro merchants. Indeed, retailers like Apple, JCPenny, Nordstrom, Gucci, Burberry, Urban Outfitters and Starbucks are already deploying mPOS.

● Second, mPOS do not face any major security flaws, and many of the solutions have the necessary certifications (PCI/EMV), as well as endorsement from Visa and Mastercard. We think that many investors are sceptical of the risk posed by mPOS-based new entrants since they are considered to lack security credentials. The bulls on the stocks often argue that the security credentials of the incumbents provide them with a key competitive advantage which cannot be rivalled. While we recognise the importance of security and trust in enabling payment transactions, the feedback from the conference suggests that the barriers to entry in the market are not as high as some expected. For example, Mastercard has around 21 mPOS companies in its approved list, and is evaluating 55 more!

● Third, we were amazed by the sheer amount of new entrants to the market. The payment industry has long been a walled garden, and the industry structure is fairly consolidated. This is particularly true in the traditional POS industry, where two companies, Verifone and Ingenico, have a near-90% share by revenues. While, typically, consolidation should have created barriers to entry, in our view mPOS have significantly lowered the floodgates. We were told at the conference that more than 200 companies are offering mPOS globally. This is even more impressive when we consider that mPOS are only three years old.

● Lastly, some bulls on the stock believe that banks and payment processors who are customers of Ingenico and Verifone will either be reluctant to adopt mPOS or will chose solutions offered by their existing suppliers. The feedback from the event also challenged this view. At the Conference, World Pay, the largest European payment processor, announced the launch of its mPOS developed in partnership with CreditCall; Monitise announced a partnership with Lloyds bank, and iZettle talked about its partnership with Santander.

● mPOS will accelerate convergence between online and offline payments. This will benefit online payment companies like Wirecard, and create more challenges for offline players like Ingenico. We maintain our Sell rating on Ingenico and Wincor and our Buy rating on Wirecard.

Ingenico SA

Sell Current Price

EUR 52.24 Price Target

EUR 40.00 05/07/2013 Paris Close

Wirecard

Buy Current Price

EUR 21.44 Price Target

EUR 25.00 05/07/2013 Frankfurt Close

Wincor Nixdorf

Sell Current Price

EUR 42.175 Price Target

EUR 30.00 05/07/2013 Frankfurt Close

Rating system: Absolute

8 July 2013

Ali Farid Khwaja, CFA Analyst +44 20 3207 7852 alifarid.khwaja@berenberg.com

Jean Beaubois

Specialist Sales +44 20 3207 7835 jean.beaubois@berenberg.com

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mPOS: change we can believe in

We went to the inaugural mPOS World Conference in Frankfurt last month. Around 200 participants attended the event, including most of the established payment brands such as Visa, Mastercard, World Pay, Wirecard, Wincor Nixdorf and Ingenico, and retailers like Metro and some of the innovative new entrants in the industry such as iZettle, mPowa, Payleven and Yapital.

The absolute consensus among the industry participants was that there is a huge opportunity for mPOS, not just for providing payment acceptance for micro merchants but also innovative solutions across the multiple channels over the retail chain.

As we wrote in our last thematic note on the financial technology sector Disruptive risks to the payment services industry, published 31 May 2013, we think the payment industry will be transformed by technology-driven innovation. Some of the progress made possible through large data, smartphones and mobility will not only lower the marginal cost of transactions but can also lead to disruption in the industry. Technology, in our view, will democratise the payment services industry. The primary beneficiaries of these changes will be the consumer and the retailers, as innovation will drive down prices in the sector and encourage new competition. We met some of the companies which are aiming to drive these changes in the sector.

We think that many investors, particularly those based in Europe, are either ignoring or underestimating these structural headwinds. There seems to be a divide between US and European investors on the assessment of these risks, which we think partly explains why stocks like Ingenico have a high “short interest”. This might also be because most of the mPOS companies in Europe are still very young. Square, for example, is much more visible in the US. In our view, in the next 6-12 months, as European mPOS like iZettle, mPowa and Payleven gain more scale, they will also gain visibility, and this might increase appreciation of the structural risks to payment incumbents like Ingenico.

In our view, there is a general perception in Europe that there is very limited structural risk to incumbents like Ingenico from mPOS-based companies. The general consensus is as follows.

1. mPOS-based solutions, like Square, only target the micro merchant, a segment not targeted by Ingenico. So the introduction of mPOS only increases the overall market, and does not bring new competition in the traditional POS market served by Ingenico.

2. mPOS-based solutions are not secure enough. They lack security certifications like PCI and EMV. They do not support chip and pin.

3. Retailers are not interested in cheaper solutions for enabling transaction services. They want a durable and secure product from a trusted brand.

The feedback we got from the conference and the statistics presented at the event contradict all three of the above myths.

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Around 200 companies are offering mPOS solutions

Source: mPOS World Conference 2013

Takeaway No.1: mPOS is not only for the micro merchant, but is a multi-segment solution which has been extremely successful so far

“By 2017, mPOS will account for 46% of the installed base of point of sales globally” – Timetric IHL Research 2013

“There are 9.5m mPOS installed globally” – Visa Analyst Day 2013

“1 in 3 retailers intends to install mPOS in 2013” – Timetric IHL 2013

“Square has 2m businesses using 4m mPOS and is processing $15bn of transactions on an annualized basis” – Visa 2013

“25 mPOS solutions are available in 209 countries” – Mastercard

“There are more than 200 companies offering mPOS solutions. 26 solutions from 21 suppliers are registered by Mastercard and applications of 55 more are pending” – Mastercard

“There will be 8m mPOS installed internationally ex US by 2016” – Ingenico

As the statistics presented above show, mPOS is not a fad, and, although the solution is only three to four years old, it has already gained significant traction and market share. There is a sense of urgency in the industry, and the pace of innovation and new product development is extremely short. While in the traditional POS industry new product development used to take years, in mPOS there have been several product evolutions already.

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A range of new proucts are available which use mPOS

Source: Credorax presentation at mPOS World Conference 2013

The forerunner in the mPOS industry is US-based Square. Square launched its product in May 2010 and was set up by Jack Dorsey, founder of Twitter. The company is privately valued at north of $4bn, which makes it almost the size of Ingenico and Verifone combined. We think that bulls on Ingenico attribute Square’s private valuation and media hype to Silicon Valley’s generosity and still view the product with scepticism. But the statistics show a different picture. Since its launch, almost three years ago, there are around 4m mPOS deployed by Square according to Visa. Two million businesses now use it. To put this in perspective, Ingenico only has 1m installed terminals in the US. So, in terms of unit market share, Square is already four times larger than Ingenico. Some bulls believe that the users of Square are micro merchants only, a segment where economics are sub-optimal and which is not addressed by companies like Ingenico. According to some surveys, 25% of mPOS are merchants who were using traditional POS as well. Also, Square is already processing $25bn of transactions on an annualised basis. This excludes the flow that Square will get from its partnership with Starbucks. This is much larger than Ingenico’s easycash and almost half the size of Wirecard!

Square has not had much impact on Ingenico so far, since the latter has very limited market share with SME customers in the US. It mainly sells to large retailers. However, going forward, Ingenico aims to double its market share in the US by selling its POS terminals to SME merchants. We think that Square can emerge as a serious competitor in this market segment, and can limit Ingenico’s market share and put pressure on the segment’s profitability pool.

One of the reasons we think that there is less awareness of the disruptive risks posed by mPOS in Europe is limited penetration there. Square is currently online in the US. Many bulls believe that EMV (chip and pin) requirements will prevent mPOS in Europe. This perception was also challenged at mPOS World. European mPOS companies are relatively younger than Square; most are 12-24 months old, and hence have relatively lower visibility. However, they have also seen a similar level of demand. iZettle, the Sweden-based mPOS company is signing up 3,000 new customers a day. UK-based mPowa and German Payleven, which has a partnership with Wirecard, has also cited strong traction by merchants. We saw many EMV-compliant and PCI certified solutions at the conference. According to Mastercard, they have registered 26 solutions from 21 suppliers and 55 applications are pending. Even Ingenico, which was one of the presenters at the conference, suggested that there will be around 8m mPOS terminals globally, excluding the US, installed by 2017.

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Most of the companies we met, if not all, believed that mPOS targets all segments of the markets and is not just a cheap solution for the micro merchant. This contradicts another perception held by the bulls on Ingenico, that mPOS will only target the lowest end of the market which is currently untapped. Hence, they think that mPOS only increases the market and does not cannibalise the market for traditional POS vendors like Ingenico and Verifone. Firstly, history tells us that it might be slightly naïve to draw boundaries around new technology innovations. We have seen such expressions of denial by incumbents in many industries before. Mainframe developers thought that PCs were a fad and would be limited to a small market segment, and PC manufacturers thought that smartphones and tablets were just gimmicks, and would never get mass traction (see our note Tech titans or dinosaurs of 28 September 2011 for a more detailed historical analysis of disruptive risks). The pace of product development suggests that these mPOS companies are very quickly moving up the technology curve, and are not only trying to offer the services which a traditional POS provided but are enhancing value by providing additional services. Indeed, retailers like JC Penny, Norstrom, Apple, Gucci, Burberry, Starbucks and Urban Outfitters are either implementing or intend to implement mPOS solutions.

Mobile at POS: simpler, cheaper and more efficient

Companies like Square, iZettle and mPowa, etc allow the mobile phone to be used as a POS. There is another concept, which we think is actually more disruptive, and that is using a mobile phone at POS. Shoppers can simply put their credit/debit card details on their smartphone wallet and use the smartphone to purchase and pay for goods. This is very similar to Apple’s iTunes or mobile payments through Paypal. While iTunes is only available at the moment for digital products, the same concept can be extended to physical goods. For example, applications like mytaxi in Germany and the Hailo app in the UK allow passengers to pay through the app without the need of a physical credit card and a physical point of sales terminal. The transaction happens seamlessly through the internet on the phone. Other mobile wallet schemes like m-PESA in Kenya do away with the requirement of a physical POS. These technical architectures totally shake up the POS market. In our view, companies like Yapital (privately owned by Otto Group) and Seamless Distribution (listed in Sweden) will launch similar mobile payment models in the UK by September/October of this year.

Mobile phone can not only “act” as a point of sales but replace the point of sales

Source: Pay works

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Hailo’s allows payment via the app

Source: Hailo

Takeway No.2: mPOS meet security/certification requirements

Contrary to expectations, many new mPOS-based companies have PCI and EMV Level 1 and 2 certifications. Many are also approved by Visa and Mastercard. In fact, Visa has a stake in Square, and also has a shareholding in Monitise, which also offers mPOS solutions. These solutions meet all security requirements and have undergone the scrutiny of the regulators. The m-POS product is not only a “dumb” dongle, but has evolved significantly over the past 12-18 months. mPOS come in different shapes and sizes. The hardware and applications now also have additional value-added features, like inventory management software, etc. A list of mPOS suppliers registered by Mastercard is available on the company’s website:

http://www.mastercard.com/corporate/_assets/img/features/MPOSApprovedSolutions.pdf

The mPOS has evolved to accept chip and pin cards

Source: Berenberg

Many EMV comopliant mPOS solutions exist

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Source: Pay works

Takeaway No.3: There is high demand for mPOS from retailers

“The future of Nordstrom’s point of sales systems is going completely mobile” – Jamie Nordstrom, President Online Division of Nordstrom

Thirdly, many large retailers have already announced their desire to move to mPOS. According to the survey results presented by companies like World Pay and Mastercard, there is very high demand from retailers for such products. The important thing to realize is that a merchant will not chose mPOS over a traditional payment terminal only to save cost for the payment terminal. But mPOS replaces the entire point of sales infrastructure (scanner, cash register, etc) – a significant cost saving.

mPOS allow retailers to transform consumer experience by offering mobility, convenience (by reducing queues), easy checkout, and enhanced sales experience (through the ability to view additional features and information on tablets). They are also cheaper to install, better-looking, and take up less space.

We think some of the following pictures speak for themselves, and show that a tablet-based solution like that offered by Square (in the pictures) is substantially smaller, convenient and “smarter” than the traditional POS systems.

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Tablet based mPOS is cheaper, smaller and has more features than a traditional system

Source: Square, Berenberg, Company data

Disruptive technology creates headwinds for traditional offline payment vendors, but benefits online payment processors

A wise person once said that candle makers did not make the light bulb, horse and cart companies did not turn into auto manufacturers and the post office did not invent email.

The installed legacy of incumbents prevents them from reacting to disruptive risks. Clayton Christensen’s “The Innovator’s Dilemma: When new technologies cause great firms to fail” (Harvard Business Review Press 1997) is considered the last word on this subject. It is hard to ignore the disruptive innovation risk to the traditional POS industry.

Ingenico has strong earnings momentum due to market share gains against Verifone, its closest peer in the traditional POS industry. Earnings momentum is likely to continue into Q2 2013 and potentially even into Q3 2013. This market share gain masks underlying risks to the industry posed by mPOS. We believe that some of these headwinds will start of manifest themselves in the next 6-24 months. In the short term, there is a risk of pressure on gross margins due to price deflation in the sector; in the medium term, there is a risk of market share loss which might slow revenue growth; in the long term, there is risk of disruption as the mobile phone eventually removes the need for a point of sale terminal.

Mobile phone-based payment solutions are essentially leveraging on some of the larger technology trends already in place. They are an extension of the “Bring Your Own Device (BYOD)” concept which allows the separation of enterprise software and hardware.

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In our view, mPOS will accelerate the convergence between online and offline payment eco-systems. Technically, this means a convergence between “card present transactions” which are offline or face to face, and “card not present (CNP)” transactions, which are carried out online. Over time, we think that, due to innovations around big data, biometric and geo-location-based identification, the distinction between Card present and CNP will merge. The payment industry will move to a “person present” pricing model. This convergence between online and offline will benefit online payment processors like Paypal, Wirecard and Optimal Payments – since it means that online payments will gain share from offline/face-to-face payment transactions.

We have a Sell recommendation on Ingenico (PT: EUR40, covered by Ali Farid Khwaja); a Buy recommendation on Wirecard (PT: EUR25, covered by Bjorn Lippe), and a Sell rating on Wincor Nixdorf (PT: EUR30, Frederik Bitter). Some of the smaller listed companies worth keeping an eye on are Monitise, Bango and Seamless Distribution.

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Company Disclosures Ingenico no disclosures Wincor Nixdorf no disclosures Wirecard no disclosures (1) Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as “the Bank”) and/or its affiliate(s) was Lead

Manager or Co-Lead Manager over the previous 12 months of a public offering of this company. (2) The Bank acts as Designated Sponsor for this company. (3) Over the previous 12 months, the Bank and/or its affiliate(s) has effected an agreement with this company

for investment banking services or received compensation or a promise to pay from this company for investment banking services.

(4) The Bank and/or its affiliate(s) holds 5% or more of the share capital of this company. (5) The Bank holds a trading position in shares of this company. Historical price target and rating changes for Ingenico in the last 12 months (full coverage)

Date Price target - EUR Rating Initiation of coverage

12 July 12 46.00 Buy 09 November 10

18 January 13 46.00 Hold

18 March 13 40.00 Hold

31 May 13 40.00 Sell

Historical price target and rating changes for Wincor Nixdorf in the last 12 months (full coverage)

Date Price target - EUR Rating Initiation of coverage

13 November 12 33.00 Hold 16 March 06

01 May 13 30.00 Sell

Historical price target and rating changes for Wirecard in the last 12 months (full coverage)

Date Price target - EUR Rating Initiation of coverage

16 August 12 18.00 Buy 21 February 06

22 January 13 18.00 Hold

12 February 13 25.00 Buy

Berenberg distribution of ratings and in proportion to investment banking services

Buy 41.54 % 50.00 % Sell 19.23 % 8.82 % Hold 39.23 % 41.18 %

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Analyst certification I, Ali Farid Khwaja, CFA, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein.

In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by the Bank or its affiliates.

Remarks regarding foreign investors The preparation of this document is subject to regulation by German law. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.

United Kingdom This document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers.

United States of America This document has been prepared exclusively by the Bank. Although Berenberg Capital Markets LLC, an affiliate of the Bank and registered US broker-dealer, distributes this document to certain customers, Berenberg Capital Markets LLC does not provide input into its contents, nor does this document constitute research of Berenberg Capital Markets LLC. In addition, this document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers.

This document is classified as objective for the purposes of FINRA rules. Please contact Berenberg Capital Markets LLC (+1 617.292.8200), if you require additional information.

Third-party research disclosures

Company Disclosures Ingenico no disclosures Wincor Nixdorf no disclosures Wirecard no disclosures (1) Berenberg Capital Markets LLC owned 1% or more of the outstanding shares of any class of the subject

company by the end of the prior month.* (2) Over the previous 12 months, Berenberg Capital Markets LLC has managed or co-managed any public

offering for the subject company.* (3) Berenberg Capital Markets LLC is making a market in the subject securities at the time of the report. (4) Berenberg Capital Markets LLC received compensation for investment banking services in the past 12 months,

or expects to receive such compensation in the next 3 months.* (5) There is another potential conflict of interest of the analyst or Berenberg Capital Markets LLC, of which the

analyst knows or has reason to know at the time of publication of this research report.

* For disclosures regarding affiliates of Berenberg Capital Markets LLC please refer to the ‘Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG)’ section above.

Copyright The Bank reserves all the rights in this document. No part of the document or its content may be rewritten, copied, photocopied or duplicated in any form by any means or redistributed without the Bank’s prior written consent.

© May 2013 Joh. Berenberg, Gossler & Co. KG