Electronic Clearing House (ECHO Inc.) - Credit Card Processing -  Category Directory

(805) 419-8700 and

730 Paseo Camarillo

Camaillio, CA 93010.

www.echo-inc.com

Electronic Clearing House (or "ECHO Inc."). is an electronic payment processor that

provides or the payment processing needs of merchants, banks and collection agencies.

ECHO Inc has more than 60,000 credit card processing, debit card processing and merchant

services customers and sales of more than $40 million.  

ECHO Inc. derives the majority of its revenues from two main business segments, bankcard
and transaction processing services ("bank card services"), whereby it provides
solutions to merchants and banks to allow them to accept credit and debit card
payments from consumers, and check-related products ("check services"), whereby
ECHO provide various services to merchants and banks to allow them to accept and
process check payments from consumers. The principal services we offer within
these two segments include, with respect to our bank card services, debit and
credit card processing, and U-Haul transaction processing, and with respect to
our check services, check guarantee (where, if we approve a check transaction
and a check is subsequently dishonored by the check writer's bank, the merchant
is reimbursed by us), check verification (where, prior to approving a check, we
search our negative and positive check writer database to determine whether the
check writer has current, delinquent check-related debts), electronic check
conversion (the conversion of a paper check at the point of sale to a direct
bank debit which is processed for settlement through the Federal Reserve
System's Automated Clearing House ("ACH") network. The ACH is the electronic
banking network through which all electronic funds transfers are made in the
United States), check re-presentment (where we attempt to clear a check on
multiple occasions via the ACH network prior to returning the check to the
merchant so as to increase the number of cleared check transactions), and check
collection (where we provide national scale collection services for a merchant
or bank). We operate our services under the following brands:

- MerchantAmerica, our retail provider of payment processing services to
both the merchant and bank markets;
- National Check Network ("NCN"), our proprietary database of negative
and positive check writer accounts (i.e., accounts that show
delinquent history in the form of non-sufficient funds and other
negative transactions), for back-end check verification, check
authorization and check capture services, and for membership to
collection agencies; and
- XPRESSCHEX, Inc. for retail check verification, check conversion,
Automated Clearing House services (which we describe in greater detail
below), check collection and check guarantee services.
 

BANKCARD AND TRANSACTION PROCESSING SERVICES

Services

With our bankcard and transaction processing services, we provide payment
solutions to merchants and banks to allow them to accept credit and debit card
payments from consumers. Our bankcard and transaction processing services
include the following:

Debit and Credit Card Payment Processing

MerchantAmerica, our retail provider of payment processing services to both the
merchant and bank markets, currently provides 24-hour daily payment processing,
"800" number access to customer service personnel and, as needed, various field
support services. Utilizing one of several methods of access to us, the
merchants' systems dial our host computers and receive credit card and debit
card authorizations, which have been electronically verified. Electronic files
are then transmitted daily by MerchantAmerica to the major credit card
organizations or to the ACH, which subsequently transfer funds from the banks to
MerchantAmerica's processing bank, which then deposits the funds into the bank
of the merchant's choice. On average, ECHO deposits funds to over 600 banks
across the nation on behalf of its merchant base each day.

Our software programs capture the transactions, retain data and enable merchants
to review, reconcile and edit transactions. MerchantAmerica's customer service
efforts include a terminal loaner program to minimize downtime, frequent sales
and activity reports, and sophisticated security services utilizing the
merchant's terminal, our host computers and assistance in the field.
Additionally, MerchantAmerica utilizes several advanced telecommunications
capabilities to provide consistent and reliable services to its merchants.

Other Payment Processing Services

We also provide various services related to our debit and credit card payment
processing, including:

- Internet Processing - ECHO allows merchants to process payment
transactions online with security services that protect the
cardholder, merchant and Internet Service Provider ("ISP") from fraud,
immediate processing and online reporting; and
- Batch File Processing - ECHO allows mail order, telephone order or
direct marketing merchants, to process and transmit hundreds of
thousands of payments at a time by using Microsoft Excel(R), Access(R)
or any other program that can create a "flat file" of data. In this
process, the merchant can visit the ECHO Merchant Center, log on with
its PIN and merchant number, and then upload the file to ECHO's
processing center. The transactions are processed immediately, with
reporting available almost immediately to provide data on each
transaction.

Deriving Revenues

Bankcard and transaction processing services provide for the majority of our
revenues. For the year ended September 30, 2003, bankcard and transaction
processing accounted for approximately 80% of our revenues. Bankcard and
transaction processing volume rose 26.4% in fiscal 2003, from $760,501,000 in
fiscal 2002 to $961,248,000 in fiscal 2003, and revenue increased approximately
18.2%, from $27,456,000 in fiscal 2002 to $32,444,000 in fiscal 2003.

In a typical transaction, ECHO receives a percentage-based fee on the dollar
amount processed and a transaction fee on the number of transactions processed.
ECHO's revenue for debit/credit card processing is derived primarily from three
sources: the merchant's discount rate, the merchant's transaction fee and set
monthly fees. The discount rate is expressed as a percentage of the amount being
processed and is deducted from the amount of each transaction submitted by the
merchant, while the net amount is deposited into the merchant's bank account.

Discount rates range between 1.5% and 4.5%, and our average discount rate is
2.1%, which is consistent with our rates for the year ended September 30, 2002.
Depending upon the discount rate and the cost of clearing interchange, about 75%
to 90%, and about 85% on average, of the discount rate revenue is paid to
card-issuing banks and organizations and the sponsoring bank.

A transaction fee is charged for each transaction processed and ECHO's average
transaction fee in fiscal 2003 was $0.19 per transaction, compared to $0.18 in
fiscal 2002. We charge our bankcard merchants a range from $0.15 up to $0.32 per
transaction, depending on the type of transaction and merchant. Larger customers
tend to pay lower transaction fees given the volume of business they provide.
Both Visa and MasterCard have instituted $0.05 to $0.10 transaction fees on each
transaction processed that ECHO is required to pay. However, due to lower costs
of communications and negotiated contracts, ECHO's communication costs have been
lowered to a range of between $0.01 and $0.02 per transaction. Therefore, on
average, ECHO pays approximately $0.012 per transaction, depending upon the
duration and method of transmission.

The market size for credit card processing is approximately 1.2 trillion
transactions per year, and this number is growing annually. ECHO has a very
small percentage of this market share, but we are one of the top 50 credit card
processors according to The Nilson Report, a monthly financial
subscription-based newsletter. Our competitors include First Data Corporation
("FDC"), the biggest credit card processor in the U.S., NPC, Global Payments,
and Payment Tech. The credit card processing market has undergone rapid
consolidation, which has raised unique challenges, including supporting and
integrating numerous processing methodologies, initiating quality customer
support and field support services and maintaining merchant relationships.
While merchant portfolios can be purchased by a processor or a credit card agent
bank, merchants are generally under no contractual obligation to utilize the
services of the new owner so many of the most active consolidators have been
experiencing difficulty in maintaining their number of active merchants.

In an effort to enhance the bankcard transaction processing business segment's
processing infrastructure and control processing costs, we licensed several
payment processing systems from Oasis Technologies in 2002 and a full
integration of this system is currently projected for late 2004. While we
believe that our data center is reliable and the costs to operate the
MerchantAmerica program are currently reasonable, no assurance can be made that
such favorable conditions will continue.

In order to engage in Visa and MasterCard processing, a cooperative relationship
is required with a bank that sponsors the Visa and MasterCard transactions.
ECHO's primary processing bank relationship is with First Regional Bank of Los
Angeles, California. As a result of its relationship, ECHO is a registered
Independent Sales Organization and Merchant Service Provider with Visa and
MasterCard, respectively, which allows us to solicit and support merchants
utilizing our services. We have an agreement with First Regional Bank, which
continues our relationship through 2005. Pursuant to the terms of the
agreement, among other matters, we market and sell merchant services and the
bank provides various support services in connection with individual
transactions, in exchange for our payment to the bank, on a monthly basis,
either a payment of $0.02 per transaction, or 10 basis points of the bankcard
processing volume, depending on the merchant. The agreement does not allow
either party to terminate other than for cause (as defined in the agreement)
without incurring liability for breach of the agreement.

CHECK-RELATED PRODUCTS (OR "CHECK SERVICES")

Overview

ECHO has invested significant resources and management focus in its check
services business. Check services revenue increased approximately 40.4% in
fiscal 2003, from $5,835,000 for fiscal 2002 to $8,192,000 for fiscal 2003.
Revenues from check conversion and check re-presentment are all increasing
significantly. Visa officially released its POS Check Service as of December
2002 and several national banks have since approved the program to be offered to
their merchants. Therefore, ECHO anticipates continued growth in check services
as the marketing efforts of participating banks in the Visa Program become more
widely implemented. (See also the discussion of the Visa POS Check Service
Program below.)

Services

With our check services, we provide various services to merchants and banks to
allow them to accept and process check payments from consumers. Our check
services include the following:

Check Verification

For a fee, we will search NCN, our proprietary database of negative and positive
check writer accounts, attempting to match a specific piece of information, such
as a driver's license number or Magnetic Ink Character Recognition ("MICR")
number (the numeric data along the bottom of a check), provided by a

 
merchant. A match identifies the check writer as having current, delinquent
check-related debts. Upon notification of this match (via a coded response from
the provider), the merchant decides whether to accept or decline the check.
Verification reduces the risk of accepting a bad check for the merchant,
however, in providing this program alone, we typically offer no guarantee that
the check will be honored by the check writer's bank and make no promise of
reimbursement if the check is dishonored by the bank. Revenue from check
verification is derived from fees collected from the merchants when a check is
verified against our positive and negative check database. This revenue is
recognized when the transaction is processed, since we have no further
performance obligations.

Check Guarantee

With this service, if we approve a check transaction and a check is subsequently
dishonored by the check writer's bank, the merchant is reimbursed by us and we
acquire rights to collect the delinquent amount from the check writer.

The principal risk of providing this service is the risk of ever collecting the
amount we guarantee from a delinquent check writer whose check transaction was
dishonored by his or her own bank. If we are unable to collect the amount, we
lose that amount. On average, we usually collect on 60% of the amounts we
guarantee that have become delinquent. Given the risks associated with check
guarantee, especially for large volume merchants, we exercise strict risk
parameters with the merchants to which this service is offered. We typically
apply several risk management approaches with this service, which include
searching NCN's database against the data provided by the merchant, and
"scoring" each transaction according to several factors such as velocity (the
number of times a check writer has been searched in a certain period of time),
prior activity (historic negative or positive transactions with the check
writer), check writer's presence in other databases (these national databases
are selectively searched based upon the size of the check and the prior activity
with the check writer), size of the check, and historic bad check activity by
geographic and/or merchant specific locations. If our scoring system concludes
that the risk is too high, we issue a coded response instructing the merchant to
refuse to accept the check. If our scoring system results in a positive result,
a coded response advises the merchant that we have guaranteed payment on that
item.

Electronic Check Conversion ("ECC")

Check conversion is the ability to convert a paper check to an electronic item
at the point of sale. ECC is a relatively new system of check settlement that
is quickly gaining merchant acceptance. Under the program, the merchant slips a
customer's check either through a check reader that reads the MICR line on the
check or a check imager that records the total image of the face of the check
and the merchant enters the amount of the check into the system. The merchant
then returns the check to the customer and the electronic image, captured by the
reader, allows us to settle the check transaction electronically. Customers like
this new system because they get their check back immediately and still have
their hard copy of the transaction. Banks like ECC because no paper has to be
handled by the bank to settle the transaction. While large national merchants
already have check-reading equipment, small merchants will adopt the system only
if their check volume justifies the capital investment in equipment, ranging
from $150 to $600 per reader.

Check Re-Presentment

The Federal Reserve System's Automated Clearing House ("ACH") provides the tools
to electronically present, re-present and settle funds between banks. Our check
re-presentment program allows a merchant to advise its bank that a returned
check should be sent to the XPRESSCHEX data processing center in Albuquerque,
New Mexico, rather than returned to the merchant. Upon receipt, XPRESSCHEX
converts the check to an electronic ACH transaction for resubmission through the
ACH network and marks the check for possible collection activity, should it
become necessary. One feature a merchant may choose is to time the
re-presentment so as to coincide with a check writer's typical payday to better
the odds of collection. The full face value of the check is returned to the
merchant upon collection and a collection fee charged to the check writer,
usually in the range of $15 to $25, is retained by XPRESSCHEX as payment for its
services.

Internet Check, Batch Check and Virtual Terminal

A check can be presented as a form of payment over the Internet and we support
the multiple types of ACH entry classes. XPRESSCHEX allows an e-commerce site
to accept a check as payment, allows a batch of check data to be sent
electronically for processing (this is commonly used by mail order or phone
order businesses) and allows both verification-only and ACH transactions to be
submitted by merchants via a secure logon and passcode connection over the
Internet.

Visa POS Check Service Program ("Visa Program")
 

The Visa Program represents a major new initiative by Visa to enable merchants
to receive direct online authorization for checks written against consumer
checking accounts, similar to the authorizations provided for credit and debit
card transactions. The Visa Program was offered as a pilot program by Visa to
its member banks from December of 2000 to December of 2002 over which time
several banks electronically connected their check writer data to the Visa
network, making verification of the check writer's bank account balance possible
when checks drawn on these select banks were processed. In December of 2002, the
program was officially released out of pilot and, as of December 2003,
approximately 10% of checking accounts in the USA are electronically connected
to the Visa network through the banks that are now participating in the Visa
Program. This number is expected to increase to 20% or higher over the coming
year as more banks connect their check writer data with Visa. ECHO has invested
significant resources and management focus in its check services business,
particularly with respect to the Visa Program, and anticipates continued growth
in check services as the marketing efforts of participating banks in the Visa
Program become more widely implemented.

As described above, "check conversion" is the ability to convert a paper check
to an electronic item at the point of sale. The Visa Program provides Visa
member banks with a check conversion service that they can sell to their bank
merchants. The Visa check conversion service allows the merchant to get an
immediate authorization or decline on a check while the check writer is at the
checkout counter. If the check is approved, the service allows the merchant to
immediately return the paper check to the check writer since the funds will be
electronically withdrawn from the check writer's account and deposited into the
merchant's account.

Being able to approve or decline a check in real time at the point of sale
requires some method to verify the check writer has either an adequate balance
in the bank to cover the check or, if that is not possible, to verify if the
check written has a match in a negative check account database. In order to
provide this check service on 100% of the checks received by a merchant, Visa
needed a solution to approve or decline (and for those approved, electronically
deposit) the checks that processed through the program on a bank that had not
yet connected its check writer data to the Visa network. We are currently one
of two companies that provide this service to Visa as a Third Party Processor.
When a Visa member bank signs up to offer the Visa Program to its merchants, it
chooses a Third Party Processor from the certified providers and, to date, eight
of the thirteen financial institutions actively participating in the program
were using ECHO's services as a Third-Party Processor and are beginning to
actively sell check services to their merchants, and two additional
participating institutions currently in the program intend to actively market
this program to their merchants and use ECHO's services as a Third-Party
Processor in 2004.

When Visa receives electronic check data from a merchant and the bank upon which
the check is drawn has not connected its check writer data to the Visa network,
Visa routes that check to the Third Party Processor that was chosen by the
merchant's bank when they set up the program. The Third Party Processor
authorizes or declines a check based upon the negative and positive data
contained in several national check account databases that are commercially
available and, for those transactions that are approved, the Third Party
Processor will electronically move the funds from the check writer's account to
either the merchant bank's master clearing account or directly to the merchant's
banking account (depending on the bank's desired settlement method) utilizing
the Automated Clearing House (ACH), a funds settlement service offered through
the Federal Reserve Bank.

In addition to being a Third Party Processor, we are one of only five companies
that are currently certified as an Acquirer Processor with Visa, a role that
accepts transactions from the merchant's point of sale terminal/systems and
reformats them for submission to the Visa network. We were chosen by two of the
seventeen banks currently in the program to serve as their Acquirer Processor.
Most banks presently in the Visa Program are large national or regional banks
and already had terminal management service providers that could act as Acquirer
Processor for the Visa Program. In the future, as smaller banks make the
decision to enter the Visa Program, it is expected that many will have no prior
relationship with a terminal management provider and therefore, may potentially
choose us as their Acquirer Processor.

We derive transaction revenue in our role as a Third Party Processor and /or
Acquirer Processor by negotiating a transaction fee with Visa and/or the bank
that chose us as its Third Party Processor and/or Acquirer Processor. This
transaction fee averages $0.09 per transaction. The party that sells the
service to the merchant (usually the bank) enjoys the largest mark-up on the
product, offering the service in the range of $0.30 to $0.60 per check, with
external cost in the $0.12 to $0.20 range, depending on what the bank negotiates
with Visa and any Third Party providers.

We entered into a sponsorship agreement with our primary credit card processing
bank, First Regional Bank, to enable us to sell the Visa Program directly to
merchants with an obligation to pay a small transaction fee per check to the
bank. This allows the bank to realize added revenue, allows us to realize
higher revenues in a marked-up pricing model, and a portion of the mark-up to be
used to compensate and motivate resellers of our products and services to offer
the Visa Program to merchants in the marketplace. The balance of the mark-up
after paying the bank and the sales organization would be additional revenue to
us. This will also enable us to use our direct sales channels to provide the
Visa Program to ECHO's current and potential merchant base.

The Visa infrastructure requires ECHO to coordinate and integrate its services
with several parties and systems. As part of the Visa Program, we have written,
tested and installed special merchant terminal software that meets specified
Visa Program requirements and certified our terminal and host response code with
Vital Processing Services, a major provider of terminal services to many major
banks. ECHO has also developed special add-on services and reporting for
specific banks or select merchants that desired to participate in the Visa
Program. Additionally, ECHO has designed and is implementing several risk
management tools that contribute to the significant reduction in net bad debt
seen by a retailer, making the Visa Program a true competitive alternative to
guarantee services. As of September 30, 2003, we have spent approximately
$2,500,000 to integrate our check services with the requirements of the Visa
infrastructure and to increase our technology infrastructure, and to design and
implement our risk management tools in connection with the program.

Deriving Revenues

For the past three years, we have invested significant resources and management
focus in our check services business which provides various services to
merchants and banks to allow them to accept and process check payments from
consumers. This business segment comprised approximately 20% of our total
revenues for the fiscal year ended September 30, 2003. As an individual
segment, check-related revenue increased by 40.4% to $8,192,000 from $5,835,000
for fiscal 2002.

ECHO's revenue in check services can come from several sources. Typically, the
merchant pays either a fixed fee for each transaction (verification, conversion,
etc.) or a fee based on the face amount of the check (check guarantee) or both
(check guarantee). In the Visa model, ECHO can receive transaction fees for
providing "third-party" services to Visa banks, whereby ECHO assists them in
processing checks from banks not participating in the Visa Program. In
addition, ECHO may serve a Visa bank by being a collector of the transaction
data for the merchant and submitting it to VisaNet, a process referred to as an
"Acquiring Processor". Finally, ECHO can also participate in the mark-up that
is charged on the sales price to a merchant, although this is only earned by
ECHO if its primary sales channels secured the relationship. Additional revenue
is earned if the merchant utilizes ECHO's collection services and it is
primarily derived from the collection fee associated with successful collection
of an item. If ECHO refers a collection item to an NCN member, a small
participation in the collection fee is returned to ECHO through agreement with
the NCN member. Finally, when ECHO provides a guarantee service to a merchant or
a bank, it earns a percentage of every check processed from the merchant or bank
and ECHO's earnings related thereto are directly tied to its success in
collection and its risk management capability.

The NCN database includes over 20 million negative check account records and 100
million positive records. Over 260 affiliated collection agencies continually
contribute to the database to enrich its depth and value. Through its network of
NCN members, ECHO can offer regional collection services and distribute
collection items to one or more of a select group of NCN's member agencies to
maximize a merchant's or bank's ability to collect amounts on a local level.
NCN provides an ongoing revenue stream for ECHO as collection agencies, major
national merchants, banks, other transaction processors, and thousands of small
merchants access the NCN database daily to verify the status of a check writer
in real time. Check verification has been recognized as one of the lowest cost
and most effective ways for retailers to lower the risks and losses experienced
in accepting checks as a form of payment. Our NCN database is one of only four
major databases in the nation that can serve this market need on a national scale, and

we are currently thefifth largest check verification processor in the United States according to the
July 2003 issue of The Nilson Report, a monthly financial subscription-based
newsletter. In addition to operating NCN, we provide a common platform where a
business can also access other major negative check writer databases that are
currently available in the nation.

XPRESSCHEX revenues are growing due to the increased use of our check conversion
services, which include the capture (through digital imaging, or the retention
of specified personal information) of the necessary check data at the point of
sale and submission of the transaction electronically to the Federal Reserve
System's Automated Clearing House for settlement of funds. XPRESSCHEX also
maintains an active collection agency, registered in 48 states, that serves
primarily as a referral agent to select NCN members that are collection agencies
and are located in various regions of the country.

OTHER SERVICES

Overview

ECHO has historically generated a small percentage of its revenue from its
terminal business whereby ECHO deploys proprietary software and terminal
hardware in a comprehensive system for real-time credit card authorization,
capture and compilation of compensation data, and in some cases, active
management of rental equipment information. However, we are currently not
pursuing the sale of our proprietary terminal system but rather focusing on our
core bankcard and check services business segments, and with respect to our
U-Haul relationship described below, we now receive lower transaction fees from
that customer as a result of our revised agreement entered into in fiscal 2001.

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WorldPay