Sears Downgrade

Fitch Ratings has lowered its ratings of the senior unsecured notes of Sears to ‘BBB+’ from ‘A-.’ Fitch says the downgrade considers heightened competitive pressures facing the company’s retail operation, challenges in executing a new full-line store strategy, concerns surrounding the overall retail environment and Fitch’s revised internal capital allocations for the credit business. Sears’ credit business has a tangible equity to managed assets ratio on a stand-alone basis which Fitch views as more indicative of the current rating level, particularly as Fitch’s assessment of the credit operation’s risk profile has increased recently. The change in risk profile has occurred as the company has substituted a portion of its declining private label card base with MasterCard accounts, which has exhibited a mixed performance to date. However, profitability of the credit card operation remains strong, although performance in 2002 has been negatively impacted by higher provisions for losses. Increased provisions were due to higher loss levels and the company moving to a more conservative reserve methodology which effectively began assigning reserves more broadly to include current accounts and other fees in addition to delinquent borrowers and finance charges. Future provisioning will mirror net write-offs, although levels will be influenced by the company’s historically longer charge-off period (write-off loans at 240 days delinquent compared to 180 days for banks) and its historic re-age policy, which effectively cures accounts that are currently delinquent. Fitch says its expects reported net chargeoffs to rise moderately during 2003.

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PULSE 2002

TX-based PULSE EFT Association reported this morning that its transaction volume for last year totaled more than 955 million, an increase of 34%. PULSE also posted a gain of 775 total new member financial institutions, including nearly 500 financial institutions that joined as a result of completion of a merger agreement with TYME. During 2002, the network processed more than 336 million ATM transactions, an increase of 22.5%, and PIN debit transactions jumped to 431.7 million, a rise of 28%. Other significant categories accounted for 187.8 million transactions, more than 87% greater than the previous year. PULSE EFT Association serves more than 3,700 banks, credit unions and savings institutions and its network includes more than 700,000 ATM and retail locations nationwide.

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Cards Mid-East

Terrapinn Ltd announced that MasterCard International has agreed to host the “4th Annual Cards Middle East” conference and exhibition in Dubai. he Middle East’s payments and transactions summit is now firmly established as the region’s meeting place for banks, telcos, retailers and other organisations profiting form card solutions. This is where the payments and transactions industry does business.

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INFRARED STANDARD

After a three year effort, a standard has been released for global,
wireless, proximity payments. The Infrared Data Association released the
standard for infrared payments to be used by cell phones and PDA’s that
beam transaction information between card readers, ATMs, kiosks, gas pumps,
turnstiles and toll booths. The new “IrFM” specification utilizes existing
financial services infrastructures to process wireless payment transactions
(credit cards, debit and smart cards, checks and loyalty programs) at the
POS. Harex InfoTech in South Korea tested the standard in 2002 for nine
months with its “ZOOP Universal Mobile Payment Service.” During the past 4
years an estimated 200+ million IrDA enabled cell phones and PDA’s have
been shipped throughout the world.

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Cash Systems

MN-based Cash Systems has signed contracts with 15 more casinos for cash advance services to bring its total client list to more than 90 gaming locations. Cash Systems, Inc. has grown from a regional ATM provider to one of four cash access companies serving the gaming industry. Cash Systems’ products include its proprietary cash advance systems, ATMs and check cashing solutions. Cash Systems gaming clients are comprised of both Native American and commercial entities.

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BOILER ROOMS

The U.S. Federal Trade Commission has launched a new Web site to fight
cross-border fraud.The most common cross-border frauds perpetuated in
Canada against U.S. residents include phony prize promotions, foreign
lottery schemes, advance-fee loan scams, fraudulent travel offers, and
unnecessary credit card loss “protection” offers. The Web site contains
information on recent FTC law enforcement actions against cross-border scam
artists, as well as FTC coordination with law enforcement agencies in other
countries to combat this multi-billion dollar problem.

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FleetBoston 4Q Update

FleetBoston reported this morning that net credit chargeoffs and writedowns (excluding Argentina) for the fourth quarter will total approximately $500 million. Three well-publicized credits account for about $150 million of the total and these relate to a major airline bankruptcy, a European energy company, and an Enron-related financing tied to the recently announced settlement by JPM Chase with various insurers. Excluding the incremental provision above the third quarter level, earnings from continuing operations are expected to approximate $600 million or $.57 per share in the fourth quarter. The core customer facing businesses continue to demonstrate solid progress.

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FHMS Buys Ski Processor

First Horizon Merchant Services has acquired substantially all of the assets of CA-based Merchant Card Management Systems, the largest provider of card-based processing services to the United States ski industry. MCMS was formed in 1992 and quickly focused on the ski resort industry, currently supporting more than 50 ski areas in the U.S. Providing processing, host-based and LAN-based loyalty card solutions, networked terminal applications and customized transaction reporting has given MCMS above-average client retention. MCMS’s client base also includes other travel and entertainment merchants as well as general retail.

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Debit Suit Hearing

A summary judgment hearing is scheduled for this morning in federal court in Brooklyn, New York in regard to the merchant class action, debit card, antitrust lawsuit against VISA and MasterCard. Attorneys representing merchants said last night they will present “compelling evidence” today to support their requests for the court to grant summary judgment on “tying” and “attempt to monopolize” claims, which if granted, will leave only the damages to be decided in the upcoming trial. A jury trial is set to begin on April 28th. The litigation involves a certified class of more than five million merchants with damages. Last month, MasterCard and VISA asked Judge John Gleeson to dismiss the antitrust litigation asserting the retailers’ claims are legally and factually deficient, and do not merit being presented to a jury. The networks also asked the court to throw out the retailers’ request for billions of dollars in damages saying it is not based on any facts. MasterCard said this morning the requested damages are based entirely on the guess-work of one economist, Dr. Franklin Fisher, who has ignored marketplace reality and a raft of evidence showing that merchants have benefited from taking signature debit cards. Because of similar deficiencies, two courts have recently disregarded damages theories offered by Dr. Fisher in other cases, and have dismissed those cases prior to trial. Meanwhile, both sides continue efforts to draw consumers into the dispute. Merchants insist that off-line debit transactions are slower, less safe, and cost merchants and their customers much more than on-line PIN debit, cash or checks. The card associations insist that merchants are trying to take away from their customers the ability to choose which payment option to use and are attempting to shift the cost of debit transactions to the retail customer. (CF Library 12/16/02; 11/15/02)

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Convergys KMS

OH-based Convergys has updated its “Credit Card Acquisition Program” with a “Knowledge Management Services.” The new KMS feature provides integrated voice response-based acquisition and balance transfer capabilities, and point-of-service evaluation services. Convergys says issuers using “KMS” have boosted sales per hour by up to 28% while cutting their cost per sale by as much as 15%. Convergys’ “Credit Card Acquisition Program” handles more than 700,000 separate credit card acquisition interactions each month. The solution is designed for major North American credit card issuers and is available on an outsourced basis. Convergys clients in the financial services industry comprise six of the top 10 credit card issuers, including Capital One.

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