PBT Pins Hopes On a $12 Billion Industry

Mercator Advisory Group has released a new report titled "The Online Opportunity for PIN-Based and "PIN-Less" Debit" which discusses market opportunities to expand usage of PIN-based debit cards in the online environment.

According to the report... "Today's lack of a widely accepted solution for using PINs online has limited the use of EFT debit in this rapidly expanding market." The report goes on to say...

"Long-term opportunities in the fast-growing e-commerce segment must await the deployment of a proven online PIN technology."

PIN debit at the point-of-sale has grown rapidly, and consumers often favor the use of PIN over signature debit for its perceived security and ease of use. The report tracks debit's growth and key consumer attitudes driving its growth. In the world of e-commerce, debit usage, essentially restricted to signature debit usage, has also grown impressively.

While the e-commerce segment its modest in sales volume today when compared with the total consumer spending market, its rapid growth makes it strategically important as a source of future payment volume.

Mercator's analysis suggest that in 2005 dollars, PIN debit's "fair share" of the e-commerce segment would be $12 billion in sales volume, if a suitable authentication solution were available to ATM cardholders.

The inherently low fraud associated with payments to utilities, educational institutions, financial institutions and other selected categories ensures that transactions authorized by billers and ATM card issuers result in very low fraud rates, even though they are not PIN-secured. Most of these PIN-less payments are for expedited/late pay consumer bills, and miss the huge volume opportunity of pre-authorized recurring payments.

The report estimates the potential market opportunity that could be addressed if PIN debit were allowed as a competitive payment option for recurring bills.


Editors Note: Pay By Touch owns the rights to the world's first and only software based PIN Debit application via their subsidiary, ATM Direct. For a closer look at ATM Direct, (which was featured here on February 13th) click the following link:

If Pay by Touch, is indeed, awarded their patent (which is currently pending) for Internet PIN Debit, then ATM Direct, combined with PBT Online, would become a cash register for Pay by Touch. They would be positioned to cut Internet Retailer's transaction processing costs in half and own the market, which in turn would boost their stock value significantly come IPO time. For further information, I've included some interesting reading below:

Related Links:

ATM Direct Says It Will Test PIN Debit on the Web This Year

Pay By Touch Closes in on 'Biometric Proxy' for PIN in Debit Payments

Pay By Touch Enters the Race to Offer Payments to Web Merchants

Mere touch of the hand pays it all

Mere touch of the hand pays it all

Article from the Birmingham News about how Pay by Touch solves some shoppers Pet Peeves...like waiting forever for customers in front of them to pull out their checkbook (which by the way contains pertinent financial information, for all to see) and taking 5 minutes to write out a check...

Nice Play Rick!

• Photo gallery
• Monday discusses the incident: 350K
• Vin Scully's call of Monday saving the flag


30 years ago today, Cubs center fielder Rick Monday rescues an American flag from protesters (asswipes) on the field at Dodger Stadium on April 25, 1976. (Los Angeles Dodgers)


LOS ANGELES -- It was 1976, a fun year for America. It was the country's bicentennial, the war in Vietnam had ended a year earlier and everyone really wanted to put all the problems from the 1960s, Watergate and Vietnam behind them and just enjoy the country's yearlong 200th birthday party.

On April 25, the Chicago Cubs were visiting Dodger Stadium for a three-game series. Playing center field for the Cubs was Rick Monday, the first player taken in the amateur draft that was created 11 years earlier. Monday was born and raised in Santa Monica, Calif., so playing in front of his friends and family was always special to him. On this day, fate would hand Monday a moment that people still talk about with reverence 30 years later. Monday recounts the moment in his own words.

"In between the top and bottom of the fourth inning, I was just getting loose in the outfield, throwing the ball back and forth. Jose Cardenal was in left field and I was in center. I don't know if I heard the crowd first or saw the guys first, but two people ran on the field. After a number of years of playing, when someone comes on the field, you don't know what's going to happen. Is it because they had too much to drink? Is it because they're trying to win a bet? Is it because they don't like you or do they have a message that they're trying to present?

"When these two guys ran on the field, something wasn't right. And it wasn't right from the standpoint that one of them had something cradled under his arm. It turned out to be an American flag. They came from the left-field corner, went past Cardenal to shallow left-center field.

"That's when I saw the flag. They unfurled it as if it was a picnic blanket. They knelt beside it, not to pay homage but to harm it as one of the guys was pulling out of his pocket somewhere a big can of lighter fluid. He began to douse it.

"What they were doing was wrong then, in 1976. In my mind, it's wrong now, in 2006. It's the way I was raised. My thoughts were reinforced with my six years in the Marine Corp Reserves. It was also reinforced by a lot of friends who lost their lives protecting the rights and freedoms that flag represented.

"So I started to run after them. To this day, I couldn't tell you what was running through my mind except I was mad, I was angry and it was wrong for a lot of reasons.

"Then the wind blew the first match out. There was hardly ever any wind at Dodger Stadium. The second match was lit, just as I got there. I did think that if I could bowl them over, they can't do what they're trying to do.

"I saw them go and put the match down to the flag. It's soaked in lighter fluid at this time. Well, they can't light it if they don't have it. So I just scooped it up.

"My first thought was, 'Is this on fire?' Well, fortunately, it was not. I continue to run. One of the men threw the can of lighter fluid at me. We found out he was not a prospect. He did not have a good arm. Thank goodness.

"Tommy Lasorda was in his last year as third-base coach before he took over for Hall of Fame manager Walter Alston. Tommy ran past me and called these guys every name in the longshoreman's encyclopedia." "A lot of people don't know this, but he beat me to the flag," recalls Lasorda. "I saw Rick start running over from center field to left. I didn't know what it was, but as soon as I saw him start, I took off and I ran out there, and of course, by that time, Rick had picked up the flag and continued running. When I got there, I see these two guys and I told them, 'Why don't one of you guys take a swing at me?' because there were 50-something thousand people in the ballpark and I only wanted them to swing at me, so I could defend myself and do a job on them."

Monday continued, "Doug Rau, a left-handed pitcher for the Dodgers at the time, came out of the dugout and I handed the flag to him. The two guys were led off the field through the Dodger bullpen.

"After the guys left, there was a buzz in the stands, people being aghast with what had taken place. Without being prompted, and I don't know where it started, but people began to sing 'God Bless America.' When I reflect back upon it now, I still get goose bumps."

James Rourke took the picture, and it was nominated for a Pulitzer Prize," said Monday. "This past winter, my wife and I had been looking at a lot of photos that had been in the archives, and one of the photos we came across was a picture of James Rourke and I standing together, holding up the photo that he took. The 30th anniversary means a lot because it was a moment captured in time by James, who is no longer with us, and he has been greatly missed over the years."

Monday, who played for the Dodgers from 1977-83 and has been one of the team's broadcasters since 1993, then recalled the impact the moment had on a country that was wanting so badly to show its patriotism again.

"The letters I've received from that day have run the gamut of emotions. They've been from children who were not born yet and had only heard about it. They've been from Vietnam veterans, including one yesterday. This soldier wrote that there were two things that he had with him in two tours of Vietnam. These two things kept him in check with reality. One was a small picture of his wife. The other was a small American flag that was neatly folded. The picture was folded inside the flag and in the left breast pocket of his uniform.

"He would be in mud for weeks and months at a time. Those two things were what he looked at to connect him with reality, other than his buddies, and some of them were lost in battle. He wrote in the letter, 'Thanks for protecting what those of us who were in Vietnam held onto dearly.'

"That means something, because this wasn't just a flag on the field. This was a flag that people looked at with respect. We have a lot of rights and freedoms -- not to sound corny -- but we all have the option if we don't like something to make it better. Or you also have the option, if you don't like it, [to] pack up and leave. But don't come onto the field and burn an American flag."

Later that year, Monday was given the flag by the Dodgers' general manager at the time, Al Campanis. It hangs proudly in his home in Vero Beach, Fla.

Monday and his wife, Barbaralee, would like anyone who was at that game or a veteran to share their thoughts -- in 500 words or less -- and photos for a book they are putting together about the event that was recently voted as one of the 100 Classic Moments in the History of the Game by National Baseball Hall of Fame. The address is mvpsportscorp@aol.com.

EuroMoney Article on PBT

EXECUTIVE VICE-PRESIDENT Guy Spanos was considering the prospects for his company, Pay By Touch Solutions. Set up in 2002, its payments technology using finger scans had taken off and was being used in more than 100 (now 2200) stores across the US. Pay By Touch had also made a series of fruitful acquisitions. Now, three years on, Spanos and founder, chairman and CEO John Rogers wanted to refinance their balance sheet and rapidly expand the business at home and abroad.


Spanos was clear about how he wanted to raise capital. Earlier in his career he had worked in the capital markets and knew that this time he wanted financing from hedge funds. Using UBS as a prime broker, Pay By Touch secured $130 million – $75 million of which was raised in senior secured notes from five hedge funds.

An increasing number of companies are taking the same path. As Pay by Touch shows, companies with healthy balance sheets and good growth prospects are discovering that hedge funds can offer an alternative and, perhaps, preferrable source of financing, be it through private equity-type arrangements, private placements, leveraged loans, commercial loans or asset-based lending.

It’s a suitable marriage. Some $80 billion is expected to flow into hedge funds this year, and it needs to be put to work. And for companies, growth is back on agenda, with flexible and tailored financing offered by hedge funds providing a solution. That’s the way Spanos saw it. “Not being a long-established company with an established cashflow, we knew that the traditional banks would not provide a loan,” he says. “At the same time, we didn’t want to use private-equity firms as we didn’t want to dilute our share price or give up control in the company. We wanted flexibility to structure the financing predominantly in the form of debt, and we wanted smart capital, so we went to the hedge fund community knowing we’d find a solution.”

Competitive advantage

Hedge funds have a clear competitive advantage over their traditional private-equity peers. They have bigger pools of capital and their return requirements are lower. “Hedge funds take fees upfront and revalue the assets on a continued basis. Private-equity houses, however, only take their fees out on exit,” explains one lawyer. As a result, hedge funds are able to pay more for companies, leading, private-equity houses lament, to higher purchase prices.

The lack of restriction enjoyed by hedge funds also allows them an edge over traditional private-equity players. At a recent presentation at the University of Pennsylvania’s Wharton School, Och-Ziff’s Dan Och discussed a life insurance investment where his hedge fund was able to offer advantages because of the flexibility of its approach to management control. “Some private-equity firms needed a board seat,” he says. All Och-Ziff required was a one-page legal document declaring that it had the same rights as all the other large capital providers.

For Pay By Touch, the flexibility of the structures was crucial. “It was a highly unusual loan, providing security on the debt from our patent portfolio with a component of equity,” says Spanos. “ A traditional bank would not have provided it. We didn’t have any concerns. Hedge funds are as diligent as private-equity companies and banks. They aren’t quick to pull the trigger, and we liaised with them with the help of UBS throughout the structuring process.”

This new source of financing, however, is putting pressure on other providers. More than half the private-equity professionals surveyed by ACG/Thomson in June complained about the hedge funds’ involvement in their space. With good cause.

Hedge funds were able to offer a more suitable alternative to private equity in the case of Pay By Touch; elsewhere they are acting as pure private-equity houses. In the US in 2004, 23 private-equity deals totalling $30 billion were conducted by hedge funds, and in Europe hedge fund involvement in private equity is growing, with a series of high-profile deals this year.

In the reverse takeover of insurer Britannic Life by Resolution Life, hedge funds were the sole providers of equity. In April, Och-Ziff Capital Management bid in the £1.2 billion ($2.1 billion) auction for Yellow Brick Road, a pan-European directories business; in September, a consortium of six hedge funds, including Och-Ziff, Perry Capital and Citadel, entered talks to take over discount retailer Peacock Group.

Investors Seem to Recognize Value of PBT

Venture capitalists are returning to their old sweethearts, high tech and Internet companies, according a survey of investment activity in the first quarter of 2006. Young technology companies raised $3.36 billion nationwide, up 13 percent from $2.98 billion a year ago. In the Bay Area, technology startups raised $1.26 billion in the first quarter, up from $1.10 billion in the same quarter last year. "I see a continuation of the interest in Internet business models," said Joe Muscat, Americas director of Ernst & Young Venture Advisory Group. Ernst & Young publishes the quarterly report with Dow Jones VentureOne. "I think it started to pick up last year and has accelerated in 2006.

The biggest Bay Area deals featured several companies benefiting from the convergence of telecom, media and Internet technologies. San Mateo's Sling Media, which delivers media content to mobile users via broadband, raised $46.6 million, while Claria, a Redwood City provider of consumer Internet services, raised $40.25 million. The largest deal was Pay By Touch, the San Francisco biometric electronic payment system that raised $60 million.

The Bay Area companies that received the largest VC investments in the quarter were both technology companies:

Pay By Touch, the San Francisco company that allows consumers to buy things biometrically, with only a fingerscan for identification, and Sling Media, the San Mateo maker of a product that beams television programming to computers and handheld devices. Pay By Touch, in its second round of funding, raised $6o million in January, and Sling Media raised $46.6 million.Pay By Touch has biometric identification systems in 2,000 stores, including Albertsons and Supervalu. Pay by Touch has contracts that put them in 10,000 plus stores by year end. It also plans to offer a version of its product for Internet shopping as well as a health care application.

The company (Pay by Touch) set out to raise just $25 million, but interest was so strong that investors offered four times that. It closed on $60 million in January, after raising $130 million just 90 days earlier.

"It definitely shows that there is an appetite in the market with institutional investors for great inventions, and they will write big checks for great opportunities," said Gus Spanos, Pay By Touch chief financial officer and executive vice president. "I think that our success and the amounts of money we've raised ... really is more specific to investors' recognition that Pay by Touch could truly could be a transformational company."

Original Article Appeared in San Francisco Chronicle and SF Gate.

Related Links

To access the EuroMoney report on the $130 million Pay by Touch raised from hedge funds:
http://www.wingrave.co.uk/news/articles/Euromoney%20Magazine-Hedge%20funds%20article%20Nov%2005.htm

Below is a Reprint of the Wall Street Journal Report on PBT and Hedge Funds:
http://webreprints.djreprints.com/1445480587512.html

Guanxi for Pay by Touch

In China, markets aren't always defined by something that can be mapped—such as a province, a city or a region. Markets can also be defined by a nearly invisible network of relationships. It's not just what you know but who you know—and who they know—that counts. The Chinese have a word for it: guanxi, (jiǎntǐzì) a Mandarin term that loosely translates as "network of influence." Guanxi is rooted in the deep sense of family loyalty that permeates the culture.

The importance of "Guanxi"

Regardless of business experiences in ones home country, in China it is the right "Guanxi" that makes all the difference in ensuring that business will be successful.

By getting the right "Guanxi", the organization minimizes the risks, frustrations, and disappointments when doing business in China.

Often it is acquiring the right "Guanxi" with the relevant authorities that will determine the competitive standing of an organization in the long run in China. And moreover, the inevitable risks, barriers, and set-ups you’ll encounter in China will be minimized when you have the right “Guanxi” network working for you. That is why the correct "Guanxi" is so vital to any successful business strategy in China.

The Lowdown: Pay by Touch forgives $1 million dollar loan, made last September 30th, in return for shares and the right to purchase shares of stock in Win Win Gaming Inc. tantamount to 19% ownership. The agreement also provides Pay by Touch with the ability to market their biometric (and processing) systems in Mainland China. This by itself would mean nothing, but Win Win has government connections..."guanxi."

As part of the Joint Marketing Agreement, Win Win Gaming, Inc. has agreed to the following joint marketing terms and conditions:

Until December 31, 2006, WinWin is obligated to provide PBT with the following support:

A reasonable amount of selling support to assist in driving PBT’s biometric authentication and payment solutions into the Chinese video lottery terminal solution that is being prepared for rollout across China.

* Introductions to senior Chinese government officials with whom WinWin has relationships for the purpose of promoting PBT solutions into other applications beyond video lottery terminals.

* Support from WinWin’s Chinese general counsel for the purpose of making introductions and helping provide tactical and strategic guidance to PBT in connection with its entry into China.

* Physical and logistical support for PBT’s entry into China, including providing access to WinWin’s distribution channels and making available without charge office space in Shanghai.

In addition, under the terms of the cooperation covenants, PBT is required to provide WinWin with reasonable support and assistance in promotional consideration and exposure of WinWin products, services and technologies. PBT is also required to provide WinWin with reasonable support and assistance in identifying sources of equity and debt financing and strategic partners and assistance with obtaining financing from such sources.

Also, under the terms of the cooperation covenants, both parties must use commercially reasonable efforts to identify and exploit opportunities for the benefit of both parties.

Editors Note: (Why This Could be an Important Development for Pay by Touch) The China business market is a very difficult one to get into. "In China, it's not what you know...it's who you know, and if you don't know anybody, you have no chance." - CMO Magazine, January 06

Therefore, with Win Win's contacts, this is one giant step for Pay by Touch in terms of potentially penetrating what promises to be the largest market in the world. Truly a Win-Win Situation. (couldn't resist) By the same token, Win Win is extremely cash poor. Anyway...here's a snippet on Win Win Gamings connections:


Slam Dunk: In the beginning of 2004, Win Win Gaming Inc. entered into an exclusive agreement with the Shanghai China Welfare Lottery to develop new Instant Ticket lottery games and a new TV lottery game show to be marketed throughout the Shanghai region. This agreement is the first of its kind between a U.S.-based lottery/gaming company and the China Welfare Lottery. In addition to the development of several new Instant Ticket lottery games and a full season of prime time TV lottery game shows, Win Win will also provide the marketing for the new lottery products and will consult on overall existing lottery operations in Shanghai.

"This is an unprecedented opportunity for a Western company to be invited to work in partnership with the Chinese government on Welfare lottery operations," said Win Win CEO/President Patrick Rogers. "

The market in China is poised for tremendous growth. This agreement validates the expressed desire of the Chinese government to blend Western-influenced marketing concepts, sales methods and technological innovations with the traditional Chinese approach to lottery operations."

Yu Jianguo, director of Shanghai Welfare Issuing Center, said, "We are very pleased that Win Win can help us on development of new Instant Ticket lottery games tied to a TV lottery game show. We look forward to a new and exciting program to improve our sales for 2004 and we are confident that together we will make it a success." Shanghai China Welfare Lottery was instituted in 1987 with proceeds directed toward the benefit of social programs throughout the area. In 2003, Shanghai China Welfare reports that gross annual sales of the lottery have reached 0.97 billion RMB.

September 21, 2005, Win Win Gaming's wholly owned subsidiary Win Win Consulting (Shanghai) Co. Ltd., entered into a Cooperation Contract with the Shanghai Welfare Lottery Issuing Center ("SWLIC"). Pursuant to this contract, the SWLIC retained Win Win Shanghai to design, market and promote the sale of a second generation of instant scratch off lottery tickets in Shanghai using the Company's "Slam Dunk" brand and trademark (the "Slam Dunk II Tickets"). The Slam Dunk II instant tickets will feature an IVR (Interactive Voice Response) component where players call to receive a "second chance" opportunity to win cash and prizes via an automated phone game. We also plan to roll out Slam Dunk II ticket games in additional cities and provinces throughout China pending final approvals from government lottery officials.

Discover Needs to Get Creative

Published: April 19, 2006 NEW YORK

Discover Financial is moving its $80 million advertising account to Interpublic Group of Cos.' Martin Agency, Richmond, Va., according to executives familiar with the situation.

"The biggest challenge for the new agency is creating something that broadens the appeal," said David Robertson, the Nilson Report's publisher. "The image has been defined by the product's limitations for a long time."

He said the agency will have to help Discover broaden the flagship card's appeal AND launch a new debit-card product.

Editors Note: Something like this?

Pay by Touch Digs Deeper...Towards China

"Win Win Situation"

Based in Las Vegas, Nevada, Win Win Gaming, Inc. (OTCBB symbol: WNWN) is a developer and provider of content and solutions for the lottery and wireless game industries with primary focus on Mainland China.

They also own and operate Win Win Wireless UK, which provides wireless broadband solutions that utilize cutting edge WiFi and WiMax technology. WiMax, the next generation of WiFi standard, was developed to provide reliable delivery of broadband services to previously unreachable markets and to promote deployment of broadband wireless networks by using a global standard. Win Win Wireless UK recently partnered with Cybermoor, an internet service (ISP) cooperative in Alston, United Kingdom, to extend Internet connectivity via broadband wireless service in the Alston area. The Alston project allows the Company to confirm its capabilities to deliver wireless broadband services to remote areas lacking standard DSL or cable service. Due to geographic and/or economic obstacles to DSL and cable in the UK and in numerous regions worldwide, Win Win sees tremendous opportunities for secure internet connectivity via broadband wireless in markets throughout the world.

Pay by Touch Connection

In return for a $1 million dollar loan last September Win Win Gaming Agreed that:

We will provide reasonable selling support to assist in driving PBT’s biometric authentication and payment solutions into the Chinese Video Lottery Terminal (“VLT”) solution that is being prepared by local Chinese parties and potentially by us in the future, for rollout across China;
·
We will provide potential networking contacts in China for the purpose of promoting PBT solutions into other applications beyond VLTs;
·
We will support from our China management team for tactical and strategic guidance on PBT’s entry of its biometric technology into China; and
·
We will provide physical and logistical support for PBT’s entry into China and US locations, such as Las Vegas.

SEC Filing of 10KSB - Filed April 17th 2005

1: 10KSB Annual Report -- Small Business HTML 849K

BUSINESS ACQUISITIONS AND JOINT VENTURE AGREEMENT

Pay By Touch Joint Venture and Note Payable

On September 30, 2005, we entered into a Joint Venture Agreement (the "Joint Venture Agreement") with Solidus Networks, Inc., d/b/a PayByTouch Solutions ("PBT") pursuant to which PBT loaned us one million dollars ($1,000,000) (the "Loan").

The Loan was secured by a pledge to PBT of a security interest in all of our assets (the “Security Agreement”), as well as a Promissory Note in favor of PBT evidencing the Loan (the "Note").

We were obligated under the Joint Venture Agreement to repay the Loan in full on October 14, 2005, at an interest rate of fifteen percent (15%) on all outstanding principal and at a rate of seventeen percent (17%) after default.

On January 17, 2006, the Company executed and delivered an Amended and Restated Secured Promissory Note (the “Amended and Restated Note”) to PBT which amends, restates and supersedes the Note.

The Amended and Restated Note (a) increases the principal amount to two and one-half million dollars ($2,500,000) (the “New Principal”), payable in full on March 31, 2006 (extended to April 30, 2006) (see Notes 1 and 9) and (b) changes the annual interest rate on all outstanding principal as of January 17, 2006, to eight percent (8%), and ten percent (10%) after default, if there is an event of default as defined.

However, the Company remains obligated to pay an annual interest rate of fifteen percent (15%) on one million dollars ($1,000,000) of the New Principal, for the period from September 30, 2005 through, but not including, January 17, 2006.

In addition, for a period of at least ninety (90) days, ending December 31, 2006 (the "Cooperation Term"), we will provide PBT with:

(a) reasonable selling support to assist in driving PBT's biometric authentication and payment solutions into the Chinese Video Lottery Terminal (“VLT”) solution that is being prepared by local Chinese parties and potentially by us in the future for rollout across China;

(b) potential networking contacts in China for the purpose of promoting PBT solutions into other applications beyond VLTs;

(c) support from our legal counsel for tactical and strategic guidance on PBT's entry of its biometric technology into China; and (d) physical and logistical support for PBT's entry into China.


Compare Win Win Gaming to Digital Chocolate. Watch for another development on the Pay by Touch/Win Win Situtation.

http://www.winwininc.com/AboutAffiliatesView.action

Video - Bill Townsend EVP Office of CEO

Pay by Touch EVP Office of the CEO and Lycos Founder ,Bill Townsend speaks at Baylor University. To view, choose your preferred streaming video methodology.

• QuickTime (streaming, 300kbps)
• QuickTime (streaming, 56kbps)

• Windows Media (streaming, 300kbps)
• Windows Media (streaming, 56kbps)

• RealPlayer (streaming, 300kbps)
• RealPlayer (streaming, 56kbps)

ATM Direct at Internet Retailer 2006

ATM Direct - a Pay By Touch Company
8081 Royal Ridge ParkwaySuite 130Irving, TX 75063
Phone: 214-596-0707

www.ATMDirect.com Booth: 435

ATM Direct is the only company in the world that delivers PIN-debit payments over the Internet with a software-only service. Internet PIN-debit is lower cost, easy to use and provides real-time, guaranteed funds.

ATM Direct provides mutual, multi-layered, authentication, monitoring and control services. We enable the multi-factor authentication of online users. This enables financial institutions to meet or exceed recent FFIEC recommendations for stronger authentication.

We use existing bank and EFT standards to minimize cost or changes to existing infrastructure.

ATM Direct is a Pay By Touch company, the world leader in biometric authentication and payment services.

http://www.paybytouch.com


Bonus For Paid Attendees

IR 2006 Conference Proceedings CD
Sponsored by ATM Direct
A Pay By Touch Company ($99 Value)

Chicagoland Likes Pay by Touch

Biometric Scanning at Chicagoland Jewel Osco an Effective Innovation

CHICAGO, IL – Now your finger is your checking account and debit card.

Jewel-Osco in Chicago became the largest grocery chain in the U.S. to espouse biometrics – or the statistical study of biological phenomena – as a new payment option. Said more simply, you can use your finger to pay as opposed to cash, your debit or credit card or a paper check.

Despite how you’d think the system operates, it actually does not capture and authenticate your purchase through the use of a fingerprint.

Instead, the Pay By Touch system collects miniscule measurements from your index finger and software gives each unique point a numerical value. These values are processed through a security algorithm. No fingerprint images are actually stored, according to Pay By Touch Solutions President John Morris, who asserts that this set of descriptors could not be used to regenerate a fingerprint.

While some privacy advocates might find issue with the technology and may fear the safety of personal data, the company also claims that these measurements cannot be reverse engineered to a fingerprint. All information is encrypted and stored at secure IBM data centers.

A Satisfying Experience

This reporter, who has not been fond of the self-service, touch-screen payment kiosks you now see at stores everywhere because they often don’t save time and still require employee intervention, on Tuesday tested the initial authentication and payment process at the Jewel-Osco on 3531 N. Broadway in Chicago.

While I couldn’t use the Pay By Touch system for my initial purchase because I wasn’t yet registered, registration immediately following was a breeze. A store employee was stationed by the customer service desk at a Pay By Touch kiosk, which came packed with everything it needed for fast processing. I would think stores eventually would want this process to fly without an employee.

Luckily I had all three forms of identification on me: a driver’s license, a Jewel-Osco loyalty card and a paper check, which would be voided by the registration process. Many people might not have all three, though, which could cause problems. The employee started the process by pressing her finger to the kiosk’s scanner and entering her private, seven-digit PIN.

After she was signed into the system, she began my enrollment process. I touched my right index finger to the scanner until I heard a confirmation sound and then repeated the process twice more. I then did the same with my left index finger three more times. It sometimes took a few seconds for the system to be satisfied with the scan and the employee recommended for me to swivel my finger right to left a bit.

She then inserted my driver’s license into a card scanner. It captured the driver’s license number and some additional information. My personal check was then fed through a check scanner to digitally acquire my checking account and routing number. I optionally entered my e-mail address, too, for system updates and likely promotional use. Pay By Touch promises never to sell personal information for marketing purposes.

The Pay By Touch system currently requires payment via checking account rather than a debit or card credit, which can be a negative for some people who accrue cash back and airline miles on cards. In total, my initial enrollment took about 12 minutes. At the end of the process, the kiosk did not indicate a successful enrollment and the employee had to log back into her account to verify its completion.

Once my enrollment was complete and I was handed my miniature FM radio for signing up, I made another purchase to try out the new payment method.

Back at the self-service checkout, I complete my item scanning and selected Pay By Touch as my choice of payment. I touched my finger once and it was recognized. I also entered my self-selected security PIN, which most people have as their telephone number for easy recollection. In addition to telling the system how to charge me, the finger touch also informs the system of my loyalty information for item discounts.

Consumer, Store Perks

While the technology precludes the need for shoppers to pay by cash, card or check, the method also prevents stores from having to pay banks and other middlemen to process cards and paper payments. Morris says a transaction with a traditional paper check is shuffled through seven or eight people’s hands starting with a cashier and ending with a bank.

While credit card companies typically charge retailers between 2 percent and 3 percent of a transaction, Pay By Touch charges stores about 10 cents per transaction. After five Pay By Touch purchases, consumers are sent a free fleece in the mail.

Following your first Pay By Touch use at a store, you’re able to go online and manage your virtual wallet. The company has integrated a site within Jewel-Osco’s for consumers to manage their wallet online. Shoppers can verify their address, loyalty card and even add a credit or debit card even though that payment type is not currently being used.

The site encountered various errors while trying to validate my account – including how I typed my driver’s license number – and the site broke out of the grocery store’s interface and revealed its true provider. Consumers can also initially register online but still must go into a store for finger scanning.

In addition to Jewel-Osco, 24 Cub Foods stores in Chicago began exploiting the technology in November 2004. Standalone Osco drugstores do not currently use the technology. In 10 months, Pay By Touch says it has grown from being installed in just 50 stores to approximately 2,100 stores today.

By ADAM FENDELMAN
Editor-in-Chief
Reporter’s Beat: Telecom
adam@midwest.bizAOL: PureAdam11

Discover the Prepaid Touch

An Idea on How Pay by Touch can "Discover" the PrePaid Touch

Both Pay by Touch and our "strategic partner" Discover have yet to "aggressively" pursue the PrePaid Debit Market. How can we propel ourselves into this industry?

BioPay's Paycheck Secure program, already has 1500+ locations with over 2 million enrollees. According to BioPay, they have cashed approximately $7 Billion dollars worth of checks since it's inception. Most of these have been payroll checks, so for illustration purposes, let's suppose that the average payroll check is $500. This would equivocate to 14 million checks cashed...which means that they earned a transaction fee on 14 million transactions.

A vast majority of these checks are being cashed by the unbanked or underbanked, which is 20+ million consumers strong. (half of which are of Hispanic descent)

The prepaid market represents a fast-growing market opportunity for Pay by Touch.. Closed and open loop prepaid processors will generate about US $1.8 billion in revenues by 2009, up from about US $0.5 billion in 2004.

By 2009, prepaid processing will be as large an industry as the debit card and ATM processing industry was in 2004. (Prepaid Trends - March 15th 2006)

“In coming years, sheer size and rapid growth will place the prepaid market at the forefront of the competition among card processors,” adds Gwen Bézard from Aite Research Group. The report predicts that, over the coming years, card networks will continue to struggle to accommodate the unique requirements of prepaid debit cards, "creating opportunities for third-party processors to innovate" on top of the network utility.

Pay by Touch "Prepaid Discover Card

Rather than having a Pay By Touch retailer dole out $500 in cash, I would suggest that the retailer offer an open loop Discover/PBT PrePaid Debit Card.

With Discover's recent announcement that they'll accept all DiscoverCard's at Pulse ATM's, this particular prepaid card could be used to withdraw cash at 350,000 Pulse ATM's, in addition to transacting purchases at any retailer who accepts Discover. (or PBT)

Currently, Pay By Touch earns a "one-time" transaction fee from cashing a $500 check, but, assuming an average purchase of $50 with the PBT/Discover Prepaid card, PBT would derive 10 transaction fees, or 10 times more activity.

Thus, 14 million transactions, become 140 Milllion transactions. Pay by Touch offers a stored value card but a reloadable DiscoverCard would offer more flexibililty. If the goal is to have customers flock towards the product, we would have to offer something unique and desirable which has not been offered before, by any finanical institution or card provider.

Leveraging PrePaid as a Means to Establishing Credit

Could Pay By Touch leverage their relationship with Discover and offer a PrePaid Card which also serves as a steppingstone to establishing credit? (which would result in attracting a tremendously huge market) Can anyone for that matter?

According to PrePaid Trends, "That's the question that pioneers in the prepaid card and banking industry are moving aggressively to answer in order to create credit records for millions of Americans"

"Finding a solution to the the age-old dilemma that young, often minority and unbanked consumers have always faced... How do I build a credit record if no one will give me credit? Solving that question could identify millions of hard-working consumers who would make good customers."

Discover the Answer

Here's my suggestion as the solution to this "age-old diemma. Pay by Touch could utilize their existing strategic partnership with Discover, and introduce an innovative rewards program attached to their PrePaid card.

The idea of "cash back" was pioneered by Discover back in 1987, according to Robert McKinley, CEO of www.CardWeb.com, and today every top issuer has some type of cash back or reward program.

But what kind of rewards would best appeal to the un/underbanked? Let's look this from a reverse angle. The inverse of cash rewards are credit rewards, an appurtenant to what Discover pioneered in '87.

Credit Rewards For Using Cash (Diametrics)

The antithesis to providing "cash rewards" for using credit, is that Pay by Touch would provide, "credit rewards" for using cash" (via a co-branded PBT/Discover Prepaid Card)

Here's how I would suggest it might work: Let's say a consumer cashed a payroll check at a PBT retailer for $500. I don't have data on whether or not they come back "week after week" to cash their payroll checks, but wouldn't we like them to? If so, then let's make them an offer that "entices them to do just that".

To entice the payroll check casher into coming back "week after week" thus enhancing loyalty on their part, PBT could introduce an innovative and (after conducting an exhaustive Google search, I'm convinced, a) "unique" new program, which offers a credit building reward.

If a consumer cashes their check with us every week or two weeks and has their funds loaded onto our Prepaid PBT/DiscoverCard, then, after 3 months, the average balance on their card will be the variable that drives the the Discover Credit Reward Perk. They vest at 25% every 3 months.

What this means is that they'll be issued (making PBT an issuer) a Discover "Credit" Card with 25% of their average balance as a credit-line perk. After 6 months it becomes 50% vested and after 9 months, the average balance becomes 75% vested. At the 12 month mark, they have the opportunity to be 100% vested.

There are stipulations, such as them agreeing, during the provisional period of building a credit line reward, that the minimum monthly payment on the credit card is automatically deducted on the due date from the Prepaid card. This of course would mitigate risk. (We might also stipulate that they pay at least one-bill per month using the card, as a gateway into the bill payment sector.)

Thus, if the consumers average balance on the PrePaid card is $1000 after 3 months, they'll have a $250 credit line on a Discover Credit card, which will become $500 after 6 months, $750 after 9 and $1000 after 12 months, provided they have made timely payments. Crazy you say? Not so fast. Allow me to prove my point that this is the way of the future...(not unlike biometric payments were when we bought Indivos).

Estimates are that as many as 50 million Americans do not qualify for credit. Hugh Gallagher, a manager in the Atlanta office of consulting company Edgar, Dunn & Company believes that about 20 million of them are ripe to be targeted for using prepaid cards and stored value data to build a credit history.

"It would be a big deal for financial service companies if prepaid data could help 20 million Americans qualify for credit cards, mortgages and loans," he says. "There is so much opportunity for incremental revenue by going after the unbanked and those without credit and that is why there are so many players going after this segment."

"A prepaid card could tell credit bureaus and and potential lenders a lot about an individual. "If such data from prepaid cards were to become accepted as a way to build credit history, it would be a "boon" for the prepaid card industry because unproven customers "would flock" to the product. And top on their wish list would be "open-loop" prepaid cards that carry such brands as Visa, MasterCard, AMEX and Discover."

Thus, if Pay by Touch could issue a Prepaid DiscoverCard that says: "My product meets your financial needs today, and can help you climb the ladder in the future for other credit products, we will harness consumers, not only initially, but long-term as well, with more frequency.

Prepaid Trends, in their March 15th issue, states that consumer data house Experian, Inc. may be drawing close to creating the predictive model for using prepaid card data in this way.

"We believe that by the end of the calendar year, we will come up with a tangible model that will allow us to use data from prepaid cards as a legitamate source for establishing credit," says Mark Hall, Experian's director of strategic initiatives.

Prepaid Trends says that Experian's working theory is that the prepaid card data will show that cardholders are making, or not making, timely payments on reucrring bills or monthly fees. Hall says Experian is looking to create positive credit files that show individuals are paying their bills on time, rather than just collecting negative data reflecting late payments. Last April, Experian created a payments industry advisory committee, including top card processors, issuers and networks to help it build the model.

So the writing is on the wall, as was biometrics. This could be a major marketing point for issuers, which Pay by Touch could become. Of course everyone that cashes a check that is loaded onto our prepaid card also must enroll with Pay by Touch, thus poetentially vastly increasing our enrollment numbers.

So while we wait for Experian to complete their findings by the end of the year, we could get started now and have a tremendously huge jump start on the industry.

Their are details to be worked out, I know...and I have some ideas, but I believe that this concept merits further attention, especially considering we would be the first to do it, we're not currently in the industry and by 2009, this market, as I've previously stated is going to be as big as the debit/ATM industry was in 2004.

Besides a way to attract the un/underbanked and Hispanic market, some of the more prevalent benefits provided are as follows:

1. PBT creates repeat/loyal payroll check cashing customers
2. PBT vastly increases the number of transactions they earn a transaction fee on.
3. PBT has an entrance into the prepaid card market.
4. PBT becomes an issuer
5. PBT retailers don't have to dole out so much cash when cashing a payroll check
6. The check casher doesn't have to (dangerously) walk out of a retail establishment with a wad of cash.
7. The un/derbanked consumer has a short and long term incentive towards building a relationship with us
8. A spending history is established that we can track
9. The un/derbanked consumer is rewarded for loyalty with a short/medium and long term goal of establishing credit.

10. Discover/PBT is able to issue two cards, where previously they have issued none...the prepaid card itself, and the future credit card.

11. Risk is mitigated, because the spending history is established, the average balance is established and the consumer agrees that the monthly minimum payment on the Discover Credit Card is automatically paid.

12. Instead of approaching companies about issuing Payroll cards, we bypass the middleman and go after the check casher.

13. Offers the opportunity to partner with existing check cashing outlets such as the 1520 locations of Ace Cash Express, the 1500+ location CashNow and 1329 locations of Dollar Financial Groups Money Store (In all there are over 22,000 check cashing/payday lending locations nationwide.

14. Allows us to penetrate banks and credit unions and cross sell our payment solutions via our Agent Bank Program. (Ironically, banks cash 52% of the unbanked consumers checks, and yes, most require that you roll you finger on an inkpad to leave a fingerprint. (so our biometric identification program would be a softsell compared to that.) According to the March 2006 issue of Bank Sytems & Technology, only 5-7% of U.S. financial institutions have deployed biometric technologies, however, banks finally seem to understand the technology, prices for biometric devices are down, and projections are that 35% of banks will install biometrics by the end of 2007. So it's a great vertical, especially considering how Pay by Touch Online can benefit as well.

15. Increases Pay by Touch enrollments and usage.

16. Creates another angle to go after Wal*Mart (who is the largest check casher in the US and a Discover Partner as well) A Wal*Mart Discover/PBT card?

17. We could require as part of the program that the consumer use this card to pay at least one bill per month as part of the credit building process, which gets us into the Bill Payments sector as well.

Discover Cards Accepted at Pulse ATM's

Discover Financial Goes Live On PULSE Network

RIVERWOODS, Ill. (04/12/06) - Discover Financial Services, which acquired PULSE EFT last year, said Tuesday that all PULSE ATMs will now accept Discover cards. That means Discover cards are now accepted at more than 350,000 ATMs and cash access locations. Discover Financial, a unit of Morgan Stanley, acquired the PULSE Network, which provides services for 2,100 credit unions and banks, in January 2005. Discover Cards issued by Discover Bank are now accepted at approximately 350,000 ATMs and cash access locations, enabling Cardmembers to access cash virtually anytime and anywhere.

This could be a very important development for Pay by Touch, with whom Discover is a strategic partner.

Bill Townsend at Baylor on PBT

Twelve years ago, Bill Townsend and a team of computer engineers at Carnegie-Mellon University in Pittsburgh were mulling over possible names for an Internet search engine and Web directory they were developing.

Though the imagery they decided on was a little unorthodox, their message was clear -- wolf spiders, of the Lycosidae family, actively hunt their prey rather than waiting for it to come to them.

The name was shortened to Lycos Inc., and the rest, as they say, is history. Townsend will be on campus today as part of the Ben Williams Distinguished Speaker series, sponsored by the Hankamer School of Business.

Cynthia J. Jackson, director of communications and marketing, said Townsend is a May 2005 graduate of Baylor's Executive MBA program in Austin and an expert on new venture funding. "He's just one of those people that has been really successful in the high-tech industry, starting new companies that are still viable," Jackson said.

Townsend is now executive vice president of Pay By Touch, a global leader in biometric authentication technologies.

Jackson said Townsend will talk about how he (helped) turned Pay By Touch into a billion-dollar company with more than 300 employees in fewer than four years.

(PBT's valuation was put at $2.25 billion dollars during their $190 million financing completed last December.)

Townsend will speak on the fifth floor of Hankamer at a free luncheon open to faculty, alumni and students interested in business.

"He'll speak to honor students in the afternoon and a group of MBA students after that," Jackson said. "In the evening, he'll speak at the annual banquet we hold for our graduating seniors."

Jackson said he'll base his evening speech on Dr. Seuss's Oh, the Places You'll Go!

Biometric Payments Growth to Continue

Michael L. Kasavana writes for AMonline.com about biometric payments and the potential for using a biocard for vending applications

Biometric Scanning Offers Vending New Payment Options Benefits in this emerging type of cashless transaction technology include increased security and confidentiality of personal and financial data.

By Michael L. Kasavana Contributing Editor AM-Online.com

While 2006 is expected to be the year radio frequency identification (RFID) contactless payment technology gains a foothold among vending operators, there are other technologies preparing to compete for a preferred position. Biometric payment technology may well become a popular settlement option.

For some time, biometric authentication seemed to be a technology in search of a quality application. The idea of linking personal characteristics (e.g., fingerprint, retina, iris, hand, face, etc.) to a database of settlement sources is beginning to be adopted in grocery stores and retail outlets across the country, and it may impact select vending accounts.

A significant attraction of biometric payment technology is its inherent heightened level of security as well as the ability to integrate with product-based marketing and frequent purchaser programs.

What is Biometrics?

Biometrics refers to the use of an automated system to verify personal identity through physiological or behavioral characteristics. Biometric technologies form the basis for highly secure identification and verification systems. With identity theft and fraudulent activity increasing, biometric-based solutions can provide increased security and confidentiality of personal and financial data.

More secure than PIN numbers, passwords, social security numbers and signatures, biometrics can authenticate an individual based on unique physical attributes that are difficult, if not impossible, to copy or forge. Although fingerprints are the most popular biometric characteristic used, other measurable traits include: iris, facial, voice, hand geometry and handwriting recognition.

A card, tag, fob or cell phone can be misplaced, lost or stolen. Fingerprints, on the other hand, are portable, reliable and always in the consumer’s possession.

Unlike a credit card or debit card application, biometric payment technology requires that the user register and create a settlement account in a closed cashless payment environment in which each supplier has a network of merchants that are part of the system. In other words, negotiability is limited to acceptance only at locations connected to the source of settlement information.

Enrollment involves proving one’s identity by scanning at least two fingerprints and entering some additional information into a database system. While some applications might require specification of a unique PIN code (a 4-digit number) or identifier code (e.g., a telephone number), all systems link the biometric payment to the consumer’s choice of payment source. To complete a typical transaction, the consumer swipes a finger, enters a PIN and selects a payment source.

How it works

Biometric payment technology allows the consumer to pay with the touch of a finger on a fingerprint scanner linked to a payment file. The fingerprint template is typically linked to a router and transmission media necessary to clear the transaction through an automated clearinghouse. While many biometric payment transaction providers focus on grocery, home improvement and convenience stores, others have indicated interest in quick-serve eateries, car wash locations and select vending operations.

Biometric payment providers (e.g., Pay-by-Touch and BioPay) require completion of a pre-enrollment process in which index fingers are scanned and driver’s license and banking information is recorded in an account database. This process reportedly takes less than two minutes. In addition to transaction settlement, biometric payment providers may also link captured transactions to loyalty reward programs, gift cards, discount coupons and Web access services.

Rapid transactions and reduced fees

Just how fast can biometric payment systems process transactions? Pay by Touch and BioPay state transaction times range from 5 to 15 seconds, which they claim is favorable compared to cash, credit card or debit card settlement. While the speed of the transaction may be attractive, decreased transaction fees may be more persuasive as a selling point. Since a biometric payment transaction is treated as an automated clearinghouse debit, fees tend to be significantly lower (estimated at 75 percent) than comparable credit card or signature-debit card transactions.

Fingerprint template

The first step in fingerprint identification is collecting the fingerprint using a special sensing device. This process is referred to as enrollment. In this step, the fingerprint is acquired for authentication. The captured image (called the fingerprint template) can be stored directly as an image or can be stored as a biometric algorithm. In the case of a biometric algorithm, several data points on the fingerprint template are scientifically measured and stored, thereby leading to discarding of the actual fingerprint. Algorithm software measures 40 or more data points for each fingerprint and may store these measurements as data coordinates or encrypt them into a digital certificate for future authentication.

When the mathematical representation of the fingerprint, not the actual fingerprint, is used to prove identity, a higher level of reliability is realized. In addition, some biometric payment systems may require the consumer to also swipe or wave a smart card in addition to scanning a finger to authenticate a transaction. This approach provides another layer of security than exclusively relying on fingerprint matching.

Consumer’s response: Positive

Are consumers skeptical about having fingerprints reside in a private database? Suppliers claim that market testing has not shown this to be the case, especially when fingerprints are not stored as images but are saved as mathematical representations. Similar to other proximity payment technologies, biometric payment systems do not link settlement directly to customer credit or debit accounts, but instead often create a proxy account (biometric algorithm) to link transactions for reconciliation.

In December 2005, NCR, the world’s largest manufacturer of financial self-service devices, entered into an agreement with Pay by Touch to introduce biometric fingerprint technology to its self-service machinery. NCR integrated the Pay by Touch fingerprint scanner into its Advanced Checkout and FastLane self-checkout terminals already installed in thousands of supermarkets.

Pay-by-Touch, as a result, adapted an NCR self-service kiosk to its system to enable consumers to register their fingerprint measurements in preparation to replace former card-based settlement systems. This arrangement with NCR followed Pay-by-Touch’s purchase of former competitor BioPay.

The number of locations participating in biometric payment technology is predicted to triple in 2006. In addition to biometric payments, fingerprint recognition can help improve other commercial applications, including age verification, check cashing and frequent shopper programming.

WECT 6 Video on Harris Teeter and PBT

Video Report of Harris Teeter Implementation in North Carolina from WECT Channel 6 in Wilmington.

Use Your Fingers to Shop and Buy "Apr 5, 2006 11:50 PM EST"

Fingering Out How to Reduce ID Theft

APRIL 5, 2006 -- An easier way to check out at the grocery store is now right at your fingertips. There's a new system in Wilmington Harris Teeter grocery stores that is making shopping more convenient. It's called "Pay by Touch" and it allows you to pay for your groceries by scanning your finger. All you need to enroll is a Harris Teeter VIC card, a blank check, and your driver's license. Your finger scan acts like a debit card, withdrawing money right from your checking account. And what's more, it can help cut down on identity theft. "Pay by Touch" is available at all seven Harris Teeter locations in Wilmington.

E-mail Me When You Go Public

Need Cash? Call a Hedge Fund

Some Young Tech Companies Move Beyond Venture Capital; "Email Me When You Go Public"

By REBECCA BUCKMAN April 5, 2006; Page C1

When fast-growing technology company Pay By Touch went looking for cash slightly over a year ago, it met with private-equity firms and venture capitalists. But the closely held San Francisco firm wound up taking money from a different type of investor: hedge funds.

Pay By Touch makes biometric identification gizmos that read fingerprints so shoppers can automatically pay for what they buy out of bank or credit accounts. Giant hedge funds, including Farallon Capital Management and Och-Ziff Capital Management, helped it raise $130 million in September.

About two months ago, the company, whose official name is Solidus Networks Inc. but does business as Pay By Touch, snared another $60 million, about half of it from hedge funds. These lightly regulated investment vehicles typically invest in publicly traded stocks and other liquid assets rather than private companies.

"There's not a company around that wouldn't want to do what we've done," says Pay By Touch Chief Executive John Rogers, who says investors view the company as being about a year away from an initial public offering of stock.

Hedge funds often make quicker investment decisions than venture capitalists and can offer more money -- though some say they may not scrutinize private companies enough before investing. Farallon declined to comment, and Och-Ziff didn't return a call seeking comment.

As other private firms wait for the moribund market for venture-backed IPOs to open up, they also are starting to tap the pool of hedge-fund cash. Microbia Inc., a Cambridge, Mass., pharmaceutical company, raised $75 million in February, a little less than a third of it from two hedge funds. ITA Software Inc., a Cambridge, Mass., maker of software for the airline industry, raised $100 million in January from a syndicate including three venture-capital firms, a buyout firm and a hedge fund. Just this week, another Massachusetts drug company, Merrimack Pharmaceuticals Inc., said it collected about half its latest, $65 million funding round from hedge funds.

Because hedge funds tend to be secretive, there are no estimates of the total they have invested in private start-up companies. In some ways the trend is a replay of the late 1990s, when hedge funds also moved into the venture arena, with mixed success, clamoring for cheap shares of private companies, including hot dot-coms, right before they went public.

The difference today is that it's more difficult to take small high-tech companies public. Hedge funds now are mainly trying to deploy the enormous amounts of capital they have raised over the last several years and diversify their investments, since returns haven't been stellar for most public stocks. Hedge funds currently have an estimated $1.5 trillion under management world-wide, compared with about $261 billion for venture-capital firms in the U.S., according to data from HedgeFund Intelligence Ltd. and the U.S. National Venture Capital Association.

Investing in private companies has risks -- for the hedge funds, for the companies they invest in, and for venture capitalists, who already are competing furiously for deals. "These guys could shift 5% of their money into venture and swamp VCs," says Kate Mitchell, a managing director with BA Venture Partners in Foster City, Calif. They could "massively overfund" small companies, she says, thus reducing returns for everyone.

Paying Down Debt

Some venture capitalists say hedge funds now are willing to make investments of $20 million to $30 million, not an unusual size for a later-stage, venture-capital deal. Some hedge funds take equity stakes in firms just as venture investors have done.

Hedge funds sometimes provide financing in the form of loans or special debt securities, which start-ups could have trouble paying down. Having debt on the books also could make it tougher for start-ups to attract other investors if they don't grow as expected.

Some money Pay By Touch raised from hedge funds last year came in the form of convertible debt and senior notes. Pay By Touch's chief financial officer, Gus Spanos, says that kind of funding "does carry more risk" than selling an equity stake but "we're comfortable with the trade-off."

For private companies, hedge-fund investments can be very alluring. Because the funds typically make many more investments than venture-capital firms, they can offer capital at attractive prices and don't depend as much on outsized returns to make up for the many failures of small companies. Hedge-fund managers, accustomed to darting quickly in and out of stock positions, also have a reputation for making investment decisions quickly -- another plus for private companies anxious to snare cash.

Venture capitalists often can't compete with hedge funds that value private companies more richly. "It's happened to everybody," says Bruce Evans, a managing partner at Summit Partners in Boston, which does venture capital and larger buyouts. Also, debt financing can prevent further dilution of founders' stakes in their own companies, if hedge funds don't take equity stakes. Mature companies that succeed in robust markets can do well by taking hedge-fund money, investors and academics say.

And hedge funds often have a more relaxed management style. A venture capitalist "might be camping out in your conference room, asking all kinds of annoying questions," says Bill Burnham, a former managing director with Mobius Venture Capital who is now a private investor (Mobius. by the way. is also a PBT Investor) The attitude of a hedge-fund manager, he says, might be, "Here's your check -- email me when you go public."

A Need to Nurture

Still, hedge funds generally don't have much experience dealing with small, private firms, which often need nurturing to succeed. As short-term investors, hedge funds might not stick with an investment for years as a company matures, as venture capitalists do.

"Hedge funds will be fickle," says William Sahlman, a professor specializing in entrepreneurial management at Harvard Business School. "If a few successes occur, money will pour in quickly....A few disasters, on the other hand, will stop the practice overnight."

Unlike venture capitalists, who generally wait to take profits themselves until they have actually realized gains on an investment, such as through an IPO or sale of a company, hedge funds often take profits from investments once a year, based on estimated gains. So if hedge funds overvalue private-company investments -- a process that can be subjective -- their long-term investors could lose out if the investments ultimately crash and burn. Some hedge funds are adopting new valuation rules to deal with these situations.

If start-up founders believe "all money is green, so whoever pays them the highest price wins," they may go to a hedge fund for financing, says Tom Crotty, a general partner with Battery Ventures in Wellesley, Mass. He says most young firms will pay extra for the advice and connections of venture-capital firms.

JBF Comment: The management at Pay by Touch is so impressive and seasoned that they simply didn't need one of the major services (which is also a costly one) provided by VC's, which is to find prime management candidates to place in key management positions. That service is part of the package and apparently the VC's weren't interested in structuring a deal that didn't tap into, or more accuratelyt, "charge" for that service. The Hedge Fund companies apparently were. I think the CEO is right when he states unequivocally that, "There isn't a company out there that wouldn't have done what we have done".

Especially a company with an elite management force such as PBT's. Pay By Touch brings together a team of seasoned veterans from virtually every discipline in the technology and financial services sectors.

Related Links: San Francisco start-up Pay By Touch didn't take venture-capital money when it sought $130 million in new financing for its biometric fingerprint-reading system (US News and World Report Article: "Hedging Their Debts"