Pay By Touch Has Reseller Agreement with eBank Systems

Pay By Touch Engages eBank Systems to Bring Its Biometric Check-Cashing Service to Community Financial Institutions

Leading Banking Software and Services Provider to Offer Paycheck Secure, Powered By Pay By Touch

LUBBOCK, Texas and SAN FRANCISCO, March 8, 2007 /PRNewswire via COMTEX/

Pay By Touch, the leader in biometric payments and personalized marketing, and eBank Systems, Inc., a leading provider of software and core services to community banks, today announced the formation of a reseller agreement. Under the alliance, eBank will market and sell Pay By Touch's Paycheck Secure(R) service -- a popular biometric check-cashing system -- to its existing customer base of more than 30 community banks and financial institutions as well as new prospects.

Paycheck Secure, powered by Pay By Touch(R), lets people cash checks using a simple finger scan to authenticate their identity. Already, more than 3 million consumers are using Paycheck Secure in 2,000 retail locations across 41 states.

"We are very excited to be working with eBank to provide their customers with a secure and easy-to-use check-cashing solution that can help them attract new customers," said John Rogers, Founder, Chairman, and CEO of Pay By Touch.

"Paycheck Secure, powered by Pay By Touch, can help banks generate additional non-interest, fee-based revenue while decreasing the risk of fraud and meeting applicable regulatory compliance requirements."

"At eBank, we are committed to helping community financial institutions realize their full potential," said Dave Boren, CEO, eBank. "Reducing fraud is a major issue for banks and credit unions alike.

We are pleased to offer Paycheck Secure, an efficient and secure way for financial service providers to serve more customers."

The one-time sign-up for the Paycheck Secure service is quick and easy to complete.

To enroll new customers, banks digitally scan the consumer's government-issued photo I.D., take an electronic photograph and capture two fingerprints, creating a unique customer profile for each individual. At subsequent visits to the bank, the customer need only place his/her finger on the scanner to safely and securely cash payroll and government checks.

eBank offers a full suite of technology and core service products for community banks including data processing, item processing, teller applications, check imaging, telephone and internet banking, document imaging, and loan processing platforms.

About eBank Systems, Inc.

eBank Systems, Inc. is a Lubbock, TX based technology and core service provider for financial institutions in the Southwestern United States. eBank offers a full suite of products for community banks including core data processing, item processing, teller applications, check imaging, telephone and internet banking, document imaging, and loan processing platforms. eBank's signature product, Trinisys, is a state of the art core data processing system designed to streamline the operations of financial institutions. eBank was founded in 1997 by Mr. Dave Boren, the current CEO of eBank.

You may learn more by visiting our website at www.ebanksystems.com.

About Pay By Touch

Pay By Touch ( www.paybytouch.com) is the global leader in biometric authentication, personalized marketing and payment solutions. Already, more than 3.6 million consumers are using Pay By Touch services to identify themselves, make purchases, cash checks and get personalized savings with the touch of a finger. Pay By Touch services are free for consumers to use and available in more than 3,000 retail locations across 44 states, the UK and Singapore. Pay By Touch also provides robust data management and payment processing solutions for ACH (electronic checking), card-present and card-not-present debit and credit transactions for retail clients. Founded in 2002 and headquartered in San Francisco, Pay By Touch employs 800 professionals and holds more than 60 patents worldwide on secure, convenient and cost-effective transaction solutions.

SOURCE Pay By Touch

Laura Bakken of Porter Novelli, +1-415-975-3323, or laura.bakken@porternovelli.com, for Pay By Touch http://www.paybytouch.com Copyright (C) 2007 PR Newswire. All rights reserved

Analysis on Pay By Touch/Opticard Alliance

How Pay By Touch Hopes to Use Opticard to Add Merchants, ISOs

(March 7, 2007) Pay By Touch Inc., the San Francisco company best known for its biometric authentication system for point-of-sale transactions, this week saw its merchant-processing unit take a step calculated to extend its reach into new merchant markets and attract more independent sales organizations to resell its services. Under this week’s agreement, Pay By Touch Payment Solutions will use Opticard Payment Services Inc.’s transaction-acquiring switch to route transactions from terminals in place at merchants the Pay By Touch unit can’t currently serve for authorization and capture of card payments.

Ron Carter, president of Pay By Touch Payment Solutions, says the agreement will allow the processor to reach new markets, such as restaurants, that offer high margins but that use point-of-sale software with which his system are not compatible. Using Scottsdale, Ariz.-based Opticard’s switch, he says, lets Pay By Touch perform authorization and capture for these merchants as well as approximately 2,000 other locations the company currently processes settlement for but for which it must hand off authorization to other parties. “That is frustrating,” says Carter. The deal with Opticard’s switch also allows Pay By Touch to take transactions from a wide range of terminals designed for high-volume, multilane merchants without having to certify on each one. The Pay By Touch acquiring unit, which in the main is made up of the technology assets of the former CardSystems Solutions Inc., has concentrated historically on small merchants. “We can get access [to new merchants] with one integration,” says Carter. “Opticard can route [transactions] right to our front end, and it’s transparent to the merchant. This allows us to go into markets where we were not able to go before.”

Carter says he can’t estimate how many merchants the deal will bring Pay By Touch by the end of the year, but he expects it to attract more ISOs to resell the company’s processing service. “This allows us to go out for a different group of ISOs, where if we weren’t certified on that terminal [marketed by the ISO], we couldn’t go after before,” he says. Pay By Touch currently uses 75 ISOs, most of whose contracts were assumed with the 2005 acquisition of CardSystems, and processes $1.4 billion in card volume monthly for 91,000 merchants. The Opticard service is expected to be available to Pay By Touch ISOs in the second quarter.

One market Carter has his eye on with the Opticard deal is restaurants, many of which use point-of-sale systems Pay By Touch’s data center can’t link to for authorization of transactions. “The front end authorization and capture has to be done by somebody else” in these cases, says Carter. The Opticard switch, he says, will change that, allowing Pay By Touch to perform authorizations. Pay By Touch will pay an undisclosed per-transaction fee to Opticard, but Carter says this will not be passed on to merchants. “It will make no difference to the merchant or ISO in terms of cost per transaction,” he says.

Pay By Touch is a strategic partner with Verifone. Opticard is a Verifone International Value Added Partner.

VeriFone’s International Value-added Partners

VeriFone has teamed with the leading product and service providers around the globe.

LAC EMEA ASPAC

www.optinc.com

Opticard LAC EMEA • Gift Card • Loyalty • Stored Value

Opticard offers a variety of gift card products including Electronic Gift Card, Loyalty. Retail Merchandise Credit Card, Employee Incentive Card and Corporate Voucher Card and the Opticard system offers the most comprehensive stored value solution in the industry.

The OPTiCard Stored Value platform supports several program types, all contained in one card, to provide you the ultimate in flexibility. Implementation specialists work to determine and configure the system for the types of programs desired and additional programs may be added at any time.

OPTiCard is available as a service, with OPT providing the facilities and processing, with a focus on restaurants, specialty retailers and other large merchants.

Pay By Touch Teams with Opticard

Pay By Touch and Opticard form point-of-sale alliance

Pay By Touch, the leader in biometric payments and personalized marketing, today announced that it has teamed with Opticard Payment Services to expand the scope and capabilities of its payment solutions division.

The addition of Opticard's numerous point-of- sale (POS) solutions, including wireless terminals and software designed for the retail and restaurant verticals, will compliment Pay By Touch Payment Solutions' existing products and enable its resellers to offer a more robust solution set.

"We are very excited to broaden our presence in the marketplace and prepare to address new opportunities through this alliance with Opticard," said Ron Carter, President of Pay By Touch Payment Solutions. "The partnership provides our clients the more complete product offering they need in order to meet the demands of their respective markets and to continue to grow their merchant bases."

Pay By Touch Payment Solutions provides end-to-end payment processing solutions for more than 91,000 internet and brick-and-mortar merchants. The division provides faster, more reliable and more secure transactions, while allowing businesses to accept all major types of payments-be they card- present, card-not-present or via automated clearinghouse (ACH).

"Over the past 12 years, we have built an outstanding portfolio of integrated POS and terminal interfaces which work in conjunction with the Opticard front-end platform," said David Ingwersen, President of Opticard Payment Services." We look forward to leveraging our existing POS solutions and expanding our solution set to better service both Pay By Touch and our existing clients."

Opticard's transaction acquiring services securely acquire, format, and route transactions to any processing institution. Its state-of-the-art switching module can accept and format a variety of message formats, which are then transmitted, real-time, to the transaction acquiring host's system for processing.

The combined service will be available to Pay By Touch Payment Solution's resellers in the second quarter of 2007.

IMI on Personalized Marketing from Pay By Touch

Foodtown, Shop 'n Save Test 'Personalized' Offers

Regional grocers Foodtown and Shop 'n Save are testing a new loyalty marketing system developed by San Francisco-based Pay By Touch.

Avenel, NJ-based grocery cooperative Foodtown is testing the program, dubbed "Personalized Savings," in three of its 56 stores, while Supervalu-owned Shop 'n Save is piloting the system in three Pittsburgh-area stores under a "Personalized Perks" moniker.

The Foodtown program tailors discounts and incentives to a shopper's own purchase history. Shoppers scan their loyalty cards at kiosks near store entrances to receive customized printouts of 16 offers for frequently purchased items -- eight from national brands and eight from the retailer. The deals are redeemed automatically at checkout when the shopper's card is scanned. The offers refresh weekly.

In addition to a summary of rewards, shoppers receive two or three coupons at checkout. Determined by the retailer, the coupons can be consistent with purchase history or may convey cross-promotions or other chain-driven campaigns.

Foodtown shoppers can also continue to accrue S&H Greenpoints from the landmark national rewards program. Pay By Touch acquired the S&H Greenpoints program from Sperry & Hutchinson Co. in December 2006. Foodtown stores, which are located in New Jersey, New York and Pennsylvania, have been involved with that program since 2000. (See Related Articles on bottom of page.)

Shop 'n Save, which operates more than 70 stores in Pennsylvania, Ohio and West Virginia, is testing a program identical to Foodtown's minus the Greenpoints component.

Designed to reward brand loyalty, the program doubles as an individualized savings initiative. For retailers, it also serves as a tool to track marketing performance.

The two programs are examples of Pay By Touch's new SmartShop loyalty program, which the company is now offering to chains nationally. Although Foodtown and Shop 'n Save are testing kiosk-based systems activated by standard frequent-shopper cards, Pay by Touch can enhance the program through the addition of biometric technology. The SmartShop concept first rolled out to Green Hills Markets in Syracuse, NY, which utilizes the biometrics option.

"SmartShop provides offers that are more relevant, based on what shoppers like and what they want to buy," says Shannon Riordan, vice president of marketing for Pay By Touch. "There are no cross-promotions. If you are a Pepsi drinker, you receive two-for-one offers or coupons for new Pepsi flavors."

Click Here for: A Case Study on PBT's SmartShop

Since introducing biometric identification technology to Seattle's Thriftway supermarkets in 2002, Pay By Touch has launched pilot programs with supermarket chains including Harris Teeter, Pathmark, Delhaize America's Food Lion, Hy-Vee, Alex Lee's Lowes Foods, Piggly Wiggly, Whole Foods, Winn-Dixie and Supervalu's Albertsons, Cub Foods, Jewel-Osco and Sunflower Market. Non-grocery participants include Citibank.

The technology uses a shopper's fingerprint to access payment information, loyalty accounts and age verification. After entering a search code to begin the transaction, users scan their fingers on Pay By Touch readers at the register. Fingerprints also act as loyalty cards, processing savings and collecting purchase data, and systems at some retailers allow shoppers to cash checks and access health care and flexible spending accounts.

The payment system includes a reader adjacent to checkout scanners and a branded, lime-green kiosk near store entrances, where users establish and maintain their accounts.

Promotional activity includes regional enrollment incentives, such as a "Touch of Holiday Cheer" sweeps in Illinois that awarded 10 grand-prize winners with $10,000 in credit for groceries. Supported by headers atop kiosks, the promotion ran from Nov. 1 to Dec. 31, 2006.

The SmartShop concept mirrors the Avenu kiosk program at Supervalu's Albertsons chains, which uses technology from Concept Shopping to deliver personalized offers to frequent-shopper cardholders. (See Related Articles.)
Published: February 2007
Source: In-Store Marketing Institute

RELATED ARTICLES

Case Studies/Category Reports/Profiles

New Loyalty Program Offers S&H Points

Pay By Touch Joins Accenture in Tech Office Grab

More information from the SF Business Times regarding the San Francisco Tech Boom and the part Pay By Touch is playing by renting 93,000 s.f of space at 506 Mission. Strategic Business Partner, Accenture, agreed to 43,000 s.f. that make up floor 11 and 12 a month earlier. Pay By Touch is taking floors six through 9. Here's the story...

Pay By Touch has agreed to move into 93,000 square feet of office space at 560 Mission St., one of the largest city lease deals of the year and a striking example of the role that technology is playing in San Francisco's office resurgence.

The rapidly growing company has signed a letter of intent to absorb floors six through nine of the dark green Cesar Pelli-designed building, a deal that would double the company's space and absorb all of the remaining sublease space that JP Morgan put on the market. JP Morgan leased the entire building at the time of completion in March of 2000, but has since subleased more than half to other tenants.

The Pay By Touch deal wipes out one of the largest chunks of available space in the South Financial District, an area which has a 7.2 percent vacancy rate, according to CB Richard Ellis' mid-quarter report.

The Pay By Touch negotiations come a month after Accenture penned a lease to take 43,000 square feet on floors 12 and 13 of the building. Accenture has partnered with Pay By Touch since Solidus Networks, which does business as Pay By Touch acquired their biometric patent portfolio from Indivos.

The asking rent for the space was approximately $45 a square foot.

San Francisco-based Pay By Touch has seen explosive growth since it was founded in 2002.

The company employs biometrics authentication technology that allows shoppers to authorize payment for goods and services by scanning their finger and punching in a numeric code rather than writing checks or fumbling for credit cards or cash.

The deal is just the latest example of the role that technology is playing in a commercial real estate market that has seen rents spike to an average of $37 a square foot. These deals include BEA Systems 110,000-square-foot lease at 475 Sansome St. and Riverbed Technology's 68,000 square-foot agreement at 199 Fremont.

During the first three quarters of 2006, 113 technology companies absorbed 1.5 million square feet in San Francisco. That is 32.6 percent of all leasing activity in the city, and already 400,000 square feet more than all of last year, according to research by Grubb & Ellis. Over the past three years, tech companies have absorbed 3.2 million square feet in San Francisco.

A Pay By Touch spokesman declined to comment on the deal, which has not closed.

Pay by Touch is hiring 43 more workers in San Francisco and 67 all together. Founded in 2002 and headquartered in San Francisco, Pay By Touch employs 800 professionals and holds more than 50 patents worldwide on secure, convenient and cost-effective transaction solutions.

Biometric Firms Gaining Momentum

Biometrics is big and getting bigger thanks to a troika of Bay Area diehards.

Biometric technologies (and the supporting software and integrators) raked in an estimated $2.1 billion last year. That's up $800 million from 1999 and on track to hit $7.4 billion by 2012, according to the International Biometric Group.

Retinal, fingerprint and facial identification technologies (and the supporting software and integrators) raked in an estimated $2.1 billion last year. That's up $800 million from 1999 and on track to hit $7.4 billion by 2012, according to the International Biometric Group.

"Before it was primarily a matter of survival. Now it is not," said DigitalPersona CEO Fabio Righi.

Founded in 1996, the Redwood City company scored some initial interest from market movers Visa and Microsoft, but that only turned to cash in recent years. The 75-person company, which makes both fingerprint reading hardware and the software that supports it, secured customer Banco Azteca in Mexico last March. Eight million bank members registered initially, a group that has grown to 14 million. Although Righi declined to disclose revenue, he confirmed his company has been profitable since 2004, a major, and often postponed milestone.

Emeryville-based Upek, which sometimes competes with DigitalPersona, is also prospering. Having spun off from STMicroelectronics in 2004, the company logged its first full year of revenue in 2005 at $30 million. Last year it rang in $52 million and 2007 also looks strong. An IPO could be in the offing.

"Today, the biggest driver of our revenue is the notebook market," said CEO Alan Kramer, saying notebook customers IBM, Dell, Toshiba and Sony represent roughly 80 percent of the company's revenue.

Since Upek sensors debuted on IBM's Lenovo notebooks in 2005 -- the first widespread launch of biometrics to average consumers -- the company has fortified its technology and begun bundling software to create a one-stop shop for customers. Upek is now the first and only silicon sensor vendor approved by the General Service Administration for deployment by Uncle Sam.

San Francisco-based Pay By Touch, which partners with both Upek and DigitalPersona, is also on the fast path with an potential IPO on it's slate. Having raised $300 million during the past six years in debt and equity financing from angels, including Craig Ramsey and the Gordon Getty Family Trust, and hedge funds like Scout Capital Management, the company now employs 800.

The most recent $60 million infusion, completed in January 2006, enabled it to acquire marketing company S&H Solutions and accelerate its own sales and marketing. Pay By Touch recruited Mayor Gavin Newsom's father, the Honorable Judge William Newsom, and Sapient co-founder Stuart Moore as board members and added former Home Depot executive vice president John Costello to its management team also in the past year.

The company now counts 3.5 million registered users, all paying for groceries, coffee, movies and other retail items by touching their finger to a reader at the point of purchase. User prints are linked to their bank, credit cards and other accounts, so once the print is authenticated, the bank processes the payment as usual.

"The market's really starting to explode. People no longer just think of biometrics as science fiction and on the edge," said President and COO John Morris.

Pay By Touch has systems installed in the United States, Britain and Citibank outlets in Singapore.

The company will offer Chicago motorists the chance to pay at the pump this spring.

So why is the age-old technology of reading fingerprints getting new growth?

Password fatigue is increasing while biometrics costs are decreasing. Morris said it costs $300 to install a Pay By Touch system in a checkout lane, compared with $2,000 three years ago. Said Morris: "It's about getting the technology rolled out and putting it where people can use it."

lwilson@bizjournals.com / (415) 288-4939

Supervalu Tests PBT Personalized Marketing

Supervalu's Shop 'n Save has implemented PBT's personal marketing platform SmartShop, which will utilize the unique application to to improve its incentive marketing program, a core strategy for grocery stores.

Three Pittsburgh-area locations of the grocery store chain are testing a new program which will be called "Shop 'n Save Personalized Perks" based on a software application established by a San Francisco-based firm called Pay By Touch.

While most loyalty card programs offer customers sales prices on a variety of different products each week, the new Shop 'n Save Perks Card provides cardholders with discounts on products they buy most. This results in huge savings in terms of hit and miss mass marketing.

The program seeks to build upon each shopper's preferences, offering them customized discounts based on their regular buying habits.

To use the program, shoppers scan their cards upon entering the store and receive a printout of products available for sale to them. When they buy those items, they use their cards for discounts.

"With Shop 'n Save Personalized Perks, shoppers can get extra savings on their favorite products right as they walk into the store," said Bill Lipsky, Director of Merchandising for Shop 'n Save, a subsidiary of Minneapolis-based wholesaler SUPERVALU Inc. "It's yet another way that we are delivering additional value to our shoppers."

There is no word as of yet as to how long Shop 'n Save will choose to test the program or if it will roll it out at its more than 20 other area stores.

A spokeswoman for Pay by Touch said the three Pittsburgh-area stores are the first SUPERVALU grocery locations to use the program by in the country.

In other news, Hebert's Supermarkets announced that Paycheck Secure(R), a biometric check cashing service, is available at all three Hebert's locations.

Paycheck Secure, powered by Pay By Touch, uses a simple finger scan to authenticate customers' identities to cash payroll or government checks. Paycheck Secure first was implemented in the Hebert's of Henderson store in March 2006, and now the retailer has expanded the service to Hebert's Supermarket and Hebert's Superette, both located in downtown Breaux Bridge, Louisiana.

"This is the best check cashing system we have had yet," said Ken Mouton, general manager of Hebert's Supermarkets. "It made sense to expand the service not only to provide more convenience for our customers, but also to help prevent check fraud across all of our stores."

Signing up to cash checks using Paycheck Secure is quick and easy. Customers simply provide a photo ID, two finger scans, and have a digital photo taken right in the store. Once enrolled, customers can quickly and securely cash payroll checks with a quick finger scan at any Hebert's store.

"Paycheck Secure offers a unique way for Hebert's customers to cash their checks rapidly and securely," said John Rogers, Founder, Chairman, and CEO of Pay By Touch. "The service also helps merchants like Hebert's dramatically reduce fraud by leveraging biometric technology to verify customers' identities."

San Fran at center of new tech boom

Competitive leases, skilled workers lure Internet, software companies to downtown office buildings

Office obsession
Tech companies are gobbling up office space in San Francisco.
Here are some of the biggest leases, in square feet, since the start of 2006:

Advent Software: 104,000
Pay By Touch: 92,900
Microsoft: 71,600
Riverbed Technology: 63,800
Yahoo: 42,800
StubHub: 37,500
Ingenico: 37,500
Source: Chronicle research

For technology companies, San Francisco is -- once again -- the place to be. Proximity to top workers, competitive lease prices and an eclectic lifestyle has made the city's downtown an irresistible draw for many Internet and software companies.

Industry superstars Yahoo Inc. and Microsoft Corp. have lead the boom by gobbling up large swaths of office space the past year. Google Inc. is on the verge of planting its flag in the city, having signed a letter of intent for space near the Embarcadero, according to sources familiar with the negotiations.

The influx of tech companies into San Francisco is part of a broader Bay Area real estate boom. New companies, along with many of the established names, are on hiring binges and sorely in need of office space.

In San Francisco, a quarter of all office space leased in 2006 went to technology companies, up from 14 percent in 2004, according to the commercial realty company Grubb & Ellis.

For commercial real estate agents, the strong demand is welcome. Just a few years ago, during the tech industry's downturn, many once-high-flying Web sites such as Pets.com and Quokka Sports shuttered, leaving the market flooded with vacancies and the city's economy in tatters.

"Space is far less available than it once was," said David Kuchinsky, a vice president at Grubb & Ellis. "In 2004, tech companies could get a lot of smaller space relatively inexpensively. That really changed in 2005 and into 2006."

Empty offices are more difficult to find these days. The vacancy rate for Class A space is 8.5 percent, half of what it was three years ago, according to Cornish & Carey, a commercial realty group.

The tighter market is driving rents up. The average asking price for Class A office is $36.80 per square foot, an increase of 30 percent from the market's trough three years ago.
Still, San Francisco remains competitive. For now, prices remain on par with Silicon Valley and the East Bay, where the cost of office space is also appreciating.

Interest in San Francisco speaks in part to the technology industry's transformation over the years from producing computers and microchips, usually in Silicon Valley. Now, many of the hottest companies are in online media and business software, niches that can draw on the city's traditional strength in design, advertising and programming.

Last year, Web portal Yahoo expanded its San Francisco outpost by leasing an additional 43,000 square in the Financial District for sales staff and its online photo-sharing service, Flickr. A second office being renovated in SoMa will house a research-and-development team.

In another major deal, Microsoft recently signed a lease for 72,000 square feet in the Westfield San Francisco Centre, the expanded shopping and office complex downtown. The space will house sales staff and paves the way for the company to double its workforce there to 400 over the next five years.

Among the most highly anticipated arrivals is Google, which has signed a letter of intent to sublease 210,000 square feet from Gap Inc., enough space for up to 800 workers. However, the deal, which Google declined to confirm, has yet to be finalized and could fall through, according to two sources familiar with the negotiations.

Google's office would take up three currently vacant floors in a building on Spear Street, near the waterfront. The company's headquarters, known as the Googleplex, would remain in Mountain View.

Mayor Gavin Newsom said San Francisco has aggressively courted Silicon Valley companies, calling the jobs they bring a potential boon to the city's coffers. Each new worker, he said, translates into $1,700 in additional tax revenue, along with helping local businesses such as dry cleaners, cafes and markets.

"These are the jobs of tomorrow," Newsom said. "They bring a vibrancy to the city and an excitement, and that's great for us."

Proximity to top-notch workers is a big selling point for San Francisco in getting tech companies to open up shop. Commuting to and from Silicon Valley can eat up as much as three hours a day, prompting many residents to balk at accepting a job down the Peninsula.

Companies such as Google try to compensate for the inconvenience by offering free commuter bus rides to Silicon Valley. Opening offices in San Francisco is considered a more attractive alternative for employees and potential job candidates.

"Companies were reticent at first to come to San Francisco because of the perceived high cost of doing business," said Nick Slonek, a senior vice president at Cornish & Carey. "The fact of the matter is that they've been able to bite the bullet and retain and attract talent who otherwise wouldn't come down to the valley or in the East Bay."

A big part of the real estate demand is fueled by technology companies already based in San Francisco that have outgrown their offices, such as Advent Software, whose clients are investment firms, and Ingenio, a company that helps online advertisers connect with consumers over the telephone. To accommodate new hires, they've had to upgrade to larger spaces.

Will Pay By Touch be a $100 Billion Market-Cap Company?

TECHNOLOGY As a Change AGENT - RedOrbit

IN THE BUSINESS WORLD, TECHNOLOGY MATTERS - EVEN IF SOME HIGHLY INFLUENTIAL THOUGHT LEADERS MIGHT SAY, OR WRITE, OTHERWISE.

Former Harvard Business Review editor Nicholas Carr did just that three years ago, when his article, "IT Doesn't Matter" sparked heated debate among chief information officers (CIOs) and business executive from some of the world's top companies, Actually, it was Carr's that raised hackles. Readers brave enough to venture into the article discovered a premise that is difficult to argue with today: IT's core functions within a business - the processing, storage and transmission of data - have become less expensive and more easily replicated, and they should be measured accordingly.

In the late 1990s through early 2000, many technology and business executives subscribed to what Carr describes as the "IT changes everything" school of thought. "In the height of the dot com boom, we felt that the Internet was changing the rules of the game," notes Baylor University assistant professor of Information Systems, Hope Koch. "Many companies put aside the traditional rules of the game or ways that they evaluated business investments and invested in Internet initiatives. We saw many of these initiatives fail with companies losing millions in the process. As connectivity increases and technology advances, organizations have to stay abreast of the possibilities, consider how it can help the company achieve value, and in cases where it will, they need to adopt it."

To effectively conduct the evaluation Koch describes, executives should understand the recent important technological breakthroughs, the implications of those breakthroughs on how companies conduct business and the other elements that need to be in place for the technology to make good on its promise.

BIG BREAK THROUGHS

Brett Moore, CFO of the McLane Group, in Temple, Texas, can recall when his company introduced the first personal computer to one of its operation divisions in 1985. Since then, Moore says, technology developments have dramatically changed how the company, which focuses on grocery distribution among other offerings, interacts with its customers and, ultimately, makes decisions.

Moore points to three technological advancements in the past two decades that have greatly improved business processes: information standards, e-mail and workflow possessing.

BUSINESS IMPACTS

Since its inception in 2002, San Francisco-based Pay By Touch has demonstrated a commitment to integrating new technologies to help its customers. The company provides "biometric authentication, loyalty, membership, and payment solutions."

When enrolled consumers check out at a Pay By Touch customer's grocery store, they simply slide their finger into a small device that scans their unique print, enter their access code and then select their payment mode (electronic check or a full range of credit and debit cards) from the "electronic wallet" on the screen in front of them.

Many of the grocery stores link the customer's purchasing history to their loyalty programs through another Pay By Touch offering called personalized marketing.

"We think that this will be a $100 billion market-cap company," says Bill Townsend, Pay By Touch executive vice president and a graduate of the Hankamer School of Business.

"It will be just like a Visa or MasterCard, and people will just expect that when you walk into a store, you put your finger down to access your account."

It's a bold claim, but, so far, a legitimate sounding one: customers have embraced the technology, and the company's venture funding is off the charts.

Pay By Touch is approaching the market with a global view. They have already launched in both the U.K. and partnered with Citibank in the Pacific Rim, first in Singapore, with more Pacific Rim territories planned in the near future.

But Townsend also understands that technology is a double-edged sword for companies that sell technology. Townsend was part of the founding management team at Internet search engine Lycos, Inc., and has launched and managed several companies including YouthStream Media Networks (now Alloy), GeoCities (now Yahoo!), NewsAlert (now MarketWatch), Deja News (now Google and eBay), and voice-over Internet Protocol (VOIP) pioneer Really Easy Internet (now Hey, Inc.).

"A mentor once told me that you do not solve problems with computers," Moore recalls. "You use people to solve the problems and computers to help you do it. A common mistake businesses make is that we think by putting in a system it's going to solve our problem."

What truly solves problems, he adds, involves a more comprehensive change-management effort: putting best practices in place, implementing technology to support those processes, training employees to properly execute the new processes and technology and then establishing internal controls and quality controls to ensure that the people, processes and technology are performing as designed.

Adapting the company's processes, people and technology is vital, particularly in today's fast-paced marketplace and global business climate.

"You may have a wonderful idea for a business that is highly dependent on what is happening in the marketplace today," Townsend explains. "But if you don't build a culture that can adapt to the changing marketplace, you'll just be another 'dot.bomb.'"

To avoid that fate, Pay By Touch has invested in proven technology, a strong intellectual property (IP) portfolio and talented employees.

"And we have adapted the business model and the product offering almost on a quarterly basis while still maintaining our vision of making Pay By Touch the most trusted, secure way to pay for goods and also to be a trusted intermediary of a consumer's personal information," he says.

Technology matters, but it matters most when it is embraced by people to support and strengthen business processes.

Red Herring On Pay By Touch & Hedge Funds

Hedge Funds Take On VCs

Armed with piles of cash, hedge-fund investors are elbowing in on venture capitalists to get a piece of the early-stage investing pie.

By Sunshine Mugrabi
Ask Gus Spanos, CFO of biometrics company Pay By Touch, about how his company was financed, and you might feel like you’re dealing with an evangelist. He believes technology companies should have choices when it comes to assembling an investment team—and venture capitalists just aren’t making his list anymore.

His company was one of the first to go to the newest financial big kids on the block: hedge funds.

Now, the trend is picking up steam, as more startups discover a new pool of capital waiting in the wings.

“Hedge funds have expanded the number of options for financings for young and growth companies,” says Mr. Spanos.

Once largely the province of venture capitalists, technology financing deals are now attracting a host of new investors, chief among them hedge funds. While hedge funds typically are interested in investing at the pre-IPO, or “mezzanine” stages, they are increasingly getting involved at earlier stages. For example, San Francisco-based hedge fund Artis Capital Management was an early investor in web sensation YouTube.

The hedge fund industry has become intensely bloated over the past 15 years, with assets growing from $39 million worldwide in 1990 to $1.3 trillion today. That money has to go somewhere. In the past, hedge funds invested in publicly held companies—most classically taking long and short positions in order to “hedge” their investments. Now, these funds are chasing returns wherever they can be found.

Mixed Welcome

For entrepreneurs chafing against the traditional venture model of high equity stakes and board control, hedge funds are welcome newcomers. Quite often, hedge fund capital arrives more quickly and with seemingly fewer strings attached. But VCs, already pressured by lower returns over the last few lean years, are hardly happy about the competition. They claim hedge funds have changed the rules of the game to the point that their gains can be at the expense of co-investors. They also say the type of financial engineering hedge funds employ can put entrepreneurs at risk.

Pay By Touch, based in San Francisco, sells a fingerprint-based payment system now used in 42 states. In 2004, the company set out to raise $30 million to $40 million in a second round of funding, having been funded in a first round by private investors.

The company was cash-flow negative, but its intellectual property was valuable, claims Mr. Spanos. And Pay By Touch had a strong management team and board of directors, including John Morris, a veteran of IBM, and John Costello, a former executive vice president at Yahoo and a top executive at Home Depot.

Backed by private investors like billionaire Ron Burkle of supermarket buyout fame, they figured they would have no trouble attracting venture financing.

VCs did come knocking. The problem, says Mr. Spanos, was that they demanded big stakes, board seats, and wanted significant control over the company—in short, standard VC stuff. That’s when hedge funds crashed the party.

In September 2005, the company closed a financing round totaling $130 million, of which $75 million was brokered by Swiss giant UBS. The financing was led by Och-Ziff Capital Management of New York City, and included two other hedge funds, Farallon Capital Management of San Francisco and Plainfield Asset Management of Greenwich, Connecticut. Between them, Och-Ziff and Farallon control over $25 billion worth of capital.

At Mr. Spanos’ request and that of Pay By Touch CEO and founder John Rogers, the financing from the hedge funds was in the form of a senior secured note. The primary collateral was the company’s intellectual property, which included over 50 patents.

The hedge funds received less than 10 percent equity, as opposed to the 20 percent or more VC firms had demanded, and no board seats. Pay By Touch raised the other $55 million in convertible promissory notes—another debt instrument—from individuals, family foundations, and smaller institutions. These notes were eventually converted into the company’s third financing round.

John Rogers, founder, CEO, and chairman of Pay By Touch, later publicly praised Mr. Spanos as a “rainmaker” for his skill in putting together such a unique financing deal.

Pay By Touch has since raised an additional $150 million from hedge funds and private investors. And though it was one of the first privately held technology companies to tap hedge funding, it is not alone. In the last two years, at least 27 private technology companies at various stages of growth have gotten hedge fund backing in the United States.

Kathryn Coffey, partner at Seven Hills, a San Francisco-based financial advisory firm, says hedge funds operate in a number of ways that differ from the traditional VC model. For example, they often pass on board seats—preferring to leave such detail and control to the management team and the VCs.

Culture Clash

That’s just one of many differences startups are beginning to appreciate, says Ms. Coffey, who has brokered several deals involving both hedge and VC funds. Another is that hedge funds tend to have lower expectations about returns.

They look for solid performers, preferring not to depend on the home-run plays VCs need to remain profitable. VCs often expect 60 percent invested rate of return (IRR), while hedge funds might expect as little as 20 to 25 percent IRR.

“A hedge fund is willing to take a lower return because it’s putting a lot more money to work in safer deals,” says Bob Machlin, CEO of SkyPilot Networks, a Santa Clara, California-based telecom startup that was recently backed by hedge fund Palo Alto Investors.

The time it takes for a hedge fund to put together a financing deal is also refreshing to many entrepreneurs—averaging about six weeks, as opposed to up to six months of due diligence in the venture world. And many entrepreneurs say they find a hedge fund’s connections on Wall Street helpful in smoothing their transition from private to public entities.

Hedge funds don’t necessarily have to cash out when a company goes public, while VC firms often have to in order to fulfill their obligations to limited partners.

“There’s no set thing we do,” says Dr. A. Joon Yun, partner and healthcare analyst at Palo Alto Investors, a hedge fund with about $1.2 billion under management. “If a company goes public at a high price relative to its value, we’ll be selling,” he says. “If it’s a low price, we’ll be buying.”

Hedge funds often have a different agenda than VC firms going into a deal, says Ned Scheetz, a partner at Aphelion Capital, a San Francisco-based healthcare technology investment firm that, while not technically a hedge fund, makes investments on both the public and private equity sides. For example, they might invest in one company simply to determine their investment strategy for an entire industry.

For a company like Pay By Touch, hedge funds were apparently a good fit. But even Mr. Spanos acknowledges that the deal he cut isn’t for every entrepreneur. Venture capitalists offer a lot to younger technology companies, which benefit from their guidance and expertise. And without the key collateral his company had to offer, he doesn’t believe he could have requested such favorable terms.

1993-2006 Red Herring, Inc. All rights reserved.

About Gus Spanos

Prior to joining Pay By Touch, Gus Spanos was a partner with JH Partners, a private equity firm for which he helped raise their inaugural $200 million institutional fund. Some of JH Partners' portfolio companies included Peet's Coffee & Tea (NASD: PEET), Design Within Reach (NASD: DWRI) and Bare Essentials / MD Beauty. Spanos has led the acquisitions of approximately 30 companies over the past 16 years. His investment experience began in 1989 as President of a private equity firm that he co-founded, which was affiliated with Gryphon Investors, Inc. from 1996 to 1997. Prior to that, Spanos worked as an investment banker in corporate finance and mergers and acquisitions with Goldman Sachs and Co. in New York. He has eight years of operations experience in executive positions as President, EVP or CFO of private equity-backed companies. He received an A.B. from Harvard College and an MBA from The Stanford Graduate School of Business.