Corporate Background

PrivaSys licenses its business solution (proprietary enterprise software & card technology) to substantially improve the P&L of credit and debit card issuers. PrivaSys' business solutions have two core value propositions:

1. PrivaSys substantially reduces the $9B in annual transaction fraud, delivering immediate bottom line improvement.

2. PrivaSys drives top line revenue through substantial differentiation of card services (by enabling multiple accounts on one physical card and delivering loyalty programs at the point of sale) to attract new cardholders and optimize the relationship with existing cardholders.

PrivaSys' core technology leverages the existing infrastructure of magnetic stripe readers. With almost 30 million accepting merchants worldwide, Privasys' business solution requires no change of merchants or their acquiring banks. When an issuer distributes a card, it is instantly compatible with the processing infrastructure of American Express, Diners Club, Discover, MasterCard and Visa as will as private label cards, enabling its technology to bring value to the $3+ trillion in transaction volume through these existing payment methods and is fully compatible with current processing methods.

The Problem

Need to Differentiate in a Commodotized Business: According to McKinsey & Co. credit, debit, and charge cards have become commodotized in an increasingly consolidated business with the top 5 issuers representing 65% (WSJ) of the credit/debit card business. In order for card issuers to maintain a competitive advantage, they must differentiate their card services. With costs of customer acquisition approaching $200, up from $75 in 2000 and attrition rates of 30% or more, issuers are spending over $30B annually to attract and maintain cardholders.

Security: The McKinsey Quarterly advises issuers; "Security and privacy concerns create opportunities for issuers & by offering customers the most secure& or most conveniently encrypted transactions on the market." Quantitative research by Consumer Financial Service Corporation ("CFSC Survey") found that while most cardholders have not been victims of credit card fraud, 74% of respondents are concerned about fraud/identity theft. Fraud cost VISA and MasterCard issuers $9B in 1999. Issuers face mounting losses due to skimming and card cloning. Transaction fraud from cloned cards alone is projected to grow to $8B by 2005 (Bank Technology News). Cloned and stolen cards numbers are the point of vulnerability that enables identity theft. Today, each case of identity theft results in $17K in losses to an issuing bank and with projections of 1.7 million new cases of identify by 2005, this gaping security problem associated with conventional credit card transactions represents a substantial impending loss to issuers. As international issuing banks are finding, card cloning is taking its toll today with numbers that have doubled in the last year resulting in losses of 30 basis points $8-9/card in UK/Canada and 47 basis points or $11.98/card in the emerging markets of Asia Pacific and Latin America(Lafferty).

- US Fraud in Q1, 2000 Survey Results, - BAI Global

"Security and privacy concerns create opportunities for issuers to differentiate their card services by offering customers the most secure& or most conveniently encrypted transactions on the market." Further, a survey by Consumer Financial Service Corporation ("CFSC Survey") found that while most cardholders have not been victims of credit card fraud, 74% of respondents are concerned about fraud. Cardholders also worry about the loss of their personal or financial information online (72% of respondents) and offline (58%). Fraud cost VISA and MasterCard issuers $9 B in 1999. In addition, online fraud resulted in $9.5 B in losses and is projected to grow to $60B by 2005 (Jupiter).

The PrivaSys Solution

PrivaSys business solution leverages its VAULT software and card technology to generate a Dynamic Authentication Code (DAC). The DAC generates a unique set of trailing data in the discretionary data fields of the magnetic stripe for each transaction. The trailing data (DAC) is decrypted by PrivaSys' VAULT software, which resides behind the issuers' firewall, to authenticate the cardholder. Protected by a portfolio of 10 issued and several pending US & international patents, PrivaSys' business solution for card security enables issuers to preclude card skimming/cloning because the DAC is used for only one transaction. If compromised by a skimmer/cloner, the VAULT precludes a DAC from being approved for a subsequent transaction, stopping skimmers cold. The DAC technology in combination with the PIN pad prevents the card from being compromised when lost or stolen. PrivaSys' patented technology enables the magnetic stripe data to change dynamically with each transaction in combination with a display (LED or LCD), input device (keypad, ATM PIN pad, biometric), all of which are assembled in the dimensions of a conventional credit card.

PrivaSys' proprietary card is engineered for durability, reliability and performance and conforms to card association rules. The Dynamic Authentication Code is compatible with all processing functions associated with a transactions i.e. authorization, settlement, adjustments, returns, stand-in processing, etc. The core assets are platform agnostic, poised to scale and leverage with new electronic payments across established & emerging platforms.

PrivaSys' Card Products

• SecurSys - protects the cardholder's credit information by creating a dynamic magnetic field that is unique for each purchase. The Dynamic Authentication Code is decrypted through PrivaSys VAULT technology behind the issuers firewall.
  
  
• VariSys - consolidates a variety of accounts (Debit, Credit, Personal, Corporate, Money Market accounts, etc.) onto a single card. The VariSys card provides the same security and VAULT decryption available on the SecurSys card but for multiple accounts.
  

Consumer Demand

Quantitative research validates consumer demand for PrivaSys core technologies. PrivaSys contracted Consumer Financial Services (consultant to Chase, Citibank and American Express) to conduct a study among 54,000 consumers.

Market Demand: Respondents "strongly agree" or "agree" they want a SecurSys credit/debit card.

• 61%  would apply for a SecurSys card from their existing issuer.
  
  
• 58% would apply to a new issuer to get SecurSys.

Not only do these consumers want SecurSys, but also it will become their preferred card (always or most of the time):

• 75% for online purchases.
  
  
• 69% for real world purchases.

Market Size and Share

Globally, general purpose credit and debit cards, including MasterCard and Visa, totaled almost 1.96 billion cards in 2003, up over 10% from the prior year, generating $4.7 trillion in total volume (The Nilson Report, March 2004). Extrapolating market potential based upon the Consumer Financial Services Research that 60% of cardholders want a more secure card solution; PrivaSys launch in 2004 is tapping a potential market of 1.18 billion cards that is likely to generate over $2.82 trillion in transaction volume. The financial model forecasts a significantly more conservative business model, despite the research indicating more pervasive market demand, the security and privacy concerns of consumers represent an enormous and untapped market. Issuers that are first to market with PrivaSys card technology will enjoy a first mover advantage to both build and sustain a substantial advantage in market share in a commodotized market.

• In a Wall Street Journal/ NBC poll, Americans ranked the loss of privacy as their # 1 concern about the 21st century. - WSJ, "Your Best Defense Against Big Brother& "
  
  
• "The biggest thing about Gramm-Leach Bliley from a banking and security perspective is the privacy issue& " - Industry Standard, "Financial Privacy Mandates Down to the Wire" 06.19.01
  
  
• Privacy breaches are the greatest threat to consumer trust, which could directly impede projected gross e-commerce revenue of $50B this year. - IDC
  
  
• 92% of Net users expressed discomfort about Web sites sharing personal information with other sites. - Business Week/Harris Poll
  
  
• Of people who have access to the Internet and have never bought anything online, 74% cite privacy/security as their main concerns. - Market Facts' Telenation Study

Real World Issue: Threats

• Any discarded receipt
  
  
• 2.5% of credit cardholders have had a card stolen & 5% of credit cardholders encounter "friendly fraud". - BAI Global
  
  
• Credit Card Fraud stood at about 7 basis points of charge volume in 2000. - Credit Card Management 6/01
  
  
• More than 400,000 people were victimized by identity theft last year and is a crime estimated to cost banks and other credit institutions about $2 Billion per year. - Forbes.com, "Smartcards Get Smarter" 06.01.01
  
  
• "In 1992 there were 32,000 incidents of identity theft reported, in 2000 the total was at least 500,000. Each case cost an average of $17,000." - American Banker, "July 1st Privacy Notices Are Only the Beginning" 06.19.01
  
  
• 24% of cardholders experienced some kind of fraud loss in 2001. - BAI Global Market Research

• "Whether or not new legislation is passed the attention of Capitol Hill will remain on protecting consumers' privacy." - American Banker, "July 1st Privacy Notices Are Only the Beginning" 06.19.01
  
  
• "At a packed workshop on privacy, identity theft and due diligence… more stringent privacy regulation may be coming down the pike at both the state and federal levels." - American Banker, "July 1st Privacy Notices Are Only the Beginning" 06.19.01
  
  
• US bank regulators have so far resisted safe harbor…the agreement requires institutions to sign up with one government agency (i.e. FDA) to handle the Gramm-Leach Bliley Act in prohibiting institutions from sharing customer information with an affiliate without the customer's consent (which requires compliance by July 2001). - American Banker, "US Banks Urged to Meet E-U Data Rules" 10/24/00