We are an international data communications company which provides networking, data communications and value added services to many of the world's leading retailers, banks and payment processors. We are also a leading provider of secure data and voice network services to the global financial services industry. We operate one of the largest unaffiliated Signaling System No. 7 networks in the United States capable of providing services nationwide, and we utilize this network to provide call signaling, database access, and other services to the domestic telecommunication industry. Our data communications services enable secure and reliable transmission of time-sensitive, transaction-related information critical to our customers' operations. Our customers outsource their data communications requirements to us because of our substantial expertise, comprehensive customer support and cost-effective services. We provide services to customers in the United States and increasingly to international customers in 28 countries including Canada, Mexico and countries in Europe, Latin America and the Asia-Pacific region.
We provide services through our multiple data networks, each designed specifically for transaction applications. Our networks support a variety of widely accepted communications protocols and are designed to be scalable and accessible by multiple methods, including dial-up, dedicated, broadband wireless and internet connections. In the year ended December 31, 2008, we transported approximately 5.3 billion dial-up transactions for more than 140 point-of-sale/point-of-service, or POS, processing customers in the United States and Canada, making us, on the basis of total transactions transmitted, a leading provider of data communications services to processors of credit card, debit card and ATM transactions. In addition, TNS connects over 1,500 financial community end-points located at over 600 distinct financial services companies, representing buy and sell-side institutions, market data and software vendors, exchanges and alternative trading venues. Based on this total number of connections and the total messages transmitted among them using our services, we are a leading service provider to the financial services industry. Our revenues are generally recurring in nature, as we typically enter into multi-year service contracts that require minimum transaction or revenue commitments from our customers.
Our business began operations in 1991 to address the needs of the POS industry in the United States. The strong operating cash flows generated by our business have enabled us to invest in and deploy data networks designed to make our data communications services more rapid, secure, reliable and cost efficient. We have leveraged these investments and used our continued strong operating cash flows to expand our service offerings to related market opportunities in the telecommunications and financial services industries in the United States and abroad. By implementing and executing this strategy, we have grown our revenues every year, from $285,000 for the year ended December 31, 1991, to $344.0 million for the year ended December 31, 2008.
Point-of-Sale (POS) Opportunity
POS and off-premise ATM (an automated teller machine at a location other than a branch office of a financial institution) transactions require the two-way transfer of information over a secure, reliable data network. Typically, at POS and off-premise ATM locations where a credit, debit or ATM card is accepted, the customer's account information and transaction amount must be electronically transmitted to a payment processor. The payment processor then electronically communicates with the financial institution that issued the card to determine whether to authorize the transaction. After this determination is made, the processor returns an authorization or rejection response to the POS or ATM terminal.
According to the industry information source The Nilson Report, the four card-based systems of payments—credit, debit, prepaid, and electronic benefits transfer—generated 62.5 billion transactions or 44.01% of total payments in the U.S. in 2007, up 10.5% from the previous year. Growth in this segment of payments has been significant and in 2002, these payment types accounted for 30.4% of transaction volume, or 36.7 billion transactions. In 2007, card-based payments exceeded paper-based payments for the first time. Continued growth is forecasted—in 2012, card-based systems are projected to have a 53.6% share of overall payment transaction volume equating to over 84 billion transactions.
Financial institutions in the United States and Canada typically outsource the processing of credit and debit card accounts to payment processors who are able to leverage technical expertise and capitalize on economies of scale. Payment processors, in turn, typically have outsourced to third party service providers such as TNS the data networking services used to transport transaction data between the processor's host computers and the POS or ATM terminal.
POS or off-premise ATM terminals access data network connections to payment processors through a variety of methods, the most common of which are dial-up and dedicated, or leased line, services and increasingly include wireless and broadband connections. Dial-up access services allow merchants and off-premise ATMs to connect to payment processors by dialing a telephone number each time a transaction is initiated. Wireless access provides the same capability as dial-up access without a physical connection to the POS device or ATM. A leased line is a dedicated connection provided to a merchant or ATM location for the exclusive purpose of connecting the POS terminal or ATM to the payment processor. Dial-up services and wireless services are less expensive than leased
line services because leased line services impose greater fixed monthly communication service charges, making a leased line economically viable only in high-volume merchant or off-premise ATM locations.
A broadband connection such as a digital subscriber line, or DSL, is an always-on connection utilized by a merchant or ATM location for various purposes including to connect a POS terminal or ATM to the payment processor. With the introduction of broadband services, merchants and other POS providers have begun to deploy integrated wide-area-network solutions. These solutions include POS services, inventory management and other back-office solutions utilized by merchants.
Our POS services
Our POS division markets our data communications services directly to payment processors in the United States, Canada and Mexico. The following chart illustrates the route of a typical POS transaction using our data communications services. The route of a typical off-premise ATM transaction is similar except that the card associations are not involved.
We also market our POS data communications services to entities responsible for the transmission of state lottery transactions, federal and state electronic benefits transfer and healthcare transactions as well as directly to select categories of merchants and retailers.
Our private, secure data networks were designed specifically to address the data communications requirements of the payment processing industry. Our data communications services provide customized routing technology, built-in redundancy and geographic diversity and are configured to provide fast and reliable call connection and efficient network utilization. Our backbone data networks are Payment Card Industry Data Security Standard (PCI DSS) certified and are used to connect a merchant's POS terminal or an off-premise ATM securely to the payment processor's host computer.
We provide multiple means for the POS terminal or ATM to access our data networks. Merchant POS terminals and off-premise ATMs can connect directly to our network using our dial-up service, which utilizes telephone services obtained from interexchange carriers and local exchange carriers. To complement this service, we offer TNS Connect, a leased line service that utilizes our secure Internet Protocol (IP) network. Leased line services are attractive to operators of off-premise ATMs and merchants that either manage their own in-house networks or transmit large volumes of transactions. While our customers primarily choose to access our networks using our dial-up services, we are increasingly providing alternative methods of connecting to our networks, including wireless, broadband and internet connectivity via our TNSLink product line.
Our wireless payment gateway platform platform, called Synapse, enables merchants and kiosk machine operators to process credit and other card transactions without the inconvenience and cost of having to connect to a telephone line. The mobile merchant market has been experiencing strong growth in the US and around the world. Our broadband service offerings enable merchants to utilize broadband connectivity in their store to transmit data from the POS terminal or ATM to the payment processor. TNS Online, a proprietary performance monitoring and management information reporting application, is used by our customers to centrally monitor and manage the TNS equipment at their locations.
We configure and provide modems that enable off-premise ATM operators to convert leased line ATMs to ATMs that use dial-up connections, broadband or wireless service. This allows the ATM operators to avoid the costs associated with the need to replace or refit the ATM. Because our modems allow the ATM and the payment processor's system to operate as if they are connected by a leased line, off-premise ATM operators retain the functionality and speed of existing leased line ATMs while reducing monthly recurring telecommunications expenses.
We have leveraged our existing network infrastructure to develop and provide additional services that enable legacy dial-up devices to utilize IP and broadband connectivity. These new services enable us to be a total solutions provider for merchants in a variety of sub-verticals within retail including convenience stores, gas stations, quick service restaurants and other retail services. For example, our FusionPoint by TNS product allows merchants to consolidate various in-store data applications, including secure payment, enterprise applications and IP services, like security monitoring, distance learning and video surveillance, over a single managed data access point, thereby reducing the merchant's costs and need to manage multiple data communications connections.
We generally enter into multi-year contracts that usually have minimum transaction or revenue commitments from our POS customers. Our traditional business of providing dial service to POS and off-premise ATMs continues to generate the majority of the revenue of our POS division. For dial-up access services, we typically charge our customers a fixed fee per transaction plus a variable time-based charge for transactions that exceed a specified period of time. Generally, our contracts provide for a reduction in the fixed fee per transaction as our customers achieve higher monthly transaction volumes. We typically charge our customers fixed monthly fees for leased line and broadband services. We also generate POS revenue from usage charges, circuit charges, charges for access to real-time transaction monitoring and charges for ancillary services. For the year ended December 31, 2008, we transmitted approximately 5.3 billion dial POS transactions in North America and generated $74.5 million of revenue in the POS division, which represented 21.6% of our total revenues.
International Services Division (ISD)
The network technology and services we have developed to serve our customers in the United States are applicable to the data communications needs of payment processing and financial services industries in other countries. Internationally, we also provide card-not-present payment services, payment processing services to ATM owners and data communications services to payment processors that are not used by payment processors in the United States, including settlement and offline polling services which enable merchants to store transaction data until the payment processor retrieves the data after business hours.
Our international services division provides services to customers located in Australia, Austria, Belgium, Bermuda, Finland, France, Gibraltar, Germany, Greece, Hong Kong, India, Ireland, Italy, Japan, Malaysia, New Zealand, Norway, Poland, Romania, Singapore, South Korea, Spain, Sweden, Taiwan, Thailand, the Netherlands and the United Kingdom.
International POS opportunity
Internationally there continues to be a growing need for fast, secure and reliable data communications services for transaction-oriented businesses. In markets outside of the United States, many financial institutions have historically performed their own processing services for ATM and credit and debit card transactions using outsourced data communications services. Financial institutions in Europe, however, have increasingly outsourced the processing of credit and debit card transactions to payment processors in an effort to leverage technical expertise, reduce costs and capitalize on economies of scale. As part of this trend, several of the largest domestic U.S. payment processors are increasing their international presence. As they expand into additional international markets, these payment processors will require providers of outsourced data communications services.
While credit and debit card payments are growing in the United States, the international market for these payment methods is expanding at a greater rate. According to Mercator Advisory Group, between 2006 and 2007 the total number of general purpose credit and debit card transactions outside of the United States increased by 14.7%, to approximately 62 billion transactions. Outside of the United States, the regions with the highest transaction volumes in the world were Europe, Asia-Pacific and Latin America, while Middle East/Africa and Asia-Pacific experiencing the fastest growth in 2007. (© 2009, Mercator Advisory Group, Inc.)
One of the key sectors of retail growth continues to be the eCommerce marketplace. Within the UK for example, it is expected that eCommerce transactions will account for 12% of all card transactions by 2013, growing from just over 8% in 2007. Transaction volume is expected to grow with a compound annual growth rate of around 23% (© 2008, Payment Systems Europe Limited). The growing needs of this class of merchant creates opportunities for payment gateway providers. Within the traditional retail market, opportunities exist to migrate merchants to high speed broadband connectivity for payment applications or to enable merchants to be able to accept payments via wireless point of sale terminals.
In addition to the credit and debit card industry, various other international industries have developed services that require the rapid, secure and reliable transmission of business-critical transaction data. For example, in many markets wireless telephone operators process transactions in which customers increase the value of their prepaid wireless telephone account balances. The number of transactions associated with mobile prepaid services is expected to continue to grow substantially, with one analyst estimating such transactions will represent 5% of total European card transaction volumes by 2010. (© 2006 Payment Systems Europe Limited).
Internationally, the growth, automation and globalization of financial markets have led to increased demand for outsourced, secure, reliable data communications services. Banks, mutual funds, pension funds, broker-dealers, alternative trading systems, electronic communications networks or ECNs, securities and commodities exchanges and other market participants increasingly use data communications services to exchange trading information, distribute research and review trading positions.
Our ISD services
Our international services revenues are currently generated primarily through the sale of our POS services. We generate the majority of our international revenues in the United Kingdom, where we are one of the leading providers of data communications and value-added services to the POS industry. We provide services to substantially all of the financial institutions in the United Kingdom which acquire and process credit and debit transactions in the United Kingdom. We also provide services to financial institutions operating ATMs. In addition, we provide card present and card not present payment gateway services to multi-channel merchants as well as card associations which offer services over the internet. We also provide managed broadband solutions and dial to IP conversion devices to merchants who desire to migrate their payment infrastructure from dial to IP technology. TNS' international financial services business has experienced a steady level of revenue growth by expanding its presence globally, with a focus on developing the business in the Asia Pacific region. By signing on exchanges and ECNs, and offering value-added services such as market-data offerings, we expand our financial community of interest brought together by our Secure Trading Extranet. Additionally, TNS has launched a suite of low latency services to capitalize on the opportunity to provide extremely high levels of system efficiency to the securities trading marketplace.
We consider a number of factors when evaluating opportunities in international markets, including the regulatory environment of the telecommunications and payments market, consumer use of credit and debit cards, the competitive landscape and the rules applicable to foreign investment. Historically we typically provided our services internationally through a subsidiary located in the country identified for expansion. Recently we have decided to expand into new countries by providing services from nearby countries in which we have existing operations. In some instances, we have elected to enter new markets through strategic acquisitions. While we continue to look for opportunities to expand into international markets, we plan to focus our efforts to grow internationally in those countries in which we currently have operations, such as Australia, France, Italy, Spain and the United Kingdom. Continued expansion into international markets is an important part of our operating strategy. We plan to expand into additional targeted countries in the Asia-Pacific region. We also expect to expand into additional countries in Central Europe as opportunities arise.
For the year ended December 31, 2008, we generated $156.5 million of revenue in the international services division, which represented 45.5% of our total revenues, of which $138.8 million was generated from the sale of our POS services and $17.7 million was generated from the sale of our financial service offerings. Our operations in the United Kingdom, France and Australia comprised 78.0% of our international revenues in 2008. Although we generate revenues in all 21 of the countries in which our international services division has operations, we have yet to generate positive operating cash flows in 4 of these countries.