Industry Overview

The following lerms in Ihis seclion bear Ihe same meanings as sel oul in Ihe Independenl Markel Research reporl doled January 2011 unless Ihe lerm is defined olherwise or Ihe conlext requires olherwise. OVERVIEW OF THE MALAYSIAN ECONOMY The Malaysian economy registered a growth of 5.3% in the third quarter of2010, driven by domestic demand amid slowing external demand. The expansion in domestic demand was supported by private sector spending. The slowdown in the global economy has led to the moderation in external demand. On the supply side, all major economic sectors, except mining, continued to expand during the quarter, but at a more moderate pace. Domestic demand expanded by 5% in the third quarter (2′” quarter (“2Q”) 10: 9%) led by a sustained expansion in both private consumption and capital spending. Private consumption recorded a growth of 7.1% (2Q 10: 7.9%) supported by favourable labour market conditions and positive consumer confidence. Public consumption declined by 10.2% (2Q 10: 6.9%) as a result of lower government spending on supplies and services. Gross fixed capital formation expansion by 9.8% (2Q 10: 12.9%) driven by capital expenditure from the private sector. Private sector capital spending was supported by the expansion in the domestic production amidst high levels of capacity utilisation and positive business sentiments. On the supply side, major economic sectors, except mining, expanded further but at a more moderate pace. Growth in the manufacturing sector moderated to 7.5% (2Q 10: 16.0%), reflecting mainly the slower growth in external demand. The services sector remained resilient, growing at 5.4% (2Q 10: 7.3%), benefiting from favourable domestic demand conditions. The construction sector expanded by 2.8% (2Q 10: 4.1%), supported by growth in the non-residential and civil engineering sub-sectors. Growth in the agriculture sector increased to 2.7% (2Q 10: 2.4%), following higher production of crude palm oil and rubber. However, the mining sector recorded a contraction of 1.0% (2Q 10: l.l%), as the lower production of natural gas. The headline inflation rate, measured by the change in the Consumer Price Index, increased to 1.9% on an annual basis in the third quarter (2Q 10; 1.6%). The increase in consumer prices was attributable mainly to the rise of food and non-alcoholic beverages (third quarter 2010: 2.9%, 2Q 10: 2.4%). In the external sector, the trade surplus narrowed further to RM22.3 billion (2Q 10: RM23.4 million) in the third quarter. Both gross exports and imports increased at a more moderate pace of 10.4% and 16.5% respectively (2Q 10: 21.7% and 30.3% respectively), in line with the weaker external environment. The slower growth in gross export was due mainly to the lower exports of manufactured products, reflecting the softening global demand for electronic and electrical products, partiCUlarly semiconductors. The moderation in gross imports was reflected in the intermediate imports, which increased at a slower pace, in tandem with the moderation in manufactured exports. Capital imports expanded strongly, supported by continued public and business investment spending, while consumption imports expanded at a modest pace. The imports of primary food and beverage as well as
motor vehicles, however, remained strong, reflecting positive consumer sentiments. On the cash basis, gross inflows of foreign direct investment (“FDI”) (excluding retained eamings) were higher at RM8.9 billion in the third quarter, reflecting mainly larger inflows of equity capital and the drawdown of intercompany loans. After adjusting for gross outflows due to repayment of intercompany loans, net FDI more than doubled to RM5.0 billion (2Q 10: +RM2.4 billion).
7. INDUSTRY OVERVIEW AND FUTURE PROSPECTS (Cont’d) The international reserve of Bank Negara Malaysia amounted to RM310.8 billion (equivalent to USDIOO.7 billion) as at 30 September 2010. This level of reserve has taken into account the quarterly adjustment for foreign exchange revaluation loss, following the strengthening of the RM against most major currencies during the quarter. As at 15 November 2010, the reserve position amounted to RM326.5 billion (equivalent to USDl05.8 billion), sufficient to finance 8.8 months of retained imports and is 4.0 times the short-tenn external debt. The Overnight Policy Rate (“OPR”) was raised by 25 basis points in July 2010, bringing the cumulative OPR adjustments for the year-to-date to 75 basis points. The OPR was raised to nonnalise monetary conditions, in line with the improved economic outlook. In September and November, the OPR was left unchanged at 2.75% at the prevailing level of the OPR, monetary policy remains accommodative and the overall level of interest rates is appropriate and consistent with assessments of the growth and inflation prospects. Following the increase in OPR on 8 July 20 10, the average overnight interbank rate traded higher and interbankrate ofothermaturitiesalsoincreasedaccordingly. In tennsofthecommercialbanks’ lending rates, both the average base lending rate and the average lending rate adjusted upwards. The average fixed deposit rates rose in tandem. (Source: Quarterly Bulletin, Third Quarter 2010. Developments in the Malaysian Economy. Bank Negara Malaysia) The rest ofthis page is intentionally left blank 7. INDUSTRY OVERVIEW AND FUTURE PROSPECTS (Cont’d) 7.2 OVERVIEW OFTHE STRUCTURE OFTHE ELECTRONIC PAVMENT SOLUTIONS INDUSTRY The advent of technology has made possible the use of Electronic Payment solutions covering all forms of payment transactions made by means of wire or wireless medium aside from ATM machines. ATM machines are dermed as all cash withdrawal machines, cash deposit machines and cheque deposit machines typically available within the premises of retail banking institutions. Electronic Payment solutions can be further divided into payments which are Card presence and non­Card presence (“Electronic Payment Solutions”). Card presence payments are dermed as payments and/or transactions made with a smart card which include payments made by Credit Card and Debit Card, and these transactions are typically carried out at a retail outlet or Merchant outlet. Non-Card presence payments are dermed as Electronic Payments that are made remotely, i.e. without being physically present when a payment is made. These include payments made via Credit Cards through an internet payment gateway, payments made through a banking account via an internet banking or tele-banking facility, and payments made through a banking account via mobile phone (i.e. via short messaging system, or SMS), among others. Key segments for the Electronic Payment industry IssuIng Bank (Card Issuer) Online debit cards payment Mobile payment Oltler remole electronic ‘O! Online tele-bclnking~~1ji1 ManagePay’s business activities lranster ~ Host party depends on type of service Telegraphic transferprovided Notes: The term “hosting” refers to a server where software applications andprogrammes reside, or are “hosted”. A host party is the organisation where the server is located. The phrase “Host party depends on type a/service provided” denotes that the location ofa server is dependent on the type ofservice provided (Source: Independent Market Assessment on the Electronic Payment Solutions Industry in Malaysia prepared by Frost & Sullivan)
7. INDUSTRY OVERVIEW AND FUTURE PROSPECTS (Cont’d) The following is a list of common Electronic Payment solutions available. (i) Card presence
(a) retail credit/charge card payment solution
(b) retail debit/ATM card payment solution
(c) retail cash card payment solution
(d) loyalty card transaction


(ii) Non-Card presence
(a) online Credit Card payment solution
(b) online Debit Card payment solution
(c) mobile payment solution
(d) other remote Electronic Payment solutions
• tele-banking solutions
• telegraphic transfer (inter-banking payment)



Currently, Electronic Payments in Malaysia are largely dominated by smart card dependent technology, with the wide-scale migration of all magnetic stripe Credit Cards, Debit Cards and ATM cards to smart card technology between 2003 and 2006. Retailers or Merchants accept payment through physieal Cards. Payments are also aceepted by some Merchants without the presence of a physical Card, largely through the internet, telephone and mobile devices, in these instances, details of a Card used to make a payment is sent via the internet or telephone. These virtual retail payments are still in their infancy stages in Malaysia. This industry overview will focus largely on the card presence Electronic Payments solutions industry in Malaysia, with a brief discussion of the growing demand for Electronic Payment made through non­Card, or virtual platform. Most industry players, inclUding our Group, currently operate predominantly in the smart card space in Malaysia. Our Group however, has also ventured into non-card presence Electronic Payments solutions, given the rising potential of this market in Malaysia. Value Chain for the Electronic Payment Solutions Industry Electronic Payment solutions
(Source: Independent Market Assessment on the Electronic Payment Solutions Industry in Malaysia prepared by Frost &Sullivan) 104
7. INDUSTRY OVERVIEW AND FUTURE PROSPECTS (Cont’d) While Electronic Payments are defmed as payments made through an electronic medium, the components and services that are required to make these payments possible are known as Electronic Payment solutions. Electronic Payment solutions typically consist of the following three components, which will be discussed in the next section: (i)  Merchant Acquisition;  (ii)  hardware and infrastructure; and  (iii)  software and services.
Electronic payment solutions are classified as above to reflect the industry as a whole and not meant to represent the business activities of any company in particular. Merchant Acquisition This refers to acquisition and recruitment services. Merchant Acquisition takes place when an Electronic Payment solution provider approaches retailers, or Merchants, with the objective of having the latter adopt the payment solution system to accept payment (i.e. non-cash payment in electronic form) from their customers. Merchant Acquisition is a key service for the payment solution provider as most banks do not conduct this service and will require an external party to achieve greater reach into the retail market. Merchant Acquisition activities may also include recruiting Merchants to participate in promotions. (promotions typically initiated by banks) as well as providing retailers with servicing and maintenance of hardware and software infrastructure. Hardware and infrastructure Hardware and infrastructure refers to the interface by which end-users and retail vendors typically transact, which include Card acceptance terminals or EDCPOS Terminals, PIN, CreditlDebit/ATM Cards and networks involved in data transfer; server systems that are connected to client systems, encryption, transmission and reception hardware as well as network nodes and switchboard routing. It also refers to Card personalisation, the process in which personalised cardholder information is printed on the surface of the smart card (Credit Card, Debit Card or ATM card) as well as embedded on the smart card chip. Software and services This mainly refers to software development, systems integration, as well as database processing and maintenance needed for the processing of payments. Software is often developed or customized according to the needs of individual clients, providing value proposition for an electronic payment sohIlion. Software applications are developed for both the front and back ends. Front-end software typically includes the user interface, while the back-end systems are generally the software that processes the transactions. Middleware software is also typically utilised to link or connect the front and back ends, as well as to create a seamless integration for payment processing to Merchant networks. (Source: Independent Market Assessment on the Electronic Payment Solutions Industry in Malaysia prepared by Frost & Sullivan) Our Group is an Electronic Payment Solution provider offering merchant acquisition, hardware and infrastructure, and software and services to our customers as a third party solution provider. Our Group’s payment services, terminal services and software, security and ICT services are all part of Electronic Payment Solutions, and can be mapped to the Electronic Payment Solution industry value chain as follows: (i) Payment services is part of “Merchant Acquisition” and “Hardware and Infrastructure”;
(ii) Terminal services is part of “Hardware and Infrastructure”; and

(iii) Software, security and ICT services fall under “Software and Services”. 7. INDUSTRY OVERVIEW AND FUTURE PROSPECTS (Cont’d) The Electronic Payment Solution industry is covered in detail in the industry overview as it is the core industry that our Group operates in. Loyalty management and smart card personalization are value­added services that complement Electronic Payment Solutions, and hence are covered as brief
overviews in the industry overview. (Source: Independent Market Assessment on the Eleclronic Payment Solutions industry in Malaysia prepared by Frost &Sullivan) 7.3 FuTURE GROWTH (i) Industry outlook in Malaysia The Electronic Payment Solutions industry in Malaysia is expeeted to reach RM280A million by year 2015 with CAGR of 8.3% (2010 to 2015). Industry sizing and forecast are based on the smart card presence payment platform of the Electronic Payment Solutions industry in Malaysia. Industry forecast for the Electronic Payment Solutions indnstry (Malaysia), 2010 -2015
Note: These figures include software and services for selected key players. Software and services related to Electronic Payment Solutions commonly include indirect ftes, such as profit-sharing. and are thus difficu/110 measure. (Source: Independent Market Assessment on the Electronic Payment Solutions Industry in Malaysia prepared by Frost & Sullivan) Between 2010 to 2015, the growth rate of Electronic Payment Solutions industry in Malaysia is expected to experience a continuous positive growth due to the potential adoption of PIN entry device (PED) security requiremenls for terminals and the growing trend towards multiple applications within a Card (i.e. credit, debit and loyalty application on a Card) as well as cross compatibility across different Cards and platforms. 7. INDUSTRY OVERVIEW AND FUTURE PROSPECTS (Cont’d) (ii) Areas of growth and opportunities and Prospects for the Group Our Group, as an Electronic Payment Solutions provider, is currently mainly focused in smart card technology based Electronic Payment products and solutions, which include payment services, EDCPOS Terminals services, and value added services such as loyalty management programs, smart card personalisation and software and related services. The bulk of shared resources that enable such solutions are the middleware and back-end services which consist of network nodes, encryption algorithms, software development as well as database management and switch routing capabilities. The equipment and expertise available at our Group, in order to execute middleware and back-end services, are versatile and can be easily adapted to accommodate solutions for non-Card presence electronic payment as well, such as for mobile and intemet payments, which has strong potential within the Malaysian market. With strong growth anticipated for the Electronic Payment Solutions industry, in the smart card-based segment as well as internet and mobile payments, the prospects for our Group are promising. The CAGR for the Electronic Payment Solutions industry in Malaysia is anticipated to be about 8.3% between 2010 and 2015. Additionally, the value of internet banking and mobile banking in Malaysia registered CAGR of 32.6% and 42.9% in 2005 to 2009 respectively. The loyalty management market in Malaysia recorded growth rates of between 15.0% and 18.1% in 2005 to 2008. Although, the growth rate of this market was lower at 6.1 % in 2009 as a result of reduced consumer spending due to the global financial crisis in 2008/09, the market is expected to return to normal growth rates as the economy of the nation improves in 2010 onwards. All of the above demonstrates that the market segments that our Group participates in are growth markets, with significant potential for further growth as both retailers and consumers continue to adopt Electronic Payment methods. Our Group is in a position, not just as an experienced player in the industry but also as an end-to-end solution provider, to leverage on our internal capabilities and external reach to capture the growing demand for Electronic Payment products and services. (Source: Independent Market Assessment on the Electronic Payment Solutions Industry in Malaysia prepared by Frost & Sullivan) 7.4 INDUSffiY PLAYERS AND COMPETITION (i) Nature and factors of competition in the industry The competitive landscape of Electronic Payment solutions industry in Malaysia is fragmented with many small players within the industry. As the industry is growing and shows strong potential, many small upstarts have stepped into the playing field in recent years. Some industry players provide a multitude of services, whiie others focus on a particular segment within the indUStry. Such segments include front end (for example: EDCPOS Terminals and website interfaces), middle ware (for example: network provision and encryption technology) as well as back end services (for example: switchboard routing, maintenance services and software application development). Some of the firms that offer products and services only in one segment are focused in their particular competencies and cater to that particular segment across many industries. An example would be a digital security technology provider who would focus on digital security and cater to the payment solutions industry, national identification industry and mobile data transfer industry -however only providing digital security technology.


7. INDUSTRY OVERVIEW AND FUTURE PROSPECTS (Cont’d) The factors ofcompetition within the industry are typically centred on the following: (i) range of products and services offered;
(ii) industries and/or sectors served;

(iii) distribution channels and coverage; (iv) speed ofdeployment of products and services; and
(v) formal certifications by the Card Organisations.

There are, at present, approximately 15 to 20 organisations in Malaysia which offer Electronic Payment Solutions to a wide range of customers in the market. These include, in alphabetical order: • Asia Smart Cards Centre (M) Sdn Bhd
• Cassis Services Sdn Bhd
• Oataprep Payment Solutions Sdn Bhd
• Oatasonic Corporation Sdn Bhd
• Gemalto Sdn Bhd
• GHL Systems Berhad
• IRIS Corporation Berhad
• IT Bizflow Sdn Bhd
• ManagePay Group Berhad
• Nera (Malaysia) Sdn Bhd
• Paysys (M) Sdn Bhd

(Source: Independent Market Assessment on the Electronic Payment Solutions Industry in Malaysia prepared by Frost &Sullivan) The rest ofthis page is intentionally left blank 7. INDUSTRY OVERVIEW AND FUTURE PROSPECTS (Cont’d) 7.5 DEMAND CONDITIONS (i) Demand (please refer to Section 7.7(i) of this Prospectus)
(ii) Demand dependencies

Growth drivers for Electronic Payment Solutions Growth drivers are factors that encourage positive growth of the Electronic Payment Solutions industry. They are of significant importance to industry participants and have a different degree of impact ou the industry. Electronic Payment Solutions: Drivers ranked in order of impact (Malaysia), 2010 to 2015
.i~~~I~;~~;l~~~~k~hich consis~:~a:~*l§’~~2~r,i~\;~~!:”\i (;{ti~~],~, ~(if~~~i;·f . 1~f~~~ IfI1~lcsi~t~l):~j;~;,;;[:~s ••;:J;vf’~~’1Illt~Ji~~ ~i~i~, !:f~iG~±~;;j~ i;~li~ ~11~ilw!W~~Y~:~:1;;t~”i~~~~~~f~~~J~~~[r~ I~Iii~ ~i;~~~l~l ,,’ -.~I ~ ,”””‘<.’ ~ c -, ~””·,,t_>-” .” -, ,-~_”~, -~”?~ \,,:.” “,’_ ~~~. ~~1:eehhol~{-a-avaricementreduc~~-‘-cfi§t~$~i:iJhit~-leadingt~~ < ~~~. ~~~ ;;~’~ ,~;-~: ~ , ..3;:’ ~ ~~~~~e~;<~~~~r~~’ ~~~n!\ m~rc~an;~/;b;~f,~~~!~l~(~fi~~~:;;~ ~:f :.,’ ~:’\ ~~ij~t~~ ..’ (Source: Independent Market Assessment on the Electronic Payment Solutions Industry in Malaysia prepared by Frost & Sullivan) Industry restraints Restraints have a direct negative impact on industry growth. The restraining factors are often beyond the control of individual companies, ifnot the entire industry.
(Source: Independent Market Assessment on the Electronic Payment Solutions Industry in Malaysia prepared by Frost &Sullivan) 7. INDUSTRY OVERVIEW AND FUTURE PROSPECTS (Cont’d) 7.6 SUPPLY CONDITIONS (i) Supply conditions and dependencies Reliance on skilled labour Skilled employees within the field of payment solutions, software and hardware development and deployment remain slightly constrained at this point. The shortage of skilled professionals in this area will drive some companies to outsource the provision and management of their payment solutions to vendors that are able to provide not just issuance of the terminals and interface but also the relevant hardware, infrastructure and software required for a full electronic payment solution. On the other hand, due to a shortage of these skills in the market the cost of implementing such services increases, thereby acting as a deterrent to companies who feel that they are able to delay the deployment of such solutions. Intellectual property In any technology-related industry, the intellectual property owned by the industry players is key to their existence. Intellectual property is typically created by a combination of the knowledge and expertise of the professionals within the organisation, and the development tools available to these skilled developers. In any case, intellectual property acts as a restraint if there is strong demand for technology patented by the competition, which will then involve payment of licensing fees. Intellectual property remains as a driver to the holder of the patent. Third party vendors Most Electronic Payment Solution providers, especially hardware vendors in Malaysia, are dependant on third party suppliers to supply EOCPOS Terminals. GHL Systems Berhad is currently the only local player which manufactures its own EOCPOS Terminals. The supply of EOCPOS Terminals, however, is readily available from a host of international manufacturers and equipment providers. Among the key manufacturers globally include Hypercom Corporation, VeriFone Holdings, Inc and Gemalto N.V. (Source: Independent Market Assessment on the Electronic Payment Solutions Industry in Malaysia prepared by Frost & Sullivan) The rest ofthis page is intentionally left blank 7. INDUSTRY OVERVIEW AND FUTURE PROSPECTS (Cont’d)
7.7 ESTIMATED MARKET COVERAGE AND MARKET SHARE The top-down industry approach is used to assess the market share where industry size is determined based on information and data extracted from publicly available sources such as publications from government agencies, trade agencies, industry associations and Frost & Sullivan’s database. The data was collated and verified by conducting primary research, which involves interviewing industry participants. (i) Industry size for Electronic Payment Solutions The estimated industry size of the Electronic Payment Solutions industry in Malaysia in 2009 stood at approximately RM173.8 million, up from approximately RM160.9 million in 2008. Industry sizing is based on the smart card presence platform Electronic Payment Solutions industry in Malaysia. Industry size for Electronic Payment Solutions industry (Malaysia), 2006 -2009 Year Revenne (Rt\I iVlillion) Growth Rate (%) 2006 141.7 fr”;l{~~Jo)~it~fl]~lt~1i;~lJltfJ!’f’~{~1ri~~0~~-;~~if~ill~l[~!!i·t~l ~8 I~S 9.3 ‘4’ig~9″;5′:i!j,:~·/:’ ~’.

CAGR 2006-2009 7.0 Note: These figures include software and services for selected key players. Software and services related to Electronic Payment Solutions commonly include indirect fees. such as profit-sharing. and are thus difficult to measure; AI/figures are rounded. (Source: Independent Market Assessment on the Electronic Payment Solutions Industry in Malaysia prepared by Frost &Sullivan) As the industry size for Electronic Payment Solutions above is quantified based on the prevailing platform (i.e. Card presence based, particularly smart cards) for organisations that offer products and services for this industry, this industry size reflects industry players’ revenues from providing such services and solutions to this industry. In 2004 to 2005, there was a significant growth in the total smart cards market in Malaysia. This was mainly due to the nationwide migration for EMV standard smart card. By 2005 Malaysia saw an almost complete migration, with approximately 95.0% of its 12 million magnetic stripe ATM cards in circulation nationwide migrated to smart card based EMV standard ATM cards. In addition, approximately 5 million Credit Cards migrated to EMV standards from 2005 to 2006. The shift to smart card based ATM card and Credit Cards thus required nationwide installations of smart card­based EDCPOS Terminals to accept such Cards. With the completion of these major projects, the hardware and infrastructure portion of the Electronics Payment Solutions industry slowed down in 2007. However with complete hardware and infrastructure migration, this has resulted in greater trust and reliance on Electronic Payment Solutions. This in turn has increased the demand and opportunities for electronic payment implementations and related products and services including merchant acquisition, EDCPOS tenninal rentals and network infrastructure, and these have contributed to the higher growth rates from 2008 onwards. III 7. INDUSTRY OVERVIEW AND FUTURE PROSPECTS (Cont’d) (il) Market share With regards to the market share in the Electronic Payment Solutions industry, all vendors that provide solutions in Electronic Payments are taken into consideration. We held approximately 4.5% of the Electronic Payment Solutions industry in Malaysia in 2009 while all other players combined accounted for the remaining 95.5 %. Estimated market share in the Electronic Payment Solutions industry (Malaysia), 2009′ 4.5%
o ManagePay Group • Others­95.5% Notes:  #  The computation parameters:  of the estimated market share  of an  industry player is  based on  the following  (0 (iJ)  industry size; and revenue ofthe industry player.  For the above, the size ofthe industry has been determined based on the various components that made up the Electronic Payment Solution industry. namely the value ofhardware and provision a/services.  Theformula used for computing the market share is:  market share  =  company revenue industry size  where,  (ij (iij  company revenue consists oj provision oj services and the revenue generated from Terminal Services industry size (in this case) is equal to value oJhardware” andprovision oJservices.  •  Others include but are not limited to GHL Systems Berhad, Dataprep Payment Solutions Sdn Bhd, Datasonic Corporation Sdn Bhd, Gemalto Sdn Bhd, IRIS Corporation Berhad, Paysys (M) Sdn Bhd, UDS Direct (M) Sdn Bhd, Nero (Malaysia) Sdn Bhd, IT Bizflow Sdn Bhd, Cassis Services Sdn Bhd and Asia Smart Cards Centre (M) Sdn Bhd.  ,.  ManagePay is involved in the provision of hardware, through its terminal rentals (i.e. ManagePay generates revenue from terminal rentals therefore is considered to be involved in the provision of hardware).  The market share ofour Group was derived based on its revenues in FYE2009 from Electronic Payment Solution services. These revenues were computed against the overall industry size of the Electronic Payment Solutions industry in 2009.
7. INDUSTRY OVERVIEW AND FUTURE PROSPECTS (Cont’d) The market share of other industry players in the Electronic Payment Solution industry cannot be determined as the revenue ofthese players solely derivedfrom Electronic Payment Solution services (i.e. segmental revenue by product) is not publicly available. Most industry players offer other leT-related products and services in addition to Electronic Payment Solutions. hence their reported revenues include these other products and services as well. Without revenue figures from Electronic Payment Solutions, their market share in the industry cannot be ascertained. (Source: Independent Market Assessment on the Electronic Payment Solutions Industry in Malaysia prepared by Frost & Sullivan) 7.8 GOVERNMENT LAWS AND REGULATIONS With regards to the Electronic Payment industry, the Banking and Financial Institutions Act, 1989, also known as the BAFIA Act, and the Payment Systems Act (PSA) 2003 contain provisions that enable BNM to effectively perfonn its role as regulator for the industry. . The objective of the BAFIA Act is to provide laws for the licensing and regulation of the institutions carrying on banking, finance, Merchant banking, discount house and securities brokerage in order to regulate such activities. It would also enable BNM to perfonn an integrated supervision of such systems and to enable speedy investigations if necessary. The PSA covers both the operators of payment systems and issuers of designated payment instruments (OPIs). While these legislations are meant to regulate the operators and issuers of payment systems, which typically include Financial Institutions and Card Organisations, Electronic Payment Solution vendors are generally bound by the guidelines set by these organisations, and these guidelines are largely based on the above legislations. With regards to smart card personalisation, among the key requirements set out by the Government with respect to a personalisation centre include: • provide a secure environment for personalisation of the Card;
• provide a secure storage facility for consumables;

• ensure that the facility meets current and future needs;
• ensure that data integrity is maintained at all times;
• manage and control the inventory required for the personalisation process;
• guarantee that the personalisation ofthe Card is within a 7-Business-Day timeframe;
• ensure that the centre meets the Government security standards at all times;
• manage and control the logistics for delivery ofthe completed personalised Cards; and
• initialise Card with e-cash application.

For Credit and Debit Cards, an important mandate, although not government-regulated, is the EMV migration. EMV refers to a set of global specifications laid down by Europay, MasterCard and Visa for Cards, tenninals and applications to enable global smart card transactions. These specifications include physical characteristics (Card size, shape, and thickness), electrical characteristics (signals to be fed to each contact), command set (access controls on Card) and overall Card security. EMV guidelines require all magnetic stripe Cards to be replaced by chip-based cards as per the deadlines set for each geographic region, failing which the liability of fraud would shift from Card issuers (such as MasterCard and Visa) to banks and financial institutions if it can be proved that such fraud could have been prevented by using chip-based smart cards. With government impetus and mandate, Malaysia completed the EMV migration exercise in 2005. 7. INDUSTRY OVERVIEW AND FUTURE PROSPECTS (Cont’d) Furthermore, EMV regulations extend to the approval of EDCPOS Terminals that accept EMV Cards. Testing is required for terminals that are rolled out, and any major modifications made to such terminals are scrutinised by EMV to ensure that seeurity remains at the required level mandated by EMV. This is a fraud prevention measure which complements the stringent rules imposed on Cards to further ensure a reduction of fraud occurrences. Thus, the main purpose of the EMV regulation is to reduce fraud and promote global interoperability by promoting a cornmon standard. (Source: Independent Market Assessment on the Electronic Payment Solutions Industry in Malaysia prepared by Frost & Sullivan)


7.9 SUBSTITUTE PRODUcrS The Electronic Payment market was born on the principle of replacing or complementing certain traditional payment methods which may include physical cash transfers, cheques and bank drafis. Hence in this sense, Electronic Payment is considered the replacement for traditional payment methods. In addition, the Electronic Payment industry in Malaysia is currently predominantly based on smart card technology, there is presently no effective substitute for smart card technology. This is because smart cards, or more specifically smart card chips, are designed to be intelligent devices due to its function of storing confidential information, ability to process information, has embedded security features and possess multi-application capabilities. At present, there is no cost-effective substitute for smart cards. However there is growing opportunity in the non-smart card alternative platforms such as mobile and internet (e-commerce) in the future. With this increasing positive uptake our Group is expected to be able to participate in this segment too. (Source: Independent Market Assessment on the Electronic Payment Solutions Industry in Malaysia prepared by Frost & Sullivan) 7.10 VULNERABILITY AND RELIANCE ON IMPORTS The Electronic Payment industry in Malaysia remains reliant on imports of hardware (for example, EDCPOS Terminals as well as personalisation equipment and consumables such as printing ribbons). Personalisation refers to the process of embossing and storing relevant information on a Credit Card, Debit Card or ATM card. However, in most cases the software that runs these processes are developed locally to cater to the domestic market. Apart from hardware and software, the other major component in this industry is in services (including technical support and maintenance) which are fully provided by local industry players. Merchant Acquisition and personalisation services are also carried out by local vendors. Therefore, save for certain hardware and equipment, the industry’s reliance and vulnerability to imports is low. (Source: Independent Market Assessment on the Electronic Payment Solutions Industry in Malaysia prepared by Frost & Sullivan) 7. INDUSTRY OVERVIEW AND FUTURE PROSPECTS (Cont’d) 7.11 CARD PERSONALISATION MARKET IN MALAYSIA Smart caId personalisation is the process whereby a smart card, be it a Credit CaId, Debit Card or ATM caId is personalised by printing the holders infonnation on the surface of the CaId as well as into the smart caId chip. Personalisation is provided by physical and logical/digital printing. Smart caId personalisation consists of physical printing before infonnation specific to a caIdholder is loaded onto the smart caId (this phase involves physical printing, photolbiometric capture, logical printing­digitisation of date for storage on the caId etc). Examples of CaId personalisation service providers aIe Datasonic Corporation Sdn Bhd, Gemalto Sdn Bhd, DZ CaId (M) Sdn Bhd, Cassis Services Sdn Bhd, IRIS Corporation Berhad, GHL Systems Berhad and our Group. The maIket drivers for caId personalisation maIket in Malaysia are: • continuous fraud reduction effort and EMV Migration;
• increasing penetration rate for Credit CaId, Debit CaId and/or ATM CaId;
• increasing population growth and replacement caIds in Govenunent applications (I.e., MyKad); and
• large untapped maIket due to the relatively low penetration rate of Credit CaIds in Malaysia.

The estimated size of the smart card personalisation industry in Malaysia in 2009 stood at approximately 2.7 million units with a CAGR from 2003 to 2009 at 15.0%. In 2010, the smart caId personalisation industry experienced a decline of approximately 22.2% as a result of the decrease in the issuance of new and renewal credit cards, due to the imposition of the RM50 annual service tax on each principal credit CaId and RM25 on each supplementary caId by the Govenunent effective I January 2010, and expected to also decline by a further 3.9% in 20 II. This service tax has caused many caIdholders to reconsider their ownership of credit caIds. However, since the enforcement of this service tax, selected banks have chosen to absorb the service tax or to offer rebates to their customers to encourage them to retain their credit caIds. In addition, consumer spending is expected to increase as the economy recovers, and this is expected to eventually boost the number of credit caId users. Therefore, the industry is expected to grow at a CAGR of9.6% from 2010 to 2015. The resf of/his page is intentionally left blank 7. INDUSTRY OVERVIEW AND FUTURE PROSPECTS (Cont’d) 7.12 LOYALTY MANAGEMENT MARKET IN MALAYSIA Loyalty Card programs are among the most typical fonns of loyalty management methods. Retailers are able to gather infonnation on their customers based on their shopping patterns. Retailers typically offer rewards such as product discounts, coupons and points towards products in exchange for voluntary participation. Loyalty Cards also promote repeat purchases by offering their customers incentives that are not available to other non-participating customers. The objective of a typical Loyalty Program is to maintain and enhance customer retention and thus increase profits for the retailer by the following factors: • increasing the perception of switching costs -a customer is more likely to remain loyal to a particular retail outlet if he perceives that he stands to lose more by patronising another retail outlet;
• reducing the cost ofthe marketing campaign and increasing its effectiveness; and
• increasing the expenditure and share of wallet of customers.

Examples of loyalty management service providers excluding the brand owners (i.e. Bonuslink, ReaIRewards, etc.) are GHL Systems Berhad, Cassis Services Sdn Bhd, IRIS Corporation Berhad and our Group. The market drivers for loyalty management market in Malaysia are: • ability to tap into the emotional need of Malaysians to save and spend wisely. By offering higher perceived values to customers, Loyalty Programs have managed to retain customers;
• increasing Credit Card programs by Financial Institutions. MasterCard, Visa and American Express are widely used by Malaysians and each Financial Institution offering these Cards ties Cardholders to a loyalty program; and
• non-Credit Card programs including BonusLink and RealRewards offer loyalty benefits from spending using all fonns of payment methods.

The growth rates in this market have been consistently high from 2005 to 2008, at over 15.0″% annually, and peaking at 18.I% in 2007. However, the growth rate of this market is lower at 6.1% in 2009 as a result of reduced consumer spending due to the global financial crisis in 2008109. (Source: Independent Market Assessment on the Electronic Payment Solutions Industry in Malaysia prepared by Frost & Sullivan) The rest ofthis page is intentionalIy leji blank


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