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DESCRIPTION OF BUSINESS

Corporate Merchant Solutions was incorporated under the laws of the State of Nevada in March 2009. With the asset purchase of WBS, the Company provides electronic processing for retail Merchants of credit cards, debit cards, electronic check processing and related payment programs. The Company markets its products and services through Independent Sale Offices and Merchant Level Sales Representatives across the United States. We believe there is a trend within the global payments industry from paper-based forms of payment such as cash and checks toward electronic forms of payment such as cards, which creates significant opportunities for continued growth in our business. We believe this trend is driven by, but not limited to, the following elements:

Increasing Usage of Electronic Forms of Payment. Credit and debit card usage has grown at significant rates and is displacing cash and checks, the traditional forms of payment. Consumers are migrating to card-based forms of payment, motivated in part by the convenience, enhanced services and reward programs that cards offer. Corporations, small businesses and governments have also increased their usage of card-based forms of payment for travel, purchasing and fleet management in order to gain better transaction information and more efficiently manage their supply chains and reduce administrative costs. Other forms of electronic payments, including pre-paid cards, chip-based cards and mobile commerce, offer opportunities for further usage and growth.

Increasing Acceptance of Electronic Forms of Payment. Merchants of all sizes have increased their acceptance of electronic payments as a way to augment their sales and increase consumer convenience. Electronic forms of payment are gaining wider acceptance in corporate payment applications and in important merchant categories such as supermarkets, gas stations, convenience stores, utilities and fast-food restaurants. In addition, governments have begun accepting electronic payments in order to reduce their administrative costs. Payment cards and other electronic forms of payment continue to be the preferred method of payment in certain higher growth channels of commerce, such as the Internet.
Corporate Merchant Solutions, Inc.. is a U.S based Company with international interests. The Company perceives great opportunity in fast growing economies outside the United States. The Company is actively pursuing business outside the mainland United States such like Puerto Rico and the United States Virgin Islands. Although the Company’s main customer base is still in the United States, the opportunity to develop the fast growing and lucrative international payment processing market is part of our strategy.

President

Casey Gerena, 42, is a member of the Board of Directors, CEO, and President. Casey Gerena, in the early 1980 – 1993 was co-founder of the Gerena Insurance Agency and Home Financial Services, Inc. where he operated & managed the business for over 15 years. Mr. Gerena was responsible for Risk Management, Underwriting and Information Technology. 1993 He co-founded Cyberstar Communications, Inc. a communications company where he served as Chief Technology Officer until the company was sold. In 1999-2003 he joined Veritas Inc. as a Computer Engineer Specialist. His role was in development & support of storage disk technologies in enterprise networks for Fortune 500 companies. In 2003 he joined Freedom Payment System as Vice President and Chief Technology Officer. Mr Gerena was instrumental in the development of payment gateways used in the merchant services industry.

Our Industry

Introduction
The department stores and other retail operators first issued credit cards in the early 50’s. They were essentially an extension of the revolving credit accounts provided to many customers. As the popularity of the revolving credit grew, the amount of data entry increased and a solution was needed to reduce the time it took to record sales transactions and improve accuracy. Machines that could rapidly scan the information on these forms were developed and the credit card was on its way.

The next big development was the entry of banks into the business. The banks saw that the retailers were not only making large profits from the increased sales that the credit cards provided; they were also earning significant revenue on the interest their credit accounts generated. Banks began issuing cards and soon formed associations to act as clearinghouses for transactions and to promote their own card brands. Bank America Card, Bankmark, and Mastercharge were a few of these. They are now consolidated into just two associations of Card issuers, Visa, and MasterCard.

By the late 60’s and early 70’s as credit usage increased, the need for faster processing was needed. Magnetic strip cards are now the standard. The next big development was the ATM machine. They quickly gained in popularity and networks of ATM transaction processors appeared. MAC, NYCE, STAR, Cirrus, Plus, Interlink are the predominate players. The next logical move was to allow POS Merchants to accept these ATM cards for purchases. Secure PIN pads were developed to accept the cardholders’ PIN numbers and the debit Card business was underway. This is also called on-line debit.

The coming of age of Internet commerce has opened new opportunities for online Merchants to accept credit cards and new challenges for banks and processors to provide secure and compliant transaction services. In over 30 countries worldwide, the magnetic strip has evolved into a smart
card. Smart cards use a microchip that looks like a small square or oval to store information. Smart cards can store up to 100 times the information than a magnetic strip. Smart cards have not taken hold in the United States although a growing number of smart cards are in use for quick service, small ticket items like fast food, and movie theater tickets.

Point of Sale Transactions

When a customer presents a credit card for payment and the merchant swipes the card in the POS terminal’s card reader, a lot of activity begins. The terminal dials up the processor and sends the cardholder account number and the amount of the sale. The processor’s system checks the card number with the issuer for validity and the amount limits. It then passes a message back to the Merchant’s terminal and either accepts or declines the transaction. If it accepts, the POS system prints a receipt, records the transaction and the sale is completed. The POS terminal will store all of the day’s transactions. At the end of the day, the merchant will run a batch or settlement. This step transmits all of the day’s activity to the processor to start the transfer of funds to the merchant account. A settlement or batch must take place for the merchant to receive the funds through ACH.

Transaction Processing

At the other end of the telephone line from the POS terminal is the processor. The processor provides several important functions. Each merchant is setup to dial out to a specific processor. The terminal has a unique ID number that the processing system uses to route authorization and settlement data. The processor sends daily transaction reports to each issuer. The issuers send ACH deposits to the Merchant’ accounts and deduct the discount fees. (An ACH is an electronic check cleared through the banking system’s Automated Clearing House.) If for some reason the transaction is declined, a message indicating that is sent back to the terminal. The merchant can then request another form of payment. If a card has been reported loss, or stolen, and an authorization is requested, the system will usually alert the merchant and request that the card be retained. MasterCard, Visa, Discover, Diners, and American Express usually deposit the Merchant’s money within 72 hours of the settlement. The issuers deduct the fees due to them from the ACH deposit.

The Card Holder

A financial institution (issuer) offers an application to a potential cardholder. The applicant is screened for creditworthiness and, if the application is approved, a card is issued. The applicant is now a cardholder. The cardholder uses the card to purchase goods, or services or obtain a cash advance.
The cardholder then:
• Receives a monthly bill (statement) from the card issuer.
• Pays the bill in full or maintains a balance on the account (revolving credit).
• Receives a finance charge on the unpaid balance.

The Issuer

The issuer is the cardholder’s financial institution and:
• is a licensed member of Visa and/or MasterCard
• issues the card to the approved cardholder
• receives and pays for transactions from Visa and/or MasterCard
• bills and collects payment from the cardholder

The Merchant

The merchant is any company meeting the qualification standards of Visa and MasterCard.
Merchants:
• Must be financially responsible and of good repute.
• Sign a written agreement with the acquirer to accept cards as payment

The Acquirer

An Acquirer is (insert a definition). The Company solicits, screens, and accepts Merchants into their program and:
• Accepts, handles, and processes card transactions
• Provides the merchant with terminals, instructions, and support services
• Charges the merchant a processing fee for handling the transaction

Overview of the Interchange (Transfer Fees Charged)

Interchange is a transfer fee between Issuers and Acquirers used to balance the costs of bankcard transactions. Every time a bankcard is used, both the Issuer and the Acquirer incur costs. Interchange reimbursement fees compensate both parties for their role in providing a comprehensive payment service to cardholders and Merchant. Interchange fees are also charged by the merchant’s Acquirer as a discount fee based upon the sales amount of the transaction. The merchant pays a discount fee that is typically 2 to 3 percent (this is negotiated between the merchant and the acquirer) which is why some Merchants prefer cash, debit cards, or even checks. Some simplify the above by defining the interchange as the wholesale price charged by Visa and MasterCard for authorization and settlement of a credit card transaction. However you define the Interchange, it is still complex, and ever changing. Today, the interchange has over 125 categories between Visa and MasterCard offering both credit card and debit card rates. AMEX, and Discover are not part of the Interchange.

Three factors that determine the category a transaction will qualify for:

1. The industry type (grocery, department stores, convenience stores, eCommerce web sites, etc.)
2. The type of Bankcard processed (Traditional, Corporate, Rewards, Debit, etc.)
3. How the card is processed (swiped, keyed, present, or not present)

Interchange

The Industry Type
The criteria used to determine the merchant category is primarily determined either by the transaction process (i.e., restaurant tip, rental reservations, quick service, invoice #, etc.) or the rate and transaction fee applied to the sales transaction. Several industries have been assigned a special rate category to encourage the use of credit cards. A good example is grocery stores. Other industries with special categories are airlines, government, motion picture theaters, travel agents, and utility companies.

The Type of Bankcard Processed Credit Cards

In order to meet the requirements of the marketplace, the Visa and MasterCard Association have created a variety of card types with different reporting features to assist the cardholders, particularly businesses. The standard card or starting point is CPS retail followed by a variety of Rewards, Corporate, and Government cards.

Debit Cards

Debit cards can be processed either online or offline. Online debit is often called pin based debit as the cardholders enters their pin number to authenticate the transaction without a signature. In this transaction, the debit network (NYCE ,MAC, STAR, and Interlink) processes the transaction and immediately debits the card holders account. Pricing for pin debit is not governed by the Visa/MasterCard interchange, but by the individual debit networks. At Corporate Merchant Solutions, the cost to the agent for online debit is $ 0.20 a transaction plus pass-through network fees. Offline debit is processed like a credit card as the cardholder provides a signature to authenticate the transaction. In this transaction the Visa/MasterCard authorization and settlement is used for processing and the cardholders account is debited in 48 to 72 hours. Due to the lower risk factor, offline debit is assigned a lower discount rate as the money is already in the cardholders account. Offline debit is also called signature debit as the signature authenticates the transaction.

How the card is processed

The third category is based upon the method of card entry (keyed or swiped) and what data is entered at the time of entry along with timing of the batch or settlement process. The first interchange factor is whether or not the card is present. When swiping the card through a terminal an indicator is transmitted along with the rest of the data recording the fact that the card is present. Without this indicator, the transaction can not qualify for any of the swiped categories.
Merchants should be encouraged to examine their monthly statements to monitor the success of swiped transactions to avoid downgrades as a result of improper operating procedures, or a faulty or dirty magnetic stripe reader. When key entering the transaction as a result of non-face to face transactions, Visa/MasterCard has created the Address Verification System which requires the zip code and numerical part of the billing address to be entered. If this information matches the issuing banks information, the transaction will qualify for an AVS rate category. Visa also requires an invoice number.

Specific Industries

Some Industries, such as Lodging and Car Rental, require data such as Check in, Check-out dates, folio numbers and length of rental are examples of the required information that is sent to Visa/MasterCard along with the credit card data. In these cases, industry specific terminal applications are required which will prompt for the additional information. The qualification of every transaction is dependent on several factors. Merchants must understand these factors, and examine their statements in order to minimize their interchange costs. Analysis of EIRF, or downgrades can help a Merchant monitor store operating procedures in order to qualify for the best category and associated fees.

Security Codes

Visa, MasterCard, Discover and AMEX have developed different security codes for each brand that may have an effect on rates in the future. Discover has already instituted this requirement. The CVV2, CVC2, and CID codes are three different acronyms for the same credit card security feature. (Visa refers to the code as CVV2, MasterCard calls it CVC2, and AMEX calls it CID). CVV = Card Verification Value CVC = Card Verification Code CID = Card member ID The acronyms refer to an additional three or four digit number included on every Visa, MasterCard, and AMEX credit card. In the case of Visa and MasterCard, the last three digits found on the back of the credit card on the signature panel. These numbers are usually preceded by either the full credit card number or just the last four digits of the credit card number, AMEX prints their four digit code above the credit card number on the front of the card on the right side. The CVV2, CVC2, and CID codes can be used as additional verification for card not present transactions. At this time, there are no rate benefits for verifying the credit card, nor will the merchant be prevented from completing the transaction if the codes are not submitted or are not correct for the Visa and MasterCard. The main advantage to obtaining a CVV2, CVC2, or CID match is for overall security. As most mail/phone/ecommerce Merchants know, the large portion of the burden of preventing credit card fraud falls on the merchant. Requiring a code match can deter many fraudulent transactions. In the event that a chargeback does occur, a code match is helpful; however it is not the sole determining factor in whether a merchant will successfully defend itself against the dispute.

Guidelines for Quoting Bankcard Rates

New Merchants

There are several factors to consider when quoting a merchant who hasn’t processed credit cards in the past. The factors are: sales volume, competitive pressures, type of business, and the types of programs to be quoted (credit card processing only, gift and loyalty, eCommerce, wireless, and eCheck). One approach is to set the initial rate around 1.89% for CPS Retail, or 2.79% for CPS Card Not Present (MO/TO), and later adjust the rate downward to a discount level appropriate to their volume. In most cases, the outlined period of time to qualify for a better rate is 6 to 12 months. In other situations, we may want to quote a more aggressive rate to maintain their processing. With this thought in mind, strong consideration should be given to presenting the benefits of a gift and loyalty program to bind the merchant closer to Corporate Merchant Solutions Inc. eCheck and wireless programs will accomplish the same, but to a lesser extent. Consideration is also given to the pricing of the above programs to encourage multiple programs. The application fee for gift and loyalty is discounted for deals submitted with credit card processing. As the agent can accomplish the same by presenting pricing for other programs along the same line. In other words, increase the application fee for eCheck as a stand alone program, and reduce it when combining it with credit card processing. Regardless of the approach, we prepare the quote in junction with the closing process so that any negotiated rate/price adjustments during the closing process doesn’t significantly impact future residual income.

Established Merchant (Conversions)

It may seem obvious that just a lower rate will secure an established merchant, but unless the agent prepares to sign and close the deal that day, competition is waiting in the wings even when the merchant does not seem happy with their existing acquirer. Armed with information as it relates to the merchant’s immediate and long-term needs are the way to establish the value of our proposal, and favorable quotes, then we are in the best position to secure the deal.

Terminals, Pin Pads, and Check Imagers and Readers

Introduction
Most bankcard terminals today are countertop models with integrated printers requiring AC power and a phone line. All of them can process credit and debit cards, but some offer additional capabilities like processing over the internet. Other bankcard terminals like the Nurit 8000 can operate on internal batteries and allow the user to collect and process a sale for later authorization and transmittal of the batch data. We can think of the Nurit 8000 as transportable as it can be used in more than one location. More prevalent today for mobility are the wireless bankcard terminals that allow on the spot processing of credit card transactions, and in the case of the Commerciant Mobilescape 5000, also process check transactions. These battery operated wireless terminals are truly portable and are commonly used by outside contractors such as plumbers, lawn services, tree services, delivery services, limousine services, etc While some of the terminals offer internal pin pad capability, others require, or have as an option, external keypads for pin based debit. The other attachable option is the check reader or imager. The check reader scans the routing numbers on the bottom of the check, whereas the check imager scans the entire check creating an image. In our check program, the use of an imager reduces the discount rate by 5 basis points. All of the above equipment, dependent upon the specific customer’s processing agreement are configured, programmed, audited, and shipped directly to the merchant or agent by Corporate Merchant Solution’s in house Technical Services, and Shipping Department.

Pin Pads
In most cases, a Pin Pad needs to be added to the terminal via a cable connection that allows the user (customer) to enter their PIN number during an (on line) debit transaction. In other cases, the Pin Pad is built into the unit’s keyboard. In both cases, the Pin Pads are enabled with DES encryption to protect the security of the PIN number. In addition to DES encryption, the pin pads meet Visa’s PED certification requirements for security.

3rd Party Interfaces to POS Equipment
Some Merchants will have Point of Sale (POS) equipment to handle credit card transactions (in lieu of the credit card terminal) but they need an acquirer like Corporate Merchant Solutions Inc. to process the transaction. There are two approaches to determine if we are compatible. The most expeditious is to gather the name of the developer or manufacturer of the software. The merchant may or may not know this. In this case, we ask for the phone number that the merchant calls for support. (Most 3rd party software providers offer support to the end user). Once we can obtain the number, we call and ask the support staff which credit card processors are compatible with their software. If they say it is compatible with Vital, TSYS or Chase, then we ask for the process of switching it over. They may provide you with a form that has all the information. The second approach is contacting our processor partner Chase who maintains a list of approved interfaces on their website.