Bentley Communications Corp. (fka BTLY)

[spiel2001]

Why I think the BTLY plan can work...

(repost from Raging Bull)

Before I begin, let me make two things absolutely clear...

What I have to say in this post is nothing but my opinion and is founded on nothing but the research I have done and the conclusions I have drawn from it. As the reader, it's your job to take my comments with a grain of salt and recognize them for what they are... just one person's stated opinion! From here you should do your own research to prove or disprove my comments for yourself, draw your own conclusions and then do what is right for you.

Second, Bentley isn't Bentley anymore. I have hesitated of late to call BTLY "Bentley" as it is no longer the same animal. At the same time, I hesitate to call it "Kryptosima" too... it isn't that either. I've found myself using Bentley/Kryptosima as the new entity is a product of their coming together... neither one nor the other. I don't even like to use just the symbol as that leads one to think only of Bentley. But, typing Bentley/Kryptosima is a pain in the butt... so I guess I'll be lazy and use the symbol.

#1 -- Reality Check

No one has to work too hard to find a respectable number of people who will call Gordon Lee a bit too much of a promoter. Probably deservingly. However, I'll be just as quick to say I don't think he's getting a fair shake either.

BTLY has had its problems and failures. Among these were the abandoning of the hosting business and the abandoning of the transaction processing for online gaming.

Well, to start with, I can fully empathize with the hosting thing. I, too, was running an Internet hosting service not too many years ago. The explosion of competition in that market and the bursting of the dot com bubble were devastating. Not to mention a whole slew of other annoyances not worth delving into here. I, like BTLY, chose to abandon that business.

Abandoning transaction processing for online gaming was not a choice BTLY was free to make. That path was forced by the banks and credit card companies. Online gaming was looking mighty attractive for a while there and until the wheel came off, looked like a very profitable direction to go. However, once the use of credit cards to fund gaming was no longer possible, what were the choices left to BTLY?

While success has been an issue, I believe it absurd to pin Gordon and/or BTLY as a scam. IMHO: It's just plain lazy, naive and baseless. This is the real world and real world problems are the source of the company's history.

Whether or not BTLY is a scam is a question that's not too terribly difficult to answer. All that is required is to ask and answer if the events that are transpiring are real. Is BTLY just making noise, or executing? Is Kryptosima real? Is the technology real?

First, we know Kryptosima is real and has real product. We know that Kryptosima at least believes that the technology it has is unique and patentable. They've gone to the time, trouble and expense to apply for patents. It remains to be seen if they get them, but they are none the less patent pending. We are already at something of an advantage as the majority of these penny stock companies do not even have a business.

Second, we know that Kryptosima already has Star Network approval. We might argue about how valuable that is, but it does at least indicate that there's something tangible and real and that there is a path present through which transactions can flow.

Third, we know that BTLY has set up a pilot program with World Trade. We're getting some noise about how good is World Trade, but I believe that completely misses the point. More on that later. What matters here is that a real world test is being deployed… Regardless of the size of the test, it’s a real test.

There's more, but that's a decent start to do a sniff test. Scams are built on hot air... lots of noise and no signal. There's a signal here. While the plan might not work, every business is at risk of failure (regardless of size), there's a huge difference between risk and scam.

#2 -- Past Failures in Debit/PIN deployment

PSEEKer raised some interesting questions this morning and I thank him (her?) for that. It made for some interesting reading and led to me pose some questions which, in the end, led me to derive a bit more faith in BTLY than I had last night.

As I read UTM and NACHA and the various press releases and publications on each, the first question that popped into my mind was why hasn't debit/pin transaction processing made it on-line if UTM (and others) had a "solution" in 1999?

The first thing I noticed, as I read, was that the UTM solution is probably both the easiest, and smallest, part of the overall problem... the problem of ATM transaction processing over the Internet is far larger than just how to get a card swipe into the machine. Heck, one stop at Racetrac for a carton of smokes and some gas proves that swiping a card into a machine is a problem that's long since been solved... ask yourself how many times you've answered the question "ATM or Credit" in the last week.

The problem extends way past swiping the ATM card and getting your PIN input. It has everything to do with deployment... that means getting the devices into the user's hands, yes, but more importantly, it means getting the swipes across the network and to the merchant's bank account while not breaking any of the rules of a card present transaction.

This is where I believe UTM (and some others) have failed. Granted, I need to read more. However, what I've already read leads me easily into realizing the potential roadblocks of the models that have been tried.

The first is the issue of a software solution to a hardware problem (i.e. digital signatures -- not the UTM device). There are two key problems here. First, the digital signature is not a card. It exists as nothing but data and data can be easily copied and/or stolen. One might protect the signature with a keyed PIN of it's own, but keystrokes are just as easily stolen. The digital signature circumvents the entire point of a card present, undeniable, transaction by sidestepping the security of the hardware.

Granted, a digital signature is easier to deploy than a hardware solution. It's even appears less expensive than having to deliver a hardware device when given a cursory look. However, in reality, it is not likely to be less expensive. In part, digital signatures require changes in how the network itself operates. Who pays for that? For that matter, who pays to issue the digital signature?

You can't look to banks to deploy this technology... there isn't enough in it for them. In fact, it could even be argued to be detrimental to the banks. Why? Banks already have ATM/Debit cards and credit cards. Many of the ATM/Debit cards also carry credit card logos and the banks make far more off of a credit card transaction than they do a debit transaction. Replacing the use of credit card transactions over the internet with debit card transactions serves only to displace their credit card business with less profitable transactions. There's no motivation for them to expend their capital resources to implement this sort of system.

As noted and in addition to the above, in order to implement digital signatures (a software solution), the processing network has to be modified end to end. Not a light undertaking and not without its significant capital expense. This includes not only the core networks like STAR, but also the networks that make the merchant connection. In order to justify the expense, there must be enough demand between consumers and the merchants on a given network for the network to make the change and the expected increased revenue from that change expected to offset the cost of the change. This also leads to the larger problem of compatibility between networks as you begin to see two different sets of standards in the marketplace, confusion, incompatibility, etc.

In the end, software solutions while elegant in their simplicity are rife with substantial problems of deployment and implementation.

In passing, hardware only solutions, such as the UTC solution PSEEKer pointed out, solve the problem of getting the card swipe into the PC, but entirely fail to address the rest of the problem. As I've already stated, deployment is about more than getting the swipe... that's the easy part. Perhaps the UTC device has a future, perhaps not. I do not yet know enough about it to comment on it -- Is the device fully compatible with the existing networks? Is the device reliable? What about systems that don’t have floppy disk drives? How expensive is the device? Lots of questions to answer.

#3 -- Playing by the rules

In order to bring card present debit transactions to the internet, a solution has to do two things. 1) It has to abide by the network rules, and, 2) It has to be built around the existing network infrastructure.

Abiding by the rules means the solution has to provide a secure and unarguable evidence of the presence of the card at the time of the transaction. Building around the existing infrastructure means that it works within the confines of the existing debit network system without requiring any alteration to the system.

The first part of this, abiding by the rules, means that the solution can be implemented immediately and reliably with accountability and without the complexity and barriers of redefining the notion of a card present transaction.

The second part means the solution can be deployed immediately without having to create a compatible merchant base. The solution is immediately available to all networks, merchants and institutions. Any entity who can currently handle debit transactions can handle the new market without significant alteration or capital expense.

This is Kryptosima's advantage. The Kryptosima solution is a hardware/infrastructure solution entirely founded in the existing protocols... in theory; any existing debit facility can employ, carry, process and/or accept a swipe through Kryptosima's system. Implementation is not a problem. Application is the only significant barrier.

#4 -- Lack of focus is deadly

This is what I believe to have been at the core of the failure of debit card processing over the internet to gain acceptance to date. On one side of the problem is a merchant who would love to be able to sell their goods and services to people who don’t have credit cards. On the other side of the problem are people who don’t have credit cards that would like to transact business over the internet. The universe of parties on both sides of the problem is huge… the very definition of chaos. It is outright impossible to go about deployment with a piecemeal approach. You can’t randomly throw hardware at consumers and merchants. In order to cost justify deployment, there has to be enough potential near term business for both parties to accept the idea.

You can’t say to a customer: Hey, here’s a cool device you can use to shop with your ATM card online. But, we have no idea how many places will accept your card.

At the same time, you can’t tell merchants, here’s this cool new way to accept payment for your goods and services over the internet. But, we have no clue if there’s anyone who will be able to use it to pay you.

Nor can you tell the networks you have a cool solution that you have neither merchants nor customers out there that will use it.

In order to make the idea work, you have to define a close connection between merchants and customers of sufficient density for it to make fiscal sense. So far, that hasn’t happened.

#5 – The value of a niche market

This brings me to the core of why I personally believe BTLY’s plan can work. In order to develop broad acceptance of debit card processing over the internet, you have to identify a specific application on a manageable scale where there’s a real need and benefit to adding debit transactions to the arsenal of tools. On-line gaming is one of those, and probably could continue to be, but it has problems of its own concerning stigma, legislation, regulations, etc., that make it a somewhat suspect market. On-line investing, however, does not suffer from the same issues of stigma, carries a far more significant time value of money motivator and the reduced cost of funds transfer serves well to offset the overhead of deployment… be the burden on the brokerage or the customer.

Advantages to the investor are reduced cost of funds transfer (wire costs, overnight mail, etc.), greater convenience (no trip to the bank, the post office, etc.) and the time value of money… the transfer is instantaneous permitting a trade right this second… not this afternoon or tomorrow or next week which, in turn, means a perception of fewer lost opportunities. Among the advantages to the brokerage are the fact that they can gain commissions on trades that would have otherwise been lost, offer a service convenience to their customers increasing interest in their brokerage, reduced cost of funding processing (wire fees, processing checks, etc.) and the opportunity of apply today, fund today, trade today convenience to potential new customers. All of these points are debatable to one degree or another and are by no means exhaustive… but I believe they serve to demonstrate a benefit, need and/or advantage constituting a real market. The recent sanction of Ameritrade by the NASD is a case in point that brokerages are willing to go to some remarkable extent to let their cash customers trade.

The key point is that BTLY has identified a real market with a real need that exists on a manageable scale. It is far easier to deploy a solution to one brokerage and its customer base and grow the solution in a well defined and controlled market than to throw a concept at the entire e-commerce community and wait to see if the shotgun blast hits enough meat to make an impact.

#6 – An end to end solution

This is where I think BTLY’s plan excels and builds a realistic future. The overall plan calls for acquiring an interest in or ownership of an on-line brokerage, attaining self clearing status for that brokerage and, ultimately, delivering clearing services to other brokerages. It is this that has led me time and again to point out that I felt people were focusing too much on the ATM swipe as the revenue model for BTLY. In the far distant future, it may well be where the fortunes lay. However, it is clear to me that the ATM swipe can not possibly be profitable in the near term… the number of swipes needed to build a serious revenue stream is not trivial. One brokerage, no matter how large, is not sufficient to generate enough card swipes to make anyone wealthy.

What the business plan does is to shift the card swipe from the meat and potatoes of the revenue model to the role of the carrot on the end of the stick. The company already has the technology to do debit card processing over the internet. It already has a network it can do that through. What the company needs is a market and customers. Acquiring a brokerage gives them both. However, what’s more important is that a brokerage gives the company a revenue stream that is not dependant on how many card swipes are transacted. Even more importantly, acquiring a brokerage gives them access into the investment world at large. Attaining self clearing status for that brokerage, in turn, improves the bottom line adding value to the revenue. If accomplished, the company finds itself with an end to end debit card processing solution with both a market and customers and a revenue stream that is both substantial and entirely independent of the debit processing.

Taking the plan to the next step, attaining approval to clear for other brokerages, then allows the company to bring its end to end solution to any other brokerage who is interested. In effect, creating its own demand. BTLY can offer a brokerage the ability to offer debit transactions to its own customer base, thus increasing BTLY’s card swipe customer base, while also taking on clearing for the new brokerage client… the company increases its revenue stream in two ways simultaneously. If you do the math, you find that revenue grows exponentially with each new brokerage client.

#7 – Solving the problem of deployment

Assuming BTLY executes to the point of clearing for other brokerages, there are two key forces set in motion. First, their own revenue stream is growing to be substantial thereby making it possible to infuse capital into the problem of growing the market for debit transaction processing. Second, they are growing the existing base of potential customers capable of using debit cards to transact e-commerce. For example, supposed that BTLY has taken on clearing for a hundred brokerages, each with a dozen or so brokers, each of whom has a hundred customers… how many customers can now use debit cards for e-commerce? Now, go to web sites that provide non-brokerage services to investors… like data and research sites… and bring them into accepting debit cards for their subscription services and from there continuing to expand into other parallel on-line services. Mind you, it’s just an example and not necessarily the exact plan. I intend it only to demonstrate how this plan can reach a level of critical mass and fiduciary interest where it begins to carry its own weight.

#8 – It isn’t the size of the stick

World Trade has been identified, according to American Banker, as the brokerage BTLY will be operating the pilot program through… and this morning some posters have taken shots at World Trade for various reasons. IMHO: That totally misses most of the point. For one, the first and most important step is to prove the idea. The size of the brokerage is not important in that regard. The idea is to get a real-world look at the model and evaluate it, modify it and improve it as needed. And, frankly, the fewer people you have to involve in that the better, most likely. A small firm will make the cost and complexity of a proof of concept far simpler than trying to do the same thing with someone like RJT… they’re also likely to be more responsive and flexible than a behemoth would be.

Second, BTLY has publicly stated (see http://www.bentleyclearing.com if in doubt) that it seeks to acquire a brokerage. That’s a significant part of the plan. The size of the brokerage they acquire is only relevant as it relates to two things: 1) How much would it cost BTLY to acquire them, and, 2) How much effort would it take to attain self clearing status – Aside from that, the size of the brokerage and its customer base is nearly irrelevant.

For that matter, how advanced the acquired brokerage’s on-line trading technology is doesn’t matter much either. What acquiring the brokerage does is to get BTLY access to the market (as in Wallstreet) in a timely fashion… it’s much easier to acquire someone who’s already in the market than to do it from scratch. The bells and whistles are easily added. Getting approval for self clearing also depends on factors that make a pre-existing brokerage a significant factor in terms of time to execute. Given sufficient age and capital, an existing brokerage, once acquired, could almost immediately be granted self clearing status and, I believe, the association between BTLY and Gibraltar Clearing is not without significance in that regard.

Mind you, I’m not implying World Trade is a target of acquisition for BTLY. I’m simply pointing out that it is an acceptable vehicle to prove the debit card/investor concept and is of the right size, age and state of being to address BTLY’s longer term plans.

In summary…

Speaking for myself, I believe BTLY passes the reality sniff test. The product, technology, market and plan all appear to have real world applicability. There are hurdles, risks and potential hazards that remain. However, I personally believe BTLY has a significant fighting chance of making this work. And, frankly, even if they failed to make debit card processing as common on the internet as credit card transactions, the acquisition of a brokerage and the capacity to clear for other brokerages alone has huge potential for profit. As OTC:BB investments go, I believe BTLY has a real chance to succeed where others have not.