Digital Payments

1. Digital Payments Jim Woodworth Head of Marketing, ACI Worldwide

2. Firstly, who are ACI ? ACI software process 300 billion digital payments per year www.aciworldwide.com

3. Agenda • History of Payments • From barter to mobile phones • Payments are a Business • Fees, Rules, Risks, Rewards, Liabilities • Recent & Current Developments • Fraud in the real world: Chip&PIN • Fraud in the virtual world@: SET, 3D Secure, Tokens • Future Developments • New payment schemes • 4 Market Forces

4. Agenda • History of Payments • From barter to mobile phones • Payments are a Business • Fees, Rules, Risks, Rewards, Liabilities • Recent & Current Developments • Fraud in the real world: Chip&PIN • Fraud in the virtual world@: SET, 3D Secure, Tokens • Future Developments • New payment schemes • 4 Market Forces

5. A brief history of payments Courtesy of www.visa.com

16. Two New Payment Types that VISA don’t mention • Paypal • Google Express “furthermore, the Google service is set to undercut fees charged to merchants by PayPal. Google will charge merchants 20 cents and two per cent of a total transaction cost to use the service, which is considerably lower than the 30 cents and 2.9% fees levied by PayPal. Google also plans to discount fees based on how much merchants spend on its advertising packages”

17. Agenda • History of Payments • From barter to mobile phones • Payments are a Business • Fees, Rules, Risks, Rewards, Liabilities • Recent & Current Developments • Fraud in the real world: Chip&PIN • Fraud in the virtual world@: SET, 3D Secure, Tokens • Future Developments • New payment schemes • 4 Market Forces

18. Different types of Payment/Settlement Operation UK • CHAPS • High Value Payments, Immediate Transfer of Value • Real-Time Gross Settlement between parties • BACS • Bulk low-value Clearing Transactions • Direct Debit, Standing Order, Credit Transfer • 3-day clearing cycle • Cheque • Bulk lower-value method • LINK • ATM withdrawal – end of day settlement • VISA, MasterCard, Maestro • Higher value merchants (too expensive for corner shops) • Credit and Debit Card Offerings • Usually end of day settlement

19. Payment Types and Volumes - UK Source: APACS

20. Schemes, Issuers, Acquirers etc. Payment/Settlement organisation Fees Fees Services Services Interchange Fee Acquiring Bank Issuing Bank Services Fees Services Fees Merchant/Receiver Customer/Payer Goods Goods Payment

21. Fees enable all parties to make a profit • Banks pay fess to the scheme (Link, VISA etc) • Monthly fees and per-transaction fees • Merchant pays fees to their acquiring bank • Monthly fees • Per-transaction fees • Customer pays fees to their issuing bank • Monthly fees etc. (it’s often hidden !!) • Interchange Fee (between banks) is a very contentious issue for Merchants • WalMart won $1bn in damages in 2003 from VISA and MasterCard because it’s anti-competitive

22. Merchants must follow the rules to get payment • Merchant is guaranteed payment if: • Card Reader can read chip cards • Card was present at time of purchase • Card is valid • Card has no chip and signature checked • OnLine Merchant not guaranteed payment • Unless using ‘secure method’

23. On-line merchants take big risks • Merchant accepts risk in all Internet transactions • Sometimes the acquiring bank will accept some losses to keep the relationship sweet • But the bank will charge big fees to the merchant for the increased risks • 50% of all disputed transactions are generated by Internet transactions

24. Agenda • History of Payments • From barter to mobile phones • Payments are a Business • Fees, Rules, Risks, Rewards, Liabilities • Recent & Current Developments • Fraud in the real world: Chip&PIN • Fraud in the virtual world@: SET, 3D Secure, Tokens • Future Developments • New payment schemes • 4 Market Forces

25. Internet Payments are increasing dramatically Internet Payment Volumes 1999 2005 Volumes (millions) 19 310 Value (£ billions) 1 22 In 2012 it is forecast that 10% of card transactions will be over the Internet Source: APACS

26. There is huge fraud on payment cards Type of Fraud Total (mill) % Increase 97 + Counterfeit Card 183 - Card Not Present 89 - Lost and Stolen 37 ? Mail Non-Receipt 2003 21 ? Identity Theft 2003 FRAUD FIGURE FOR 2004: £504 Million !!!! FRAUD FIGURE FOR 2005: £439 Million !!!! Source: APACS, Cardwatch, www.apacs.org.uk

27. The industry is taking steps to reduce these losses • In the real world (not just UK) • Chip replaces magnetic stripe • PIN replaces signature • Liability Shift • If you don’t use chip you are responsible for the cost of disputed transactions • In the virtual world • CVV2 • Verified by VISA/MasterCard SecureCode • Liability Shift

28. Securing Internet Payments: PAIN • Privacy • Is the message secure ? • Authentication • Is it from whom we think it’s from? • Integrity • Has the message been tampered with? • Non-Repudiation • Can the sender not later claim it wasn’t them?

29. Why did SET fail ? • Secure Electronic Transaction (SET) was a standard designed to provide Internet payment security • SET was designed by technologists • Very secure, very sophisticated … • … and very hard to use !! • No thought given to implementation • Merchants don’t want it until customers have it • Customers don’t see a need if merchants don’t use it • An expensive lesson: Security and useability are a trade-off

30. What will provide secure Internet Payments • Three Domain Models • Card schemes are adopting these • Something you have (card number) • Something you know (password) • Token Authentication Models • MasterCard CAP • Uses a Chip&PIN card and low-cost reader to generate one-time passwords • Smart Card Readers in PCs

31. How it works… One Time Password Card is introduced Cardholder push for One-Time password Cardholder enters his PIN The secret is in the chip card If PIN correct, card/Reader generates a dynamic password e.g. 1788 0357 which changes at each authentication

32. Agenda • History of Payments • From barter to mobile phones • Payments are a Business • Fees, Rules, Risks, Rewards, Liabilities • Recent & Current Developments • Fraud in the real world: Chip&PIN • Fraud in the virtual world@: SET, 3D Secure, Tokens • Future Developments • New payment schemes • 4 Market Forces

33. 4 Market Forces that Determine the Payment Model Merchant Proposition Value proposition Cost of Acquisition Cost of Retention Pricing Public Policy Issues Regulation Equal Access Competitive Framework SUSTAINABLE BUSINESS MODEL Trust & Brand Issues Branding Security Consumer Proposition Cost of Acquisition Cost of Retention

34. Public Policy Issues determine the shape of a payment system • Banking Regulation • UK and European Regulation, especially SEPA • Banking and Electronic Money Licences • Pricing Transparency • Competitive Framework Required • Anti-Monopolistic Behaviour • Must not exclude potential entrants • Banks DO operates as a cartel • Security and Fraud Issues • Money Laundering, criminal funding REGULATION IS THE BIGGEST DRIVER FOR CHANGE

35. A brand is a pre-requisite of any payment system • There has to be a brand • to let consumers know what to expect • There has to be a scheme • to set the rules • to decide liability • There has to be a settlement mechanism

36. Merchants are crucial to a payment system • Banks have a comprehensiveMerchant Account base • Relationship is much more than payments • Enrolment, retention, training, support • Banks often make more money from merchant relationships than consumers • There is huge tension between banks and merchants

37. The consumer must receive a benefit from any payment system • Douglas Adams, GSM 2001 • If an innovation happens when you’re aged less than 18, it’s normal • If it happens between the ages of 18 to 35it’s learnable • If it happens after 35 you don’t get it • Surveys Indicate Willingness of Consumers • e.g. AT Kearney 2004, Mobile Commerce • Market Research Shows: • 80% of people will use a mobile payment servicewhen the phone is provisioned MAKE IT EASY AND PEOPLE WILL USE IT

38. The Future Decoded: Mobile Commerce Symbol Market Force Good OK Bad Clear & Transparent Pricing EMI Licence Large Brand/Trust Building Costs – but plenty of players No existing merchant relationships … and expensive To enrol them Lots of customers, real utility Regulator Friendly Brand Friendly Merchant Proposition Consumer Proposition www.simpay.com

39. The Future Decoded: Contactless Symbol Market Force Good OK Bad Works under the auspices of existing schemes Works under the auspice of existing schemes Sales force in place but pricing and cost of terminal equipment will be key Trials positive but early adopter trials usually are. Do consumers want to replace cash ? Regulator Friendly Brand Friendly Merchant Proposition Consumer Proposition Ideal for small value payments

40. The Future Decoded: Non-bank Payment Types Symbol Market Force Good OK Bad Regulator concerned about fraud and laundering but generally supportive Paypal and Google have excellent branding, other entrants do not – but prone to attack by fraudsters Merchants (especially small) are keen – fills a niche that banks don’t handle. Customer service issues. Consumers are OK with it .. In one niche (auctions) – will they adopt it in other scenarios ? Regulator Friendly Brand Friendly Merchant Proposition Consumer Proposition

41. The Future Decoded: Faster Payments Symbol Market Force Good OK Bad Regulator Friendly Regulator driven initiative – Cruickshank report Uses existing settlement entities. Not a scheme as such, will use the existing bank setup No merchant involvement per se. Great proposition for utility companies and industry (payroll etc) Real consumer utility Brand Friendly Merchant Proposition Consumer Proposition

42. The Future Decoded: E-purses Symbol Market Force Good OK Bad Regulator is OK No payment brand/organisation currently exists .. But can piggy-back on existing Oyster public transport brand Cost of cash for merchants is high so real value .. But new terminals required Real consumer utility .. In London area anyway ! Regulator Friendly Brand Friendly Merchant Proposition Consumer Proposition

43. My personal guesses • Mobile commerce using prepay/contract Telco accounts will not extend significantly past premium SMS • e-commerce will continue to progress – consumers will have to pay more to use ‘insecure’ schemes • SSL-only will continue to dominate Internet Payments • Multi-application bank chip cards will provide us with e-purses. Contactless will be a key driver • Faster Payments will cannibalise all but the very highest value payments from CHAPS • Faster Payments together with Internet & Mobile will be a strong person-to-person payment proposition • Public Transport based schemes will have local success

44. Finally But …Cash will always be king especially, if you owe me money

45. www.aciworldwide.com