bank of america merchant services

1. Bank Of America Merchant Services

2. Some comments about the Payments Landscape: You’ll note that these Visa numbers are from the year 2003. And no one expects that the situation has remained the same – these percentage have shifted as the share of wallet continues to move toward electronic payments. But some obvious summary facts: Credit card usage is huge and stable or growing slowly. Debit card usage is huge and growing rapidly! Over-all Check usage has been declining for several years What the Visa numbers don’t show is where that usage has been changing Paper check usage for consumer or business bill payment remains high and steady – desire for float & concerns about online security. Paper check usage has been declining much more quickly at point of sale as debit card & credit usage have grown – to some degree it’s a generational thing. Very small increase in Web & MOTO check usage – some consumers becoming familiar with what a “DDA” really is and how to make payments from this type of account without a paper document.Some comments about the Payments Landscape: You’ll note that these Visa numbers are from the year 2003. And no one expects that the situation has remained the same – these percentage have shifted as the share of wallet continues to move toward electronic payments. But some obvious summary facts: Credit card usage is huge and stable or growing slowly. Debit card usage is huge and growing rapidly! Over-all Check usage has been declining for several years What the Visa numbers don’t show is where that usage has been changing Paper check usage for consumer or business bill payment remains high and steady – desire for float & concerns about online security. Paper check usage has been declining much more quickly at point of sale as debit card & credit usage have grown – to some degree it’s a generational thing. Very small increase in Web & MOTO check usage – some consumers becoming familiar with what a “DDA” really is and how to make payments from this type of account without a paper document.

3. Payments Landscape The numbers Visa displays reflect a broad cross-section of merchants of all different sizes, different average sale amounts and varying degrees of susceptibility to fraud. For larger regional merchants and most national chains, the average net check expense is far lower than the figures displayed. For example, a white paper prepared by the Food Marketing Institute (FMI) benchmarked the average all-in cost per check for grocery/ supermarket merchants at $0.52. For those familiar with payments in this retail segments, $0.52 is much more credible and defensible estimate than anything north of a dollar. But it instructive to note that the Supermarket segment and the national Discount/Mass Merchandisers have the strongest check expense performance of any retail group. You could then work from the knowledge that virtually any merchant of any size does not have net check expense below that $.52 number. Some realities for merchants: Most are still taking 15% - 50% of payments by paper check Checks as a percentage of all sales are slowly declining Checks in absolute numbers are declining Their % of Uncollectible Returned Checks is up year over year Collections expense is up each year, chasing an ever-lower quality of receivable.The numbers Visa displays reflect a broad cross-section of merchants of all different sizes, different average sale amounts and varying degrees of susceptibility to fraud. For larger regional merchants and most national chains, the average net check expense is far lower than the figures displayed. For example, a white paper prepared by the Food Marketing Institute (FMI) benchmarked the average all-in cost per check for grocery/ supermarket merchants at $0.52. For those familiar with payments in this retail segments, $0.52 is much more credible and defensible estimate than anything north of a dollar. But it instructive to note that the Supermarket segment and the national Discount/Mass Merchandisers have the strongest check expense performance of any retail group. You could then work from the knowledge that virtually any merchant of any size does not have net check expense below that $.52 number. Some realities for merchants: Most are still taking 15% - 50% of payments by paper check Checks as a percentage of all sales are slowly declining Checks in absolute numbers are declining Their % of Uncollectible Returned Checks is up year over year Collections expense is up each year, chasing an ever-lower quality of receivable.

4. Merchant Check Experience Paper Check Process Merchant’s Experience: Checks are their highest risk form of payment - Small Retail/ Service Provider – the merchant may know their repeat customers Large Retail – Traditional verification or guarantee services Checks are handled separately from card payments: Close till, end-of-day, (self-encoded in larger stores), deposit prep, armored car?, deposit/ bank walk, reconciliation, reporting – all different from the automated processes associated with credit & debit cards. Bounced Check Recovery – also quite different from card payments Small Retail/ Service Provider - Self-collect or local agency collections Large Retail – Collection Agency or Warrantees from guarantee serviceMerchant’s Experience: Checks are their highest risk form of payment - Small Retail/ Service Provider – the merchant may know their repeat customers Large Retail – Traditional verification or guarantee services Checks are handled separately from card payments: Close till, end-of-day, (self-encoded in larger stores), deposit prep, armored car?, deposit/ bank walk, reconciliation, reporting – all different from the automated processes associated with credit & debit cards. Bounced Check Recovery – also quite different from card payments Small Retail/ Service Provider - Self-collect or local agency collections Large Retail – Collection Agency or Warrantees from guarantee service

5. Check Protection Options Today Verification Services – negative databases and risk parameters all designed to reduce the number of uncollectible returns. Merchant self-insures using a service provider’s information. Collections are responsibility of merchant or their collection agency. Guarantee Services – merchant pays a percentage of all checks waranteed by the service provider. Guarantee provider is “insuring” these checks. Guarantee provider is in complete control of check approval process Historical Merchant Pain Points Percentage of checks declined = potentially lost sales Quantity of items determined to be “non-compliant” - not covered Extra Fees, Unexpected Fees associated with minimums, statements, duplicate transactions, collections on items not under warrantee

6. Check Protection Options Today Electronic Check Conversion with Guarantee Traditional national players (Telecheck, Certegy) using their historical databases for the approval process, then debiting the check writer through the ACH or recreating check as paper draft Initially high administrative returns, reliance on paper drafts, historical databases were not formatted with raw MICR data Check Truncation Check 21 - Remote Deposit, few banks currently capable

7. The Opportunity For the agency/organization – Significantly reduce net check expense Faster funds movement Better loss prevention Faster, higher percentage of bounced check collections @ lower cost Streamline handling/ reporting for debit, credit & check in single operation Single source of reports Settle with other payment types Single source of tech support

8. VISA POS Check Process Overview Converts paper checks into electronic payments at the point of sale Built on existing VisaNet Single Message System – like offline debit Ability to route and process POS Check Service transactions similarly to debit and credit transactions Provides integrated payment and online reporting Key Differentiators Utilizes the world’s largest payment transaction processing system - VisaNet Potential connectivity to 90% of the DDAs in the U.S. and millions of U.S. merchant locations (20% of current transactions are with participating financial institutions (FIs) Real-time authorization of check transaction against consumer’s DDA (for participating FIs)

9. HOW Visa POS Check WORKS 1. The merchant scans the customer’s check through the check-reading equipment. The terminal electronically captures the data from the check’s MICR encoding. 2. The merchant enters the purchase amount and any required customer identification information. 3. The terminal converts the MICR data to a formatted POS Check transaction and sends it to Bank of America Merchant Services for processing. 4. The check transaction is processed and routed to the customer’s bank or a third-party check authorizer and an authorization response is forwarded to the merchant’s terminal. 5. If the check is authorized, terminal prints a sales receipt for the customer’s signature 6. To complete the transaction at POS, the merchant voids the paper check. 7. The voided check is returned to the customer together with a copy of the signed receipt. 8. Settlement occurs daily by Visanet or ACH. HOW Visa POS Check WORKS 1. The merchant scans the customer’s check through the check-reading equipment. The terminal electronically captures the data from the check’s MICR encoding. 2. The merchant enters the purchase amount and any required customer identification information. 3. The terminal converts the MICR data to a formatted POS Check transaction and sends it to Bank of America Merchant Services for processing. 4. The check transaction is processed and routed to the customer’s bank or a third-party check authorizer and an authorization response is forwarded to the merchant’s terminal. 5. If the check is authorized, terminal prints a sales receipt for the customer’s signature 6. To complete the transaction at POS, the merchant voids the paper check. 7. The voided check is returned to the customer together with a copy of the signed receipt. 8. Settlement occurs daily by Visanet or ACH.

10. Authorization - Third Party vs “Participating Bank” It works whether the customer’s bank participates or not! Participating Transaction: Currently, only a limited number of drawee banks participate in supporting VISA POS Check. What this means is that only the checks drawn on these participating drawee banks can be accessed in real time for authorizations. VISA continues to spend considerable money and effort to increase additional bank participation in the POS Check program.It works whether the customer’s bank participates or not! Participating Transaction: Currently, only a limited number of drawee banks participate in supporting VISA POS Check. What this means is that only the checks drawn on these participating drawee banks can be accessed in real time for authorizations. VISA continues to spend considerable money and effort to increase additional bank participation in the POS Check program.

11. VISA POS Check Drawee Financial Institutions This is the most up-to-date listing of participating FI’s. You should feel free to ask for the most current list prior to any major presentations you have coming up.This is the most up-to-date listing of participating FI’s. You should feel free to ask for the most current list prior to any major presentations you have coming up.

12. VISA POS Check Service Options While “Conversion Only” is listed as an option, it is not in use by any of our customers today. Virtually all merchants will want the benefit of the check protection systems that are available. And Conversion with Verification is provided at the exact same cost as Conversion Only.While “Conversion Only” is listed as an option, it is not in use by any of our customers today. Virtually all merchants will want the benefit of the check protection systems that are available. And Conversion with Verification is provided at the exact same cost as Conversion Only.

13. VISA POS Check Service Options Conversion with Verification The check authorization message is routed to VisaNet and then to either the customer’s Participating Bank Check paid based on current information at participating drawee - acct. status & balance Check paid based on checking account’s eligibility for electronic check conversion Some drawee banks place a post hold on funds OR the third-party authorizer Check will be authorized/ verified against their available databases, historical activity of the account and risk logic Check will be authorized based on known eligibility for conversion to an electronic item The third-party authorizer returns the accept or decline decision to point of sale The merchant retains the risk if the transaction does not clear the check writer’s account.

14. VISA POS Check Service Options Conversion with Guarantee In addition to the steps taken for Conversion with Verification, the customer’s bank or a third-party authorizer determines whether the check can be guaranteed for payment based on available funds or other information. The rate the merchant pays for guaranteed transactions is a percentage of the face value of the check plus per transaction fee. The check guarantor accepts the risk if the transaction does not clear the check writer’s account.

15. Participating Drawee DDA Market Share – August 2005

16. Business Case for VISA POS Check Benefits to Government Agencies Significantly reduce net check expense Better loss prevention – reduce risk of accepting checks – access to DDA’s Faster, higher percentage of bounced check collections @ lower cost Government Agencies collect returned check service fees at little cost Reduced cost on a per item basis Minimize or remove bank fees – deposit, encoding, return fees Streamline handling/ reporting for debit, credit & check Faster check out experience for customer Fewer paper checks in the your environment Faster funds movement – same schedule as credit items Settle with other payment types Government Agencies “stay whole” until fatal returns Single source of reconciliation & reports Single source of tech support Consumer acceptance is long since proven by Walmart, GAP, Burlington Coat Factory and other major retailers.

17. Guarantee vs. Verification Knowing which option is right for your department Example: Building Permits vs. Motor Vehicle Administration Can your agency easily rescind what it has granted to enforce collection on returned checks? Could your agency or department be out a significant amount of money if numerous persons abuse the system? Do you have the staff and time to track down those whose transactions are declined? Would using your staff in this way be a productive use of time, or would it be better to pay a percentage and let the bank take the risk?

18. Possible Drawbacks/Complications Consequences to Government Agencies Example: Parking Tickets How will the city/county handle declines on checks offered as payment? Are they willing to require a different form of payment if the Third Party database declines a citizen’s check? What will they do if the citizen doesn’t have a credit or debit card? Will the citizen have any legal recourse if the city refuses his/her check?