Digital Payments

Jim Woodworth Head of Marketing, ACI Worldwide

Firstly, who are ACI ?

ACI software process 300 billion digital payments per year www.aciworldwide.com

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

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

A brief history of payments

Courtesy of www.visa.com

Two New Payment Types that VISA dont 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

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

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

Payment Types and Volumes - UK

Transaction volumes in the UK (millions) Plastic card purchases Debit card 1 Credit and charge card 1 Store card 1,2 Plastic card withdrawals at ATMs and counters Direct debits, Standing orders, direct credits and CHAPS sterling Cheques For payment For cash acquisition Total non-cash (plastic card, automated and paper) Cash payments (estimate) Post office counter and passbook withdrawals 3 Total transaction volumes 1998 3,094 1,736 1,224 134 1,917 1999 3,537 2,062 1,344 131 2,030 2000 3,923 2,337 1,452 134 2,090 2001 4,387 2,696 1,562 129 2,250 2002 4,821 2,994 1,687 140 2,342 2003 5,318 3,364 1,822 132 2,457 2004 5,739 3,690 1,949 100 2,615 2005 6,094 4,084 1,924 83 2,807

3,055 2,988 2,768 219

3,252 2,859 2,654 205

3,469 2,702 2,526 176

3,706 2,567 2,401 165

3,930 2,394 2,247 147

4,271 2,251 2,110 141

4,827 2,089 1,966 122

5,378 1,931 1,846 86

11,053 25,309 1,019 37,381

11,674 25,596 962 38,236

12,176 27,910 879 40,966

12,914 27,684 792 41,421

13,484 26,622 687 40,792

14,296 25,859 595 40,748

15,270 24,916 395 40,580

16,207 23,968 257 40,432

Source: APACS

Schemes, Issuers, Acquirers etc.

Fees
Payment/Settlement organisation

Fees Services
Issuing Bank

Services
Acquiring Bank

Interchange Fee Services Goods

Fees
Merchant/Receiver

Services
Customer/Payer

Fees

Payment

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. (its 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 its anti-competitive

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

OnOn-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

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

Internet Payments are increasing dramatically

Internet Payment Volumes Volumes (millions) Value ( billions)

1999 19 1

2005 310 22

In 2012 it is forecast that 10% of card transactions will be over the Internet
Source: APACS

There is huge fraud on payment cards

Type of Fraud Counterfeit Card Card Not Present Lost and Stolen Mail Non-Receipt Identity Theft
2003 2003

Total (mill)

% Increase

97 183 89 37 21

+ ? ?

FRAUD FIGURE FOR 2004: 504 Million !!!! FRAUD FIGURE FOR 2005: 439 Million !!!! Source: APACS, Cardwatch, www.apacs.org.uk

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 dont use chip you are responsible for the cost of disputed transactions

In the virtual world

CVV2 Verified by VISA/MasterCard SecureCode Liability Shift

Securing Internet Payments: PAIN

Privacy
Is the message secure ?

Authentication
Is it from whom we think its from?

Integrity
Has the message been tampered with?

Non-Repudiation
Can the sender not later claim it wasnt them?

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 dont want it until customers have it Customers dont see a need if merchants dont use it

An expensive lesson: Security and useability are a trade-off

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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

How it works One Time

Password
Card is introduced Cardholder push for One-Time password

The secret is in the chip card

Cardholder enters his PIN If PIN correct, card/Reader generates a dynamic password e.g. 1788 0357 which changes at each authentication

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 Market Forces that Determine the Payment Model

Public Policy Issues Regulation Equal Access Competitive Framework Merchant Proposition Value proposition Cost of Acquisition Cost of Retention Pricing

SUSTAINABLE BUSINESS MODEL Trust & Brand Issues Branding Security

Consumer Proposition Cost of Acquisition Cost of Retention

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

A brand is a pre-requisite of any payment system pre-

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

Merchants are crucial to a payment system

Banks have a comprehensive Merchant 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

The consumer must receive a benefit from any payment system Douglas Adams, GSM 2001
If an innovation happens when youre aged less than 18, its normal If it happens between the ages of 18 to 35 its learnable If it happens after 35 you dont 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 service when the phone is provisioned MAKE IT EASY AND PEOPLE WILL USE IT

The Future Decoded: Mobile Commerce

Symbol Market Force Good Regulator Friendly Brand Friendly Merchant Proposition Consumer Proposition 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

www.simpay.com

The Future Decoded: Contactless

Symbol Market Force Good Regulator Friendly Brand Friendly Merchant Proposition Consumer Proposition 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 ?

Ideal for small value payments

The Future Decoded: Non-bank Payment Types NonSymbol Market Force Good Regulator Friendly Brand Friendly Merchant Proposition Consumer Proposition 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 ?

The Future Decoded: Faster Payments

Symbol Market Force Good Regulator Friendly Brand Friendly Merchant Proposition Consumer Proposition OK Bad
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

The Future Decoded: E-purses ESymbol Market Force Good Regulator Friendly Brand Friendly Merchant Proposition Consumer Proposition
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 !

OK

Bad

Regulator is OK

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 epurses. 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

Finally

But Cash will always be king

especially, if you owe me money

www.aciworldwide.com