The Fourth Way and a Better Way

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1 WHITE PAPER The Fourth Way and a Better Way Staying competitive in the payments arena Trends and technology continue to increase the ways consumers and businesses can make and receive payments. As a digital banking innovator, Q2 offers financial institutions (FIs) a platform with best-inclass security that supports ACH, Wire, and tax payments as well as innovations like ACH Prefunding and Same Day ACH, all within an intuitive UX.

2 Ways to pay The fourth way Currently, the U.S. has three ways to electronically move money between accounts and institutions ACH, Wires, and card payments. While over a dozen other countries have had a fourth, real-time method for some time, the U.S. has just recently begun to look at new ways to move funds quickly, securely, and cost-effectively. At this point, there s no federal mandate to institute this fourth way, but the Federal Reserve and The Clearing House (TCH) will help facilitate this real-time payment solution currently under development. As it goes into beta, the largest FIs will test this new, instant means of funds transfer. Once complete, this fourth way will have the potential to make truly instant payments ubiquitous nationally. But because this new money movement method is being developed and tested privately by large, traditional software and banking entities, it is likely that many of the common complaints FIs have with their existing payments solutions will creep into the fourth method. Likely pitfalls include limited mobile access, difficult or inefficient user experience, and security concerns. Additionally, smaller and community-focused banks and credit unions have had little to no part in this development, raising questions about exactly how this new real-time functionality will trickle-down to them or integrate with their business models. A competitive consumer landscape The number of payment front-end options is increasing. Recent years have seen the proliferation of FinTech payment providers like Stripe, Square, Fortumo, Mozido, boxpay, and dozens of others. These providers have fragmented the market, allowing consumers to employ a multitude of solutions. The average number of payment methods used per consumer increased from 2.9 in 2014 to 3.6 in Only 10% of consumers who pay bills are using a single method, while 70% are regularly using three or more bill pay methods. In the mobile space, FIs mobile apps or sites only account for 41% of mobile usage, while billers mobile sites and apps account for 49%. The average number of payment methods used per consumer increased from 2.9 in 2014 to 3.6 in As the fourth method rolls out, providing another back-end payments solution for FinTech to take advantage of, it s likely we ll see even more applications emerge, able to tout real-time payments and increased efficiency. FIs looking to increase engagement around payments and, in doing so, generate additional revenue, leverage more data, and increase deposits require payment options that fit their account holders needs and expectations. 2

3 All the ways you pay, but better Q2 isn t a payments company. We don t provide back-end payments functionality. Instead, we offer a front-end user experience through which payment processors (ACH, Wires, card, and soon real-time payments), can be accessed. We provide an array of features housed within a unified and secure platform that effectively ensure FIs can provide their consumer, business, and corporate account holders with all the necessary transactional features they require. In addition, we re working towards creating and expanding technologies and strategies for payments through our recent acquisition of Unbill, for example that will provide our FI customers with fast payment options that can also generate new revenue opportunities. Our approach to payments includes innovations and benefits such as: 1. ACH To address the need for fast payment options, Q2 has developed a streamlined, easy-to-use platform for ACH origination, including the following features: ACH Prefunding This add-on feature to the Q2 Platform supports a guaranteed funding model. ACH Prefunding enables FIs to make a real-time transfer from an end user s account at the time of ACH processing (before the effective date). This is done by holding the appropriate funds in an escrow account also called a funding or settlement account. ACH Prefunding can be enabled for Payroll, Single Payment, Batch Payments, Tax Payments, and External Transfers. This provides an additional layer of financial security for the involved parties by guaranteeing the necessary funds will be available as needed. Q2 can provide ACH Prefunding for external transfers for any core system that is not a Card Agreement Core, or cores that don t support realtime funds transfers. Testing is required to determine if transfers across card agreements will be possible. Same Day ACH This fast payment option lets FIs easily and securely send same-day ACH transactions to accounts at Receiving Depository FIs (RDFIs). To meet our clients and their account holders needs, Q2 supports these same-day options: ACH Payments ACH Single Payment ACH Payroll ACH State Tax Payments ACH External Transfers ACH Collections ACH Single Receipts ACH Entitlements by Group, Customer, and User To track fees generated by the demand for quicker payment turnaround, Q2 will create a separate line item in our fee plans specific to this feature. This will help FIs charge their account holders for Same Day ACH access separately from other fee-generating transactions. We will also support reporting of Same Day ACH transactions from Q2central. 3

4 2. Wires & File-to-File Transfers In addition to ACH, the Q2 Platform supports Wire transfers as well as reporting around Outgoing Wires and Wire Activity. Our Wire functionality includes: Domestic & International Wires ABA Lookup Batch Cross-Currency (FX) Rates And under development for 2018: Real-Time FX Rates SWIFT/BIC Lookup An optimized Multi-Wire entry in-line with our always-improving user experience Q2 also offers File-to-File Transfers and the ability to import payments files into the Q2 Platform for greater efficiency, especially surrounding large numbers of payments. 3. Unified User Experience (UUX) & Mobility Q2 s focus on user experience is in-line with current trends across an array of industries and is arguably setting a new standard across the banking industry. Our mobile-first, experience-driven design helps streamline tasks and makes using digital banking tools simpler and more intuitive for both the FI and their account holders within consumer, business, and corporate functionality. There s a case to be made that most account holders care more about experience than how their FI processes their payments. There s a case to be made that most account holders care more about experience than how their FI processes their payments. Payments can be made in a variety of ways and, while there is pending time, card payments (for example) can fit nearly any of their routine payment needs. Bill Pay adoption trends tend to illustrate some degree of ambivalence by account holders. In short, the presence of a specific back-end payment option like the real-time method currently under development simply isn t a deciding factor for most users, whereas ease-of-use, mobile accessibility, and other experiential factors can have a powerful impact on adoption, and retention. This trend away from FIs mobile bill payment solutions to billers mobile solutions is problematic but a better, simpler, more attractive, and comprehensive mobile/user experience can work towards account holder adoption and retention in the bill pay arena. 4

5 4. Security Q2 s commitment to security is a powerful differentiator in the payments space. Rather than simply putting safeguards in place, Q2 manages security through a three-pronged approach, focusing on people, processes, and technology. We provide training and insights to help users navigate security issues, assist FIs in developing and implementing processes designed to reduce risk, and offer best-in-class technology to identify and stop fraud before it occurs. Our unified platform provides integrated security, presenting fewer exposure points. By combining real-time analytics, behavioral scoring, and endpoint interrogation with in-house, multi-factor, and out-of-band authentication, Q2 s layered approach to security prevents unauthorized log-ins and stops fraudulent transactions before they re completed. And because our native security tools continue to learn with every transaction, our customers assets and reputations are safe from today s threats and tomorrow s. This is true of all transactions through the Q2 Platform, from a simple consumer card payment to a corporate entity s ACH Payroll. While many payment providers have security solutions that manage specific types of payments, they lack the data of Q2 s single platform. Put simply, the extensive amount of information we have access to as a comprehensive provider of digital banking helps arm our security tools with models of typical and therefore atypical or potentially fraudulent user and account behavior. 5. Q2 P2P P2P fulfills the real-time money transfer needs of account holders. The majority of consumers prefer to use their FI for all of their financial services and transactions, with the primary reason being security. While person-to-person services have become fairly common even expected among digital banking users Q2 s focus on a layered, multi-pronged approach to security makes Q2 P2P a powerful differentiator for FIs. In addition to being secure, this real-time money transfer feature is also simple to use. FIs can white-label Q2 P2P as well, giving account holders a person-to-person payment option within a trusted and familiar identity. While many payment providers have security solutions that manage specific types of payments, they lack the data of Q2 s single platform. 6. Analytics FIs are sitting on a wealth of account holder data. Q2 s ability to both provide timely, secure, and simple payment options, as well as leverage that data in our security solutions and Q2 SMART, makes us a valuable partner to FIs. Our focus on user/mobile-first design as well as security helps us compete with the many other payment options available to consumers. This results in greater engagement, a more complete set of transactional data, and therefore better, more actionable analysis of that data in FI marketing and security. 5

6 7. Innovation It s rare for core providers and other banking solutions companies to invest in innovation. Q2 on the other hand invests a sizable percentage of revenue into research and development of new strategies, technologies, and futureminded acquisitions. Q2 recently acquired Unbill, for example, to become a part of the Q2 Labs innovation team. While we are still developing our offering and strategy around Unbill, its biller direct model has the ability to: Support card payment options that provide consumers with rewards points and FIs with the opportunity to generate interchange fee revenue from debit and credit cards used for payments. Support bill splitting and partial payments when applicable/available. Fueled by our mission of helping community-focused FIs compete, Q2 will undertake the task of making sure smaller FIs can benefit from this new payments scheme as well by integrating it into our user-first, secure, and intuitive platform. Offer access to substantially more data about bills, creating opportunities for proactive alerts. Support expedited payments, which are highly valued by,and essentially expected by, many new market segments, especially where cash flow is variable. When the fourth way rolls out, it will initially be beta tested and rolled out to the largest banks. Fueled by our mission of helping community-focused FIs compete, Q2 will undertake the task of making sure smaller FIs can benefit from this new payments scheme as well by integrating it into our user-first, secure, and intuitive platform. It s worth noting as well that, unlike ACH, Wires, and cards, this new method will make a wealth of data available to travel with payments to FIs. This has the potential to revolutionize finance and analytics. Q2, already innovating with Q2 SMART and our analyticsdriven security suite, is ready to participate even lead this push into deeper data engagement in the community banking space. 6

7 A unified competitive advantage Q2 offers the competitive advantage of providing comprehensive digital banking functionality to FIs, including numerous ways to make payments in a timely manner. By doing so within a unified user experience with native security features and analytics, Q2 does more than simply provide a means to make fast and easy payments we offer the security, innovation, functionality, data, and partnership to help FIs stand apart from their competitors; scale their business intelligently through back-office efficiency and solutions for businesses of every size; and grow beyond their current technology and strategy to increase revenue and digital reach. Q2 doesn t make payments happen, but we do make it easier and more secure for FIs to originate them. When the fourth, real-time payments methods rolls out, we will continue to do the same leveraging our best-in-class experience to help FIs make the most of all four options. Q2 doesn t make payments happen, but we do make it easier and more secure for FIs to originate them. Q2 s future-minded, user-first development will continue to differentiate our FI partners in the market. Ultimately, consumers don t care how payments are settled i.e. the back-end technology they just want their payments settled. Business and corporate account holders may have deeper concerns about backend functionality, but the Q2 Platform offers and will continue to offer access to all the relevant payments processes. And we ll continue to do this simply, quickly, and securely. Moving forward, payment solution opportunities like those within Unbill, combined with our ability to leverage analytics, will grant FIs more ways to provide payments, generate revenue, and create greater engagement in a highly competitive market. To learn more about the features, usability, and innovation of the Q2 Platform, visit us online at q2ebanking.com or call us today at (512) ext. 2.