Alternative Payments Perspectives

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1 Peter Davey, VP Payment Strategy & Industry Robert Mau, Expert Alternative Payments Perspectives EastPay Information Interchange February 26, 2015

2 Welcome to Gringotts Wizarding Bank Established in 1474 SOURCE: 2

3 Has banking really changed that much over the past 541 years? SOURCE(s): & Peter Davey 3

4 The banking industry as a whole is moving at a much slower pace of change than the rest of the payments industry Circa 1980 s Circa 1950 s Modern Branch Design SOURCE: 4

5 In the US, Cash is still king when it comes to the volume of payments transactions US Payments Transactions Volume billions Cash 80 Debit Card Credit Card ACH 20 Prepaid Check 0 Wire Transfer E 15E 16E 17E 2018E SOURCE: McKinsey U.S. Payments Map, Release Q

6 Payment transaction dollars are dominated by ACH and Check US Payments Transaction Dollars $ billions 60,000 ACH 45,000 30,000 Check Wire Transfer 15,000 Credit Card Cash Debit Card Prepaid Average dollar amount per transaction by payment type Cash Debit Card Credit Card ACH Check Prepaid Wire $19 $39 $95 $2,267 $1,480 $25 $70,155 SOURCE: McKinsey U.S. Payments Map, Release Q

7 U.S. financial institutions and other providers generate $289 billion in revenues; expected to grow at 4% annually NII Fees 2013 revenues Billions growth Percent 2018F revenues Billions, Estimate growth Percent US Payment Industry Cons. Credit Card Issuing Cons. DDA % % Bus/Gov DDA Bus./Gov Credit Card Issuing 28 29% % 7 Merchant Acquiring Money Services Other Includes Wholesale and Retail Lockbox 2 Money Services includes prepaid cards, electronic money transfer (EMT), non-bank check cashing and money orders. 3 Other includes armored transport, check verification/guarantee, travelers checks, and ISO ATM fees. SOURCE: McKinsey U.S. Payments Map, Release Q

Seven Disruptions in the Payments Ecosystem 1 2 3 4 5 6 7 Convergence occurring at digital speed Merchant

faster than consumer Payment network infrastructures are being enhanced Payments security will remain at

8 Seven Disruptions in the Payments Ecosystem Convergence occurring at digital speed Merchant payments is epicenter of disruption Digitization, data/ analytics critical to win B2B Payments is growing faster than consumer Payment network infrastructures are being enhanced Payments security will remain at the forefront Underbanked and Millennial segments driving change Convergence occurring at digital speed Commerce, payments and loyalty are colliding Payments is being integrated into the search-shop-buy consumer experience The mobile experience is connecting digital and physical shopping SOURCE: McKinsey Payments Practice 8

Seven Disruptions in the Payments Ecosystem 1 2 3 4 5 6 7 Convergence occurring at digital speed Merchant payments is

Payment network infrastructures are being enhanced Payments security will remain at the forefront Underbanked and

into business systems and put into the cloud Attackers are giving away payments as a way to sell other services

9 Seven Disruptions in the Payments Ecosystem Convergence occurring at digital speed Merchant payments is epicenter of disruption Digitization, data/ analytics critical to win B2B Payments is growing faster than consumer Payment network infrastructures are being enhanced Payments security will remain at the forefront Underbanked and Millennial segments driving change Merchant payments is the epicenter of disruption The POS terminal is being integrated into business systems and put into the cloud Attackers are giving away payments as a way to sell other services Traditional players faced with pricing compression and need to adopt new distribution models Square Register SOURCE: McKinsey Payments Practice 9

Seven Disruptions in the Payments Ecosystem 1 2 3 4 5 6 7 Convergence occurring at digital speed Merchant payments is epicenter

infrastructures are being enhanced Payments security will remain at the forefront Underbanked and Millennial segments driving

non-traditional data for risk management The acquisition march from direct mail to digital has been reinvigorated by data The

10 Seven Disruptions in the Payments Ecosystem Convergence occurring at digital speed Merchant payments is epicenter of disruption Digitization, data/ analytics critical to win B2B Payments is growing faster than consumer Payment network infrastructures are being enhanced Payments security will remain at the forefront Underbanked and Millennial segments driving change Payments businesses must increasingly leverage digitization, data and analytics to win New entrants are better leveraging non-traditional data for risk management The acquisition march from direct mail to digital has been reinvigorated by data The next big thing will be data enabled marketing engines Data sharing is transforming the cobrand card partnership SOURCE: McKinsey Payments Practice 10

than consumer Payment network infrastructures are being enhanced Payments security will remain at the forefront

undergo its own digital revolution Digitization of the AR/AP value chain is creating opportunities for

11 Seven Disruptions in the Payments Ecosystem Convergence occurring at digital speed Merchant payments is epicenter of disruption Digitization, data/ analytics critical to win B2B Payments is growing faster than consumer Payment network infrastructures are being enhanced Payments security will remain at the forefront Underbanked and Millennial segments driving change B2B Payments is growing faster than consumer - and poised to undergo its own digital revolution Digitization of the AR/AP value chain is creating opportunities for e-invoicing The catalyst is often national infrastructure upgrades sponsored by governments SOURCE: McKinsey Payments Practice 11

Seven Disruptions in the Payments Ecosystem 1 2 3 4 5 6 7 Convergence occurring at digital speed Merchant payments is epicenter of disruption Digitization, data/ analytics critical to win B2B

network infrastructures are being enhanced in the near term and possibly poised for radical change in the medium/long term Over 22 markets around the world (including the US) are upgrading national

12 Seven Disruptions in the Payments Ecosystem Convergence occurring at digital speed Merchant payments is epicenter of disruption Digitization, data/ analytics critical to win B2B Payments is growing faster than consumer Payment network infrastructures are being enhanced Payments security will remain at the forefront Underbanked and Millennial segments driving change Payment network infrastructures are being enhanced in the near term and possibly poised for radical change in the medium/long term Over 22 markets around the world (including the US) are upgrading national payments infrastructures The enhanced capability can foster new product and service innovation (micro-lending, real-time P2P) Point-to-point network architecture begins to take over from the decades old hub-and-spoke architecture SOURCE: McKinsey Payments Practice 12

security will remain at the forefront - with acceleration in EMV adoption, encryption and tokenization Target data breach and subsequent events puts Payments security merchant and consumer radar.

13 Seven Disruptions in the Payments Ecosystem Convergence occurring at digital speed Merchant payments is epicenter of disruption Digitization, data/ analytics critical to win B2B Payments is growing faster than consumer Payment network infrastructures are being enhanced Payments security will remain at the forefront Underbanked and Millennial segments driving change Payments security will remain at the forefront - with acceleration in EMV adoption, encryption and tokenization Target data breach and subsequent events puts Payments security merchant and consumer radar. EMV addresses one security component but effective risk and fraud management requires actions on encryption and tokenization Accelerated EMV will open the door to NFC payments, advantaging mobile OS players and digital wallet providers SOURCE: McKinsey Payments Practice 13

Seven Disruptions in the Payments Ecosystem 1 2 3 4 5 6 7 Convergence occurring at digital speed Merchant payments is epicenter of disruption

security will remain at the forefront Underbanked and Millennial segments driving change The growing underbanked and Millennial segments are looking

14 Seven Disruptions in the Payments Ecosystem Convergence occurring at digital speed Merchant payments is epicenter of disruption Digitization, data/ analytics critical to win B2B Payments is growing faster than consumer Payment network infrastructures are being enhanced Payments security will remain at the forefront Underbanked and Millennial segments driving change The growing underbanked and Millennial segments are looking for simpler and seamless Payment and Banking options ~20% of households in the US are Underbanked Simple, low-friction and easy to understand products have strong appeal (e.g., prepaid) Trust in big banks has eroded opening the door to nonbanks with distribution and cost advantages Large retailers with adjacent economics are seeking to fill the gap, as are smaller prepaid players and emerging peer-to-peer lending platforms SOURCE: McKinsey Payments Practice 14

15 Payments has become the hot sector and is attracting investment and activity from a number of different players Mobile payments p2p payments Network/processor Online payments Others 15

Non-financial institutions are playing a larger role in payments with a different set of strategies (1/2) Company Core business Strategic enabler P2P BillPay Merchant Services Lending P2P Merchant

Utilize purchase data for marketing Build a network of on-us payments Utilize purchase data for marketing Drive ad spend and marketing opportunities Further reliance on android and other Google

16 Non-financial institutions are playing a larger role in payments with a different set of strategies (1/2) Company Core business Strategic enabler P2P BillPay Merchant Services Lending P2P Merchant Services Software provider (search, maps, smart phone) Mobile, online and physical wallet P2P Merchant Services Inventory Management & Fulfillment P2P Build a network of on-us payments FX revenue Utilize purchase data for marketing Build a network of on-us payments Utilize purchase data for marketing Drive ad spend and marketing opportunities Further reliance on android and other Google software Primary Wallet Build a network of on-us payments Utilize purchase data for marketing Networks leveraged Credit Debit ACH On-Us Network ACH On-Us Network Credit Debit ACH On-Us Network Credit Debit 16

Non-financial institutions are playing a larger role in payments with a different set of strategies (2/2) Company Core business

customer experience Sell more handsets Attract different customers (e.g.

fulfillment Ecommerce front end Marketing engine Online wallet Social network of consumers and businesses Marketing engine Enable

17 Non-financial institutions are playing a larger role in payments with a different set of strategies (2/2) Company Core business Strategic enabler Hardware & software provider Mobile, Online Wallet Digital Commerce Ecosystem Pass through Merchant Services Own the customer experience Sell more handsets Attract different customers (e.g., merchants) Build an on-us network Networks leveraged Credit Debit Seller and re-seller of goods and services Merchant Services and fulfillment Ecommerce front end Marketing engine Online wallet Social network of consumers and businesses Marketing engine Enable ecommerce and dominate sales Make revenue on transactions and order fulfillment Utilize consumer data to monetize business relationships Facilitate social commerce transactions (P2P) Credit Debit On-Us ACH TBD 17

18 Infrastructure players are evolving while new alternative networks are gaining momentum Non-FI s like Fiserv and FIS have leveraged their size and position in the payment ecosystem to build their own private networks Traditional networks are evolving their offerings beyond credit and debit card payments Others like Coinbase and Ripple have developed networks leveraging leaner technology stacks and more sophisticated security features About a year ago, we started working with MasterCard and Amex to reinvent the account number, known in the industry as tokenization - Ryan McInerney, President Visa, Nov 2014 Today we're simplifying access for our traditional partners but we're also enabling a much broader set of partners to access these platforms in ways we have not allowed historically so, they can build experiences that use our payment of capabilities - Charles Scharf, CEO Visa, Nov 2014 There are more than 2 billion people in the world, and 70 million in the US, that are poorly served by the traditional financial system - Dan Schulman, AMEX, Oct

Finally, crypto currencies like Bitcoin provide an entirely new

transactions across the globe largely by US, China, Germany and UK

public ledger All bitcoin transactions are maintained in a public

Merchants and consumers can directly transact Exchanges facilitate

19 Finally, crypto currencies like Bitcoin provide an entirely new approach to payments Bitcoin as a currency Is used to conduct transactions across the globe largely by US, China, Germany and UK Daily transaction volume of ~$70M 1 Bitcoin as a secure, distributed public ledger All bitcoin transactions are maintained in a public ledger called the block chain Bitcoin as a transaction network Merchants and consumers can directly transact Exchanges facilitate purchases/sales into other currencies average daily volume in USD, blockchain.info 7/8/

20 There are four key components to any currency or payment mechanism 1 Core attributes Store of value Buy and hold bitcoins as an investment Positive forces Long term increase in value Cross border investment No exchange needed for investments Negative forces Lack of backing or standard of value Speculatory behavior Questions on tax treatment 2 Currency Trading for goods and services with bitcoins Easy cross border trade Very low cost of acceptance Merchants like finality of transaction (irreversible) Psydononymous, traceability of all transactions Challenges sovereign currency independence Poor store of value Lack of consumer protections 3 Network Enabling a transaction or transfer including settlement and verification Frictionless transactions Simpler network leveraging existing infrastructure Safe and secure transactions No single point of failure Fraud opportunity inherent in protocol (51% problem) Ability to grow, expand and sustain 4 Ledger of record The log or record keeping of an event or transaction Cheap and reliable Global in nature Fast transaction time Decentralized Lack of Regulator controls Complete paradigm shift required 20

21 A typical Bitcoin transaction has a complicated value chain ALT ALT Online exchanges enable 24/7 trading Online wallets store Bitcoins which can then be received or sent Goods and services On/off ramp, e.g., Coinbase exchange On/off ramp, e.g., Coinbase exchange Online wallet Online wallet Blockchain Bitcoin miner computers act as nodes Miner node Ledger Miner node 21

The application of Crypto technology could have far-reaching roles and relevance particularly in the commercial or intra bank landscape New payments protocol Secure, distributed public ledger

22 The application of Crypto technology could have far-reaching roles and relevance particularly in the commercial or intra bank landscape New payments protocol Secure, distributed public ledger Unlikely to be a currency or store of value Description Merchants and consumers can directly transact with much lower friction Exchanges facilitate purchases/sales into other currencies, remittances All transactions maintained in public ledger aka blockchain Opportunity to conduct other types of transactions (e.g., escrow services, medical records) Used to conduct global transactions, led by US, China, S America and Western Europe Daily transaction volume of ~$90MM Critical aspects Low fees (50-80% lower than existing solutions) Rapid confirmation No single point of failure Almost frictionless Permanent time-stamped proof of existence Pseudo-anonymous Distributed across the globe Secure Instant global transfer No charge-backs Anti-inflationary Infinitely divisible but volatile SOURCE: McKinsey Payments Practice 22

23 What role could crypto currencies have in the next evolution in network architecture? Hub and spoke clearing Direct clearing via distributed IP Clearing model Architecture Confirmation of Good Funds Settlement Funds Availability Banks clear through a central clearinghouse with only select direct clearing relationships Hub and spoke architecture No confirmation of good funds prior to clearing (ACH) Next day or end of day settlement Next day availability of funds Banks clear directly with one another; clearinghouses may see roles shift managing settlement ledger Leverage open Internet IP architecture Confirmation of good funds in real-time Intraday settlement windows Real-time availability of funds 23

24 Ripple labs has taken the blockchain concept and developed a different take on distributed network and ledgers SOURCE: Ripple Labs 24

Traditional players are making investments in these

Network of 260+ airlines the ability to accept

companies with ~$1B in revenue "We are very happy

additional forms of payment to the UATP processing

DFJ Growth, USAA, NYSE, and More Today we are

million in Series C financing, the largest funding

25 Traditional players are making investments in these new networks based on the promise of the technologies WASHINGTON, Feb. 10, 2015 /PRNewswire/ -- UATP has teamed up with Bitnet as a payment processing partner. This relationship will allow UATP to offer its Network of 260+ airlines the ability to accept bitcoin payments in a simplified manner. Who accepts Bitcoins? Over 30,000 merchants accept Bitcoin including companies with ~$1B in revenue "We are very happy to be partnering with Bitnet to add bitcoin to our payment platform. We are always looking for skilled partners to bring additional forms of payment to the UATP processing platform and Bitnet fits the bill well," said Ralph Kaiser, president and CEO, UATP. It s a new disruptive technology, so, yeah, we re looking at Bitcoin closely. John Donahue CEO, Ebay Coinbase Raises $75M from DFJ Growth, USAA, NYSE, and More Today we are pleased to announce that Coinbase has raised $75 million in Series C financing, the largest funding round to date for a Bitcoin company. This brings our total capital raised to $106 million. The round was led by DFJ Growth, with participation from our existing investors, including Andreessen Horowitz, Union Square Ventures, and Ribbit Capital. 25

26 Other established providers like FIS, FiServ, Visa and MasterCard have been evolving their products and networks as well SOURCE: FIS 26

Virtual Currency and Electronic Money Movers: AML Red Flags. John A. Beccia, Circle Internet Financial

Virtual Currency and Electronic Money Movers: AML Red Flags John A. Beccia, Circle Internet Financial Discussion Topics Background on Digital Currency and Emerging Payments Regulatory Update Assessing