25 th Annual Idea Exchange Innovative Payment Techniques Mark K. Webster, CPA, CCM Partner Treasury Alliance Group, LLC Specialists in Payments and Treasury Consulting
Agenda Payments in Transition Key Trends Closing Thoughts Q&A Page 1
Payments in Transition
Change is good! Page 3
Unless you have to pay for it! 1960 Page 4
The battle for dominance Coin and currency were dominant until the middle of the 20 th century Checks became predominant by the 1960s Credit cards entered the picture in the 50s ACH joined the battle in the 70s Debit cards in the 80s Page 5
Changing Payment Patterns Source: FRB Page 6
The Tipping Point Page 7
Retail Payment Mix Sources: Unisys, Global Concepts, Talon Page 8
U.S. Retail Payment Volume 120 100 (billions) 80 60 40 Electronic Conversion Check 20 0 1979 1995 2000 2010 Sources: FRB, ABA, Global Concepts Page 9
Forces behind change New Technology Economics Channel/Location Market demand/acceptance Need for accurate and timely remittance information Regulatory changes & demands Page 10
Key Trends
Key Trends Check Conversion Page 12
Point of Purchase (POP) Blanket Authorization Check presented at POS MICR Information Captured OK -all checks Authorization Signed by Consumer Check and Receipt handed back to consumer Electronic Network Payee s Bank (ODFI) Consumer s Bank (RDFI) Page 13
Accounts Receivable Check (ARC) Consumer receives notice in bill Check presented at Lockbox or dropbox MICR Information Captured Check Imaged Electronic Network Check Destroyed Merchant Payee s Bank (ODFI) Consumer s Bank (RDFI) Page 14
Back Office Conversion (BOC) Check presented at POS Checks collected in back office MICR Information Captured Check Imaged Electronic Network Check Destroyed Merchant Payee s Bank (ODFI) Consumer s Bank (RDFI) Page 15
Why ARC? To reduce deposit fees Most Billers are saving $.01 - $.03 per transaction with ARC NACHA quotes 35 50% reduction in return fees To reduce number of returns NACHA quotes that this has been reported as high as 50% by current ARC billers 15 20% reduction is a conservative estimate Faster notification of returns 3-4 days after settlement vs. 5-10 for checks To reduce operational costs Reduced labor, equipment, supplies etc. Reduced errors, overtime, and holdover Faster collection 1 day settlement for all ACH items versus 0-2+ days for checks Page 16
Conversion Challenges Not all checks can be converted! Choice of payment method moved from payer to payee Potential legal issues Impact on reconciliation/fraud control systems Ability to get copies of the check Yes, I KNOW it s against the rules, but your check IS going to be converted. Page 17
Key Trends Check Conversion Check Truncation Page 18
Legalized substitute checks Check 21 Became effective October 2004 for ALL checks DOES NOT require image processing Does create foundational framework for image Front Back Page 19
Payment Process Traditional Paper Collection Check Check Check Intermediary BOFD Paying Bank Substitute Check Collection Check Image Intermediary Sub Ck or BOFD Paying Bank Image Page 20
Truncation Challenges Procedure changes Some of your checks will become substitute checks Page 21
Truncation Challenges Procedure changes Service disruptions ARP/Positive Pay may be problematic Statement cycles may be extended Customer service/problem resolution may take longer Product changes/enhancements may be delayed Page 22
Truncation Challenges Procedure changes Service disruptions Price changes Bank margin pressures may result in attempts to increase prices Physical check processing will become more expensive Page 23
Truncation Challenges Procedure changes Service disruptions Price changes Float impact Disbursement float will be reduced Collection float may be reduced End result will be pressure on available cash Page 24
And let s not forget check fraud! Are you expecting this? Or this? More importantly, what will your local prosecutor or AG expect?? Page 25
Remote Deposit Capture Check presented at POS/Agency Check Image Captured Electronic Network Images consolidated and sent to central bank Payee s Bank (ODFI) ACH IMAGE IRD Consumer s Bank (RDFI) Consumer s Bank (RDFI) Consumer s Bank (RDFI) Page 26
Remote Deposit Capture Potential Benefits All items eligible Minimal retraining No customer notice needed Reduce costs associated with courier services Reduce work involved in deposit preparation Reduce work in account reconciliation Later deposit deadlines can expedite posting Remote deposit capture coupled with image exchange will eventually improve availability and cash flow Page 27
Key Trends Check Conversion Check Truncation Debit vs. Credit Cards Page 28
Card Usage is growing Source: Nilson Report Page 29
Debit is taking over Purchases (billions) 16 14 12 10 8 6 4 2 0 Debit Cards Credit Cards '90'91'92'93'94'95'96'97'98'99'00'01'02'03 Source: Nilson Report, FRB Page 30
Signature vs. Pin Debit Source: ATM & Debit News, Nilson Page 31
But don t forget Wal-Mart Signature based debit card interchange fees were reduced by one-third on August 1, 2003 Beginning January 1, 2004, merchants may choose which cards to honor By or before EOY 2005, banks will need to reissue debit-only cards to distinguish them from credit cards And the battle continues Even with interchange, cards may be the least cost alternative! Page 32
Key Trends Check Conversion Check Truncation Debit vs. Credit Cards P Cards Page 33
P-Cards Today The 3 Ps Page 34
Procurement Cards Widely acknowledged as a best practice in purchasing/disbursements Gunn Partners study estimates an average savings of $47.75 per transaction based on average procurement cost of $77 Both MC and Visa are using interchange rates to incent merchants to include detailed (Level III) purchase data with transactions Growth in online purchasing makes p-cards even more attractive Page 35
Payroll Cards Particularly popular among retail and hospitality industries. Major employers using them include: McDonald's Lowe's Sears UPS FedEx Cingular Wireless Blockbuster Office Depot Coca-Cola Source: Wall St. Journal Page 36
Payroll Cards vs. Direct Deposit More convenient Easier to use Saves time/faster Can get money faster Instant access to money Don t have to have checking account Easily accessible Page 37
Prepaid Cards Stored Value Cards Gift Cards Campus Cards Insurance Cards Incentive Cards Flexible Spending Accounts (FSA) Other??? $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Prepaid Cards (millions) 2003 2004 2005 Source: American Banker, Mercator Page 38
Key Trends Check Conversion Check Truncation Debit vs. Credit P Cards Payment Hubs Page 39
Enterprise Payments Hub Internet Balancing & Recon Returns & Repair Reporting & Analytics Security & Risk Mgmt Bank 1 Treasury Workstation A/P Shared Services Manager Payments Hub Bank 2 A/R Release Mgmt Least Cost Routing Translation Messaging Bank 3 POS Data Management Payroll Bank n Payments Customers Rules Page 40
Why Payment Hubs Reduced cost Improved flexibility Faster response time Open standards Fewer exceptions/improved STP Improved compliance Bank independent Network agnostic Page 41
Closing Thoughts
Closing Thoughts Payments are more than moving money, they re also moving and managing information. Electronic payments can make the movement of information easier, but may complicate the management of that information if not implemented carefully. There will always be new payment methods. Developing a long term implementation and migration strategy is not a one time decision. Rather it is a commitment to your future success and peace of mind. Keep your options open. Remember Mencken: For every complex problem there is an answer that is clear, simple, and wrong. Page 43
Payments What are your goals? Maintain controls/minimize cost Streamline payments process Convert payments from paper to electronic Minimize risk and fraud Increase customer satisfaction Page 44
Questions? Page 45
For further information: Mark K. Webster, CCM, CPA Partner Treasury Alliance Group, LLC http://www.treasuryalliance.com mark.webster@treasuryalliance.com (216) 375-4155 (mobile) (216) 932-1678 (office) Page 46