Digital Payments

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Digital Payments
Jim Woodworth Head of Marketing, ACI Worldwide
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Firstly, who are ACI ?
ACI software process 300 billion digital payments
per year
www.aciworldwide.com
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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 ChipPIN
• Fraud in the virtual world_at_ SET, 3D Secure,
  Tokens
• Future Developments
• New payment schemes
• 4 Market Forces

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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 ChipPIN
• Fraud in the virtual world_at_ SET, 3D Secure,
  Tokens
• Future Developments
• New payment schemes
• 4 Market Forces

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A brief history of payments
Courtesy of www.visa.com
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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
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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 ChipPIN
• Fraud in the virtual world_at_ SET, 3D Secure,
  Tokens
• Future Developments
• New payment schemes
• 4 Market Forces

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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

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Payment Types and Volumes - UK
Transaction  1998 1999 2000 2001 2002 2003 2004 2005
volumes in the UK (millions) 1998 1999 2000 2001 2002 2003 2004 2005
Plastic card purchases 3,094 3,537 3,923 4,387 4,821 5,318 5,739 6,094
Debit card 1 1,736 2,062 2,337 2,696 2,994 3,364 3,690 4,084
Credit and charge card 1 1,224 1,344 1,452 1,562 1,687 1,822 1,949 1,924
Store card 1,2 134 131 134 129 140 132 100 83
Plastic card withdrawals at ATMs and counters 1,917 2,030 2,090 2,250 2,342 2,457 2,615 2,807
Direct debits, Standing orders, direct credits and CHAPS sterling 3,055 3,252 3,469 3,706 3,930 4,271 4,827 5,378
Cheques 2,988 2,859 2,702 2,567 2,394 2,251 2,089 1,931
For payment 2,768 2,654 2,526 2,401 2,247 2,110 1,966 1,846
For cash acquisition 219 205 176 165 147 141 122 86
Total non-cash (plastic card, automated and paper) 11,053 11,674 12,176 12,914 13,484 14,296 15,270 16,207
Cash payments (estimate) 25,309 25,596 27,910 27,684 26,622 25,859 24,916 23,968
Post office counter and passbook withdrawals 3 1,019 962 879 792 687 595 395 257
Total transaction volumes 37,381 38,236 40,966 41,421 40,792 40,748 40,580 40,432
Source APACS
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Schemes, Issuers, Acquirers etc.
Payment/Settlement organisation
Fees
Fees
Services
Services
Issuing Bank
Acquiring Bank
Interchange Fee
Services
Fees
Fees
Services
Customer/Payer
Merchant/Receiver
Goods
Goods
Payment
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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

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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

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On-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

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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 ChipPIN
• Fraud in the virtual world_at_ SET, 3D Secure,
  Tokens
• Future Developments
• New payment schemes
• 4 Market Forces

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Internet Payments are increasing dramatically
Internet Payment Volumes 1999 2005 Volumes
(millions) 19 310 Value (
billions) 1 22
In 2012 it is forecast that 10 of card
transactions will be over the Internet
Source APACS
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There is huge fraud on payment cards
Type of Fraud
Total (mill)
Increase
97

Counterfeit Card
183
-
Card Not Present
89
-
Lost and Stolen
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?
Mail Non-Receipt
2003
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?
Identity Theft
2003
FRAUD FIGURE FOR 2004 504 Million !!!!
FRAUD FIGURE FOR 2005 439 Million !!!!
Source APACS, Cardwatch, www.apacs.org.uk
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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

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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?

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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 ChipPIN card and low-cost reader to
  generate one-time passwords
• Smart Card Readers in PCs

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How it works One Time Password
Card is introduced
Cardholder push for One-Time password
Cardholder enters his PIN
The secret is in the chip card
If PIN correct, card/Reader generates a dynamic
password e.g. 1788 0357 which changes at each
authentication
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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 ChipPIN
• Fraud in the virtual world_at_ SET, 3D Secure,
  Tokens
• Future Developments
• New payment schemes
• 4 Market Forces

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4 Market Forces that Determine the Payment Model
Merchant Proposition Value proposition Cost of
Acquisition Cost of Retention Pricing
Public Policy Issues Regulation Equal
Access Competitive Framework
SUSTAINABLE BUSINESS MODEL
Trust Brand Issues Branding Security
Consumer Proposition Cost of Acquisition Cost of
Retention
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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
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A brand is a pre-requisite of any payment system

• 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

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Merchants are crucial to a payment system

• Banks have a comprehensiveMerchant 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

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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 35its
  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
  servicewhen the phone is provisioned

MAKE IT EASY AND PEOPLE WILL USE IT
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The Future Decoded Mobile Commerce
Symbol Market Force Good 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
Regulator Friendly
Brand Friendly
Merchant Proposition
Consumer Proposition
www.simpay.com
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The Future Decoded Contactless
Symbol Market Force Good 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 ?
Regulator Friendly
Brand Friendly
Merchant Proposition
Consumer Proposition
Ideal for small value payments
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The Future Decoded Non-bank Payment Types
Symbol Market Force Good 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 dont handle. Customer service
issues. Consumers are OK with it .. In one niche
(auctions) will they adopt it in other
scenarios ?
Regulator Friendly
Brand Friendly
Merchant Proposition
Consumer Proposition
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The Future Decoded Faster Payments
Symbol Market Force Good OK Bad
Regulator Friendly
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
Brand Friendly
Merchant Proposition
Consumer Proposition
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The Future Decoded E-purses
Symbol Market Force Good OK Bad
Regulator is OK 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 !
Regulator Friendly
Brand Friendly
Merchant Proposition
Consumer Proposition
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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 e-purses. 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

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Finally
But Cash will always be king
especially, if you owe me money
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www.aciworldwide.com