This document summarizes a presentation given by Chris Dunne and Neil Burton of Earthport on the changing role of utilities in payments. The presentation discusses how regulation has driven innovation in the UK payments market through the development of faster payment services for ACH, cash ISA transfers, and account switching. It provides case studies on each of these developments and argues that utilities should focus on addressing the end-to-end value proposition and leveraging existing infrastructure to fill gaps in the international low-value payments market. The presentation concludes with five principles for utilities, including leveraging economies of scale and keeping value within the existing infrastructure providers.

1. © 2012 Earthport Plc. All Rights Reserved. Because there’s a better way.

2. “An invasion of armies can
The changing role of utilities be resisted, but not an
idea whose time has
come.”
Victor Hugo
Chris Dunne, Vocalink
Payment Services Director
Neil Burton, Earthport
Director, Product Strategy
Sibos, Osaka, Japan
1.11.2012
© 2012 Earthport Plc. All Rights Reserved. Because there’s a better way.

3. The changing role of utilities
“Infrastructure
investment is
concentrated on fine
tuning…, not on
meeting present and
future needs of the
digital economy.”
Bruce Summers 'Facilitating
Consumer Payment Innovation in
the U.S...’ 2012
“Half of all large IT
Regulations, projects—defined as
more those with initial price
regulations tags exceeding $15
million—massively blow
their budgets…
Software projects run
the highest risk of cost
and schedule overruns”
Delivering large-scale IT projects
on time, on budget, and on value,
McKinsey Oct 2012
© 2012 Earthport Plc. All Rights Reserved. Because there’s a better way.

4. Regulation can drive benefits as well as costs
With regulators placing ever-increasing demands on banks, bank-owned
utilities are natural candidates for taking on more. In what areas should
they focus?
We will discuss:
• Market research into the role of utilities
• How regulation, or the anticipation of regulation, has driven the
payments market in the UK
• How this principle can be applied to international transactions
• Some principles for assessing candidate services
© 2012 Earthport Plc. All Rights Reserved. Because there’s a better way.

5. In the beginning infrastructure was the innovation
© 2012 Earthport Plc. All Rights Reserved. Because there’s a better way.

6. New entrants are challenging the system
© 2012 Earthport Plc. All Rights Reserved. Because there’s a better way.

7. Changes will require infrastructures to innovate
20.0%
30.0%
Source: Nick Senechal
© 2012 Earthport Plc. All Rights Reserved. Because there’s a better way.

8. Infrastructures must engage more with the market
Source: Nick Senechal
© 2012 Earthport Plc. All Rights Reserved. Because there’s a better way.

9. Changing payments market in the UK
Source: UK Payments Council
© 2012 Earthport Plc. All Rights Reserved. Because there’s a better way.

10. Changing payments market in the UK
Source: UK Payments Council
© 2012 Earthport Plc. All Rights Reserved. Because there’s a better way.

11. Case study 1: Faster payments
• Bacs ACH service in the UK operates at very high volume (almost 6
billion transactions per year) at D+2
• Office of Fair Trading Payment Systems Task Force identified the
need “to reduce clearing times on electronic payments between
banks following telephone or internet instructions from customers, as
well as standing orders”
• Faster Payments service launched in 2008 to meet this requirement
© 2012 Earthport Plc. All Rights Reserved. Because there’s a better way.

12. Faster Payments – more than ACH migration
Internet and telephone banking payments
35
New electronic transactions
30
Number of payments per month millions
25
20
15
10
5
0
Jun 05 Dec 05 Jun 06 Dec 06 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09 Dec 09 Jun 10 Dec 10 Jun 11
Source: UK Payments Council Bacs Faster Payments (from June 2008)
© 2012 Earthport Plc. All Rights Reserved. Because there’s a better way.

13. Faster Payments – Drivers for growth
Migration of standing orders
Changing customer behaviour
Increased corporate/govt use
Increased transaction limit
© 2012 Earthport Plc. All Rights Reserved. Because there’s a better way.

14. Case study 2: Cash ISA transfer
• Office of Fair Trading in the UK received a ‘super complaint’ from
Consumer Focus
• The OFT's investigation in 2010 found that, across the period April 2008 -
April 2010, transferring cash ISAs took just over 26 calendar days on
average, with 25 per cent of transfers taking longer than 30 calendar days
• An OFT review published in March 2012 has found that providers of cash
ISAs have shortened transfer times significantly since the OFT intervened
in 2010. The review found that more than 90% of all cash ISA transfers
carried out in 2011 were completed within 15 working days
• Automated service launched in October 2012 building on the ACH
infrastructure that will significantly enhance the speed and efficiency of
the process.
Source: UK Office of Fair Trading
© 2012 Earthport Plc. All Rights Reserved. Because there’s a better way.

15. Case study 3: Account switching
• Currently it takes 18-30 days to switch current accounts in the UK
• Switching rates are low, and there is a public perception that switching
is difficult and prone to problems
• The Independent Commission on Banking identified an improved
switching service as a key driver to improve competition in retail
banking
• Payments Council has commissioned a new service to deliver in
September 2013, building on the existing ACH infrastructure. It will
deliver:
• a faster service - reducing the time it takes to switch just seven working days;
• a hassle-free service - all payments will be automatically transferred to a
customer’s new account;
• peace of mind – the new service will be backed by a customer guarantee.
Source: UK Payments Council
© 2012 Earthport Plc. All Rights Reserved. Because there’s a better way.

16. Case study 4: Low value international payments
Fast growth segment driven by Analysts often refer to
payments as a
commodity business...
• Globalisation this isn’t true for cross-
border payments.
• Growing cost-effectiveness of smaller lots of cross
border trade Cross-Border Payments
Perspectives, Glenbrook
Research Brief 2011
• Regulators (and consumers?) demanding
transparency
Requirement is more like domestic credit transfer than
corporate cash management - suggests a utility
© 2012 Earthport Plc. All Rights Reserved. Because there’s a better way.

17. The market gap
Analysts often refer to
CLS payments as a
commodity business.
High This isn’t true for cross-
value border payments.
RTGS Correspondent Cross-Border Payments
Banking Perspectives, Glenbrook
Research Brief 2011
Even though they
Hybrid/’Global
ACH undercut the banks,
Low ACH’
money-transfer agents
value earn mouth-watering
margins on remittances
Non-bank providers
The economist, Over the sea and
far away, May 19th 2012
Domestic International
© 2012 Earthport Plc. All Rights Reserved. Because there’s a better way.

18. Five principles
Why do we seem to
• Leverage economies of scale make our products so
complex and difficult to
use?
• Re-use tracks, skills & competencies How do we expect to
help our customers
become more efficient,
when we are not efficient
ourselves?
• Keep value inside the tent
Why is it that so many of
the successful
innovations in our
• Address the end to end value proposition industry are pioneered by
non-banks?
If the internet is
ubiquitous and free, why
• Action is the antidote to disintermediation should we pay SWIFT for
messaging?
Heidi Miller, JP Morgan Treasury
Services
© 2012 Earthport Plc. All Rights Reserved. Because there’s a better way.