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Executive thinkingon payments:disconnects andopportunities

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Executive thinking on payments:Executive Views: disconnects and opportunitiesCautious Timelines While consumers await new payment technologies, merchants and financial executives are being cautious—but at what price?“Customers are really not ask-ing for mobile yet. They aren’tusing it in our [mobile paymentpilot] programs. It’s going to beyears before it’s common—at Merchants and financial institution EMV implementation, ensuring security,least five years.” executives devote a great deal of at- and costs associated with emerging —Apparel retailer tention to keeping up with changing payment methods. But they also see payment methods. They are constantly opportunities to increase revenues and“We are taking a ‘wait-and- weighing everything from mobile and strengthen customer relationships.see’ approach for mobile until prepaid strategies to the rollout ofa clear product becomes avail- new security technologies and the However, the research revealed thatable and there is clear demand emergence of new competitors. Faced executive attitudes about paymentsfor it, with a clear leader or with shifting and even contradictory are not always aligned with customersolution. It’s not there yet.” currents, they find the ultimate direc- attitudes. Comparisons of the two sets —VP, credit union tion of events is not always clear. As of responses indicated that consumers a result, they are often hesitant about are often out in front of merchants and“There’s a lot of work and moving forward with new approaches. financial institutions when it comeseducation needed to develop to enthusiasm for new approachesthe right digital wallet that will That is one of the key findings of to payments. And organizations thatinclude all our cards and the recent research conducted by Merca- move too slowly may find themselvesother cards people need.… At tor and Vantiv. Researchers conducted losing customers to competitors thatthis point, is the convenience in-depth interviews with dozens of are able to meet rising customer ex-worth the risk?” executives representing merchants and pectations for fast, convenient mobile —Marketing head, financial institutions to explore their payment methods. large regional bank thoughts on payment trends. These in- terviews were part of a larger research What’s Keeping Executives“Right now, there is no value effort—the Vantiv/Mercator Insight Up at Night?proposition [for mobile pay- Series—that also surveyed some 1,200ments] from a consumer consumers to gauge their awareness of Today, mobile payments are very muchstandpoint and no common and interest in various payment meth- on the minds of merchant and financialstandard platform…. It’s a ods. The result is a multifaceted view of institution executives. In general, theychicken and egg—merchants the payment landscape. expect mobile payments to becomeneed to support it and the is- mainstream, but they have a number ofsuers need to offer it.” The interviews found that executives concerns about how they will work and —Executive VP, regional bank are concerned on many fronts—about what it will take to get there. Part of the Vantiv Insight Series 2012, featuring proprietary research performed by Vantiv LLC and Mercator Advisory Group © 2012 by Vantiv LLC. All rights reserved.

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3As one might expect, executives are less payment technology will emerge No or low cost 87%worried about security with new pay- as the dominant approach. Rather, ex-ment methods in general, and with ecutives are looking at a growing rangemobile payments in particular. That’s a of options. These include alternatives Fast at POS 85%strong concern for consumers as well. to NFC, such as Paydiant and otherBut looking ahead, executives are actu- cloud-based interfaces activated viaally more optimistic than consumers QR codes or PIN—approaches that do Security 72%about the industry’s ability to address not require much additional infrastruc-security. Many interviewees “recognized ture. With such options getting trac- Control spend 71%a potential for even greater security tion, the future role of NFC is not clear.with smartphone payments throughtechnologies like multifactor authenti- The interviews found that executives Ease of dispute 68%cation and tokenization,” says Bill Wein- are seeing a similar level of uncertaintygart, chief product officer at Vantiv. around mobile wallets, which provide No minimum 66% a single access point to an individual’s purchaseExecutives are less confident when it cards and accounts for payments.comes to dealing with the widespread Industry executives feel that current im- Instant 65%implementation of mobile payments. plementations of these wallets do not deductionMerchants not only worry about the provide the functionality consumers are 0% 50% 100%cost of new infrastructure, they also looking for—in particular, they don’t in-want to avoid driving customers to new corporate all the cards customers wantpayment types that will increase costs. to carry, such as merchants’ private-la- WHAT CONSUMERSFinancial institutions, seeing lower bel closed-loop cards. Most merchants WANTrevenues driven by legislation, want to said that they were involved in evaluat-clearly understand the value of mobile ing mobile wallets, but many complained Executives tend to thinkpayments before investing. that not enough phones support mobile that consumers are looking payments and that current technology for convenience, but costsAt the same time, it isn’t clear which is not user-friendly. Three merchants are top of mind for consum-technologies companies should invest reported that their mobile wallet pilots ers when choosing a pay-in. “A primary concern is the lack of a were unsuccessful; a fourth decided to ment method.universal standard platform for mobile suspend its program until more phonespayments,” says Weingart. The issue is can accept NFC.partly behind the formation of the Mer-chant Customer Exchange, a consortium At the same time, executives are con-of 14 major retailers that aims to come fronted with a long and changing listup with a standard mobile platform for of mobile wallets in the marketplace.its members. “Efforts like this are a sign There are no mobile wallet standardsof how much desire there is for a clear in place, and wallets are available fromway forward,” he adds. a wide range of providers. Overall, says Weingart, “executives fear that earlyFew interviewees felt it was certain implementations may be quickly outdat-that near field communication contact- ed, and they don’t want to waste limited

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4Executive Views: resources on something that won’t ing to figure out when and how to startThe Challenge serve their purpose for very long.” actually issuing these cards. And someof Change bank executives are doubtful about the Looking at a shorter-term issue, the eventual enforcement of the mandates“The most challenging is to interviews showed that the impending and whether an extensive installed basefigure out which payment types rollout of EMV technology is a source of EMV terminals will actually emerge.”a bank with limited resources of anxiety for merchant executives. Asshould offer…. We can’t offer ev- one might expect, they are focused on Finally, executives expressed concernery type of solution that comes the Visa and MasterCard implementa- about the emergence of nontraditionalalong.” tion mandates and the 2015 shift of players in payments. Financial institu- —Senior VP, fraud liability to merchants. But they are tion executives are worried about new large regional bank also concerned about the challenges mobile payment providers. “Many fear of weaving EMV implementation into that the new non-card-based entrants“A major pain point is having a list their point-of-sale technology update may quickly make significant inroadsof 25 things to do.… How should cycles—and the fact that EMV does and cut out their card network-basedwe allocate our resources in the not address card-not-present fraud. interchange revenues,” says Royal Cole,payment world that is changing president, FI Services, at Vantiv.so fast? We need to move more But these executives aren’t alone. Inter-quickly in some areas, but how?” viewers found that financial institution Merchant executives also worry about —EVP, community bank executives are perhaps even more con- new players—such as Google and cerned than their merchant counter- perhaps Amazon, Apple, and even social“Some of the new companies parts about EMV implementation. Es- media networks—becoming interme-developing mobile wallets are not sentially, EMV does not address banks’ diaries that gather a wealth of informa-in the payment industry—we see security concerns; it is effective against tion about their customers. This couldright through them. They’re trying card counterfeiting, and it helps bank not only result in merchants having lessto make the marketing compo- customers use their U.S.-issued cards control over customer relationships, itnent more valuable, but their busi- in the EMV networks found abroad, but could also enable those intermediariesness is run by advertising.” it does not strengthen security against to use that data to offer marketing and —Supermarket retailer the kind of database breaches and advertising services to a merchant’s compromises that affect banks. competitors, targeting the merchant’s“Our biggest pain point is un- customers. However, the executives doderstanding which payments Nevertheless, implementing EMV will see an upside to the arrival of new play-customers really want to use, create a significant expense for finan- ers which, they hope, can help reduceeven if they don’t know yet. It’s cial institutions. “It’s primarily a cost their costs around mobile payments.too expensive to invest in all the issue for them—a big cost issue,” saystechnologies that come out. We Ken Paterson, vice president of re- Executives and Consumers:have limited resources and want search operations at Mercator. “In some Differing Opinionsto focus only on the most impor- ways they are even more confused thantant ones to our customers.” merchants because they’ve been given With all of these concerns in mind, —Drugstore retailer less of a mandate. So they are just try- the merchant and financial institution

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5executives told interviewers that they also felt that current mobile payment AGEwere moving forward very cautiously strategies are not in their best interest 18-34 57%with new payment methods. But in a and benefit only the issuer. “There is a 35-64 33%rapidly evolving environment, a wait- consensus that these are coming, but 65+ 14%and-see strategy may be ill-advised there is a lack of clarity and agreementbecause it is out of sync with what about how fast they’re coming andcustomers want and expect. Waiting how they’re going to work,” says Peter GENDERtoo long could mean missed opportu- Kulik, vice president, Product Manage- Men 41%nities and even lost customers. ment, at Vantiv. Women 33%The research identified several key The research also uncovered somedifferences between executive and differences of opinion around the role INCOMEconsumer attitudes—and a number mobile payment platforms will play in Less than $50K 34%of these “disconnects” underscore consumers’ lives. Executives tend to $50K-$75K 33%the risks involved with a wait-and-see see mobile payments as a vehicle for $75K-$100K 42%strategy. For example, consumer inter- using traditional card accounts—anest in mobile payments is quite high: electronic form of plastic—and little More than $100K 43%Vantiv research found that 62% of con- more. Consumers, however, expectsumers expect mobile payments to be mobile payment platforms to bring 0% 20% 40% 60%widely used within five years—and 31% more information and conveniencethink that will be the case in just two to their entire purchasing experience.years. Consumers see challenges, such They want mobile platforms that not WHO’S INTERESTED INas security and reliability issues, but ex- only handle payment transactions but MOBILE?pect the industry to work through them also help them manage receipts andand deliver mobile payments capabili- coupons, track spending, and so forth. Executives are cautiousties sooner rather than later. about mobile payments, but Indeed, the Vantiv research found that younger consumers are es-But executives see a slower transi- for consumers a key barrier to the pecially interested in them,tion and believe that the widespread greater use of mobile payments was suggesting future growth.use of mobile payments is farther off. that mobile payments, by themselves, Desirable customers—high-Financial institution executives foresee are no more convenient than a credit er-income consumers—area somewhat shorter timeline than do card. At the current state of evolution, also interested.merchants. That presumably stems many consumers see no compellingfrom the fact that banks consider reason to change. They want moremobile payments a natural extension than just the ability to pay with theirof mobile banking and card operations. phones. Without additional tools andMany merchants, on the other hand, more information on the mobile plat-cited their disappointing pilot pro- form, they may stay away from mobilegrams and frustration with the mobile payments—or find providers that havepayment tools being offered. Some those broader offerings.

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6 Consumers are also looking for more accounts, so they are kind of lukewarm when it comes to prepaid cards, and they toward prepaid,” says Paciolla. like the inherent spending discipline of having a set amount of funds loaded Merchants, too, are paying relatively on a card. The research also found that little attention to the potential of pre- consumers see prepaid cards as the paid cards. Although they are familiar most secure form of in-store payment. with closed-loop cards and are aware of And nearly half considered prepaid cards the recent growth in the sales of such useful for online purchases—a “surpris- cards, they generally do not view them ing finding, since open- and closed-loop as a critical form of payment. “Mer- cards have not generally been marketed chants usually do not link their loyalty for this use,” says Ed Paciolla, product or rewards programs with their closed- management director at Vantiv. Looking loop cards,” Paciolla says. “And general- at consumer interest and awareness, the purpose prepaid cards are essentially research concluded that prepaid card off their radar.” Merchants may also be usage is likely to keep growing. missing an opportunity to use closed- loop prepaid cards to reduce the overall The research suggested that mer- cost of payments. chants and financial institutions may be missing the significance of the growing Meanwhile it seems that consumers consumer interest in prepaid cards. The and executives have different views on MOBILE AND PREPAID: interviews found that in many cases, what drives consumer payment choice. HITTING THEIR STRIDE banks are only in the planning stages Vantiv’s consumer research has shown with general-purpose reloadable card that consumer payment preferences The use of both prepaid programs, and many are just beginning are determined, in order of importance, cards and mobile financial to think about issues such as reloading by low fees and low costs, speed and tools are following adoption capabilities and online usage. Few are convenience, security, and spending curves that indicate contin- including prepaid cards in their rewards control. Consumers are clearly fee- ued growth, with prepaid programs or actively marketing them to sensitive, with nearly 90% saying that cards being further along their customers. “At some larger banks, cost is a critical factor. Eighty percent the curve. executives think that prepaid cards will consider their worst payment experi- only pull customers away from core ences to be unauthorized, unexpected, or added fees based on payment type. 100% In contrast, executives tend to believe 90% that consumer payment preferencesJANUARY 2012 CONSUMER USAGE LEVEL 80% are driven primarily by convenience and/or rewards, rather than costs. 70% Incidentally, financial insitutions think 60% of convenience in terms of offering an ✦ Retailer closed-loop gift cards 50% ✦ Smartphones (iPhone intro) 40% 30% ✦ General-purpose open gift cards 20% ✦ Mobile banking* (initially SMS-based) ✦ Tablets (iPad intro) ✦ Prepaid cards online 10% ✦ General-purpose reloadable cards ✦ Mobile P2P services ✦ ✦ Open and single-merchant e-wallets, Downloaded prepaid mobile app like Starbucks 0% 0 years 5 years 10 years 15 years 20 years YEARS IN U.S. MARKET Source: Vantiv/Mercator Insight Series Research, February 2012. * Data from Mercator Advisory Group Survey, October 2011.

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7organized, easy way to manage spend- offerings out there, getting to know Eithering, payments, and receipts, while mer- which customers use them and how general-purpose 26% or retailer cardschants think of it as speed at checkout they use them, understanding the useand being easy to carry. cases that their customers are most in- terested in—those types of things areFinally, in considering these various very important,” says Kulik. “Whether Retailer-specific 20%disconnects, it’s worthwhile to con- it’s a mobile banking application that’s prepaid cardssider some demographic realities. The accessed through the phone browserresearch found that young adults are or a single-use case like mobile checkmore interested in mobile payments deposit, banks can provide some valueand prepaid cards than older consum- to customers while learning how to General-purpose 18% cardsers are, and they are more likely to see make the best use of the platform.”themselves using mobile payments.Thus, consumer interest in these areas The idea is to strengthen relationships 0% 10% 20% 30%is not a short-term event. As these with consumers and hold on to themtypes of tech-savvy consumers come as the mobile payments space evolves.to make up more of the consumer pop- The Vantiv research found that someulation, the marketplace’s expectations banks are adopting this kind of defen- PREPAID PURCHASESaround these payment methods is only sive strategy with mobile wallets, intro- PLANNEDgoing to increase. These consumers ducing their own wallets using their own Executives may be luke-are not likely to reward those providers bank cards or branding “white label” warm about prepaid cards,who took a wait-and-see attitude. wallets from partners. “Even if they do but more than a quarter of not expect their digital wallets to be a surveyed consumers expectTaking Action— leading payment type in the near future, to purchase more of them inand Finding What Works they want to introduce their customers the next 12 months. Young- to the experience early to gain loyalty er consumers, women, moreIn this environment, merchants and and seed their market,” says Paterson. affluent consumers, andfinancial institutions need to move “These financial institutions will be bet- smartphone/tablet ownersahead—and they can do so in incremen- ter positioned to combat nontraditional are more likely than averagetal steps. They can get beyond wait- mobile competitors.” That’s important, to plan such purchases.and-see strategies to gradually build he adds, because “the window of op-the capabilities needed in an evolving portunity for financial institutions ispayments environment—without having closing as non-traditional vendors stepto commit solely to one approach. up the pace of their mobile network development.”Financial institutions, for example, canleverage their existing mobile banking Merchants can take similar action andplatforms by adding functions and fea- explore the use of mobile platformstures, even if they not ready to include without including payments, allowingpayments. “Getting various mobile them to make progress while they wait

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8 Executive Views: Growing Opportunityfor terminal standards to emerge and and skills. That can be a lot for individ- “Prepaid cards are very impor-infrastructure decisions to be resolved. ual merchants and financial institutions tant.... I think there’s an op-That can mean focusing on smartphone to cover, making it difficult to tackle portunity for someone to comeapplications that enhance the in-store these initiatives alone. Like other indus- up with a mobile gift card mallexperience—providing features such tries, merchants and financial institu- where it is easier to redeemas coupons, e-receipts, and product tions are likely to benefit from working points and convert to gift cardssearch capabilities to customers, who with partners that can bring mobile, and access your prepaid ac-can then make payments with their tra- processing, and other payment-related count using mobile phones.”ditional credit card. Case in point: the expertise to the table. “Forging part- —Home improvement retailerrecently released Apple Passbook ap- nerships that are focused on strength-plication lets consumers organize and ening payment initiatives is becoming “The technology is moving somanage their virtual cards and coupons more critical to the success of financial fast, there’s a lot of opportu-for use with mobile payment systems. institutions and merchants, because nity to move to new payment“By integrating mobile into the shop- it can help them navigate through the types…. We don’t want to loseping experience and the overall process development and deployment of new membership to another finan-for consumers,” says Kulik, “customers technologies to more adeptly address cial institution, and we wantcan then be transitioned to mobile pay- market needs,” says Paterson. to attract the younger gen-ments when the merchant is ready.” erations. Are we on top of the At the same time, executives can ques- market? Are we identifying theOn the prepaid card front, merchants tion assumptions—always critical in a best alternatives and partner-and financial institutions can look for changing environment. The research ing with the right vendors?”opportunities to strengthen their identified several areas where consumer —SVP, credit unionprograms to take advantage of that attitudes appear to be out in front ofgrowing market. Improvements could merchants and financial institutions. But “Mobile technology will helpinclude providing better access to those disconnects are not insurmount- us better engage our custom-balance information, simpler redemp- able, and by understanding them, execu- ers and guide them throughtion and reloading, the ability to split tives can take action to shape strategies our stores.… They can set up atransactions across prepaid and credit around consumer wants and needs. “Fi- profile within our rewards appli-cards, and so forth. Companies can nancial institutions and merchants have cations to include preferences,also integrate open- and closed-loop an opportunity to take a leadership role shopping lists, and preferredprepaid cards into their mobile wallets in the evolution of payments and shape payment method. It will recog-and their rewards and loyalty programs. standards, technologies, and offerings nize through geo-fencing when that keep them in step with changing they will be in or near our storesAltogether, such initiatives, combined demand,” says Weingart “Those that and know what they want towith ongoing loyalty, security, compli- take early steps to engage their cus- buy and direct them to theance, and cost-management efforts, tomers will be better positioned to keep best product in that category.”require a wide range of technologies those customers tomorrow.” —Drugstore retailerAbout VantivVantiv LLC is one of the leading integratedpayment processors in the United States. Knownas Fifth Third Processing Solutions since 1971,the company, headquartered in Cincinnati, Ohio,changed its name to Vantiv in 2011, and becamea public company in 2012. Vantiv’s credit,debit, prepaid, and data security solutions helpbusinesses and financial institutions of all sizesget the most out of payment activities. Vantiv Corporate Headquarters 8500 Governors Hill Drive, Cincinnati, OH 45249 866-622-2880 | www.vantiv.com TL0002 7/12