Scanning the Future: International Payment Systems

1. The TransformationThe Transformation
in Digital Transactingin Digital Transacting
Steve Mott
Principal-BetterBuyDesign
Payments Systems Review Task Force
4 November 2010

2. 2
Two Neighboring Countries,Two Neighboring Countries,
Different as Night and DayDifferent as Night and Day
(at least in banking)(at least in banking)

3. 3
PIN-Debit: Against the FlowPIN-Debit: Against the Flow
• By most counts growing faster than signature-’debit’ over
past three years (up 15% vs. 4% according to 2009 Oliver
Wyman/Pulse Debit Issuer Study)
• Differences in interchange rates are collapsing at low end
(thanks to Visa); termination of PIN-debit ‘caps’ will continue
convergence
• Still the best payment option for consumers and merchants
(PIN-debit fraud is $.15 per card, vs. $1.81 for sig-’debit’)
• Still the cleanest payment option for merchants in the back-
end; despite convergence of interchange rates, PIN-debit is
making inroads in eCommerce
• Additional terminal costs have deterred merchant acceptance,
but integrated terminal solutions are impacting that
• But in April, the biggest U.S. issuer ran adds saying signing
for debit card transactions is safer than using PINs, undoing
40 years of trying to get consumers to put some skin in the
payment security game…
Sources: Various

4. 4
Upheaval in U.S. Debit CardsUpheaval in U.S. Debit Cards
Signature-'debit' Card Revenues ($ bil.)
0
5
10
15
20
25
30
2008 2009e 2010 2011 2012 2013 2014
Interchange NSFs Other
‘Skip the PIN and Win’ to trash heap of payment history
15% of PIN transaction overdrafts disappear
PIN-debit interchange rates move to parity with Sig-’debit’
PIN-debit interchange caps dissipate
40%
atPOS
Source: Nilson Report; BBD estimates

5. 5
Consumers Scarred by Banking CrisisConsumers Scarred by Banking Crisis
Source: Mercator Advisory Group
46% 45%
86%
59%
84%
77%
50%
17%
Try to pay with debit
or prepaid to avoid
borrowing on credit
cards
Due to
unemployment or
reduced income, I try
to spend less in
general
Try to pay with cash
more often to be
careful how much I
am spending
Try to pay with
charge card to make
sure I pay off
purchases
% Agree % of those agreeing who feel this is likely to be permanent change

6. 6
The Scourge of PCIThe Scourge of PCI
• PCI standards and compliance cannot guarantee
security in a mag-stripe paradigm
• Even end-to-end encryption and tokenization is
disputed as a solution within the PCI Council (of
brands)
• It doesn’t matter whether a merchant is compliant or
not (even if they are certified as compliant); by
definition, a breach means the merchant was at fault
• That means Visa/MC issuers can load up card
replacement and implied fraud costs on merchants
as blanket liabilities
• The costs of PCI compliance in the U.S. are running
at $2 bil./year--more than the cost of fraud

7. 7
Result: Assault on the Core BusinessResult: Assault on the Core Business

8. 8
Merchant Acceptance, Costs, and Perceptions of Retail Payments: A Canadian Survey by Carlos Arango and Varya Taylor Bank of Canada 12/2008
Canadian Payment Behavior: SensibleCanadian Payment Behavior: Sensible

9. 9
Why Did Canadian Banks Do So Well?Why Did Canadian Banks Do So Well?
􀂃 Ten reasons for their relatively strong performance:
(1) Prudent lending practices from risk-based supervision
and natural conservatism
(2) A stronger housing sector [Charts 6]
(3) Less reliance on wholesale financing and securitization
(4) A single national regulator for most deposit-taking
institutions
(5) Close co-operation among government agencies and
departments
(6) High capital ratios and heavier reliance on equity capital
[Chart 7]
(7) A strict limit on bank leverage and inclusion of most offbalance
activities [Chart 8]
(8)Mortgage insurance and prudent underwriting
standards [Chart 9]
(9) An effective deposit insurance system
(10) Mechanism for the quick and orderly resolution of any
problem institutions
� Advantages of a principles-based system vs. a rules-
based system
� The importance of good supervision vs. regulation
Source: Address by John Murray, Deputy Governor, Bank of Canada, American U. 4/2010

10. 10
Payment Card Code of ConductPayment Card Code of Conduct
Canadian government tables new code of conduct for payment cards
The Honourable Jim Flaherty, Minister of Finance, today released a Code of Conduct for the Credit
and Debit Card Industry in Canada, which promotes fair business practices and ensures that
merchants and consumers understand the costs and benefits associated with credit and debit
cards.
Under the Code, merchants will be:
* Provided with clear information regarding fees and rates.
* Given advance notice of any new fees and fee increases.
* Able to cancel contracts without penalty should fees rise or new fees be
introduced.
* Given new tools to promote competition, and in particular, will have the freedom
to accept credit payments from a particular network without the obligation to
accept debit payments and vice versa.
On March 29, the Government introduced legislation in Parliament to implement certain
provisions of the Budget. The legislation enacts the Payment Card Networks Act, which
would give the Minister of Finance the power to regulate the market conduct of the credit
and debit card networks and their participants, if necessary.
Legislation tabled would also expand the mandate of the Financial Consumer Agency of
Canada to supervise payment card network operators to monitor their compliance with the
Code of Conduct and with any regulations introduced under the new Act.
Source: Government of Canada, 16 April, 2010

11. 11
The Digital Transformation ofThe Digital Transformation of
How People TransactHow People Transact

12. 12
Participation in Online Social NetworksParticipation in Online Social Networks
0% 10% 20% 30% 40% 50% 60% 70% 80%
Other
Bebo.com
Friendster
Reunion.com
WindowsLive
LinkedIn
Classmates.com
MySpace
Facebook
Any(net)
Participation
Source: Synergistic Research Corp. 9/2010

13. 13
Twitter: TwitPay, Via PayPalTwitter: TwitPay, Via PayPal

14. 14
Facebook: PayPal’s Latest ConquestFacebook: PayPal’s Latest Conquest

15. 15
Online Shopping on FacebookOnline Shopping on Facebook
Digital shopping provider Fluid Inc. has
announced Nine West as the second
customer deploying Fluid Fan Shop, its
new Facebook shopping component of
Fluid Social, a social shopping platform.
Fan Shop embeds unique and highly
branded fans-only shopping experiences
directly into a tab on a retailer's
Facebook fan page.
Nine West also chose Fan Shop to
launch a fans-only "lookbook" on
Facebook to attract new fans and
deepen the relationship with existing
ones by offering exclusive content and a
private brand-appropriate shopping
experience. Fans also get a Facebook-
exclusive 15% discount for limited time
+ Referrals on MarketPlace and in posts

16. 16
Facebook Credits: New CurrencyFacebook Credits: New Currency

17. 17
FarmVille: How People Spend Time NowFarmVille: How People Spend Time Now

18. 18
Digital IDs: Personalization, but PrivacyDigital IDs: Personalization, but Privacy
Information Card
Source: Company Websites

19. 19
The Web: Technology in TransitionThe Web: Technology in Transition
Web 1.0: Connecting People to Information Content
One-way pulling of product information is enabled;
transacting becomes search-based; buyers can be
anonymous and sellers can be anywhere in world
]
Web 2.0: Connecting People to People
Social networks encourage user data
personalization and permissioning;
purchases become transparent and
referral-based; buyers and sellers
co-habitate in community venues
Web 3.0: Connecting Concepts to Meanings
Advanced data/relationship-matching
empowers 1:1 services; transacting becomes
embedded in relationships; buyers monetize
their value to sellers; sellers transition to
‘narrowcasting’ offers to individuals

20. 20
Mobile Really Does ChangeMobile Really Does Change
EverythingEverything

21. 21
21
Mobile Transcends and TransformsMobile Transcends and Transforms
Key attributes of mobile devices:
•Two-way
•Real-time
•Always on
•Always with you
•One-to-one
•Where U R

22. 22
USAA: Mobile Check DepositsUSAA: Mobile Check Deposits

23. 23
Mobile Enables Consumers to go DirectMobile Enables Consumers to go Direct

24. 24
Anyone Can Be a Merchant: Square for a DollarAnyone Can Be a Merchant: Square for a Dollar

25. 25
Can Mobile Save Contactless?Can Mobile Save Contactless?

26. 26

27. 27
Merchants Voting Their Preferences in U.S.Merchants Voting Their Preferences in U.S.
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
Tower-1998 Tower-2001 Javelin-2010 BBD-C'less
$ billions
• Merchant Advisory Group/NRF report and recommendations
• Merchants providing input to Fed regulation of debit cards (including
survey that estimates PCI costs at $10-20 billion to-date)
• Big merchants (Wal-Mart, BestBuy, HomeDepot) bought EMV
terminals and are ready to go
• Contactless solves previously intractable problems (e.g., costs of
outfitting gas pumps with EMV contact cards)
• Merchants have to pay up to 75% of the costs of conversion, so
their vote counts

28. 28
Hybrid Cards and Other TweaksHybrid Cards and Other Tweaks

29. 29
Bling Nation: A New POS ‘Eco-system’Bling Nation: A New POS ‘Eco-system’

30. 30
Bringing Rural Areas into Digital LifeBringing Rural Areas into Digital Life

31. 31
Agenda for the Path ForwardAgenda for the Path Forward
• Seek government mandate (from the Fed?) for contactless and
contact cards as a national security priority?
• Establish a mobile ecosystem-defined (and provided?) TSM to
create synonymous security and interoperability from the get-go as
an non-competing, industry-wide utility
• Provide a regulatory roadmap (Fed to head a ‘college of
regulators’—especially the FTC and FCC) that clears the way for
mobile marketing and advertising business cases—and robust
competition
• Encourage a level-playing field that minimizes redundant costs
and investments, allowing the marketplace to determine ultimate
winners and losers
• Develop a default utility for routing and settlement options for
any and all who want them, and a low-cost, ubiquitous default
payment type (e.g., ACH) for those who want to use them
• Encourage volume aggregation to ensure the best chance to deploy
timely and effective risk management

32. 32
Regulation Scuttling Old Business ModelsRegulation Scuttling Old Business Models
• Overdraft legislation
– Debit Cards
– Opt-in
• Credit Card Bill
– Failed implementation
– Credit card interchange/merchant choice up next
• Financial Reform Act
– Debit card interchange
– Network interconnectivity
• Emergence of strong, non-bank competitors (e.g.,
PayPal, Intuit, Apple, ATT, etc.)

33. 33
Handicapping the Durbin EffectHandicapping the Durbin Effect
1. Visa and their big banks would like PIN-debit to ‘disappear’ (or not matter);
Signature-debit is accepted in 7 million merchant locations, vs. 2.2 million for
PIN; and it can be used online—value-added that deserves higher
interchange
2. The cost of PCI compliance for PIN-debit (PCI-PED) could be as much as
$20,000 per store, which will make full acceptance difficult to achieve—
and save signature-debit from the axe
3. Rumored 'dynamic overdraft opt-in' capabilities at BofA and other big
banks will likely only apply to sig-debit, so Visa could argue that this
is another form of value that PIN-debit can't/won't offer--further justifying
higher fees
4. Sig-debit is mostly outsourced by banks to third-parties, and rides the credit
card 'rails', but it costs banks twice as much ($.21 per transaction) as PIN-
debit ($.10), which they mostly do in-house, with ATM and true DDA
5. Banks make $.65 on sig-debit interchange (plus a similar amount on NSFs--
40% of all DDA overdrafts are from ‘debit’ cards; revenue from PIN is barely
$.50; at cost-plus-20% (a very liberal interpretation of the statute), the $.25
max rate for sig-debit and $.12 max rate for PIN will kill $.40 a transaction,
or at least 2/3 of the $13 billion in debit card interchange a year
6. Another 40% of overdraft fee revenues on debit cards, or $6 billion is
expected to go away, due to overdraft regulation; total loss: $14 billion

34. 34
The Future of Money (and Banks)The Future of Money (and Banks)

35. 35
Clues from the Grateful Dead…Clues from the Grateful Dead…
The best way to raise
demand for your product is
to give it away”

36. 36
36
Should Money be Free?Should Money be Free?
Source: Wired Magazine

37. 37
WhatWhat ISIS a Bank, Anymore?a Bank, Anymore?

38. 38
Is PayPal the Future of Money? Banking?Is PayPal the Future of Money? Banking?

39. 39
Steve Mott’s Contact CoordinatesSteve Mott’s Contact Coordinates
dba CSI Management Services,
Inc.
1386 Long Ridge Road
Stamford, CT 06903
and 1214 Querida Drive
Colorado Springs, CO 80909
(o) 203.968.1967
(c) 203-536.0588
email: stevemottusa@yahoo.com
website:www.betterbuydesign.c
om
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Steve Mott
BetterBuyDesign