Credit unions face opportunities and challenges from evolving payments markets. Regulatory changes are reshaping retail financial services, increasing pressure on legacy models. Emerging technologies and new entrants threaten traditional revenue streams. Credit unions have opportunities for growth but must continue innovating. EMV implementation in the US faces delays from dual debit network requirements. Prepaid cards and mobile devices are gaining traction, changing how consumers interact with financial institutions. To compete, credit unions must enhance digital capabilities and appeal to younger demographics through offerings like mobile payments and banking. Trusted brands position credit unions well to lead developments.

1. Rising Above Uncertainty:
Opportunities and Challenges For
Credit Unions In Payments
NAFCU 2013 Congressional Caucus
September 9, 2013
Royal Cole, President
Vantiv Financial Institution Services

2. Agenda
Key Market Dynamics
– Evolving Retail Financial
Services Models
– Regulatory Impact
Emerging Strategies – Impact to Credit
Unions
– EMV
– Prepaid
– Mobile
Preparing for the Future
2

3. Key Market Dynamics
 The retail financial services market is in a transformative
period where new stakeholders and business models are
reshaping the industry.
 Legacy financial services are under increasing pressure and reengineering using new technologies that leverage virtual
delivery channels is increasingly necessary.
 New stakeholders and existing market participants are looking
for tighter control over threatened revenue/expense streams.
 Credit unions have aggressively competed for and won market
share, but members are increasingly interested in the digitalbased experience and services delivered through nontraditional providers.
 Credit unions still have opportunity for retention and growth, but
must continue to compete.
3

4. Modern Dynamics Shifting Payments Market to Next
Generation Products and Business Models
Macroeconomic
Trends
Financial
Inclusion
Regulatory
Control
Mobility
Merchant
Segment
Control
Consumer
Adoption
Shifts
Fraud/
Risk
Payment
Efficiencies
Network
Expansion
4

5. Legislators and Litigators Exert Increasing Influence
on the Payments Industry
2009
Card Act goes into effect, requiring issuers to take a longer view of credit risk, limiting access to credit
for emerging consumers and sub-prime market.
•
Consumer credit industry retrenches into smaller opportunity market, impacting credit
unions’ ability to compete against institutions with more diversified product portfolios.
2010
Combined impact of Regulation II (Durbin Amendment) and Overdraft Fee Act shifts retail financial
services business model towards fee-based services.
•
Over time, exempt financial institutions realize interchange fee income losses due to
merchant control over debit network relationships.
2013
U.S. Courts rule on credit card surcharges, credit card interchange fee reimbursement, and potentially
a rewrite of Regulation II interchange fee and network routing rules pending appeal.
•
Interchange fees, especially for debit, continue to be de-stabilized, but larger impact could
be the requirement of issuers to support two debit signature networks.
5

6. Durbin Amendment Ripple Effect Felt Across the Industry
Federal Reserve Survey (2011) highlights the true impact of Regulation
II on exempt (unregulated) financial institutions.
• Overall interchange fee revenue decreased 4% for
unregulated issuers and network fees were higher than those
of regulated issuers.
• The average ticket of a prepaid card transactions was reported
to be $34.42, more than $4.00 higher than the average cardpresent signature debit transaction of $30.23 as regulated
issuers incorporate these products into their debit portfolios.
Supporting dual network routing on EMV-compliant cards add cost and
complexity to reissue strategies.
Recent court ruling vacating Regulation II rules threaten further
disruption and potential for debit card issuers to have to support four
networks with no control over final routing.
6

7. Finding a Balance in the New Normal – Lessons Learned
Credit unions’ competition may not be a bank or a physical
entity; expanding digital service capabilities should be a
key near term activity.
As financial institutions exit a period of branch expansion, a
gap in local services exists, especially in non-metro areas.
Partnering for compliance and risk-related activities
protects organizations and allows more room for strategic
product planning.
While credit union needs and values have been
communicated effectively so far, credit union lobbying
efforts need ongoing support to keep their profile high
with Congress and regulators.
7

8. Agenda
Key Market Dynamics
– Regulatory Impact
– Evolving Retail Financial
Services Models
Emerging Products
– EMV
– Prepaid
– Mobile
Preparing for the Future
8

9. Overview of EMV
• EMV is a set of international standards developed by Europay,
MasterCard, and Visa in 1996 (now joined by Discover, AEXP
JCB, CUP)
• Standards define interoperability of a new secure transaction
type across the international payments enterprise
– US and China most recent and largest markets to join
• EMV provides comprehensive protection against:
– Counterfeit and skimming fraud
– US issuers can select to add PIN or Signature as CVM preference
• An EMV card is inserted into a terminal, and removed when the
transaction is completed.
9

10. Overview of EMV US Roadmap
April 2013
• Processors must
support EMV
April 2015
• 3rd Party ATM must
support EMV
April 2013
• Processors must
support EMV
• International ATM
liability shift
October 2015
Liability shift of
counterfeit transactions
April 2013
• Processors must
support EMV
April 2013
• Processors must
support EMV
October 2015
• Liability shift of
counterfeit transactions
October 2015
• Liability shift of
counterfeit transactions
October 2017
• Liability shift for AFD
•
•
October 2015
• Liability shift of
counterfeit transactions
October 2017
• Liability shift for AFD
• Liability shift for ATM
October 2017
Liability shift for AFD
October 2016
• Liability shift for ATM
October 2017
Liability shift for AFD
•
10

11. A Business Case for Change Exists in U.S. Market
Counterfeit Fraud Volume
(Visa only)
+ 307%
2004
2011
- 56%
- 52%
Europe
Asia Pacific
U.S.
(Liability Shift
in 2005)
(Liability Shift
in 2006)
(Liability Shift
in 2015)
› Gift cards most popular target after cash
› Cross border fraud migration increasing in US
as more markets adopt EMV (Canada and
Mexico latest to adopt)
11

12. Dual Network Debit Routing Requirement Will Drag
on EMV Implementation Timeframes
Regulation II has created a unique operating model in the U.S.
– The main problem for the U.S. is that EMV is designed to operate as a one to
one relationship between the issuer and their network. Regulation II requires
that issuers support at least two, unaffiliated networks on their debit cards.
– Networks want to retain ownership of their AID (Application Identifier) as
proprietary software, but this leaves the industry having to support a wide
variety of AIDs.
Solutions are converging around inter-operability across networks in
2013, but implementation scope and timeframes remain unclear.
– Smart Card Alliance EMV working group agreed to license the D-Payment
Application Specification (D-PAS) as a common U.S. debit chip payment
solution.
– Visa and MasterCard agree to license their AID software.
Issuers are grappling with cost differentials between PIN and
signature EMV deployment, but recent threats to further decrease
debit interchange may swing the market towards PIN.
12

13. Merchant Deployment of EMV Terminals Is Likely To Extend
Through The Decade, With Many Uncertainties and Delays
We don’t have EMV implementation plan but we are focused
on figuring that out now… We need to know whether or not
we should invest in EMV.
We still haven’t made a decision about EMV and whether
to convert our operations by 2015. There is some
discussion in the industry of the value of EMV vs. the cost
of implementation. We are studying the issues now.
It will take at least 2 years to update all the stores, but we will
have the EMV capability by the liability shift date.
Sources: Mercator Advisory Group Estimates, Vantiv Insights Executive Interviews
13

14. EMV Card Issuance Is Slowly Ramping Up In The US
•
Own Chip-based Cards for Security
(Base = Own debit or general purpose credit cards
Not Sure
19%
Yes
15%
No
66%
•
While 15% of debit or credit
card owners say they own at
least one chip card, 19% are
not sure if they have one or
not, despite seeing an image
of one in the survey.
Chip cards issued today in the
US are more likely to be credit
cards given to frequent
travelers and/or high volume
customers who tend to be
among the highest income
earners.
Source: Vantiv Insights consumer surveys 2012-2013, N=1,200 US adults
14

15. Agenda
Key Market Dynamics
– Regulatory Impact
– Evolving Retail Financial
Services Models
Emerging Products
– EMV
– Prepaid
– Mobile
Preparing for the Future
15

16. Prepaid Card Purchases Continue to Grow, Some To
Replace DDAs
Type of Prepaid Card Purchased
•
(Base = All, year refers to year
purchased)
63%
2013
60%
52% 50%
2012
•
27% 25%
19%
15%
•
General
General
Retailer Any prepaid
purpose, purpose, not specific
card
reloadable* reloadable prepaid card
Prepaid cards of all types
continue to gain traction
with consumers.
23% of consumers report
having purchased a
prepaid card as a checking
account/ share draft
account replacement, up
from 16% in 2012.
32% of consumers 18-34
see prepaid as a DDA
replacement.
*Statistically significant difference 2012-2013 at the 95%
Source: Vantiv Insights consumer surveys 2012-2013, N=1,200 US adults
16

17. General Purpose Reloadable Prepaid Cards Are Showing
Dynamic Growth In the U.S.
Amount Loaded onto GPR Cards
($Billions)
$180
$168.4
$160
$140
$129.5
$120
$99.7
$100
$76.7
$80
$56.8
$60
$40.8
$40
$28.6
$20
$-
$0.4
$1.6
$2.7
$5.3
2003
2004
2005
2006
$12.0
2007
$19.5
2008
2009
2010
2011
2012 2013(f) 2014(f) 2015(f)
Source: Mercator Advisory Group Estimates 2012
17

18. American Express/Walmart’s Bluebird Account Is Actively
Competing For The Underserved Banking Market
•
•
•
•
The account is fully electronic, meaning that no
checks are issued (the company has stated that
checks will be available in 2013).
Account servicing and statements are online only.
Cardholders use a mobile application that
supports money transfer, bill payment, remote
deposit capture, text alerts, and account balance
and transaction information.
Other features include:
–
–
–
–
–
–
–
–
–
Supporting up to four subaccounts, controlled from the
main account
Purchase protection
Fraud protection
Global assist services for travelers
Roadside assistance
Entertainment access
Live customer service
No minimum balance
No foreign transaction fees
18

19. Agenda
Key Market Dynamics
– Regulatory Impact
– Evolving Retail Financial
Services Models
Emerging Products
– EMV
– Prepaid
– Mobile
Preparing for the Future
19

20. Consumer Adoption of Mobile Devices Continues to
Grow Strongly
Mobile Device Ownership by Type:
(Base=All)
2013
•
2012
61%
48%
Smartphone or tablet*
56%
45%
Smartphone*
31%
39%
Voice and text phone*
Tablet*
27%
12%
Basic cell phone
23%
26%
Do not own mobile
device
7%
6%
•
•
A majority of credit union
members should be
considered mobileenabled.
Over 8 in 10 consumers
under age 35 own a
smartphone.
Due to the speed of
growth in device
ownership, many are
new users who will grow
their use of mobile
banking apps over the
long term.
*Statistically significant difference 2012-2013 at the 95% level
Source: Vantiv Insights consumer surveys 2012-2013, N=1,200 US adults
20

21. Mobile Usage Has Already Changed How
Consumers Interact With Their FIs
FI Communication Methods Used in Past Year
(Base = All and Smartphone Owners)
79%
83%
Went into branch and spoke with a teller
Went into branch and spoke with customer service rep
62%
64%
61%
67%
Through an ATM
Use a customer service website
Called 800 service number and spoke to a person
Spoke with my personal financial advisor, banker, or broker
Called 800 service number and used the phone menu
By mail
Sent an email to a rep or inquiry address
Accessed a special mobile app using my smartphone
Accessed customer service website using my smartphone
Used online chat on customer service website
Accessed a special mobile app using my tablet computer
Spoke with advisor or service rep using video conferencing
Sent an SMS text to rep or inquiry address
43%
50%
39%
46%
35%
39%
34%
36%
20%
18%
15%
22%
10%
27%
9%
22%
8%
14%
4%
8%
3%
4%
3%
6%
Total Respondents
Smartphone Owners
Source: Mercator Advisory Group CustomerMonitor Survey Series 2011
21

22. Soon, Mobile-Based Payments Will Force Issuers to
Think About Their Brands in a Different Way
Card Brand Acceptance Marks
Mobile Wallet Brands
22

23. Consumers Increasingly Expect Mobile Payments Will Be
Common In The Future—But The Form Is Unclear
Expectations About Mobile
Payments Use
(Base = All)
Mobile payments
will be common
(2012)
Mobile payments
will be common
(2013)
I will use mobile
payments (2012)
I will use mobile
payments (2013)
•
31%
31%
10%
22%
7%
9%
7%
•
36%
30%
1-2 yrs
2-5 yrs
18%
5+ yrs
8%
9%
17%
19%
No idea
Never
18%
37%
21%
18%
20%
33%
•
Two thirds agree that
mobile payments will be
common in five years.
Nearly 8 in 10 consumers
under age 35 expect mobile
payments to be common in
five years.
But just two in five expect
they themselves will use
them in five years--they do
not have a clear picture
how mobile payments will
work or what their value will
be.
Source: Vantiv Insights consumer surveys 2012-2013, N=1,200 US adults
23

24. For Those Willing To Consider Mobile Payments, Trusted
Financial Providers/ Brands Are The Preferred Sources
Preferences for Digital Wallet Provider
(Base = All)
50%
Bank or credit union
Major card network (Visa,
MasterCard, AmEx)
Online payment provider
like PayPal
43%
20%
Major technology company
like Apple
13%
Major eCommerce retailer
like Amazon
13%
Wireless cellular phone
provider (Verizon, Sprint)
13%
Major retailer like Target or
Walmart
• Financial institutions are
preferred providers, in part due
to their established presence
providing online and mobile
banking services to members
today.
• Consumer and industry visions
for mobile payments could
benefit from the strong support
of trusted financial institutions.
12%
Third party, independent
developer like Google
I would never use a digital
wallet
9%
28%
Source: Vantiv Insights consumer surveys 2012-2013, N=1,200 US adults
24

25. Agenda
Key Market Dynamics
– Regulatory Impact
– Evolving Retail Financial
Services Models
Emerging Products
– EMV
– Prepaid
– Mobile
Preparing for the Future
25

26. Preparing for the Future
• Credit Unions have maintained their
reputation as trusted financial services
providers throughout the economic
crisis period.
• Banks are disadvantaged in today’s
regulatory environment and continue
to be a target for legislators and
litigators.
• Credit unions can effectively compete
on a digital basis and also offer local
services being increasingly abandoned
by banks.
• Creating appeal to a younger
demographic should be a near-term
focus; mobile represents a major
opportunity.
26

27. What’s Your Next Step?
•
Now is the time to plan and start your
EMV strategy.
•
Anticipate the needs and interests of
members--match demographics to
products as closely as possible.
–
•
Mobile payments are just appearing on
the horizon but mobile banking is here
now.
–
•
Members want next generation products from
their financial institutions, but relevancy is key.
Build out as much functionality into your mobile
banking services as possible.
Accentuate the fundamentals of a credit
union.
–
Members and businesses need credit.
Consider new ways to reach the
disenfranchised.
27

28. Q&A
royal.cole@vantiv.com
28