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Emerging Payments – The Changing Landscape Presented to: (April 15, 2008)

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Emerging Payments – The Changing Landscape Presented to: (April 15, 2008)
Emerging Payments –
The Changing Landscape
Presented to:
Maine Association of Community Banks
(April 15, 2008)
New Hampshire Community Bankers Association
(April 17, 2008)
Marianne Crowe
Federal Reserve Bank of Boston
© 2008 Federal Reserve Bank of Boston
1
Agenda
ƒ Payment Landscape Today
ƒ Growth in Electronic Payments
ƒ Future Directions
© 2008 Federal Reserve Bank of Boston
2
Today’s Payment System is Dynamic
Many Factors in Play
Changes in Rules and
Regulations
Migration to Electronic
Payments
Increasing NonBank/non-traditional
Competition
Continued Decline in
Check Volume
Growth in Internet
Payments
Dynamic,
Rapidly
Evolving
Payments
System
Consumer & Merchant
Preferences
Technology Advances &
Cross-Channel Access
Increased Risks
Shifting Demographics
© 2008 Federal Reserve Bank of Boston
3
Payment System Continues to Shift from Paper
to Electronics
Estimated Total Number of Transactions by Payment Type, In Billions
Cash
Check
Cash use
declining
50
Checks
declining
Cash
Checks
40
Money Orders
Credit Cards
Debit Cards Pin
Credit
Credit card
growth has
slowed
ACH
ACH
growing
steadily
Debit Cards Sig
30
Debit Card Total
ACH
Prepaid Cards
EBT
20
Debit
(Pin &
Signature)
10
Debit card
growth
rapid
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: Nilson, Federal Reserve, NACHA, ATM&Debit News
4
© 2008 Federal Reserve Bank of Boston
Noncash Payments Increased at Annual Rate
of 4.6% from 2003 to 2006
Number of noncash
payments (billions)
Rate of change in the number of payments
2003 to 2006, CAGR*
4.6%
Total
Checks (paid)
-6.4%
4.6%
Credit card
2003
2006
81.4
93.3
37.3
30.6
19.0
21.7
EBT
10.0%
0.8
1.1
Debit card
17.5%
15.6
25.3
ACH
18.6%
8.8
14.6
*CAGR is compound annual growth rate.
Source: 2007 Federal Reserve Payments Study
© 2008 Federal Reserve Bank of Boston
5
Payments By Check
2006 distribution of checks by counterparty and purpose
ƒ Representative random
sample of over 32,000
checks
51%
Remittance
Remit/POS
POS
Income
Casual
32%
25%
17%
6%
16%
13%
5%
3%
C2B
B2B
ƒ Sample is ~40% of U.S.
“prime pass” checks
processed by 9 large
commercial banks
ƒ Consumers write 58%
of checks paid
ƒ Business/government
receive 76% of checks
paid
7%
17%
7%
B2C
C2C
*Source: 2007 Federal Reserve Payments Study
© 2008 Federal Reserve Bank of Boston
6
Business Payments Show Slow Decline in Check
Usage & Migration to Electronic Payments
100%
90%
86%
80%
75%
72%
70%
60%
57%
50%
Checks
40%
ACH
29%
30%
17%
20%
10%
10%
8%
Cards
18%
14%
10%
1%
0%
2001
2004
2006
9.3 billion trans.
2010*
10.9 billion trans.*
Source: Cards and Payments, First Annapolis, Projected estimate.*
© 2008 Federal Reserve Bank of Boston
7
Debit Card Growth
Why Debit Cards are one of Fastest Growing Payment Methods
„ Most common in-store & POS payment type
„ Displacing credit card, check & cash
„ Both signature & PIN growing but most consumers prefer PIN debit
„ Average volume growth of 25% per year for last six years
„ Projected to grow at 15-20% over next several years
„ 80% of U.S. consumers carry debit card
„ Active debit users do 11 transactions per month
„ Consumer debit purchases exceeded $1 trillion in 2006 globally, up
19% over 2005
Source: First Data, Visa 2006
© 2008 Federal Reserve Bank of Boston
8
Decoupled Debit Card As Alternative Payment
ƒ Debit card issued by Financial Institution (DDI) that does
not own customer’s checking or savings account
ƒ Debit card NOT linked to customer’s DDA account
ƒ Debit card is ‘Decoupled’ from customer’s DDA bank
ƒ Customer not required to have DDA account at the DDI
ƒ Decoupled debit purchases debited to the customer’s DDA
account via ACH
ƒ NACHA Rule Changes effective May 5, 2008
ƒ ACH transactions CANNOT be aggregated for POS or ATM
ƒ Merchant (payee) must be identified in ACH record, not
issuer
© 2008 Federal Reserve Bank of Boston
9
Decoupled Debit Card Current Market Players
ƒ Capital One
ƒ
ƒ
ƒ
ƒ
MasterCard branded debit card issued by Capital One
Can be used at POS, ATM or Internet
Offers higher rewards
$500 limit per day per account
ƒ Tempo Debit
ƒ Offers outsourcing solution to FIs to compete with Capital One
ƒ Provides functionality to allow FIs to offer decoupled debit product
ƒ Tempo manages the operations activities
ƒ PayPal
ƒ MasterCard debit card linked to PayPal account
ƒ Daily limits for ATM & POS
© 2008 Federal Reserve Bank of Boston
10
Decoupled Debit Card Process Flow
Customer makes
purchase using
Cap One Decoupled
Debit Card
Transaction routed
through
Master Card network
Cap One authorizes
transaction &
converts it from EFT
to ACH
Transaction flow
Settlement flow
Cap One
ACH Servicer
ACH Credit
to ODFI
ACH
Operator
© 2008 Federal Reserve Bank of Boston
ACH debit
to customer’s bank
account through RDFI
11
Decoupled Debit Card Benefits
Consumer
Benefits
ƒ Can choose debit provider just like credit card
ƒ Higher rewards than standard debit cards
ƒ Pooling of rewards
Merchant
Benefits
ƒ Co-branding with DD card issuer expands customer
base beyond one bank
ƒ Eliminates interchange fees
ƒ Builds customer loyalty
© 2008 Federal Reserve Bank of Boston
12
Decoupled Debit Card Concerns
Risks
ƒ Disintermediates DDA banks from debit transaction on their own
accounts
ƒ DDA balance unknown, DDA may be closed or blocked at time of
authorization
ƒ ACH transaction not simultaneous with debit card transaction
ƒ Short-term credit risk until ACH transaction clears
ƒ Capital One sets $500 daily limit per account to reduce exposure
ƒ Customer service issues – who to call if transaction problem
Threats to ƒ Moves relationship & consumer away from Bank to third party
Traditional ƒ Eliminates need for consumer to use DDA FI’s debit card
Bank
ƒ Possible loss of customer loyalty
Model
ƒ Threatens traditional bank debit card model with richer rewards
ƒ Low cost way for DDI to get more of customer wallet; cross-sell
© 2008 Federal Reserve Bank of Boston
13
Decoupled Debit Bank Response
ƒ Wait to see how decoupled debit takes off
ƒ Very little data on current volumes
ƒ Discourage customer use of competitor decoupled debit card
ƒ Charge DDI transaction fees to account holder
ƒ May risk customer complaints or loss
ƒ National banks - Issue a competitive decoupled debit product
ƒ 12% of banks surveyed recently indicated they were considering a
decoupled debit product
ƒ Mid-size regional and smaller community banks
ƒ Enhance appeal of existing debit card programs
ƒ Innovate, market, educate
© 2008 Federal Reserve Bank of Boston
14
Pre-Paid Cards
ƒ Payment card with dollar value pre-loaded at ATM, retail venue,
other location
ƒ Not linked to individual bank account
ƒ Multiple markets and types
Employer to Employee
„
„
„
„
Payroll Cards
Health Care
Reimbursement Cards
Bonus Cards
Government to Consumer
„
„
„
Consumer to Business
„
„
„
Gift Cards
Youth Cards
Travel Cards
Social Security Payments
Welfare Payments
Other
Business to Consumer
„
„
„
Insurance Claims
Rebates
Store Refunds
Source: Mercator Advisory Group, September 2006
© 2008 Federal Reserve Bank of Boston
15
Pre-paid Cards
for Unbanked
Customers Consumers
Pre-paid
Cards
for Unbanked
More & more unbanked have wages credited directly to cards
Use cards much like a bank account
Unbanked cardholders use payroll cards for everyday purchases
Cash replacement for unbanked?
ƒ
ƒ
ƒ
ƒ
Spending Trends of Unbanked Prepaid Cardholders
15
11.00%
10.61%
10
6.64%
5
3.47%
3.45%
Discount Stores
Fast Food
Restaurants
3.83%
0
Grocery Stores
Restaurants
Gas Stations
Household
Expenses Online
Percent by Primary Spending Category
Source: eCount Prepaid Index, Banked vs. Unbanked Cardholders, July 2006
© 2008 Federal Reserve Bank of Boston
16
Internet Payments
75% of Americans use the Internet today for various activities,
including financial transactions
ƒ Online Bill Payments
ƒ e-Commerce: Online purchase of
goods & services
ƒ Person to Person (P2P) or account to
account money transfers
© 2008 Federal Reserve Bank of Boston
17
Bill Payment Trends
Percentage Growth By Payment Type
70%
60%
50%
40%
30%
20%
10%
0%
2006
Paper Checks
2007
Money Orders
2008
Cash
ACH
Credit Card
© 2008 Federal Reserve Bank of Boston
2009
Debit Card
2010
PINless Debit
Source: TowerGroup, Celent, Aite Group
18
Bill Payment Trends
Consumers Paying More Bills through Online Bill Payment
2007
2005*
Pay online
39%
35%
U.S. Consumers Paying at Least
One Bill Per Month Online
Pay/mail check
34%
38%
U.S. Region
Pay at least 1 bill online
- Online bank site
38%
33%
- Biller website
55%
53%
% of Users
West
78%
South
76%
Northeast
72%
Midwest
71%
Concern with
online security
*December
13%
20%
Higher broadband penetration and
use of online banking tend to drive
higher use of online bill payment
Source: Harris Interactive & Marketing Workshop January 2007 Survey
© 2008 Federal Reserve Bank of Boston
19
Internet Purchases are Growing
ƒ e-Commerce sales increased
from 2.9% to 3.4% of total
retail sales between 2006
and 2007
ƒ While total retail sales far
exceed e-Commerce sales, eCommerce sales are growing
more rapidly.
ƒ e-Commerce sales grew 19%
from 2006 to 2007 vs only
4% between 2005 and 2006
ƒ Opportunity for increased
internet purchases & payments
is huge
U.S. e-Commerce sales as
% of Total Retail Sales
100%
80%
60%
40%
20%
0%
2006
Total Retail
2007
e-Commerce Retail
U.S. Census, February 2008
© 2008 Federal Reserve Bank of Boston
20
Security Concerns Changing How Consumers
Pay for Internet Purchases
Concern that credit card data will be accessed by unauthorized parties, misused,
or intercepted.
Internet Transaction Mix by Payment Type (%)
100%
90%
80%
70%
63%
59%
51%
55%
47%
43%
60%
50%
40%
30%
21%
20%
10%
11%
0%
3%
3%
2005
Other Debit/ACH
22%
9%
24%
23%
6%
4%
8%
4%
3%
7%
10%
2006
2007
Stored Value
25%
5%
6%
25%
3%
8%
15%
17%
21%
2008
2009
2010
Paper
© 2008 Federal Reserve Bank of Boston
Debit
Credit
Source: Nilson Reports
21
Merchants Responding to Security Concerns
Merchants Adopting More Alternative Payment Methods for Internet Purchases
Online Merchant Adoption Rate of Payment Alternatives
40%
35%
30%
25%
20%
15%
10%
5%
0%
ACH
e-Check
Bill Me
Later
Gift Cards
2005
Google
Checkout
PayPal
2006
Source: Digital Transaction News
© 2008 Federal Reserve Bank of Boston
22
Major e-Commerce Payment Providers
ƒ
Make internet purchases or transfer money P2P online via
email
ƒ
Stored-value model: Funds stored in PayPal account
ƒ
Huge account base (over 160 million, over 30 million active),
in 103 countries
ƒ
e-wallet account created at set-up with customer’s financial
information
ƒ
Pay multiple merchants from account with credit or offline
debit card
ƒ
25% of top 500 e-retailers since June 2006
© 2008 Federal Reserve Bank of Boston
23
Major e-Commerce Payment Providers
ƒ
Instant credit model – buy now, pay later
ƒ
DOB & last four digits of SS# for instant credit check at
merchant website
ƒ
3 million users & over 450 e-retailers (2007)
ƒ
Good for high ticket items (electronics, travel)
ƒ
Online banking model
ƒ
Customer directed from merchant website to online banking
platform to authorize payment
ƒ
Merchant set up as payee
ƒ
Alternate option if no credit card or prefer cash-like payment
© 2008 Federal Reserve Bank of Boston
24
Micropayment Industries Ready for Electronic
Payments
Micropayments defined as every day cash & check sales less than $5.00
- Represent ~ $1.7 trillion annually
- Represent ~ 400 billion transactions annually
„ Estimated potential to pay with credit/debit cards vs. cash ~ $500 billion
„
Micropayment Mix by Purchase Type
Incidental Cash
30%
40%
Fast Food
Vending
Transportation
12%
2%
4%
5%
7%
Online video,
ringtones, music
Parking
Convenience
Source: TowerGroup 2007
© 2008 Federal Reserve Bank of Boston
25
Will Contactless Cards Replace Cash for
Micropayments?
What is a contactless payment?
ƒ Credit or debit card
ƒ Embedded with wireless
communication chip
ƒ RFID: Radio Frequency ID
ƒ Used for POS purchases LT $25
ƒ Waved or tapped at POS reader
What is the value?
ƒ Consumer
ƒ
ƒ
ƒ
ƒ
Convenience
Speed (no swipe, no PIN)
Security
Control
ƒ Merchant
ƒ
ƒ
ƒ
ƒ
Brand differentiation
Increased spend
Less cash
Speed of transaction
ƒ 40% faster than cards
ƒ 55% faster than cash
© 2008 Federal Reserve Bank of Boston
26
Contactless Payments –
Consumer & Merchant Adoption
Where is Consumer Demand?
Who Accepts Contactless Cards?
% Willing to Use Contactless
Vending
Gas
Food/Groceries
Fast Food
Convenience Store
Transit
Parking
Coffee/Beverage
Video Game
0%
10%
20%
30%
40%
50%
60%
70%
Source: Peppercoin/Ipsos 2006
© 2008 Federal Reserve Bank of Boston
27
Contactless Payments – Target Industries
US Contactless-enabled Merchants 2007
11%
5%
QSR
29%
Pharmacy
Movie
Theatre
Gas Station
24%
Convenience
2%
29%
Big-Box
Rental
Source: Aite Group
© 2008 Federal Reserve Bank of Boston
28
Mobile Banking
ƒ Definition
ƒ Use of a mobile device to connect a customer to a financial
institution’s website to conduct self-service banking and
financial business, such as:
ƒ Viewing account balances
ƒ Transferring funds between accounts
ƒ Bill Payment
ƒ Receiving account alerts
ƒ Several Large Banks offer Mobile Banking services today
ƒ Wells Fargo, Bank of America, Citi, Chase, SunTrust, USBank,
Wachovia, USAA
ƒ Smaller Banks determining competitive strategy
© 2008 Federal Reserve Bank of Boston
29
Mobile Banking Channels
ƒ Mobile Banking is made available through different
mobile sub-channels
ƒ SMS (Short Message Service) to send & receive simple text
messages (160 characters)
ƒ WAP (Wireless Access Protocol) allows users to access
information instantly on the Internet, using a mobile browser
ƒ Downloadable or Preloaded applications loaded on phone
ƒ Banks may offer one or more of the above channels
© 2008 Federal Reserve Bank of Boston
30
Trends in Use of Mobile Banking
35% growth forecast for online banking consumer use of mobile banking by 2010
Mobile & Internet Banking Household Penetration
„
„
„
„
Internet banking households (millions)
% of all households
Mobile banking households (millions)
% of online banking households
2006
2007
2010
43.0
46.0
56.0
37%
40%
46%
0.215
1.38
19.6
1%
3%
35%
„
BofA has over 600,000 mobile banking customers (2007 Annual Report)
„
3.3 billion mobile phone users = 50% of world population (ITM)
Celent, September 2007
© 2008 Federal Reserve Bank of Boston
31
Trends in Use of Mobile Banking
ƒ Javelin 2007 Survey of Mobile Banking Users
ƒ 71% check balances
ƒ 41% monitor recent transactions
ƒ 25% pay bills
ƒ Early adopters
ƒ
ƒ
ƒ
ƒ
High income
Professionals
Travelers
Gen Y/Under 30
© 2008 Federal Reserve Bank of Boston
32
Mobile Banking – Potential Benefits
ƒ Build stickier relationship with customers
ƒ Enhance customer payment convenience
ƒ Reduce operations costs by moving some inquiries from
branch/call centers to mobile channel
ƒ Incremental revenue from new mobile services:
expedited payments, remittances, bill pay, increased
transaction volume
ƒ Product differentiation
ƒ Keep up with competition, retain customers
© 2008 Federal Reserve Bank of Boston
33
Mobile Banking Challenges
ƒ Technology still incompatible, lacks standards
ƒ Complexity of using mobile device
ƒ Entering passwords & commands can be difficult
ƒ Applications on handset can be tricky to use
ƒ Customer Ownership Unresolved
ƒ Need cooperation from carriers, networks, and banks to support
mobile channel, manage customer support, handle billing, collect fees
ƒ Security
ƒ Need secure access to bank accounts over wireless network
ƒ Phones more prone to being lost or stolen
ƒ Authentication & Fraud
ƒ How to build customer demand
© 2008 Federal Reserve Bank of Boston
34
The Future Payments Landscape
ƒ
ƒ
ƒ
ƒ
U.S. payment system will continue to evolve from paper to electronic
instruments.
ƒ
Driven largely by consumer choices today, but business demand is
increasing
Card payments will continue to lead volume growth among electronic
instruments, especially debit card
Pace of e-Commerce will accelerate as today’s 20-somethings and
teenagers become tomorrow’s primary consumers
Leveraging relationship between mobile- and e-Commerce will drive
future innovation in payments
ƒ
New types of fraud & other security threats will need to be addressed to
maintain consumer confidence
ƒ
Increasing globalization will offer rich opportunities to payment systems
that are easy to use internationally & convenient to process across
borders.
© 2008 Federal Reserve Bank of Boston
35
QUESTIONS??
http://www.bos.frb.org/economic/eprg/
© 2008 Federal Reserve Bank of Boston
36
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