Digital PaymentsDigital Payments

Jim WoodworthHead of Marketing, ACI Worldwide

Firstly, who are ACI ?Firstly, who are ACI ?

ACI software process 300 billion digital payments per year

www.aciworldwide.com

AgendaAgenda

• History of Payments– From barter to mobile phones

• Payments are a Business– Fees, Rules, Risks, Rewards, Liabilities

• Recent & Current Developments– Fraud in the real world: Chip&PIN– Fraud in the virtual world@: SET, 3D Secure, Tokens

• Future Developments– New payment schemes– 4 Market Forces

AgendaAgenda

• History of Payments– From barter to mobile phones

• Payments are a Business– Fees, Rules, Risks, Rewards, Liabilities

• Recent & Current Developments– Fraud in the real world: Chip&PIN– Fraud in the virtual world@: SET, 3D Secure, Tokens

• Future Developments– New payment schemes– 4 Market Forces

A brief history of paymentsA brief history of payments

Courtesy of www.visa.com

Two New Payment Types that VISA don’t mentionTwo New Payment Types that VISA don’t mention

• Paypal

• Google Express

“furthermore, the Google service is set to undercut fees charged to merchants by PayPal. Google will charge merchants 20 cents and two per cent of a total transaction cost to use the service, which is considerably lower than the 30 cents and 2.9% fees levied by PayPal. Google also plans to discount fees based on how much merchants spend on its advertising packages”

AgendaAgenda

• History of Payments– From barter to mobile phones

• Payments are a Business– Fees, Rules, Risks, Rewards, Liabilities

• Recent & Current Developments– Fraud in the real world: Chip&PIN– Fraud in the virtual world@: SET, 3D Secure, Tokens

• Future Developments– New payment schemes– 4 Market Forces

Different types of Payment/Settlement Operation UKDifferent types of Payment/Settlement Operation UK

• CHAPS– High Value Payments, Immediate Transfer of Value– Real-Time Gross Settlement between parties

• BACS– Bulk low-value Clearing Transactions– Direct Debit, Standing Order, Credit Transfer– 3-day clearing cycle

• Cheque – Bulk lower-value method

• LINK– ATM withdrawal – end of day settlement

• VISA, MasterCard, Maestro– Higher value merchants (too expensive for corner shops)– Credit and Debit Card Offerings– Usually end of day settlement

Payment Types and Volumes - UKPayment Types and Volumes - UK

Transaction 

1998 1999 2000 2001 2002 2003 2004 2005volumes in the UK (millions)

Plastic card purchases 3,094 3,537 3,923 4,387 4,821 5,318 5,739 6,094

Debit card 1 1,736 2,062 2,337 2,696 2,994 3,364 3,690 4,084

Credit and charge card 1 1,224 1,344 1,452 1,562 1,687 1,822 1,949 1,924

Store card 1,2 134 131 134 129 140 132 100 83

Plastic card withdrawals at ATMs and counters 1,917 2,030 2,090 2,250 2,342 2,457 2,615 2,807

Direct debits, Standing orders, direct credits and CHAPS sterling 3,055 3,252 3,469 3,706 3,930 4,271 4,827 5,378

Cheques 2,988 2,859 2,702 2,567 2,394 2,251 2,089 1,931

For payment 2,768 2,654 2,526 2,401 2,247 2,110 1,966 1,846

For cash acquisition 219 205 176 165 147 141 122 86

Total non-cash (plastic card, automated and paper) 11,053 11,674 12,176 12,914 13,484 14,296 15,270 16,207

Cash payments (estimate) 25,309 25,596 27,910 27,684 26,622 25,859 24,916 23,968

Post office counter and passbook withdrawals 3 1,019 962 879 792 687 595 395 257

Total transaction volumes 37,381 38,236 40,966 41,421 40,792 40,748 40,580 40,432

Source: APACS

Schemes, Issuers, Acquirers etc.Schemes, Issuers, Acquirers etc.

Fees

Fees

Fees

Issuing BankIssuing Bank

Customer/PayerCustomer/Payer

Acquiring BankAcquiring Bank

Merchant/Receiver

Merchant/Receiver

Payment

Services

Fees

Services

Services

GoodsGoods

Services

Payment/Settlement

organisation

Payment/Settlement

organisation

Interchange Fee

Fees enable all parties to make a profitFees enable all parties to make a profit

• Banks pay fess to the scheme (Link, VISA etc)– Monthly fees and per-transaction fees

• Merchant pays fees to their acquiring bank– Monthly fees– Per-transaction fees

• Customer pays fees to their issuing bank– Monthly fees etc. (it’s often hidden !!)

• Interchange Fee (between banks) is a very contentious issue for Merchants

– WalMart won $1bn in damages in 2003 from VISA and MasterCard because it’s anti-competitive

Merchants must follow the rules to get payment Merchants must follow the rules to get payment

• Merchant is guaranteed payment if:– Card Reader can read chip cards– Card was present at time of purchase– Card is valid– Card has no chip and signature checked

• OnLine Merchant not guaranteed payment– Unless using ‘secure method’

On-line merchants take big risksOn-line merchants take big risks

• Merchant accepts risk in all Internet transactions

• Sometimes the acquiring bank will accept some losses to keep the relationship sweet

• But the bank will charge big fees to the merchant for the increased risks

• 50% of all disputed transactions are generated by Internet transactions

AgendaAgenda

• History of Payments– From barter to mobile phones

• Payments are a Business– Fees, Rules, Risks, Rewards, Liabilities

• Recent & Current Developments– Fraud in the real world: Chip&PIN– Fraud in the virtual world@: SET, 3D Secure, Tokens

• Future Developments– New payment schemes– 4 Market Forces

Internet Payments are increasing dramaticallyInternet Payments are increasing dramatically

In 2012 it is forecast that 10% of card transactions will be over the Internet

Source: APACS

Internet Payment Volumes 1999 2005

Volumes (millions) 19 310

Value (£ billions) 1 22

There is huge fraud on payment cardsThere is huge fraud on payment cards

Type of Fraud Total (mill) % Increase

Counterfeit Card 97 +Card Not Present 183 -Lost and Stolen 89 -Mail Non-Receipt 37 ?Identity Theft 21 ?

Source: APACS, Cardwatch, www.apacs.org.uk

FRAUD FIGURE FOR 2005: £439 Million !!!!

2003

2003

FRAUD FIGURE FOR 2004: £504 Million !!!!

The industry is taking steps to reduce these lossesThe industry is taking steps to reduce these losses

• In the real world (not just UK)– Chip replaces magnetic stripe– PIN replaces signature– Liability Shift – If you don’t use chip you are responsible for the cost of

disputed transactions• In the virtual world

– CVV2– Verified by VISA/MasterCard SecureCode– Liability Shift

Securing Internet Payments: PAINSecuring Internet Payments: PAIN

• Privacy– Is the message secure ?

• Authentication– Is it from whom we think it’s from?

• Integrity– Has the message been tampered with?

• Non-Repudiation– Can the sender not later claim it wasn’t them?

Why did SET fail ?Why did SET fail ?

• Secure Electronic Transaction (SET) was a standard designed to provide Internet payment security

• SET was designed by technologists– Very secure, very sophisticated …– … and very hard to use !!

• No thought given to implementation– Merchants don’t want it until customers have it– Customers don’t see a need if merchants don’t use it

• An expensive lesson: Security and useability are a trade-off

What will provide secure Internet PaymentsWhat will provide secure Internet Payments

• Three Domain Models– Card schemes are adopting these– Something you have (card number)– Something you know (password)

• Token Authentication Models– MasterCard CAP– Uses a Chip&PIN card and low-cost reader to generate one-time passwords

• Smart Card Readers in PCs

How it works… How it works… One Time PasswordOne Time Password

Cardholder enters his PIN

If PIN correct, card/Reader generates a dynamic password e.g. 1788 0357 which changes at each authentication

Card is introduced

The secret is in the chip card

Cardholder push for One-Time password

AgendaAgenda

• History of Payments– From barter to mobile phones

• Payments are a Business– Fees, Rules, Risks, Rewards, Liabilities

• Recent & Current Developments– Fraud in the real world: Chip&PIN– Fraud in the virtual world@: SET, 3D Secure, Tokens

• Future Developments– New payment schemes– 4 Market Forces

4 Market Forces that Determine the Payment Model4 Market Forces that Determine the Payment Model

Trust & Brand IssuesBrandingSecurity

Public Policy IssuesRegulationEqual AccessCompetitive Framework

Merchant PropositionValue proposition Cost of AcquisitionCost of RetentionPricing

Consumer PropositionCost of AcquisitionCost of Retention

SUSTAINABLE BUSINESS MODEL

Public Policy Issues determine the shape of a Public Policy Issues determine the shape of a payment systempayment system

• Banking Regulation– UK and European Regulation, especially SEPA– Banking and Electronic Money Licences

• Pricing Transparency– Competitive Framework Required

• Anti-Monopolistic Behaviour– Must not exclude potential entrants– Banks DO operates as a cartel

• Security and Fraud Issues– Money Laundering, criminal funding

REGULATION IS THE BIGGEST DRIVER FOR CHANGE

A brand is a pre-requisite of any payment systemA brand is a pre-requisite of any payment system

• There has to be a brand– to let consumers know what to expect

• There has to be a scheme– to set the rules– to decide liability

• There has to be a settlement mechanism

Merchants are crucial to a payment systemMerchants are crucial to a payment system

• Banks have a comprehensiveMerchant Account base

• Relationship is much more than payments• Enrolment, retention, training, support

• Banks often make more money from merchant relationships than consumers

• There is huge tension between banks and merchants

The consumer must receive a benefit from any The consumer must receive a benefit from any payment systempayment system

• Douglas Adams, GSM 2001– If an innovation happens when you’re aged less than 18,

it’s normal– If it happens between the ages of 18 to 35

it’s learnable– If it happens after 35 you don’t get it

• Surveys Indicate Willingness of Consumers– e.g. AT Kearney 2004, Mobile Commerce

• Market Research Shows:– 80% of people will use a mobile payment service

when the phone is provisioned

MAKE IT EASY AND PEOPLE WILL USE IT

The Future Decoded: Mobile CommerceThe Future Decoded: Mobile Commerce

Symbol Market Force Good OK Bad

RegulatorFriendly

BrandFriendly

MerchantProposition

ConsumerProposition

Clear & Transparent PricingEMI Licence

Large Brand/Trust Building Costs – but plenty of players

No existing merchant relationships … and expensiveTo enrol them

Lots of customers, real utility

www.simpay.com

The Future Decoded: ContactlessThe Future Decoded: Contactless

Symbol Market Force Good OK Bad

RegulatorFriendly

BrandFriendly

MerchantProposition

ConsumerProposition

Works under the auspices of existing schemes

Works under the auspice of existing schemes

Sales force in place but pricing and cost of terminal equipment will be key

Trials positive but early adopter trials usually are. Do consumers want to replace cash ?Ideal for small value payments

The Future Decoded: Non-bank Payment TypesThe Future Decoded: Non-bank Payment Types

Symbol Market Force Good OK Bad

RegulatorFriendly

BrandFriendly

MerchantProposition

ConsumerProposition

Regulator concerned about fraud and laundering but generally supportive

Paypal and Google have excellent branding, other entrants do not – but prone to attack by fraudsters

Merchants (especially small) are keen – fills a niche that banks don’t handle. Customer service issues.

Consumers are OK with it .. In one niche (auctions) – will they adopt it in other scenarios ?

The Future Decoded: Faster PaymentsThe Future Decoded: Faster Payments

Symbol Market Force Good OK Bad

RegulatorFriendly

BrandFriendly

MerchantProposition

ConsumerProposition

Regulator driven initiative – Cruickshank report

Uses existing settlement entities. Not a scheme as such, will use the existing bank setup

No merchant involvement per se. Great proposition for utility companies and industry (payroll etc)

Real consumer utility

The Future Decoded: E-pursesThe Future Decoded: E-purses

Symbol Market Force Good OK Bad

RegulatorFriendly

BrandFriendly

MerchantProposition

ConsumerProposition

Regulator is OK

No payment brand/organisation currently exists .. But can piggy-back on existing Oyster public transport brand

Cost of cash for merchants is high so real value .. But new terminals required

Real consumer utility .. In London area anyway !

My personal guessesMy personal guesses

• Mobile commerce using prepay/contract Telco accounts will not extend significantly past premium SMS

• e-commerce will continue to progress – consumers will have to pay more to use ‘insecure’ schemes

• SSL-only will continue to dominate Internet Payments• Multi-application bank chip cards will provide us with e-purses.

Contactless will be a key driver• Faster Payments will cannibalise all but the very highest value

payments from CHAPS• Faster Payments together with Internet & Mobile will be a strong

person-to-person payment proposition• Public Transport based schemes will have local success

FinallyFinally

But …Cash will always be king

especially, if you owe me money

www.aciworldwide.com