Insurance Payments Transformation

Aaron Schneider, VP, Bank of America Merchant Services

October 23, 2007

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Agenda

• Introduction• Credit Card Players, Debit Card Players• Costs of Credit Card, Debit Card Acceptance• PIN-less Debit, What is it?, Costs• Current Landscape • Benefits • Payment Methods• Growth Opportunities• Merchant Marketing• Technology/Implementation Options• Questions/Comments

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Introduction

• Major trends in billing and payment technology in the insurance industry:

– Increase in electronic presentment and payment– Increase in credit card payment – Decrease in check payments

• Payment card growth is slowing in the most mature bill payments segments — telecommunications and cable/satellite/ISPs — while growth remains healthy in the insurance and utility segments.

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Credit Card Players

• Visa and MasterCard Issuers– Includes Citibank, Wells Fargo, Wachovia, Bank of America,

Chase, Suntrust, PNC, and hundreds of others

• Visa and MasterCard Acquirers (Processors)– Includes Chase, Bank of America, First Data, Fifth Third, and

many others– Independent Sales Organizations (ISOs)

• Third-Party Technology Vendors– Includes Bill Matrix, Fort Knox, Speedpay, Kubra, CyberSource,

Various Bank Technologies, and many others

• American Express and Discover (act as issuer and acquirer)

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• For a typical credit card transaction, the Interchange fee represents over 90% of the total cost of card acceptance.

• Visa and MasterCard have created more than 152 different Interchange levels, although only a few typically apply to insurance companies.

• “Interchange qualification” represents a significant cost to all insurance companies.

Costs of Card Acceptance

90% to 93% Interchange Cost

5% Visa and

MasterCard

Associations

2% to 5% Merchant

Processor

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Costs of Card Acceptance

• Visa Interchange fees (paid to issuing banks) for insurance companies are:

1.43% + $.05 for credit or .80% + $.25 for debit/check card+ Visa assessment fees of .0925% (paid to Visa)+ Acquirer fees of X (negotiable depending on volume)____________________________________________________

= Total Cost of Acceptance

Example Cost Calculation

$100 Insurance Premium= $1 .48 in Interchange fees (paid to issuing bank)

+ $ .09 paid to Visa + $ .08 paid to acquiring bank processor $1 .66 in total cost (1.66% effective rate)

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Costs of Card Acceptance

• MasterCard Interchange fees (paid to issuing banks) for insurance companies are:

Credit (card not present consumer non-rewards rate) is 1.89% + $.10 or .80% + $.25 for debit/check card + MasterCard assessment fees of .095% (paid to MasterCard) + Acquirer fees of X (negotiable depending on volume)

______________________________________________________ = Total Cost of Acceptance

Example Cost Calculation

$100 Insurance Premium= $1 .89 in Interchange fees (paid to issuing bank)

+ $ .09 paid to MasterCard + $ .08 paid to acquiring bank processor $2 .06 in total cost (2.06% effective

rate)

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Costs of Card Acceptance

Interchange and assessment fees for other industries:• Mail Order/Phone Order Merchant = Visa Consumer Card (non-rewards)

Interchange of 1.85% + $.10• Consumer Utility = $.75 Interchange flat fee for Visa and MasterCard• Supermarket = Credit Visa Interchange of 1.24% + $.05• Petroleum = Debit MasterCard Interchange of .70% + $.17

• Large Ticket B2B ($7500 +) = Visa Interchange of .95% + $35

Example Cost Calculation for $10,000 Visa Insurance Premium Payment from

Level 3 Corporate Card Customer

$10,000 Insurance Premium= $130.00 in Interchange fees (paid to issuing bank)

+ $ 6.93 paid to Visa + $ 10.00 paid to acquiring bank processor $146 .93 in total cost (1.46% effective

rate)

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PIN-less Debit

• Allows ATM/Debit cardholders to pay bills at bill payment merchant

– Web site– Voice response unit (VRU),– Live customer service representative or call center– Recurring payment

• Transactions are processed online, in real time • Transactions limited to biller categories that fit a specific

low-risk model (utilities, insurance, telecom, financial institutions)

• Bill payment merchant assumes the transaction liability and is responsible for authenticating cardholder at time the transaction is initiated

Source: First Data ® : “Real-time Debit Alternative Payments STAR® PIN-Secure & STAR® Bill Payment”

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PIN-less Debit

• Insurance is a core category for the STAR Bill Payment Service. Nearly 15% of total transaction volume comes from insurers.

– 558 billers – 89 new in 2007 – 78 insurers

• Approval rate for STAR Bill Payment is 90%. • Research shows that when asked what type of card they

would prefer to use to make a bill payment, consumers selected debit cards over credit cards by nearly a 5-to-2 ratio.*

• More than one-third of consumers say that they would pay more bills electronically if they could use their debit cards.*

* “2007 Consumer Payments Preferences and Usage Study”; Phoenix Marketing International / ESP Payments PracticeSource: First Data ® : “Real-time Debit Alternative Payments STAR® PIN-Secure & STAR® Bill Payment”

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PIN-less Debit (Bill Pay Debit)

• STAR, NYCE, and PULSE Debit Networks have approved insurance companies to accept PIN-less debit transactions

• .65% + $.175 = capped at $.62 + processor/third-party vendor fees

Sample Effective cost of a $500 premium= $.62 + $.25= $.87This equals effective rate of .17%

• Litigation currently exists regarding PIN-less debit patents. Litigation may be resolved in next 12 months.

• ATM/debit transactions increased about 23% between 2005 and 2006 *

• One third-party vendor insurance client saw a 224% growth in PIN-less ATM debit transactions from May 2005 (15%) to July 2006 (33.6%)

* Source: ATM&Debit News EFT Data Book September 2006

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Current Landscape

• Bill payment volume is a sizeable opportunity with volume concentrated in insurance, utilities and telecommunications

9%

11%

18%20%

34%

Insurance

Utilities

Telecom

PropertyManagement

Cable/Satellite/ISP

Other

34%

20%

11%

Other

12%

PropertyManagement

9% Insurance

Telecom

Utilities

Life/P&C Insurance

Consumer Bill Pay Sales Volume*$953 billion (CY05)

Business Bill Pay Sales Volume*$419 billion (CY05)

Source: Visa U.S.A. PIC Analysis* Represents bill payment portion of segment volume only; totals may not sum due to rounding.

5%8%

36%

28%

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Current Landscape (e-Commerce)

Personal Insurance• Can policyholders send payments

via Web site?– Yes – 100%

• Payment methods customers can set up from Web site.

– Single payment credit card – 20%– Recurring credit card – 10%– Single payment EFT – 25%– Recurring EFT – 15%– Recurring debit card – 10%

• Electronic bill presentment for customers?

– Yes – 40%– No – 60%

• Electronic bill presentment for agents?

– Yes – 40%– No – 60%

Commercial Insurance• Can policyholders send payments

via Web site?– Yes – 47%– No – 53%

• Payment methods customers can set up from Web site.

– Single payment credit card – 17%– Recurring credit card – 10%– Single payment EFT – 24%– Recurring EFT – 17%– Single payment debit card – 17%– Recurring debit card – 10%– Monthly pay plan only – 3%

• Electronic bill presentment for customers?

– Yes – 24%– No – 76%

• Electronic bill presentment for agents?

– Yes – 30%– No – 70%Source: ICE survey

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Current Landscape (Payment Plans and Fees)

Personal Insurance• Methods of charging credit card fees

– Do not offer credit card payments – 10%

– Do not charge fees on credit card payments – 20%

– Charge standard installment fee – 60%– Discount standard installment fees –

0%– Charge more than standard installment

fee – 10%• Amount charged for electronic

payments made via Web site– No charge – 62.5%– $0.01 to $3.00 – 12.5%– $3.01 to $5.00 – 12.5%– $5.01 to $8.00 – 12.5%

• Amount charged for payments via phone

– No charge – 62.5%– $0.01 to $3.00 – 12.5%– $3.01 to $5.00 – 12.5%– $5.01 to $8.00 – 12.5%

Commercial Insurance• Methods of charging credit card fees

– Do not offer credit card payments – 44%

– Do not charge fees on credit card payments – 11%

– Charge standard installment fee – 39%– Discount standard installment fees – 0%– Charge more than standard installment

fee – 6%

• Amount charged for electronic payments made via Web site

– Does not offer electronic payments – 33%– No charge – 55.5.%– $3.01 to $5.00 – 5.56%– $5.01 to $8.00 – 5.56%

• Amount charged for payments via phone– Does not offer payments via phone – 39%– No charge – 50%– $3.01 to $5.00 – 5.5%– $5.01 to $8.00 – 5.5%

Source: ICE survey

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Current Landscape

• Online bill payments accounted for 39% of bill payments among online households in 2006, an increase of 4% from 2005.

• Volume of checks sent by mail fell 4%, accounting for only 34% of the volume of payments.

• Consumers paying at least one bill online per month rose to 74%, compared to 69% in the previous survey.

• Consumer adoption of online bill payment has more than doubled since January 2002, when 37% of online households reported paying at least one bill online.

• Half of property/casualty insurers are currently offering electronic bill presentment and payment to their policyholders, and nearly half have it for their agents.

Source: The 2007 Consumer Bill Payment Survey, a study by Harris Interactive Inc. and The Marketing Workshop Inc.Source: 2006 Celent report, “Billing: Business and IT Issues for P/C Insurers.

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Benefits of electronic payments

Benefits to insurance companies:• Improves cash flow and increases profits• Timely payment • Streamlines payment processing• Reduces handling costs and losses• Reduces risk of losses from bad checks• Improved customer service and consumer perception• Labor and operational efficiency • Consolidate and automate electronic deposits to your

accounts• Decrease lapse rates

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Benefits

Benefits to your customers: • Choose from multiple methods of payment • Take comfort in knowing payments are fast, reliable and

secure• Rewards (frequent flier miles, cash back, ease of

accounting)• Addresses most consumer security concerns• Speeds up time to statement

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Payment Methods

• Cardholders demonstrate a desire to pay through various channels, indicating opportunity in both the biller direct and consolidator models

• Example of biller direct is a merchant who allows payment directly on the merchant’s Web site

• Example of consolidator is a third-party vendor who accepts the payment on behalf of the merchant

• Advantages of consolidator include ease of implementation, speed of implementation, less compliance liability

• Disadvantages of consolidator include loss of control

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Payment Methods

52%Use online

bill pay at bank

Web site

13%

75%Pay by biller-direct*

24%Use all three

methods

82%Send checks

via mail

35% 12%

• While card acceptance has grown, most Visa cardholders use multiple methods to pay bills.

Bill Payment Methods of Choice, 2006Responsible for Household Bill Paying (n=308)

* Pay directly to biller by payment card or EFT from checking or savings (online or by phone)Source: Visa U.S.A. Research Services, 2006

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Growth Opportunities

• Statistics reported from a top 5 insurance company (based on revenues)

11%

13%

1%

3%

5%

7%

9%

11%

13%

2006 2007

Per

centa

ge o

f P

aym

ents

Pai

d vi

a

Cre

dit

Car

d

Approximate % of overall payments (among all types of insurance)

paid via credit card

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Stats for Top Insurance Company

Percentage of payments paid via credit cards in 2006 and 2007 for specific lines of insurance

87%

79%

70%

75%

80%

85%

90%

95%

100%

Standard &

Non-Standard Auto

Homeowners

Type of Insurance

Per

cent

age

(%) o

f

Pay

men

ts P

aid

via

Cre

dit

Car

d

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Growth Opportunities

• In terms of credit card acceptance, this top 5 insurance company reported their credit card growth rates over the past three years are as follows:

– 2005: 29% growth– 2006: 30% growth– 2007: 13% growth (year-to-date)

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Insurance Inserts

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Insurance Company Statement Insert

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BillPay Marketing

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BillPay Marketing

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Merchant Marketing

• Biller (merchant) marketing of Visa Bill Pay generated more than 180 million direct marketing impressions in the last year.

• Participating marketing partners within the insurance industry included Farmers Insurance and St. Paul Travelers Insurance.

• In the retail (non-bill payment) marketplace, there is minimal amount of growth potential for payments.

• Visa, MasterCard, American Express, Discover, STAR, NYCE, PULSE, and many of the major issuers are all focused on increasing the amount of bill payments paid via credit card, debit card.

• These companies are going to more aggressively market bill payment to consumers who are going to request bill payment capabilities from insurers.

• Marketing will include television, Web, statement inserts, magazine and other forms of media. Incentives are being increased to push consumers in this direction.

• What is the message to pass to your customer service agents who will be taking calls from customers that want to know, can I pay with my credit card?

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Technology and Implementation

• Outlining needs – Which lines of insurance?, pricing concerns • Accept payments face to face at agent office, mail order via

lockbox, phone order via customer service rep or automated phone system (IVR), Web payments, Direct or Consolidator model?

• Convenience fees or no convenience fees?• All customers or exception items? (marketing or no

marketing?)• Which payment types?

ACH/E-Check Visa Consumer Transactions, Visa B2B-Level 2 and Level 3 MasterCard Consumer Transactions, MasterCard B2B-Level 2, 3 STAR, NYCE, PULSE American Express Consumer, American Express B2B Discover International Payment Types

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Technology and Implementation

• Business to Business – Examples: Agent to Insurer, Corporation to Insurer

• Visa Level 2, Level 3, and Large Ticket Level 3

• Mastercard Level 2, Level 3, and Large Ticket Level 3

• International Payments – Consumers in many international markets prefer methods other than Visa/MC/Amex/Discover

• Example- France – Carte Bleue, Carte Vert Italy – Carta Si UK – Maestro, Solo, Electron Ireland – Laser

Scandinavia – Dankort Germany – Bank Transfers, Direct Debit Asia – Bank Transfers (similar to wire transfer)

• There is no single source acquirer with a single platform that can process all domestic and international payments. Multiple acquirers would need to be chosen for many implementations involving both domestic and foreign processing.

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Technology and Implementation

• Choose third-party vendor, bank vendor, or choose to code directly to a payment processor (proprietary or non proprietary concerns)

• Choose processor (acquirer)• Establish connectivity (Internet API, frame relay)• Test and certify connectivity• Train users• Go live• Closely monitor fees and Interchange levels• Stand-alone payment projects can take 4-6 weeks to

implement• Fully integrated payment projects can take 2-6 months to

implement

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Questions/Comments/Discussion

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Thank you

• Aaron Schneider, 1.954.558.0252 aaron.schneider@bankofamerica.com

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