Faster Payments, Mobile Wallets…What’s Taking So-o-o-o Long?

Steve Mott Principal—BetterBuyDesign NACHA Payments—San Diego 1 May 2018

1 Key Messages: We’re Still Experimenting • There are too many choices now, and no compelling value yet • P2P appears to be a Trojan Horse (or Virus) for digital payments • Small business focus (with service integration) is paramount to making money • QR codes are now in the pole position for the technology integration race • Faster payments: P2P and B2B open bigger doors • Mobile wallets appear to be mainly a place-holder for mobile apps at POS now, but do bear promise for digital transacting • The best value proposition in apps and wallets will prevail (if legacy payment providers let it happen…) • Always remember: Digital aims to be free

2 1st Generation of Digital Payments: Instructive

In the Beginning, there was David Chaum, and Digicash

3 The Checkered History of Digital Payments Shows Recurring Fits & Starts

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

4 The Nexus of Financial Services Convergence Popmoney; PeoplePay clearXchange/Zelle; 1. Online/Mobile Visa Direct (OCT)/MC Money Banking Send

PayPal/Ve Fed FPI; nmo/ Digital Initial Zoom; 3. P2P 2. Faster service Square Payments Payments offerings Cash; overseas; Facebook Dwolla; Coinbase

Apple Pay; Walmart Pay; 4. Mobile Twin Towers of Wallets China; Wallet

5 1. Online/Mobile Banking: P2P as Cash/Check Replacement is a Big Addressable Market

Business Insider (US, 7/2016): $540 bil. for 2014 Aite Group (DT, 2/2016): $600 bil. E&Y (Cross-Border Remittances-2017): $600 bil. McKinsey (Global, 2016): $625 bil.

6 Upside: Mobile Banking Customers that do P2P Payments Are More Satisfied with Provider Retail Bank Satisfaction Mobile Banking Index Incidence Impact of Mobile Banking & Used in past 3 months P2P Usage 835 44% 44% Did Not Used 812 Use Mobile 806 Mobile Banking 799 Banking but Not P2P 12% Used Mobile Banking and Sent a P2P Payment Did Not Use Average Retail Used Used P2P in Mobile Bank Mobile Mobile App Banking Satisfaction Banking Source: 2018 J.D. Power Retail Banking Satisfaction Study. Wave 3, Sep/Oct 2017 n = 21,182 7 DDA Leverage: Gen Z and Y Consumers Opening up Mobile and Digital Wallets to their Bank Accounts

Which apps/services do you use that are linked to your primary bank checking account? 55% All Customers Gen Z & Y 52% Customers

39% 30%

15% 15% 8% 10% 8% 6% 5% 4% 4% 3% 2% 3%

None / PayPal Android Samsung Zelle Other I do not Pay or Pay use Google Wallet

Source: 2018 J.D. Power Retail Banking Satisfaction Study. Wave 3, Sep/Oct 2017 n = 21,182 8 Zelle vs. Venmo Gets All the Hype; Banks Flout Size of Volume and Sign-up Rates

Zelle: $ bil. • 35% TDV growth • 45% Volume growth $80 • 170 mil. txns.-2016 • 247 mil. txns.-2017 $60 • Avg. txn.-2016: $324 • Avg. txn.-2017: $304 $40 • Signing up 100K/day Chase QuickPay: $20 • 94 mil. txns.-2016 • 148 mil. txns.-2017 $0 Venmo/other FinTech: Zelle • Half the $ Volume Venmo • But faster growth (97% to $35 bil.) 2016 2017 • $30-35 transaction size

9 But in Customer Satisfaction Zelle Seems to be Coming Back to the ‘Pack’ as Sign-ups Expand Overall satisfaction with mobile payment apps/services: Apple Pay Android Pay/Google Wallet PayPal Venmo Zelle

9.2 9.3 n = 39 9.2

9.1

10 10 scale) 8.9 – 9.0 n = 146 8.9 8.8 8.8 n = 366

8.7

8.6

8.5 Overall Satisfaction (1 (1 Satisfaction Overall 8.4 Mar/Apr 2017 Jun/Jul 2017 Sep/Oct 2017

Source: 2018 J.D. Power Retail Banking Satisfaction Study. Thru Wave 3. n = 35,716 10 And Differences in Customer Experience & Security Seem to Demonstrate Startup Pains

• clearXchange (launched in 2011) still around— perplexing users trying to unhook from it if their phone or email address under old bank relationship—have to return to old bank • Most banks auto-enroll from clearXchange for Zelle: is this a competitive move—stickiness? • But no pre-enrollment into Zelle—Early Warning; but BofA considers Zelle an enhancement to money transfer services, so no notification is necessary… • Wells Fargo markets Zelle to its SurePay customers, but with notification of “Service Addendum” for online Access Agreement via email • PNC requires consent and enrollment upfront • Is this just a ‘Term of Service’ difference without a distinction? Or evidence of tension from competition amidst declaration of collaboration?

11 Chase’s QuickPay targeted Online and Mobile Success- fully (Focus on SmallBiz)

12 Chase Decided to Pivot on QuickPay to join with Zelle (for real-time, and interbank network effect)

13 But Smaller Banks Lag Behind

For mid-sized and small financial institutions, however, P2P payments so far are “lots of hype and no results,” according to new report from Malauzai Software Inc., an Austin, Texas-based developer of mobile-banking applications used by 435 community banks and credit unions. Malauzai says only 1.2% of active digital-banking users are making P2P payments, regardless of device.

Source: Malauzai Software, 8/2017 survey 14 Neither Banks Nor FinTech Competitors Appear to Have Figured out How to Make Money on P2P…yet

Source: Treliance (1/2017): P2P—A Comprehensive Look at Person-to- Person Payments

15 2. Faster Payments: Enabling Benefits of True Digital Transacting

16 McKinsey’s B-Case: 1/3 Checks Go Away

Checks account for 10 percent of P2P payments in the US, and the opportunity exists to digitize these transactions as well. According to research by the Federal Reserve Bank of San Francisco, the average value of a P2P check payment is $128, four times larger than the average P2P cash transaction ($32). Checks are costly for banks to process, and savings can be realized from bank-based P2P solutions displacing these paper items.—McKinsey 2016: Cooperation and Competition in the U.S. P2P Market 17 Checks are Still Everyone’s Problem (and Best B-Case)

18 Where as Cash Replacement Doesn’t Compute: Costs are Still Very Low (so Contactless Doesn’t Compute as a B-Case) Transaction Cost Per Average Ring ($)

$1.40

$1.20

$1.00

$0.80

$0.60

$0.40

$0.20

$0.00 Cash Check Offline Online ACH Debit Debit Bank/Acq.Fees Tender Time .Deposit Prep Transport Indirect

Sources: FMI, Paymentech, NDPS, Nilson Report, ATM/Debit News, Piper Jaffray, BCG

Sources: RBA (2014) The Evolution of Payment Costs in Australia

19 Dwolla: Pivots to Small Businesses to Leverage Real-time Capabilities

While Venmo continues to grow the number of users who download and use the app, Dwolla is trying to shed its app users and pivot from paying people to paying companies. Dwolla will now focus on providing payments application interfaces that can be embedded in companies own apps and websites to allow consumers to make payments from their Dwolla stored-value or from their bank accounts or credit or debit cards. --Treliance BBVA and Dwolla collaborated to deliver the bank’s US P2P offering, leveraging Dwolla’s “real-time” model (essentially a book entry transfer). This move is notable because although BBVA conceptually possessed the capabilities to move forward independently, it opted to leverage a fintech’s consumer experience knowledge to move forward more rapidly.—McKinsey 2016: Cooperation and Competition in the U.S. P2P Market 20 Coinbase Crypto-Exchange Speeds Fiat Money Transfers via U.K. Faster Payments

Coinbase, a leading virtual currencies exchange, gains e-money license in the U.K. and becomes the first crypto-exchange to support the U.K.’s Faster Payments Scheme, which, once rolled out, will significantly speed up the time it takes U.K. customers to send and receive fiat money from Coinbase. It will first launch as a pilot, giving a small number of Coinbase’s institutional users access to Faster Payments. Coinbase also has announced a partnership with Barclays Bank to accommodate fiat money movements. Ostensibly, this will provide some protection from Visa’s recent imposition of MCCs for ‘quasi-money’, which makes many smaller transactions exorbitantly expensive.—News Articles, 14/15 March 2018 21 Secret Sauce? Small Business Payments. Why? They Will Pay (One Way or Another)

Source: Medici (LTP) 22 3. P2P Payments: Motoring Ahead

23 PayPal: Not Just Venmo…

Total P2P: PayPal + Venmo + Zoom: 4Q2017: $27 billion TPV (20% of total TPV of $131 billion)

Total Mobile: 4Q2017: $43 billion TPV (up 53%)

Source: PayPal Investor Call, 4Q2017

24 Facebook Partners with PayPal for P2P

25 Venmo at POS—plus 2 mil. Online Merchants

26 But What about P2P Branching out to POS? Lydia in France Might be a Leading Indicator…

27 It’s a QR-code System that can Piggy Back on Mobile Wallets with a Card! Lydia is doing 1 mil. transactions a month at 25 Euros average ticket

28 Square Cash: Mobile POS Convenience, But Morphing into A New Business Banking Model

S-1 Pre-IPO Filing, 2015: 29 4. Mobile Payments: Mobile Proximity Payments at POS Plod Along…

30 Mobile Wallets Roll On Out

PayGility, Mobile ‘Pays’: US Payments Forum White Paper

31 Technology Integration Solutions Compete

PayGility, Mobile ‘Pays’: US Payments Forum White Paper 32 Operability and Consistency of Experience: A Big Issue in Formative Year of 2016

33 Refinement of Value Proposition: Added Focus in 2017 (e.g., Fuel)

34 The ‘Pays’: Two Clear Leaders in 2018

Source: PYMNTS.com/InfoScout

35 Apple Pay Cash: Riding In to the Rescue?

36 …Not so Fast…

37 Apple’s Using Legacy Payment Provider Rails Apple Pay Cash card services are provided by Green Dot Bank. Users must still have a separate credit or debit card to transfer money to an Apple Pay Cash card

Apple Pay Cash leverages Discover Network rails for new virtual tap-to-pay debit card for money transfers and in-store purchases

38 Apple Pay Setup Notifications: Crafty or Creepy? PYMNTS.com: • $29 bil. LoB pushing to $40 bil. in 2020

451 Research: • Only 34% of iPhone users link to AP at setup • 18% used the function in past 90 days 39 & WeChatPay: Not Just for Chinese Travelers any more

40 Google Tries Again…

Google’s history with P2P has taken many twists and turns to become what it is today. Google first released its Google Wallet payment service in late 2011. It consisted of a stored-value account linked to a bank account or debit card, a mobile app that could be used for payments where NFC was accepted, and a plastic card which could be used to access the stored-value account where NFC was not available.

Then in 2015, Google acquired the mobile wallet Softcard, which was a payment app offered by the major U.S carriers AT&T, and T-Mobile. The Google Wallet would come bundled with Android phones offered by those three carriers as a competitor to Apple Pay. This Google Wallet app on these Android phones was renamed Android Pay. The Google Wallet nomenclature was re-defined to denote the P2P payment service, including the stored-value account, accessed from a new mobile app (separate from Android Pay, but now also available on iPhones), from Gmail, and from the associated plastic card. But in early 2016, Google announced that it was dropping support for the plastic card. Recently, Google added access to P2P payments from its web browsers. Source: Treliance

41 Steve Mott’s Contact Info

0 1 0 1 0 1 0 1 0 1 0 Steve Mott 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 BetterBuyDesign 1 0 1 0 1 0 1 0 1 0 1 1386 Long Ridge Road 0 1 0 1 0 1 0 1 0 1 0 Stamford, CT 06903 1 0 1 0 1 0 1 0 1 0 1 and 1214 Querida Drive Colorado Springs, CO 80909 0 1 0 1 0 1 0 1 0 1 0 (c) 203.536.0588 1 0 1 0 1 0 1 0 1 0 1 email: [email protected] 0 1 0 1 0 1 0 1 0 1 0 website:www.betterbuydesign.com 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0

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