Conexxus Annual Conference Payment Modernization – Responding to Mass Connectivity and Technology Innovation

Guy Berg Vice President Payments, Standards, and Outreach Group

April 30, 2019 Today’s Payment System

For its time, it worked well It was, • Faster • More convenient • More efficient

But now, Disclaimer: The opinions expressed are those of the • Its slow individual presenter and not those of • Its vulnerable to attack the Federal Reserve System or any • Its inefficient Federal Reserve Bank.

Payments need to become a Jet

• Fast • Efficient • Safe

• Lots of Room for Innovation

26% 43% 8% 6%5% Almost Constantly Several Times a day About Several Less once a times a often day week Daily

88% 18-29 "Use of 78% 30-49 Social 64% 50-64 Media by 37% 65+ Age"

0% 20% 40% 60% 80% 100%

Source: Pew Research Center Internet & Technology, Mobile Fact Sheet; Pew Research Center: about a quarter of U.S. adults say they are “almost constantly” online, March 2018; IELTS Adviser ©2019 Federal Reserve Bank of Minneapolis. Materials are not to be used without consent. 4 Global Use of Social Networking Apps

Monthly Active Users (in millions) FACEBOOK 2,230 YOUTUBE 1,900 INSTAGRAM 1,000 QZONE 563 WEIBO 376 TWITTER 336 REDDIT 330 PINTEREST 200 ASK.FM 160 TUMBLR 115 FLICKR 112 GOOGLE+ 111 LINKEDIN 106 VK 97 Do we completely ODNOKLASSNIKI 71 MEETUP 35 understand the implications?

Source: Pew Research Center Internet & Technology; Dreamgrow, Top 15 Most Popular Social Networking Sites and Apps, August 2, 2018. ©2019 Federal Reserve Bank of Minneapolis. Materials are not to be used without consent. 5 Payments Modernization at Tale of Two Stories

Consumer Payments B2B Payments

Non-CashNon-Cash Retail PaPaymentsyments Volume Trends ValueValue i inn TrillionsTrillions ooff inin tthehe UU.S..S. DollarsDollars

CardCard ppaymentsayments 55.6.6 DDebitebit 7% ccardsards 22.6.6 Check 33%% ppaymentsayments 29.029.0 337%7%

NNetworketwork ACH 41.641.6 5353%%

Mobile apps

Online banking

Mobile wallets

Mobile coupons Work e-mail

Social Media Cloud computing

Insufficient PII and Payment Data Security • Cyber attacks • Man-in-the-browser • Man-in-the-middle • Malware • Robotic attacks • Phishing/social engineering • Large scale data breaches

• Account takeover fraud • Application fraud • Identity theft • Remote payment fraud

Add • Dynamic authentication security

Remove • Sensitive account information

Combine • Multiple layered security functions

• Existing infrastructure while Leverage adding new technology

• Identity verification, payment device Converge authentication and location validation

• Consumer Demand • Business Competition

• Same old payment rails • New convenience feeding demand, stimulating competition • What are the possibilities in the petroleum industry?

Increasing expectations for digital engagement and faster payments

Increased customer Competition for engagement Deposits

Venmo's Total Payment Volume Q1 2017 to Q1 2019 Zelle - $35 billion in payments volume (Q4, 2018) Press Release Jan. 24 2019, Zellepay.com

Payfare Instant Financial Daily Pay FlexWage PayActive

EmployeeEmployee BenefitsBenefits EmployerEmployer BenefitsBenefits • InstantInstant access to earned wageswages • RetentionRetention and recruitinrecruitingg tool • Prevents fee and debt trapstraps • No changeschanges to payrollpayroll processprocess • Reduces finfinancialancial stressstress aandnd • No compliancecompliance or financial risk absenteeismabsenteeism (this(this maymay vary)vary) • FlexibleFlexible fee structure and service offeringsofferings Most don’t require a traditional bank account No credit check, loan agreements, or securitization

• 4433 countriescountries livelive — P2P2PP PaymentsPayments — P2P2BB PaymentsPayments — B2B2BB PaPaymentsyments • 15 countries pendinpendingg imimplementationplementation • ISO 20022 MigrationMigration Will the new near real-time payment rails be used in Retail and to what extent?

Source: https://www.instapay.today/tracker/ ©2019 Federal Reserve Bank of Minneapolis. Materials are not to be used without consent. 17 B2B Payments: Lacks Mass Connectivity DEMANDING STRAIGHT-THROUGH- PROCESSING

What Needs to Happen?

Simplifies Corner 1 Corner 4 connectivity between Supplier / Buyer / trading partners Payeey Payery Connect once, trade Capabilities with many Registry

Leverages existing process models

Access Access e-Invoice Point Point Corner 2 Corner 3

Provides structured data Enables Process Automation

Requires B2B directories Helps Drive B2B Mass-Connectivity

Trade Chainn Food Trustt JPM Coinn Experimentt Network Prototypee Commonwealth Bank and 5 Walmart, Kroger, Unilever J.P Morgan became the first supply chain companies and others teamed with IBM U.S. bank to create and test a develop an end-to-end global to track food from suppliers to digital settlement coin trade experiment stores representing fiat currency

• Uses a combination of • Goal is to increase • Coins are transferred blockchain, smart contracts, traceability to reduce food- between client accounts in a and IoT to parallel end-to- born illness private network for end existing processes • Walmart is requiring full business-to-business money • Improved communications, traceability participation by movement resolved paperwork some suppliers by inefficiencies and improved September 30, 2019 visibility for the participants Sources: https://www.jpmorgan.com/global/news/digital-coin-payments https://www.commbank.com.au/guidance/newsroom/commonwealth-bank-completes-new-blockchain-enabled- global-trade--201807.html https://www.forbes.com/sites/stevebanker/2019/02/02/2019-is-the-year-for-blockchain-for-traceability-but-will-it- have-legs/#3061ceb23dcc ©2019 Federal Reserve Bank of Minneapolis. Materials are not to be used without consent. 22 Blockchain Risk

Could Cause Greater Fragmentation for Suppliers

CompanyCompany 1 CompanyCompany 2 CompanyCompany 3

BlockchainBlockchain BlockchainBlockchain BlockchainBlockchain

SupplySupply SSupplyupply SSupplyupply ChaChainin ChaChainin ChaChainin MgMgmt.mt. MMgmt.gmt. MgMgmt.mt.

Consumer Payments B2B Payments Modernization Modernization Is Surging Is Lagging Behind

Mass connectivity Lacks mass connectivity Smart mobile phones Lacks necessary interoperability Consumer expectation and demand for greater Increasing cost and convenience inefficiency Competition Insufficient Corporate Security Is Lagging Leadership to Drive Innovation in the Right Direction