Alternative Payment Providers Disrupting the Payment Landscape Michelle Evans | Consumer Finance Analyst Euromonitor International

#PaymentsForum @Euromonitor @MEvans14

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FINANCIAL CARDS CONSUMER LENDING CONSUMER PAYMENTS .ATM .Mortgages/Housing .Card Payment Transactions .Debit .Consumer Credit .Cash Transactions .Credit (Commercial & .Auto Lending .Other Paper Payments Personal) .Card Lending .Electronic direct/ACH .Charge (Commercial & .Home Lending transactions Personal) .Durables Lending .Open loop Prepaid .Education Lending .Closed loop Prepaid .Other Personal Lending . Store

NEW PAYMENTS FRONTIER 8 Alternative payment providers are disrupting traditional landscape

“If the rate of change

on the outside is

greater than the rate of

change on the inside,

the end is near.”

Jack Welch, former CEO of General Electric

Smartphones

Tablets

NFC chips

QR codes

Bluetooth

Cloud computing

New business models

Regulations

$12.5 $185.4 $300 billion billion billion SMARTPHONE SALES SMARTPHONES SALES EXPECTED SALES OF IN 2006 IN 2012 SMARTPHONE IN 2015 NEW PAYMENTS FRONTIER 11 A look at the changing landscape of mobile-enabled devices

.Near Field Communications is considered the technology frontrunner to power m-payments .It builds upon RFID systems by allowing two-way communication between two NFC-enabled devices .Can read and transmit radio frequencies within 20 centimeters .Automatically pairs two devices .Already used in contactless card payment systems like MasterCard’s PayPass

Payment

Service Pairing initiation NFC ecosystem

Sharing Ticketing

Short-range communication Short-range communication technology technology Range of less than 20 centimeters, Range of up to 100 meters, reducing liklihood of interception depending upon its class Operates on lower frequency Operates on more higher, more (13.56MHz) popular frequency (2.4GHz) Transfer rates ranging from 106 to Transfer rates below 100 megabits 424 kilobit per second per second Connection automatically established Connection must be established within 1/10th of second manually to create a trusted bond

Product example: Google Wallet Product Example: Rollpay

Consumers Manufacturers must have introduce confidence in NFC-enabled payment smartphones alternative

Retailers install NFC- compliant POS terminals

Typical POS Transaction: New Payment Entrants:

Mobile Issuing Customer Mobile bank phone networks makers

Value-added service Retailers Payment Merchant networks providers

Tech Mobile app Merchant acquirer companies platforms

Banks/card issuers (eg Barclays)

Retailers (eg Card operators Tesco plc) (eg Visa Inc.)

Payments US$13.8 Mobile app trillion Value-added platforms (eg service Android by providers (eg Google Inc.) PayPal Inc.)

Mobile phone Mobile phone networks (eg manufacturers Verizon (eg Samsung Wireless) Electronics)

PLUG-IN DEVICES Such products consist of a free mobile app and a fully encrypted small card reader, which can turn any iOS or Android-based device into a mobile payment system accepting card transactions.

DISRUPTORS RESHAPING PAYMENTS Meet the poster child for plug-in devices: Square

$275/ 2 US$8 month million billion FEE CHARGED TO SMALL INDIVIDUALS AND TRANSACTIONS BUSINESS IN EXCHANGE BUSINESSES USE PROCESSED BY FOR 0% SWIPE FEE SQUARE SQUARE ANNUALLY QR CODE-BASED PAYMENT SYSTEMS QR codes are a two-dimensional form of a barcode whose contents can be decoded electronically. QR codes recently gained attention in payments.

DISRUPTORS RESHAPING PAYMENTS 24 Starbucks has operated most successful QR code system to date 60 million MOBILE TRANSACTIONS PROCESSED ON THE STARBUCKS’ MOBILE APP SINCE JANUARY 2011 1 million MOBILE PAYMENTS PROCESSED BY STARBUCKS WEEKLY

$4 30 million 4000 US CITIES, MORE THAN TRANSACTIONS PER MERCHANTS ON BOARD DOUBLING ITS PRESENCE MONTH TELECOM-DRIVEN PARTNERSHIPS Mobile networks, which will play an important role in pushing the necessary technology forward, likely will become a part of the banking and payment processes executed on mobile phones and could reap significant financial benefits as a result.

DISRUPTORS RESHAPING PAYMENTS 28 Telecom-driven mobile payments efforts from around the globe

Isis, WyWallet, US Sweden

Trusted Service Oscar, Management, UK Taiwan

Platform where individual servicers can interoperate

Increases likelihood of use among banks, retailers and other companies

Single point of contact for advertisers, media agencies, retailers, brands

Control of consumer information

© Euromonitor International DIRECT-CARRIER BILLING Method of payment that charges the payment directly to a consumer’s wireless bill. It’s most popular with small- volume payment transactions like the digital purchase of apps, ringtones or game tokens. DISRUPTORS RESHAPING PAYMENTS 32 Direct-carrier most popular in Asia Pacific, the Middle East, LATAM

© Euromonitor International EFT NETWORK DISRUPTORS These disruptors challenge the status quo by funding a payment method through electronic funds transfer, also known as EFT, rather than a credit or debit card.

DISRUPTORS RESHAPING PAYMENTS 35 Dwolla’s attempt to launch its own national payments network

“It (paying) should be a very simple thing and for whatever reason we have complicated the hell out of it as a society. We need to blow it up and start over.”

Ben Milne, founder and CEO of Dwolla As part of Inc. Magazine’s 30 under 30 interview

© Euromonitor International DISRUPTORS RESHAPING PAYMENTS Dwolla’s free web-based system relies on ACH network for funding $0.25 RECEIVER PAYS FOR TRANSFERS OVER US$10 100,000 USER ACCOUNTS 1Million DAILY TRANSACTIONS $500 AVERAGE TRANSACTION AMOUNT VIA DWOLLA RETAILERS IN CONSUMER FINANCE Retailers around the world are morphing into consumer finance providers, as well. Besides selling core products, retailers also may offer loans, insurance, card services or even proprietary mobile payment systems.

DISRUPTORS RESHAPING PAYMENTS 38 Nearly 20 US retailers aim to create a new m-commerce platform

Gain scale, critical mass among consumers

Could negotiate lower interchange fees

Promote own merchant-issued cards

Avoid payment rails altogether by connecting merchant-issued cards to bank accounts

Control all customer data

© Euromonitor International CLOSED-LOOP PAYMENT SYSTEMS Companies, such as Apple, that have found success operating closed-loop payment systems could leverage that experience to a wider payment system.

DISRUPTORS RESHAPING PAYMENTS 41 New iPhone lacks NFC, but Apple may still be thinking payments

Boarding passes

Movie tickets

Sporting event tickets

Retail coupons

Loyalty cards

Prepaid cards

© Euromonitor International TECH TITANS IN PAYMENTS Technology-driven giants like Apple, Google, Facebook, and Amazon.com are well positioned to cash in on the upcoming mobile payments bonanza thanks to their reputation for innovation.

DISRUPTORS RESHAPING PAYMENTS 44 Will consumers trust tech titans when it comes to payments?

Top 10 Most-Trusted Brands March 2012 1. Amazon 2. Coca-Cola 3. FedEx 4. Apple 5. Target 6. Ford 7. Nike 8. Starbucks 9. Southwest Airlines 10. Nordstrom

Source: Entreprenueur

Direct- Acquired Zong Inc. for US $240 million in 2011 carrier Users can charge online purchases like online games to wireless billing carrier bills Wireless Acquired Fig for US$15 million in 2011 payments Smartphone app and POS connect over wireless network Customer photo appears on POS for shopkeeper to confirm identity Plug-in Plug-in device unveiled in March device Unlike many rivals, it is international, as well

Scan card Acquired card.io in July details Captures credit card info via smartphone camera

3 SEPARATE DEALS WITH BIGGEST POS MAKERS — VERIFONE, INGENICO AND EQUINOX PAYMENTS 40 million TERMINALS WORLDWIDE 80% TOP 200 BIG-BOX RETAILERS IN US USE VERIFONE POS © Euromonitor International INTRODUCTION NEW PAYMENTS FRONTIER DISRUPTORS RESHAPING PAYMENTS STRATEGIES BEHIND M-COMMERCE PROSPECTS FOR PAYMENT DISRUPTORS

STRATEGIES BEHIND M-COMMERCE 48 MasterCard’s mobile-related recent acquisitions, partnerships

• Partnered with Sybase 365, Utiba and Comviva to bring transactions through Mobile Money telephone to brick-and-mortar and online merchants worldwide Partnership

• Acquired rewards specialist, formerly known as Bill Shrink, in 2012 • Uses payment data to target special offers and discounts from merchants to Truaxis debit and credit cardholders

• Acquired DataCash, a European payment service provider, in 2010 • Offers single interface that provides e-commerce merchants with ability to DataCash process secure payments around the world

• Acquired platform that enables delivery of financial services to unbanked consumers, including P2P payments, airtime top-up and bill payment Fundamo

• Acquired platform works with publishers and developers to handle transactions for digital online games, digital media and social networks PlaySpan

• Acquired software provider, which has a variety of fraud-detection capabilities that identify questionable transactions and provide near-instant fraud detection CyberSource

• Visa entered into a five-year agreement in 2011 • Monitise operates payments an mobile banking services for financial institutions Monitise

Rise in the Banked Population, 2.5 billion Selected Markets 100 people in the world do not have accounts at formal financial institutions 90

80 11% in developed markets do not have 70

accounts versus 59% in emerging markets 60

40 Lack of access is not only because of poverty, but also the cost, travel distance and amount 30

of paperwork involved in opening accounts 15+ a of % as population Banked 20

Women, in particular, are more 0 2002 2004 2006 2008 2010 likely to be unbanked India Brazil Turkey South Africa China Czech Republic

Source: World Bank Japan USA

Possession of Internet-Enabled Computer Versus a Mobile Phone 2012 100

% of households of % 40

0 Indonesia India Ukraine China Chile Russia United Germany Canada Japan Australia USA Kingdom

Possession of internet-enabled computer Possession of mobile telephone

Internet Retailing as a Percentage of Total Retailing, Selected Markets

12%

10%

2% Internet retailing as percentageretailingtotal as of aretailing Internet

0% UK US France Germany Sweden Japan China Hungary Russia Ukraine Romania Thailand India

2006 2011 2016

PROSPECTS FOR PAYMENT DISRUPTORS 54 Mobile wallet expected to gain momentum in coming years

386% PROJECTED 2012-2017 GROWTH OF THE 46 MARKETS RESEARCHED BY EUROMONITOR $378 billion PROJECTED 2017 SIZE OF M-COMMERCE IN MARKETS 64% THE SIZE OF THE US MARKET VERSUS WHOLE

Plug-in devices

QR code-based payment systems

Mobile carrier-led payment systems

Direct-carrier billing

ACH-funded payments

Merchant-led payment networks

Closed-loop payment systems

Product innovations from tech titans

Industry collaboration

Technology included in new phone models

Proving to merchants that it’s worth POS updates

Convincing consumers it is safe and effective

Consumers prefer a digital wallet from their primary bank

Non-payment providers tackling trust and privacy concerns

Regulatory barriers

Manage loyalty

Geo-location discounts

Comparison shopping

Read product reviews

Faster transaction time

Check account balances

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