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Digital Payments. Jim Woodworth Head of Marketing, ACI Worldwide. Firstly, who are ACI ?. ACI software process 300 billion digital payments per year. www.aciworldwide.com. Agenda. History of Payments From barter to mobile phones Payments are a Business - PowerPoint PPT Presentation
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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