Market Overview

“Contactless Payments: Issuers Meet Demand for Speed and Convenience”Market Overview

Deborah Baxley, Partner, Global Business Services, IBM

Property of the Smart Card Alliance © 2007

How contactless payment works

Contactless read range from0-10cm (0-4 inches)

Fast, convenient payment using cards ordevices with an embedded smart card chip and antenna

Issuer

MasterCardVisa

American ExpressDiscover Network

Acquirer

Transaction is processed through existing secure payment processing networks


Contactless is not RFID!

RFID tagsCommonly used for applications like inventory tracking , animal identification, building access controlSimple, low-cost, and commonly disposableLong operating range: 25+ feetMinimal data stored on the chipMinimal security

Contactless ChipsTypical applications: transaction card payment and secure identity, ePassportShort operating range: < 4 inchesStrong support for security: encryption, mutual authentication, tamper-resistance, PIN and biometric support


The shift from cash to cards

Consumers carry less cash60% have ≤ $20 75% see no need to carry large amounts of cash62% purchase with cash less often

Contactless payments changes consumer behavior:

More loyal to merchantsSpend 20-40% moreUse cards 18% more often vs. traditional cards

Appeals to youth market(ages 18 to 25):

60% prefer to use cards for purchases of ≤ $25More interested in paying with mobile phone4X as likely to carry phone vs. cash50% want to send money to friends via phone

Why pay with contactless?(< $25)

86%

62%

45%35%

% re

spon

dant

s

Con

ven

ien

t

Easy

Fast

Man

age

Expe

nse

s

Source: re:ID Magazine, Fall 2006, ePayments News Network, 7/06, 5/06 Ipsos Insight/Peppercoin telephone survey of 1,001 adults, Visa, MasterCard, IBM analysis


Contactless payments are here to stay

US Contactless Cards Issued, 2006 US Contactless Merchants, 2006Total US cards in circulation as of 11/15/06: 18.8m Total merchants enabled: 46k

C-Store Parking PharmacyQSRRetail Theater Stadium

HSBC1% Amex

9% GE4%

Chase37%

Chase10%

Citi12%

Key12%

Citizens5%

HSBC6%

Wells Fargo2%

Bank of America1%

US Bank1%

Gre

en =

deb

it ca

rds B

lue = credit cards

49%

Conven-tional

credit & debit

cards, 55%

50% Cash & checks,

30%

Contact-less, 15%

1%

2006 2011

Contactless Payment Share

Tota

l 200

6 sp

end

= $1

.4 tr

illion

Source: Vivotech, Source of Map: MasterCard 2006, Celent 2006, Cardline 9/1/06, Forrester July, 2005, Nilson Report #868, 11/06, IBM analysis


All benefit – merchants, issuers, and consumers

Merchantsspeed, spend, cost, insight

Simpler and faster than cashShorter queuesCan increase spendImproved customer satisfaction Increases customer loyaltyReduced cash handling feesAbility to capture data on customer buying behavior

Consumersspeed, convenience, security

Speed ConvenienceBetter able to track spendSecurity

Issuersrevenue, differentiation, and loyalty

Increased spend results in increased interchange revenue Customer retention and acquisitionCapture cardholder data for marketing and rewards programs


Contactless and mobile payment trends differ among regions

US well-developed marketNearly 20m devices, ~50K merchantsChase Blink drives acceptance at national chains including drug, fast food and convenienceOnline authorizationCitibank and MasterCard conduct trial in NYC subways, Boston Transit issues contactless cardsIncreasing mobile pilots – HSBC, BoA, MasterCard, Visa, AT&T, Discover, Citi, Keybank

implement NFC-enabled mobile phone at Atlanta

basketball/hockey stadium

Source: Datamonitor, June, 2006, “Contactless Payments 2006”, ePayments News Network, 7/06, ABI 3/07, Cardline, Aberdeen Group 2006, IBM analysis



Transit drives adoption in Europe

Effort and cost of EMV roll-out slowing interest in contactlessGrowth driven by transit systems in Paris, London, Lisbon

pilot

launches PayPass in 7/06 with 25K

cards

US well-developed market




Japan and Korea leading the world in contactless

= other pilots and trials

Visa Wave cards launched in 2005 and mobile phone-

based in 4/06 with 160K cards & 4K merchants

launched Visa Wave in 2005 with 300K cards, 2 co-brand partners Watson’s

and CostCo

launched Visa Wave with 50K cards/mobile phones, accepted at

66 national Tesco storesbitWallet JV NTT & Sony

with 43K merchants, 23m users

Suicaadoption

driven by East Japan

railways






Contactless has reached its tipping point having achieved 5 of 6 significant milestones:

1.Standards emerge2.Pilots are scalable and replicable3.Retail, transit and government initiatives gain

acceptance4.Vendors offer products supporting wide audience5.More retailers announce contactless initiatives

Data / analytics not increasing POS efficiencies, labor management, sales


Japan and Korea leading the world in contactless




Formulating a business caseAs with any new product launch, the entire customer relationship must be considered

What’s the same?Market assessment - size, customer willingness to acceptP&L drivers Subjective factors

What’s different?Higher cost of cards and devicesReissue considerationsSpecial customer service considerationsCustomer educationLower average payment size


Contactless vendorsEquipment providers


Contributors:Deborah Baxley, IBMNancy Baunis, Gotham Financial ServicesKatherine Boosalis, DatacardJean-Marc Delbecq, VerifoneSunil Dewan, First Data CorporationRahul Gadkari, GemaltoJennifer Hale, American ExpressPeter Ho, Wells FargoLinh Huynh, Inside ContactlessMohammed Khan, VivotechKim Madore, Giesecke & DevrientCathy Medich, Smart Card AllianceJoanne Middendorf, MasterCardKenneth Moy, MasterCardRon Pincus, Giesecke & DevrientLiane Redford, VisaDidier Serra, Inside Contactless Carl Stauffeneger, Key BankJohn Suchanec, Bank of AmericaBrenda Washington, Verifone

Thank you!

Deborah Baxley, Partner, Global Business Services, [email protected], 1-416-478-4039

mailto:[email protected]


Contactless Payments Peter Ho, Vice President, Wells Fargo Card Services


There are three primary components to a successful contactless offering.

Merchant TypesMerchant Types

17 MCC’s make up small ticket services• QSR

• Drug & Pharmacy

• Parking

• Transit

• Vending1

TechnologyTechnology

Various ISO standards define usage• Payments

• Identification

• Stored Value

Form FactorsForm Factors

Each delivers convenience for a specific application• Card

• Key Fob

• Mobile

1 Pending changes to Regulation E


Wells Fargo’s SmartSpender Plan was created to help customers better manage, protect and reward their spending.

Protect RewardManage

Security Features that enable

customers to shop with confidence

because they are protected from

liability for fraud, identity theft and

unauthorized transactions.

Optional programs reward consumers for the spending they already do

with points toward travel,

entertainment, shopping and cash

rebate rewards.

Management Tools help

customers keep track of spending

patterns and empower them to

make smarter money

management decisions.


Contactless merchant adoption continues to grow with West Coast merchants starting to show interest.

Source: Visa USA

Peter [email protected]

PayPass – Still, the Simpler Way to Pay!

Carl Stauffeneger, Senior Vice President, KeyBank NA


Agenda

PayPass – What Is It?Payment TrendsThe Opportunity• Consumers• Issuers• Merchants

The Future

21


PayPass – What Is it?PayPass – Still, the Simpler Way to Pay!

The PayPass card has built-in chip technology, as well as, a standard magnetic stripe. This enables the card to be used, traditionally, at locations that accept debit cards

• However, at PayPass accepting locations, the cardholder can pay with one touch of the card

No swipe of the card, signature or PIN is required for most transactions under $25.00

PayPass is focused on replacing cash transactions with card transactions at quick-service environments where checkout time is critical

• Quick Service Restaurants• People Centers• Movie Theaters• Petroleum

22


Payment Trends – Why not CashPerceived Disadvantages of Paying with Cash

National Internet Survey - 1,000 consumers age 18 or older

Large amounts are unsafe 91%

Can not use online 70%

Extra bank/ATM trips 61%

Difficult record keeping 53%

ATM/check charges 49%

Large bills are not accepted 49%

Refunds are difficult 32%

Change is a hassle 31%

Source: Synergistics23


Payment Trends – Non CashPayment Options will Continue to Evolve

Total Retail Non Cash Payments

25% 27%

55%51%

48%45%

42%

32%

9% 10% 11% 12% 13%17%

23%20%

14%16%

18% 19%21% 23%24% 24%

0%

10%

20%

30%

40%

50%

60%

2001 2002 2003 2004 2005 2010

Debit Credit Check Electronic

Source: Federal Reserve & Purchase Street ResearchElectronic Transactions that occur through automated clearing house vs. credit, check or debitFor all USA retail non cash payments

24


Payments - Vision 201040% of all cards will be chip-enabled and multi-application

5% chip5% chip 40% chip40% chip

201020102010

Estimates: MasterCard Analysis Estimates: MasterCard Analysis

25


Contactless – The OpportunityWhy Contactless Fits!Compartmentalization of Payments – Most consumers have a propensity to use specific payment types for specific purchase amounts (i.e., most consumers will only use cash to buy a loaf of bread at a convenience store or buy movie tickets)

Purchase Amount

$50.00-$100.00

Credit Card

CheckCash

Debit CardContactless*

$100.00 +$25.00-$50.00

$0.00-$25.00

Payment Type

Purchase Amount

$50.00-$100.00

Credit Card

CheckCash

Debit CardContactless*

$100.00 +$25.00-$50.00

$0.00-$25.00

Payment Type

Majority of the time Sometime Unlikely

* Both pilots and production products, such as SpeedPass, have proven that contactless enabled payment devices ultimately replace cash as the preferred method of payment in the eyes of the consumer.

Source: KeyBank26


Contactless – The OpportunityCompetitive Difference

Assist in new checking account acquisition

Penetrate Cash only environments, where speed is essential

• An Aite Group study found that 50% of cash transactions in 2005 were less than $10.00

• Displace cash transactions used to make purchases from $1.00 to $25.00

• Transactions tend to be at least 10% more when using a card instead of cash

Increase in the number of debit card transactions per cardholder

Enhance consumer feeling of security, the card never leaves their hand

Contactless devices are not limited to just a card. They can also be built into a cell phone, key chain tag, key fob, PDA or __________ ?

27


Contactless - Merchant Business Drivers

1. Movement from Cash to Card = Increased Spend2. More Customer visits = Increased Revenue3. Greater Customer Loyalty = Increased Visits

Speed of PaymentSpeed of Payment Customer Customer Convenience+ Convenience

Source: MasterCard and KeyBank28


Contactless – The FutureWhen a contactless offering is combined with “state of the art” POS systems, it has the capability to displace cash

Contactless deployment strategies• Target ‘quick cash’ and ‘tap and go’ merchants• Close alignment with planned merchant POS upgrades • Minimize card and back-office costs• Support credit, debit, private label, and proprietary stored value• Put a contactless device in everyone’s hand

Compliments new checking account acquisition through a enhanced competitive offering

• Drives revenue growth• Increases transaction volumes• Moves inactive cardholders to active cardholders

Contactless payment is the most important payment card innovation in the past decade, creating new opportunities for delivering a new type of secure and convenient payment

29

Carl [email protected]

BB&T Contactless Visa Debit CardJeff Tansill, Senior Vice President, BB&T


About BB&T

• Over $121 Billion in assets• 1,472 branch locations in NC, SC, VA, WV,

MD, DC, KY, GA, FL, TN, AL and IN• BB&T is a full-service commercial and retail

banking institution providing insurance, investments, retail brokerage, corporate finance, payment services, international banking, leasing and trust services.

• Portfolio of over 2 million debit cards


BB&T’s Decision: Why Contactless and Why Now?

•The need for new technologyDynamic CVV

•Growth in small ticket purchasesLarge step in the replacement of cash

•Cardholder experiencePositive demographics of the typical contactless user

•Merchant acceptancePositive experience for issuer, merchant and cardholder


Planning

•Identify Geographical LocationsCentral Florida and Atlanta

Expanded to DC Metro, and Baltimore, MD regions

•Identify CardholdersSorted by geographic locationIdentified medium to heavy Check Card usageIdentified small ticket debit usersIdentified cardholders patronizing Contactless merchants


Security

•Skimming ConcernsUniversity of Massachusetts studyCardholders name not included on Track data

•Mail ConcernsMasking of antenna

Foil activation label vs. foil envelopeOpted for activationlabel with half antenna

•ATC (Application Transaction Counter)


Development

• Implemented new BIN for reporting purposes

• Anticipated extended lead time for plastic production

• Needed programming to identify new POS entry mode and adapted Card Management system for card issuance and reporting

Not considered a major programming effortATC validation performed by processorDue to the ATC BB&T is not reissuing a duplicate card if card is damaged for example


Implementation

• Employee pilot rolled out January 2007• 100,000 contactless cards mailed end of

FebruaryCardholders were not offered an opt-outCard package included detailed usage instructions, security information and how to locate Contactless merchantsExpanded returned card process was implemented to handle undeliverable mail


Cardholder Experience

• Early comments have been positive• Some merchant issues

A few merchants are PIN prompting causing customer confusionA few merchants have unnecessary steps in their payment process

Visa has been very responsive in going onsite to each merchant and working with them on correcting any issues


Follow-up

• Transactions are being monitored and reported monthly

10% of our initial group of identified cardholders was held out as a control groupTo date the program is exceeding our expectations for number of transactions per day

• Detailed analysis on usage, spending habits and profitability will be performed in Q3 2007 to determine potential program expansion


Lessons Learned

• Consider pre-mailing to prospective cardholders

• Consider outbound calling for activation• Consider increased education on how to

perform contactless transactions • Keep Call Center actively involved in the

process• Security has not been an issue for the

cardholders

Jeff Tansill, BB&[email protected]

Industry Perspective and ActivitiesRandy Vanderhoof, Executive Director, Smart Card Alliance


Industry Perspective

• Market results have proven that contactless payments delivers significant benefits to issuers, consumers and retailers

• Issuers are reporting positive results: market demographics, consumer acceptance and usage, cash replacement, account activation, differentiation

• New form factors and new acceptance locations are enabling exciting new opportunities for issuers and merchants and benefits for consumers

• Contactless payments have reached the tipping point – delivering value to all payment transaction participants and providing the platform for innovative offerings in this new era of payment


Smart Card Alliance• Smart Card Alliance mission

To stimulate the understanding, adoption, use and widespread application of smart card technology through educational programs, market analysis, advocacy, and industry relations . . . .

• Over 160 members, including participants from financial, retail, government, corporate, and transit industries and technology providers to those users

• Major activitiesIndustry and Technology Councils

Contactless Payments CouncilHealthcare CouncilIdentity CouncilPhysical Access CouncilTransportation Council

Conferences, symposia, web seminars and educational workshopsWeb-based resources and email newsletters


Contactless Payments Council

• Mission: Facilitate the adoption of contactless payments in the U.S. through education programs for consumers, merchants and issuers

• Over 34 active members, including financial industry representatives and technology suppliers

• ResourcesMerchant and Issuer Advisory GroupsEducational publications on contactless payments

The What, Who and Why of Contactless PaymentsMarket Survey: Consumer Attitudes and AcceptanceContactless Payments: Frequently Asked QuestionsMerchant Implementation Guide

Contactless payments resources and newsIssuer and merchant web seminars


Council Participants

American ExpressArby'sBank of AmericaBooz Allen HamiltonChaseCitizens BankCPI Card GroupDatacardDiscover NetworkFirst Data CorporationGemaltoGiesecke & DevrientGotham Financial ServicesHypercomIBMInfineon TechnologuesINSIDE ContactlessJCBKeyBank

MasterCard WorldwideNYC TransitNXPOberthur Card SystemsOTI AmericaPricewaterhouseCoopersSkyetekTexas InstrumentsThales GroupUSA TechnologiesVeriFoneVisa U.S.A., Inc.ViVOtechWells FargoWMATA


Web Seminar Sponsors

Randy [email protected](800) 556-6828http://www.smartcardalliance.org



http://www.smartcardalliance.org/

Documents

Market Overview