All Things Payments & EMV. /

Transcription

1 All Things Payments & EMV /

2 Section 1: Payments Primer History and major payments milestones Merchants having the ability to accept card brands is the foundation of the merchant acquiring industry 1920 Companies such as oil companies and hotel chains issued their own credit cards 1949 Diners Club card introduced 1958 American Express introduces its first credit card 1966 BankAmericard (now Visa) and InterBank Card Association (now MasterCard) are established 1998 PayPal is founded 1946 First bank card Charg-It is introduced 1951 Franklin National Bank issues the first bank credit card 1959 Financial institutions introduce a revolving balance option 1986 Discover Card, originally part of the Sears Corporation. Its first card was unveiled at the 1986 Super Bowl 2006/2008 MasterCard and Visa go public; previously owned by member FIs now regard themselves as payment companies

3 Section 1: Payments Primer The Changing Payments Ecosystem Tech. Solutions Payment Brands Acquirers 3 rd Party Processors ISOs Gateways Banks POS Providers, VARs, ISVs

4 Section 1: Payments Primer The typical transaction flow Consumer $ Authorization 1 Merchant submits transaction information to its Merchant Acquirer 2 Acquirer transmits transaction, via 3 rd Party Processor, to the appropriate Payments Network 3 Merchant ISO/Bank/Acquirer Payments Network Payments Network directs transaction to the respective Issuing Bank for authorization Issuing Bank Traditional Merchant Acquiring: Clearing & Settlement Overview 3 rd Party Processor Merchant $ 6 Acquiring bank credits Merchant s account, net of fees paid to the Issuing Bank, Payments Network and Merchant Acquirer 5 Payments Network remits funds to the acquiring bank Settlement 4 If authorization occurs, the Issuing Bank withdraws and remits funds through the Payments Network

5 Section 1: Payments Primer Products / Services Credit / Debit Card Processing Pre-Paid Services & Loyalty Solutions Virtual/Physical POS Terminal Sales Data Security / PCI Check Processing & ACH Business Management Software Marketing Tools & Analytics Sales Distribution Direct Sales Indirect / Traditional ISO Agent Banks Telesales POS Developers / ISVs and VARs Representative Verticals Specialty / Mass Retail Grocery / Supermarkets Restaurant (Table / QSR) Hotels Convenience / Fuel Property Management Healthcare Education Market Large Merchants Mid-Sized Merchants Small Merchants In recent years, payments companies have evolved to provide more products to merchant clients, with recent products and service offerings including business management software, marketing tools and analytics, as well as mpayments (mobile payments) Trade Associations / Other Retail Direct Selling

6 Section 2: The Opportunity & Data Metrics Electronic payments companies are the driver of commerce in the U.S. In 2015, there will be $4.9 Trillion of Volume on Cards in the U.S. $408 Billion Per Month $13 Billion Per Day $560 Million Per Hour $9 Million Per Minute $155 Thousand Per Second In 2015, there will be 82 Billion Transactions on Cards in the U.S. 7 Billion Per Month 224 Million Per Day 9 Million Per Hour 156 Thousand Per Minute For context 2.6 Thousand Per Second U.S. GDP: $16 Trillion (2015) Federal Government: collected $2.5 Trillion in taxes (2012) U.S. Consumer Spending: $10.5 Trillion (2015)

7 Section 2: The Opportunity & Data Metrics Total Visa/MasterCard credit & debit payment volume is estimated to reach nearly $4 trillion by 2015 U.S. V/MC Payment Volume Trends & Projections Visa Credit Visa Debit MasterCard Credit MasterCard Debit (Volume in $ billions, debit is signature and PIN) $3,929 $1,846 $146 $472 $554 $2,111 $216 $509 $643 $2,351 $269 $548 $726 $2,497 $2,451 $309 $327 $547 $477 $817 $883 +8% CAGR $2,942 $3,021 $2,675 $393 $443 $333 $508 $524 $479 $1,152 $1,096 $1,054 $3,248 $484 $567 $1,155 $3,596 $529 $613 $1,217 $578 $663 $1,283 $674 $743 $808 $824 $764 $809 $889 $959 1,042 $1,237 $1, Source: Visa & MasterCard earnings releases 2012 data annualized YTD Sept totals 2013, 2015 trended using CAGR

8 Section 2: The Opportunity & Data Metrics The chart below displays the performance of a $100 investment in an index of selected payments companies which represent the TSG Payments Index - this index is calculated on a value weighted basis using market capitalization and is compared to the S&P 500 which is also calculated using the same methodology. A $100 investment in the TSGPX in Q would now be valued at $346, as compared to $146 if invested in the S&P 500. The chart above displays the performance of $100 investment in an index of the following listed companies which represent the TSG Payments Index - this index is calculated on a value weighted basis using market capitalization and is compared to the S&P 500 which is also calculated using the same methodology. This analysis does not include affects of re-invested dividends. While some of the companies listed in TSG s Payments Index do not meet the requirements to be a S&P 500 listed company (S&P listed companies have a market cap of at least $3 billion), the S&P 500 served to be the best comparable index to TSG s Payments Index since it is one of the most commonly used benchmarks for the overall U.S. stock market. In fact, many consider it to be the definition of the market. The companies included in TSG s Payments Index met the criteria that at least 50% of their revenues were produced from electronic payments products or services. Ingenico and Gemalto have been removed due to inclusion of NetSpend and Cardtronics as well as their being traded on non-us exchanges. As of Q Fundtech has been removed due to an acquisition and Tier Technologies name has been changed to Official Payments. Vantiv was added to the index as of Q PEA International was added in Q LML Payment Solutions and Transaction Network Services were removed as of Q due to acquisition.

9 Section 2: The Opportunity & Data Metrics Small and medium size merchants make up the majority of the opportunity for most merchant acquiring companies U.S. Merchant Breakdown: Acquiring Opportunities 2015 est. Sources: Morgan Stanley estimates and TSG estimates National Merchants > $1 Billion Annual Bankcard Volume Large Merchants $1 Million - $1 Billion Annual Bankcard Volume Mid-Sized Merchants $100,000 - $1 Million Annual Bankcard Volume Small Merchants < $100,000 Annual Bankcard Volume Estimated Number of Bankcard Accepting U.S. Merchants: 8-10 Million.005% Merchants 2% Merchants 12% Merchants 86% Merchants Total V/MC Bank Card Sales Volume: $3.9 Trillion 50% Sales Volume 30% Sales Volume 12% Sales Volume 8% Sales Volume Total Acquirer Net Revenue: $11 Billion 5% Revenue 25% Revenue If you re not doing payments, you re missing out on big money. If you are doing payments, do what it takes to get all your customers processing with you. 30% Revenue 40% Revenue 40% of the *net revenue opportunity *Net Revenue = Gross Revenue + Other Income Cost of the Trans.

10 Section 3: Trending In the recent past, a deluge of inside changes have affected the merchant acquiring ecosystem Mobile Technology Companies Compete ecommerce M e r c h a n t A c q u i r i n g

11 Section 3: Trending Trend: Mobile Payments. Payments made via a mobile device in the world estimates Global Card Payments $ Volume est. (in billions) % Mobile Payments 25, % 20,000 15, % 2.9% 3.8% 3.4% 10,000 5,000 11,161 13,204 15,622 18,482 21,866 0 $800 $700 $600 $500 $400 $300 $200 $100 $ Global Consumer Electronic Payments $ Volume via Mobile Device est. (in billions) $240 $379 $600 $634 $ Source: IE Market Research

12 Section 3: Trending Trend: Technology Companies Competing Square and PayPal s influence has been immense in that they helped created a new, card accepting micromerchant market see chart below. With this new market, merchant acquiring is not a zero sum game. The U.S. Merchant Market (Est.) % of Visa & MasterCard Sales Volume 150 Largest Merchants 50% 100,000 Large Merchants 250,000 Medium Merchants 30% 12% Traditional Merchant Market 6.5 Million Small Merchants 6% 25 Million Micromerchants Square s Market Share (~2 million merchants) <2% New Merchant Market

13 Section 3: Trending Trend: Ecommerce 1% 2% ecommerce Share By Payment Type (U.S.) 1% 18% 1% 7% 71% Cards Mobile wallets Direct Debits Mobile Cash on delivery Bank transfers The ecommerce space is an important and growing opportunity in the U.S. market. Currently, 8% of Visa/MC volume is online. To compete, merchant acquirers have to have an ecommerce offering. ecommerce Share of Bank Card Volume (U.S.) 8% Other ecommerce Sales Other Bank Card Payment Methods 92%

14 Section 3: Trending In the recent past, a deluge of outside influences have changed the merchant acquiring ecosystem Data Security Breaches EMV M e r c h a n t A c q u i r i n g

15 Section 3: Trending Trend: Data Breaches Data Breaches Happen Frequently 1,054 breaches last year in the U.S. alone Data Breaches Cost Millions $54.M is the average cost per company Most Breaches Could Have Been Prevented 89% of breaches analyzed by the Online Trust Alliance could have been avoided with basic controls and best practices Primary Breach Targets Impact The Largest Merchants 45% 24% 9% Retail Food & Beverage Hospitality 2013 broke the record (by nearly double) for the most records exposed: 822 million globally The recent Target breach ranked only fifth in breach history for total records exposed The average breach cost per record was $188 in % of initial intrusions are rated as low difficulty

16 Section 3: Trending EMV What Is EMV? EMV, named for the coalition of Europay, MasterCard, and Visa (the EMV Coalition or EMVCo) that developed the specifications for the system in the 1990s, improves safety through better card security and improved standards. EMV has become the world-wide standard and both U.S. neighbors, Canada and Mexico, have EMV mandates impacting U.S. multi-national retailers. Major card brands support EMV because it: Reduces criminal attractiveness of card fraud. Reduces chargebacks due to counterfeit or stolen cards. Fewer chargebacks save merchants time and reduce the frustration typically involved with the chargeback process. Helps merchants avoid the potential liability for card-present card fraud. Creates common cardholder experience. Moving to the EMV standard in the U.S. will make it easier for U.S. travelers using cards abroad. Likewise, international travelers have peace of mind when conducting transactions in the U.S. EMV also helps usher in the new technology and capability for contactless transactions. EMV is the stepping stone to the future of payments due to its dynamic data authentication (i.e. contactless, mobile). Source: EMVCo; Smart Card Alliance; American Banker; Federal Reserve

17 Section 3: Trending EMV Fraud Liability Shift Explained Liability Approaching Each card network's EMV deadline varies slightly, but these are the broad requirements put forth for their implementation: April Merchant acquirers and card processors had to upgrade their systems to be able to process chip card transactions. October Liability for magnetic stripe card fraud is shifted to the entity that does not support EMV technology. The broad idea is that the merchant, issuing bank, or credit card processor that's not on board with EMV would bear the responsibility when fraud occurs. October The liability shift goes into effect for organizations that sell fuel. These businesses have much more expensive payment terminals and have more time to upgrade. October 2012 April 2013 October 2013 April 2015 October 2015 October 2016 October 2017 Visa PCI audit relief Acquirers & processors required to support merchant acceptance of EMV transactions 3 rd party ATM acquirer processors & subprocessors required to support EMV data Card-present counterfeit liability takes effect excluding automated fuel dispensers (AFD) ATM liability shift Card-present counterfeit liability takes effect for automated fuel dispensers MasterCard Account data compromise (ADC) relief (50%) ADC relief (95% - 100%) ATM liability shift Lost or stolen liability shift Lost or stolen liability shift for AFD Discover PCI audit relief American Express Source: EMV Migration Forum; TSG Analysis and Commentary; Federal Reserve; Retail Info Systems (RIS); Card brands

18 Section 3: Trending Who is ready (and who is not) for the transition to EMV in the U.S.? EMV: Not Coming To A Small Merchant Near You There is a troubling reality for small-merchant EMV take-up. 4% of merchants with fewer than 20 employees have implemented EMV-compatible terminals. 72% have no plan in place to deploy the technology by the October 2015 liability shift. EMV Deployment at Merchants With Fewer Than 20 Employees 37% 4% 35% 24% Three key impediments that are stalling EMV at small merchants: Limited awareness Absence of a clear ROI A story they've heard before Yes No, but plan to do so prior to October 2015 No, but considering acceptance with no definite time frame No, and no plans to do so Where is the Opportunity? Source: Yankee Group

19 Section 3: Trending The Value Added Benefits of EMV EMV Lays The Foundation For A New Payment Ecosystem In The U.S. The Time is Right Smart phone usage and technology. Given that phone manufacturers are gearing up to include NFC capabilities, and the rapid replacement rates of smart phones by U.S. consumers (every 1.7 years on average), it is predicted that over 50% of smart phones will be NFC enabled by Growing momentum of contactless. Many major retailers have already implemented contactless payments. While the technology being deployed in the U.S. is not fully dynamic, the growth in usage by consumers indicates that the contactless payments will grow even more significantly in the more feature-rich, dynamic mobile world. Changing shopping behaviors. The number of consumers using online shopping aids, such as price comparison and product review sites, is growing rapidly. However, there continues to be a missing, seamless link with the payment at POS and online. The new ecosystem will increase consumer usability and spend. Consumers are likely to use their EMV-enabled devices more frequently and enthusiastically when they have a clear understanding of the benefits - particularly around fraud prevention. EMV and the bridge to mobile will allow cardholders to experience interactive, real-time experiences such as location-based services, online reviews and price comparisons. The impact of consumers perception can be both significant and positive. In Latin America, for example, card usage following EMV migration increased with the perception of stronger payment security. Source: TSG Analysis and Commentary; NFC Times; RIS; Edgar, Dunn & Company

20 Section 3: Trending EMV The Bottom-Line Collaboration Is Needed An open, collaborative approach by all industry stakeholders will be the best way to develop a comprehensive, thoughtful and innovative standard for the next generation secure payment acceptance environment/infrastructure. What s more, timelines must be realistic for all stakeholders including issuers, acquirers, hardware manufacturers and merchants. Sharing The Costs The costs of conversion are considerable, and will be borne by merchants and FIs. As in prior EMV rollouts in other countries, if the card networks were to help share the cost of the technological transition, it could drive much faster adoption in the U.S. The U.K. and Australian markets also were given interchange concessions by the card networks, which helped share the costs of purchasing and deploying new hardware and software that will benefit many stakeholders. Source: TSG Analysis and Commentary; Bank Info Security; Accenture

21 The Future Of Payments Card Brands Card Readers & Apps P2P / ecommerce

22 The Future Of Payments Technology Companies Technology companies that have the potential to be disruptors in the payments space: Apple Loyalty Potential to be Disruptive NFC iphone 6 and Apple Watch Secure Standard Rails Limited Use < 2% Merchants $6B Self Valuation Mass Aggregation Simple Boarding Not Profitable Underwriting Poor Security No Customer Service Evolving Model User Base Local Register Backed by Amazon Incentives Billing & Recurring Payments 152 M Customers Global Brand $27 B Mobile Home Depot Aged Platforms Developer Preferred Interface Recurring Billing Global Secure Cash Based Service <$10 Free Flat Fee Small (60 Employees) Unique Approach No Card Brand Interactions US Only New entries into the market have the potential to be very disruptive, but lack volume, acceptance and market share has limited any appreciable impact to traditional payment models Often more marketing buzz than business impact Historically focused on technology focused consumers for P2P and P2B transactions Other Technologies to watch out for: Bluetooth LE and beacons

23 Question & Answer Chuck Fillinger, Senior Associate TSG / Cfillinger@TheStrawGroup.com Mention Retail IT to get 15% off TSG s EMV ereport About TSG The Strawhecker Group (TSG) specializes in providing financial institutions, merchant acquirers, card associations, ISOs, processing companies, large merchants, and the investment community with advisory services to maximize their growth and profitability. TSG is also a resource for consumer spending data, industry research, benchmark studies, and developing trends. For more information please visit /