A number of major business and economic concepts surrounding payments

1. The Business of Payments
Chip Wickenden
Tom Kettell
© 2011 NACHA — The Electronic Payments Association®. All rights reserved. No part of this material may be
used without the prior written permission of NACHA. This material is not intended to provide any warranties, legal
advice, or professional assistance of any kind.

2. Breaking News – UK Cheques back from the Brink
Slide not included in Handouts
The Payments Institute – July 10-13, 2011 – Washington, D.C. 2
© 2011 NACHA — The Electronic Payments Association®. All rights reserved.
Source: Finextra.com

3. Agenda
Basic Premise – it’s all about economics Major Market Concepts Affecting the Payments Market
Scope and scale of the market Market Equilibrium; Growth Markets; Contracting
Markets
Three tiers of the payments market The Network Effect
Channels / order management Disruptive Innovation
Processing
Networks / Gateways / Core Regulation climate
Information aspects Dodd Frank,
FFIEC
Revenue Models Others
Item Fees
Value Pricing - interchange Risk Aspects and Models
The Promise to Pay
Cost Models Fraud
Capital Allocation – Enterprise Solution Operational Risk
Expense / Outsourced Solution
Building a Business Case
Routes to Market Marginal or incremental change vs Aggregate
change
Market share change
Payment System Architecture (Enterprise vs.
Outsource)
The Payments Institute – July 10-13, 2011 – Washington, D.C.
© 2011 NACHA — The Electronic Payments Association®. All rights reserved. 3

4. Scope and Scale of the Market
2009 US transactions 2009 US dollar flows
C2B
219 billion USD 84,097 billion B2B
•
0%
107.5 (49%) Cash $1,871 (2%) 1%
15 37.9 (17%) Debit Card $1,421 (2%) 14
-7 24.5 (11%) Check $31,599 (38%) -5
4 21.6 (10%) Credit Card $1,917 (2%) 4
12 19.1 (9%) ACH $37,164 (44%) 8
14 7.7 (4%) Prepaid $173 (0%) 12
20 0.4 (0%) Book Entry Transfers $34 (0%) 42
1 0.2 (0%) Wire Transfer $9,919 (12%) 9
33 0 (0%) Other $1 (0%) 30
%
SOURCE: McKinsey U.S. Payments Map, Release Q2-11
CAGR
‘04-09
The Payments Institute – July 10-13, 2011 – Washington, D.C.
© 2011 NACHA — The Electronic Payments Association®. All rights reserved.
4

5. If Forrest Gump Looked at the Payments Market . . .
He could say it looks like a wedding cake
• The top part – the smallest – is what everyone
looks at – that’s the customer interactions and
order management – the services – the routing
– the innovation – the razzle-dazzle
• The middle part is what most people eat – and
that is the operations and gateways – the
factories of payments processing
• And the bottom part – bakers often add extra
tasty ingredients to the bottom layer – and
that’s where there are hidden goodies to be
found in payments too – the information
aspects of payments, including loyalty
The Payments Institute – July 10-13, 2011 – Washington, D.C. 5
© 2011 NACHA — The Electronic Payments Association®. All rights reserved.

6. The Problem of Payments
ACH Check Wire Cash Cards
Vault Operations
Item Processing
Image Deposit
Customer File
Teller Drawer
POS Network
Online / CNP
Check Image
EBPP Facility
Mgt/Online
Wire Desk
Treasury
Lockbox
Facility
ATM
Syntax Edit Cash Letter Syntax Edit Counting /
Authorization
Prep Strapping
OFAC Check Enrichment
Inventory /
Balancing Switching
Safekeeping
OFAC / PEP
Warehouse
Checking
General Clearing and
DDA Deposits Ledger Settlement
DDA Interface DDA Interface
Returns and Network Network
Returns and Delivery
Exceptions interfaces Gateway
Exceptions
Bilateral Agreement
Clearinghouse
Third Party
Fed Interface
CHIPS
SWIFT
Fedwire
Armored Trucks
Recyclers
Other Netwk
JCB
Discover
American Exp
MasterCard
Visa
Direct Send
Endpoint Exchange
Fed Interface
Payments are processed in silos based on the transaction format and clearing
method - developed in response to operational, not business needs
The Payments Institute – July 10-13, 2011 – Washington, D.C.
© 2011 NACHA — The Electronic Payments Association®. All rights reserved. 6

7. The Business of Payments
Outbound Payments
Gateways
Channels
Counterparties
Customers
Networks
Inbound Payments
Gateways
Channels
Business Logic Execution Gateways
Opportunity for:
• Differentiation
Cost of:
• Operations
• Innovation
• Support
• Revenue
Strategic Tactical • Capital
The Payments Institute – July 10-13, 2011 – Washington, D.C.
© 2011 NACHA — The Electronic Payments Association®. All rights reserved. 7

8. The Different Worlds of Payments Are
Nothing Alike
Keys to Revenue Generation Levers of Bottom Line Management
• Customer experience • High volume / Low fixed cost
• Speed to market • Minimization of errors and exceptions
• Integration across products and • Minimize operational risk
channels • Delivery arbitrage
• Leveraging market forces • Consistent operational excellence
• Collaboration and innovation
Opportunity for:
• Differentiation
Cost of:
• Operations
• Innovation
• Support
• Revenue
Strategic Tactical • Capital
The Payments Institute – July 10-13, 2011 – Washington, D.C.
© 2011 NACHA — The Electronic Payments Association®. All rights reserved. 8

9. A Component Based Approach to Payment Services
Hubs Enables Rationalization and Transformation
ACH Check Wire FX Cards
Item Processing
Image Deposit
Customer File
POS Network
Common Instruction Management
Online / CNP
Check Image
EBPP Facility
Mgt/Online
Mgt/Online
Operations
FX Trading
Wire Desk
Treasury
Treasury
Lockbox
Facility
Syntax Edit Cash Letter Syntax Edit Validation Authorization
Prep
OFAC Check Enrichment
Balancing Warehouse Switching
Payment Execution/ PEP Management
OFAC and
Warehouse
Checking
General Clearing and
DDA Deposits Ledger Settlement
DDA Interface DDA Interface
Returns and Network Counterparty Network
Returns and
Exceptions interfaces Clearing Gateway
Exceptions
Bilateral Agreement
Clearinghouse
Third Party
Fed Interface
CHIPS
SWIFT
Fedwire
SWIFT
DDA
Other Netwk
JCB
Discover
American Exp
MasterCard
Visa
Direct Send
Endpoint Exchange
Fed Interface
Payment Networks and Gateways
The introduction of a common order management system creates opportunities for improved
routing and customer interaction, while also providing the buffer necessary for banks to rationalize
their payment management and gateway functions
The Payments Institute – July 10-13, 2011 – Washington, D.C.
© 2011 NACHA — The Electronic Payments Association®. All rights reserved. 9

10. The Network Effect
―The value of a network to it’s members
increases exponentially with the number
of users‖
2
V=N
• Theodore Vail, president of Bell Telephone, 1908 Annual
Report
• Robert Metcalfe, Metcalfe’s Law 1980, focusing on
devices
• Rod Beckstrom, Beckstrom’s Law, focusing on the value
of transactions within the network
• Bernard Lunn, Reverse Network Effect with Scale
• Rahul Tongia, The Cost of Network Exclusion
The Payments Institute – July 10-13, 2011 – Washington, D.C. 10
© 2011 NACHA — The Electronic Payments Association®. All rights reserved.

11. Adjacent Markets
Trade
P2P
Finance
Market
Market
Retail
Payments Credit
Store
Market Market
Market
Analytics
Developing solutions that target adjacent markets, rather than the current market
offer appealing ways to tap net new sources of revenue, rather than simply battling
competitors. The risk, however increases, since the bank will be outside of it’s
core areas of expertise.
The Payments Institute – July 10-13, 2011 – Washington, D.C. 11
© 2011 NACHA — The Electronic Payments Association®. All rights reserved.

12. Disruptive Innovation
―The Innovator’s Dilemma‖
• Disruptive innovations are generally not • A market incumbent is incented to invest only to
acceptable for the mass market when they are sustain current returns
introduced • Additional incumbent investment requires a
• Only the fringes of the market pick up the higher rate of return
innovation in the first iteration • A market insurgent will invest to reduce the risk of
• As the innovator continues to refine their product not achieving critical mass
the utility value to the market increases • In this context the telecom providers are market
• While incumbents improve their product insurgents
performance over time, disruptive innovators are • The more complex the market, the higher the
forced to improve faster in order to survive stakes
For much more on this, refer to the works of Harvard professor Clayton Christiansen. His website is:
http://www.claytonchristensen.com/
The Payments Institute – July 10-13, 2011 – Washington, D.C.
© 2011 NACHA — The Electronic Payments Association®. All rights reserved. 12

13. Two Sided Markets
• The number of participant of a
given group create an attraction
for members in a related group
– Patients and hospitals
– Electronic billers and bill
payment service providers
– Fraternities and sororities
– Publishers using Adobe and
consumers using PDF readers
– Merchants and cardholders
http://en.wikipedia.org/wiki/Two-sided_market
The Payments Institute – July 10-13, 2011 – Washington, D.C. 13
© 2011 NACHA — The Electronic Payments Association®. All rights reserved.

14. The Farther You Reach from the Data Required to
Post a Transaction, the More Value is Uncovered
Meta-Data Transactional Data ->
Associated Aggregated Functional Payment Separated Related
Data Payment Payment Detail Data Enhanced Data
Data Data Data
Information Provides insight Minimum data Additional line- Detailed data Financial
gathered into market required to post item which needs to supply chain
separately that trends and a transaction information on be associated data i.e. billing
enhances the customer what was with the or invoice, FX
insight behavior Accounts purchased and transaction, or capital costs
provided by Amount the identity of component,
payments data Date the parties ingredient or
supply chain
data
The Payments Institute – July 10-13, 2011 – Washington, D.C. 14
© 2011 NACHA — The Electronic Payments Association®. All rights reserved.

15. A Componentized Approach to Payments Services Hubs
Allows the Bank to Focus on Strategic Imperatives
Industrialize
Processing
The Payments Institute – July 10-13, 2011 – Washington, D.C. 15
© 2011 NACHA — The Electronic Payments Association®. All rights reserved.

16. Payment Methods
• Generalized for the overall market, not
specific to mobile payments General Use
Payment Methods
• The method of payment is different than
the device or means of affecting payment • Franchise extends into mobile
• Risks and cost of funds are well
understood and managed
• A major factor in the utility of a payment • Broad merchant acceptance
method is the breadth of acceptance
• Franchise may go beyond
Closed Loop mobile
Notional Account • Risk is managed based on
program specifics
• Program carries cost of funds
• Merchants must subscribe
• Simple and Easy
Bill Through Third Party • Carrier holds risk & cost of funds
(Provisional Credit) • Merchants must subscribe
The Payments Institute – July 10-13, 2011 – Washington, D.C. 16
© 2011 NACHA — The Electronic Payments Association®. All rights reserved.

17. The Gartner Group Hype Cycle
Slide not included in Handouts
The Payments Institute – July 10-13, 2011 – Washington, D.C. 17
© 2011 NACHA — The Electronic Payments Association®. All rights reserved.

18. The Hype Cycle Can Also be Adapted to Market
Development
Slide not included in Handouts
The Payments Institute – July 10-13, 2011 – Washington, D.C. 18
© 2011 NACHA — The Electronic Payments Association®. All rights reserved.

19. Market Participants Behave Differently than
Pundits
Slide not included in Handouts
The Payments Institute – July 10-13, 2011 – Washington, D.C. 19
© 2011 NACHA — The Electronic Payments Association®. All rights reserved.

20. End Customers also Behave Differently
Slide not included in Handouts
The Payments Institute – July 10-13, 2011 – Washington, D.C. 20
© 2011 NACHA — The Electronic Payments Association®. All rights reserved.

21. The Needs of Four Parties Had to be Addressed in Order
to Create the Credit Card Market
Benefits Costs Benefits Costs
• Carry less cash • Fees • Increased traffic • POS Equipment
• Short term credit • Interest • Increased per • Interchange and
• Status (early days) • Credit / fraud ticket spend Fees
• Rewards (now) exposure • Decreased cash • Chargebacks
handling cost
The Card Associations Delivered
Consumers Merchants
• A means of sharing revenue - interchange
• Standardized processes, rules and enforcement
• Marketing to define the value to all participants
• The NetworkIssuingthrough membership growth
Effect Acquiring
Bank Bank
Benefits Costs Benefits Costs
• Fee income • Issuing and • Fee income • Sales costs
• Interest income Account Mgt. • Growth in • Processing costs
• Retail account • Processing commercial • Credit risk
growth • Credit / fraud risk accounts • Association fees
• Association fees
The Payments Institute – July 10-13, 2011 – Washington, D.C. 21
© 2011 NACHA — The Electronic Payments Association®. All rights reserved.

22. Similarly, the Needs of 8 or 9 Players Must be Aligned to
Ignite the Mobile Payments Market
• In this new reality the role of • The new market entrants
the card associations shifts view the payments market
from market catalyst to as an adjacent space and an
another vested interest. opportunity for new
revenue.
• In most developed economies, Wireless
the situation is further • The earliest days of this
Networks
Consumers Merchants
Payment
Networks Point of
complicated by the relative Sale market have been
Handset
maturity of electronic Providers characterized by fierce
/ SIM
payments, particularly card Mfrs
Issuer Acquirer domain defense;
payments. Bank Bank collaborative efforts are just
now emerging and a
• The card associations’ network effect has yet to be
situation is further catalyzed.
exacerbated by pressure to
reduce interchange costs.
A catalyst is needed that will balance the benefits and costs for all of
the market participants in mobile payments
The Payments Institute – July 10-13, 2011 – Washington, D.C. 22
© 2011 NACHA — The Electronic Payments Association®. All rights reserved.

23. Building a Business Case
• Cost vs. Revenue
• Cost vs. Compliance
• Cost vs. Cost
• Cost vs. Do Nothing
The Payments Institute – July 10-13, 2011 – Washington, D.C. 23
© 2011 NACHA — The Electronic Payments Association®. All rights reserved.

24. The Actual Cost of Doing Nothing
Source: Clayton Christensen; Failed Paradigms of Financial Analysis
The Payments Institute – July 10-13, 2011 – Washington, D.C. 24
© 2011 NACHA — The Electronic Payments Association®. All rights reserved.

25. Things to Consider - Risk Impacts
• Prior to implementing you should assess
– Is the product/service strategic?
– Have we identified and assessed all the risks to our organization?
• Legal
• Compliance
• Reputation
• Operational
• Security of personal information
The Payments Institute – July 10-13, 2011 – Washington, D.C.
© 2011 NACHA — The Electronic Payments Association®. All rights reserved.

26. Key decisions for a bank during the strategy and
planning phase of a payment project
ILLUSTRATIVE ILLUSTRATIVE
Multi-
national/
Orchestration Orchestration
regional
within Core
within Core
Payments
Payments
Payments
Payments
International
systems
systems
banking
banking
engine
engine
Other
Other
vs
Domestic
How many Orchestrate
Credit Direct Cards …
transfers debits
hubs and vs New Legacy
where? upgrade?
Value and
risk
assessment
Build vs
• How many technology Partners? buy? Build Buy from
vendors? For what roles? internally vendor
• What capabilities are you
looking for from a
technology vendor?
Buy and build
• How many (framework
implementation partners? and SDK)
Source: Celent
The Payments Institute – July 10-13, 2011 – Washington, D.C.
© 2011 NACHA — The Electronic Payments Association®. All rights reserved.

27. Changing Regulatory Climate
Issued January 14, 2009
Issued November 1, Addresses the necessary
2008 elements of an RDC risk
management process in an
There are 26 electronic environment, focusing
possible red flags on RDC deployed at a customer
that fall into five location, mobile banking
categories FTC Red FFIEC automated clearing house (ACH)
Flag check conversions
Regulatory
Assessment
Dodd Rule •Check 21
Frank Making •Image Exchange
Act Bodies •Regulation CC
•Regulation J
•State Law
•Title X: Durbin Amendment •ACH
•Title VIII: Payment, Clearing and Settlement •Regulation E
Supervision •Agreements and Clearinghouse
•Title X: Bureau of Consumer Financial Protection Rules
•Interchange
•Patriot Act
•OFAC
The Payments Institute – July 10-13, 2011 – Washington, D.C.
© 2011 NACHA — The Electronic Payments Association®. All rights reserved.

28. Questions and Legal Disclaimer
Chip Wickenden Tom Kettell
Enterprise Solutions Emerging Markets
FIS Global Epson America, Inc.
Chip.wickenden@fisglobal.com tom_kettell@ea.epson.com
1-904-422-1321 1-952-906-3996
Unnamed lawyers make us include the following: The views expressed herein are the speaker’s personal views and do not necessarily
reflect the views of NACHA – The Electronic Payments Association
The Payments Institute – July 10-13, 2011 – Washington, D.C. 28
© 2011 NACHA — The Electronic Payments Association®. All rights reserved.