A Long & Winding Road for Mobile PaymentsFebruary 2013

Upwardly Mobile

Introducing the Speaker

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Universal Interest in Mobile PaymentsThe driver behind interest in Mobile Payments varies depending on the entity

Mobile Payments = A potential

lucrative new revenue source

The vested interest in the eventual widespread adoption of Mobile Payments is on the rise, across governments and corporations in multiple verticals

Optimism around the growth of Mobile Payments is largely due to the high levels of penetration of mobile phones

This optimism has translated into real

investment in the field. By 2015-16, investment estimates exceed:

$ 1 Trillion

Why are Industry Participants Optimistic About Mobile Payments?

Electronic vs. Cash15% vs. 85% penetrations

Bank Accounts vs. Mobile Solutions1.8 billion vs. 5.9 billion (reach)220+ years vs. 25 years (pace)

Source : Citi Research, Citi GTS, GSMA Mobile Money For Unbanked2

Investment Direction in Mobile Payments

6 months of > 10 announcements / day*

Mobile Payments is an incredibly exciting and fast-moving field

ISIS, the mobile commerce joint venture created by AT&T, T-Mobile and Verizon, made its mobile wallet available in Austin & Salt Lake City

Apple released the iPhone 5, with a host of new hardware and software features, but not NFC support

PayPal announced that consumers with Android devices can pay at Starbucks using its payment service

MoneyGram partnered with Dutch digital security provider Gemalto to allow mobile money transfers to any of its 248,000 global locations

ParkMobile USA is launching a new NFC-enabled mobile parking service in Michigan to allow motorists to pay for parking via their mobile phones

Telefonica has struck global direct-to-bill deals with Facebook, Google, Microsoft and RIM, enabling users to pay for content through their mobile phone bills

* Period between 3/2012-9/20123

Participants in Mobile PaymentsWe consider 5 key categories of participants investing in Mobile Payments. Their achievements include:

Merchants Continued rapid support of non-traditional card acceptance systems, especially the smaller and micro-merchants

Expended their vision of a “by the merchants, for merchants” Mobile Payments ecosystem through a venture called “Merchant Consumer Exchange” (MCX)

Technology & Internet Companies

Invested in supporting technology to enable security and funding

Introduced chip-and-pin support in addition to standard card swipes

Introduced credible alternatives to NFC-centric technology- includes PayPal’s fast evolving offline approach and Google’s redesigned wallet approach

Telecom Companies

Introduced direct-carrier billing relationships in several geographies

Made progress on SMS based mobile payments in several emerging markets

Continued the process of starting regional partnerships to introduce wallets (partners include card networks, technology companies and banks)

Card Networks

Unveiled incremental details about their respective wallets

Worked on expanding their funding reach beyond traditional bank relationships by investing in prepaid and cash-based funding options

Focused on targeted offers through either M&A or specific merchant arrangements or both

Banks & Financial Processors

Processors have unveiled products that could extend mobile payments capability to smaller financial institutions

Larger U.S. banks have agreed to collaborate/exchange data to facilitate P2P transactions

Unveiled regional inter-bank or bank/telecom collaboration on wallets

This is just the beginning…As quick as the market is moving, the Mobile Payments is still in its infancy

Although we are now able to take a guess at the lay-of-the-land for a future Mobile Payments ecosystem, we still look for a multi-year path to reasonably widespread adoption

It may be a long and winding road, but every day brings us closer to reality

Let us address some of the key topics in the industry around Mobile Payments

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1. Processing “Rails” & Transactions

Processing “Rails” & TransactionsIntroducing mobility comes along with introducing changes to the payment value chain

There are potentially two ways in which the mobile payment transaction differs from a traditional transaction

Integration to a Commerce Platform

The mobile phone is now an overlay to the payment transaction itself:

• Information • Interaction

Creates potentially large adjacent markets

Gives rise to new business models:

• Social/commerce aspects could be integrated

Transaction Mechanism

The underlying transaction mechanism can change

Consumer can use NFC technology to perform a transaction

• Form factor change from a credit card to a smart phone

Process of authentication and clearing

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2. Card Network Incumbents and their actions

Card Network Incumbents: Visa, Mastercard, Amex

Visa - Drive more volume and commit to a B2B model

V.me Cyber Source

Fundamo Vodafone

Square

MasterCard - Drive more volume and commit to a B2B model

Paypass Western Union Google

Telefonica Truaxis

American Express - Enter new marketsegments and build new geographies

Serve Twitter Facebook

Foursquare

Lianlian Group

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Although card network incumbents are not at the risk of material disintermediation of their business model, they have invested in non-traditional models to increase market relevance

3. Targeted Offers & Data Ownership

Targeted Offers

Data Type

Merchant-LevelPurchase History

Data Collected Offer Made

SKU-LevelPurchase History

Purchase History+

Real-Time Location

Customer has Completed Several

Recent Purchases at Local Golf Course

Customer PurchasesE-Book Reader at

Bookstore

Frequent CoffeeDrinker is Driving by Popular Coffee Shop

Sporting Goods Store Offers $20 off Purchase

of $100 or more

Bookstore Offers 15% Discount on Compatible

Accessories (Case / Headphones)

Coffee Shop Offers 25% Discount at Nearby

Location

Browsing History+

Real-Time Location

Consumer Recently Searched for Jeans and is Walking by Clothing

Store

Clothing Store Offers $10 off Purchase of

Jeans at Nearby Store

Data Type

Merchant-LevelPurchase History

Data Collected Offer Made

SKU-LevelPurchase History

Purchase History+

Real-Time Location

Customer has Completed Several

Recent Purchases at Local Golf Course

Customer PurchasesE-Book Reader at

Bookstore

Frequent CoffeeDrinker is Driving by Popular Coffee Shop

Sporting Goods Store Offers $20 off Purchase

of $100 or more

Bookstore Offers 15% Discount on Compatible

Accessories (Case / Headphones)

Coffee Shop Offers 25% Discount at Nearby

Location

Browsing History+

Real-Time Location

Consumer Recently Searched for Jeans and is Walking by Clothing

Store

Clothing Store Offers $10 off Purchase of

Jeans at Nearby Store

Data Type

Merchant-LevelPurchase History

Data Collected Offer Made

SKU-LevelPurchase History

Purchase History+

Real-Time Location

Customer has Completed Several

Recent Purchases at Local Golf Course

Customer PurchasesE-Book Reader at

Bookstore

Frequent CoffeeDrinker is Driving by Popular Coffee Shop

Sporting Goods Store Offers $20 off Purchase

of $100 or more

Bookstore Offers 15% Discount on Compatible

Accessories (Case / Headphones)

Coffee Shop Offers 25% Discount at Nearby

Location

Browsing History+

Real-Time Location

Consumer Recently Searched for Jeans and is Walking by Clothing

Store

Clothing Store Offers $10 off Purchase of

Jeans at Nearby Store

Targeted Offers: Examples

Given the trend in advertising industry towards tangible return on investment based on efficient targeting, financial transaction data is considered a extremely valuable resource

Financial Transaction Data: Ownership & AccessThe ownership of financial transaction data is a tricky with each player having access to different elements

• Card issuers are well-positioned given their direct access to consumers, but they lack SKU level data. The scope of their information is also narrow to the spend on their cards

• Card networks have the fullest view of broad payment trends given their vast volumes, but they lack direct access to consumers and to SKU-level data

• Merchants have the richest SKU-level data, but often lack direct access to consumers and have a narrow view of spending only at their stores.

• Private label credit card providers have access to full array of data. They are well-positioned to make targeted offers, though the scope of this offering is typically limited to singular programs.

Card Issuers Merchants

Customer InformationName

Contact InfoFinancial Profile

Purchase SummaryMerchant Data

Purchase AmountDate / Time

Customer Account Number

Merchant InformationItems Purchased

Discounts / Coupons Used

Card Networks & Acquirers

Proprietary Data Proprietary DataShared Data

Card Issuers Merchants

Customer InformationName

Contact InfoFinancial Profile

Purchase SummaryMerchant Data

Purchase AmountDate / Time

Customer Account Number

Merchant InformationItems Purchased

Discounts / Coupons Used

Card Networks & Acquirers

Proprietary Data Proprietary DataShared Data

Card Issuers Merchants

Customer InformationName

Contact InfoFinancial Profile

Purchase SummaryMerchant Data

Purchase AmountDate / Time

Customer Account No

Merchant Information

Items PurchasedCoupons Used

Card Networks & Acquirers

Proprietary Data Proprietary DataShared Data

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4. Ecosystem Evolution

Ecosystem Evolution

Mobility clearly complicates the traditional payment ecosystem and process flow. It introduces to the picture

more steps, more roles and more role-players in the ecosystem.

We are no longer dealing with the traditional 4-party ecosystem consisting of:

- Consumer- Merchant- Issuer- Acquirer

Mobile Payments creates new roles due to:

The integration of social/commerce functionality into the purchase

transaction

Changes in how the purchase transaction is executed

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New and existing players are increasing their offerings in the Mobile Payments space

5. The Technology Choice

The Technology ChoiceWhich technology is likely to win and become the global standard for Mobile Payments?

Near- Field Communications

Radio-Frequency

Identification

Quick Response

CodeSMS

TechnologyCloud-based Technology

(Internet & Wi-Fi & GPS)

• Presumed de-facto standard

• Allows mobile devices with a NFC chip to send data to an NFC enabled POS device

• Secure element that saves confidential data in an encrypted format

• “Tap & Pay”

• Uses radio waves to transfer information

• Information is transferred from and RFID tag to an RFID reader

• Uses two-dimensional bar codes to store unique information

• When a Smartphone is placed in front of a scanner, the identifier is passed to the mobile payment system and then to the POS

• Very useful in emerging markets since it can be used without a Smartphone

• Text messages are used to transfer money

• Uses the wireless internet to pass payment information from the consumers phone to the merchants POS servers

• Information is pushed over a cellular and/or Wi-Fi network

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6. Global Standards & Regulation

Mobile Payments Regulation in US: A case study

Federal Reserve Board (FRB)

Federal Deposit Insurance

Corporation (FDIC)

Office of the Comptroller of the Currency

(OCC)

National Credit Union

Association (NCUA)

Consumer Financial

Protection Bureau (CFPB)

Federal Trade Commission

(FTC)

Federal Communications

Commission (FCC)

Multiple regulatory agencies could issue or influence the regulation for the mobile payments industry

Complex regulatory environment with variable standards depending on the status of the participants

Consumer protection is of paramount importance and many regulators are focused on this area

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Mobile Payments Regulation in US: A case study We expect regulation to be a focal point as the industry grows

ConsumerProtection Regulation

Better Mobile Specific

Technology (Ex : Facial

Recognition )

Wide spread consumer adoption

Source: Fumiko Hayashi, Federal Reserve Bank of Kansas City, July 2012

Appropriate consumer protection regulation can clearly help the adoption of mobile payments

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7. Mobile Wallet Attributes

Desirable Mobile Wallet Attributes

Mobile wallet

Consumers

Banks & Financial

Processors

Card Networks

Merchants

……..

Technology & Internet

Companies

Security

Speed & Ease of Use

Ubiquity

Convenience

End to end experience

Ecosystem integration

Cost

Desirable attributes differ based on participants but a few characteristics are universal

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Desirable Mobile Wallet Attributes: Examples

Payments

Loyalty

Rewards

• It Works Today: Does not need any additional hardware or a special phone

• Not Just Payments: Takes consumer centric approach by consolidating useful consumer tools

• Loyalty/Rewards: Makes it easy to earn, check and use loyalty points

• Mental Accounting: Allows for partitioning of money for coffee (essentially a gift card that the consumer can reload)

Google Search, for a restaurant

Allow merchants to present Google Offers

Research choices with Zagat

Share the experience with Google Plus

Payment via Google Wallet

Search OffersResearch Pay Share

End to end experience

Ecosystem integration

Starbucks mobile wallet has grown to 42MM transactions by focusing on the entire wallet experience

Google’s integration of products show how wallets fit into larger information ecosystem

“StarbucksMobile

Wallet”

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8. Consumer Adoption

Consumer Adoption: The Holy Grail

Consumers typically adopt if they see value

• M-Pesa• Starbucks

Behavioral change is in progress

• Level Up• Park mobile

Broad adoption of ecosystem players

• Including small merchants

• Including small banks

We remain believers in the multi-year adoption of mobile payments. There are several factors that support our view

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It’s time for your

Questions?

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