Emerging Payment TrendsNavigating Turbulent Waters

Troy BernardGlobal Head of Chip PaymentsMarch 15, 2012

Today’s “Mag Stripe” Payments Model is Being Challenged

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Mobile

Social Media & Commerce

Highly Targeted Marketing

Mobile Wallets P2P Payment Mobile Offers

Tokens EMV Contactless

“Open Hand” Proxy Cards Virtual Wallets

Cloud

Big Data

Dynamic Data

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Credit unions, merchants and credit union members face a multitude of choices, many of them competing

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Many ways to pay

Source: Market Platform Dynamics

Mag Stripe EMV Offsite Remote “Cloud” Proximity

Card-based transaction at existing terminal or mobile card reader

Chip-based payment device that generates one-time use data & authenticates card & user

Contact

Contactless

eCommerce or mCommerce (mobile web or mobile app)

A token or proxy number is provided to the POS. The token is exchanged for traditional card data in the cloud

Sending payment information directly from payment device to reader

QR Code

NFC

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Profusion of choices

• Which shopping channels?–Store?–Online?–Mobile web?–App?

• What device?–Samsung Nexus S 4G?–BlackBerry 9900?–iPhone?

• How to identify myself?–Card?–PIN?–Phone #?–Fingerprint?

? ? ?

• What POS?–Traditional?–Portable?–Customer-based mobile?

• What form factor?–Mag stripe card?–EMV?–NFC?–Barcode?–Empty hand?

• Which data storage location?–Merchant?–Third party?–Device?–Cloud?

Members Merchants Credit Unions

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Building a Mobile Commerce Strategy

Issuer-Centric Carrier-

Centric• Google

Wallet

• M-Web /Offsite Remote

• Isis

• Mobile Offers

Cloud (software-based)

NFC (hardware-based)

• QR/Bar Code

• Contactless Stickers

• NFC Accessories

• Boku

Strategy, continued

• Simplicity• Relevance

• Price• Standardization

• Profitability• Security

Collaborate with partners Build your own solution

Promote contextually-appropriate payments

Needs:

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Base your emerging payments strategy on your assessment of market direction, your own strengths and weaknesses, and what is

relevant to your members

Your mobile payments strategy should not be a mere placement of today’s plastic card and paper coupons in a digital wallet.

Which products will best resonate with your credit union members?

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Due to recent U.S. payment network announcements, any emerging payments strategy must account for EMV

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EMV

EMV is a chip-based payments standard created by Europay, MasterCard and Visa in the mid-1990s

– Current EMVCo owners are: MasterCard, Visa, Amex, and JCB– Discover participates as business and technical associates

The EMV specifications create an open standard for the interoperability of chip cards and terminals with the purpose of combating card-present fraud

– Prior to having a widespread, low-cost telecom infrastructure, merchants and issuers would not authorize every purchase transaction online

– These offline approvals, using floor limits, left the door open to counterfeit, overlimit, and stolen cards

EMV combats this by:– Using a secret key embedded in the chip so the terminal can validate that the card is

not counterfeit using public/private key infrastructure– Using an optional PIN stored in the chip, validated offline, or an online, issuer-

validated PIN to ensure the account holder is the rightful owner of the card

Anatomy of a traditional EMV transaction

Contact Chip

1. Insert contact EMV card in terminal

2. Validate D-PAS AID present in card and terminal

3. Initiate D-PAS card applet and read terminal data

Options: •Card validates offline data (prevent counterfeiting)•Determine Cardholder Verification Method (CVM)

- PIN validated locally (not by issuer)

- Signature- None (low $)

Using Issuer*-driven rules, EMV card determines: •What is the $ amount of purchase?• MCC high or low risk?• Last time card authed online?• Nearing credit limit?• Is this a domestic or international transaction?

Contact Card Slot

Chip Contains:•Account data •D-PAS applet & Application ID# (AID)• Unique encryption key for each card• Offline PIN (optional)• Record of last few transactions ($, MCC)• Est. available credit line

Terminal Contains:• Generic EMV kernal (V/MC/Amex/D)• D-PAS AID• D-PAS Public Key• D-PAS Terminal Parameters

Options: • Validate cryptogram• Return a cryptogram to the card• Determine Cardholder Verification Method (CVM)

- PIN - Signature- None

* Issuer must comply w/ Payment Network and/or local regulators’ EMV mandates

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EMV Globally

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Overview of U.S. EMV Statements

Visa MasterCard MAGAcquirer Certification

• EMV mandate -April 2013 • EMV mandate- April 2013 • All parties should collaborate on date

Merchant Incentives

• Waive Annual PCI Audit if 75% of purchases through a EMV/NFC terminal

• Waive annual PCI audit• Payments Hierarchy to be

implemented by Oct 2015

• Underlying message is that PIN should reduce chargebacks & interchange in the long run. Dynamic data can reduce PCI costs.

Issuer Impacts / Fraud Liability Shift (FLS)

• 2015 Fraud Liability Shift for card present, counterfeit cards

• Payments Hierarchy to be implemented by Oct 2015

• More secure payment will be lower cost

• N/A

Mobile / NFC Support

• Advocate installation of EMV/NFC terminals

• No mandate

• Included in roadmap. No specifics provided

• Agreed upon roadmap should include mobile/NFC

Online vs. Offline Transactions

• Encourages online transactions in U.S.

• Not mentioned • N/A

PIN vs. Signature & Cardholder Verification

• Discourages offline PIN in U.S.

• “Providing consumers with greater control & to reduce fraudulent transactions”

• Advocate use of PIN for all card transactions, including credit

Multi-channel Approach

• N/A • “Tap, click or touch in-store, online or on a mobile device”

• Advocate “chip” solutions for in-store and e-commerce purchases

EMV Summary

EMV is coming to the U.S. Acquirers are the first to be impacted – October 2013 Incentives for merchants and issuers to comply continue to grow Continuing debate on online vs. offline transactions and the use of PIN

for credit card transactions

Final Thoughts

Today’s payments ecosystem is about to undergo a dramatic evolution.

The way consumers will conduct commerce will drastically change within the next 5 years.

– EMV– Mobile– Increased security (dynamic data, PINs, biometrics)

How well you navigate these waters and deliver meaningful, contextually-relevant, and easy-to-use products will differentiate you from the competition.

How will you help your credit union navigate this sea of change?

Thank you!

Troy BernardGlobal Head of Chip PaymentsEmail: troybernard@discover.comOffice: 224.405.2127