Evolving Mobile Payments Industry Landscape

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“Mobile Banking: Can the Unbanked Bank on It?”

Sargent Shriver National Center on Poverty Law webinar

August 16, 2012

Marianne Crowe

Federal Reserve Bank of Boston

Evolving Mobile Payments Industry

Landscape

Disclaimer: The views expressed in this presentation are those of the presenter and do not necessarily reflect the views of the Federal Reserve Bank of Boston or the Federal Reserve System

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Agenda



Overview



Opportunities



Challenges



Conclusions

2

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Mobile Banking & Payment Terms



Mobile Banking



Mobile device connects to FI to view account or credit

card balances, transfer funds between accounts, pay

bills, receive account alerts, locate ATMs



Mobile Payment



Mobile device used to pay at point-of-sale or Internet for

goods, services or digital content, transit, P2P



Payment initiated via SMS, browser, mobile app, NFC, or

2D barcode



Contactless/NFC (near field communication)



Communication protocol that enables contactless

transactions, data exchange, and wireless connections

between mobile phone and merchant terminal in close

proximity. NFC chip embedded in mobile phone, on SIM

card, or on MicroSD chip

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Trends in U.S. Mobile Payments

4



Consumers making more mobile internet, remote and

POS purchases



PayPal mobile payment volume grew 500% from 2010 to 2011,

estimate $3 billion in mobile payments in 2012



Google mobile shopping searches grew 220% from 2010 to

2011



Driven by more smartphones, mobile apps; incented

by m-coupons, discounts, and rewards



Convergence of online, mobile, and POS channels



Mobile wallet developments



EMV security in U.S.



Non-banks (Google, PayPal, Apple, Square, carrier

billers) active in payment system



Cloud (remote server) alternative for storing mobile

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Smartphone Adoption Driving Mobile

5 43 66 90 106 121 135 147 158 21% 36% 45% 52% 58% 64% 68% 72% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0 20 40 60 80 100 120 140 160 2009 2010 2011 2012 2013 2014 2015 2016 P e r ce n ta g e of U .S . Ad u lt s w it h M ob il e P h on e s M il li on s of U .S . Ad u lt s

Smartphone users (in millions) Smartphone users

Actual

Projected

U.S. Adult Smartphone Adoption 2009-2016

U.S. Smartphone Market Share* 1Q 2012 51.0% 30.7% 12.3% 3.9% 1.4% Android iPhone Blackberry Windows

*By operating systems

Source: comScore, May 2012, *comScore July 2012

 Need smartphone to make contactless (NFC, barcode) mobile payments;

download apps and access web; receive mobile coupons, discounts

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How the Underserved Use Mobile

Underbanked

Unbanked

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

90% have mobile phones



57% have smartphones



28% use mobile banking



22% plan to use in next

12 months



17% use mobile payments



62% pay bills



20% transfer money



63% have mobile phones



26% have smartphones



10% use mobile banking



19% plan to use in next

12 months



12% use mobile payments



40% pay bills



33% make purchases



25% transfer money

Source: Board of Governors of the Federal Reserve System, “Consumers and Mobile Financial Services,” March 2012



Most prepaid providers offer low cost smartphones ($49 and up)



Virgin Mobile began offering prepaid iPhone in June 2012

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Evolution of U.S. Mobile Banking and

Payments

7 NFC & Wallet NFC/ Bridge Technologies Remote Mobile Payments via app,

internet

P2P bank and non-bank activity

Advanced Mobile Banking -

transactions

Basic Mobile Banking -

information

Online Banking led to e-commerce

then m-Banking

QR Barcode, microSD, contactless sticker Customer comfort shopping online via mobile transcends to physical POS

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0% 4% 4% 13% 13% 22% 22% 26% 26% 26% 30% 61% 61% 87% 91% 78% 78% 91% 96% 100% 100% 100% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Enroll using a mobile phone

Open accounts over mobile phone View and redeem offers based on location View Current Rates Mobile Personal Financial Management application Mobile Remote Deposit Capture Check balances (prepaid) Other: Business Mobile Banking View rewards Mobile P2P transfers Bilingual mobile website or application Transfer funds between customers at same FI Transfer funds between FIs to your own accounts Pay bills Transfer funds between your accounts intra-bank View recent transactions (Credit Card) Check balances (Credit Card) View any other account ATM/branch locator Check balances (savings) View recent transactions (DDA) Check balances (DDA)

Adv ance d C apa bi lit ie s M one y M ov em ent M obi le M oni tor ing

Percent of Financial Institutions

Mobile Banking Functions Offered by Banks

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Mobile Remote Deposit Capture

9



Mobile app uses camera

to send check image to FI

for deposit



Usually immediate

availability



Consumers and small

businesses



Offered by banks and

non-banks



USAA, Chase, Bank of

America, Wells Fargo



PayPal, Plastyc

Fraud Controls

 Multi-factor authentication

 Secure (encrypted) transmission  Limit on daily customer deposit

amounts

 KYC, customer due diligence  Monitor frequency of use

 Detection of duplicates, double-posting

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Mobile P2P

10



Replaces checks, cash,

money orders



Small dollar money transfers

via ACH



Less costly than wire



Bank/card network

 MC MoneySend, Amex Serve, Fiserv PopMoney



Bank-owned – ClearXchange

 Bank of America, Wells Fargo, Chase



Non-bank

 PayPal, Western Union, Dwolla

Risks



More cross-border

remittances



Money laundering



Need for more KYC

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Mobile Payment Opportunities

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Remote

Proximity

Platform

 SMS text, WAP browser  NFC

 Mobile apps  2D Barcode app

 Cloud  Cloud

 Direct Carrier Billing

Services

 Remittances, P2P  Retail POS purchases  Donations

 Digital content

 QSR

 Convenience & drug store  Internet purchases  Public transit, taxis, parking  Ticketing (airline, event,

parking)

 Vending

Benefits

 Loyalty and Reward Programs  Location-based services

 Financial inclusion

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Mobile Wallet of the Future

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Mobile

Wallet

&

Secure

Element

Prepaid

account/access

Bank

Account/

ACH

Credit/

Debit

Card

Cash

Other

(PayPal, DCB, iTunes/cloud, merchant app/barcode) Loyalty, rewards, coupons 

Secure Element

Encrypted chip in

mobile phone

that stores

payment

credentials

Mobile wallet

 Application stored in secure element  Controls access to payment

credentials (debit, credit, prepaid, checking account), coupons, loyalty, transit tickets

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Mobile Wallet Initiatives

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Wallet Provider

Features

Market

• Embedded NFC

• Google prepaid account (MC) • Citi MasterCard

• Merchant deals, loyalty programs

• Sprint, Citibank, MC, First Data • Launched September 2011

• 30+ merchants, Transit

• NFC SIM card

• Reloadable Isis cash card • All major credit/debit cards • Merchant deals, loyalty

programs

• AT&T, T-mobile, Verizon • Barclaycard, Chase, Capital

One, Amex, Discover, MC, Visa • Summer 2012: Austin, TX, Salt

Lake City, UT & UTAH Transit • Remote server (cloud)

• POS at Home Depot, 15 other retailers

• 9M existing PayPal merchants • Over 103M active PayPal

accounts • Online commerce via cloud

• All major credit/debit cards & payment methods

• Launch TBD • Mobile NFC TBD

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Mobile Payment Disruptors

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Disruptor

Market

Features

• Mobile plug-in device and app • Small POS merchants can accept

credit/debit cards

• Cash & check replacement • Growing competition

• Merchant acquirer

• Assumes liability, handles charge-backs

• Lower merchant fees • Cloud data storage

• 225M+ iTunes accounts • 100M+ iPhones, 500K+ apps • iTunes mobile app

Passbook app aggregates

QR/barcodes, loyalty, gift cards, boarding passes, movie tickets

• Merchant–driven

• 2D barcode with mobile app • 14K US, UK & Canada venues • 55K+ mobile transactions to date

• Closed-loop prepaid account • Reload funds, track rewards • Low cost, easy entry

Direct Carrier Biller Intermediary handles payment to online merchant and charge to customer mobile phone bill

In U.S., used for small value, low risk digital content, online donations

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Low consumer

demand, unclear

value proposition

Multiple

stakeholders

Security and

privacy

concerns

Not enough

NFC-enabled

phones

Uncertain business

model between

MNOs and Banks

Lack of

standards for

interoperability

Weak merchant

business case

Ownership of

Customer Data

Lack of

regulatory

direction

Mobile Payment Industry Challenges

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Principles for Successful Adoption of Mobile

Payments in U.S.



Mobile device to initiate and receive payments for purchases

between consumers and/or businesses



“Open mobile wallet” that supports multiple payment options

(credit, debit, bank account, prepaid/stored value, etc.) in a

secure container



NFC technology for POS contactless mobile payments, with

enabling phone applications



Payments cleared and settled over existing channels (credit,

debit, prepaid, ACH, mobile); open to new channels



Dynamic data authentication deployed for security



Standards developed for the U.S. based on evolving global

standards and an industry supported certification process



Regulatory clarity for oversight between applicable agencies



Trusted Service Managers (TSMs) to provision secure elements

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Mobile Payments Security Must be

Addressed Holistically

17 Security of app, software, wireless network Customer Authentication Secure Element & NFC chip Mobile carrier security Payment transaction security Unregulated technology & service providers Account/ Wallet Security Physical security of mobile device

 Several risk points  Need shared

responsibility to monitor and protect

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Mobile Regulatory Landscape



No one law or governing authority oversees mobile payments

 Fed, FDIC, OCC, NCUA, and CFPB for financial institutions  FCC oversees mobile carrier standards and competition

 FTC looks at consumer protection and identity fraud more broadly  State regulators cover MSB and money transmitters



Alternative payment providers less familiar with banking laws



Status of mobile regulation

 Fed and Industry Workgroup met with above regulators in April 2012  Primary concerns – consumer protection, privacy and data security  Stressed consumer ‘awareness before engagement’