Association for Financial Professionals of Arizona - 2013

1. Association for Financial Professionals of Arizona - 2013

2. Factors Impacting Payment Market Development • Macro/Socioeconomic Factors • Demographics – Higher proportion of young people in the regional/national population could lead to faster adoption of new payment methods • Unbanked Population – High proportion of consumers with no formal banking relationship will also lead to rapid uptake of new payment methods • GDP Growth – Rapidly growing economies generate a greater number of new market entrants and faster adoption of new types of payment methods • Average Real-Income Growth – Markets with relatively high real-income growth foster increases in average payments values and favorable returns on investments in payments innovation. • Export-Import Balance – Cross-border trade growth leads to greater opportunities for high-margin payments products (but also heightens competition) Source: Boston Consulting Group: Winning After the Storm, 2011

3. Factors Impacting Payment Market Development • Macro/Socioeconomic Factors • Regulatory Outlook – Rigorous government regulation can have a dramatic impact on payments economics, sometimes necessitating strategic transformations. • Infrastructure – Active government involvement in building payments infrastructure can have large implications on the pace of market evolution and potential profit pools. • Industry Factors • Mix of Payments Instruments – Greater use of cash and checks can generate high potential to capture new payments flows, resulting in new market entrants and the likelihood of more innovation • Efficiency Level – In inefficient markets with a low degree of operational excellence, new market entrants are more likely to excel. Source: Boston Consulting Group: Winning After the Storm, 2011

4. Globalization is moving down market and middle market customers are now also requiring more international capabilities Source: Aite Group

5. Overview of volumes, values and revenues in the payments marketplace, 2010 to 2020 Volume of retail and wholesale cross-border payments, 2010-2020 Millions 2010 2020 CAGR: 8% 6% 13% 25% 37% 9% Source: BCG Global Payments Database, 2010

6. Overview of volumes, values and revenues in the payments marketplace, 2010 to 2020 Average Revenue per Domestic Payment Transaction, 2010-2020 -2% -3% -8% -5% -4% -2% -3% CAGR: Average Revenue per Cross-Border Payment Transaction, 2010-2020 US CAGR: -2% 1% -1% -2% -3% -1% -2% Source: BCG Global Payments Database, 2010

7. Process Standardization Drives Agenda of more International and Complex Client Profiles Global Model • Global funding, concentration and investments • Commodity financing • Global payment factory Global Solutions Regional Model Centralization / Globalization • Shared Service Centers – centralize AP and AR activities • Regional Treasury Centers – centralize FX and funding • Rationalization of banking relationships • Netting, pooling, sweeping structures • Physical & financial supply chain management • Regional re-invoicing center • Active treasury and risk management role RegionalRiskManagement Regional Liquidity Solutions Regional Treasury Centers RegionalShared ServiceCenters Decentralized Model ActiveTreasuryManagement In-CountryLiquidity Management Country Level Finance Solutions • In-country accounts • Basic payments / receivables • In-country liquidity structures • Sweeping cash into centrally managed bank accounts or centralized in-country banks EntityLevel Cash FlowProjections Payables Receivables Client’s treasury structure will determine your relationship to the subsidiary

8. Critical Characteristics of Different Payment Types

9. Key Concepts and Definitions • Large value payments A somewhat generic term generally used to describe electronic, RTGS payments. What are described as wire transfers generally fall into this category. Historically, these payments types were used primarily for large payments because they were expensive. But, there is no official amount threshold that delimits them. Most international payments fall into this broad category. • Small value payments Typically smaller electronic payments processed in batches. These payments are generally not time sensitive, and are processed on a store and forward basis. They also typically are not final and irrevocable. These payments are usually less expensive to process as their smaller amounts make it harder to justify expensive processing. US ACH payments are an example of this type of payment. Small value processing is historically limited to domestic payments, though this is gradually changing.

10. Continued Global Migration from Paper-to-Electronic • Businesses are responding to forces of economic pressures, scalability, risk management, and environmental consciousness by accelerating the transition from paper to electronic processing Distribution of the number of noncash payments Total US check transactions (bn) 2006 2011 Source: The 2010 Federal Reserve Payments Study based on 2006, 2009 volumes • Over 10mm individuals are unbanked in the US, challenging electronification of certain payments (e.g. payroll), providing opportunity for payroll cards

11. Let’s Dig Deeper….What is International ACH? • ACH (Automated Clearing House) is a US system/process for lower value, non-urgent payments and collections • International ACH—an international payment and collection process that leverages in-country clearing systems • Provides a cost effective method for corporate clients to make high volume payments such as • Payroll • Accounts Payable • Dividends • Expense Reimbursement • Payments and/or Collections are made to • Vendors • Businesses • Consumers • Employees

12. Why International ACH? • Customers looking for cost effective reliable payment channels • Improved experience for the beneficiary • No lifting fees on originated transactions • Increased awareness in the market • Customers are asking for International ACH • Provides dual revenue source • Fee income • Foreign exchange revenue • Leverages domestic ACH system • Intelligent use of communication, delivery channels and billing processes and expertise

13. Customer Benefits and Value Proposition • Reduced funds movement costs • More predictable cash flow • Integrated disbursements • Electronic return reporting • Fast confirmation • Settlement on a specified value date • Full value of item received by beneficiary • Reduced need to maintain multiple bank relationships globally

14. Consider International Business Activity International business Wire Solutions International ACH Maintains operations overseas Multinational corporation Occasional international business Regular international business Regular payments and receipts in same currency Range of needs

15. Payment Types • Credits • Employees—payroll, expense reimbursement • Shareholders—dividend payments • Customers/Vendors—insurance payments, accounts payables • Debits • Consumer—subscriptions, dues and utility bills • Corporations—trade payments, loans, leases, disbursement, funding, dealer drafting, cash concentration, and franchise royalties

16. Client Profile—International ACH or Wire? • If client needs • Payments only • Same day availability • Advices (individual) • Repairs (non STP transactions) • Third party payment capability • Accessible via SWIFT • Low number of transactions per country • Countries that do not have national low-value clearing system Wires are the best route…

17. Client Profile—International ACH or Wire (continued) • If client needs • Payments and/or direct debits • Repetitive transactions • High volume of items per country per month • Transactions are non-urgent (i.e., not same day) • Need only to send minimal information • Does not require advices • Country offers non-urgent clearing alternative • Bulk file preference They are a good global ACH candidate

18. Typical Customer Industries for International ACH • Travel services/hospitality • Oil/drilling/energy • Engineering services • Legal services • Manufacturing • Insurance • Securities dealer • Educational services • Computer software • Churches

19. International ACH Parties • Originator • Company originating the ACH item • Originating Gateway Operator (OGO) • Originating financial institution • Re-formats file to local country specifications • Creates settlement by country to originator • Receiving Gateway Operator (RGO) • Receives file from OGO • Distributes file into local country payment system • Beneficiary • Recipient of payment in foreign country

20. Originating company Receiving banks Beneficiaries and debtors Non-Global ACH Client Model… for Making Payments Receiving banks Beneficiaries and debtors Receiving banks Beneficiaries and debtors Receiving banks Beneficiaries and debtors

21. Originating company ACH Gateway Receiving banks Beneficiaries and debtors Global ACH Client’s Payment Model Receiving banks Beneficiaries and debtors Receiving banks Beneficiaries and debtors Receiving banks Beneficiaries and debtors

22. Bank acts as OGO • Performs FX—USD to foreign currency or • Originate in settlement currency • Translates modified NACHA into foreign format • Performs OFAC Review • Sends to RGOs Bank Originator How it Works NACHA file

23. Step 1 Monday by 8:30 AM CT bank receives ACH file with effective entry date of Monday Step 2 On Monday bank sends ACH file to the British RGO¹ Step 3 On Monday the payment file is presented to the British clearing system² British Clearing System—Bankers Automated Clearing Service (BACS) Beneficiary’s Bank in the UK Bank Step 4a On Wednesday, bank debits customer’s settlement account Step 4b On Wednesday, British clearing system delivers transactions to beneficiaries’ banks Step 5 Beneficiary’s bank credits beneficiary’s account on Wednesday or later depending on that bank’s practices Payment beneficiary Settlement account at bank ACH Payment Flow to the UK ¹ UK includes England, Wales, Scotland, and Northern Ireland ² British clearing system has a 3-day processing cycle

24. Differences Between US ACH and International ACH • There is no such thing as true Global or International ACH! • No international standard • No standards or common rules • No centralized system • No “international version” of US prenotification process • Longer settlement time/varies by country • Different formats for account numbers and routing numbers • Different holiday schedules • In most countries, reversals are not allowed • In most countries, must pay in local currency • Differing debit rules in country • Some countries have no low value system or it is an immature system • Local language requirements for clearing systems

25. IPFA Concept • Defining rules, standards and operating framework • Simplifying non-urgent cross-border credit transfers • Leveraging existing payment networks and international standards e.g. ISO 20022 • Enabling interoperability between domestic and regional non-urgent payments systems and banks • Why? • Globalization is continuing to drive a broader base of clients who demand cost-effective, less complex payment services with a wider reach • The International Payments Framework approach is to enable locally originated non-urgent credit transfers to reach markets around the world • Leverage existing “railways”, enhancing existing “rules” and deploying existing international “standards” • Increased regulatory requirements requires institutions to collaborate with counter-parts in order to ensure compliance

26. ISO 20022 Standard Format Member Member Customer Customer Customer Customer Customer Customer IPFA Overlay Structure Model Association Euro US dollar Domestic Formats & Rules Domestic Formats & Rules Rules and Procedures Association Association Clearing & Settlement Mechanism Clearing & Settlement Mechanism Financial Institution Financial Institution Financial Institution Financial Institution There can be one or more entry points into or out of any country. The domestic ACH Rules & Formats are not impacted by IPFA Rules and Procedures. Intermediary Financial Institution Intermediary Financial Institution

27. IPFA Governance • International Payments Framework Association (IPFA) was established as a U.S. not-for-profit association in February 2010 • Two membership categories • Primary Member – financial institution or a clearing & settlement mechanism • Affiliate Member – an association that represents one or more FIs (but is not a FI) a standard-setting body, an industry vendor or a user of payment services. • Has a nine member Board of Directors • Is run by a Chief Executive Officer • Cooperates with Observers from international and national organizations / regulatory bodies

28. Payment Behavior and Trends differ Greatly by Region • Europe: • Snapshot: • Credit transfer and debit card are most frequently used non-cash payment types. Credit cards have not been embraced in this region, except in the UK. Innovation is not as extensive as in developing regions due to high level of electronic payment adoption and low unbanked population. • Trends: • Significant margin pressure across region (e.g. SEPA-driven consolidation and regulations are shrinking transaction fees) pushing need to manage costs • Less mature markets (e.g. Eastern Europe) will experience double-digit growth in payments value • North America: • Snapshot: • Paper checks are still heavily used (representing almost half of the non-cash value in the region) and credit cards are leveling off. Payments are growing but slower than rest of the world. • Trends: • Debit card use continues to grow rapidly • Demand for more detailed remittance data included with payment • Consumers are moving from the credit-based economy of the past decade to a savings based economy Source: BCG, KPMG, and McKinsey reports, and EPS analysis

29. Payment Behavior and Trends differ Greatly by Region • Asia Pacific: • Snapshot: • Large divergence on trends and initiatives based on high and low income countries. Region offers attractive structural opportunities for innovation in payments. Domestic payments growing quickly. Cards represent about half of non-cash transactions. Large unbanked population. • Trends: • China: government encouraging migration to e-payments, and Alipay has become the dominant e-wallet (more registered users than PayPal globally) • Hong Kong: smart cards (e.g. Octopus) are replacing cash for micro payments • Japan and South Korea: increasing use of mobile payments Australia and New Zealand: likely to follow the lead of the North American or European models • Latin America: • Snapshot: • Still heavily cash based, and fear of inflation remains a strong driver of payment choice. Credit transfers are most frequently used non-cash instrument. Significant unbanked population. • Trends: • Credit cards are growing rapidly, as the banked population has increased significantly, banks are aggressively pushing electronic payment enablers (such as POS network), and banks and retailers have successfully partnered Source: BCG, KPMG, and McKinsey reports, and EPS analysis

30. Payment Trends—Definitions • Wireless payment: The initiation and or confirmation of a payment transaction from a wireless device (mobile phone or a PDA) • At point of sales, vending environment • M-commerce environment • Contact smart cards: Chip embedded in a card • Contactless cards: Contactless chip embedded in a card or other fancy packaging carried by individuals, does not need to be inserted into the card reader to complete a transaction • Near Field Communication (NFC) mobile phone: Mobile phone equipped with a chip using NFC protocol. It can be used like a card or like a reader

31. Source: Chetan Sharma Consulting

32. Source: Chetan Sharma Consulting

33. Mobile Payments and Mobile Banking • Mobile payments comprise a growing population of payment types and related transaction information: • Bill payment: text bill alerts, two-way text payments • Shopping: text-to-buy, apps and stores, retail payment apps • Point of Sale (POS): Bling mobile tags, Square • Prefunded accounts: Green.dot, others • Person-to-Person (P2P) networks: PayPal, Obopay

34. Currently, Japan is testing a smart card built into a mobile phone that allows for 40(+) applications to be stored. Malaysia Mykad • Product: Government Multipurpose Card, Dual interface (government & private) contact/contactless smart card • Target: All Malaysian citizens (<12 years children: MyKid card) • Uses: 8 functions: Biometric Identity card, driver’s license, regional passport, health information,e-cash (maximum of $500), ATM card, Touch ’n Gotransit card, Digital certificate (PKI: Used for secure online tax returns, Internet banking and email) • Launched in 2001. By 2005, all citizens were mandated to carry the card outside the home. Failureto do so may incur a fine of between RM3,000 ($622)and RM20,000 ($6,218) or jail term of up to three years

35. Kenya M-Pesa • Product: Mobile payments—Vodafone and Safaricom Ltd. • Uses: Pay rent, taxi, groceries. Intend to expand to pension payments, school fees, wages to workers, contract phones, water and electricity bills • Launched in 2007. Expanded to Afghanistan and plan to expand to India and other African countries. No bank needed in Kenya but may need one in India Send Money By Phone Anytime Anywhere

36. South Africa Wizzit • Product: Mobile money services—South African Bank of Athens • Uses: Pay utility bills, hair cuts, buy mobile airtime, send money to relatives • Launched in 2005. 2000 unemployedpeople—Wizzkids. Eight of ten customers previously had no bank account and never used an ATM. Fees are 1/3 cheaper than traditional banks

37. mobileAxept Norway mobileAxept • Product: Mobile payments - Directly charges an existing credit card or a bank account, either by customers calling or sending a SMS to a specified number • Uses: Purchase goods and services online or at physical locations, and donate money (e.g. several Norwegian churches are collecting donations from people via mobileAxept payments instead of small notes or coins) • Launched in 2003.Piloting customers from different countries, and currently has operations in Norway, Denmark, Sweden, and USA

38. China Union Mobile Pay • Product: Mobile Payments – UMPay is a joint-venture between China Mobile, the world’s largest mobile operator, and China UnionPay, China’s only inter-bank fund-transfer network • Uses: Check phone bills and make payments, check bank account balances and other information, pay utility bills, online goods, buy lottery tickets, and book airplane tickets. • Launched in 2004: By June 2009, 19 million users have conducted mobile payments. In the first half of 2009, there were 63 million transactions worth 17 billion yuan, up 42% and 64% year-on-year respectively.

39. Euro Overview – Key Changes • Payment Services Directive (PSD) legislation affecting delivery time and charge practices • The PSD affects payments where the first and last bank in the chain are EU residents • Harmonisation of the high-value, national clearing systems by the implementation of TARGET2 • Introduction of a single EU payment scheme for credit & debit transfers as part of the single euro payment area (SEPA) • Increased competition among banks resulted in a greater focus on costs to remain competitive • Escalation in the volume and cost of processing third-party bank charges for commercial payments driven by regulatory change • Wide-scale use of the SWIFT bank identifier code (BIC) and international bank account number (IBAN) on payments within the European area • EC Regulation 1781/2006 required ordering financial institutions make sure all wire transfers carry specified information about the payer, through the payment chain

40. International Banking Account Number (IBAN) Description • An international standard that identifies bank accounts across national borders and merges existing country specific account number formats into a global standardized framework • Required for European payments • Mandatory to ensure straight through processing Objective • The IBAN number reduces routing errors that result in payments delays and extra costs incurred • Allows for payment information validation at the point of data entry using: • Country code • Appropriate number of characters (by country) • Specified format

41. International Banking Account Number (IBAN) Composition • The IBAN is made up of the beneficiary’s account number and a prefix that includes the International Organization for Standardization (ISO) Country Code, two check digits and a bank identifier, which varies, by country/institution. • Alpha-numeric up to 34 characters in length • Provided by the account holding bank • Customer must obtain IBAN from beneficiaries

42. Single Euro Payments Area (SEPA) • “SEPA harmonizes the way we make and process retail payments in euro” • SEPA enables customers to make cashless euro payments to anyone located anywhere in Europe, using a single payment account and a single set of payment instruments. • SEPA Credit Transfer (SCT) • A payment initiated by the payer. The payer sends a payment instruction to his/her bank. The bank moves the funds to the receiver’s bank. This can happen via several intermediaries. • SEPA Direct Debit (SDD) • A transfer initiated by the receiver via his/her bank. Direct debits are often used for recurring payments, such as utility bills. They require a pre-authorization (“mandate”) from the payer. Direct debits are also used for one-off payments. In this case, the payer authorizes an individual payment. • SEPA Card Clearing (SCC) • Debit cards - allow the cardholder to charge purchases directly and individually to an account. • Credit cards - allow purchases within a certain credit limit. The balance is settled in full by the end of a specified period. Alternatively, it is partly settled. The remaining balance is taken as extended credit on which the cardholder must pay interest.

43. SEPA Successfully Launched and Volumes are Rising Austria Austria Belgium Cyprus Cyprus Estonia Finland Finland France • January 28th, 2008: SEPA Credit Transfer launched successfully • November 2, 2009: Banks started to offer SEPA Direct Debit • SEPA member states include all members of the European Economic Area (Inclusive of the Eurozone and the EU) in addition to Monaco and Switzerland • SCT volumes are rising: France Germany Germany Greece Greece Ireland Eurozone countries (EU17) Eurozone countries (EU16) Ireland Italy Italy Luxembourg Luxembourg Malta Malta Netherlands Netherlands Portugal Portugal Slovakia All 27 European Union member states Slovakia Slovenia European Economic Area Slovenia Spain Spain 31 SEPA countries including all 27 European Union member states Bulgaria Bulgaria Czech Republic Czech Republic Denmark Hungary Denmark Bulgaria Latvia Estonia Czech Republic Lithuania Hungary Denmark Poland Iceland * Hungary Romania Latvia Latvia Liechtenstein * Sweden Norway * Lithuania Lithuania United Kingdom Poland Poland Iceland Liechtenstein Switzerland * Norway Monaco Other SEPA member states Switzerland

44. SEPA Migration End Date • The SEPA Migration end date imposes a mandatory adoption for clearing systems and the retirement of legacy ACH by Feb 1, 2014 • EU Regulation 260/2012 of the European Parliament and of the Council (the SEPA end-date regulation) was finally published on 30th March establishing EU-wide requirements for credit transfers and direct debits in euro. The regulation was adopted by the EU Council and the European Parliament in February 2012. • The objective is to establish technical and business requirements and set deadlines for migrating credit transfers and direct debits in euro from national to Union-wide standards • Corporations operating cross-country and the public sector are analyzing SEPA impacts and re-evaluating their bank relationships SEPA Migration end date: SCT February 1, 2014 SDD February 1, 2014

45. SEPA Migration End Date • The day after publication of EU Regulation 260/2012, the following entered into force: • Reachability for euro Credit Transfers and Direct Debits (the latter only where national Direct Debits are available to consumers) • Payment accessibility across EU Member States, implying accounts can be held in any European Member State • Removal for €50,000 limit on equal charging practices aligning cross border with domestic charges for payments of the same value and in the same currency • Impact on banks: • National timeframes for winding down niche services • Complying with interoperability requirements • Flexibility with national variances • The removal of the obligation for customers to provide BIC with the IBAN.

46. Are all banks now reachable for SEPA DD&CT? Within the Eurozone • All consumer / retail and commercial banks in the Eurozone are reachable • SCT was launched in January 2008  and currently has more than 4,400 European banks registered with the EPC for this service • EC Regulation 924 that came into force on 1st November 2009 mandated the SDD reachability of all Eurozone banks – currently 2,600 European banks have registered with the European Payment Council (EPC) for the SDD Core service and 2,400 banks for SDD Business to Business service Outside the Eurozone • Limited reach for banks outside the Eurozone and some private / special institutions • Dependent on countries: UK and Switzerland are leading here, some eastern European non-euro countries already have BIC & IBAN as mandatory. If banks offer Euro accounts then they are SEPA ready • Generally SCT reach into non-Eurozone countries is good.  For instance, in excess of 100 banks are reachable in Switzerland • SDD reachability is considerably lower at this point in these countries.  Most have less than 10% of their banks as reachable for the Core DD service and participation is lower still for the Business to Business DD service

47. United Kingdom Overview • Currency: GBP–₤ • Residents are permitted to open and maintain domestic (GBP) and foreign currency accounts both in the UK and abroad • Non-residents are permitted to hold domestic and foreign currency accounts in the UK • Resident and non-resident accounts in domestic currency are convertible into foreign currency • Interest payments on current and short-term accounts are allowed • Interest, if earned, is paid on a daily basis to residents and non-residents • Relevant Regulatory & Tax Implications: • A company is a UK resident if it is either incorporated in the UK or centrally managed and controlled in the UK • 20% withholding tax levied on interest paid to non-resident companies without a UK branch • Banking Structure: • Payment and clearing systems • High-value/urgent payments in GBP are processed through the Clearing House Automated Payment System (CHAPS) and delivered with same-day value • Low-value/non-urgent payments are cleared through the Banker’s Automated Clearing Services (BACS) and operates within a three-day cycle • Single or multiple transactions of less than 10,000 GBP in value cleared able to be cleared through Faster Payments Service (FPS). FPS offers a two-hour delivery timeframe, longer operating hours, extensive capacity for remittance information • Paper-based clearing system operated by the Cheque and Credit Clearing Company Ltd offers three-day settlement cycle

48. UK Faster Payments • Near real time for electronic and telephone initiated payments • £100,000 or less • Funds credited to beneficiary within two hours of receipt • Standing orders of £100,000 or less will have intraday cycle • Launched June 2008 • Aimed largely at retail sector but corporates also benefit

49. UK Faster Payments CHAPS UK Faster Payments BACS Transaction Payments Payments Payments n n n types Standing orders Standing orders n n Direct debits n Ceiling Unlimited £99,999,999.99 n n n £100,000 for payments; £100,000 for standing orders Payment Same day 2 hours for attended payments 3 days n n n cycl e Intraday for unattended payments n No guarantee of same day n crediting — depends on the beneficiary bank Clearing 6am to 4pm Up to 24/7/365 7am Monday to 10.30pm Friday n n n opening hours Monday to Friday n Revocability Irrevocable Irrevocable With recourse n n n Target Primarily for corporate customers Primarily aimed at retail Retail and corporate customers n n n customers customers — internet payments and Limited retail customer use n telephone banking Also applicable to corporate n customers

50. Payments – Debit is more popular than cash in the UK Total Payments Volumes MMs Value Total Payments Values £billions Forecast Forecast Actual Actual Cash Credit Debit Source: Visa Europe, February 2011; Data does not include direct debits, checks; only debit and credit vs. cash