U.S. Mobile Payments in Conflict: Why hasn’t NFC taken off?

1. U.S. Mobile Payments in Conflict:Why hasn’t NFC taken off? Mobey Forum Marianne Crowe Federal Reserve Bank of Boston October 10, 2013 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

2. Agenda • Barriers to Adoption of Mobile Payments in the U.S. • NFC adoption issues • NFC vs. Cloud • How to build NFC acceptance

3. 3 Barriers to Adoption of Mobile Payments in the U.S. Strong U.S. banking & payments infrastructure Dynamic, Rapidly Evolving Mobile Payments Landscape Fragmented U.S. mobile payments market Complex regulatory structure Competing technologies: NFC, Cloud, QR Unclear value-added services Large, diverse geography & consumer demographics Perception that mobile is less secure

4. Strong U.S. Payments and Banking Infrastructure • Accessibility: Banking system has high level of trust and is available to most consumers in the U.S. • Unbanked is small percentage population • 9.5% of consumers and 8.2% of U.S. households • Have alternative payment systems • Ubiquity: Thousands of banks/branches across all states • Mature, secure, payment choices: cash, check, credit, debit, and prepaid cards • When new payment methods are added, old methods are rarely eliminated

5. Complex U.S. Regulatory System No one authority or law regulates payments or governs m-commerce ID theft, fraud, unfair business practices Federal Reserve FDIC FTC Mobile carrier standards U.S. Mobile Payments Ecosystem FCC CFPB CSBS NCUA Consumer Protection OCC State Money Transmitter laws 5

6. Mobile Payments are Perceived as Less Secure • Need shared responsibility for monitoring & protection • Address security holistically

7. 7 • Fragmented U.S. Mobile Payments Market

8. Many Mobile/Digital Payment Opportunities – Room for Everyone? Remote Proximity

9. Unclear Consumer Value • Too many mobile/digital payment choices create customer confusion and merchant uncertainty on investment decisions • Not sure what problem mobile payments is solving • Need ubiquity and open solutions to incent consumers to use mobile payments • Poor communication and marketing of benefits • Lack of coordinated consumer education

10. No Foundation for NFC Contactless Cards Transit Over 7,000 autonomous public transit systems Multi-modal: commuter rail, subway, streetcar, ferry Payment acceptance technologies vary Spotty adoption U.S. couldn’t leverage value of contactless card for transit broadly • Contactless cards were never adopted in U.S. • No more convenient than mag stripe card • No EMV • Not widely offered by FIs • Poorly marketed

11. Isis and Google: The Great Divide • Two initiatives from well-known entities announced in close timeframe • Different industry organization leadership • Internet service provider vs. MNO/FI-centric • Prematurely raised expectations, set the bar high, and exaggerated the competition • Divided MNOs and prevented coordination of standards and best practices • SIM vs. embedded SE • Different business/pricing models (transaction vs. advertising fees) • Apple iOS with 43% of U.S. market not involved in NFC • FIs, merchants, and consumers conflicted

12. Easy Market Entry for Non-NFC Solutions – Can NFC Compete? • PayPal In-store pay with mobile phone # • Google NFC/cloud hybridwallet • White Label wallet/QR code: Paydiant, LevelUp • Merchant: Starbucks, MCX • Cloud authentication with GPS & facial recognition • Square Wallet • Non-payment wallets • Apple Passbook, Lemon, Google • Store loyalty/rewards, tickets, coupons • Restaurant & transportation mobile apps • TabbedOut, Uber, MBTA commuter rail • Newest - Bluetooth Low Energy (BLE) • Apple iBeacon & PayPal Beacon

13. Where is FI Leadership? • Only 2 of top 5 FIs involved to date with NFC wallets – Citi (Google) and Chase (Isis) • High cost of participation • Isis issuers pay each time consumer loads their card in wallet • Not a priority for FIs • Focused on expanding mobile banking services • P2P is gaining momentum • Dealing with regulatory & revenue issues • Trying other solutions • BoA: Paydiant • U.S. Bank: microSD NFC • PNC: First Data Mobile Pay

14. Merchants Exploring Lower-cost Alternatives • Don’t see strong business model for NFC • Cost is their top issue • NFC is card-based, with high interchange fees • NFC has not addressed lower cost payment methods such as ACH, PIN Debit/EFT • Upgrading POS terminals and software for NFC is costly and poses operational challenges, so low value proposition • EMV has created even more friction • Control of customer data is also key • Merchants collectively strong in driving direction of mobile payments • MCX is a coordinated effort by large merchants

15. 15 • NFC vs. Cloud – Point/Counterpoint

16. Negative Press Distorts Perception of NFC

17. What Can Industry do Collectively to Build Acceptance of NFC? Reduce costs of merchant implementation Standardize & openNFC wallet to other payment methods Provide incentives for FIs to participate in NFC wallets Figure out how to address iPhone issue without Apple Coordinate Transit initiatives Improve communication for awareness, security, value

18. Conclusion • NFC is no longer viewed by industry stakeholders as exclusive technology that will drive mobile payment adoption • NFC/secure element solution remains a viable option, but cloud-based mobile services also provide secure storage and access to payment credentials, without limitations inherent in a hardware model • Open wallet will likely evolve to include components of NFC with secure element and cloud

19. Thank you. QUESTIONS?