Regular Payments First and Subsequent Payments

1. Regular Payments First and Subsequent Payments Steve Clough Direct Response Forum EU Amsterdam, April 2005 VISA INTERNAL USE ONLY

2. Agenda • Regular payments – the opportunity • The benefits • The problems • Proposed solutions • Summary

3. Regular Payment Opportunity • European Regular Payment market estimated at circa €1tn * • Key sectors include Insurance, telecommunications and subscriptions • Regular Payments represents 30% of EU PCE • Less than 1% of this business is transacted on Visa cards EU Regular Payment sector value €1tn < 1% processed on Visa Cards Clear sector opportunity * Source Global Insight 2003

4. French Regular Payments market 2003 Source: Visa Analysis of Carte Bancaire data

5. UK Regular Payments market 2003 Cash and Cheques = £ 50 bn Source: 2004 APACS report (excludes rent & mortgage) Iceland Regular payments > 16% Visa POS CEV

6. Regular Payment Benefits Merchants Easy mechanism to initiate remote payment and improved renewal rates Cardholders Easy to set up and convenient for remote environments - Internet Convenience Members Increased revenue. Cuts costs of cheques. Visa Increased transaction volume

7. But there are problems • Existing card scheme solutions have evolved over 30 years and do not necessarily meet the requirements of all parties: • First transaction is usually Card Not Present, which needs specific risk precautions • merchants often hold invalid card number information • difficult to stop Regular Payments - regulatory impact Cardholder and merchants are reluctant to use card based Regular Payments

8. First Transaction – Best Practice Best Practices • Risk • CNP Fraud is the highest single loss category • Chargebacks for MoTo are five times Face-to-Face rates, and e-Commerce rates are eighttimes higher • Cardholder authentication is the major problem But… not everyone suffers equal losses. Fraudsters will find the weakest link

9. First Transaction - Authorisations Best Practices • Authorise all transactions • but remember authorisation isn’t a guarantee of payment • Collect and submit the Expiry Date • Ensure your transactions have correct data • Merchant Category Code • CNP indicators

10. First Transaction - Card Verification Value 2 Best Practices • CVV2 is highly effective against CNP fraud • Simple to implement and use • Already on all cards • Gives up to 70% savings in losses • Transaction approval rates are higher when CVV2 used • Reduces merchant back office costs

11. First Transaction - Address Verification Service Best Practices • AVS enables a merchant to validate the cardholder’s billing address with the Issuer • UK Addresses only • Merchants should • Review all AVS failures • Research partial AVS matches

12. First Transaction – Verified by Visa Best Practices • VbV enables a merchant to request confirmation of the cardholders identity from the Card Issuer • If an eligible merchant offers VbV, he will not be liable for identity-related fraud • Merchants should also keep other fraud prevention tools to maintain eligibility

13. Be Vigilant Best Practices • Is the transaction suspicious? • High value • Hesitant customer • Urgent delivery • Random or multiple orders • Differing addresses • Use of multiple cards

14. Be Vigilant Best Practices • Maintain records of cardholder’s previous transactions and shipping address(es) • Monitor for suspicious transaction frequencies • Monitor for account generation attacks • Consider confirming high value purchases with the cardholder

15. Fraud Screening Best Practices • Commercial Fraud Screening tools can be very effective • Use in addition to other fraud prevention measures

16. First Transaction - More information Best Practices • Visa Merchant Best Practice Guide • Talk to your Visa Acquirer

17. Subsequent transactions – Visa’s response • Tactical Improvements • Working with key merchants on ‘best practice’ to contain the problems • Summer 2004 3 UK credit Issuers undertook a refresh of card numbers for 5 Regular Payment merchants. • Provided a statistically high level of either refreshed card numbers (18.5%) or confirmed to merchant that they were currently using the most recent card number • Demonstrated the value of developing an automated mechanism to refresh card numbers • Results varied based on frequency of billing and operational procedures at the merchant

18. Subsequent Transactions - Strategic initiatives • Build an automated service to refresh merchant card number databases • Incorporate a facility for cardholders to stop Regular Payments

19. How will the VAU / Stop Service Work? Acquirer Acquirer submits enquiry on merchants behalf On-line stop instructions Issuer Customer Service Centre Submission of enquiry file (merchant determines Frequency) Merchant VAU / Stop Service Issuer Card Management System Batch card number updates (minimum monthly) • Merchant receives • Refreshed number or • Confirmation of existing number • Details of any stop transactions

20. Summary • A large sector opportunity exists for more efficient and convenient payments • Best practices can make a huge difference for first transactions • Current card based solutions for subsequent transactions are archaic and not suited to developing the sector • Strategic solutions have been designed.