This presentation explores what future of commerce may look like given the current trends in mobile devices, digital payments, social commerce and security including tokenization and new forms of identity verification

1. Payments 2020: Banks
& Payments
Mohit Kant
September 2016

2. Objectives/Agenda
 Explore what future of commerce may look like given the current trends in mobile devices,
digital payments, social commerce and security including tokenization and new forms of
identity verification
Note: The opinions expressed in this presentation are solely those of the author and not of author’s current/former employers or any
other related parties. All third party information featured in the presentation slides remain the intellectual property of their respective
originators. All use of information is done under the fair use copyright principal, and author does not assert any claim of copyright for any
quotation, statistic, fact, figure, data or any other content that has been sourced from the public domain. This presentation has been
drafted for research and educational purposes

3. Payments Industry Outlook and Key Drivers

4. 4
Payments – The key enabler
Payments are the relationship anchor – they enable data that can be used to identify other product
needs
Traditionally, payments have enabled banks to obtain behavioral data that they can use to inform
their view on risk and identify potentially un-met product needs or cross-sell opportunities
Source: Deloitte research

5. 5
Payments industry is expected to grow 6% annually over next few years but
amid that growth, there will be a rebalancing of revenue sources, and disruptive
forces will reshape the global payments landscape
Payments Industry Outlook
Disruptive mix of regulatory and consumer behavioral changes, emerging technologies and new
competition brings a new set of challenges to market players
Market Definition (Digital Payments)
Payments industry is expected to grow 6% annually over next few years but amid that growth,
there will be a rebalancing of revenue sources, and disruptive forces will reshape the global payments
landscape
• Online processed payment transactions
• Mobile payments processed via smart devices at point-
of-sale
• Cross-border peer-to-peer payments
• Digital consumer commerce transactions (credit cards)

6. 6
Macro/Socioeconomic Factors
Factors Impacting Payment Market Development
Demographics
Higher proportion of young people &
evolving consumer behavior often leads to
faster adoption of new payment methods
High proportion unbanked population
leads to rapid adoption of new payment
methods
Unbanked
Population
High GDP growth attracts new market
entrants and faster adoption. Also, high
real-income growth foster increases in
average payments values
GDP & Real-
Income Growth
Cross-border trade growth leads to
greater opportunities for high-margin
payments
Export-Import
Balance
Low Medium High
Low Medium High
Low Medium High
Low Medium High
Impact by 2020*
*Impact ratings based on limited expert discussions

7. 7
Industry Factors
Factors Impacting Payment Market Development
Regulatory
Outlook
Rigorous government regulation can
increase the cost of compliance, leading to
lower levels on innovation
Active government involvement and
private market player innovation can
strongly impact payments infrastructure
development
Infrastructure
Evolving payment flows and new
payment instruments can result in new
market entrants and increase the
likelihood of more innovation
Payment Flows
& Instruments
After basic consumer needs are met,
consumer adoption is driven by
incremental value, efficiency or
convenience
Efficiency Level
Low Medium High
Low Medium High
Low Medium High
Low Medium High
Impact by 2020*
*Impact ratings based on limited expert discussions

8. 8
Keeping pace with customers’ changing needs will be key to winning
Evolution of Consumer Digital Payments
We are entering a new era in digital
payments where we will see rapid
adoption of innovative solutions such
as digital wallets, tokens and use of
biometrics as an authentication tool.
Ubiquitous connectivity, biometrics,
tokenization, cloud computing and
internet of things are some of the key
digital trends that will impact who
customers transact and interact with
payment providers
Source: BCG

9. 9
Key trends that are driving a shift in the payments landscape
Technology experts are dominating the next wave of payments innovations
Key Trends
Impacting
Banks
Macro-shifts & Evolving
Behaviors
Threats
New-age customer and rapid
innovations
Move from online payments to offline, social
and mobile payments in daily life, coupled with
technology innovation is impacting the
economics of payments business models
Disintermediation of Banks
Disruption in payments is often seen as
synonymous with disintermediation. While
disintermediation continues to remain a long
term threat, the disintermediation effect has
largely been contained
OpportunitiesIncreased Focus on
Security &
Authentication
With a string of data breaches,
security and authentication are
top of mind for consumer with
tokenization being the top
security measure that could help
mitigate the authentication
concerns
Mobile Payments are
now Mainstream
Most of U.S. consumers keep
their phones within reach 24/7
with mobile commerce already
accounting for 30% of U.S. e-
commerce; Social commerce is
accelerating
Ongoing Digital
Revolution
Digital technologies
continue to evolve rapidly
and reshape how people
communicate and transact
Blockchain
Technologies
Gaining Momentum
The potential of blockchain
technologies to transform
payments processing is driving
next wave of change
• Innovate
• Focus on cost
efficiencies to
protect ROE
• Decide – block or
participate in
disruption
• A strategic
combination of the
above options
Strategic Options

10. Macro-shifts & Evolving Behaviors

11. 11
Consumers seek frictionless payments that are convenient, personal and on demand
Digital Payments
The use of mobile internet is growing rapidly
and the evolution of smartphones is enabling
new payment streams
• Total Value of Global Retail Transactions
is predicted to be $21 trillion by 2020
• Digital Payments projected to be 18-24%
of global retail payments market by 2020
• According to Forrester, Global smartphone
penetration by population is expected to
exceed 50 percent by 2017
• IoT, peer-to-peer and proximity
transactions to drive payments growth.

12. 12
The realized economic value of IoT will go up to $11T/year by 2025 - McKinsey
Internet of things and smart-device growth
Cisco estimates that the number of devices
connected to the Internet will increase to 50
billion by 2020. Some potential use cases of IoT
payments may be
• Paying for groceries using a wrist band
• Paying for gas at a gas-station using a
connected car
• Ordering milk from a connected fridge
With rapid growth, issues such as security
and data ownership will need to be
addressed to realize the opportunity IoT
payments
• Make the IoT central to digital payments strategy
• Create capabilities to incorporate new types of devices
into the payments strategy
• Prioritize security and privacy
• Partner with manufacturers of connected devices early to
create payment offerings
IoT: Opportunity for Financial Institutions

13. 13
Mobile proximity payments are the fastest growing segment for mobile payments
Proximity Payments
Consumers using near-field communications
(NFC) and other mobile proximity technology will
increase to ~1 billion by 2019, according to the
Ovum forecast. NFC payments will be used by
~940 million people by that time driven by:
• Wider merchant support for NFC across
point-of-sale (POS) acceptance infrastructure
• Rapid adoption of Host Card
Emulation(HCE) allows banks to offer a cloud-
based solution without the need to coordinate
with individual carriers, thus reducing time to
market
• Support of tech giants - Apple, Google,
PayPal, and Samsung is also driving rapid
adoption .
• Assess market readiness and test new NFC use cases
and partner with key players early
• Take the lead in ability to use mobile as payment advisor
at POS to maximize rewards, leading to higher NPS
• Blend security and utility in a seamless experience
delivered through NFC technology with mobile as anchor
Proximity Payments – Opportunities for FIs

14. 14
Convergence of mobile banking and social media is leading to “talk and transact” culture
Peer-to-Peer Payments
Sending money person-to-person (P2P) has
also gone from expensive to cheap or free. It
is forcing many in the industry to rethink this
revenue stream
• New tech-entrants in P2P payments
space such as Facebook and Snapchat
are facilitating commerce between their
users to reduce switching risk
• Banks need to evaluate joining
clearXchange or similar initiatives to stay
competitive in P2P space and gradually
implementing real-time settlement
• Extend value proposition beyond payments – for example
optimizing rewards and instruments
• Utilize trust and security value proposition to slow
revenue erosion in P2P space
• Replicate successful designs and experiences offered by
more agile and efficient competitors
P2P Payments – Opportunities for FIs

15. 15
Millennials present the greatest challenge and growth potential—for banks, especially in Payments
Key Customer Segment Profile – Millennials
Millennials are more likely to consider payment disruptors.
They see value in the convenience, mobile support and ease
of use
• Over 50% of Millennials are already using or considering
payment companies like PayPal or Venmo
• According to Global PayPal Survey, 34% of Millennials
see credit cards as “old fashioned”
• Trends mentioned above are laying the emotional and
psychological foundation for broader adoption of digital and
mobile payments technologies — both for online and offline
transactions

16. Threats: Disintermediation of Banks

17. 17
FinTech disruptors do not carry the costs of onboarding, fraud, network infrastructure, or credit risk
The Four Scenarios
Payments are an attractive market
for disruptors. At a macro level the
global market continues to grow at a
healthy margin. At a micro level,
there are opportunities to deliver
better customer experience through
faster payment options, more
convenience, or integrating
payments into other experiences
The launch of Apple Pay and other
movements towards mobile wallets
from Samsung, Google and Microsoft
is accelerating disintermediation of
Banks
Source: Mckinsey

18. 18
Disintermediation is inevitable for most banks; However, degree of disintermediation may vary
Disintermediation of Banks
Disruption in payments manifests itself in the rise of three major
risks:
• Loss of relationships (e.g. fewer customer interactions)
• Loss of relevance (e.g. back of wallet)
• Loss of revenue (e.g. fewer transactions)
As consumers pursue the path of least resistance in payments,
solutions that blend payments into the background (such as
Uber) are likely to be most successful. There is a high risk that
Banks may become disengaged from consumers.
Banks face a strategic choice whether to retain, recede or
expand their position in the payments space through
partnerships, proprietary solutions or a combination of the two

19. 19
The digital wallet has diverse commerce-related applications extending well beyond payments
Disintermediation of Banks – Digital Wallets
Biggest impact of
digital wallets on
banks so far has been
on relationships -
particularly branding.
Staying top of
wallet has become
even more difficult
Digital Wallets
Revenue Sharing (e.g.. Apple Pay)
Transaction Revenue Loss due to aggregation (e.g..
Starbucks)
As long as cards remain the source inside digital wallets,
banks will continue to earn revenue from those transactions
Strategic Options for Financial Institutions
Integrate third
party wallets into
mobile banking
apps
Partner with other
mobile wallet
providers
Build your own
Wallet

20. 20
Interchange revenue is being disintermediated by new merchant services solutions
Disintermediation of Banks – Merchant Services
Threat to banks in
merchant services is
not in payments, but
in relationships with
merchants
Merchant Services
Missed opportunities as disruptors tap on underserved
merchant market
Disruptors are providing technology solutions to merchants and
may start tapping into lending revenue streams
While competition for merchant relationships has intensified,
disruptors are also helping in growing the pie. For example -
Square helps issuers by increasing transaction volume
Strategic Options for Financial Institutions
Re-think business
models – i.e. pay
per use
Reduce
operational cost
and optimize
pricing
Introduce value-
added solutions
for merchants
“PayPal recently announced
that it has advanced USD 1
billion to more than 60,000
entrepreneurs in the US,
UK, and Australia through
PayPal Working Capital, its
cash advance program for
small businesses”

21. 21
P2P transfers, either domestically or internationally have been disrupted
Disintermediation of Banks – Money Transfer (Domestic & International)
Threat to banks in
money transfers is
that of ceding the
front end customer
relationships to
disruptors
Money Transfer
Domestically, social payment platforms such as Venmo have
gained mainstream adoption(especially amongst millennials)
Bypassing costly correspondent banking arrangements,
disruptors are offering consumers faster, transparent and more
reliable international payments at a fraction of the cost
Blockchain disruption is still in its nascent stages and Banks
could explore its utilization in removing inefficiencies in cross-
border payments
Strategic Options for Financial Institutions
Partner with
emerging players
to reduce go-to
market time
Update
infrastructure to
reduce
inefficiencies
Deepen client
relationships
(increase
switching costs)

22. Opportunities

23. 23
Security and authentication measures such as Chip Authentication Program, 3D Secure,
Tokenization, and biometrics are gaining traction
Increased Focus on Security & Authentication
• Total card fraud loses incurred by
Banks and Merchants worldwide
reached USD 16.3 billion in 2014
• Card Not Present fraud is rapidly
increasing
• Cost of data breaches has
increased steadily, with total average
cost to involved payments firms
increasing from USD 5.4 million to
USD 5.9 million
DEMAND
• Advanced tech-solutions
to combat fraud
• Real-time transaction
analytics

24. 24
The rapidly changing fraud landscape and the scale of recent data breaches make EMV a
compelling long-term solution
Increased Focus on Security & Authentication
• Reputational impact - Combined effect of
several big breaches created an environment
of concern for anyone holding credit cards on
file
• Financial impact - Stolen credit card
information has a real cost to issuers which is
typically then borne by the entity that was
hacked
• Consumer impact - Consumers have to
update billers with new card information which
can be time consuming (negative impact to
NPS)
28%
of fraud victims abandon
merchants
after a security breach*
Sources: Javelin Strategy & Research 2015 Identity Fraud Study

25. 25
EMV and tokenization work together to create vastly greater protections against credit card fraud
Increased Focus on Security & Authentication

26. 26
EMV implementation has forced the fraudsters to explore other channels
EMV-Fraud Moves to New Channels
• The major global brand networks announced that
starting in October 2015, fraud liability may shift
to the party with least security.
• An EMV chip payment transaction is more secure
than a magnetic stripe transaction, resulting in
stronger fraud prevention for card present
transactions.
• As an issuer, if your cards are not EMV enabled
fraud liability will remain as it is today.
• NFC and EMV are companion technologies

27. 27
Tokenization is an effective approach that can be used to safeguard payment credentials
How does Tokenization Help Reduce Fraud
• Tokens help prevent cross-
channel fraud. Even if a token is
intercepted by fraudsters, its re-use
will be limited
• Tokens help accelerate mobile
payment deployment by
• Integrating easily into existing
acquiring network infrastructure
• Enabling immediate card
activation on mobile
• Existing cards can be used with
tokenization

28. 28
Which is the best placed party in the ecosystem to serve as Token Service Provider?
Tokenization – Key Questions
• U.S.-based issuers of early payment industry tokenization initiatives had limited deployment
options, since the services only were offered by the payment networks. Now, however, many
issuers want to exercise more control by bringing some or even all of the tokenization
process in-house, or hosting it with a trusted third-party service provider
• Only the token service provider (TSP), via access to the token vault, can see the relationship
between the original credential and all of its related tokens. This means that any parties
involved downstream of tokenization may find it difficult to gain an aggregated view of
the single credential, due to the presence of its many seemingly unrelated tokens
TSP
Key Responsibilities

29. 29
Likely Scenarios
Should Issuers take on the role of TSP?
Tokenization – Key Questions
• Issuers are well placed to provide powerful levels of token
and domain level control across the entire breadth of their
consumer relationship.
• However, tokenization is a scalable technology that does
not rely on high-scale requirements for certain interfaces.
Therefore, for issuers that already outsource this activity,
bringing solution in-house may not be cost-effective
• Further, token requestors may be unwilling to directly
connect to every single issuer, and may want to interface
with national or regional aggregators for token requests
and token provisioning.
• Different parties may evolve as TSPs – Issuer processors,
networks, other third parties
Large Issuers will need multi-partner tokenization
strategies across different payment brands and regions,
mixing some or all elements of in-house, processor and
network-level tokenization activities to deliver
tokenization across all channels and geographies
This is high probability of intense competition between
TSPs to ensure service pricing and quality and give
issuers the choice to match their individual needs for
security, ownership and levels of control while also
meeting national and regional requirements for security
and competition
By late 2016, EMVCo is expected to issue the updated version of its Tokenization Specification Technical Framework add
potential new implementation considerations such as Payment Account Reference(PAR) and use of QR codes for presenting and
reading tokens

30. 30
Biometrics represent the potential for safer, harder to replicate authentication techniques, but they
haven't been thoroughly tested on the market
Biometrics - the future of authentication?
• According to a recent report by Acuity Market
Intelligence, mobile biometrics is set to secure
65 percent of all mobile commerce transactions
by 2020, generating $34.6 billion in annual
revenue
• Biometrics can make it easy to conduct "card
not present" transactions and eliminate the
need for a physical wallet.
• Many companies are testing the use of
fingerprints, voices, irises and faces to validate
that you are who you say you are when making
a purchase or other transaction
MasterCard plans to
bring "selfie pay"
security checks to
more than a dozen
countries
Samsung is looking
at both fingerprint,
voice and iris
recognition for its
Samsung Pay
offering

31. 31
3D Secure offers an extra layer of protection for cardholders and merchants. Customers are asked
to enter an additional password after checkout completion to “verify” they are truly the cardholder.
3D Secure – The good and the bad
Pros from Merchant Standpoint
• Liability shift
• Chargeback protection
• Interchange benefits
• Increased online shopping (untested)
Cons from Merchant Standpoint
• Customers dislike it – extra step in checkout
• Customers don’t understand it
• Increased card blocking and associated costs
Understand interplay
between fee revenue &
fraud losses
Issuer Considerations
Consider selective
implementation
Invest in customer
education
Stay updated on evolving
trends (in-house fraud teams at
Merchants e.g.. Amazon)