May 2011 Quick Links. A Partnership Discussion with U.S. Bank. A New Direction for Financial Institution Rewards

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May 2011 Quick Links

A Partnership Discussion with U.S. Bank Jim Geeslin is the Chief Strategy Officer for U.S. Bank’s Retail Payments division, which includes credit, debit, and prepaid services for consumers and small businesses for the bank. Jim leads business strategy, business development, and public relations for the industry’s sixth largest card issuing business. 1. What should potential partners know about U.S. Bank’s payments business? The U.S. Bank payments business is an integral piece, being 24% overall revenue, of U.S. Bancorp. Potential partners should know that U.S. Bank’s payments business is a partner-based business. Whether it is card issuing or merchant acquiring, we’ve defined and built our business on successful... More

A New Direction for Financial Institution Rewards There was a lot of press about changes to financial institution rewards during the economic down-turn. Articles

Mobile Research Webinar were published about reductions in value propositions, strategies to increase breakage, and issuers making Thursday, May 26th, 2011 rewards program adjustments to make up for the various factors placing pressure on card... More Please join us for the Mobile Research Webinar on Mobile P2P Capabilities For more information and to sign up, please email: [email protected]

Q1 2011: U.S. Credit Card Issuer Performance Snapshot As we close the books on the first quarter of 2011, many of the trends of 2010 – declining receivables, improving loss rates, stronger returns – continue. We are expecting 2011 to be a year of “stabilization” as most major performance trends begin to settle down and... More

Small Business Data Collection Requirements Impact on Issuers Dodd Frank Act, Section 1071 Nine months after the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“the Act”), there is still much uncertainty in the industry regarding the Act’s new fair lending requirements, in particular, Section 1071, which imposes new data collection obligations... More

Mobile P2P Trial Study: Initial Results First Annapolis recently completed a first-person study of the person-to-person (P2P) mobile money transfer services currently available in the U.S. market. We tested ten of the most prominent services and prepared this overview of our observations. We are also preparing a research report with the... More

Scott Calliham Joins Merchant Acquiring Practice First Annapolis Consulting, Inc. is pleased to announce that Scott Calliham has joined its Merchant Acquiring practice as a Principal. Scott has nearly 15 years of experience in the payments industry including the last 7 years with Bank of America. Prior to Bank of America... More May 2011 Navigator

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A Partnership Discussion with U.S. Bank Jim Geeslin is the Chief Strategy Officer for U.S. Bank’s Retail Payments division, which includes credit, debit, and prepaid services for consumers and small businesses for the bank. Jim leads business strategy, business development, and public relations for the industry’s sixth largest card issuing business. 1. What should potential partners know about U.S. Bank’s payments business? The U.S. Bank payments business is an integral piece, being 24% overall revenue, of U.S. Bancorp. Potential partners should know that U.S. Bank’s payments business is a partner-based business. Whether it is card issuing or merchant acquiring, we’ve defined and built our business on successful partnerships. In addition to serving our core U.S. Bank retail enterprise, comprised of 3,082 branch locations across 25 states, our card issuing business has three primary, partner-based business lines: Agent Financial Institutions (FI) (known in the marketplace as Elan), co-branded partnerships, and prepaid partnerships. Our Elan business issues credit products on behalf of over 1,700 banks and credit unions as well as prepaid programs for more than 180 banks and credit unions nationally. Our partnerships include industry leaders such as Key Bank, Comerica Bank, and Desert Schools FCU. It is a business our company has proudly built over the last 40 years. Today, we believe we are the clear industry leader as a result of our unique abilities to serve our partners with tools and processes specific and unique to the Agent FI marketplace needs. Our co-brand business is built on a select group of partners, primarily in the travel and entertainment and retail markets. We manage co-branded programs on behalf of leading organizations such as REI, Harley Davidson, Gymboree, Korean Airlines, and The Kroger Company, our newest strategic partnership. Finally, our prepaid business is a growing part of our marketplace offering. We now manage prepaid programs for more than 300 partners with products including General Purpose Reloadable (GPR) cards, payroll cards, gift cards, incentive cards, and teen cards. We see this business as an increasingly important service to offer our partners in the marketplace. 2. How is U.S. Bank thinking about card partnerships in the current environment? What fits your profile? The Agent FI and co-branded partnership markets have changed the greatest as a result of the financial crisis. With the exit of many of the traditional service providers in the FI market, as well as the advent of the new regulatory climate, we have seen a significant number of financial institutions reexamine their credit issuing relationships to determine if a change is appropriate. We have certainly seen an industry-wide trend of regional and super-regional banks reverting back to self issuance. There is now a common belief that they can hire the expertise to relaunch a proprietary card program and effectively compete with the top issuers in a post-CARD Act world. For financial institutions of a more modest size, we have seen the opposite. They remain very concerned about the regulatory burden of managing a proprietary card business and have had an increasing interest in selecting the right issuing partner for the next several years. The FI market is core to us, and we continue to invest heavily in our Elan business to assure we maintain industry-leading capabilities to serve our current and future partner financial institutions. We continue to actively seek new partnerships in the Agent FI market across the entire spectrum of partners, from community banks and credit unions to super-regional institutions. Over the 2008-2010 time period, we acquired over $1.5 billion in Agent FI card portfolio assets. We have built this business with the ability to effectively serve each segment of the market and provide our partners products and cardmember service, elevating them to be highly competitive leading issuers in the industry. The co-branded partnership market has probably seen the greatest amount of disruption since the financial crisis began. During the recession we really saw consumers in this market choose a primary card and focus their spending through that card. Strong and unique value propositions fared very well through the crisis while the more generic value propositions saw adverse selection and significant performance deterioration. We remain focused and active in the co-branded partnership marketplace. Between the years of 2008-2010 we acquired over $600 million in card portfolio assets in this market. We’ve become more deliberate in maintaining partners and finding new partners who truly understand the incremental enterprise value that is created through co-branded payment vehicles. Once a partner understands and validates that concept, they become willing to invest in a unique and compelling value proposition which, in-turn, creates positive selection in the acquisition process and creates a healthy card portfolio. This is of mutual benefit to both the bank and the partner. When we find these types of partnerships, we are willing to make significant investments in program customization, spanning from product differentiation to servicing strategies. 3. Can USB leverage its franchise (debit, prepaid, credit) on certain partners? U.S. Bank’s franchise is significant. Our company is now over $311 billion in assets with 3,082 retail branch locations spanning 25 states. Our payments business is international in scope, with our merchant acquiring business (Elavon) operating internationally in more than 100 May 2011 Navigator

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currencies and our commercial card business having just launched the European issuing business. We issue credit, debit, and prepaid products for both consumers and small businesses, and we offer as many of those products to our partners as they desire. Should the Durbin Amendment remain intact, we believe prepaid programs, as both a debit alternative and a credit down-sell, will become increasingly important to both our FI and co-brand partners. We have had a significant amount of interest in this, and it’s a great example of how a wide product set can help partners increase their customer base penetration and satisfaction levels. A great example of this in the market is our Kroger partnership. Through this partnership, Kroger and U.S. Bank offer a suite of credit and prepaid products with a common customer value proposition. This partnership has been incredibly successful in serving the diverse needs of their customer base. 4. What attributes of a partnership do you believe create mutual interests and value? As previously mentioned, we look for partners who seek and understand the enterprise value of payment programs, not just the direct financial value created from the programs. We have always had a significant focus on both partner and cardmember service. Again, we seek partners who value this as well. Partners, whether they are an FI or a co-brand partner, also must be willing to make a dedicated staffing investment within their organization to give a card program the best chance to succeed. Our most successful partnerships are those that are founded on the fundamental understanding of enterprise value created by a card program, committed to actively marketing unique product sets, mutually focused on and respected for service, and dedicated to necessary staffing to champion the program throughout the partner’s enterprise.

A New Direction for Financial Institution Rewards By Sarah Phelps, Katherine Wallis, and Tim Skeen There was a lot of press about changes to financial institution rewards during the economic down-turn. Articles were published about reductions in value propositions, strategies to increase breakage, and issuers making rewards program adjustments to make up for the various factors placing pressure on card portfolios at that time. With estimated bank program reserves between $26-$27 billion at the end of 2010, there is no doubt that issuers had a lot to gain in altering rewards programs, not only in the context of containing existing costs, but also in translating savings to the bottom line if average cost per point and breakage rates justified a year-end program liability adjustment. As it turns out, the proposed limitations on debit interchange are having a far greater impact than the economy did. First Annapolis completed a review of the rewards programs of the top 100 debit and credit card issuing financial institutions (in terms of assets) at the beginning of this year and compared it to similar research conducted in 2008. Information was gathered on bank and rewards program websites in addition to financial statements and payments industry reporting. For the most part, we looked at a bank’s proprietary rewards program (as opposed to co-branded or affinity cards) and attempted to make some comparisons. Much about financial institution rewards has not changed. Most financial institutions still have credit rewards and embrace the $0.01 per point paradigm. Based upon a sampling of redemption catalogs, redemption values in general have only experienced moderate changes. The value of gift cards and merchandise has decreased moderately, whereas the value of “cash” redemptions (i.e., statement credits, checks, charitable donations, etc.) has been very stable. That is not to say that there have not been material adjustments in discreet programs, in fact, many of the partner programs were restructured in the context of the downturn, particularly in the travel sector. One other thing that has not changed is adoption of enterprise-wide rewards with only one new issuer deploying such a construct over the period. As for changes, programs tapping into the economics of the affiliate network (e.g., merchant-funded) have become far more pervasive, with 41 of the top 100 offering them, compared to 17 in 2008. In addition, debit rewards programs are rapidly declining with six of the top ten debit-issuing financial institutions either halting enrollments or flat-out cancelling bank-branded debit rewards over the past six months. Only 39 of the top 100 are offering debit rewards today, down from 51 at the peak. What is surprising is the aggressive movement in debit rewards, even in advance of knowing the ultimate outcome of debit interchange regulation. For those taking a fresh look at their bank-branded programs, whether in the context of debit interchange regulation or just as a general measure, here are a few considerations that should weigh into your thinking. 1. Transitions away from debit rewards should be developed in the context of the broader banking relationship. Customer experience will be everything when it comes to making a material change to a cardholder’s rewards program. To ensure a seamless customer experience, issuers should be mindful of the effects of implementing multiple changes over a short period of time. The first step should be a review of the customer base to identify segments that might get special treatment. At opposite ends of the spectrum are inactive, single-relationship cardholders (many platforms fail to identify closed or inactive payment accounts and adjust balances accordingly) versus highly-engaged, multi-relationship customers with material balances. There may be a strong rationale for a targeted, proactive redemption campaign to encourage high-balance customers to redeem. Of course, any program transition would need to pass muster from a legal standpoint. Some organizations have concluded that the CARD Act requirements relative to terms changes may apply to rewards programs and, as a result, fall under advance notice requirements. May 2011 Navigator

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2. Redemption steering can ease the impact of eventual program cancellations in addition to generating in-year and long-term program savings. A recurring campaign to remind certain customers of lower-cost, low-value redemption alternatives can clear out balances and reduce the overall average cost per point. 3. Merchant funded programs should evolve in the financial institution’s favor. With broad deployment of affiliate marketing / merchant-funded platforms and consolidation among the service provider community, distribution of offers should be moving up the consumer adoption scale and are becoming more attractive to merchants. As merchant-funded service provider relationships cut across financial institutions, the scale the provider offers the merchant increases, making targeting more attractive and (potentially) more effective. Of course, key to this business model is the ability of the vendor to cover the merchant community from a sales perspective, which implies a substantial sales force. 4. Rewards program infrastructure can be leveraged across financial institution business units. At the core of rewards program functionality is the ability to track behavior, accrue the value of relationships, and generate customer incentives. At one point, several financial institutions were moving in the direction of leveraging their platforms to deploy points-based programs across banking relationships including deposit accounts, mortgages, home equity lines, and others. While the removal of the value associated with debit card activity may make a points based approach less compelling, rewards platform infrastructure can still be utilized to track and act on a consolidated set of banking activities at the customer level. 5. Borrow from the retailer / airline playbook: Consider ways to drive program investment and customer activity back to the financial institution. PNC has embraced this approach by offering redemption to a checking or savings account or as a statement credit. These options have the added benefit to the bank of directing the customers attention, and the bank’s rewards program investment, back to the Bank and its products. The three-year period between Q1 2008 and Q1 2011 brackets the down-cycle and the impact of the CARD Act fairly well and, generally speaking, changes to core financial programs have been moderate to non-existent. However, over the past six months since debit interchange legislation has evolved closer to reality, many financial institutions have outright cancelled their debit rewards programs, even in advance of knowing the ultimate outcome. Those that have not cancelled their programs are no doubt making preparations in anticipation of the July enforcement date. Whatever change they make, the considerations outlined above should help to frame their thinking around how to move forward. For more information, please contact [email protected], [email protected], or [email protected]

Q1 2011: U.S. Credit Card Issuer Performance Snapshot By Loren Zadecky As we close the books on the first quarter of 2011, many of the trends of 2010 – declining receivables, improving loss rates, stronger returns – continue. We are expecting 2011 to be a year of “stabilization” as most major performance trends begin to settle down and we anniversary the implementation of CARD and see its full effects. In short, improvement is evident across the board and, on the surface, is quite uniform across the industry, but the degree to which reserve releases are driving the sharp improvement varies significantly from issuer to issuer. Below is our commentary on Q1 2011: 1. Return to Profitability: We do not normally start our review with a look at profits, but it really is the headline of Q1. The industry clocked in at just below a 4% ROA – the highest since we started tracking it at the industry level. It also represented the eighth straight quarter of improvement (ignoring rounding in Q2/Q3 last year). By all means, this is a dramatic turnaround. However, when you consider that the six largest issuers released $6 billion in reserves in the first quarter, the industry ROA drops by more than 300 basis points to below 1% on an adjusted basis. All issuers remained in the black even after reversing out the reserve impact, but this alternative view exposes the gap that still needs to be closed before we can claim victory and have visibility to industry stability. 2. Declining Receivables: Receivables continued to decline on a year-over-year basis at a rate very consistent with virtually every quarter since late 2009. Various factors go into the movement in receivables; however, lower loss rates and higher purchase volume will contribute to more stabilization over the near term. Off-setting these forces will be the impact of higher payment rates, which are starting to materialize and are a welcome sign, all things considered. 3. Rising Purchase Volume: Five out of six issuers reported strong increases in purchase volume on a year-over-year basis, with three in doubledigit range. On average, the largest issuers reported a combined purchase volume increase of 8% year-over-year – the largest and fourth consecutive increase for the industry. Increased marketing spend and growth in new accounts for some issuers helped drive higher volume overall. Looking forward, one of the largest influencing factors on volume growth will obviously be how consumers alter their behavior as a result of significantly higher fuel prices. 4. Improving Loss Rates: Issuers continued to benefit from the actions taken over the last several years to manage credit quality as loss rates maintained strong quarter-over-quarter and year-over-year improvements. The 400+ basis point improvement on a year-over-year basis is the largest single quarter improvement during this recovery period. However, returning to anything close to pre-recession levels will require more than just modest improvement in the state of unemployment in the U.S.

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Issuer

A/R ($B) 1Q11

Chase1

$128.8

Chase (exWaMu)1

$116.4

Bank of America2

$134.3

Citigroup3

$114.5

Capital One4

$50.6

American Express5

$49.2

Discover6

$44.3

Wells Fargo

$21.0

Sum/Wtd Avg7

$542.7

"Change (vs. 1Q10)"

"Change (vs. 4Q10)"

-13.7%

-6.4%

-11.9%

-6.1%

-10.2%

-4.9%

-13.4%

-7.6%

-10.1%

-6.1%

0.0%

-4.7%

-3.2%

-1.9%

-6.8%

-5.7%

-10.3%

-5.7%

"Purchase Volume ($B) 1Q11"

"Change (vs. 1Q10)"

"Change (vs. 4Q10)"

11.7%

-9.8%

NR

NR

Net Loss Rate 1Q11

$77.5

NR

"Change (vs. 4Q10)"

-478 bps

-88 bps

-441 bps

-95 bps

-456 bps

-44 bps

-342 bps

-161 bps

-428 bps

-108 bps

-350 bps

-70 bps

-304 bps

-99 bps

-396 bps

-98 bps

-419 bps

-93 bps

6.97%

NR

8.32% 3.7%

-10.6%

-4.2%

-15.6%

13.8%

-7.3%

13.2%

-7.1%

7.1%

3.3%

NR

NR

$52.6

7.21%

-9.1%

NR

NR

217 bps

64 bps

325 bps

132 bps

248 bps

129 bps

120 bps

-115 bps

532 bps

56 bps

NR

NR

324 bps

54 bps

3.58%

NR

7.21% 7.8%

31 bps

4.48%

5.96%

$325.7

490 bps

5.04%

3.70%

$24.0

"Change (vs. 4Q10)"

2.49%

6.20%

$96.1

"Change (vs. 1Q10)"

4.20%

8.37%

$25.0

After-Tax ROA 1Q11 4.11%

6.13%

$50.5

NR

"Change (vs. 1Q10)"

3.99%

Source: Issuer quarterly reports and First Annapolis analysis. Note: 1 Includes income from acquiring business and private label receivables and volume. Purchase volume restated as sales volume. Net loss rate results reflect the impact of purchase accounting adjustments related to the Washington Mutual transaction and the consolidation of the Washington Mutual Master Trust. Ex-WaMu A/R, and net loss excludes impact of WaMu. 2 Receivables, purchase volume, and net loss rates are for U.S. consumer and international consumer cards. After-tax ROA includes U.S. consumer and business, International, and merchant acquiring. 3 Restated splitting between Citibranded North American and CitiHoldings Retail Partners from Q1 2008. Purchase volume includes cash advances. All figures for combined portofolios with the exception of ROA; after-tax ROA only includes Citibranded NA cards. 4 U.S. card business, small business, installment loans only. Purchase volume excludes cash advances. 5 Receivables and charge-offs are for U.S. Cardmember Lending business only. Purchase volume is for U.S. Card Services segment, consumer and small business. Includes restated NCL rate. 6 Includes U.S. domestic receivables and purchase volumes only. ROA includes merchant services and implied U.S. Cards tax rate of ~40% as well as a Q4 2009 $472MM pre-tax gain ($285MM after-tax) related to the antitrust settlement. 7 After Tax ROA and purchase volume totals exclude Wells Fargo.

For more information, please contact [email protected]

Small Business Data Collection Requirements Impact on Issuers - Dodd Frank Act, Section 1071 By Raymond Carter and Chandita Kotoky Nine months after the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“the Act”), there is still much uncertainty in the industry regarding the Act’s new fair lending requirements, in particular, Section 1071, which imposes new data collection obligations on lenders. In brief, Section 1071 amends the Equal Credit Opportunity Act (“ECOA”) to mandate every financial institution1 to inquire of any business applying for credit whether the business is a small business or a women or minority-owned business, maintain a record of the information separate from the application, and report the information along with related information2 about the application to the newly created Bureau of Consumer Financial Protection (“CFPB” or “the Bureau”). The Act requires the CFPB to make such data publicly available on an annual basis. While the Act assigns the Bureau responsibility to prescribe regulations implementing Section 1071, absent any communication from the Bureau, there has been much uncertainty among financial institutions in the past nine months about the exact nature of their obligations come July 21, 2011 (the designated transfer date) when Section 1071 becomes effective. The Bureau finally clarified last month3 that financial institutions’ obligations under section 1071 will not go into effect “until the Bureau issues necessary implementing regulations.” However, timing is only one of the many fundamental questions that surround this controversial requirement. At the heart of the debate is the cost-benefit trade-off involved in collecting, reporting, and publicly disclosing applicant characteristic data for small business lending. Section 1071 is intended to produce reliable data that can be analyzed by the Bureau to “facilitate enforcement of fair lending laws and identify business and community development needs.” However, small business lending is more complex4 than other types of lending and varies across lenders to a greater degree than other market segments. As a result, when evaluating small business loan applications, lenders may consider a variety of different factors May 2011 Navigator

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about the business and its owners. Accordingly, absent relevant data about business attributes and underwriting standards of the lender, information on personal characteristics (such as race, ethnicity, and gender) alone may be insufficient to identify discriminatory lending practices in small business lending. First Annapolis interviewed a sample of business credit card issuers on their key concerns and questions regarding Section 1071. The overwhelming sentiment in the industry is that for credit that typically is granted using automated underwriting systems and without face-to-face contact between the creditor and the consumer, such as business credit and charge cards, this requirement seems particularly unjustified. The Bureau; however, is yet silent on whether exceptions would be made for specific small business lending products. Another concern is that the cost of data collection could be significant, depending upon the complexity of the products for which data must be collected, and may outweigh the anticipated benefits. Of particular concern to financial institutions is the backlash of negative customer reaction to inquiry of race, ethnicity, and gender data. Issuers we interviewed anticipate additional costs from hiring incremental resources to field customer calls, revamping paper and electronic applications, and employing supplemental IT resources to manage the changes in data collection, segregation, reporting, and submission. A final key concern that has been voiced by financial institutions and industry observers is the lack of direction regarding data fields to be collected, procedures for requesting information on personal characteristics, and procedures for report formatting and transmittal. The language of the Act, itself, raises more questions than it answers: i.

Financial institutions are required to collect information on race, gender, and ethnicity of the principal owners of the business, but no definition of “principal owner” has been provided.

ii. Section 1071 does not specify when the obligation of a financial institution to inquire about the ownership or size of a business applicant is triggered. Effectively, therefore, the Act appears to mandate inquiry of all commercial applicants since any might be small, minority- or womenowned. Since an applicant will not always know if it meets the Dodd-Frank statutory definitions for “small,” “minority,” or “women-owned” business, there is need for clarity on how the financial institution should handle incorrect responses. iii. Per the Act, underwriters must not have access to any information provided by the applicant in response to inquiry “where feasible.” However, there is no direction on how financial institutions should determine feasibility. In summary, Section 1071 of the Dodd-Frank Act brings in a number of significant changes to fair lending compliance and for most lenders may necessitate substantive changes to existing go-to-market infrastructure and fair lending programs in order to comply. Specific contours of rulemaking are expected to be subject to notice-and-comment procedures and may evolve over the upcoming months. Broadly defined under this section as any entity that engages in any financial activity. In addition to race, gender, and ethnicity of the principal owners of the business, other data fields to be collected include application number and date, action taken, amount of credit applied for and approved, loan purpose, location of business, gross annual revenue, etc. 3 Letter from the Bureau’s General Counsel, Leonard J. Kennedy, dated April 11, 2011, and posted on the CFPB’s web site. http://www.consumerfinance.gov/wp-content/uploads/2011/04/GC-letterre-1071.pdf 4 There are many different types of small business lending (secured or unsecured credit cards, credit lines, equipment loans, trade credit, capital lease, etc.), as well as many different types of small business lenders (banks, credit card companies, trade creditors, etc.). Among small businesses too, there are significant differences in credit needs depending on industry type, size of business, time in business, personal creditworthiness of the owner, etc. 1 2

For more information, please contact [email protected] or [email protected]

2011 First Annapolis Mobile P2P Trial Study: Initial Results By Dara Khan First Annapolis recently completed a first-person study of the person-to-person (P2P) mobile money transfer services currently available in the U.S. market. We tested ten of the most prominent services and prepared this overview of our observations. We are also preparing a research report with the full results, an assessment of the mobile P2P market, and analysis of key players. A preview of the report and additional discussion of current market mobile P2P activities will be presented in a webinar on Thursday, May 26th. For more information on the report and webinar, please e-mail [email protected]. Electronic P2P transactions represent an opportunity that the payments industry has long perceived as significant, but difficult to scale and even tougher to monetize. Several players have attempted to enter this market using a variety of strategies. Some have partnered with banks while others, like PayPal, have been successful by focusing on an underserved segment of the market. The integration of mobile technology into P2P payment schemes has improved market optimism for broad consumer adoption of P2P payments. Mobile P2P services are rarely stand-alone mobile access services, but are part of broader payments schemes that also provide online access and use funding and withdrawal channels that run on traditional payment scheme rails. The advent of the mobile wallet is another underlying trend that will advance P2P. Smartphone proliferation has created an opportunity for P2P transactions initiated via mobile to reach the scale required for viability. PayPal has reported that it expects over $2 billion in volume to be conducted via mobile in 2011, the majority of which is likely to be P2P. To achieve necessary adoption, mastering the consumer experience is crucial. After testing the most prominent P2P services currently in-market today, we believe the following components are critical for a P2P offering to be considered competitive. May 2011 Navigator

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1. Scalable Adoption (Distribution) • Source and destination agnostic approach to moving funds • Multiple mobile channels enabled (smartphone platform apps, mobile web, and SMS, as well as integrated online access) • Brand or awareness investment 2. Simplicity and Ease of Use • Convenient addressability: the ability to send funds to mobile numbers or email addresses • Streamlined processes for: - Sign-up - Funding method additions / verification - Funds load / send / receive / withdraw • Quick and secure authentication 3. Mobile Wallet Integration • P2P as one of many mobile commerce services, including: payments at the POS, remote payments or e-commerce, and integration with mobile banking • Bells and whistles to highlight use cases: offers, functions for splitting bills, recurring payment, requesting funds, dollar incentives for signup, social networking, and location integration Figure 1: Average Minutes Needed to Complete One mP2P Transfer

Broad adoption of P2P payments will require some work to establish these schemes as socially acceptable methods of informal payments. Consumers must be confident that they will not impose on recipients with unproven processes or difficult redemption. Most providers support multiple mobile channels, but few support them all. Issuers are taking different approaches to introduce this concept to consumers. Some providers, like Chase, US Bank, and PayPal, enable free transfers but limit funding sources to linked DDA to ensure only low cost ACH channels are used. PayPal also offers the ability to transfer from a linked bankcard, but charges the user 2.9% + $0.30 to do so. Other providers, like Amazon TextPayMe and American Express’ Serve, do not charge fees, regardless of whether the transaction is funded from stored balance, ACH / DDA, or a linked bank card. Other providers have fees that range from $0.25 - $0.75 for transactions under $10. The user interface for sending and redemption is commoditized and fairly uniform, albeit generally user-friendly. The interfaces typically include fields for the transfer amount, the recipient address, and an optional message. Redemption is instant for most services if the recipient has an account with the service, and the funds are house-account or cardfunded. Transfers to an external bank account take 2-3 days via ACH.

Source: 2011 First Annapolis Mobile P2P Payments Study. Note: Each service was tested with at least 5 transactions. Average does not include failed transactions.

A steep learning curve among consumers was observed; typically, users needed 4-5 minutes to make their first transaction but only 1-2 minutes to complete subsequent transfers. Generally, recipients were notified in a minute or less, but some providers ended up having lag times as “long” as 2-3 minutes. There were some technical difficulties, with a few trials resulting in error screens, timeouts, or failure notifications.

Several providers are seeking differentiation by enabling unique methods of loading funds to their services. Chase, US Bank, and PayPal offer mobile remote deposit capture, which allows users to make a deposit to their account by taking a photograph of a paper check. PayPal enables cash reloads via Green Dot MoneyPaks at retail stores. Common approaches for enabling transactions were to allow senders to address either mobile phone numbers or email address. Several services enabled both phone and email approaches, while a few services lacked functionality by limiting addressability options to one or the other. Authentication methods for transactions vary by scheme and channel. Several providers rely on their online login credentials, including alphanumeric username and password, to authenticate transactions initiated via mobile web or via an app. When transactions are initiated via SMS, providers like Amazon, PayPal, and others confirm the transaction out-of-band by calling the sender and requesting a service PIN be returned via outbound IVR prompt. US Bank’s P2P service can be accessed via Firethorn, the third-party mobile wallet provider, which supports transactions authenticated via a six-digit PIN. Despite these challenges, P2P providers continue to innovate. TextPayMe enables users to send funds in the form of an Amazon gift card. Some providers enable multi-account or card funding. PayPal offers various services in addition to P2P, including offers and a “bump” proximity P2P feature. US Bank and May 2011 Navigator

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© 2011 First Annapolis Consulting, Inc.

Chase have integrated P2P as a mobile banking service. One provider offers users the opportunity to post their payments to friends to Facebook and Twitter and also enables geo-location. Serve enables users to create sub-accounts. While a “killer” P2P app is still elusive in the payments industry, the increased pace of activity suggests several providers are closing in. As these players continue to integrate with financial institutions, it appears that mobile may be the catalyst needed to drive widespread P2P adoption. Join us at our webinar on Thursday, May 26th, as we discuss more specific results from the study and provide deeper analysis of individual services. For more information, please contact [email protected]

Scott Calliham Joins Merchant Acquiring Practice at First Annapolis Consulting First Annapolis Consulting, Inc. is pleased to announce that Scott Calliham has joined its Merchant Acquiring practice as a Principal. Scott has nearly 15 years of experience in the payments industry including the last seven years with Bank of America. Prior to Bank of America, Scott spent seven years with First Annapolis. While with Bank of America, Scott held various positions in both Payments and Strategy and Merchant Services. In Payments and Strategy, he was responsible for several projects focused on payments related initiatives across Bank of America’s Debit, Issuing, and Acquiring businesses. Additionally, Scott spent the last five years in Merchant Services at Bank of America holding multiple roles, including leading Corporate Strategy, Pricing and Portfolio Management, and Product Development and Support. Most recently, Scott was Executive Vice President of Bank of America Merchant Services with responsibility for Emerging Payments and Strategy. Scott graduated with his Bachelor’s Degree from San Jose State University and earned his MBA at Carnegie Mellon University in Pittsburgh, PA. “Scott is uniquely qualified to add value to our clients based on his experience with both Bank of America and First Annapolis” said Marc Abbey, Managing Partner. “He has held a diverse set of executive positions with one of the largest acquirers in the world while also having a high degree of familiarity with our consulting practice. We are very excited to have Scott back at First Annapolis and he will be focused on helping to build the Acquiring practice in both Consulting and M&A related initiatives.”

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Founded in 1991, First Annapolis is a specialized advisory firm focused on electronic payments. Our market coverage is international in scope with a primary focus on North America, Latin America, and Europe. First Annapolis is headquartered in the Baltimore / Washington, D.C. corridor and Europe is served through our office in Amsterdam. In total, we have over 70 professionals across our practice areas giving us one of the largest and strongest advisory teams focused exclusively on electronic payments.

Practice Areas

Services

Card Issuing Deposit Access Merchant Acquiring Retailer Services Emerging / Mobile Payments Commercial Payments

Management Consulting Partnership Finance Strategic Sourcing Portfolio Management Strategy Development / Implementation Loyalty Program Support Commercial Risk & Compliance

May 2011 Navigator

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M & A Advisory Services Transaction Support Valuations Fairness Opinions Negotiation Support

© 2011 First Annapolis Consulting, Inc.