1. © 2011 The Tower Group, Inc. May not be reproduced by any means without express permission. All rights reserved. Top Worldwide Innovations in Payments Changing the world one step at a time Andy Schmidt Research Director Commercial Banking & Payments October 14, 2011

2. © 2011 The Tower Group, Inc. 1 Agenda  Innovation Overview ­Why is it important, and why do we need it in financial services?  Views into Payments innovations by: ­Service ­Product ­Technology

3. © 2011 The Tower Group, Inc. 2 A framework for analyzing markets and disruption Pace of technology change Barriers to entry RAPID HIGH LOW SLOW BattleshipsJets & Sharks Meteors Fruit Flies

4. © 2011 The Tower Group, Inc. 3 Each segment displays unique dynamics and innovation potential Jets & Sharks  Aggressive competition among sophisticated players  Fast pace of business demands advanced technology  Incumbents know each other, and their “moves” Relationships change rapidly; business models less so; insider- based which can be disruptive Meteors  Slowly evolving, with new entrants entering the business  No substantial change beyond price or relationship  Incumbents can be surprised by a better mousetrap High potential for disruption in relationships and business model; incumbents not positioned to respond quickly SegmentDynamicsNature of innovation Battleships  Dominated by few large players  Pace of the business in general is slow  Incumbents seek to maintain status quo Unlikely; high probability of “sustaining” evolution from incumbents Fruit Flies  Constant experimentation and rapid evolution at the margins  Most liable to be influenced by imports from other industries  Incumbents can contribute to the experimentation as well Innovation from within and without; constant evolution of business models and shifting client relationships; first-mover advantages are slim

5. © 2011 The Tower Group, Inc. 4 Why is innovation important in financial services?  The basic financial services product set hasn’t changed in nearly a century  Customers (and even regulators) are demanding change  Initiatives like SEPA and Dodd-Frank/Durbin place limits on bank transaction revenue  Parties ranging from alternative payment providers to wireless companies threaten to disintermediate financial institutions

6. © 2011 The Tower Group, Inc. 5 Some guiding thoughts on Innovation  Being first doesn’t mean you’re the smartest  It’s perfectly okay to take someone else’s idea and build on it  Meaningful innovation often happens in small steps  Change is the only constant, so focus is required to sustain forward momentum

7. © 2011 The Tower Group, Inc. 6 Getting to the segment of one Service Innovations in Payments

8. © 2011 The Tower Group, Inc. 7 Special Needs, Markets, and Hours  Japan(Citibank) ­Branches are open evenings, Saturdays, or year-round  New Zealand (ASB Bank) ­Virtual branch targeted at Facebook users  Singapore (DBS) ­Creating a Gen-Y branch  Sweden (Swedbank) ­“Special Senior Hour” from 10-11 daily

9. © 2011 The Tower Group, Inc. 8 Cards & Services for Women Only  Portugal (Caixa Geral de Depositos) ­Offering includes credit and debit cards  South Africa (Standard Bank) ­Offering includes cash back on all purchase  Both cards include access to expanded medical insurance ­Access to life insurance and discounted medical visits

10. © 2011 The Tower Group, Inc. 9 Cards & Services for Women Only

11. © 2011 The Tower Group, Inc. 10 Card-less ATM Withdrawals  Brazil (Banco do Brasil)  South Africa (ABSA)  US* (PayPal)  Singapore** (Confidential)  Offerings have different use cases ranging from the mundane (paying the gardener) to the urgent (lost/stolen wallet)  Origination paths are identical: SMS message from user * Announced October 12, 2011 ** In development

12. © 2011 The Tower Group, Inc. 11 Bumping, wallets, and Bitcoins New Ways to Meet Existing Needs

13. © 2011 The Tower Group, Inc. 12 Bumping Phones to Make Payments  March 2010 – PayPal announces “bump” feature ­First for Apple, then for Android  July 2011 – PayPal announces NFC support ­Allows any transfer of value – and information – to and from any NFC phones Source: PayPal

14. © 2011 The Tower Group, Inc. 13 Mobile Wallets – Coming Soon to a Phone Near You  Offerings abound: ­US (American Express, Discover, Google, Isis, MasterCard, Square, Visa) ­UK (O2, Orange, Vodafone) ­Denmark (TDC, Telenor, TeliaSonera, 3Denmark) ­Singapore (Infocomm Development Authority, DBS)  Goal is simple – to turn your phone into a “master key” for any payment need Source: Square

15. © 2011 The Tower Group, Inc. 14 But wait – mobile wallets aren’t just for payments  CardMobili (Portugal) offers a mobile wallet for loyalty and reward cards  Supports all major mobile operating systems  Catalog includes over 2,000 cards from over 30 countries  Company has won multiple industry awards

16. © 2011 The Tower Group, Inc. 15 But wait – mobile wallets aren’t just for payments

17. © 2011 The Tower Group, Inc. 16 Virtual Currencies – replacing paper and coins with bits and bytes  Transactions are often peer to peer without the use of a central authority  Relies upon “the network” to self-police  Concept drives regulators crazy ­Can’t rely on the network to stop/filter transactions ­Proponents claim attention is just a ploy by banks to impede adoption

18. © 2011 The Tower Group, Inc. 17 Virtual Currencies – replacing paper and coins with bits and bytes

19. © 2011 The Tower Group, Inc. 18 The New Bill Pay: Reverse Remote Deposit Capture (RDC)  Allows users to take a picture of any bill and pay it  Can add recurring payee information or be used for one-time bills  Uses the same optical character recognition and image correction technology as mobile RDC  Currently in pilot, expected to be commercially available by year end Source: Mitek Systems

20. © 2011 The Tower Group, Inc. 19 Card.io – RDC for cards Source: card.io website

21. © 2011 The Tower Group, Inc. 20 Gift Cards: Another Way to Use Points  Pilot began in December 2010  Allows Chase customers to convert points into closed-loop gift cards  Follows growing bank interest in creating “gift malls” for mobile clients  Over 20 participating merchants, including CVS, Gap, The Home Depot, Uno Source: Chase Gift Shelf

22. © 2011 The Tower Group, Inc. 21 Payments You Can Wear  US Bank MasterCard® PayPass™ VITAband® ­Contactless payment device ­Emergency contact and health information  “Wearable” payments already in use in Europe ­Transit passes and ski lifts are leading uses Source: US Bank, VITAband

23. © 2011 The Tower Group, Inc. 22 Location-based offers and mobile coupons – right deal, right place, right time  Singapore (McDonald’s) – application identifies nearest McDonald’s on a map and send coupon to mobile phone  Global (Groupon) – leverages group-buying to deliver significant savings to members

24. © 2011 The Tower Group, Inc. 23 Sample Groupon offer – Singapore

25. © 2011 The Tower Group, Inc. 24 Biometrics – authentication based on something you have  Poland (BPS) – ATMs let customers use their fingers rather than bank cards to identify themselves and access ATM services  US (iCache) – uses fingerprint to make payment and loyalty card data available on a single plastic card for a short period of time

26. © 2011 The Tower Group, Inc. 25 Phones that can both hear and see have no need for NFC Leveraging the Entire Smartphone

27. © 2011 The Tower Group, Inc. 26 QR Codes and Sound Leverage Existing Smartphone Capabilities  QR (Quick Response) most often used to drive offers or provide information  EasyDo (Japan) adds payment functionality and is widely used  mFoundry (US) markets an application used at Starbucks  eWise payo looking to expand use at POS Source: TowerGroup

28. © 2011 The Tower Group, Inc. 27 QR Codes and Sound Leverage Existing Smartphone Capabilities (continued)  Sound is being used in stores and beyond ­Shopkick (US) is used in stores to push coupons and offers ­Zoosh (US) can be used between devices ­PayFair (Belgium) sends audio file from phone to POS

29. © 2011 The Tower Group, Inc. 28 Conclusions  Financial services institutions need to innovate to attract and retain customers  The pace of innovation is fastest in the mobile market where users, banks, and application developers explore – and expand – the medium’s capabilities  Gen Y’s demands for mobile capabilities will influence their choice in banks  Even slight improvements in existing offerings can add significant value to target markets

30. © 2011 The Tower Group, Inc. 29 Questions aschmidt@towergroup.com