Emerging Payments Market Developments: Trends and Risks James Van Dyke, President and Founder Presented at the Federal Reserve Bank of Atlanta, November 5-6 2009

Key Findings: 2009 Trends Overall “Identity Fraud” Increased in the United States Average Fraud Amounts and Cost to Consumers is Down Economic Conditions are a Factor Fraudsters are Moving Much More Quickly 2 © 2009 Javelin Strategy & Research - Do not distribute or reproduce without permission

Key Findings: 2009 Avenues of Attack Both Low and High Tech and Methods Still Common “Friendly Frauds”: One-in-Ten Knows the Perpetrator Account Takeovers Show That Industry Efforts are Working Criminals Use PINs for Cash Withdrawals 3 © 2009 Javelin Strategy & Research - Do not distribute or reproduce without permission

Payments Risk from an Ecosystem Perspective As Pertains to Three Ultimate and Ultimate PII Goals: Cracking, Terrorism, ID Fraud Significant driver of new technology expense: security, transactional fraud, compliance, etc. Banks: on top of losses and mitigation costs, security is #1 driver of consumer payment relationship or method Merchants: absorb majority of costs, on top of systems, staff and cost of goods Public toll (annually) 4+% of consumers victimized 5+% of SMB owners $496 and 30 hour cost $4,849 fraud amount Law enforcement: Pedestrian aspects, low arrest rate and high visibility © 2009 Javelin Strategy & Research - Do not distribute or reproduce without permission

Key Fraud and Security Trends Evolving and Quantitative Javelin Data Shapes 48 Banking Scorecard criteria ID Fraud increased to $48B in 2008 12% have been a victim, 11% have victims in their family Security and fraud crimes occur via all channels One in ten victims can identify the perpetrator Fraudsters are moving more quickly Accountholders continue to detect half of fraud cases Emerging channels can enable both risk and safety © 2009 Javelin Strategy & Research - Do not distribute or reproduce without permission

Key Trends and Forces Consumer finance is increasingly fast and complex Multiple providers, interaction channels and products More products, but no passbooks or check registers Are “speeds and feeds” replacing control? Account- and identity-holders motivated by fear Top reason for selecting a new issuer or existing card: security FI’s struggle to prioritize and sometimes work solo Security and fraud is costly to everyone Relationships with trusted providers changing rapidly Criminals are sometimes more informed and organized © 2009 Javelin Strategy & Research - Do not distribute or reproduce without permission

Four Times Higher Fraud Victimization Rate among Data Breach Victims Breach Victims (Notified last 12 months) Fraud Rate vs. All Consumers Fraud Rate

Likely Disconnect Between Actual Fraud Caused By Data Breach and Consumer Understanding Figure 4: Actual Fraud Rates Among Data Breach Victims Last 12 months vs. Fraud Attributed to the Data Breach by Those Notified of Data Breach Last 12 Months

Disconnect with Notification May Increase Time to Detect Fraud Figure 6: Average Dollar Consumer Cost by Detection Time

Many Banks Best “Customer Control” Capabilities Actually are About Clean-up Bank and Credit Union Scores for Prevention, Detection and Resolution™, 2005-2008 © 2009 Javelin Strategy & Research

X Account Takeover: Address Change Controls Lead the Industry-Wide Improvements Yet With Criminal Methods Changing Rapidly, Where Must Fraud Execs Focus Next? Records Most Frequently Changed by Fraudsters 2007 Rank 2008 Rank Add name as a registered user on an account #2 #3 Change the PIN on a card #7 Change the phone number #5 #4 Obtain checks Change the email address on an account #8 Change the physical address #1 Change the password on an online account #6 Obtain a debit or credit card © 2009 Javelin Strategy & Research - Do not distribute or reproduce without permission

Mobile Finance Has its own Complexities…and Opportunities New risks come with with new opportunities for authentication and detection © 2009 Javelin Strategy & Research - Do not distribute or reproduce without permission

Javelin’s Prevention, Detection and Resolution™ Model How Prevention, Detection and Resolution™ Mitigate Fraud Average FI Score: 61% 54% 80% © 2009 Javelin Strategy & Research - Do not distribute or reproduce without permission

Identity Fraud Rate Rises, but Mean Fraud Amounts and Consumer Costs Drop Figure 1: Overall Measures of Impact ¹Past years dollars figures have been adjusted for inflation using the Consumer Price Index (CPI-U) issued by the Bureau of Labor Statistics, ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt accessed 01/09/2008. ²Based on US population estimates (age 18 and over), http://www.census.gov/popest/estimates.php accessed 01/09/2008. ³2006, 2007 and 2008 dollar cost estimates have been smoothed using three-year averaging—refer to Methodology Section for details. © 2009 Javelin Strategy & Research - Do not distribute or reproduce without permission

Selected Payments Regulatory Issues With regard to individual identity records, what role should companies and individuals have? Consumers prefer involvement, real-time methods and control Do notifications and penalties achieve desired results? If more control were enabled, what would the impact be? Are we encouraging factual awareness and decisions? Are fraud costs shared in ways that support action? Is technology a friend, foe or both? © 2009 Javelin Strategy & Research - Do not distribute or reproduce without permission

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