T H E R A P I D P A C E O F C H A N G E I N T H E P A Y M E N T S L A N D S C A P E

Transcription

1 S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L T H E R A P I D P A C E O F C H A N G E I N T H E P A Y M E N T S L A N D S C A P E October 2014

2 T H E R A P I D P A C E O F C H A N G E I N T H E P A Y M E N T S L A N D S C A P E This presentation was prepared exclusively for the benefit and internal use of the J.P. Morgan client to whom it is directly addressed and delivered (including such client s subsidiaries, the Company ) in order to assist the Company in evaluating, on a preliminary basis, the feasibility of a possible transaction or transactions and does not carry any right of publication or disclosure, in whole or in part, to any other party. This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by J.P. Morgan. Neither this presentation nor any of its contents may be disclosed or used for any other purpose without the prior written consent of J.P. Morgan. The information in this presentation is based upon any management forecasts supplied to us and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. J.P. Morgan s opinions and estimates constitute J.P. Morgan s judgment and should be regarded as indicative, preliminary and for illustrative purposes only. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock, or business of the Company or any other entity. J.P. Morgan makes no representations as to the actual value which may be received in connection with a transaction nor the legal, tax or accounting effects of consummating a transaction. Unless expressly contemplated hereby, the information in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other effects. Notwithstanding anything herein to the contrary, the Company and each of its employees, representatives or other agents may disclose to any and all persons, without limitation of any kind, the U.S. federal and state income tax treatment and the U.S. federal and state income tax structure of the transactions contemplated hereby and all materials of any kind (including opinions or other tax analyses) that are provided to the Company relating to such tax treatment and tax structure insofar as such treatment and/or structure relates to a U.S. federal or state income tax strategy provided to the Company by J.P. Morgan. J.P. Morgan's policies on data privacy can be found at J.P. Morgan s policies prohibit employees from offering, directly or indirectly, a favorable research rating or specific price target, or offering to change a rating or price target, to a subject company as consideration or inducement for the receipt of business or for compensation. J.P. Morgan also prohibits its research analysts from being compensated for involvement in investment banking transactions except to the extent that such participation is intended to benefit investors. IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters included herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone not affiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties. J.P. Morgan is a marketing name for investment banking businesses of JPMorgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan arranging, financial advisory and other investment banking activities are performed by a combination of J.P. Morgan Securities LLC, J.P. Morgan Limited, J.P. Morgan Securities plc and the appropriately licensed subsidiaries of JPMorgan Chase & Co. in EMEA and Asia-Pacific, and lending, derivatives and other commercial banking activities are performed by JPMorgan Chase Bank, N.A. J.P. Morgan deal team members may be employees of any of the foregoing entities. This presentation does not constitute a commitment by any J.P. Morgan entity to underwrite, subscribe for or place any securities or to extend or arrange credit or to provide any other services.

3 T H E R A P I D P A C E O F C H A N G E I N T H E P A Y M E N T S L A N D S C A P E Agenda Page State of Payments Industry 1 Disruptors and New Technologies 5 Process and Policy Implications 14 1

4 S T A T E O F P A Y M E N T S I N D U S T R Y Are we entering the wild, wild west in the payments ecosystem? 2

5 S T A T E O F P A Y M E N T S I N D U S T R Y Our payments ecosystem is changing before our eyes! Faster Payments Tokenization Mobile ApplePay Bitcoin PayPal Google Apple Amazon MCX EMV NFC 3

6 S T A T E O F P A Y M E N T S I N D U S T R Y Déjà vu all over again In the nineteenth century, we had (1) Gold dust Real bank notes Foreign coins Fake bank notes Barter (1): The Atlantic May 22, 2014 Lana Swartz and Bill Maurer We ve made progress Today, we have a multi-faceted, largely interoperable monetary (payments) system (cash, checks, ACH, credit cards) Tomorrow, all of the above plus digital currency, mobile, closed loop networks (pervasive) 4

7 T H E R A P I D P A C E O F C H A N G E I N T H E P A Y M E N T S L A N D S C A P E Agenda Page State of Payments Industry 1 Disruptors and Technology 5 Process and Policy Implications 14 5

8 S T A T E O F P A Y M E N T S I N D U S T R Y EMV What is it? EMV stands for Europay, Mastercard and Visa(*) A global standard for inter-operation of integrated circuit cards (IC cards or "chip cards") and IC card capable point of sale (POS) terminals and automated teller machines (ATMs), for authenticating credit and debit card transactions How does it affect me? Point of sale terminals will need to be replaced to accommodate chip/pin cards New chip-enabled terminals will accommodate both cards with chip/pin as well as contactless NFC payments Is it the silver bullet to mitigate fraud? For card present transactions, EMV assists in mitigating fraud For card not present transactions, EMV has not proven to be a fraud deterrent EMV, combined with tokenization and encryption, does provide a robust fraud deterrent Liability shift will occur on October 1, 2015 (from issuer to merchant), if for fraud, resulting from transactions on systems that are not EMV capable (pay at the pump liability shift will occur on October 1, 2017). Source: Chase Commerce Solutions White Paper,

9 S T A T E O F P A Y M E N T S I N D U S T R Y Tokenization and Encryption Tokenization and Encryption Along with EMV, token and encryption are needed to make transactions safe Tokenization Process of substituting a sensitive data element with a non-sensitive equivalent. Referred to as a token with no extrinsic or exploitable meaning or value When tokens replace live data in systems, the result is minimized exposure of sensitive data to those applications, stores, people and processes, reducing risk of compromise or accidental exposure and unauthorized access to sensitive data Used to safeguard sensitive data such as PII Tokenization can render it more difficult for attackers to gain access to sensitive data outside of the tokenization system or service Encryption Encryption is the process of encoding messages or information in such a way that only authorized parties can read it Encryption doesn't prevent hacking but it reduces the likelihood that the hacker will be able to read the data that is encrypted In an encryption scheme, the message or information, referred to as plaintext, is encrypted using an encryption algorithm, turning it into an unreadable ciphertext An encryption key specifies how the message is to be encoded Any adversary that can see the ciphertext should not be able to determine anything about the original message 7

10 D I S R U P T O R S Near Field Communications (NFC) Overview Set of standards for Smartphones and similar devices to establish radio communication with each other by touching them together or bringing them into proximity, usually no more than a few inches NFC devices can be used in contactless payment systems, similar to those currently used in credit cards and electronic ticket smartcards, which allow mobile payments to replace or supplement these systems Google Wallet allows consumers to store credit card and store loyalty card information in a virtual wallet, and also use an NFC-enabled device at terminals which also accept MasterCard PayPass transactions. German, Austria, Finland, New Zealand, Italy, Iran, and Turkey have trialed NFC ticketing systems for public transport Vilnius, Lithuania fully replaced paper tickets for public transportation with NFC transactions on July 1, 2013 Did you know? Have you bought coffee or pastries at either Starbucks or Tim Horton s using your Smartphone? If so, you ve used NFC on a closed loop network Source: Wikipedia and Electronic Funds Transfer Association 8

11 S T A T E O F P A Y M E N T S I N D U S T R Y Mobile payments Where is the payment information stored? On the phone In the cloud Hybrid model What role will social media play in the evolution/expansion of mobile payments? 9

12 D I S R U P T O R S ApplePay What is it? Overview It is a mobile payment alternative which incorporates a focus on security/privacy How does it work: Operates within EMV and NFC contactless protocols and includes a secure element in the iphone or iwatch Does not store cardholder information or card number in the phone or on the Apple servers A unique device account number is stored within the secure element in the iphone (a transaction requires the device account number and a transaction specific dynamic security code) The debit/credit card numbers are never shared with the merchant To make a payment, tap the phone against the terminal and validate with fingerprint (Touch ID) Credit card information can be linked to itunes stored account information and/or a picture can be taken of the credit card/debit card The credit card information is validated by the issuer Upon validation, Apple will store the unique device account number within the secure element in the iphone Agreements in place with large issuers (Bank of America, Capitol One, Chase, Citi and Wells Fargo) Agreements in place with merchants, i.e., Nordstrom, Macy.) What does this mean: Will this announcement accelerate adoption of mobile payments as a mainstream alternative? Source: UL White Paper Apple Pay What do we know September,

13 D I S R U P T O R S Trends Faster payments In late 2013, Federal Reserve Banks solicited comments on a Payment System Improvement Public Consultation Paper The paper sought the input of payment system stakeholders and end users on: Payment system gaps, opportunities and desired outcomes Potential strategies and tactics to shape the future of the U.S. payment system The Federal Reserve Banks role in implementing these strategies and tactics What does fast mean? Consumer payers and business payees preferred instant or one-hour payment speed Real-time or near real-time notification of good money (payment made and payment received by payee) is more important than real-time settlement Feedback from industry stakeholders Faster is preferred Faster debiting preferred by consumers Fast availability of funds is important to businesses Payment attributes of interest include: Ubiquity Payment speed Payment notification Send payments without account information What s next for faster payments? Federal Reserve Bank is participating in conferences, seminars and is continuing to seek feedback on this topic Expect to produce a white paper in late 2014, stay tuned Preference is to share or phone number as identifying information when making a payment vs. sharing bank account information Source: Federal Reserve Bank 11

14 D I S R U P T O R S Digital currency Crypto With the advent of such crypto currencies as Bitcoin, Litecoin, and Peercoin, transactions are happening across cyberspace in the blink of an eye, and banks aren t involved. Bitcoin began in 2009 when its secretive creator known as Satoshi Nakamoto, which may or may not be a pseudonym wrote the encryption programming that makes the currency possible. Open Source Software Allows each unit of the currency to be traced back through the computer code to its origin Bitcoin relies on a public ledger, which allows currency to be accounted for by everyone on the network. Users access their coins through a Bitcoin wallet Bitcoin Wallet A private key that proves to the rest of the network that you have the right to this digit on the public ledger and can control this part of the public ledger. Your wallet is your key to access the Bitcoins Ability to move the digital currency without the need for processing fees, banks, or exchange rates The U.S. Treasury and IRS declared Bitcoin property which has spurred debate about it s validity as currency The more people and businesses that decide to accept and use Bitcoin as a means of exchange, the more confidence there is in the currency, and the more value it accrues Critics of Bitcoin cite the currency s ability to rapidly fluctuate as a downside Bitcoin may now be accepted as political campaign contributions, Dish Network recently announced Bitcoin as an acceptable means of payment as has Overstock.com, to name a few Is this a fad or a preview of a larger, more mainstream movement? Source: Electronic Funds Transfer Association 12

15 T E C H N O L O G Y Who are the players? Financial Institutions Card Associations Retailers Mobile Service Providers Emerging Technology Companies Digital Currency Ecosystem Service Providers 13

16 T H E R A P I D P A C E O F C H A N G E I N T H E P A Y M E N T S L A N D S C A P E Agenda Page State of Payments Industry 1 Disruptors and Technology 5 Process and Policy Implications

17 T E C H N O L O G Y We re still using paper checks WOW! Does this really pertain to me? YES! Your constituents (citizens and businesses) are (or will be soon) using a combination of all of these new payment modes and will expect you to support any/all means available to remit their obligations Is your technology infrastructure equipped to handle the increasing number of payment types likely to be used within the next months What existing operational business processes need to be considered and potentially revamped How might this affect your existing policies Do your standard contracts need to be revisited? Who will own the data associated with a transaction? Do you need to revisit your security/privacy policies in light of these new payment alternatives? 15

18 R E G U L A T I N G T E C H N O L O G Y What s next? Checklist Read everything you can about these emerging technologies and their use cases Encourage your professional associations to include educational sessions at conferences Explore multiple perspectives for each emerging area try to separate fact from fiction or urban legend Consider how to best educate your senior leaders and legislators In the next 5 years (or 6 months.), our payments landscape will look vastly different will you be ready? 16