Digital E Commerce Leveraging digital technologies for better customer engagement and lower payment costs René M Pelegero RPGC Group LLC

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2 Digital E Commerce Leveraging digital technologies for better customer engagement and lower payment costs René M Pelegero RPGC Group LLC Dallas, TX February 17 th, 2015

3 Remember When

4 Today we live in a world where instant gratification is the norm

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6 Mobile Phone Penetration Nearly 5 Billion people are expected to use a mobile phone in 2014* Smartphone users worldwide will total 1.75 Billion* US Smartphone market share continues to grow and now accounts for over 70% of all mobile subscribers in the USA * Source: emarketer

7 Smart Phones and Tablets Creating Convergence Nearly half of digital time spent on retail properties now occurs via smartphones and tablets Consumers are multi platform accessing retail sites with technologies that have different attributes and capabilities 78% of respondents webroomed before heading to a store to make a purchase and 72% of respondents showroomed seeing a product at a store before purchasing it online* * Accenture, The Seamless Consumer Retail Survey, February 2014

8 Why Technology Changes Behavior

9 The Digital Commerce Cycle Search Create awareness Identify need Analyze Track usage Engagement and satisfaction Find Compare price and attributes Locate providers Track Loyalty programs Rewards points Obtain Enhance Experience Pay for goods or services

10 Search Help consumers develop awareness and consideration for merchant s products Evolving from Tradeshows, direct mail, buying lists to attracting customers through inbound marketing using a suite of tools Blogging Social Inbox SEO Call to action Landing pages Lead management Marketing automation Analytics Sales force sync

11 Search Social Media Facebook, Twitter, Google+, LinkedIn, Yelp, Instagram, FourSquare, YouTube, Tumblr, Blogs, etc. More attuned to engagement than to advertising Difficult to assess the effectiveness of social media marketing Search Engine Optimization Many tools (e.g. XML Maps, SEO landing pages, rich Snippet tags, different keywords depending on stage of buying cycle, personalization, etc.) 50% of all mobile searches have local intent and 17% are done on the go Evolving from SEO to Search Engine Marketing (SEM) Retargeting Reach out to non converted customers (e.g. AdRoll) Marketing Automation Software Full suite of products and services as well as marketing analytics Industry revenues grow to $5.5 Billion in 19 as compared with $3.65 Billion in 14

12 Find Helps consumers locate the desired product or service and provide comparison of price and attributes Although solutions are available in the market, the tools are still being experimented with Maps Geolocation Blue Tooth Low Energy (BLE) or Beacons Price comparison engines

13 Find Maps 52% of US Smartphones users used Google Maps and 59% used GPS in the survey month* Locating and advertiser on a map was respondent s 4th most common action after seeing an ad on a mobile device** Geolocation Consumer concerns regarding privacy and security Used in a variety of ways SMS Shopalerts Pizza Hut in UK found location based advertising was 142% more efficient delivering incremental sales than their other measured campaign average Square s arrival prediction tool Uber s driver location MasterCard s reduce transaction declines when cardholder travels * B2X Care Solutions and Motorola Survey, March 2104 ** inmobi Syrvey, January 2014

14 Find Beacons (Blue Tooth Low Energy or BLE) Merchants still experimenting with technology Set up challenges (e.g. Bluetooth on, location services on, and app opt in to receive notifications) Used for in a number of ways throughout the shopping experience Solutions Apple ibeams Shopkick rewarding foot traffic PayPal no touch payment Groupon s announced new products to tailor and launch consumer targeted promotions via proximity signals. Price Comparison * B2X Care Solutions and Motorola Survey, March 2104 ** inmobi Syrvey, January 2014

15 Obtain Help facilitate the actual acquisition of the desired product or service Much energy and effort being spent here Shopping Experience Checkout and Payments

16 New Shopping Experiences

17 Tablets Replacing Paper

18 Digital Fitting Rooms

19 Checkout and Payments Consumers online fickleness migrating to physical stores Long lines and long wait times is second reason shoppers cited for avoiding shopping at certain brick and mortar retailers UK study found that consumers will wait an average of 5:45 minutes before abandoning basket Only 19% would never abandon their basket and 16% would refuse to wait more than 3 minutes Apple and Nordstrom stores leveraging mobile devices to checkout on the floor Other interesting checkout experiences Chipotle Tabbedout Uber

20 Mobile Payments RPGC Payments Framework Consumer attitudes Mobile payments technologies Recent developments and trends in mobile payments

21 RPGC Payments Framework Delivery Layer E Wallets Gateways Aggregators Other This layer evolved to address the deficiencies in traditional payment instruments Sometimes consumers think of this as the payment instrument Instrument Layer Credit Cards Debit Cards Prepaid Cards Network Layer VI/MC/AX. etc. EFT Networks ACH Networks RTN/Acct Numbers Check/Paper Clearing Houses Paper Docs (Checks, Boletos, etc.) Pre Paid Vendors Value holders (e.g. financial institutions,) provide Payment Instruments to access the value Instruments contain credentials used to initiate transactions Payment instructions initiated by credentials must travel through payment networks Networks are sometimes branded & brands often extend to the instruments (e.g. Visa / Mastercard) Value Layer Credit Lines Deposit Accounts Stored Value Typically value is money which is kept in Financial Institutions Value is also a credit line or a stored value in a pre paid account Copyright RPGC Group LLC All rights reserved Copyright RPGC Group LLC All rights reserved

22 RPGC Payments Framework Delivery Layer E Wallets Gateways Aggregators M Wallets Other Mobile Wallets store traditional payment instruments which are processed through the legacy payment networks (e.g. ApplePay, Google Wallet, SoftCard, etc.) Credit Cards Debit Cards Instrument Layer Prepaid Cards RTN/Acct Numbers Paper Docs (Checks, Boletos, etc.) Phone # Some solutions use the phone number as the instrument to initiate payment transaction (e.g. Boku) VI/MC/AX. etc. Credit Lines EFT Networks Network Layer ACH Networks Value Layer Deposit Accounts Check/Paper Clearing Houses Non Financial Credit Lines Pre Paid Vendors Telco carriers Stored Value Telco carriers can deliver payment transactions to the their final destination financial accounts (e.g. Mpesa) With Direct Carrier Billing (DCB) the value of the purchase is charged to the consumers phone bill Copyright RPGC Group LLC All rights reserved Copyright RPGC Group LLC All rights reserved

23 US Consumers Waiting But Awareness Increasing US consumers still waiting on sidelines* Only 13.5% have paid with mobile phones Over half believe that mobile payments will probably be widely used in 5 years Although US consumers believe mobile payments will be widely used in the future, they remain uncommitted** 43% open to use mobile payments but this % has fallen since 2011 Openness depends on merchant adoption and merchant s offerings 38% expect that they will have multiple digital wallets US Mobile payment usage highly driven by age and locations** * Source: E Marketer/AYTM Market Research survey, August 2014 ** Source: McKinsey s Mobile Payments Consumer Survey, 2013

24 But Then,There Is Starbucks A Customer Hit? First mobile app in September 2009 with over 10 Million active users 5 Million mobile payments/week accounting for over 14% of US tender It is not about payments at all Loyalty point tracker Store locations and hours of operation Product and nutritional information Drink builder Gift cards marketplace Value added itunes songs & apps Economics A Financial Success Over $1B loaded to card balances in Q (mobile is 25% of card volume) Average load/purchase $25/$5 Card fee savings per load $1 SV contribution of $172MM per Year in card fee savings

25 Mobile Payment Alternatives Browser based Consumer uses a full or customized version of a browser to make a payment just as they would do in a desktop or laptop In App Consumers use app enabled to make payments within the app Consumer use retailer branded app to initiate a payment Generic Payment Wallet at POS Consumers use a generic payment wallet that stores payment information In the Cloud in Non NFC In NFC s Secure Element In NFC using Host Card Emulation

26 NFC in Payments NFC is a set of standards for smart phones and similar devices to establish radio communication with each over very short ranges NFC can be used to communicate between two powered devices (peer topeer) and one powered device and an unpowered tag NFC has existed in the payments space for several years White label payment systems (e.g. Vivotech) Closed loop transit systems (e.g. UK s Oyster) Tag based payments (e.g. Bling Nation) MasterCard s paypass Visa s paywave NFC began to make inroads on mobile phones in Attach a tag to a phone Acquire and insert a SIM on mobile Phones with built in NFC chip

27 NFC in Mobile Payments NFC chip includes a Secure Element Stores information in a secure manner It is controlled by telephone carrier (MNO) or phone manufacturer Different implementations Embedded in mobile phone SIM based Removable SE (SD Card) Visa/MC approach Store the card number in the Secure Element portion of the NFC device Host Card Emulation Card number stored in host rather than Secure Element Solves the MNO control, provisioning and associated expense issues

28 Payment Credentials in NFC Phone Acquirer Issuer NFC leverages the existing infrastructure but does not create anything more than a new way to enter traditional payment instrument data into the networks

29 Payment Credentials in NFC Phone Pros Leverages existing infrastructure Consistent with other card based payment Secure element protects card number Cons Required investment to obtain NFC readers Another silo Requires smart phones with NFC chips Limited to enabled funding sources Expensive issuer must pay a rent fee ($3 $5) to carrier per card number stored NFC is the approach preferred by established players

30 Payment Credentials in the Cloud Acquirer Issuer Payment Credential in the Cloud stores payment information in secure servers and gives flexibility to the technology used to communicate between mobile phone and POS device

31 Payment Credentials In The Cloud Consumer Payment Server Merchant Server NFC Bluetooth LE Bar codes and QR Codes Wi Fi Bump RFID A F 8 8 C M H W G 7 3 A G 8 9 Infrared Sound Biometric

32 Payment Credentials In The Cloud Consumers Banks Merchants Banks Clearing House Card Schemes Independent Schemes Consumer Payment Information Consumer Payment Server Merchant Server Merchant Payment Information Communications A F 8 8 C M H W G 7 3 A G 8 9 Exchange

33 Payment Credentials In The Cloud Pros Some implementations can be done with feature phones and other non smart phone devices May not need expensive investment at POS to support payments Can be used outside the POS (e.g. QR codes in a poster) Can be done as push or pull payments Can access more than one funding source Is not exclusive of NFC Cons Still requires POS investment Schemes must provide equal or better security than NFC Change in consumer behavior Banks must be active participants Many new creative ideas and players outside of NFC

34 Interaction of Components Mobile devices need to talk to other devices to initiate transaction A POS terminal Another mobile device Multiple technologies NFC Bluetooth LE Bar codes and QR Codes Wi Fi Bump RFID Infrared Sound Biometric POS environment will undergo massive changes From specialized to commodity devices From specialized functions to all in one

35 Captive Independent Generic Industry Specific Apple Pay Processing Scope Background Announced September 10th, 2014 / Launched Oct 20 th, 2014 Positioned as the replacement for the physical wallet How it works Registration/Enrollment Apple Pay app sends card number to issuing bank through Visa or MasterCard Issuing bank approves card number to be tokenized Visa or MasterCard tokenizes the card number and sends token back to app Apple Pay provisions (i.e. stores) token onto SE in iphone How it works Purchases NFC on POS device wakes NFC on phone no need to launch an App Consumer taps on POS device (using Touch ID to authenticate the user) iphone transmits token to POS (plus some other information) POS sends token to Acquirer who sends to Visa or MasterCard Visa or MasterCard translate token back to the original card number and sends it to issuer (after insuring that the token came from the proper device) Issuer approves or decline transaction as normal Mag stripe Mobile number Bar Code NFC/FFC Biometric Technology Funding Cards Bank account Phone bill

36 Captive Independent Generic Industry Specific Apple Pay Processing Scope Apple Pay Coverage and Limitations Do not support corporate/business cards nor pre paid cards Limited to 220,000 NFC enabled locations in the US and to iphone 6 (no international coverage yet)* In App Purchases vs. Apple Pay Over 500 issuers supporting Apple Pay Apple Pay Economics Zero liability for consumers and merchants on Apple Pay transactions Apple receives a 15bps of each transaction from issuers Merchant pays same interchange as before Developments Lots of buzz but usage is still tepid Card Not Present interchange justification * iphone 5, 5C, and 5S can be used when paired with Apple Watch 2015 Mag stripe Mobile number Bar Code NFC/FFC Biometric Technology Funding Cards Bank account Phone bill

37 Captive Independent Generic Industry Specific Google Wallet 3.0 Processing Scope How it works Instant Buy Google provisions a prepaid card in the Android phone (not in the SE!) using HCE When consumer pays on merchant site, Google passes virtual card number to merchant Merchant processes virtual card through its own acquirer the virtual card is routed to Google Google pulls the appropriate credit or debit card stored by consumer and initiates an authorization through its own acquirer Card issuer approves or declines the transaction as it normally does Google approves or declines the merchant request based on the response from card issuer Other Features Google Wallet on e mail allowing P2P payments Released NFC free version for most Android and iphones (BLE) Closers integration with merchants coupons and offers Economics Merchant pay interchange and transaction fees on a non regulated pre paid debit card plus processing fees to its own acquirer No additional fees to merchant from Google Google earns and pays interchange on transaction Mag stripe Mobile number Bar Code NFC/FFC Biometric Technology Funding Cards Bank account Phone bill

38 Captive Independent Generic Industry Specific PayPal Mobile Processing Scope How it works Consumers load payment credentials (e.g. credit cards, debit cards, bank account information) onto a PayPal account Payments credentials stored in the Cloud Merchant must have a relationship with PayPal PayPal approves transaction based on card authorization response and its own risk models PayPal collects from consumer s card or bank account and pays merchant (usually via ACH) Consumer Shopping Experience Consumers shop at PayPal Merchants either by sending a text message or a web like interface who redirect shoppers to PayPal for authentication and authorization More recent versions featuring stay logged on for purchases and be able to pay without reaching for your wallet or entering info a.k.a. One Touch Shopping) Leveraging BLE for customer check in and pre ordering Economics PayPal gets paid 2.7% (larger merchants pay a lot less) PayPal s Cost of Payments is a little over 1% based on shoppers use of bank (i.e. ACH debit) or balances Mag stripe Mobile number Bar Code NFC/FFC Biometric Technology Funding Cards Bank account Phone bill

39 Merchant Commerce Exchange (MCX) What is MCX? A joint venture created by a group of the nation's leading merchants with a singular purpose: to offer consumers a customer focused, versatile and seamlessly integrated m commerce platform. Membership operates over 110,000 locations processing over $1 Trillion in annual payments Announcement of CurrentC, Sep. 3 rd, Private pilots in 2014 and national rollout in 2015 CurrentC CurrentC will be barcode and cloud based Passcode and unique paycode protect consumer Apply exclusive offers, coupons and promotions Track loyalty programs Pay with a variety of financial accounts, including checking accounts, gift cards, private label credit and debit cards

40 Other Retailer Wallets

41 Other Wallets Worth Mentioning Wallets offered by Card Schemes Visa Checkout by Visa, MasterCard s PayPass Wallet Services are primarily online wallets accepting only cards (a.k.a. PayPal minus the ACH). Mobile services coming soon Sprig/CardNav by The Co Op for Credit Unions Traditional Online Wallets Amazon s Wallet (Beta), ClickandBuy, Skrill Moneybookers all are traditional online wallets with possibility of entering mobile payments Facebook Messenger s P2P payments Industry Specific Wallets Parking and Tolls (ParkNow!, ParkMobile, PayByPhone) Vending (Apriva, Byndl) Food / QSR (OLO/GoMobo, GrubHub, Menuism, GoPago, Jamba Juice) Closed Loop (Chipotle, Burger King, T.G.I. Friday s) Gift cards and promotions (Mocapay, Modo) Other carrier billing wallets PayByPhone, Zong, BilltoMobile

42 The Layering of Mobile Payments App1 App2 App 3 App1 App2 App 3 Function1 Function1 Function1 Function1 Function1 Function1 Function2 Function2 Function2 Function2 Function2 Function2 Function3 Function3 Function3 Function3 Function3 Function3 Payments Payments Payments Payments Payments Payments

43 Two Camps

44 Track and Analyze Track Loyalty programs Keep customers nurtured for repeat purchases Receipts management electronic copies to specialized services (e.g. PiperUp) Analyze Fraud and risk management Support the entire digital commerce lifecycle Forecast project product demand and location Marketing spot and contact influencers Merchandising identify bundles and suggest most competitive pricing

45 Final Observations Technology can change behavior Simple Transparent Give users control Mobile technology fundamentally altering how commerce is conducted No one size fits all Retailers still have control through technology deployed at POS Retailer enabled vs. generic wallets Technology cannot change the economics of payments until business models do

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