Monday, April 4, 1:30 2:30 Room 19AB

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1 The Case for Mobile Payments in the U.S. Marianne Crowe Vice President, Federal Reserve Bank of Boston Steve Mott Principal, BetterBuyDesign Richard R. Oliver Executive Vice President, Federal Reserve Bank of Atlanta Monday, April 4, 1:30 2:30 Room 19AB

Monday Announcements Please turn off all cell phones or mobile devices.

This morning s Continental Breakfast sponsored by Javelin Breakfast Roundtables

Monday Night Celebration sponsored by Fiserv Most of the education sessions at

If you are interested in becoming an Accredited ACH Professional (AAP), please

Please take a moment to complete session evaluations!

2 Monday Announcements Please turn off all cell phones or mobile devices. Thank you to today s sponsors! This morning s Continental Breakfast sponsored by Javelin Breakfast Roundtables sponsored by SWACHA Thought Leadership Spotlight Session sponsored by Fundtech Monday Night Celebration sponsored by Fiserv Most of the education sessions at the conference can be counted towards your continuing AAP accreditation. If you are interested in becoming an Accredited ACH Professional (AAP), please stop by the NACHA & RPA booth. Please take a moment to complete session evaluations! Each evening attendees will receive an link to access session evaluations that are offered each day. Attendees are automatically entered into a daily drawing for a chance to win a $50 gift card. Register now for PAYMENTS 2012 Receive the PAYMENTS 2011 Early Bird Rates Only available onsite Visit the Registration Desk for more details. Thanks to all of our Track Sponsors! 2

3 Agenda 1. View from the Federal Reserve Current state of mobile ecosystem, opportunities and challenges Fed perspective and role in mobile payments Mobile Payments Industry Workgroup (MPIW) Next Steps 2. View from the streets Composition of mobile payments Balkanization of mobile payment near term Why security and standards 3. Q/A 3

4 1. Fed Perspective: State of Mobile Payments Mobile payment adoption is strong in emerging markets for person to person and remittance payments U.S. markets have been slow emphasis on mobile banking versus payments banks leveraging existing services Mobile carriers experimenting with mobile micropayments for charitable donations (Haiti), digital content, online games 2010 saw growing emphasis on commercial partnerships and pilots for mobile payments in U.S. P2P mobile payments from banks or card networks with Obopay, CashEdge, Fiserv, PayPal, MasterCard MoneySend NFC/NFC like trials for mobile proximity payments Isis Joint venture between AT&T, T Mobile US, Verizon Wireless, Barclaysbank and Discover for NFC mobile wallet 4

5 Mobile Payment Opportunities Increased Security & Payments Monitoring Merchant Cost Efficiency Consumer Demographic & Life style Changes Financial Inclusion Convergence with Valueadded Services Marketing & Location Based Services 5

6 Many Mobile Payment Venues Mobile Technology WAP, SMS, M app Contactless / NFC Mobile banking Payment Size Macro $25 Micro Remittances Mobile top up Internet purchases Online subscriptions Rewards Remittances P2P Digital Content Rewards, coupons Retail POS purchases Rewards, coupons Retail POS QSR, coffee shop Convenience, drug store Vending Parking, transit, tolls Rewards, coupons Remote Mobile Payment Type Proximity 6

7 Mobile NFC Use Case Opportunities Transportation Airlines Mass transit Ticketing Theaters Stadiums Marketing Coupons ATMs Many more examples 7

Sharing models Risk Assessment & Mitigation Collaboration of Many

8 Mobile Payment Challenges Resolution of Customer Ownership Merchant Business Case Adoption of Global Standards Revenue Sharing models Risk Assessment & Mitigation Collaboration of Many Stakeholders Uncertain Consumer Demand Regulatory Roadmap Customer Education 8

9 Regulatory Barriers and Concerns No coordinated effort to oversee regulation of mobile payments, creating gaps where coverage and liability are unclear Many regulatory agencies touch payments and/or wireless transactions with little overlap Bank regulators oversee account management and consumer protection (Fed, FDIC, OCC, NCUA, SEC, NACHA) Treasury regulators (FINCEN, OFAC) oversee use for cross border AML/ATF FTC oversees use for fraudulent or deceptive purposes by companies FCC oversees mobile carrier standards, competition Underlying payment methods from mobile initiated transactions covered by existing bank regulations & rules for credit, debit & prepaid cards, and ACH Carriers unfamiliar with payments/banking requirements such as KYC, BSA/AML, Money Service Business, risk compliance, consumer protection Are new roles needed to address issues in this emerging space? What role might the Consumer Financial Protection Bureau play? 9

10 Federal Reserve Perspective on Mobile Banking and Payments Use of mobile phone as channel for banking and payments is beginning to evolve question of when Fed works to foster integrity and safety of nation s payment system Fed needs to be informed and involved to understand impact of mobile payments on the U.S. payments system Fed can help to identify potential gaps in regulatory oversight related to consumer security, privacy, and education 10

11 Fed Involvement in Industry Mobile Initiatives FSTC/BITS Mobile Payments Projects Identified industry best practices and analyzed business requirements, barriers, potential business models for collaboration and security ( ) New mobile projects started in 2011 NACHA Internet Council Mobile Workgroup Defined mobile banking and payments terminology and use cases (2009) Considered need for new SEC Code for ACH mobile payments Recommended use of WEB SEC code for now Currently addressing mobile P2P payments X9 and ISO Mobile Standards Workgroups X9: Developing security standard to pass information via mobile device using cryptographic algorithms ISO: Developing standard to outline data elements and message formats 11

12 Evolution of Mobile Payments Industry Workgroup (MPIW) Banking industry concerned with fragmentation, lack of communication between key stakeholders around direction of mobile payments in the U.S. Fed viewed as a neutral organization capable of facilitating a diverse group of mobile payment stakeholders, and interested in understanding direction of mobile payments Boston and Atlanta Reserve banks convened group in January 2010 to facilitate discussion on evolution of mobile payments in U.S. retail payments space Group (self named Mobile Payments Industry Workgroup) comprised of invited representatives from organizations in the mobile payments value chain 12

Structure of Mobile Payments Industry Workgroup Co chaired by Rich Oliver and Marianne Crowe and supported by staff from Boston and Atlanta payments

collaboration Banking System Participants Financial Institutions Payment networks Payment processors & online payment service providers Payment & merchant

13 Structure of Mobile Payments Industry Workgroup Co chaired by Rich Oliver and Marianne Crowe and supported by staff from Boston and Atlanta payments research teams Involves many stakeholders from multiple industries Each party views its responsibilities & liabilities differently but success requires collaboration Banking System Participants Financial Institutions Payment networks Payment processors & online payment service providers Payment & merchant trade associations Technology Participants Major mobile carriers Mobile handset, chip & security vendors Software solution providers Mobile trade associations 13

14 Objectives of Mobile Payments Industry Workgroup To understand the evolution of mobile payments in the U.S. retail payment space To establish relationships, discuss roles, assess challenges, find points of mutual value, share ideas, and build consensus in a non binding, free market fashion To determine, in an informal and voluntary effort, possible business cases for and direction of future collaborative activities to help build critical mass for success of mobile payments in the U.S. 14

15 Principles of a Successful U.S. Mobile Payments Framework 1) Mobile device used to initiate and receive payments for purchases between consumers and/or businesses 2) Open mobile wallet created to support multiple payment options (credit, debit, bank account, prepaid/stored value, etc.) in a secure container 3) Near Field Communications (NFC) technology for contactless mobile payments at point of sale, with enabling phone applications 4) Payments cleared and settled over existing channels (credit, debit, prepaid, ACH, mobile); open to future new channels 15

16 Principles of a Successful U.S. Mobile Payments Framework 5) Dynamic data authentication deployed for security 6) Standards developed for the U.S. based on evolving global standards and an industry supported certification process 7) Regulatory clarity for ongoing oversight established between applicable agencies 8) Trusted Service Managers (TSMs) provision secure elements in the mobile phone 16

17 Questions for Mobile Industry Stakeholders to Explore Further What will the base technology be for mobile payments (who owns the chips and applications or are they shared)? What will the standards be for authentication, data protection, and network access (chip based technologies, encryption, dynamic authentication, etc.) Who should pay for the infrastructure (merchants, acquirers, issuers, telecoms, government, etc.)? What is the value for each party in the value chain (revenues for banks, carriers, card issuers and acquirers, networks, etc.)? Which models will be deployed and who will regulate this space? How will new fraud and risk threats be addressed (roaming, prepaid cards, portability across borders, credential replacement, ID protection, etc.)? Should EMV Chip+PIN based security be considered in the U.S.? 17

18 MPIW Current Activities and Next Steps Participants have conceptually agreed to a number of basic principles for a future mobile payments environment White paper discussing views of the MPIW was published at end of March Industry debate, public presentations, dialogue with industry groups, individual organizations and regulators to escalate issues will follow Private trials and partnerships are likely to continue Consider formalizing the MPIW to meet regularly and collaborate to address mobile payments issues and move market forward 18

19 Benefits of a Collaborative Model Discuss issues and barriers as soon as discovered to help with resolution Enable proprietary innovation while promoting shared framework for interoperability Bring together views and concerns of diverse mobile participants 19

20 What the Fed can do to help Continue to facilitate dialogue between MPIW and other stakeholders to monitor evolution of mobile payments Help establish regulatory guidelines for security and privacy and to clarify oversight responsibilities Actively participate in development of industry wide mobile payment standards that ensure the continued safety, soundness and efficiency of the payments system Explore doing quantitative research to estimate the potential value of mobile payments in the U.S. 20

21 2. View from the Streets 21

22 New, Powerful Players Emerge X Credits: BusinessWire, PCWorld, CNet 22

23 But not Every Competitor has an Easy Time 23

24 What Merchants Want: Incremental Business 24

25 Merchants Express Their Preferences 25

26 Complexities of Mobile Ecosystem: Non Trivial 26

27 Key Igniter: MID as Bank Account Token? Focusing on payments where two parties are able to send and receive or exchange funds using the mobile channel, irrespective of where they are located, the white paper highlights three key findings: * The important role of the mobile phone number known as the mobile identifier (MID) as a proxy for bank account details. Using the MID enables a payer to initiate a fund transfer using the payee's phone number and without the need to know their bank account or card details, ensuring ease of use and customer convenience. * Markets are different; what might be an efficient solution for one market might not be acceptable for another. Implementers will need to consider many factors when selecting the operating model to deploy. * The necessity of creating an interoperable ecosystem to support the number of common core processes that apply across the industry, and to enable mass market adoption. Source: Mobey Forum, 5/

28 Shared Infrastructure for Payment Transacting? Enrollment Profiles Composite ID DB Txn Files DB Risk Mgmt. DB Enrollment Profiles Carrier Device/ rd Party 3 rd Mobile Specific Payment Type FI Non FI Technology Providers NFC/RFID SE/Chip Provision Provision m Banking m Payment Advertising Exception Handling/ Cust. Svcs. Reporting/ auditing/ compliance Loyalty System Risk Mgmt. Bank Risk Mgmt. Gray denotes TSM like utility functions Multi source SE Provision and Management; Global Platform/EMV/contactless Telecom Clearing Houses Clearing and Settlement Format aggregation/ Existing/Unified Networks; conversion (e.g., xml ISO 20022, 820, etc.) Consolidated Operational Support Bank Regulators Networks Standards Domestic Int l Bodies Clearing Clearing Houses Houses Red type denotes potential new utility services Source: FSTC Mobile Payments Technology Project,

29 Regulators/Industry Groups Weigh in 29

30 NFC Action: Hot and Heavy, but Confused 30

31 Full NFC is on its way Chip in handset (e.g., SIM) supports Secure Elements. Secure Elements communicate safely with NFC chip in handset. NFC chip supports two way dialogs with terminal receiver. 147 Mobile Money pilots using NFC with a bank and a wireless carrier working together are underway worldwide (GSMA meeting, 2/2010) Nokia will outfit all smart phones with full NFC beginning in 2011 Google/Android will outfit up to 3 million handsets with full NFC Evolution of market from banking applications to payments occurring rapidly now 31

32 Why 2 way NFC Makes the B Case Coupons 1 to 1 targeting, refreshing, etc. can reduce billions of waste from $100 billion annual spend FSI/media ads (where only 8% of consumers collect and just 2% redeem) Location based services e.g., queries on nearest brand store or restaurant, where promotional offers can be returned with info Customers can be recognized (supplying data and receiving offers and updating rewards programs) upon entering stores; data can be harvested for banking products and joint bank/merchant promotions Products can be pitched inside the store, while shopping including competitive offers Shopping items can be automatically scanned/read while shopping, facilitating self checkout (where payment options can be pitched) Loyalty programs can be integrated and instantly updated for real time redemptions All this data can be used (with sufficient consumer opt in) to better address offers, promotions, financial services needed, targeting of ads, etc. 32

33 Politics of Mobile: Caught in Chip+PIN Debate 33

34 Mobile Patent Applications Another new patent request from Apple would enable iphone users to do NFC based P2P payments (highlights by NFC Times). 34

35 Enterprise Platforms Emerge Mobile Front Side Bus Mobile Gateway Audits Billing Statistics Device Orchestrator Security Enterprise Connectivity Surveillance Mobile Enterprise Service Bus Transaction Mode Batch Mode 35

36 Recommendations for Mobile Standards Four key aspects of the desired mobile infrastructure were identified for potential submissions to the standards setting process 1. Trusted Services Manager Requirements and Compliance 2. Secure Element Requirements and Certification 3. Universal mobile ID 4. Mobile specific payment transactions ISO and X9 new work items and Work Groups X9F4 Cryptographic Protocols and Application Security ISO TC68/SC7/WG10 Mobile Banking and Payments 36

37 Ṁobile Risks: Networks not Integrated Yet Acquirer Merchant Application Developer SIM Manufacturer Consumer Internet Mobile Network Operators Phone Manufacturer Trusted Services Manager Settlement Issuer Mobile Fraud Risk: new environments & entities Financial Fraud Risk: legacy environments & entities Legacy payments relationships 37

38 Mobile Risks Beyond Banking Networks Mobile Entity Application Developer SIM (SE) Manufacturer Phone Manufacturer Mobile Tower Infrastructure (MTI) Mobile Network Operators (MNO) Trusted Services Manager (TSM) Consumer Assets Mobile Risks Assurance issues Assurance issues Assurance issues Data protection Infrastructure administration Data protection Infrastructure administration Data protection Infrastructure administration Operating rules Phishing, malware Lost, stolen or shared assets 38

39 Mobile Transformation: Getting Out of the way of Transacting Future iphones could get chips that allow close proximity transfer of data between them. (Credit: Josh Lowensohn/CNET) 39

40 What IS a Bank, Anymore? 40

41 QUESTIONS? 41

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