American Express and Discover (act as issuer and acquirer)

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Insurance Payments Transformation

• Aaron Schneider, VP, Bank of America Merchant
  Services

October 23, 2007
2
Agenda

• Introduction
• Credit Card Players, Debit Card Players
• Costs of Credit Card, Debit Card Acceptance
• PIN-less Debit, What is it?, Costs
• Current Landscape
• Benefits
• Payment Methods
• Growth Opportunities
• Merchant Marketing
• Technology/Implementation Options
• Questions/Comments

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Introduction

• Major trends in billing and payment technology in
  the insurance industry
• Increase in electronic presentment and payment
• Increase in credit card payment
• Decrease in check payments
• Payment card growth is slowing in the most mature
  bill payments segments telecommunications and
  cable/satellite/ISPs while growth remains
  healthy in the insurance and utility segments.

4
Credit Card Players

• Visa and MasterCard Issuers
• Includes Citibank, Wells Fargo, Wachovia, Bank of
  America, Chase, Suntrust, PNC, and hundreds of
  others
• Visa and MasterCard Acquirers (Processors)
• Includes Chase, Bank of America, First Data,
  Fifth Third, and many others
• Independent Sales Organizations (ISOs)
• Third-Party Technology Vendors
• Includes Bill Matrix, Fort Knox, Speedpay, Kubra,
  CyberSource, Various Bank Technologies, and many
  others
• American Express and Discover (act as issuer and
  acquirer)

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Costs of Card Acceptance

• For a typical credit card transaction, the
  Interchange fee represents over 90 of the total
  cost of card acceptance.
• Visa and MasterCard have created more than 152
  different Interchange levels, although only a few
  typically apply to insurance companies.
• Interchange qualification represents a
  significant cost to all insurance companies.

90 to 93 Interchange Cost
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Costs of Card Acceptance

• Visa Interchange fees (paid to issuing banks) for
  insurance companies are
• 1.43 .05 for credit or .80 .25 for
  debit/check card
• Visa assessment fees of .0925 (paid to
  Visa)
• Acquirer fees of X (negotiable depending
  on volume)
• ________________________________________________
  ____
• Total Cost of Acceptance
• Example Cost Calculation
• 100 Insurance Premium 1 .48 in Interchange
  fees (paid to issuing bank)
• 
  .09 paid to Visa
• 
  .08 paid to acquiring bank processor
• 1
  .66 in total cost (1.66 effective rate)
  
  

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Costs of Card Acceptance

• MasterCard Interchange fees (paid to issuing
  banks) for insurance companies are
• Credit (card not present consumer
  non-rewards rate) is
• 1.89 .10 or .80 .25
  for debit/check card
• MasterCard assessment fees of .095 (paid
  to MasterCard)
• Acquirer fees of X (negotiable depending
  on volume)
• ________________________________________________
  ______
• Total Cost of Acceptance
• Example Cost Calculation
• 100 Insurance Premium 1 .89 in Interchange
  fees (paid to issuing bank)
• 
  .09 paid to MasterCard
• 
  .08 paid to acquiring bank processor
• 2
  .06 in total cost (2.06 effective rate)

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Costs of Card Acceptance

• Interchange and assessment fees for other
  industries
• Mail Order/Phone Order Merchant Visa Consumer
  Card (non-rewards) Interchange of 1.85 .10
• Consumer Utility .75 Interchange flat fee for
  Visa and MasterCard
• Supermarket Credit Visa Interchange of 1.24
  .05
• Petroleum Debit MasterCard Interchange of .70
  .17
• Large Ticket B2B (7500 ) Visa Interchange of
  .95 35
• Example Cost Calculation for 10,000 Visa
  Insurance Premium Payment from
• Level 3 Corporate Card Customer
• 10,000 Insurance Premium 130.00 in Interchange
  fees (paid to issuing bank)
• 
  6.93 paid to Visa
• 
  10.00 paid to acquiring bank processor
• 
  146 .93 in total cost (1.46 effective rate)

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PIN-less Debit

• Allows ATM/Debit cardholders to pay bills at bill
  payment merchant
• Web site
• Voice response unit (VRU),
• Live customer service representative or call
  center
• Recurring payment
• Transactions are processed online, in real time
• Transactions limited to biller categories that
  fit a specific low-risk model (utilities,
  insurance, telecom, financial institutions)
• Bill payment merchant assumes the transaction
  liability and is responsible for authenticating
  cardholder at time the transaction is initiated

Source First Data Real-time Debit
Alternative Payments STAR PIN-Secure STAR
Bill Payment
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PIN-less Debit

• Insurance is a core category for the STAR Bill
  Payment Service. Nearly 15 of total transaction
  volume comes from insurers.
• 558 billers
• 89 new in 2007
• 78 insurers
• Approval rate for STAR Bill Payment is 90.
• Research shows that when asked what type of card
  they would prefer to use to make a bill payment,
  consumers selected debit cards over credit cards
  by nearly a 5-to-2 ratio.
• More than one-third of consumers say that they
  would pay more bills electronically if they could
  use their debit cards.

2007 Consumer Payments Preferences and Usage
Study Phoenix Marketing International / ESP
Payments PracticeSource First Data
Real-time Debit Alternative Payments STAR
PIN-Secure STAR Bill Payment
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PIN-less Debit (Bill Pay Debit)

• STAR, NYCE, and PULSE Debit Networks have
  approved insurance companies to accept PIN-less
  debit transactions
• .65 .175 capped at .62
  processor/third-party vendor fees
• Sample Effective cost of a 500 premium .62
  .25 .87
• This equals effective rate of .17
• Litigation currently exists regarding PIN-less
  debit patents. Litigation may be resolved in next
  12 months.
• ATM/debit transactions increased about 23
  between 2005 and 2006
• One third-party vendor insurance client saw a
  224 growth in PIN-less ATM debit transactions
  from May 2005 (15) to July 2006 (33.6)
• Source ATMDebit News EFT Data Book September
  2006

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Current Landscape

• Bill payment volume is a sizeable opportunity
  with volume concentrated in insurance, utilities
  and telecommunications

Consumer Bill Pay Sales Volume 953 billion
(CY05)
Business Bill Pay Sales Volume 419 billion
(CY05)
Other
Other
Property Management
Cable/Satellite/ISP
9
Insurance
8
Insurance
5
Property Management
Utilities
36
34
11
12
Telecom
20
28
Telecom
Utilities
Life/PC Insurance
Source Visa U.S.A. PIC Analysis Represents
bill payment portion of segment volume only
totals may not sum due to rounding.
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Current Landscape (e-Commerce)

• Personal Insurance
• Can policyholders send payments via Web site?
• Yes 100
• Payment methods customers can set up from Web
  site.
• Single payment credit card 20
• Recurring credit card 10
• Single payment EFT 25
• Recurring EFT 15
• Recurring debit card 10
• Electronic bill presentment for customers?
• Yes 40
• No 60
• Electronic bill presentment for agents?
• Yes 40
• No 60

• Commercial Insurance
• Can policyholders send payments via Web site?
• Yes 47
• No 53
• Payment methods customers can set up from Web
  site.
• Single payment credit card 17
• Recurring credit card 10
• Single payment EFT 24
• Recurring EFT 17
• Single payment debit card 17
• Recurring debit card 10
• Monthly pay plan only 3
• Electronic bill presentment for customers?
• Yes 24
• No 76
• Electronic bill presentment for agents?
• Yes 30
• No 70

Source ICE survey
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Current Landscape (Payment Plans and Fees)

• Personal Insurance
• Methods of charging credit card fees
• Do not offer credit card payments 10
• Do not charge fees on credit card payments 20
• Charge standard installment fee 60
• Discount standard installment fees 0
• Charge more than standard installment fee 10
• Amount charged for electronic payments made via
  Web site
• No charge 62.5
• 0.01 to 3.00 12.5
• 3.01 to 5.00 12.5
• 5.01 to 8.00 12.5
• Amount charged for payments via phone
• No charge 62.5
• 0.01 to 3.00 12.5
• 3.01 to 5.00 12.5
• 5.01 to 8.00 12.5

• Commercial Insurance
• Methods of charging credit card fees
• Do not offer credit card payments 44
• Do not charge fees on credit card payments 11
• Charge standard installment fee 39
• Discount standard installment fees 0
• Charge more than standard installment fee 6
• Amount charged for electronic payments made via
  Web site
• Does not offer electronic payments 33
• No charge 55.5.
• 3.01 to 5.00 5.56
• 5.01 to 8.00 5.56
• Amount charged for payments via phone
• Does not offer payments via phone 39
• No charge 50
• 3.01 to 5.00 5.5
• 5.01 to 8.00 5.5

Source ICE survey
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Current Landscape

• Online bill payments accounted for 39 of bill
  payments among online households in 2006, an
  increase of 4 from 2005.
• Volume of checks sent by mail fell 4, accounting
  for only 34 of the volume of payments.
• Consumers paying at least one bill online per
  month rose to 74, compared to 69 in the
  previous survey.
• Consumer adoption of online bill payment has more
  than doubled since January 2002, when 37 of
  online households reported paying at least one
  bill online.
• Half of property/casualty insurers are currently
  offering electronic bill presentment and payment
  to their policyholders, and nearly half have it
  for their agents.

Source The 2007 Consumer Bill Payment Survey, a
study by Harris Interactive Inc. and The
Marketing Workshop Inc. Source 2006 Celent
report, Billing Business and IT Issues for P/C
Insurers.
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Benefits of electronic payments

• Benefits to insurance companies
• Improves cash flow and increases profits
• Timely payment
• Streamlines payment processing
• Reduces handling costs and losses
• Reduces risk of losses from bad checks
• Improved customer service and consumer perception
• Labor and operational efficiency
• Consolidate and automate electronic deposits to
  your accounts
• Decrease lapse rates

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Benefits

• Benefits to your customers
• Choose from multiple methods of payment
• Take comfort in knowing payments are fast,
  reliable and secure
• Rewards (frequent flier miles, cash back, ease
  of accounting)
• Addresses most consumer security concerns
• Speeds up time to statement

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Payment Methods

• Cardholders demonstrate a desire to pay through
  various channels, indicating opportunity in both
  the biller direct and consolidator models
• Example of biller direct is a merchant who allows
  payment directly on the merchants Web site
• Example of consolidator is a third-party vendor
  who accepts the payment on behalf of the merchant
• Advantages of consolidator include ease of
  implementation, speed of implementation, less
  compliance liability
• Disadvantages of consolidator include loss of
  control

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Payment Methods

• While card acceptance has grown, most Visa
  cardholders use multiple methods to pay bills.

Bill Payment Methods of Choice, 2006 Responsible
for Household Bill Paying (n308)
Pay directly to biller by payment card or EFT
from checking or savings (online or by
phone) Source Visa U.S.A. Research Services,
2006
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Growth Opportunities

• Statistics reported from a top 5 insurance
  company (based on revenues)

Approximate of overall payments (among all
types of insurance) paid via credit card
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Stats for Top Insurance Company
Percentage of payments paid via credit cards in
2006 and 2007 for specific lines of insurance
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Growth Opportunities

• In terms of credit card acceptance, this top 5
  insurance company reported their credit card
  growth rates over the past three years are as
  follows
• 2005 29 growth
• 2006 30 growth
• 2007 13 growth (year-to-date)

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Insurance Inserts
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Insurance Company Statement Insert
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BillPay Marketing
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BillPay Marketing
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Merchant Marketing

• Biller (merchant) marketing of Visa Bill Pay
  generated more than 180 million direct marketing
  impressions in the last year.
• Participating marketing partners within the
  insurance industry included Farmers Insurance and
  St. Paul Travelers Insurance.
• In the retail (non-bill payment) marketplace,
  there is minimal amount of growth potential for
  payments.
• Visa, MasterCard, American Express, Discover,
  STAR, NYCE, PULSE, and many of the major issuers
  are all focused on increasing the amount of bill
  payments paid via credit card, debit card.
• These companies are going to more aggressively
  market bill payment to consumers who are going to
  request bill payment capabilities from insurers.
• Marketing will include television, Web, statement
  inserts, magazine and other forms of media.
  Incentives are being increased to push consumers
  in this direction.
• What is the message to pass to your customer
  service agents who will be taking calls from
  customers that want to know, can I pay with my
  credit card?

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Technology and Implementation

• Outlining needs Which lines of insurance?,
  pricing concerns
• Accept payments face to face at agent office,
  mail order via lockbox, phone order via customer
  service rep or automated phone system (IVR), Web
  payments, Direct or Consolidator model?
• Convenience fees or no convenience fees?
• All customers or exception items? (marketing or
  no marketing?)
• Which payment types?
• ACH/E-Check
• Visa Consumer Transactions, Visa B2B-Level 2 and
  Level 3
• MasterCard Consumer Transactions, MasterCard
  B2B-Level 2, 3
• STAR, NYCE, PULSE
• American Express Consumer, American Express B2B
• Discover
• International Payment Types

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Technology and Implementation

• Business to Business Examples Agent to
  Insurer, Corporation to Insurer
• Visa Level 2, Level 3, and Large Ticket Level 3
• Mastercard Level 2, Level 3, and Large Ticket
  Level 3
• International Payments Consumers in many
  international markets prefer methods other than
  Visa/MC/Amex/Discover
• Example- France Carte Bleue, Carte Vert
• Italy Carta Si
• UK Maestro, Solo, Electron
• Ireland Laser
• Scandinavia Dankort
• Germany Bank Transfers,
  Direct Debit
• Asia Bank Transfers
  (similar to wire transfer)
• There is no single source acquirer with a single
  platform that can process all domestic and
  international payments. Multiple acquirers would
  need to be chosen for many implementations
  involving both domestic and foreign processing.

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Technology and Implementation

• Choose third-party vendor, bank vendor, or choose
  to code directly to a payment processor
  (proprietary or non proprietary concerns)
• Choose processor (acquirer)
• Establish connectivity (Internet API, frame
  relay)
• Test and certify connectivity
• Train users
• Go live
• Closely monitor fees and Interchange levels
• Stand-alone payment projects can take 4-6 weeks
  to implement
• Fully integrated payment projects can take 2-6
  months to implement

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Questions/Comments/Discussion
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Thank you

• Aaron Schneider, 1.954.558.0252
  aaron.schneider_at_bankofamerica.com

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