Convergence, Payments

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(No Transcript)
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Convergence, Payments The Future

• Exploiting Payments Trends To Improve
  Collections, Cash Flow Disbursements

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Agenda

• Convergence, Trends Statistics
• Payments Panorama
• The Convergence of Everything
• ACH Update 2005
• Exploding Growth of eChecks
• The Rise of Remote Deposit
• Does Geography Matter Any More?
• Standing Ovation
• Seriously, please stand up and clap.

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Payments Panorama
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Payments Trends

• Debit will become the dominant payment form in
  the U.S.
• Projected to surpass credit in 2004 and check
  volume by 2007.

Projected Mix of Non-Cash Payments in the U.S.,
2000-2010
Source Dove Analysis
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Payments Trends 2005

• Fully 75 of business-to-business payments are
  still made by paper check. (AFP 2004 Survey)
• 28 of companies are very likely to shift most
  payments to electronic systems in the next three
  years. (AFP 2004 Survey)
• Businesses must weigh the 20-cent cost of
  generating a check against the 3-to-4 cent cost
  of initiating an ACH payment.
• While businesses have been eager to collect
  electronically, they have also been eager to pay
  using paper checks (for the float).
• Going forward, float is a crapshoot (thanks to
  Check 21).
• What a company may give up in float, it can
  recover through better control of cash flow by
  paying electronically.

Electronic Payment Showing Good Signs in B-to-B
MarketAmerican Banker Thursday, March 10,
2005By Steve Bills
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Fed Closing Check Centers
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Shift to Electronic Payments

• Since 1979, the U.S. has moved from paper-based
  payments to an electronic payments-driven world
  in 2003.

Share of Non-Cash Payment Transactions
A Paper-Based World
Multiple Electronic Payment Options
ElectronicPayments 52
1979
2000
2003
Source Federal Reserve, Dove Analysis
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Payments Statistics

• Check Payments
• Number of check payments 36.7 billion
• Value 39.3 trillion
• Annual rate of decline 2000-2003 4.3
• Electronic Payments
• Number of electronic payments 44.5 billion
• Value 27.4 trillion
• Annual growth rate 2000-2003 13.2
• ACH Transactions
• Number of ACH payments 9.1 billion
• Value 25.1 trillion
• Annual growth rate 2000-2003 13.4

FRB Press Release 12/06/2004
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Payments News, contd.

• Debit Cards
• Number of debit card transactions 15.6 billion
• Value 0.6 trillion
• Annual growth rate 2000-2003 23.5
• Credit Cards
• Number of credit card payments 19 billion
• Value 1.7 trillion
• Annual growth rate 2000-2003 6.7

FRB Press Release 12/06/2004
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Signature and PIN Debit Growth

• Debit is the fastest growing mainstream payment
  form, outpacing credit transactions this year.
• Between 1998 and 2003, the annualized growth rate
  for debit card transactions was 25, while the
  number of cards increased by only 3.

Signature Debit CAGR 28
Debit Transaction Growth
Total Debit CAGR 25
PIN Debit CAGR 22
Debit Transactions (Billions)
Source ATM Debit News
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Debit Cards

• Debit card transactions are the fastest growing
  transaction type.
• 18B trans in 2003 38B trans in 2007
• Signature vs. PIN debit transactions
• PIN debit card transactions will prevail
• Safer (5X less fraud) than signature debit
• Cheaper to accept (by about half)

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Convergence Hybridization

• Media
• Voice, Data, and Images
• Devices
• Phones, PCs, TVs, PDAs, Cameras, Music Players,
  USB Flash-Drive Data Storage, GPS
• Payments
• Cards, Checks, ACH (Electronic Payments)

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Convergence in Payments

• Hybridization results in new capabilities
• ARC lockbox conversion of consumer checks into
  ACH (check ACH)
• POP point-of-purchase conversion of consumer
  checks into ACH (check ACH)
• VISA Commerce (card ACH)
• EBPP (ACH electronic billing)
• Electronic Bill Payment (electronic check writing
  ACH/check)

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State Treasury Payments Today

• ACH Collections
• PPD (pre-authorized debits to consumer accounts)
• CCD (pre-authorized debits to corporate accounts)
• ACH Disbursements
• E.g., refunds, vendor payments, etc.
• PPD (credits to consumer accounts)
• CCD (credits to corporate accounts)
• Remittance info with payment.

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State Treasury Payments Future

• Converting incoming consumer checks to ACH debits
  (ARC).
• Accepting consumer payments over the telephone
  (TEL) or Internet (WEB).
• Re-presenting returned checks electronically
  (RCK).
• Truncating incoming business checks to deposit
  electronically with bank. (a.k.a. Remote
  Deposit or Merchant Capture)

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ACH Update

• 2005

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ACH Grows 21 in 2004!
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ACH vs. Check Stats

• 2003 was the first year that electronic payments
  outnumbered checks.
• Check volume processed by FRB dove nearly 11 in
  2004.
• FRB projects a decline of 13-15 in inter-bank
  check volume in 2005.
• ACH volume grew 21 in 2004!
• Lockbox ACH check conversion grew 338 in 2004!

Source NACHA Federal Reserve Bank
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ACH Economics Attractive

• FIs can anticipate similar per-unit check cost
  increases and ACH cost decreases as the Fed has
  experienced.

• As the cost differential widens, ACH is an
  increasingly attractive alternative to paper
  check processing.
• In response, five new ACH e-check applications
  were developed
• Accounts Receivable Conversion (ARC)
• Point-of-Purchase (POP)
• Re-presented Check (RCK)
• Internet (WEB)
• Telephone (TEL)

Per Unit Costs (1995-2003) Check vs. ACH
Source Federal Reserve NACHA
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Shift to ACH eCheck

• In addition to the volume lost to debit cards,
  eChecks converted (or replaced) 1.3 billion
  paper checks into ACH transactions in 2003 a
  154 increase over 2002.
• ARC, POP, TEL, WEB, and RCK truncate checks at
  the source.

Quarterly eCheck Volumes in Millions (2000-2003)
Source NACHA
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eCheck Overview

• eCheck payments that in some way replace checks
  with electronic ACH transactions
• Fastest growing area of the ACH
• Check conversion vs. check truncation
• Conversion check becomes fully electronic
  falls under Regulation E ARC or POP
• Truncation check is processed electronically
  but remains under check law RCK or Check 21

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eCheck Types of Originators

• ARC lockbox/drop-box conversion
• retail billers credit card companies, mortgage,
  telecom, lockbox processors
• POP point of purchase
• retailers including WalMart
• RCK returned checks
• retailers and others bill collectors, mortgage,
  loan, credit card
• TEL telephone
• credit card, bill collections, bill payment
  (sometimes late or overdue payments)
• WEB Internet
• Internet merchants, credit card, utilities,
  retailers including WalMart substitute for
  credit card payments

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ACH eCheck Stats

• Credit card issuers represent over 78 of the WEB
  and ARC origination volumes.
• For checks converted to ARC, companies report
  cost savings of .20 cents per item!
• .06 cents operational costs savings.
• .14 cents in reduced losses due to better return
  timeframes.

Source NACHA, Electronic Payments
JournalNovember/December 2004
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What is ARC?

• Accounts Receivable Conversion
• Lockbox/Dropbox Check Conversion
• Checks are scanned and their MICR data captured
  to create electronic transactions that settle via
  ACH.
• Original check is destroyed.
• Only consumers' checks are permitted to be
  scanned at the lockbox corporate checks must
  still be processed manually.

Source Banks, Billers, Prove Eager To Truncate
Checks American Banker Friday, January 17,
2003 By Will Wade
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Lockbox Check Conversion (ARC)

• ARC refers to the conversion of paper checks
  (sent by consumers to companies' lockboxes to pay
  bills) into an electronic ACH format.
• Companies using ARC get next-day funds
  availability and reduce the time on returned
  checks to two business days from as many as
  eight.
• ARC processing costs about 2 cents per item,
  compared to the 14 to 20 cents it costs to
  process a retail check in a lockbox.

J.P. Morgan Reaps a Windfall from Lockbox Check
Conversionwww.digitaltransactions.com July
19, 2004
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ARC Volume Projections
Millions (includes on-us)
Source TowerGroup
Why Image Exchange Wont Kill ARCby Stuart
Williams Digital Transactions March 2005
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ARCs as of Consumer Payments
Source TowerGroup
Why Image Exchange Wont Kill ARCby Stuart
Williams Digital Transactions March 2005
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ARC Quality Low Return Rates
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The Remote DepositOpportunity
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Check 21

• What Check 21 does do
• Legalizes use of a substitute check in
  replacement of an actual check
• What Check 21 does not do
• Does not legalize use of a check replacement in
  electronic form (it only legalizes paper
  substitute checks)
• Does not legalize use of image or MICR exchange
• Does not mandate FIs to image or truncate checks.

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Check 21 Implementation

• Impact of Check 21 will be phased over a number
  of years dependent on
• Growth in participation by FIs
• Presumed reduction in costs over time based on
  volume
• Initially only larger checks will be truncated
  under Check 21 because of clearing costs and
  substitute-check printing costs.
• End goal is full electronic payments (no check
  writing at all).

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Traditional Deposit Problems

• Business Challenges
• Many businesses are located far from branches.
• Most businesses face challenges getting deposits
  in before cutoff times.
• Financial Institution Challenges
• Expand commercial client base.
• Increase core deposits to fund loan growth.
• Fend off big-bank competition offering remote
  deposit services in your market.

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Opportunity

• The time, effort, and inconvenience required to
  deposit checks on time is a daily challenge for
  many treasuries.
• Remote deposit allows businesses to capture
  checks and submit them electronically for
  deposit. No more daily trips to the bank branch!
• Deposit any check from anywhere electronically.

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Remote Deposit Overview
Print/ProcessSubstitute Checks
Check PaymentsAccepted By State Treasury
SecureSubmission
ChecksScanned Truncated
BOFD
X9.37
Process/ForwardImage File
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Drop-Off vs. Courier vs. Remote
Comparative monthly costs for merchant (5 miles
frombranch) depositing 20 checks per weekday.
Average deposit fee of 30 provided by
bankrate.com research. Financial institution
determines all fees above fees are examples.
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Check 21 Hold Times

• Responding to complaints, Rep. Carolyn Maloney of
  New York has reintroduced a bill to shorten holds
  on checks.
• Consumer Checking Account Fairness Act
• BUT the existing Expedited Funds Availability Act
  should be sufficient.
• Defines current hold policy and requires the Fed
  to adjust hold periods downward if "most" banks
  begin settling checks faster than a pre-defined
  time frame. Most banks" typically means
  two-thirds.

Bill to Cut 3 Days From Check Holds Is
Reintroduced American Banker Wednesday,
February 16, 2005 By Will Wade
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ACH eCheck vs. Remote Deposit
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Recommendations

• Capitalize on shifts in payments franchises
• Take full advantage of ACH eChecks (consumer
  check conversion)
• Offer remote deposit (check truncation)
• Look for Least Cost Routing that will automate
  decision to convert or truncate checks

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Resources

• www.americanbanker.com
• www.banktech.com
• www.banktechnews.com
• www.bankrate.com
• http//banking.yahoo.com

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David PetersonExecutive Vice PresidentGoldleaf
Technologies
www.goldleaf.com Phone [phone] Fax (229)
794-4100 Email david_at_goldeaf.com