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Next Generation of PaymentsGovernment Finance Officers Association of South Carolina

Presented by: Doris Dixon and Everette Glass October 19, 2015

For decades consumers had the same shopping process

The Commerce

Lifecycle

“I need to buy a birthday present” “What are some gift ideas?”

“Where should I buy the present?” “How am I going to Pay?”

2

“Where should I buy the present?”

Today the process is much more complex

3

“I need to buy a birthday present” “What are some gift ideas?”

“How am I going to Pay?”

I ask my friends on Facebook

I read product reviews on Amazon

I check out the blog post my Facebook friend sent me

I found something I like… but want to make sure it’s safe

I look for deals and coupons

Who has the best price?

What do people think about the store with the best price?

What store with the product is closest to me?

Which account has extra $$$?

Credit ?Cash ?What is easiest and fast?

Do I get a reward or points?

The Commerce

Lifecycle

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Consumers leverage online channels more than ever before

4

-6.00%

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

2008 2009 2010 2011 2012 2013

Global Offline Sales Growth for Top Retailers

*Includes Wal-Mart, JC Penney, Best Buy, Gap

Offline sales growth

Offlinevs

Online

Source: Forrester Research, 9/14Source: Business Insider, August 2014

Offline sales have plummeted while

online sales account for nearly all growth in retail volumes1 –

driven by ubiquity of mobile technology.

1. Source: Business Insider, August 2014

U.S online retail forecast 2012 to 2017

Consumer mobile and online shopping trends mean . . .

5

In-store sales have plummeted

Source: Business Insider, August 2014

The USPS is closing facilities and introducing new delivery standards

U.S. retail store closings

226 225

200

189180

175

33

0

50

100

150

200

250

Barnes & Noble Staples GameStop Gap Abercrombie & Fitch

Aeropostale JCP

U.S. Retail Store Closings* To close between

2011-2021* To close by end of 2015

* Closed in 2013

* Closed in 2012-13

* To close by 2015 * To close between 2014-19

* To close by 2014

What happens to bank branches?

Interaction with financial institutions is changing too

6

▪ Customer transaction trends moving rapidly towards online, mobile and ATM options

▪ Resulting in significantly lower volume of over-the-counter transactions

▪ Geographic redundancy and distance to replacement services

▪ Customers seeking convenient, self-service options for transaction banking

▪ Desire for transactions that are faster, expedient and cost-effective

▪ Desire for more personalized service, financial expertise and advice

SELF-SERVICING

MORE AND ENHANCED ATMS

PERSONAL SERVICE

ONLINE BANKING

MOBILE CHECK DEPOSIT

B2C PaymentsDigital Disbursements

The move away from checks

Initiate Reconcile Research Forecast

paper process

electronic processvs.

84% of respondents cited reducing overall processing costs was the top factor for driving a focus on electronic payments2

Check challenges driving decline:▪ Increasing cost of paper processes—including rising postage costs▪ Slow to reach customers—perceived as poor customer service▪ Loses from fraud and theft—plus the additional costs for stop-

payment and reissues▪ Reliance on physical addresses create returned mail issues—people

retain cell phone number and email address when they move and often neglect to update physical address

73%Were writing fewer checks

in 20132

Electronic payments are GreenTrees remove carbon dioxide from the earth’s atmosphere; cutting them down to produce checks may speed up climate change (a tree can only produce, on average, 17 reams of paper and takes about 100 years to grow3).

Going electronic for payments also means reduced transportation impacts and fewer file cabinets and printer cartridges in landfills.

1. Anecdotal estimates shared with us by our clients have ranged as high as $25 per payment. In recognition of the variability of costs across our clients and of the presumed partial cost offset offered by check float, Bank of America typically references a conservative estimate of $4 per check when discussing the potential benefit of electronic payments. 2. Electronic Supplier Payments; PayStream Advisors Q3 2013 3. 2013 Federal Reserve Payments Study

$4Average cost per check payment 1

Average of

75% lessFor electronic payments

Fraud is still a factor with checks

9

62%of companies surveyed experience

attempted or actual payments fraud1

1. 2015 AFP Payments Fraud and Control Survey, 3/152. KOFAX White Paper • Verify Checks in Real-Time: Meet Customer Expectations While Reducing Fraud, 1/2015

77%reported checks were the primary target

for fraud attacks at their companies1

Companies are moving away from manual, paper-based payments to help deter fraudulent activity.1

As the EMV is adopted in the United States, and credit cards become a less attractive payment method to attack, fraudsters will follow the path of least resistance: checks.2

The Ripple Effect of Fraud

The check was only for $21.22 but that’s not what the thief cared about. The value was the paper itself—that supplied:▪ The company's logo▪ Their DDA number▪ Their bank’s routing number▪ The check number series▪ And an authorized signature

The migration to mobile banking

10

Mobile banking

Of those using mobile banking apps, more than four in five (82%) access it once a week or more.

Nearly a third (31%) access mobile banking at least once a day or more.

Trends in Consumer Mobility Report, Bank of America, 2014

Smartphones are changing the way consumers access financial services

Fifty-two percent of smartphone owners with a bank account have use mobile banking in the past 12 months1

1. Board of Governors of The Federal Reserve , Consumers and Mobile Financial Services 2015., March 2015

It’s time to rethink your payment process

11

Distribute funds without paper

To anyone with a U.S. bank account

Using mobile phone number or email address

1. Anecdotal estimates shared with us by our clients have ranged as high as $25 per payment. In recognition of the variability of costs across our clients and of the presumed partial cost offset offered by check float, Bank of America typically references a conservative estimate of $4 per check when discussing the potential benefit of electronic payments.

Recipients receive payments more quickly

No need to obtain sensitive bank account information

Higher customer satisfaction

Potentially reduce payment expenses by 75%1

Digital Disbursements uses and applications

12

Use whenever it would be desirable to expedite a payment directly into a customer’s bank account…

…without needing to capture or retain their bank account data

Invitational travel

Overpayment or deposit refunds

Juror payments

Miscellaneousreimbursements

Tax refunds or credits

Independent contractor payments

Bank of America and clearXchange

▪The first U.S. P2P payment network created by financial institutions for financial institutions

▪The first U.S. P2P payment network created by financial institutions for financial institutions—equally owned by Bank of America, Capital One, Chase , US Bank and Wells Fargo

▪CXC members reach over 50% of all U.S. online and mobile banking customers

▪Now includes 5 of the largest banks in the United States, along with multiple regional financial institutions, who together serve over 100 million customers

Bank of America has been using clearXchange for person-to-person transfers since 2011.

The same network is now used for B2C payments.

13

Digital Disbursements process flow

14

Unregistered RecipientThe unregistered recipient connects an email address or

mobile number to clearXchange one time–account information is not shared among bank participants

ONE-TIME REGISTRATION

21 3 4

Business

METHODCONFIRMATION

Confirm recipient agrees to receive a

digital disbursement.

* Please note: time references when payments are generally available. Payments to a registered Bank of America customer and instructed prior to the established deadline are generally available same day. Payments to a registered customer at another financial institution and instructed prior to the established deadline are generally available next business day. Actual times may vary.

Our innovative solution uses a credit push model that provides faster payments with near real-time messaging

Registered Recipient

FUNDING RECEIVED

Payment is deposited on an automated basis into

the recipient’s account the same or next day.*

Business

PAYMENT INITIATION

Send us your recipient’s name, email address or mobile number and the

payment amount.

Recipient

PAYMENTNOTIFICATION

The recipient receives an email or text with

instructions for receiving the money.

Registered recipient notification

15

Registered recipients receive notification from their bank (text or email) and the funds are deposited same or next business day.

By text if using mobile

number

By email message if using email

Unregistered recipient notificationEmail Recipient

16

Unregistered recipients receive notification of funds with a call-to-action to enroll to accept the funds.1

After choosing their bank to enroll in the service, they are able to accept funds.2

Focus group reactions

17

Question: What would you think of an organization that used this method of payment?

The road to Same Day ACHWhat has happened and where are we headed

Why same day ACH and who will benefit

19

Both payment Originators and Receivers could benefit from same-day processing and faster funds availability▪Same Day ACH addresses needs of end-users▪Same Day ACH is an immediate action to modernize the payment system, which supports the

Federal Reserve goal of faster payments▪Implementation of Same Day ACH would lead to changes within financial institutions that could

also be utilized for real-time payments in the future

Who NACHA believes will benefit:Among survey respondents1, the top 5 most commonly cited beneficial use cases for Same Day ACH were:▪Payroll (cited by 87% of survey respondents that said they would use/offer Same Day ACH)▪Business-to-business (72%)▪Account-to-account transfers (59%)▪Person-to-person payments (57%)▪Bill payments (53%).

1. NACHA engaged an external consulting firm to independently evaluate the use cases. Data, research, and ODFI interviews were used to develop the potential volume for each use case

NOTEWORTHY: “Faster payments” is one of eight attributes of the future ACH Network, according to NACHA’s ACH Blueprint of 2012.

WHY NACHA is moving this forward:

What just happened

Industry Comes Together to Move Payments Faster on the ACH NetworkHERNDON, Va., May 19, 2015 - NACHA —The Electronic Payments Association ® announced today that its voting membership approved Same Day ACH, an amendment to the NACHA Operating Rules to move payments faster. The rule enables a ubiquitous same-day capability for virtually any ACH transaction, creating options for the businesses, governments and consumers who want to move their money faster.

20

NACHA Membership Approves Same Day ACH

NOTEWORTHY: The ACH Network processes about 71 million ACH payments every business day

““

What transactions will be eligible and when

21

IS eligible…Most ACH transactions (both credits & debits) would be eligible for same-day processing:▪Same-day ACH credits▪Same-day ACH debits▪Most non-monetary transactions

IS NOT eligible…The only ACH transactions not eligible for same-day processing would be:▪International transactions (IATs)▪Individual large-dollar transactions > $25,000

Functionality Phase 1Sept. 23, 2016

Phase 2Sept. 15, 2017

Phase 3March 16, 2018

Transaction Eligibility($25,000 limit, IAT not eligible) Credits only Credits and debits Credits and debits

New Same Day ACH Processing Deadlines

10:30 a.m. and 3 p.m. Eastern

10:30 a.m. and 3 p.m. Eastern

10:30 a.m. and 3 p.m. Eastern

New Settlement Times 1 p.m. and 5 p.m. Eastern 1 p.m. and 5 p.m. Eastern 1 p.m. and 5 p.m. Eastern

ACH Credit Funds Availability

End of RDFI’s processing day

End of RDFI’s processing day 5 p.m. RDFI local time

Key strategic points to take away

22

Consumers are changing their shopping behavior

Online shopping is driving changes in the payment landscape

Mobile adoption is moving financial transactions to the smartphone

Elimination of check payments should remain a focus to drive efficiencies

P2P payment growth presents an opportunity to reduce costs and enhance customer satisfaction though Digital Disbursements

Same day ACH is moving slow but appears to be on its way

Government Prepaid Card

Reducing the costs of payments with Prepaid Card solutions

Prepaid card industry volume trends

Source: Mercator Advisory Group, 11th Annual U.S. Prepaid Cards Market Forecasts, 2014-2017, November 2014

2015 YOY Growth of Load Volume

8.5%

2014 (f)

2015 (f)

2016 (f)

2017 (f)

$- $50

$100 $150 $200 $250 $300 $350 $400

$264 $286

$311 $338

2014 – 2017 Total Amount Loaded onto Cards ($Billions)

Total Open Loop

▪ Trophy value – Provides significant options for branding and personalization▪ Flexibility – Allows variable load values, expiration dates▪ Everyone qualifies – Recipient does not need to have a U.S. bank account▪ Personalized cards – Order cards as you need them; we personalize and mail them to the

cardholder or send them non-personalized to you for instant distribution▪ Abandoned property management – BofAML takes on all responsibility for managing state-

specific requirements and regulatory compliance for escheatment and abandoned property▪ Rapid processing – Receive the cards within 5-7

business days of receipt of card order

Comprehensive prepaid payments

25

The advantages of a Prepaid Card for consumer payments

BofAML Government Prepaid Cards

▪ Meet regulatory compliance – Management of the escheatment process and help ensure compliance with the various state laws

▪ Streamline administration – by eliminating difficult, time-consuming reconciliation process

▪ Reduce expenses – reduce costs associated with check production, reconciliation, bank fees and customer replacement requests

▪ Reduce risk exposure – eliminates check fraud exposure and improves audit reporting

▪ Security/safer than cash – improves safety, fraud protections and provides 24/7 customer care. If lost or stolen, the unspent amount can be replaced

▪ More choices & convenience – Unlike gift certificates and checks, customers have access to use funds wherever Visa or MasterCard debit cards are accepted

▪ Online activation and balance availability – Cardholders can activate their cards immediately and have 24/7 access to their available balance

Payments/reimbursements

Retirement/pension

Incentives/rewards

Payroll

Worker’s compensation

Lottery

Unemployment/disability

Other benefits

Tax refunds

Child support

Government

Use case: Government benefitsRecurring payments through prepaid cards

Personalized

▪ Personalized embossed cards issued to benefit recipients

▪ Receive card within 5-7 business days

▪ Three year expiration or auto-renewable

Features

▪ Primary funding via ACH direct deposit

▪ Reloadable

▪ Purchases everywhere Visa debit cards accepted, plus cash access via ATMs and financial institutions

▪ Online funds transfers

▪ Emergency cash transfers via Western Union

▪ 24/7/365 Cardholder customer service by toll-free phone line and online customer service

Supported

▪ Fully customized implementation with dedicated implementation engineer resources

▪ Marketing and transition support

▪ Fully automated enrollment and reporting support via data file transmissions

▪ Web portal administration option

▪ Dedicated Client Support for agency administrators

BofAML Prepaid program features

28

Easy to implement You are assigned an implementation project manager to provide complete support as you design and launch your programEasy to administer

Secure web-based tools to manage your program and access reporting

Dedicated Client Support support including account

management, implementation and client support hot line

Flexible Product Structures Multiple product design and structure options, including ATM access.

24/7 support for your cardholders

Customer service is available through an online website, toll-

free telephone access to an IVR of live agent call center

Questions &Open Discussion

30

Notice to Recipient

"Bank of America Merrill Lynch" is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation ("Investment Banking Affiliates"), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., both of which are registered as broker-dealers and members of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp. are registered as futures commission merchants with the CFTC and are members of the NFA. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured * May Lose Value * Are Not Bank Guaranteed.

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