ICE Bank of America Presentation 10-23-07 FINAL-V2

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    Insurance Payments Transformation

    Aaron Schneider, VP, Bank of America Merchant Services

    October 23, 2007

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    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 insuranceindustry:

    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 paymentssegments telecommunications and cable/satellite/ISPs whilegrowth remains healthy in the insurance and utility segments.

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    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 manyothers

    Independent Sales Organizations (ISOs)

    Third-Party Technology Vendors

    Includes Bill Matrix, Fort Knox, Speedpay, Kubra, CyberSource, VariousBank Technologies, and many others

    American Express and Discover (act as issuer and acquirer)

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    For a typical credit cardtransaction, the Interchangefee represents over 90% of thetotal cost of card acceptance.

    Visa and MasterCard have

    created more than 152different Interchange levels,although only a few typicallyapply to insurance companies.

    Interchange qualificationrepresents a significant cost toall insurance companies.

    Costs of Card Acceptance

    90% to 93% Interchange Cost

    5% Visa and

    MasterCard

    Associations 2% to 5% Merchant

    Processor

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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 insurancecompanies are:

    Credit (card not present consumer non-rewards rate) is1.89% + $.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 fromLevel 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 isresponsible 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 overcredit cards by nearly a 5-to-2 ratio.*

    More than one-third of consumers say that they would pay more billselectronically 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 companiesto 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 beresolved 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 ATMdebit transactions from May 2005 (15%) to July 2006 (33.6%)

    * Source: ATM&Debit News EFT Data Book September 2006

    AS1

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    Slide 11

    AS1 Aaron Schneider, 10/15/2007

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    Current Landscape

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

    9%

    11%

    18% 20%

    34%

    Insurance

    Utilities

    Telecom

    PropertyManagement

    Cable/Satellite/ISP

    Other

    34%

    20%

    11%

    Other

    12%

    PropertyManagement

    9% Insurance

    Telecom

    Utilities

    Life/P&C Insurance

    Consumer Bill Pay Sales Volume*

    $953 billion (CY05)Business Bill Pay Sales Volume*

    $419 billion (CY05)

    Source: Visa U.S.A. PIC Analysis

    * Represents bill payment portion of segment volume only; totals may not sum due to rounding.

    5%8%

    36%

    28%

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    Current Landscape (e-Commerce)

    Personal Insurance Can policyholders send payments via

    Web site? Yes 100%

    Payment methods customers can setup 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 forcustomers?

    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 setup 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 forcustomers?

    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 cardpayments 20%

    Charge standard installment fee 60%

    Discount standard installment fees 0%

    Charge more than standard installmentfee 10%

    Amount charged for electronic paymentsmade 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 cardpayments 11%

    Charge standard installment fee 39%

    Discount standard installment fees 0%

    Charge more than standard installmentfee 6%

    Amount charged for electronic paymentsmade 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%

    Source: ICE survey

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    Current Landscape

    Online bill payments accounted for 39% of bill payments amongonline households in 2006, an increase of4% from 2005.

    Volume of checks sent by mail fell 4%, accounting for only 34% of thevolume 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 payingat least one bill online.

    Half of property/casualty insurers are currently offering electronic bill

    presentment and payment to their policyholders, and nearly half haveit 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 onthe 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

    52%Use online

    bill payat bankWeb site

    13%

    75%Pay by biller-direct*

    24%Use all three

    methods

    82%Send checks

    via mail

    35% 12%

    While card acceptance has grown, most Visa cardholders usemultiple methods to pay bills.

    Bill Payment Methods of Choice, 2006Responsible for Household Bill Paying (n=308)

    * 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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    Stats for Top Insurance Company

    Percentage of payments paid via credit cards in 2006and 2007 for specific lines of insurance

    7

    7

    70%

    75%

    80%

    85%

    90%

    95%

    100%

    Standard &

    Non-Standard Auto

    Homeowners

    Type of Insurance

    Percentage

    of

    PaymentsPaid

    via

    CreditCard

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    Growth Opportunities

    In terms of credit card acceptance, this top 5 insurance companyreported their credit card growth rates over the past three years areas 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 milliondirect marketing impressions in the last year.

    Participating marketing partners within the insurance industry includedFarmers Insurance and St. Paul Travelers Insurance.

    In the retail (non-bill payment) marketplace, there is minimal amount ofgrowth potential for payments.

    Visa, MasterCard, American Express, Discover, STAR, NYCE, PULSE, andmany of the major issuers are all focused on increasing the amount of billpayments paid via credit card, debit card.

    These companies are going to more aggressively market bill payment toconsumers who are going to request bill payment capabilities from insurers.

    Marketing will include television, Web, statement inserts, magazine and otherforms of media. Incentives are being increased to push consumers in thisdirection.

    What is the message to pass to your customer service agents who will betaking 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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