Critical Issues with Electronification Alternatives Woody Tyner Senior Vice President Payment Systems Strategist BB&T Corporation BITS ECP Forum January 14, 2003 Birmingham, Alabama

Agenda Changes in the Payments Business Economic Impacts Regulation E Check Conversion Initiatives Client Service Issues Bank Systems Issues Check Conversion Economics Implications for Banks Opportunities

The Payments Business is Changing The latest Fed study shows the number of checks, in absolute terms, are less than thought; 42 billion in 2000 and declining 3% - 6% annually versus estimations of 68 billion. Several different independent evaluations suggest check volume may have peaked in the late 1990s. Checks are 50% of non-cash payments today, down from 85% twenty years ago. By 2006, checks will be outnumbered by electronic payment transactions. The number of payment transactions per account will continue to increase. The future volume of checks is unknown, but checks will not go away.

The Changing Landscape: Economic Impacts Interchange : PIN versus Signature based authorizations Loss of deposited check fees Client servicing expense Infrastructure and systems expense Revenue shifts related to payment migration “Free or No Fee Checking” Electronified fraud

Regulation E A check is not always a check!!! Notice equals authorization for a one-time conversion of a check to an electronic debit. “It depends on your definition of ‘is’.” - William Jefferson Clinton

Check Conversion Initiatives Point-of-sale (retail checks) Check to ACH debit SafeCHECK VISA POS Check Returned Checks to ACH debit Lockbox (retail checks) Check to ACH Between Financial Institutions ECP CTA and Image Replacement Documents Commercial Checks - TBD

Client Service Issues “I wrote a check ………” Voice Response Unit Statements Call Center Financial institutions can no longer direct the clearing and settlement of a check. Web Banking ATM Branch Offices

Systems Issues By 2006, electronic payments will outnumber checks. ACH and POS systems capacity Check fraud filters Stop payment orders Cash Management Services controlled disbursement positive pay

Check Conversion Economics Check to ACH debit SafeCHECK/Visa POS Check RCK, WEB & TEL Debit Cards and NSF/OD income ACH Interbank Compensation Business Method Patents

Implications: Revenue, Expenses, and Investments A substantial portion of bank revenues is based in legacy payment products. Some estimates suggest that profitability from financial institutions’ payments business may decline by as much as 30% in the next five years in an unmanaged environment. Need to make proper investments in new products and in the payments infrastructure. Decisions made in isolation may be good for a specific line-of-business but not for the whole enterprise. Payment information remains fragmented.

Opportunities Build payments-related informational databases and mine the derivative information consistent with the principles of good personal information use. Develop and promote higher margin payment products. Align payment products and incentive systems to promote more incremental revenue producing payment transactions. Continue to make strategic investments in emerging payment mechanisms. Identify new payment processing business opportunities.

Conclusions The rate of change in the payments business is increasing. These changes present opportunities for new payment revenues and risks to legacy streams of revenues. The changes are impacting our clients’ payment choices. The changes in payment behaviors are creating infrastructure challenges. Yesterday’s payments management model will not succeed.

Payment Systems Strategist For More Information Woody Tyner Senior Vice President Payment Systems Strategist BB&T Corporation WTyner@BBandT.com 252-246-3391