1. E-Commerce Conference April 23, 2008 Electronic Task Force Update Gwen Canady, Chief Deputy State Controller David C. Reavis, E-Commerce Manager Office of the State Controller

2. Special Provision 2007 Appropriations Act - OSC was charged with the task of: Evaluate opportunities for efficiencies in State government through the use of electronic commerce as it relates to both disbursement and collection of funds Evaluate opportunities for efficiencies in State government through the use of electronic commerce as it relates to both disbursement and collection of funds Report the results of that evaluation to the 2008 Regular Session of the 2007 General Assembly – April 30 Report the results of that evaluation to the 2008 Regular Session of the 2007 General Assembly – April 30 Recommend proposed legislation that may be considered by the 2008 Regular Session of the 2007 General Assembly. Recommend proposed legislation that may be considered by the 2008 Regular Session of the 2007 General Assembly. OSC to acquire input from various sectors of state government. OSC to acquire input from various sectors of state government. Input was acquired by two primary means: Input was acquired by two primary means: Creation of a task force - Various government sectorsCreation of a task force - Various government sectors Conducting a comprehensive survey of fiscal officersConducting a comprehensive survey of fiscal officers

3. Task Force Assembled Central Agencies Central Agencies OSCOSC DSTDST OSBMOSBM ITSITS UNC-GAUNC-GA NC CCSNC CCS DPIDPI Other Agencies Other Agencies DORDOR DOTDOT DHHSDHHS ESCESC SOSSOS

4. Website for Task Force Most Most

5. Input and Activities Blog Postings to Website Blog Postings to Website Zoomerang Survey – Fiscal Officers Zoomerang Survey – Fiscal Officers General Govt.General Govt. UniversitiesUniversities Community CollegesCommunity Colleges OSC Research OSC Research Best PracticesBest Practices Other StudiesOther Studies

6. Objectives In each of the two areas (disbursements and collections), ascertain current utilization: In each of the two areas (disbursements and collections), ascertain current utilization: Paper based (types of transactions, number volumes, and dollar volumes)Paper based (types of transactions, number volumes, and dollar volumes) Electronic based (types of transactions, number volumes, and dollar volumes)Electronic based (types of transactions, number volumes, and dollar volumes) Identify agencies and programs that have developed successful programs Identify agencies and programs that have developed successful programs Identify reasons and obstacles for lack of ecommerce participation Identify reasons and obstacles for lack of ecommerce participation Identify current costs of ecommerce activities Identify current costs of ecommerce activities Identify the various types of ecommerce solutions available Identify the various types of ecommerce solutions available Identify the various types of agency activities suitable for e-commerce Identify the various types of agency activities suitable for e-commerce Identify best practices in e-commerce Identify best practices in e-commerce Identify security related issues Identify security related issues Identify industry issues of concern to governments Identify industry issues of concern to governments Identify current roles of central agencies Identify current roles of central agencies Identify inefficiencies in current operations Identify inefficiencies in current operations Identify what services could/should be offered on an enterprise basis Identify what services could/should be offered on an enterprise basis Identify impact of pending planning of BEACON Financials on e-commerce Identify impact of pending planning of BEACON Financials on e-commerce Identify the correlation between ecommerce and the State’s Cash Management Plan Identify the correlation between ecommerce and the State’s Cash Management Plan Identify various statutes pertaining to ecommerce Identify various statutes pertaining to ecommerce Identify modifications needed to statutes Identify modifications needed to statutes

7. Assessment of Current Environment Two Master Contracts Statewide E-Commerce Program Electronic Funds Transfer Merchant Cards Rates most favorable in the country - RFPs EFT - Less than a penny EFT - Less than a penny Merchant Cards - $.04 Merchant Cards - $.04

8. Common Payment Service Gateway EFT (ACH) STMS CPS Gateway Service for both EFT & Merchant Cards Gateway Service for both EFT & Merchant Cards Provided by Office of Information Technology Services (ITS) Provided by Office of Information Technology Services (ITS) Cards Wachovia Agency Web Application Application Processes 39% of merchant card transactions (23% of $) Processes 39% of merchant card transactions (23% of $) Processes 20% of EFT transactions Processes 20% of EFT transactions Biggest card user - DMV Biggest card user - DMV Biggest EFT user - DOR Biggest EFT user - DOR Fee Decrease for Cards 4-1-08 Fee Decrease for Cards 4-1-08 $.41 to $.35 (15% reduction) $.41 to $.35 (15% reduction)

9. EFT Utilization Biggest Inbound User Biggest Inbound User Dept of Revenue – Started 1994Dept of Revenue – Started 1994 120,000 taxpayers remitting electronically120,000 taxpayers remitting electronically 9,000 mandated 9,000 mandated 111,000 voluntarily 111,000 voluntarily $1.9 million transactions annually$1.9 million transactions annually 17.4 billion of $26.2 billion collected = 66%17.4 billion of $26.2 billion collected = 66% Increased investment earnings of $8.7 million per year - as result of 3½ days float reductionIncreased investment earnings of $8.7 million per year - as result of 3½ days float reduction Biggest Outbound Users Biggest Outbound Users Retirement System – Started 1977Retirement System – Started 1977 200,000 out of 209,000 = 96% 200,000 out of 209,000 = 96% Central Payroll – Started 1979Central Payroll – Started 1979 82,700 out of 87,700 = 94% 82,700 out of 87,700 = 94% Compare to August  74,300 out of 83,800 = 88% Compare to August  74,300 out of 83,800 = 88% NCAS Vendors – Started 2000NCAS Vendors – Started 2000 ACH: 225,000 out of 954,000 = 24% (34% of Dollars) ACH: 225,000 out of 954,000 = 24% (34% of Dollars)

10. NCAS Vendor Payments FY2006-07 24% (224,566) of 937,000 NCAS vendor payments by EFT 24% (224,566) of 937,000 NCAS vendor payments by EFT 35% ($7.3 billion) of $21 billion by EFT 35% ($7.3 billion) of $21 billion by EFT 2% (17,400) payment totaling $394 million by Inter/Intra Governmental Transfer method 2% (17,400) payment totaling $394 million by Inter/Intra Governmental Transfer method Opportunity for Improvement Possibly mandate participation ? Possibly mandate participation ? Make enrollment easier – online ? Make enrollment easier – online ?

11. Direct Deposit Retirement benefits by direct deposit since 1977 Retirement benefits by direct deposit since 1977 Payroll by direct deposit since 1979 Payroll by direct deposit since 1979 Success largely due to DST being able to pay bank fees from interest earnings as opposed to agencies picking up tab Success largely due to DST being able to pay bank fees from interest earnings as opposed to agencies picking up tab Mandatory Direct Deposit Policy Mandatory Direct Deposit Policy Retirement in 1994Retirement in 1994 Central Payroll in 2007Central Payroll in 2007 Coming in 2008 – Payroll cards for the “unbanked” Coming in 2008 – Payroll cards for the “unbanked” Number DDPercent DD Retirement Benefits200,000 96% Central Payroll 88,000 94% Mailing costs savings alone for Retirement = $80,000 per month

12. Paper Warrant Trend Decrease of: 3% 6% 11% 3% 7% Million FY 2001-02 was peak in paper warrants = 18.2 million FY 2004-05 had biggest % decrease = 11% FY 2006-07 - TANF was only increase = 16% (No EFT Program) 14.7 16.5 17.6 18.2 Largest Accounts 14.3 13.3

13. #Transactions $ Million FY-01 285,000 FY-02 868,000 FY-031,573,000 FY-042,078,000 FY-052,842,000 FY-063,673,000 FY-074,509,000 FY-01$ 22.8 FY-02$ 76.7 FY-03$ 182.6 FY-04$ 233.7 FY-05$ 311.4 FY-06 $ 435.7 FY-07$ 534.8 Merchant Card Utilization Dollar Amount Growth rate FY 2006-07 was 23% (30% previous years) Currently 92 participants (850+ merchant numbers): 21 Agencies26 Community Colleges 15 Universities30 Local Governments

14. Card Activity FY 2006-07 Segment Transaction Volume Dollar Volume Avg. Ticket Size General Govt.1,967 M$ 107,541 M$ 54 Universities1,797 M$ 349,237 M$ 194 Com. Colleges 161 M$ 19,910 M$ 124 Local Units 583 M$ 58,006 M$ 99 LEAs 1 M$ 1 M$ 112 Total4,509 M$ 534,807 M$ 119 DMV Vehicle Registration largest volume 1.25 million transaction $ 39 million Represents 12% of $338 million DMV fees collected

15. Card Fees FY 2006-07 Trans. Vol. Sales Vol. Pass-Thru Fees Vendor Fees Total Fees General Govt 1,967 M $ 107,541 M $ 1,895 M $ 140 M $ 2,036 M Universities 1,797 M $ 349,237 M $ 5,634 M $ 168 M $ 5,802 M Com. Colleges 161 M 161 M $ 19,910 M $ 283 M $ 19 M $ 302 M Local Units 583 M 583 M $ 58,006 M $ 986 M $ 47 M $ 1,033 M LEAs 1 M 1 M $ 113 M $ 2 M $ 0 M $ 2 M Total 4,509 M $ 534,807 M $ 8,801 M $ 374 M $ 9,175 M Two Types of Fees Pass-thru fees are paid to Visa/MC Vendor Fees are paid to STMS DMV Vehicle Registration largest volume 1.25 million transaction $ 39 million

16. Online Payments for Receipts AgencyOptionsFee DMV Registration Cards only No Wildlife No Yahoo Agencies Cards only No Retirement ACH draft only No Secretary of State Cards & ACH $2 Child Support Cards & ACH $5 ESC $5 Dept Revenue Cards & ACH 2% Universities 2%

17. #Transactions $ Billion Cards- 11% Cash- 17% ACH- 28% Checks - 44% Collections Mix Dollar Amount Greatest number of transactions are paper - 61% Greatest transactions dollars are electronic – 76% Cards and Cash combined represent 2% of dollars collected Twice as much is collected by cash than cards Million Cards-.7% Cash- 1.5% Checks - 23.5% ACH - 74.2%

18. Collections Paper vs. Electronic

19. Paper Base Receipts Checks vs. Cash

20. Disbursements Paper vs. Electronic

21. Cost of Paper State Check Agency CostDST CostTotal Cost Gen. Govt. Agency $.43 $.11 $.54 University $1.30 $.11 $1.41 Community College $2.11 $.11 $2.22 Weighted Average $.63 $.11 $.74 Two components of cost = Agency cost & DST cost Two components of cost = Agency cost & DST cost DST functions as “bank” for agencies DST functions as “bank” for agencies Internal costs = $.09Internal costs = $.09 FRB fees = $.02FRB fees = $.02 Cost of the issuance of a paper state check varies from agency to agency Cost of the issuance of a paper state check varies from agency to agency General Government agencies experiences lower per item cost due to several large volume accounts General Government agencies experiences lower per item cost due to several large volume accounts Average overall cost for a State warrant is $.74 Average overall cost for a State warrant is $.74 Smaller check volumes = higher per item costs Smaller check volumes = higher per item costs Some agencies’ cost as high as $35 Some agencies’ cost as high as $35

22. Debit Cards for Disbursement EBT Card Food Stamps Debit Card Child Support Debit Card Unemployment Debit Card Payroll Debit Card Student Refunds Debit Cards EBT – Since 1999; Vendor EFunds; Quest branded; Fee $.55 per case mo. Child Support – Being implemented in 2008; Vendor is JP Morgan ESC – Since Jan 2007; Vendor is ACS (EPPI Card) - MasterCard branded Payroll – Being implemented in 2008; Vendor is Wachovia - Visa branded Student Refunds- Universities; Vendor is Higher One – MasterCard branded

23. Procurement Card Activity Annual Volumes SegmentTransPercent #DollarsPercent $ General Govt. 140,530 29% $ 68.4 Million49% Universities 265,510 55% $ 60.5 Million44% Colleges 77,896 16% $ 9.4 Million7% Total 483,936100% $138.3 Million100% Administered by P&C – Vendor is Bank of America Administered by P&C – Vendor is Bank of America Not considered a form of “electronic payment” as defined by statute (G.S. 147-86.20(2a) Not considered a form of “electronic payment” as defined by statute (G.S. 147-86.20(2a) Does not result in movement of monies as it creates an “accounts receivable” and paid for when invoiced Does not result in movement of monies as it creates an “accounts receivable” and paid for when invoiced Providers for rebates of up to 1.5% ($1million in 2007) Providers for rebates of up to 1.5% ($1million in 2007) Limited to purchases of $2,500 Limited to purchases of $2,500 Universities largest user based on number of transactions (55% of ½ million transactions) Universities largest user based on number of transactions (55% of ½ million transactions) Average transaction size = $285 (avg. check = $1,828) Average transaction size = $285 (avg. check = $1,828) Potential for P-cards to be used for invoices – not just small purchases Potential for P-cards to be used for invoices – not just small purchases

24. Best Practice - Web Capture Card STMS Database Authentication of O/S Transactions Gateway Service providing both capture and processing Gateway Service providing both capture and processing Presentment Engine – Payor is redirected to vendor’s websitePresentment Engine – Payor is redirected to vendor’s website Payment Engine / Two options – ACH draft or card transactionPayment Engine / Two options – ACH draft or card transaction Two types of transactions Two types of transactions Bill presentment -Transaction authenticated against O/S databaseBill presentment -Transaction authenticated against O/S database One time payment – No authentication (One time payment)One time payment – No authentication (One time payment) ACH Bank Draft Wachovia Agency’s A/R System System Choice of Payment Method Third-Party Vendor

25. Best Practice Remote Deposit Capture Two methods for processing receipts of checks Two methods for processing receipts of checks ACH Conversion (POP, BOC, ARC) – MICR line sent to bankACH Conversion (POP, BOC, ARC) – MICR line sent to bank Check 21 / IRD (Image Replacement Document) - Image sent to bankCheck 21 / IRD (Image Replacement Document) - Image sent to bank ACH Conversion not conducive to government ACH Conversion not conducive to government Applies to consumer checks onlyApplies to consumer checks only Has an amount limit of $25,000Has an amount limit of $25,000 DST is evaluating potential use in State government DST is evaluating potential use in State government OSC pilot in 2008 OSC pilot in 2008 Check scanner terminalCheck scanner terminal Small volume of checksSmall volume of checks Eliminates having to make trips to the bankEliminates having to make trips to the bank

26. Best Practice PCI Data Security Card industry rules to protect cardholder data and prevent security breaches Card industry rules to protect cardholder data and prevent security breaches Potential fines $1 million per occurrence Potential fines $1 million per occurrence OSC has secured services of a “Qualified Security Assessor” to assist agencies in becoming and remaining compliant - Trustwave OSC has secured services of a “Qualified Security Assessor” to assist agencies in becoming and remaining compliant - Trustwave Annual certification via questionnaireAnnual certification via questionnaire Quarterly scanning of website and other external facing IP addressesQuarterly scanning of website and other external facing IP addresses Requires resources of OSC and agencies Requires resources of OSC and agencies OSC has become a member of the PCI Security Council in order to have input into rule making OSC has become a member of the PCI Security Council in order to have input into rule making

27. Costs of Receipts General Government RankType Cost 1ACH $1.00 2Cards $1.60 3Paper $2.00 Universities RankType Cost 1Paper $2.00 2ACH $3.00 3Cards $5.00 Comm. Colleges RankType Cost 1ACH $1.50 2Paper $2.00 3Cards $3.60 Cost of Electronic transaction NOT always cheaper than Paper Cost of Electronic transaction NOT always cheaper than Paper Card transactions – Cost related to amount of transactionCard transactions – Cost related to amount of transaction Low volume of any one type = high per item costLow volume of any one type = high per item cost Agency’s cost of ongoing infrastructure could be higherAgency’s cost of ongoing infrastructure could be higher ACH – Lowest for Gen Govt. and Colleges but not universities ACH – Lowest for Gen Govt. and Colleges but not universities Cards – Lower than paper only for Gen Govt. Cards – Lower than paper only for Gen Govt. Paper – Lowest cost for universities Paper – Lowest cost for universities High dollar tuition results in high card cost for univ & colleges High dollar tuition results in high card cost for univ & colleges

28. Merchant Card Fees Processing Fees Credit Cards Interchange Fees Assessment Fees Merchant Service Fees Debit Cards Interchange Fees Network Switch Fees Merchant Service Fees Vendor-Levied Pass-Through Visa & MC Card Issuing Banks Debit Network

29. Convenience Fee Issue Statutes conflict with industry rules Statutes conflict with industry rules Visa only allows “Flat” fee Visa only allows “Flat” fee Many universities discontinuing Visa Many universities discontinuing Visa Current statute requires approval of OSBM, ITS, and Govt. Opts Current statute requires approval of OSBM, ITS, and Govt. Opts Charged by agencyCharged by agency Charged by third-partyCharged by third-party

30. Recommendations - Expansion OSC to be primary agency charged with the governance responsibility of establishing comprehensive standards, policies, and procedures OSC to be primary agency charged with the governance responsibility of establishing comprehensive standards, policies, and procedures Other central oversight offices to be involved: Other central oversight offices to be involved: DST, OSBM, ITS, UNC GA, NC Community College SystemDST, OSBM, ITS, UNC GA, NC Community College System Management of each agency Management of each agency Take an active role in identifying paper based payments that are potential candidates for converting to electronic paymentsTake an active role in identifying paper based payments that are potential candidates for converting to electronic payments Reporting to the OSC on a prescribed basisReporting to the OSC on a prescribed basis Oversight and approval process should be established within OSC to ensure all new ecommerce applications desired to be implemented by an agency are consistent with statewide standards and policies that may be established Oversight and approval process should be established within OSC to ensure all new ecommerce applications desired to be implemented by an agency are consistent with statewide standards and policies that may be established Policies to be conducive to the orderly expansion of ecommerce activities Policies to be conducive to the orderly expansion of ecommerce activities Statutory requirementsStatutory requirements Industry requirementsIndustry requirements Security RequirementsSecurity Requirements Cash management effectsCash management effects Best PracticesBest Practices Citizens needsCitizens needs

31. Recommendations - Funding Funding should be a priority for those agencies desiring to establish ecommerce functions that require modifications to their website infrastructure. These development cost are separate from the ongoing processing costs once a system is developed. Funding should be a priority for those agencies desiring to establish ecommerce functions that require modifications to their website infrastructure. These development cost are separate from the ongoing processing costs once a system is developed. Whenever it is determined that any ecommerce activity is economically beneficial to the State as a whole, the costs incurred should be considered as a “cost of doing business,” without any expectation that the citizen should pay a convenience fee. Whenever it is determined that any ecommerce activity is economically beneficial to the State as a whole, the costs incurred should be considered as a “cost of doing business,” without any expectation that the citizen should pay a convenience fee. Funding for ecommerce activities should be in accordance with the type of agency operation, as determined by the Office of State Budget and Management and based upon a business case for a particular agency. Funding for ecommerce activities should be in accordance with the type of agency operation, as determined by the Office of State Budget and Management and based upon a business case for a particular agency. “Enterprise or receipts supported” operation - Transaction costs should be paid for from the agency’s enterprise or special fund.“Enterprise or receipts supported” operation - Transaction costs should be paid for from the agency’s enterprise or special fund. “Appropriations supported” operation - Transactions costs may be paid for either by a direct appropriation or from the revenue account established to account for Interest on Treasurer’s Investments, whenever that revenue account is the beneficiary of the increased availability of funds as a result of being collected electronically.“Appropriations supported” operation - Transactions costs may be paid for either by a direct appropriation or from the revenue account established to account for Interest on Treasurer’s Investments, whenever that revenue account is the beneficiary of the increased availability of funds as a result of being collected electronically. Whenever it is not more efficient to process a transaction electronically, a convenience fee may potentially be levied against the payor, as approved by the Office of State Budget and Management in consultation with the State Controller, based upon the agency’s submitted business case. Whenever it is not more efficient to process a transaction electronically, a convenience fee may potentially be levied against the payor, as approved by the Office of State Budget and Management in consultation with the State Controller, based upon the agency’s submitted business case.

32. Factors for Cost of Doing Business Considered for Absorbing Fees as a “Cost of Doing Business” Reduced transaction costs Reduced transaction costs Speedier collections and availability of funds (increased interest earnings) Speedier collections and availability of funds (increased interest earnings) Payment for service or product is considered “mandatory” (e.g., taxes) Payment for service or product is considered “mandatory” (e.g., taxes) Acceptance of an electronic transaction would likely increase sales or revenue Acceptance of an electronic transaction would likely increase sales or revenue Payment is to satisfy a “delinquent” account or other type of payment that would not likely otherwise be collected Payment is to satisfy a “delinquent” account or other type of payment that would not likely otherwise be collected Other factors deemed appropriate for a particular type of payment (e.g., convenience expectation of citizen) Other factors deemed appropriate for a particular type of payment (e.g., convenience expectation of citizen) Approval Processes Funding for Enterprise and Receipts Supported Operations – By OSBM Funding for Enterprise and Receipts Supported Operations – By OSBM Funding for Appropriations Supported Operations Funding for Appropriations Supported Operations If appropriated – By General AssemblyIf appropriated – By General Assembly If from interest earnings – By OSBM in consultation with OSC & DSTIf from interest earnings – By OSBM in consultation with OSC & DST Levy of convenience fee – By OSBM in consultation with OSC Levy of convenience fee – By OSBM in consultation with OSC Reporting of Convenience Fees To General Assembly by OSC To General Assembly by OSC

33. Funding E-Commerce Transactions Determine Type of Operation Enterprise or Receipts Supported Cost of Electronic Not Less Than Paper Cost of Electronic Less Than Paper Appropriations Supported Cost of Electronic Less Than Paper Cost of Electronic Not Less Than Paper Convenience Fee Prohibited (Cost of doing business) Fund from Operations Convenience Fee Possible If other factors - Fund from operations If for citizen’s convenience only – Fund from convenience fee Convenience Fee Prohibited (Cost of doing business) Fund from Interest Earnings Convenience Fee Possible If other factors - Fund thru appropriations If for citizen’s convenience only – Fund from convenience fee Any Convenience Fee to be approved by OSBM w/OSC Funding to be approved by OSBM Funding to be approved by OSBM w/ OSC and DST Agency Business Case

34. Recommended Legislation Cash Management Law Cash Management Law G.S. 147-86.10 G.S. 147-86.10 Pertains to Cash Management (Existing) (Existing) Electronic Commerce Electronic Commerce in State Govt. G.S. 66-58 in State Govt. G.S. 66-58 Pertains to Digital, etc. (Existing) 1) Create a New Chapter 1) Create a New Chapter Incorporates two existing chapters Pertains to “Electronic Payments” only Clarifies Responsibilities 2) Amend Various Agencies’ Statutes 2) Amend Various Agencies’ Statutes(Existing)

35. More Information Office of the State Controller Web Site www.ncosc.net David C. Reavis E-Commerce Manager (919) 871-6483 April 23, 2008 Robert Powell State Controller Amber Young Central Compliance Manager (919) 981-5481 Support Services Center (919) 875-HELP (4357)