1. © 2014 Fair Isaac Corporation. Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent. Alternative Payments FICO World 2014 Jason Malo CEB TowerGroup

2. © 2014 Fair Isaac Corporation. Confidential. Change is headed your way whether you’re prepared or not. Emerging technologies like mobile and contactless payments continue to grow in adoption and consumers demand more convenience and more protection. 2

3. © 2014 Fair Isaac Corporation. Confidential. What Do Consumers Want? 3

4. © 2014 Fair Isaac Corporation. Confidential. © 2014 The Corporate Executive Board Company. All Rights Reserved. WHAT DO CUSTOMERS WANT FROM THEIR BANKS? Consumers want transparency, simplicity and 24/7 secure access to their finances. Financial Service Provider Attributes Most Valued By Consumers Top 3 Attributes n~1600 Security Ease of Use Source: 2014 Unisys Security Index, N=1,005 4

5. © 2014 Fair Isaac Corporation. Confidential. © 2014 The Corporate Executive Board Company. All Rights Reserved. MOBILE MUST EVOLVE INTO A BUYING CHANNEL Financial institutions and payment providers must transition users from shopping to buying in order to drive revenue Would you Like to Use your Mobile Phone for the Following Purposes? Respondents Could Select Multiple Answers Source: US Federal Reserve 5

6. © 2014 Fair Isaac Corporation. Confidential. © 2014 The Corporate Executive Board Company. All Rights Reserved. IDENTITY THEFT TOPS LIST OF CONSUMER FEARS Greatest concerns for consumers relate to the security of their finances and personal information. How concerned are you about the following risks? Respondents answering “extremely” or “very” concerned Source: 2014 Unisys Security Index, N=1,005 6

7. © 2014 Fair Isaac Corporation. Confidential. © 2014 The Corporate Executive Board Company. All Rights Reserved. MOBILE USERS CARE ABOUT PAYMENTS & SECURITY Real-time mobile alerts for unusual account activity is more important than remote deposit capture Most Desired Mobile Banking Features by Segment  “Unusual account activity alerts” rely on mature, transaction fraud evaluation processes.  Alerts must include an opportunity for customers to respond if necessary, but not drive contact center costs Source: Segment Based Strategies for Mobile Banking, Cognizant, April 2014, N = 296 Aspiring Bloomers Ardent Affluents Liberal Users Cautious Seniors N=59 N=51 N=122 N=64 7

8. © 2014 Fair Isaac Corporation. Confidential. What are “Alternative Payments” 8

9. © 2014 Fair Isaac Corporation. Confidential. Card Transaction Forms Paper Card Stock Data Transcription Embossed Card Impress Card Information Magnetic Stripe Stream of Data Chip Card Real-Time Validation Mobile/NFC Device Integration 1955 2014 THE EVOLUTION OF PAYMENTS TECHNOLOGY 9

10. © 2014 Fair Isaac Corporation. Confidential. Product FeaturesData SecurityCompetitive Landscape Threats Opportunities Non-Financial Players are entering the market CFPB Transparency Warnings  Revolving Debt  Digital Prepaid Increasing use of Internet Cards  +50% of total market Major Data Breaches Evolving Security Technology  EMV Rollout in United States  Biometrics — enabled smart devices Partnerships with Tech Companies MAJOR 2014 EVENTS (THROUGH OCTOBER) 10

11. © 2014 Fair Isaac Corporation. Confidential. © 2014 The Corporate Executive Board Company. All Rights Reserved. HOW DO WE ASSESS ALTERNATIVE PAYMENTS? Although seemingly impossible to predict what will take hold with consumers, we can assess the capability of solutions. Attributes of a Best-in-Class Mobile Wallet/Payments Application Card Storage Store any credit or debit card regardless of issuer Store gift cards, rewards cards, loyalty cards Enable flexible card management Merchant Network Network of national merchants Network of local merchants Flexibility to allow FIs to add merchants Coupons/Discounts Targeted offering based on customer and transaction data Joint marketing campaigns Location-based offers POS Payments Accepted at a variety of merchants Quick and easy to access QR, NFC, etc. Wallet Data Data on customer wallet usage – including issuer and non-issuer cards Benchmarking and network statistics Segmentation analysis Non-POS Transaction P2P ACH Bill pay Cardless ATM withdrawal Loyalty Program Flexible rewards system: e.g. points based, per-dollar, percentage, amount spend, etc. Merchant-funded rewards Financial Discounts Data Security Meet regulatory standards Business continuity plan Balance between security and convenience / access Remote wipe or lock Market Ready Up & Coming Needs Development Non Existent 11

12. © 2014 Fair Isaac Corporation. Confidential. © 2014 The Corporate Executive Board Company. All Rights Reserved. PAYPAL PayPal could be viewed as the original alternative payment. With its recent spinoff from eBay, evolving partnerships, and significant customer base, there are a lot of open roads. Attributes of a Best-in-Class Mobile Wallet/Payments Application Card Storage Merchant Network Coupons/Discounts POS Payments* Wallet Data Non-POS Transaction Loyalty Program Data Security Market Ready Up & Coming Needs Development Non Existent Challenges *Low POS customer adoption Lower penetration in younger user segments Expanding P2P success from Venmo acquisition to POS payments traction Transaction Volumes (in millions USD) P2P POS Payment Partners 12

13. © 2014 Fair Isaac Corporation. Confidential. © 2014 The Corporate Executive Board Company. All Rights Reserved. STARBUCKS MOBILE APP Starbucks is the leading example of how mobile payments can be successful with a tight integration to rewards, free offers, and marketing Attributes of a Best-in-Class Mobile Wallet/Payments Application Card Storage Merchant Network Coupons/Discounts POS Payments Wallet Data Non-POS Transaction Loyalty Program Data Security Challenges Only accepted at Starbucks Participating merchants are limited More expensive to deploy (barcode scanners) Static barcode Market Ready Up & Coming Needs Development Non Existent Transaction Volumes (in millions USD) 13

14. © 2014 Fair Isaac Corporation. Confidential. © 2014 The Corporate Executive Board Company. All Rights Reserved. MOBILE WALLETS Mobile wallets haven’t yet gained widespread adoption as technology, market, and consumer readiness are all under development. Attributes of a Best-in-Class Mobile Wallet/Payments Application Card Storage Merchant Network Coupons/Discounts POS Payments Wallet Data Non-POS Transaction Loyalty Program Data Security Market Ready Up & Coming Needs Development Non Existent Challenges Strategic mix of wallets to be supported Security Evolving standards & market readiness Customer replacement value Institution-LedProvider-Led Providers 1 1 Partial List 14

15. © 2014 Fair Isaac Corporation. Confidential. © 2014 The Corporate Executive Board Company. All Rights Reserved. MOBILE BANKING APPS Mobile banking applications are beginning to incorporate payment mechanisms for P2P as well as POS Attributes of a Best-in-Class Mobile Wallet/Payments Application Card Storage Merchant Network Coupons/Discounts POS Payments Wallet Data Non-POS Transaction Loyalty Program Data Security Market Ready Up & Coming Needs Development Non Existent Challenges Evolving standards & market readiness Limited capabilities to import other cards Competition 15

16. © 2014 Fair Isaac Corporation. Confidential. © 2014 The Corporate Executive Board Company. All Rights Reserved. APPLE PAY Apple has made a big splash with Apple Pay, but still has room to improve. Attributes of a Best-in-Class Mobile Wallet/Payments Application Card Storage Merchant Network Coupons/Discounts POS Payments Wallet Data Non-POS Transaction Loyalty Program Data Security Challenges Enabled consumer base is limited Participating merchants are limited Replacement value is security, not ease of use Pricing Market Ready Up & Coming Needs Development Non Existent 16

17. © 2014 Fair Isaac Corporation. Confidential. © 2014 The Corporate Executive Board Company. All Rights Reserved. MCX / CURRENTC (EXPECTED AT TIME OF LAUNCH) CurrentC promises secure transactions, and faster checkouts but rewards and coupons pose the biggest customer opportunity. Attributes of a Best-in-Class Mobile Wallet/Payments Application Card Storage Merchant Network Coupons/Discounts POS Payments Wallet Data Non-POS Transaction Loyalty Program Data Security Challenges More expensive to deploy (barcode readers) Security & privacy concerns Value proposition & customer- friendly challenge Giving bank account information not card information ACH & Debit only Market Ready Up & Coming Needs Development Non Existent 17

18. © 2014 Fair Isaac Corporation. Confidential. Keeping Pace With the Evolution 18

19. © 2014 Fair Isaac Corporation. Confidential. What’s ChangingWhat’s Not Changing Multichannel AccessOnly Banks Can Take Deposits and Issue Network Cards Top Ten Issuers= 85% of Market Specialized Non-Bank Players Merchant Driven Programs 10–12% Growth in a $26 Trillion Market NOT EVERYTHING IS CHANGING 19

20. © 2014 Fair Isaac Corporation. Confidential. BANKS ARE LOOKED TO FOR SECURITY, BUT INCENTIVES LAG 20

21. © 2014 Fair Isaac Corporation. Confidential. BANKS DETECT MORE, BUT CONSUMERS HEAVILY INVOLVED Source: 2014 Faces of Fraud Survey, Information Security Media Group Most common ways victims discovered identity theft, by type of theft, 2014 Percentage of Information Risk Executives, September 2014, n=37 How is fraud typically detected? Percentage of banks responding, multiple responses accepted, 2014, n~200 Source: US Dept. of Justice, 2014 Victims of Identity Theft,, Dec 2014 21

22. © 2014 Fair Isaac Corporation. Confidential. 22 TWO-FACTOR AUTHENTICATION HAS COME TO PAYMENTS IN MANY FORMS Source: CEB analysis. First Authentication FactorSecond Authentication Factor Standard Card Swipe EMV (Chip and Pin) Apple Pay (Biometric) Something Someone Has Something Someone Knows Something Someone Is + + + CurrentC (Device and Pin) + Something Someone Has Something Someone Knows 22

23. © 2014 Fair Isaac Corporation. Confidential. 3 NEW PRINCIPLES FOR CONSUMER AUTHENTICATION Risk-based security doesn’t always mean ADDING locks, but it does mean considering the transaction, user, and capabilities at hand. 1. Align Authentication Strategy to Transactional Risk Incorporate “Step-up” authentication for risky transactions Remove security measures where the risk is low, or easier authentication methods are available. 2. Don’t Hide Security, but Make it Easy “Frictionless” doesn’t mean invisible Reassure customers and involve them only when necessary Example: Fraud notifications, transaction verification Apps 3. Consider Your Distribution and Support Channels Understand impact that security will have on support Work to supplement other channels through cross-channel processes 23

24. © 2014 Fair Isaac Corporation. Confidential. Card Transaction Forms Paper Card Stock 1.Notify 2.Change Account # 3.Replace Card Embossed CardMagnetic StripeChip CardMobile/NFC 1.Disable 2.Locate device 3.Authenticate on new device 1955 2014 1.Notify 2.Change Account # 3.Replace Card 1.Notify 2.Change Account # 3.Replace Card 1.Notify 2.Change Account # 3.Replace Card DEVICE LOSS AND REPLACEMENT PROCESSES MUST EVOLVE 24

25. © 2014 Fair Isaac Corporation. Confidential. ► The best way to predict success in payments is to test them against customer value ► Security is now more than just an imperative, it’s a differentiator ► Even in cases where banks are disintermediated they are not absolved of responsibility of fraud ► Opportunities to secure consumer data and finances are greater than the risks posed by alternative payments CONCLUSION 25

26. © 2014 Fair Isaac Corporation. Confidential. Please rate this session online! Jason Malo jmalo@executiveboard.com 26