Expert Payments Advisors
1129 20th Street, Northwest | Suite 300 | Washington, DC 20036 | 202-721-9120 | www.mcgovernsmithadvisors.com
Maryland Financial Bank Advisory Board Meeting
“Payments Sleeper Risk”
September 30, 2014
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• Financial industry regulatory expert
• Co-author of Gramm-Leach-Bliley
Act (GLBA), Data Protection
Regulation
• 28+ years compliance & risk
experience (13 with Department of
Treasury in D.C.)
• Visionary behind outsourced
management compliance products &
services
Paul Reymann
Partner, McGovern Smith Advisors
Payments system risk come from regulations, technology, cyber criminals,
fraudsters, consumers, 3rd party vendors, merchants, competition, & innovation.
Payments Sleeper Risk
Consumer Compliance;
Strategic; Financial; IT;
Info Sec; Reputation
Security
Regulations
Technology
Strategic
Operational
Reputation
Card Act
AML
Durbin
Overdraft
UDAAP
Reg. E
Disclosures
Op Choke Pt.
EMV
APPs
SmartPhones
Mobile Money
Credit Cards
Debit Cards
Prepaid Cards
Innovation
Apple Pay
3rd Party Processors
Program Managers
Merchants
Silo Back Office Ops.
Fraud
Cyber Crimes
EMV
Tokenization
Consider your payments strategy:
Build one branch or build a national solution.
EMV is coming, but Swipe continues.
SmartPhones reaching critical mass.
Understand your members’ needs.
Consolidate payments silos.
Analyze member transaction data.
Security will always be paramount.
Vendor management is the next frontier of efficiency.
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Innovation vs. Fast-follower Strategy
A Prepaid Example – Understanding Success Factors
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Innovation vs. Fast-follower Strategy
• Fees
• No load vs Reloadable (i.e., type of reload)
• Other factors (e.g., alerts, email, OD)
Life of a Card?
• Gender
• Nationality
• Age & Education Levels
Socio-demographic?
• Direct Deposit (21X/mo.)
• Monthly fee (17X/mo.)
• Over Draft (23X/mo.)
Transaction Frequency?
Source: FRB of Kansas City.
“General Purpose Reloadable Prepaid Cards: Penetration,
Use, Fees and Fraud Risks” (Feb 2014)
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Credit Card Sales Volume
Growth Exceeds Debit Volume
Credit Card Profitability
“After Tax Income”
2010 1.8%
2011 4.2%
2012 3.9%
2013 4.4%
Source: FDIC QTRLY Banking Profiles –
Institutions with managed credit card loans
exceeding 50% of total assets.
Align Credit Card Issuing Options & Bank’s Goals
Profit Share Joint Venture Self Issuance
Card Issuing Infrastructure Spectrum
• 3rd-party issuer
controlled
- Owns accounts
- No conveyance
• Fixed payments to
FI (usually per new
account + ongoing
card renewal
payments)
• Marketing support -
3rd-party issuer has
access to FI
customer list for
marketing purposes
• Same as Agent
Bank
EXCEPT:
- Revenue sharing
vs. fixed
payments
• FI owns some /
all of portfolio
• Issuer provides
card account
servicing on a fee
for service basis
• All asset risk is
FI’s for assets
owned
• All profits on
owned accounts
accrue to FI
• FI & issuer
agree on a
P&L
measurement
structure
• Profits are
shared as
agreed
• Investments,
costs shared as
agreed
• True separate
entity created
between FI &
issuer
• Each party
contributes
resources as
agreed
• Value to each
party ascribed
based upon
resources
contributed
• Profits shared
based upon equity
stake
• FI issues cards
directly
• FI takes all risk /
retains all profits
• FI either builds or
buys needed
infrastructure, skill
sets
• Numerous
strategic, financial
& regulatory
considerations
Servicing StructureEnhanced Agent BankAgent Bank
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Economics
Investment
Ongoing Commitment
Risks
Operational
Credit
Regulatory
Financial & IRR
Reputation
Strategic
Bank’s Resources
Dedicated
Accounting
Marketing
Controls
Customer Experience
Pricing
Underwriting
Rewards
Network Relationships
Marketing
Evaluate Key Parameters of Card Option
Ease of:
Implementation
Management
• Consumers like debit cards
• Attractive DDA-based payment
• Debit issuers are likely to return to a growth agenda to match consumer demand
• Current interchange rates will remain intact
Investments in Debit Issuing
• MC, Visa, & PIN debit networks for cross-line applications, opens gates for EMV enabled debit cards
• Home Depot, Target and other data breaches push fraud agenda and EMV
Thumbs Up for EMV
• Prepaid has emerged as competitive DDA alternative
• Prepaid and credit card are Durbin exempt
• Debit cards still favored for security & control Competition
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Debit Cards & Interchange
Top 10 Banker Reasons for Apple Pay Success
1. One more means to make payments
2. Growing percentage of iPhone users
3. Bankers will want their card to be loaded
4. Works with over 50% of cards issued today
5. Drives more credit card transaction volume
6. Credit cards already stored with iTunes & Apple Store
7. NFCommunication enabled
8. TouchID – Finger print scan on iPhone 6
9. Tokenization – Assigns 1-time codes
10. EMV retrofits likely to include mobile communications
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Innovation & Apple Pay
PR Newswire
Up to 63% of security infractions & business
disruptions attributed to suppliers & vendors.
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Sky Rocketing Cost &
Complexity
Intelligent Operational Resources
Outsourcing Savings & Simplicity
SellingCustomer
ServiceRevenue & Profits
Your Core
Focus
The Next Frontier of Operating Efficiency
Competitive Landscape
New Products &
Services
Speed to Market
Economies of Scale
Complexity of
Technology
Compliance Tsunami
Consumer Compliance
Cybersecurity Breaches
Manage Risk to
Company & Consumer
Need Intelligent Expertise
New
Ch
all
en
ges
3rd Parties / Vendor Management Risk
Increasing enforcement activity from third party relationships.
Approx. # Regulatory VM Publications
FFIEC 2
FRB 6NCUA
18FDIC
30OCC
58
BITS 1
CFPB 1
116
Strategic Validation of 3rd Party
Business NeedsDevelop a plan tailored to:
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Inherent Risk
Benefits Complexity
Customer Interaction
Information Security
Contingency Planning
Compliance Oversight
Getting More Attention
Contract Development, Review, &
Performance Monitoring
• Develop and negotiate contracts that address the 18
elements outlined by the OCC.
• Identify and incorporate mutually beneficial performance
indicators and key risk indicators into contracts to enable
effective quantitative monitoring of performance against
anticipated outcomes.
• Review existing contracts on critical vendors, as material
changes warrant.
• Renegotiate at the earliest opportunity, if problems are
identified.15
Getting More Attention
3rd Party Relationships
Information Gathering
Contract Management
Due Diligence
High-Risk Vendor Evaluations
Vendor Program Gap Analysis
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Issues Management Framework
Getting More Attention
Quick Reference Resources- CFPB RFI on Mobile Financial Services (June 2014)
- FRB of Boston Payment Strategies
- FRB of Boston Mobile Payments Industry Workgroup
- Other Fed Payments Groups & Research:
• FRB of Atlanta Retail Payments Risk Forum
• FRB of Philadelphia Payment Cards Center
• FRB of Kansas City Banking & Payments Research
• FRB of Kansas City - General Purpose Reloadable Prepaid Cards: Penetration, Use, Fees and Fraud Risks (Feb 2014)
Paul Reymann
P: 410-212-5955
twitter.com/paulreymann
www.mcgovernsmithadvisors.com
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