Ponte Vedra Beach, FLOctober 2003
SMART CARD ALLIANCE CONFERENCE – SMART CARDS IN MOTION
RFID as a Platform for Growing U.S. Consumer Charge Volume
This document is confidential and is intended solely for the use and information of the client to whom it is addressed.
1
Top five things that you will never hear from a consultant…
1. Everything looks okay to me
2. I can't take the credit - it was Ed in your marketing department
3. I don't know enough to speak intelligently about that
4. How about paying us based on the success of the project?
5. This whole strategy is based on a Harvard business case I read
2
Growth in Credit Card Charge Volume
5%
10%
15%
20%
25%
1991 1993 1995 1997 1999 2001
Gro
wth
Rat
e
Source: UBS Warburg Equity Research, Federal Reserve Bank, Cardweb.com, Blue Chip Economic Indicators
Avg. Card Growth ‘91-’95:
15.9%
Avg. Card Growth ‘96-’01:
11.6%
The U.S. credit card industry is experiencing slowing growth in charge volumes and new accounts...
0.00.51.01.52.02.53.03.54.04.5
1991 1993 1995 1997 1999 20010%
1%
2%
3%
Card Industry Mailings and Response Rates
Ann
ual m
ail V
olum
e (in
BB
)
Annual R
esponse Rate
= Annual Mail Volume
Source: UBS Warburg Equity Research, BAI Mail Monitor
= Annual Response Rate
3
… and is facing increasing competition from emerging payment technologies and new intermediaries in the market
Card issuers traditionally own the consumer relationship
Traditional Relationship Marginalized Relationship
Card Not In Relationship
Source: Booz Allen Hamilton
Activity around alternative payment models that exclude cards
Some momentum is evident in wireless
Intermediary payment devices marginalize the Card issuer’s role
These devices are gaining share with convenience transactions
Potential for new entrants to issue payment devices
??
Issuing Bank Issuing Bank
4
Despite targeting cash-to-card conversion for years, 19% of U.S. consumer purchases are still cash …
Source: The Nilson Report; Concord EFS; Salomon Smith Barney
Durable Goods12%
Housing20%
Medical Care15%
Recreation4%
U.S. Consumer PurchasesTotal: $6.7 Trillion
Source: Bureau of Economic Analysis,
Food14%
Clothing5%
Energy Purchases
3%Other
Non-Durable8%
Transportation
4%
Other Services
16%
Method of PaymentMethod of Payment
Majority of payments by U.S. consumers remain paper-based (65% by check or cash)– 46% Check– 19% Cash– 29% Credit/Debit Cards– 4% Electronic
Majority of payments by U.S. consumers remain paper-based (65% by check or cash)– 46% Check– 19% Cash– 29% Credit/Debit Cards– 4% Electronic
5
…and sizable, cash and transaction intensive merchant segments exist
U.S CASH PAYMENTSIN SELECT INDUSTRIES
Quick Serve Restaurants
$133.4B
Movie Theatres$7.58B
Movie and Video Game
Rental$10.6B
TOTAL: $151.6B
CommentsComments
Total size of the U.S quick serve restaurant, movie theatre, and movie/game rental industries is $160B……with cash transactions accounting for ~95% of the value– Fast food consumption ~
7% card penetration– Movie theaters ~ 12% card
penetration
Total size of the U.S quick serve restaurant, movie theatre, and movie/game rental industries is $160B……with cash transactions accounting for ~95% of the value– Fast food consumption ~
7% card penetration– Movie theaters ~ 12% card
penetration
Source: Concord EFS; Salomon Smith Barney; Celent Communications
6
Penetrating these merchant segments and capturing these cash transactions requires extending the current card platform
Opportunity for Cash ConversionOpportunity for Cash Conversion
Big ticket purchases have been driven to card– Consumers like convenience,
financing, and float– Merchant margins can support
fees
Current platform has been less successful in capturing smaller dollar value transactions– Cash has speed, convenience
appeal– Merchants resist paying for card
fees and infrastructure
Big ticket purchases have been driven to card– Consumers like convenience,
financing, and float– Merchant margins can support
fees
Current platform has been less successful in capturing smaller dollar value transactions– Cash has speed, convenience
appeal– Merchants resist paying for card
fees and infrastructure
5%
10%
15%
20%
25%
30%
35%
40%
$0 $5 $10 $20 $40 $60 $80 $100 $500
Card Penetration by Transaction Size
Transaction Amount (in $)
% C
redi
t/Deb
it C
ards
Source: Paying with Plastic, Evans & Schmalensee; Visa’s Payment Systems Panel Study Booz Allen
Cas
h-C
ard
Thre
shol
d
7
RFID technology is a market-proven and economical way to extend the current payment platform and grow card volume
Opportunity for RFIDOpportunity for RFID
Market-proven in initial rollouts (e.g., tolls, gas retailers, mass transit)
Technical standards are established
Low(er) cost technology
Durable and low maintenance -no battery required
Market-proven in initial rollouts (e.g., tolls, gas retailers, mass transit)
Technical standards are established
Low(er) cost technology
Durable and low maintenance -no battery required
What is RFID?What is RFID?
Radio Frequency identification (RFID) technology is a method for wireless transmission of data between a remote tag and a reader
– Tag holds payment identity (e.g., account number, instructions)
– Antenna activates tag and receives data
– Data processor completes transaction and links to back-end systems
Radio Frequency identification (RFID) technology is a method for wireless transmission of data between a remote tag and a reader
– Tag holds payment identity (e.g., account number, instructions)
– Antenna activates tag and receives data
– Data processor completes transaction and links to back-end systems
RFID TAG ANTENNA &TRANSCEIVER
DATA PROCESSO
R
8
Over 20M households in the U.S use RFID to make payments and a number of pilots and trials are underway today
Over 20M U.S households use RFID to make payments today– 6M+ RFID payment fobs issued in the
United States…– …with 4M+ active and occasional users– 25M+ RFID toll transponders in the U.S
Multiple products and payment pilots and trials underway today to include:– American Express – ExpressPay– Commerce Systems – 2Scoot– ExxonMobil – Speedpass– FreedomPay– MasterCard – Paypass– …
DemographicDemographic
Average HH income
Average HH income
Use RFIDUse RFID
$62,800$62,800
Average ageAverage age 4646
MarriedMarried 53%53%
No RFIDNo RFID
$46,700$46,700
5151
52%52%
Children <18 yrs old
Children <18 yrs old
39%39% 23%23%
College degreeCollege degree 39%39% 28%28%
Technology optimist
Technology optimist
61%61% 48%48%
FemaleFemale 53%53% 54%54%
Source: Forrester Research, Tower Group
RFID Payment User Profile
9
Issuers, merchants, and consumers in the U.S market show high interest/openness to RFID enabled products
Valu
e A
dd o
f “C
hip”
High
Low High
Stakeholder Demand
Low
• Proximity Payments
• Couponing
• e-cash• Chip-Based
Loyalty
• Data Storage• Id/Authenticate• Ticketing• Host-Based Loyalty
Primary Application On Device/Card Stakeholder DemandStakeholder Demand• Was there a strong interest in the
functionality with the applicable stakeholders?
• What is the urgency in the stakeholder population to use the functionality?
Value Add of “Chip”Value Add of “Chip”• What is the benefit of using chip
or RFID technology in delivering the functionality?
• Can comparable results be achieved using magnetic stripe or bar code alternatives?
IncreasingAttractiveness
Source: Booz Allen analysis
10
RFID appears to offer a clear value proposition for all key constituencies
Issuers
Merchants Consumers
11
RFID can offer merchants tangible benefits – reduced operating costs, incremental revenue, information capture mechanism
Reduced operating costs/improved operational efficiency– Speed of throughput at the register - time savings with key chain RFID fobs
can average 5-8 seconds per user/per transaction – in some cases can be as high as 15 seconds per transaction – note that production must be able to keep up
– Reduced cash handling – reduces fraud, employee time required to process cash
Incremental revenue– Increased consumer spending - average transaction volume (up to) 20-30%
higher for purchases via an RFID wand vs. cash purchases -anecdotally number of visits is also higher for RFID users
– Opportunity to acquire new customers/differentiate
Customer information capture– Easy gathering of data on user’s buying habits– Opportunity to integrate into a loyalty program/targeted marketing program
12
RFID offers consumers payment convenience and a new way to make payments
Convenience– Reduces “hassle factor” of physically opening wallet and searching for
payment card or cash to pay for transaction– No worry about not having enough cash to pay for purchase– Need to carry less cash and make fewer trips to the ATM– Easier to manage and track cash expenditures– Easier use of merchant loyalty programs
Novelty appeal– Form factor of payment devices (wand, card, watch, integrated into cell
phone/other personal devices)– “Wave vs. swipe” appeal
13
RFID enabled payment solutions provides issuers with the opportunity to acquire new customers with a differentiated product and drive incremental revenues
New/incremental interchange revenues– Cash conversion– Increased usage
Opportunity for product differentiation
Improved customer acquisition and retention– RFID payment users compare favorably to the general population
14
To reach its full potential the RFID operating model needs to evolve beyond today’s brand exclusive/closed loop environment
RFID programs today are designed to drive loyalty for the device issuer– Limited acceptance– Closed loop networks– Limited/no platform interoperability
57% of non-users don’t have RFID because they don’t know any company that offers it
Introduction of multiple, national/regional single brand RFID networks will reduce consumer convenience and at some point begin to dilute the value of the platform
ProgramProgram
Speedpass/ ExxonMobilSpeedpass/ ExxonMobil
AcceptanceAcceptance
ExxonMobil, selected McDonalds, Stop & Shops
ExxonMobil, selected McDonalds, Stop & Shops
Smartrip/ Washington Transit
Smartrip/ Washington Transit
Transit fares and parking at stations
Transit fares and parking at stations
E-ZPassE-ZPass Toll collection – DE, MA, NY, WVA, MD, NJ, PA
Toll collection – DE, MA, NY, WVA, MD, NJ, PA
Source: Forrester Research
ILLUSTRATIVE
ILLUSTRATIVE
15
Category exclusive merchant coalitions are the likely next step in the evolution of RFID payments - some may have bigger plans
Single BrandSingle Brand Merchant CoalitionsMerchant Coalitions
Network Based Acceptance
Network Based Acceptance
• Single brand owns and operates the payment network
• Payments only accepted by the device issuer
• Key challenge – value proposition and scale
• Category exclusive multi-merchant coalitions
• Payments are accepted by all merchants within coalition
• May evolve within a given location or geography (I.e., Orlando or merchants located at a Washington Metro station) or more broadly
• Key challenge – building and managing merchant coalition
• Broad(er) acceptance across merchants within a given payment network
• Likely driven by closed loop network issuers or issuers with strong acquiring businesses
• Key challenge – POS costs and transaction pricing
16
There are a number of challenges to operating Merchant Coalitions
ProgramProgram
Branding of the service offering
Ownership of customer information and opportunity to cross-sell
Responsibility for the customer experience
Trade-off between good merchant customer and bad credit risk
Branding of the service offering
Ownership of customer information and opportunity to cross-sell
Responsibility for the customer experience
Trade-off between good merchant customer and bad credit risk
Potential OutcomesPotential Outcomes
3rd party (potentially issuers and/or processors) manage coalitionsPayment network owner spins out the RFID processing and servicing business3rd party (potentially issuers and/or processors) manage coalitionsPayment network owner spins out the RFID processing and servicing business
17
Efforts to drive RFID acceptance will likely focus on convenience brands/merchants
Source: External interviews; disguised client data; Booz Allen analysis
Rewards to increase frequency of purchase of non-essential, small ticket items Low High
Low
HighA
vera
ge T
icke
t
Frequency of Usage
Chip Applications for Merchant SegmentsILLUSTRATIVE
ILLUSTRATIVE
Entertain-ment
MassTransit
Super-markets
DepartmentStores
Gas
VendingGift &Paper
Books
Fast Food
Airlines
Health-care
Office Supply
Loyalty to prevent share shift to competitors between infrequent purchases
Use of chip to capture cash/check volume for frequent, small ticket purchases
Cross-sell and up-sell by leveraging affinity to establishment for frequent, big ticket sales
CasualDining
SportsCarDealers
Key App: Loyalty
Key App: CouponingKey App: Proximity/Contactless Payment
Key App: Data Storage
18
While there are a number of items to consider in structuring a RFID payment product four key factors stand-out
Card transmits an identification number which is subsequently linked to a user account or card vs. card transmitting the actual account number
Data Transmission
Data Transmission
Form FactorForm Factor
Payment PlatformPayment Platform
Shape of the product – key fob, attached to a consumer’s electronic device (cell phone, PDA), integrated into a card with a magnetic stripe, embedded into another device (I.e., wrist watch) - implications for portability, theft, fraud etc
Stored value (on network or on card)
Device linked to a debit or credit card
Authorization and Payment Processing
Authorization and Payment Processing
Real-time vs. batch authorization and processing
Chip-based vs. network based authorization
Other controls i.e, usage caps, spending limits etc
19
We see four fundamental processing models (with permutations) – each with differing costs, complexity and transaction times
Real-time Card Processing
TIME
Customer waves device
to start transaction
Customer waves device
to start transaction
Request sent to Issuer for
approval
Request sent to Issuer for
approval
Merchant gets approval and finishes sale
Merchant gets approval and finishes sale
Transaction confirmation sent to Issuer
Transaction confirmation sent to Issuer
Sale complete
Customer waves device
to start transaction
Customer waves device
to start transaction
Request sent to Issuer for
approval
Request sent to Issuer for
approval
Merchant gets approval and finishes sale
Merchant gets approval and finishes sale
Sale complete
Transactions aggregated and sent to
Issuer
Transactions aggregated and sent to
Issuer
Customer waves device
to start transaction
Customer waves device
to start transaction
POS reader accepts dataPOS reader accepts data
Sale complete
Transactions aggregated and sent to
Issuer
Transactions aggregated and sent to
Issuer
T0 6 seconds 15 secondsSource: Concord EFS, Booz Allen analysis
Real-time Authorization,
Batched Processing
Batch Authorization
and Processing
Customer waves device
to start transaction
Customer waves device
to start transaction
POS checks card balance
and debits sale
POS checks card balance
and debits saleSale
complete
Transactions aggregated and sent to
Issuer
Transactions aggregated and sent to
IssuerStored Value
POS recharges card if needed
(100msec)
POS recharges card if needed
(100msec)
RFID Processing Model Options
20
Looking forward we are optimistic around the potential for RFID enabled consumer payments in selected merchant segments…
U.S. Market Scenarios
Low
Hig
h
Low High
Competitive Activities and Market Demand
Bus
ines
s C
ase
and
Mar
ket R
eadi
ness
LOOKING FOR DEMAND
ADOPTION
AND GROWTH
DIES OUTEXPERIMENTATIO
N
Source: Booz Allen analysis
RationaleRationale
Meets un-met needs with a compelling value proposition across key stakeholders– Issuer – incremental revenue and
customers– Merchant – improved customer
service and lift at point of sale– Consumer – increased convenience
Success of Speedpass and anecdotal information coming out of other multi-merchant U.S RFID trials initially encouraging
Proven, low cost technology solution that is simple to operate
21
…however there are still a number of barriers to address
Merchants
– Historical resistance to accepting cards for convenience transactions
– Need to upgrade (or install) POS to accept RFID payments
Consumers
– Overcoming consumer concerns/ reluctance around security and data privacy
– Changing consumer payment behavior
Issuers
– Evolving the operating model and extending acceptance
– Potential competition with card-based payment products
– Transaction pricing for the merchant
57
29
24
23
14
0 10 20 30 40 50 60
I don't know any company ororganization that offers one
I don't like ot pay for services inadvance
I am concerned that the tag wouldget stolen
I am concerned that I will losecontrol of my personal information
I know companies that offer RFIDbut I don't do business with them
“Why haven’t you used RFID to pay for products and services”
Source: Forrester Research
22
Contact InformationContact InformationDavid Owen
Principal, U.S. Financial Services
Booz Allen Hamilton101 Park Avenue
New York, NY 10178
(212)551 6642 (office)(646)734 6094 (mobile)[email protected]
David OwenPrincipal, U.S. Financial Services
Booz Allen Hamilton101 Park Avenue
New York, NY 10178
(212)551 6642 (office)(646)734 6094 (mobile)[email protected]
