SMU

Dedman School of Law

October 8, 2007Glenn Wheeler – Chief Executive Officer

Agenda Topics

• Who is NCHA/PRO• Who Are The Other Players• Payments Overview• What is Happening in Each

Channel• Success Stories and Challenges• Conclusions

Who is NCHA/PRO

• Non-profit 501 c 6 association of member financial institutions

• Consortium of financial institutions that come together to address common industry needs

• Key Products and Services: Check Exchange, Education, Risk Management

Who is NCHA/PRO

• Approximately 800 member financial institutions (Holding Companies)

• 30 Employed staff with offices in Dallas (headquarters) and Phoenix

• Outsource Relationships• Corporate Board of Directors (from

membership)• Growing number of partners – vendors,

non-financial institutions

Who is NCHA/PRO

Large Banks

Credit Unions

Aggregators Mid-size/SmallBanks

Credit Unions

Large Banks

Collecting Banks Paying Banks

Electronic and Physical Routing/Distribution/ Settlement Providers

~35%

Mid-size/SmallBanks

~80%

~20%

Aggregators ~25%

~40%

Check Exchange and Settlement

Who is NCHA/PRO

• Settlement For Over 20% of All Checks Written in the Unites States

• 6 billion checks• 6 trillion dollars• 40% are exchanged electronically• Less than 10% electronic a year

ago

Check Exchange and Settlement

Who is NCHA/PRO

• Broadens presentment warranties that otherwise exists in UCC 4.208

1.No forged endorsements

2.No alterations

3.No knowledge of any unauthorized signatures

– CHANGES #3 to: No unauthorized signatures and is not counterfeit

• Future – Revisions to UCC Similar to Rule 8

Risk Management – Rule 9

Who is NCHA/PRO

• Image Survivable Check Security Features

• Payment Fraud Information Tools

• Training

• Education

• Payments Approach to Fraud – Breaking Down Existing Silos

Risk Management

Who is NCHA/PRO

• Payments Support For Questions Around Payments

• Training and Education – Certification Classes Taught Via Web and In Person

• Industry Advocacy– National Automated Clearing House Association

(NACHA)– Electronic Check Clearing House Organization

(ECCHO)

Training and Education

Who Are The Other Players?

Large Banks

Credit Unions

Aggregators Mid-size/SmallBanks

Credit Unions

Large Banks

Collecting Banks Paying Banks

Electronic and Physical Routing/Distribution/ Settlement Providers

~35%

Mid-size/SmallBanks

~80%

~20%

Aggregators ~25%

~40%

Check Exchange and Settlement

Who Are The Other Players?

• Federal Reserve

• Financial Institutions and Aggregators

• Service Providers (Image Exchange, Check and ACH Processing, Card Transactions)

• Regional Payment Association

• Local and Regional Check Clearing Houses

• The Clearing House

• NACHA and ECCHO

Payments Overview

41.936.7

12.3

15.2

5.3 10.3

6.2

9.17.83

8.323.0

5.3

3.3

3.8

0

10

20

30

40

50

60

70

80

90

100

2000 2003

(billio

ns o

f tr

an

sacti

on

s)

(# of Items processed)

Sources:2004 Electronic Payments Summary; Federal Reserve* Depository Institutions Payments Study; Federal Reserve

-4.3%

7.3%

24.9%

2%

13.4%

Note: Does not include cash payments

21%

4.4%

CAGR

Checks*

Credit - General Purpose

Offline Debit

ATM** - withdrawals

ACH*

Online DebitCredit - Private Label

Fedwire / CHIPS (not shown)2000 0.17 billion2003 0.19 billionCAGR3.8%

Total 79.8

Total 88.8

** Dove Consulting Group, 2004+ FEDWIRE Annual statistics++ CHIPS Annual statistics

3.6%

Electronic payments ~ 11.2% CAGR

• Will continue to displace cash and checks

Debit card payments are the fastest growing product ~ 25% CAGR

Credit card payments ~ 3-5% CAGR

Check payments ~ -5%CADR

• Expected to level-off to ~ 18-20 billion items / year

• B2B checks (currently ~70% of B2B transactions) will be slower to erode

Observations

Electronic

What Is Happening in Each Channel?

• Checks– Continual Decline But 33% of All Non Cash

Payments– Less Reliance on the Physical Paper Check– NCHA Volume = 40% Electronic Conversion– Improved Collection Times– Fraud Prevention– Information Rich– Estimated to Level Off at 18-20 billion per year

What Is Happening in Each Channel?

• Automated Clearing House (ACH)– Continued Growth– Checks That Are Not Images – Likely to Covert to

ACH Transactions– New Fraud and Risk Considerations– Attractive Payment Tool for Some Merchants and

Businesses

What Is Happening in Each Channel?

• Debit Card– Strong Growth– Reducing Smaller Value Cash Transactions– Resulting in Some Reduction in Check and Credit

Card

• Credit Card– Moderate Growth– Acceptance in Online Transactions– Security and Information Protection

What Is Happening in Each Channel?

• ATM– Moderate Growth– Reduced Needs for Cash– Acceptance of Envelope Free Deposits (Imaging)– Service Customers With Less Overhead

• Cash– Diminishing Need– Constant Battle With Forgery– High Risk For Consumers (Lose It and It Is Gone)

Success Stories and Challenges

• Success Stories– Unprecedented Industry Transition of Check to

Imaging and Electronics– Check Collection Becoming More Efficient– Debit Cards Have Made Certain Payments Easier

and More Convenient– Technology Continues to Create New

Opportunities to Attack Fraud– Payment System – Multiple Options All Efficient

Success Stories and Challenges

• Challenges– Litigation Continues Over Patent Infringement

Relates to New Technology– Significant Number of Checks Are Turned Back

Into Paper at the Receiving Institution– Payment Systems Are Often in Silos– Significant Fragmentation in Industry– Fraud Remains A Big Problem

Conclusions

• Payments are a Big Deal: Banks, Merchants, Consumers, the Nation, Global

• Technology is Creating New Opportunities to Improve the Efficiency of the Payment System

• Significant Growth Opportunities: Online, Mobile, Check Conversion to Electronics

• Consistent With Society – Movement to ECommerce