Insurance Payments Transformation

Aaron Schneider, VP, Bank of America Merchant Services

October 23, 2007

Agenda
Introduction Credit Card Players, Debit Card Players Costs of Credit Card, Debit Card Acceptance PIN-less Debit, What is it?, Costs Current Landscape Benefits Payment Methods Growth Opportunities Merchant Marketing Technology/Implementation Options Questions/Comments

Introduction
Major trends in billing and payment technology in the insurance industry:
Increase in electronic presentment and payment Increase in credit card payment Decrease in check payments

Payment card growth is slowing in the most mature bill payments segments telecommunications and cable/satellite/ISPs while growth remains healthy in the insurance and utility segments.

Credit Card Players

Visa and MasterCard Issuers
Includes Citibank, Wells Fargo, Wachovia, Bank of America, Chase, Suntrust, PNC, and hundreds of others

Visa and MasterCard Acquirers (Processors)

Includes Chase, Bank of America, First Data, Fifth Third, and many others Independent Sales Organizations (ISOs)

Third-Party Technology Vendors

Includes Bill Matrix, Fort Knox, Speedpay, Kubra, CyberSource, Various Bank Technologies, and many others

American Express and Discover (act as issuer and acquirer)

Costs of Card Acceptance

For a typical credit card transaction, the Interchange fee represents over 90% of the total cost of card acceptance. Visa and MasterCard have created more than 152 different Interchange levels, although only a few typically apply to insurance companies. Interchange qualification represents a significant cost to all insurance companies.

5% Visa and MasterCard Associations

2% to 5% Merchant Processor

90% to 93% Interchange Cost

Costs of Card Acceptance

Visa Interchange fees (paid to issuing banks) for insurance companies are: 1.43% + $.05 for credit or .80% + $.25 for debit/check card + Visa assessment fees of .0925% (paid to Visa) + Acquirer fees of X (negotiable depending on volume) ____________________________________________________

= Total Cost of Acceptance

Example Cost Calculation $100 Insurance Premium= $1 .48 in Interchange fees (paid to issuing bank) + $ .09 paid to Visa + $ .08 paid to acquiring bank processor $1 .66 in total cost (1.66% effective rate)
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Costs of Card Acceptance

MasterCard Interchange fees (paid to issuing banks) for insurance companies are: Credit (card not present consumer non-rewards rate) is 1.89% + $.10 or .80% + $.25 for debit/check card + MasterCard assessment fees of .095% (paid to MasterCard) + Acquirer fees of X (negotiable depending on volume) ______________________________________________________ = Total Cost of Acceptance Example Cost Calculation $100 Insurance Premium= $1 .89 in Interchange fees (paid to issuing bank) + $ .09 paid to MasterCard + $ .08 paid to acquiring bank processor $2 .06 in total cost (2.06% effective rate)
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Costs of Card Acceptance

Interchange and assessment fees for other industries:
Mail Order/Phone Order Merchant = Visa Consumer Card (non-rewards) Interchange of 1.85% + $.10 Consumer Utility = $.75 Interchange flat fee for Visa and MasterCard Supermarket = Credit Visa Interchange of 1.24% + $.05 Petroleum = Debit MasterCard Interchange of .70% + $.17 Large Ticket B2B ($7500 +) = Visa Interchange of .95% + $35

Example Cost Calculation for $10,000 Visa Insurance Premium Payment from Level 3 Corporate Card Customer $10,000 Insurance Premium= $130.00 in Interchange fees (paid to issuing bank) + $ 6.93 paid to Visa + $ 10.00 paid to acquiring bank processor $146 .93 in total cost (1.46% effective rate)
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PIN-less Debit
Allows ATM/Debit cardholders to pay bills at bill payment merchant
Web site Voice response unit (VRU), Live customer service representative or call center Recurring payment

Transactions are processed online, in real time Transactions limited to biller categories that fit a specific low-risk model (utilities, insurance, telecom, financial institutions) Bill payment merchant assumes the transaction liability and is responsible for authenticating cardholder at time the transaction is initiated

Source: First Data : Real-time Debit Alternative Payments STAR PIN-Secure & STAR Bill Payment

PIN-less Debit
Insurance is a core category for the STAR Bill Payment Service. Nearly 15% of total transaction volume comes from insurers.
558 billers 89 new in 2007 78 insurers

Approval rate for STAR Bill Payment is 90%. Research shows that when asked what type of card they would prefer to use to make a bill payment, consumers selected debit cards over credit cards by nearly a 5-to-2 ratio.* More than one-third of consumers say that they would pay more bills electronically if they could use their debit cards.*

2007 Consumer Payments Preferences and Usage Study; Phoenix Marketing International / ESP Payments Practice Source: First Data : Real-time Debit Alternative Payments STAR PIN-Secure & STAR Bill Payment

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AS1

PIN-less Debit (Bill Pay Debit)

STAR, NYCE, and PULSE Debit Networks have approved insurance companies to accept PIN-less debit transactions .65% + $.175 = capped at $.62 + processor/third-party vendor fees Sample Effective cost of a $500 premium= $.62 + $.25= $.87 This equals effective rate of .17% Litigation currently exists regarding PIN-less debit patents. Litigation may be resolved in next 12 months. ATM/debit transactions increased about 23% between 2005 and 2006 * One third-party vendor insurance client saw a 224% growth in PIN-less ATM debit transactions from May 2005 (15%) to July 2006 (33.6%)
* Source: ATM&Debit News EFT Data Book September 2006
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Slide 11 AS1
Aaron Schneider, 10/15/2007

Current Landscape
Bill payment volume is a sizeable opportunity with volume concentrated in insurance, utilities and telecommunications
Consumer Bill Pay Sales Volume* $953 billion (CY05)
Other Cable/Satellite/ISP

Business Bill Pay Sales Volume* $419 billion (CY05)

Property Management Other

8% 9% 34% 34%

Insurance Utilities

5% 9%

Insurance

Property Management

11% 18%

11% 12%

36%

Telecom

Telecom

20% 20%
Utilities

28%
Life/P&C Insurance

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Source: Visa U.S.A. PIC Analysis * Represents bill payment portion of segment volume only; totals may not sum due to rounding.

Current Landscape (e-Commerce)

Personal Insurance
Can policyholders send payments via Web site?
Yes 100%

Commercial Insurance
Can policyholders send payments via Web site?
Yes 47% No 53%

Payment methods customers can set up from Web site.

Single payment credit card 20% Recurring credit card 10% Single payment EFT 25% Recurring EFT 15% Recurring debit card 10%

Payment methods customers can set up from Web site.

Single payment credit card 17% Recurring credit card 10% Single payment EFT 24% Recurring EFT 17% Single payment debit card 17% Recurring debit card 10% Monthly pay plan only 3%

Electronic bill presentment for customers?

Yes 40% No 60%

Electronic bill presentment for agents?

Yes 40% No 60%

Electronic bill presentment for customers?

Yes 24% No 76%

Electronic bill presentment for agents?

Yes 30% No 70%

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Source: ICE survey

Current Landscape (Payment Plans and Fees)

Personal Insurance
Methods of charging credit card fees
Do not offer credit card payments 10% Do not charge fees on credit card payments 20% Charge standard installment fee 60% Discount standard installment fees 0% Charge more than standard installment fee 10%

Commercial Insurance
Methods of charging credit card fees
Do not offer credit card payments 44% Do not charge fees on credit card payments 11% Charge standard installment fee 39% Discount standard installment fees 0% Charge more than standard installment fee 6%

Amount charged for electronic payments made via Web site

No charge 62.5% $0.01 to $3.00 12.5% $3.01 to $5.00 12.5% $5.01 to $8.00 12.5% No charge 62.5% $0.01 to $3.00 12.5% $3.01 to $5.00 12.5% $5.01 to $8.00 12.5%

Amount charged for electronic payments made via Web site

Does not offer electronic payments 33% No charge 55.5.% $3.01 to $5.00 5.56% $5.01 to $8.00 5.56%

Amount charged for payments via phone

Amount charged for payments via phone

Does not offer payments via phone 39% No charge 50% $3.01 to $5.00 5.5% $5.01 to $8.00 5.5%

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Source: ICE survey

Current Landscape
Online bill payments accounted for 39% of bill payments among online households in 2006, an increase of 4% from 2005. Volume of checks sent by mail fell 4%, accounting for only 34% of the volume of payments. Consumers paying at least one bill online per month rose to 74%, compared to 69% in the previous survey. Consumer adoption of online bill payment has more than doubled since January 2002, when 37% of online households reported paying at least one bill online. Half of property/casualty insurers are currently offering electronic bill presentment and payment to their policyholders, and nearly half have it for their agents.

Source: The 2007 Consumer Bill Payment Survey, a study by Harris Interactive Inc. and The Marketing Workshop Inc. Source: 2006 Celent report, Billing: Business and IT Issues for P/C Insurers.
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Benefits of electronic payments

Benefits to insurance companies: Improves cash flow and increases profits Timely payment Streamlines payment processing Reduces handling costs and losses Reduces risk of losses from bad checks Improved customer service and consumer perception Labor and operational efficiency Consolidate and automate electronic deposits to your accounts Decrease lapse rates

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Benefits
Benefits to your customers: Choose from multiple methods of payment Take comfort in knowing payments are fast, reliable and secure Rewards (frequent flier miles, cash back, ease of accounting) Addresses most consumer security concerns Speeds up time to statement

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Payment Methods
Cardholders demonstrate a desire to pay through various channels, indicating opportunity in both the biller direct and consolidator models Example of biller direct is a merchant who allows payment directly on the merchants Web site Example of consolidator is a third-party vendor who accepts the payment on behalf of the merchant Advantages of consolidator include ease of implementation, speed of implementation, less compliance liability Disadvantages of consolidator include loss of control

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Payment Methods
While card acceptance has grown, most Visa cardholders use multiple methods to pay bills.
82%
Send checks via mail

13% 24%
Use all three methods

52%
Use online bill pay at bank Web site

35%

12%

Bill Payment Methods of Choice, 2006

Responsible for Household Bill Paying (n=308)

75%
Pay by biller-direct*

* Pay directly to biller by payment card or EFT from checking or savings (online or by phone) Source: Visa U.S.A. Research Services, 2006
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Growth Opportunities
Statistics reported from a top 5 insurance company (based on revenues)
Approximate of overall payments (amon all types of insurance) paid via credit card
13% 11%

ercent a e of ayment s aid via

ard redit

9% 7% 5% 3% 1% 2006 2007

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Stats for Top Insurance Company

Percentage of payments paid via credit cards in 2006 and 2007 for specific lines of insurance
100%

Percentage of Payments Paid via Credit Card

95% 90% 85% 80% 75% 70% St andard & N on-St andard Aut o H omeowners 7 7

Type of Insurance

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Growth Opportunities
In terms of credit card acceptance, this top 5 insurance company reported their credit card growth rates over the past three years are as follows: 2005: 29% growth 2006: 30% growth 2007: 13% growth (year-to-date)

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Insurance Inserts

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Insurance Company Statement Insert

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BillPay Marketing

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BillPay Marketing

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Merchant Marketing
Biller (merchant) marketing of Visa Bill Pay generated more than 180 million direct marketing impressions in the last year. Participating marketing partners within the insurance industry included Farmers Insurance and St. Paul Travelers Insurance. In the retail (non-bill payment) marketplace, there is minimal amount of growth potential for payments. Visa, MasterCard, American Express, Discover, STAR, NYCE, PULSE, and many of the major issuers are all focused on increasing the amount of bill payments paid via credit card, debit card. These companies are going to more aggressively market bill payment to consumers who are going to request bill payment capabilities from insurers. Marketing will include television, Web, statement inserts, magazine and other forms of media. Incentives are being increased to push consumers in this direction. What is the message to pass to your customer service agents who will be taking calls from customers that want to know, can I pay with my credit card?
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Technology and Implementation

Outlining needs Which lines of insurance?, pricing concerns Accept payments face to face at agent office, mail order via lockbox, phone order via customer service rep or automated phone system (IVR), Web payments, Direct or Consolidator model? Convenience fees or no convenience fees? All customers or exception items? (marketing or no marketing?) Which payment types?
 ACH/E-Check  Visa Consumer Transactions, Visa B2B-Level 2 and Level 3  MasterCard Consumer Transactions, MasterCard B2B-Level 2, 3  STAR, NYCE, PULSE  American Express Consumer, American Express B2B  Discover  International Payment Types
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Technology and Implementation

Business to Business Examples: Agent to Insurer, Corporation to Insurer Visa Level 2, Level 3, and Large Ticket Level 3 Mastercard Level 2, Level 3, and Large Ticket Level 3 International Payments Consumers in many international markets prefer methods other than Visa/MC/Amex/Discover Example- France Carte Bleue, Carte Vert Italy Carta Si UK Maestro, Solo, Electron Ireland Laser Scandinavia Dankort Germany Bank Transfers, Direct Debit Asia Bank Transfers (similar to wire transfer) There is no single source acquirer with a single platform that can process all domestic and international payments. Multiple acquirers would need to be chosen for many implementations involving both domestic and foreign processing.
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Technology and Implementation

Choose third-party vendor, bank vendor, or choose to code directly to a payment processor (proprietary or non proprietary concerns) Choose processor (acquirer) Establish connectivity (Internet API, frame relay) Test and certify connectivity Train users Go live Closely monitor fees and Interchange levels Stand-alone payment projects can take 4-6 weeks to implement Fully integrated payment projects can take 2-6 months to implement

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Questions/Comments/Discussion

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Thank you
Aaron Schneider, 1.954.558.0252 [email protected]

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Do Not print this page. For projector presentations only.

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