vince d’agostino & d’arcy delamer

Toronto, Canada

November 2010

P A Y M E N T S Y S T E M S R E V I E W S C E N A R I O P L A N N I N G W O R K S H O P

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Vin D’Agostino, Payments Strategy

ã 2010 JPMorgan Chase & Co. All rights reserved.Confidential and proprietary to JPMorgan Chase & Co.

C:\Documents and Settings\r073200\Desktop\CA B2B Payments Discussion_10Nov02_v6.pptx

Global B2B Payments Volume (USD trillion)Global B2B Payments Volume (USD trillion)

The global B2B marketplace is approaching $100 trillion in payments volume.

Source: First Annapolis Consulting, Visa Commercial Consumption Expenditure (CCE) Index. Index includes: intermediate inputs, wholesale and retail purchases, private fixed investment, and government capital expenditures.

P A Y M E N T S S T R A T E G Y

2005 2006 2007 2008

21.2 23.4 29.1 31.9

15.9 16.8

20.6 23.4 16.2

18.7

19.3

20.3

3.9

4.3

6.0

7.4

2.9

3.7

4.3

5.0

1.7

2.1

2.2

2.3

Europe Asia Pacific U.S. C. Europe, MEA LAC Canada4 YR CAGRs

CA: 11%LAC: 20%

U.S.: 8%

Asia: 14%

CEU, MEA: 24%

EU: 15%

Total: 13%

$61.8

$69.0

$81.8

$90.3

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The most prevalent B2B payment methods include checks, cards, wire transfers,

and ACH transactions.

Source: Aite Group.

P A Y M E N T S S T R A T E G Y 2P A

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Key themes among B2B payments:


Wires

Checks

Commercial Cards

EFT (ACH)

SWIFT: growing in popularity but gaps in requirements of corps and SMEs limits adoption

Bank Wire: high cost / urgent electronic payment channel; growing market; strong need for off-shore and cross border wire solutions; heightened regulatory environment requires more cooperation from clients

Reducing check volume through electronification provides greater efficiency across economies

Two ways to reduce checks: eliminate them (e.g. through migration to cards / ACH) or convert them to digital formats (e.g. captured via ACH)

Rapid product innovation in B2B card space P-Cards evolving into sophisticated A/P tools Suppliers appreciate certainty of card payments High acceptance costs stifle adoption

Attractive / low cost electronic payments channel Well endorsed by larger corps; less prominent

among SME segment Extended remittance data formats (CTC/CTX)

and EDI conversion capabilities are attractive Would benefit most from strong set of

standards (e.g. around data formats)

Purchase-to-Pay (P2P)Solutions

Both ACH and cards integrate well with P2P

Fragmented market withvarious vendors

Can be Integrated with bizsystems

Goal is to strive to create an end-to-end globalsolution for businesses of all shapes and sizes

Types of Payments Key Themes

Lack of

consistent

standards,

both

locally

and globally

Sets the stage for cards/ACH

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A key issue among major payment systems is the abundance of paper checks,

which is a major driver of the electronification of payments.

U.S. B2B Payments Value MixU.S. B2B Payments Value Mix

81%

10%

7% 2%

67%

20%

9%4%

2004 2010E

Check ACH Wire Card

Source: AFP Electronic Payments Survey, First Annapolis Consulting.

Why paper checks are a problem (opportunity)?

Check processing is costly Environmental impact Requires government resources

Fraud issues Reduces efficiency of system


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Bank Wire Solutions

Reasons Why Attractive Reasons Why Challenging

Trusted way to securely move money

Immediacy of payment

Increased competition has led to more attractive pricing

Need for cross border payments and off-shore clearing is growing

New technologies provide inroads to new products, services, and markets

Banks are focused on automating client services which drives efficiency in the broader economy

Vendors are enhancing service quality through greater transparency and improved service levels

Heightened regulatory / compliance environment requires more cooperation from client

Market infrastructure pricing is likely to continue to increase (e.g. 14% increase in U.S. Fed charges)

Costs to maintain the payments infrastructure will continue to increase

Emergence of new currencies such as Euro and RMB will impact payment strategies


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Commercial Cards Solutions



Provides spend management capabilities to limit fraud and control purchase behavior

Provides improved payment terms (time between purchases and paying card company)

Significant investments in innovation continue to be made by top issuers

Provides certainty of payment to suppliers

Reduces A/R staff and provides operational/back office efficiencies

Evolving into an increasingly sophisticated A/P tool and is generally offered in tandem and integrated with electronic A/P solutions

Increasing supplier card acceptance remains challenging due to high acceptance costs and confusing merchant contracts

ACH is a simple, low cost, alternative

Products not well understood by less sophisticated organizations

Merchant acquiring contracts are confusing

Integration issues with current business process systems

Buyers are used to checks

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Purchase-to-Pay (P2P) Solutions



Proven solutions in market today

Eliminates manual processes through automating AP functions

Creates greater efficiency and cost savings within A/R and A/P departments

Integrating a P2P solution with an existing business system brings an organization closer to achieving end-to-end processing capabilities

Companies and banks yearn to leverage common functionalities

Banks and non-bank vendors are investing in innovation

Fragmented market for solutions with multiple vendors and lack of standards

Multiple supplier communities and eco-systems created by P2P solutions complicate introducing changes

Issues with providing consistent global experiences

Lack of strong standards

Issues with systems integrations (time consuming, painful)

Buyers are used to checks

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Appendix


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A/R and A/P departments could be more efficient and P2P solutions drive needed

changes.

Source: First Annapolis Consulting, 2008 Visa Global Cash Management Survey of 800 corporate financial executives from 11 countries. Sixty-two percent of respondents held the position of CFO, treasurer, or controller. Half of survey respondents were from the U.S. with the remaining respondents in descending order from the U.K, Canada, South Africa, Japan, Brazil, South Korea, Mexico, Australia, France, and Germany. Respondents had at least 100 employees and annual revenues of USD 25 million or more. The majority of respondents were from companies with at least 1000 employees and annual revenues of USD 100 million or more.

"very efficient"

less than "very ef-ficient"

Cash Management Function

Lack of streamlined operational processes

Labor-intensive admin work

Inadequate info & reporting capabilities

37%

35%

29%

Top Challenges to Cash Management Process Efficiency

A/R and A/P staff actually performing the work have disincentives to pursuing efficiencies.

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There are many challenges to modifying AP department processes, but payments are

one of the least painful element in the process to change.

Source: First Annapolis Consulting, 2007 PayStream Advisors, Inc., "AP Automation for the European Market," Q1 2007.

Invoice receipt

Matching

Imaging / data capture

Approval processing

Discrepancy resolution

Accessing invoice info

Payment

Supplier spend mgmt

24%

25%

25%

25%

35%

14%

7%

18%

AP Automation “Pain Index”(% of in top-two boxes of a five-point pain scale)

Payment is viewed as substantially less “painful”

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The market has been gradually adopting electronic invoicing solutions and P2P

solutions are likely to win the market over.

Source: First Annapolis Consulting, PayStream Advisors 4Q 2009 survey of 275 U.S. enterprises from a diverse set of sectors. (60% < $500 mil, 20% $500 mil to $2.5 bil, 20% over $2.5 bil in annual sales.) Projections from “Beyond Plastics,” Citi, GSA SmartPay® 2010 Conference.

> 50% 26-50% 11-25% 1-10% none

25%16% 17%

24%18%

% of P.O.s SentElectronically to Suppliers

E-invoice14%

E-mail10%

Fax7%

Paper68%

% of All Invoices Traded by

2006 2007 2008 2009 2010 2011 20120%

20%

40%

60%

80%

Electronic InvoicesPaper Invoices

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The market suggests that ACH payments are favored over cards…however, this

is likely the result of low card acceptance and product familiarity issues.

Integration of Pmt Systems with Acct Systems (< $1 billion in revenue organizations)

23

%

14

%

16

% 9%

54

%

8%

6%

70

%A/P only A/P and A/R A/R only Neither is

integrated

ACH Card

Integration of Pmt Systems with Acct Systems(> $1 billion in revenue organizations)

31

%

32

%

30

%

14

% 8%

29

%

5%

51

%

A/P only A/P and A/R A/R only Neither isintegrated

ACH Card

Source: First Annapolis Consulting, 2007 AFP Electronic Payments Survey of 493 members and customers in Sept 2007. Distribution of respondents by annual revenue: 7% under $50 million; 5% $50-99.9 million; 9% $100-249.9 million; 15% $250-499.9 million; 13% $500-999.9 million; 31% $1-4.9 billion; 8% $5-9.9 billion; 5% $10-20 billion; 7% over $20 billion. The median was $1.13 billion.

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Suppliers appreciate most the certainty of payment that is associated with

commercial cards over other payment solutions, mainly checks.

Quick payment

Guaranteed payment

Process ease

To be "preferred"

Lower AR process cost

Reduce AR staff

0% 10% 20% 30% 40% 50% 60% 70%

Reasons suppliers give for accepting cards

High capture

Overall

Source: First Annapolis Consulting, and NAPCP, End-user survey on supplier acceptance, Nov / Dec 2009. Note: Frequencies are for "regularly cited" responses only. A response of "Decreases hard-dollar costs (e.g., banking fees, paper invoices, postage)" grouped within "Lower AR process costs." A response of "Competitive advantage over non-accepting suppliers" grouped within "To be preferred.“ 23% of respondents were deemed to be “High Capture” with annual p-card spend equal to or greater than 4% of annual revenue (private sector) or budget (public sector).

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As travel and procurement expenses join up, T&E and p-card integration is inevitable.

Old New positive negative

the autonomoustravel manager → integrated into

procurement

• Enhance coordination of card spend processes

• Clamp down on travel expenses

• Quest to commoditize cards and key off rebate

regional / localspend mgmt → global category

management• Consolidate travel data and provider / supplier

vendor relationships globally

stand-alonetravel reporting →

integrated travel / p-card online solution

• Emulate a consumer web interface look / feel

• Review performance through dashboards

• Integrate receipt / invoice imaging with card

• Combine and reconcile data from disparate systems (agency, expensing, card)

• Track travelers (where, least-cost itineraries)

multipleone-offs → one global

solution

• Lead bank with partners in certain regions

• Multiple banks feeding into one online solution

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The most prominent complaints among suppliers that resist cards largely center

around high acceptance costs.

Source: First Annapolis Consulting and NAPCP, End-user survey on supplier acceptance, Nov / Dec 2009. Note: Frequencies are for "regularly cited" responses only. Responses of "regularly cited" for "Cant find acquirer" and "PCI compliance" were less than 5% of overall respondents.

Fees too high

Too hard to set up

Don't understand benefits

Few customers request

Too much to maintain

Don't understand acq contract

Don't have proper staff

0% 10% 20% 30% 40% 50% 60% 70% 80%

Reasons suppliers resist or won't accept cards

High capture

Overall

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Acceptance is the major issue standing in the way of increased commercial card

usage.

US Canada Europe Asia Pacific

Latin America

Middle East

Africa

% of my suppliers that take cards

75% +

50 - 74%

25 - 49%

<25%

Don't know

N/A

Source: First Annapolis Consulting and NAPCP, End-user survey on supplier acceptance. Note: Inferred supplier acceptance rates calculated by multiplying the midpoint of each percentage response option range by the percent of respondents who ticked a percentage response.

75% 51% 34% 28% 26% 26% 21% Inferred supplier acceptance rate

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P-cards are evolving into an increasingly sophisticated tool.

industry overview

Bypass purchase orders Automate POs and A/P

Rebate Automate spend management

Issue card for every auth user Supplier / project / mtg cards

Mandate card for low tickets Optimize form of payment

Past Purchasing Card Evolution Future

Source: First Annapolis Consulting market observations. RPMG 2010 Purchasing Card Benchmarking Survey.

Ghost cards AP embedded cards

30%13%

33%16%

Organizations utilizing:

2007 2009

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There are many barriers to electronification of payments that currently exist.

Barriers to Increasing Usage of E-Payments

32%

25%

38%

32%

30%

18%

22%

23%

53%

52%

38%

42%

43%

55%

41%

37%

85%

77%

76%

74%

73%

73%

63%

60%

Convincing customers to pay electronically

Sending or receiving auto remittance info with e-pmts

Shortage of IT resources for implementation

No standard format for remittance information

Lack of integration btw e-payment and accounting sys

Convincing suppliers to accept e-payments

Funding for electronic payments projects not a priority

Paper check systems work well

Major Minor

Source: First Annapolis Consulting, 2007 AFP Electronic Payments Survey of 493 members and customers in Sept 2007. Distribution of respondents by annual revenue: 7% under $50 million; 5% $50-99.9 million; 9% $100-249.9 million; 15% $250-499.9 million; 13% $500-999.9 million; 31% $1-4.9 billion; 8% $5-9.9 billion; 5% $10-20 billion; 7% over $20 billion. The median was $1.13 billion.

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vince d’agostino & d’arcy delamer

Leadership & Management

e n t s y s t e

e n t s s t r

e w s c e n

s r e v

electronification of

t e g y wires

e check

payments strategy