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Hello, everyone My name is Fred Baldassaro, and I am the assistant administrator for SBAís Office of Communication and Public Liaison I would like to welcome you to our first webinar with the Federal Reserve The U.S. Federal Reserve Bank, through its 12 regional locations, works to assure the smooth movement of funds between banks, savings and loans, and credit unions through a nationwide electronic payment system For todayís webinar, Claudia Swendseid, Senior Vice President of the Minneapolis Federal Reserve Bank, will show us the ins and outs of making and receiving payments as a small business owner But, before I turn this over to Claudia, I want to share with you why we, at the U.S Small Business Administration, felt that this was an important topic With electronic and mobile payments becoming increasingly more popular, itís time to consider whether these forms payments are a good fit for your business We understand that small businesses donít necessarily have the time or the employees to research the pros and cons of electronic methods of payment, and so often times they miss out on opportunities to improve their bottom line Knowing where to start is perhaps the number 1 obstacle holding many small business owners back So, in todayís webinar, Claudia will walk through Ö walk you through the basics of electronic payments and remittance methods, as well as the pros and cons of accepting various forms of payments in your business So, I hope you enjoy this presentation With that, Claudia, I turn it over to you Claudia: Thanks very much, Fred Iím delighted to be here today with all of you who are listening in on this webinar As Eddie mentioned, your questions are certainly welcome Weíll be dealing with those at the end of the presentation So, if you hear something along the way that isnít clear to you or that itís confusing or that you want more information about, by all means ask the question We are calling this session ìElectronic Payments Basics,î so we only have about an hour, and that means weíre going to cover a lot of information fairly quickly As a result, weíre going to try to point you to some resources, and there may be areas where you will need to do some additional followup based on what you hear So, itís important to start out by noting that I am speaking as a member of the Federal Reserve Bank of Minneapolis, but not on behalf of and not Ö Thus, my opinions are my own Although, I certainly am going to provide as many factual bits of information as I can Ö but an important disclaimer Many of you Ö Iíd like to talk a little bit about the Federal Reserve Bank Many of you, when you think of the Federal Reserve, really think about the fact that we are the central bank of the United States, and so you are aware that we establish and execute monetary policy; weíre involved in financial stability; regulating financial institutions and that sort of thing But, many of you probably donít know that we also play a really prominent role in our nationís financial and payment system, and so you see listed on this slide the fact that we are what we call a ìbankerís bank.î We provide a lot of wholesale payment (audio cuts out) financial institutions We also serve as the bank, in many respects, for the federal government So, itís for these reasons that we have a lot of expertise and background in these topics In terms of what I hope we accomplish today, I certainly want you to better understand some of the electronic alternatives that are available to you Most organizations, most consumers are very familiar with cash We all use that Many of us, particularly in the business community, very familiar with check But, you may not be as familiar with some of the other options that you have available, and so thatís what weíll be focusing on in particular So, I want to start out, though, by letting you know a little bit about the aggregate practices of businesses, including small businesses So, what you see on this particular slide is that businesses of all types in the U.S still make a lot of their payments, their disbursements, using the paper check Thatís a little surprising, perhaps, because we live in the Internet Age and the Electronic Age, but there are reasons why businesses still value the check, and weíll talk about that in a bit Some of those are good reasons Some of those, I would argue, arenít such good reasons and are more related to the fact that they may not understand what their alternatives are So, small businesses, in particular, are very large users of the paper check They write many billions of checks a year

Even though some people will say, ìWell, the check is really inexpensive,î when you add up all of the costs associated with checks Ö the stocks, the mail related costs, the production costs, some bank fees, etc Ö they arenít actually all that inexpensive compared, again, to some other alternatives As much as 1 in 5 of smaller businesses make as much as 90% of their payments by paper check, so that is a lot of paper Again, thereís nothing wrong with the check Itís easy to use Itís ubiquitous in terms of it being accepted for the most part, and so itís fine to use if thatís what you want to use, but if youíre using the check because thatís what youíve always done or you donít understand alternatives, then maybe itís not such a good situation Now, in looking at small business, weíve also tried to explore where we see some small businesses that use more electronic payments and some that use fewer Keep in mind, when I am talking about electronic payments, Iím talking about something called the Automated Clearing House, what we call wires or fund transfers, and card payments, so credit, debit, prepaid, etc So, what you see in terms of small businesses that already have adopted a fair amount of electronic payments, first of all they tend to be more in what I would call the retail or consumer space, so that their customers tend to be more on the consumer side of things Healthcare shows up because in that particular industry, the government has pushed the use of electronic payments, so sometimes there can be a regulatory push toward electronics They also tend to have smaller transaction amounts, and they tend to have had problems with things like bounced checks, so they want to avoid them They tend to use the web for transactions In that case, then cards is the dominant payment method (audio cuts out) On the other hand, businesses that are perhaps more in the wholesale or B-to-B business services arena; that maybe have fewer employees, be a small or sole proprietorship; have larger average payments and who have not had problems, say, with bounced checks or issues like that, then you find the reverse to be true, that they still use a lot of paper checks Now, on this particular slide, Iím not going to get into these topics yet in a lot of detail But, I want to highlight now that these 2 areas, the Automated Clearing House and Card Acceptance, are areas that if you arenít using these payment methods today, I hope that after this particular webinar, you have some interest in exploring the use of these alternatives Ö especially if youíre in the group that primarily using checks So, weíll be talking about both the Automated Clearing House and about cards in a lot more detail I just wanted to highlight them now to get you thinking and interested in these particular categories The other thing that is important to point out is right or wrong, itís been my experience, and in talking to a lot of smaller businesses, that they are not necessarily well served by their bankers and other financial services providers Ö at least in the area of payments So, they might get great service from their banks as far as maybe loans or lines of credit or that sort of thing, but in terms of reaching out to you and talking to you about, ìGosh, have you tried the ACH? Have you tried a different payment method?î This has not been an area where bankers have done a lot of outreach So, I would encourage you if, again, we touch on things that interest you, for you to take the initiative and make sure that you reach out to your bank about your interest in, say, pursuing an ACH or a [inaudible 00:09:44] opportunity Weíll talk more about that as we go through So, in terms of payment types, Iím going to be covering, to some degree, the check, although not in a lot of detail; then, electronic options such as wire transfers, the Automated

Clearing House, cards; and weíll touch on newer and emerging payment channels as well, online and mobile So, thatís what weíre going to be covering here in some depth So, in the case of the paper check Ö Again, the definition of a check is, as stated on this particular slide, itís a written, dated, signed instrument Basically, you as the payer, if you are the check writer, you are telling your financial institution to pay a definite sum and a particular amount, again, a definite sum, to whoever you are seeking to pay Thatís the receiver of the check, the payee So, Iíve also listed on this slide some of the concerns, in particular, about using a check What I would say there is fraud, in particular, is a source of concern for businesses as well as returns and, in that respect, [certaintee of receipt 00:11:15] So, let me talk a little bit more about fraud So, in many surveys of businesses, and this is just 1 example, the check shows up over and over again in terms of where the business has the most fraud attempts and the most of losses Thatís also true with small business, so itís not just something that is of concern to larger organizations In some of the studies that weíve looked at, the paper check actually saw 10 times the amount of fraud incidents as electronic alternatives The numbers can be relatively high in terms of losses that small businesses may take in this arena So, that in itself can be a reason for you at least to consider electronic payment alternatives Where, the issue here may be somewhat less Although, fraud is a concern, of course, with any kind of payment methods (audio cuts out) that would not be the case So, ìWhy,î you might ask, ìis check fraud still an issue?î Well, first of all, itís relatively easy, if youíre a criminal, to get into this line of fraudulent activity Itís a relatively low tech endeavor, but there are also lots of fairly low-cost pieces of equipment where it makes it fairly easy to produce a counterfeit check Because checks are paper in form, they can be relatively easy to counterfeit and relatively easy to alter Part of it may not even require that somebody steal your check [inaudible 00:13:08] But, if they happen to get a copy of a check or if they happen to be a recipient of a check that you have sent and they have illicit ideas in mind, these can all be ways where they can get information about your organization and create a fraudulent item One other topic in the check arena that I want to make sure youíre aware of, if youíre not already, is something called Remote Deposit Capture This is a way in which the check can be made more electronic and easier to deposit So, this is a situation where you are the recipient of the check So, someone is paying you One of your customers, for example, is paying you Obviously, for you to get access to those funds, you have to deposit that check with your bank You can do that in person Certainly, many organizations still do that But, another thing that you can do is you can get whatís called a scanner, which is pictured on the slide, from your bank and you can scan the check Your bank can provide you with software that allows you to create an electronic file of those check images, and you can send that electronically to your bank This can save you time It can save you money You may get your funds, in terms of availability to those funds, faster So, there are lots of reasons to consider this in terms of your business operation and your financial arrangements There are, really, 2 ways in which you can do whatís called Remote Deposit Capture The first one, shown on this slide, is really focused on, frankly, the consumer market because youíre dealing with checks one-by-one This is where a number of consumers now can download a mobile application from their bank,

and use that to take a photo of the front and back of the check, and then again deposit it electronically But, what is primarily used with businesses is, as I mentioned earlier, a scanner This is something you would want to get from your bank Often, the bank will rent or sell it to you Then, once you set that up, the cost is very small to use this method to deposit your checks with your financial institution Iím sure if youíre interested in that, again, you can talk to your banker and make it clear what you are interested in having them discuss with you There will certainly be some paperwork involved, perhaps some credit evaluation, etc But, it may be well worth it in terms of the convenience and the benefit (audio cuts out) So, Iím now going to turn to wire transfers Let me start out by noting that the term ìwireî is often used by folks who may not be intimately familiar with payments to cover any type of an electronic payment When Iím talking about wire, Iím talking about a specific type of payment Iím not talking about the Automated Clearing House, for example So, Iíll continue to reinforce that distinction The 2 ways in which banks talk about this particular service is shown here on the second bullet Itís either called the Fedwire Network, which is a network that the Federal Reserve provides, or CHIPS, which is the private sector alternative Essentially, what happens here is the business lets your bank know, and you can do this in person, but often you would do this online Ö perhaps through your online banking relationship You would let your bank know that you want to make a credit payment to a supplier, for example, and you want to send it by the wire system, and so you provide them with particular instructions to do that The bank makes the appropriate arrangements and makes that payment on your behalf What is key about the wire and what makes it different, and importantly different, from other forms of electronic payments is first of all, itís very fast If youíre doing it in the U.S., those payments are going to clear and settle on that day, so both in terms of debiting your account if youíre the one sending the wire or crediting your account if youíre the one receiving the wire We refer to these as, basically, real-time Thatís real-time between financial institutions So, if we receive a wire transaction from a financial institution that we then send to the receiving financial institution, that happens on our books within seconds So, in that sense, itís very much real-time in terms of the interbank nature of the payment But, usually for the actual sender and the actual receiver, itíll happen within that day depending, again, on the services that your financial institution provides to you Very secure, very reliable Ö and itís typically used because itís so fast for time critical payments The other piece thatís important is when you send a wire and receive a wire, the funds are final They cannot be revoked They cannot be returned So, it has a lot of value because of the finality of funds, which is not true for, say, a check, for a card payment, or for the Automated Clearing House So, thatís a really important distinction Itís also used a lot internationally because for many organizations, it may be one of the few options Although, cards are becoming more and more of an option [inaudible 00:19:29] But, the downside is they tend to be relatively expensive So, you might be talking about $25 to send a wire to make a payment, for example So, weíre going to move on now to the Automated Clearing House Again, as I said at the beginning, you can see that I am moving through this information relatively quickly One of the issues that often comes up with electronic payments is that the check Ö You write the check because you may have the copy of the check that was deposited or the check

that was cleared, and that might be a good way for you to validate payment In the case of electronic payments, you may not have an exact substitute, but you can typically get similar information confirming the instructions, basically a notification or an [advice 00:20:31] from your financial institution on the disbursement side that proves, if you will, that the payment was sent The same thing can occur on the receipt side So, there are ways of ensuring that you have the right kind of documentation that you may need for audit purposes, etc So, now Iím going to turn to the Automated Clearing House This is a Ö Itís an electronic, altogether electronic payment system that, as it describes here, we call it batch processing The reason itís batch processing is with a wire payment, typically a wire is sent Ö The instructions are sent to a bank The bank may send that single wire or a few wires in a file immediately to an interbank clearing mechanism, like the Fed, and we handle those immediately and one-by-one With the ACH, this tends to be many more millions of payments on any given day For example in the Fed, we handle maybe 50, 60 million ACH payments on a daily basis So, what happens is the payments are collected by banks, throughout the day, from various businesses that are, quote, ìoriginatingî instructions Then, once maybe 2, 3, up to 4 times a day, the financial institution sends an electronic file to an intermediary, like the Fed We then reroute those payments that come in to us in these big files and send them to all of the appropriate receiving institutions, who then credit the appropriate account So, itís batch in that sense It doesnít flow through As each payment or each file comes to the bank, the bank collects them and sends them on at a particular time during the day So, this picture shows this again If I were to give you the example of payroll Ö Letís say you use the ACH to pay your employees Many of you have probably received whatís called Direct Deposit, and thatís using the ACH So, in this particular case, the originator is the business Letís say you pay your employees twice a month, so you put together an electronic file, and the bank would work with you to get the software in place or find a vendor for you With the right kind of software, you would format that information, and you would then send a file to your financial institution Keep in mind, if you do something like this, you would have gone through a process with your employees, where they have authorized you to have their bank account information so that you can provide that to your financial institution so those payroll payments can go to the right accounts So, you would put that particular electronic file together, and you would send it to your financial institution over a secure channel Your financial institution then, as I mentioned earlier, is going to be collecting a lot of payroll files from a lot of different businesses, and theyíre going to put that all together into a single file that has various batches in it for different businesses Theyíre going to send it on to an ACH operator, and that is either the Fed or thereís one private sector operator called the Electronic Payments Network Weíre then going to ingest all of those files and at specific times during the day, we are going to send files out with that information reorganized so each receiving institution, in this example, would get the information only for those employees at your organization who uses that particular bank So, letís say you use Bank of America and your employee uses X,Y,Z Credit Union, hereís this process that I just described X,Y,Z Credit Union gets the payment information through the ACH for that particular employee The receiving financial institution then credits that account, and that becomes available, typically the next day, to your employee through their financial institution

If youíre using this to make trade payments or pay suppliers, it might also be credited to a business account So, thatís the general idea What are some of the features here? Again, very secure, very reliable It works especially well for batches of payments, recurring payments Weíll talk a little bit more about that from a business perspective Once you have set it up, and there will be some costs and some challenges related to that setup because you have to get certain software in place; you have to work with your bank to establish this particular service So, there is going to be a process, upfront, thatís going to take some time, some effort But, once thatís in place, the ongoing cost is really quite reasonable, relatively low It tends to be one of the lowest cost payment methods available for these kinds of (audio cuts out) Often, if you do on Ö some sort of on Ö have an online banking relationship, this can be an expansion of those particular services that you have with your financial institution You do, though, have to be Ö You do have to pay attention to returns, especially on the debit side So, ACH payments can be credits or they can be debits against where youíre [inaudible 00:26:30] a debit against, say, a customerís account or your account is being debited for, say, taxes In that particular case, thereís also the return process Ö especially if youíre debiting a consumer customerís account So, you need to understand how that works and be paying attention to it in terms of managing this particular (audio cuts out) So, why would you want to think about doing something like this instead of, say, the check? Which, it might work well already Well, if you have more than a few employees, it can be a benefit to them It can be very easy to continue to do once you have it set up So, it may involve less fraud for your employees potentially or loss of the payroll check in the mail kind of thing If you want to use it on behalf of customers, for example Ö Letís say youíre in the business of, say, offering childcare or you run a gym or youíre a nonprofit organization, you can set up monthly recurring, what are called, debits This can be a great way for your customers to pay you and, in many cases, you donít then have to worry about the billing process every month or collections because itís set up in this automated fashion Frankly, to do business with some governments and with some large organizations, you have to, as a small business, be able to engage in electronic payments for, say, a large supplier Ö like potentially a Target or a Walmart or a Costco do business with you So, it may be a business growth opportunity All right So, weíre going to move on to cards and talk a little bit about this arena Cards, of course Ö credit, debit, prepaid, etc But, credit and debit, in particular, are very popular especially with consumers So, any of you who are in a business where consumers are your customers, being able to accept cards may be an important way to grow your business I think one of the main concerns, though, in terms of cards is they tend to have fees associated with them, and many of those fees are charged by the accepting organization So, if you are the one accepting a credit card or, for that matter, a debit card from a customer, you will likely have to pay a percentage of the value of the sale Ö say 2-1/2% kind of thing That can be, depending on your business, a fairly large cost to absorb So, you just need to be aware of that and you need to build that into your business (audio cuts out) if youíre going to use a card approach So, a credit card, as you know, is where someone doesnít have to pay the bill right away, but they can pay it later In the case of small businesses, this is often used as a funding source, frankly, because of that ability to leverage 20 days of funds, so to speak It also can be used in terms of what are called a Purchasing or Procurement Card Program,

where if you purchase a lot of relatively low-cost items, say supplies, you can use a P-Card approach to aggregate those smaller purchases so youíre only making a single monthly payment to [inaudible 00:30:24] through the P-Card issuer So, if thatís something that interests you, many financial institutions have programs involving providing P-Cards and would be happy to talk to you and make that kind of an arrangement with you Again, while the cost of a card in terms of acceptance can be somewhat high, there are a lot of savings in terms of labor processes If you are the one paying with a card, you also get the benefit, especially in most P-Card programs, of whatís considered a rebate So, the benefits of cards often depends on whether youíre making the payments versus whether youíre accepting the card for payment Now, in the case of debit cards, debit cards are where you pay now, essentially, and thatís why theyíre tied to an underlying account, most often a checking account They are more popular than credit cards among younger people, and so, again, if you are serving largely a consumer market, you may want to think about, if youíre not already, whether or not you want to accept debit cards This point about debit card fraud, it is a serious and growing problem But, whatís also very relevant here is the issuing bank, the issuing financial institution, the issuing credit union, they absorb the liability for the most part So, thatís not good in the sense that itís not Ö One shouldnít say, ìOh, well then I donít care about fraud.î But, the liability, in most instances, do not Ö The liability does not flow to the business Where that changes is when the card is accepted in a online or remote Ö for a remote transaction, say, over the phone or an online transaction In those cases, the liability rules often change, and so these are the kinds of details that if youíre going to get into card acceptance, you simply need to understand the costs, the liability, and the rules A prepaid card is when the card has funds that are loaded onto the card in advance So, you pay before, if you will These can be either one-time giftcards, like you might see this time of year as we get into the holidays, or they can be reloadable So, businesses that might want to use prepaid cards for payroll purposes would work with the issuer and would be implementing what would be considered a reloadable card In this particular case, the balances are also linked to an account They could be a bank account, or they are often an altogether separate system and are not associated with, specifically, an underlying bank account, which is why theyíre often used with unbanked populations But, they still are relatively small in terms of use If someone has a prepaid card, in many cases on the acceptance side, they act and function much like a debit card So, from that perspective, you might see them as pretty similar Although, the [interest change rates 00:34:08] that I mentioned earlier, the fees that you pay for acceptance, will likely vary A couple of terms that Iíve been using Ö ìIssuerî and ìacquirerî are worth at least describing This issuer is typically, but not always, the financial institution It could also be American Express There are non-banks, so to speak, or non-financial institutions, as such, that can serve as issuers They have the relationship with whoever is holding the card, the consumer or business that would be using the card to make payment They agree to abide by various laws that are established by the card network, so American Express, Visa, MasterCard, Discover The issuer typically underwrites and takes the liability on that card But, as I said, the liability can vary depending on whether itís an [inaudible 00:35:07] (audio

cuts out) transaction or something youíre doing remotely or online Then, the issuer then makes payment to whoever the business or seller of the goods and services are on behalf of that cardholder The acquirer is someone that if youíre the business accepting the card, you will have a relationship with the acquirer You will work Ö If youíre the seller of the service, the goods, you will have an acquirer relationship Theyíre the ones that underwrites your risk, that basically takes on that liability Theyíre the ones that will then charge you various fees, often called a discount rate They will submit payments for settlements to the cardholder account So, there are a variety of actors in this mix and, again, weíre touching on a lot of topics quickly, but we at least wanted to introduce you to these terms so that if you want to explore these, you have some sense of what these different terms mean and who the players are in these arrangements So, one of the things that has really become prominent in the last few years is this ability, either with a smartphone or a tablet, to accept cards So, my Ö the person who cuts my hair has Square, which is one of these service providers Thereís Gopay, which I [inaudible 00:36:43] Intuit example PayPal has an example of one of these, kind of what are called [inaudible 00:36:50] So, this is where you have a small appliance, and you attach it to your phone or your tablet, and you use it, essentially, to swipe the card, the mag stripe on the back of the card The reason this is popular with smaller merchants is because you donít have to have expensive equipment to accept cards You can just leverage what everybody has these days, your smartphone or your tablet, and that can turn into a cash register Especially on the smart Ö or the tablets, there can be software associated with is that can really make this function essentially like a cash register It does allow both card present and card not present payments In most cases, the vendors have pretty straight forward fees, where theyíre a 2-1/2% kind of thing of the sale amount So, thatís another reason why small businesses tend to like them because the fees tend to be fairly straightforward, and simplified, and easy to understand All right So, the last topic is online and mobile Weíll spend a little bit of time on this as well, and then weíll get to some of your questions So, online and mobile banking is certainly an area of growth in terms of itís used by small and medium-sized businesses That makes a lot of sense because small businesses are very focused; tend to be resource deprived, if you will, and they need to use every opportunity to use efficient technology So, as this slide points out, half of banking business activities, a lot of businesses do half of that or more than half of that online Many, many, many businesses now are using mobile devices for some aspect of their banking services, their financial services Not a lot of transaction activities, but perhaps for alert for instruction, for information, that sort of thing So, with online bill pay, this can offer lots of different services that your bank can tailor to your particular needs Banks also will work closely with you to ensure that you have the right kind of security around these particular services Itís very important to understand fully what your bank offers you on the security side and to use those particular services, including practices, to make sure you are defending and/or protecting any kind of online activity So, online bill pay can be done through your banking service

Online information can be sent, as I talked about earlier, or received from your bank There are many other kinds of services that can be conducted through an online relationship So, again, I would urge you to explore more than just online bill pay Of course, there are concerns about hackers There are concerns about fraud I mentioned earlier about documentation and, ìHow can you prove these sorts of payments?î In all of these cases, your bank should have services available; should be able to answer your questions and provide you with a way to address each of these concerns But, it tends to be a 2-way street because in many cases, your banker is going to suggest actions, as well, that you need to take either on a daily, weekly, or monthly basis Now, mobile payments and not just payments, but these are all examples of how the mobile device is becoming part of the payment environment So, the top example is Starbucks, and this is something called QR Code payments, and it acts a lot like when you go to the grocery store and the barcode is scanned So, the QR Code enables a recognition between, say, the prepaid instrument that is in Ö that is associated with a particular userís phone and a reader in that particular merchantís establishment Thatís something that we could see more and more of, and certainly would be something that potentially small businesses could [inaudible 00:42:05] A mobile wallet is effectively what itís suggesting, where the consumer would have a wallet application Google has been promoting this Within that wallet, they could hold a multiplicity of different, quote, ìcardsî that they could then use at a particular time to make payment NFC is Near Frequency Communication, and thatís basically a radio frequency where thereís a chip in the phone and a reader that has to be enabled to read that chip That process enables a payment transaction to occur We talked already about the mobile card reader There are also examples of software available, where you can use your mobile device to make payments to another person This happens to be something called Popmoney, which is a service that is available through a variety of financial institutions I would be able to send a birthday gift, using Popmoney, to another consumer So, as I say, I covered a lot of information very quickly We do have about 10 minutes or so left for questions You have my information here and also [deck 00:43:34], which will be made available to you Iíve summarized, in this particular form, some of the information that I just described in terms of the features, the various payments, what the fees would be attached to them, what some of the issues are, what some of the risks are Then, also in your [deck 00:43:54] is a variety of information about where you might go for additional reading, additional resources because [inaudible 00:44:02] weíve gone through information [inaudible 00:44:05] (audio cuts out) So, let me stop there and speak to your particular questions that you may have I believe Eddie is going to be reading questions for me to respond to Eddie: That is correct Hold on before I proceed to read some of the questions that have come in via chat I would like to simply remind our participants that if you would like to submit a question, you may use the ìSend Noteî button at the top of your screen or the Chat Box and address your questions to ìAll Moderatorsî or ìPresenters.î Again, if you would like to submit a question, you may use the ìSend Noteî button at the top of your screen or the Chat Box and address your questions to ìAll Moderatorsî or ìPresenters.î Now, the first question that we have here, Claudia Ö How susceptible to fraud are mobile payments like NFC or P-to-P? Claudia: Excellent question So, many of you have heard about malware and about viruses that can infect computers and

compromise personally identifiable information, can compromise or access your bank account information and your credit card information The same thing is true, frankly, of mobile devices and mobile payments So, one of the big concerns here is that you could, when youíre surfing the web through your mobile device just like you could if you were doing this [inaudible 00:45:35] (audio cuts out), you could download malware or a virus that would potentially infect and/or collect information that you donít want to have available to a criminal Another issue that you might have with a mobile device is most mobile devices allow you to secure them with a password so that if you move them, whoever Ö if someone steals your device, for example, they would not be able to access information you might have available or open apps that you might have through your device But, if youíre not doing that, you may be susceptible to that kind of an issue Another issue, itís whether or not with your mobile device, if you were to lose it or if it were to be stolen, if you can have that device wiped So, for example, in my company with my phone that I use for business purposes, if I were to lose it, I would immediately a particular phone number and they would remotely wipe my phone so no information of any value could be accessed by a potential criminal So, definitely there are fraud risks associated with phones, but there are also ways to protect yourself and your company from those risks Eddie: Thank you, Claudia The next question asks, ìWhat are the best payment methods for international payments? What about international payments by ACH or wire transfer?î Claudia: So, if you are making a payment, so this a payment where youíre trying to pay somebody or a company in another country Your best options are Ö Depending on the size of the payment, your best option is probably still the wire if itís a relatively large payment, or the ACH In the case of the ACH, keep in mind that if you do, say, an international payment once in a long time Ö once a year, maybe once a month If you donít already have ACH set up with your bank, itís not the kind of thing where you would call your bank up or go online and issue an instruction to your bank and say, ìHey Pay this company in another country via ACH.î Thatíll all have to be established in advance, and you have to have those systems operating and working You also need to find out whether or not your particular bank provides international ACH Not all financial institutions do Although, many Ö many do, and certainly most of the large financial institutions do More financial institutions offer international wires as it relates to making payments There are also a number of non-bank providers that will Ö Western Union, for that matter Ö that will help you and accommodate an international wire On PayPal, if you have a PayPal account and/or a PayPal relationship, they offer some international payment services that you might want to look into Certainly, paying by credit card is an option But, again, all of these have pros and cons If you want to do something thatís more systematic and lower cost, itís certainly well worth talking to your bank about, again, establishing ACH as a service Ö including if you do do international transfers for that kind of activity Eddie: Okay, Claudia The next question here Ö In regards to mobile payments, is the small size of the screen going to be an obstacle to adoption? Claudia: Thatís a really good question, and I think thatís why tablets have also become popular in this particular space However, in terms of Ö Weíve done some research, at the Fed, on mobile payment adoption Thus far, itís really still pretty small, so there is much more use of what I would

call information or banking information through mobile devices But, keep in mind that on the adoption side, to the extent that the means for doing this, like the Starbucks example If all I have to do is open up an app and bring up the relevant QR Code Ö remember, the code that looks like a barcode Ö and wave that in front of a reader, it doesnít really matter that the screenís small So, I think it will depend a lot on the way in which the payment applications are designed So, readability of a lot of detail is really not important for the transactions to move forward Eddie: All right The next question asks, ìWhat are the chips and some payment cards that we see sometimes here and that are widely available in Europe?î Claudia: So, chips and cards, itís referred to as EMV EMV, if I recall, stands for Europay MasterCard and Visa Thatís because when this particular technical specification was first rolled out about 20 plus years ago, they were the organizations that got together and collaborated on this specification So, the United States is the last marketplace around the World, major marketplace, yet to implement EMV chips in cards Ö or, for that matter, in a phone There are lots of reasons for that Perhaps the best, simplest reason is that across the issuers, the merchants, etc., there hasnít been a sufficient business case, and the fraud levels that chip cards prevent have not been that high, at least historically, in the U.S What a chip does is it basically prevents counterfeit fraud, and it prevents counterfeit fraud on in-person transactions So, itís not an end-all type of security improvement, but it does improve security for in-person transactions where the [card 00:52:32] has been counterfeited So, I think we will see adoption over time in the U.S. Thereís a fairly significant effort underway with dates that have been put out there for the various brands like Visa, MasterCard, American Express, Discover [inaudible 00:52:48] that if you, merchant, or if you, issuer, donít offer chip cards by this particular date, certain liabilities that currently we absorb are going to flow to you That sort of carrot and stick approach is being used to [inaudible 00:53:04] (audio cuts out) in that direction The reason some of you have received cards with chips in them is these are typically where the bank, the financial institution, has decided that for maybe customers that they have that they think travel a fair amount, theyíre putting the chip in the card to accommodate, perhaps, that requirement Or, they may just have decided, as an organization, that they want to kind of get ahead of the game and start issuing chip cards because theyíre assuming that thatís going to be the way of the future in the U.S But, thatís still coming, and I think weíll see more chip cards deployed over the next few years Eddie: All right The next question, ìClaudia, can you tell us more about the legality of [passing 00:53:51] on the cost of accepting credit or debit to the consumer? Also, is it legal to set a minimum purchase price for accepting a card?î Claudia: So, yes, it is legal or it is okay, under the rules particularly as it relates to debit cards now, to set a minimum for a debit card transaction In many cases, itís not Ö The rules donít allow you typically to set a minimum on credit cards, but thatís a situation where depending on the industry youíre in, the size of your business, there may be Ö Itís something to look into because itís not a blanket rule, so to speak But, on the debit side, given recent changes in regulations, you can in fact set a minimum As far as passing fees back, the answer there is also a little mixed So, if you are Ö If you are Ö If youíre in, say, for example, a utility or a government

or a tuition type of institution, there are industries that are allowed to charge those fees in the form of a service fee If itís the only tender that you use Ö So, in other words, you only accept cards and you donít differentiate in terms of, say, check, then you can add a fee because you arenít, quote, ìdiscriminatingî against cards [inaudible 00:55:44] checks The other way that some businesses do this is you are allowed, in most cases, to offer a discount for a preferred payment method So, rather than surcharging, you might say, ìWell, if you pay by cash or if you pay by check or if you pay by X, you get 3 cents back,î or that sort of thing So, that is a more common practice and is something you can do under the rules Keep in mind, though, that a lot of these things are continuing to evolve and change So, while I might describe something now, that could very well change over time because this is a dynamic area So, as you explore these options, be sure when you talk to your acquirer or your financial institution to ask those very good questions for your specific circumstances Eddie: Claudia, I think with that, we have hit the top of the hour here Although, there are a few more questions in the queue, we will log them and possibly follow up afterwards But, that was the last of our questions in the queue given the time constraints there Claudia: Thank you so much, and I want to thank everybody who has been on the call today I appreciate your interest, and I hope you continue to explore this area 112013-204840-SBA (Completed 11/22/13) Page 1 of 16

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