Payments Business Magazine JulyAug 2014 by Lloydmedia Inc

Jul/aug 2014

The Merchant’s Guide to Transactions, Cards & eCommerce

THE POS REPORT

A look at the trends in POS and mPOS and the future choices for the payments industry

also in this issue:

❱ Bitcoin finds a place in the entertainment industry

❱ Innovation transforms how

prepaid cards are being used

❱ Minimizing risk with

©JUSP

real-time decision making in mobile banking

PM 4 0 0 5 0 8 0 3

Table of Contents

July/August 2014 Volume 5 Number 4 Editor Karen Treml karen@paymentsbusiness.ca Publisher Mark Henry mark@paymentsbusiness.ca

COLUMNS & DEPARTMENTS 4

News

26 ACT Update

FEATURES

Contributors Stefano Calderano, Kevin Gonyea, Nicolas Guay, Mitchell Cobrin, Catherine Johnston, Tony Sakich, Julia Patterson, Dave Eason, Rodney Vesling, Ron Delnevo, Paul Burak

POS Report

Creative Direction Jennifer O’Neill jennifer@paymentsbusiness.ca

Insights into POS today and into the future as well as trends in mobile commerce technology

Photographer Gary Tannyan

On the cover: Giuseppe Saponaro, co-founder JUSP

Senior Account Managers Brent White brent@paymentsbusiness.ca Chantal Goudreau chantal@paymentsbusiness.ca President Steve Lloyd steve@paymentsbusiness.ca For subscription, circulation and change of address information, contact subscriptions@ paymentsbusiness.ca Publications Mail Agreement No. 40050803 Return undeliverable Canadian addresses to: Circulation Department 302-137 Main Street North Markham ON L3P 1Y2 t: 905.201.6600 f: 905.201.6601 info@paymentsbusiness.ca www.paymentsbusiness.ca Subscriptions available for $40.00 year or $60.00 two years. ©2014 Lloydmedia Inc. All rights reserved. The contents of this publication may not be reproduced by any means, in whole or in part, without the prior written consent of the publisher. Printed in Canada. Reprint permission requests to use materials published in Payments Business should be directed to the publisher. Made possible with the support of the Ontario Media Development Corporation

Payment trends in the entertainment industry – bitcoin finds its place

Cash shows few signs of playing ball with the delusional dreams of those who have vested interests in its demise

How do changes in AML affect ACH Payments and Electronic Funds Transfers

Vertical Market

Pay Channel

Industry Update

Insider Report Companies are finding innovative and effective uses for prepaid cards

Technology Update Mobile banking requires real-time pay/no pay decisions to maximize convenience while minimizing risk

Association Spotlight A look at the CPA, ISO 20022, and Payments Panorama

Next issue…

September/October — Security & Privacy Report: Security, fraud, and privacy – protecting data, serving clients, and dealing with disasters July/August 2014

PAYMENTSBUSINESS

News

Brand campaign puts people back in charge of their money PayPal brings a unique understanding of how people think about and use money to the launch of its first-ever brand campaign in Canada. ‘Powering The People Economy’, will reach across print, digital, out of home, experiential, mobile, and social channels. The key insight underscoring the campaign is that people are now more empowered than ever before – to create new ways to connect, pay, and transact on their terms. PayPal is leading this movement by making it easier, more secure, and more intuitive for people to pay – wherever and whenever they want. “PayPal has an opportunity and responsibility to help people take control of their money and use it in any way they want, through seamless and delightful experiences,” says Cameron Schmidt, general manager, PayPal Canada. “Powering The People Economy is a recognition of what our customers should expect and demand from us – secure, easy and convenient payment experiences that get out of the way and get them closer to what they want.”

Smoothing out the daily grind To help people experience the new brand, PayPal Canada will treat Torontonians to free coffee at 25 popular coffee places in the city. As part of this offer, people who pay with the PayPal mobile app get $5 off their bill from July 21 to 31, 2014 at participating locations. Non-coffee lovers can use the offer to get a drink or snack of their choice. “Our new brand campaign puts people first, not institutions,” says Nicky Mezo, marketing director, PayPal Canada. “Through our products, we’re making every day easier and simpler for everyone in meaningful ways. People love coffee. We’re excited to roll out our brand campaign by offering free coffee to Torontonians who pay with the PayPal mobile app at their much loved neighbourhood cafe.” With a focus on building an active comprehension of PayPal, print, digital, outdoor, and mobile ads will launch on media channels throughout the summer and into the fall of 2014. The campaign extends beyond marketing and features a new brand identity and updated PayPal logo that features a more modern and mobile-first appearance. The new identity will begin appearing on products, marketing communications and collateral, and PayPal’s various online channels including PayPal. ca, PayPal-Forward.com, and its social media channels. “Our goal was to give a contemporary, human, and populist voice to a brand that does amazing things for everyday people. Rather than describe simple benefits, we focused on the perspective of what does PayPal do for people as a whole – how the brand is challenging and changing the status quo. ‘Powering The People Economy’ came as a natural extension of that thought,” says Matt Weiss, global chief marketing officer for Havas Worldwide. 4

PAYMENTSBUSINESS

Payments companies terminated more than 10,000 merchants for fraud in 2013 The Electronic Transactions Association (ETA), the global trade association representing the payments technology world, announced today the results of a survey of its membership which found that respondents discharged more than 10,000 merchants for fraud in 2013. The survey, along with ETA’s ‘Guidelines on Merchant and ISO Underwriting and Risk Monitoring’, are part of ETA’s larger efforts to demonstrate the payments industry’s long-standing commitment to combating consumer fraud. These initiatives are in light of a recent federal law enforcement campaign, ‘Operation Choke Point’, which targets payments companies in an effort to “choke off” financing sources for industries deemed “high-risk.” “Although well intentioned, the federal agencies supporting ‘Operation Choke Point’ are aiming in the wrong direction. By targeting payments companies instead of fraudulent merchants, the Financial Fraud Enforcement Task Force is ignoring the payments industry’s massive efforts to identify and eliminate fraud,” says Jason Oxman, CEO of ETA. “Federal law enforcement officials should understand that we make a better partner than a target in the effort to choke off fraud – but unfortunately ‘Operation Choke Point’ continues unabated.” Despite the ‘Operation Choke Point’ effort to target payments companies, ETA and its member companies have deployed guidelines and other tools to augment industry efforts to fight fraud. The guidelines were developed by a working group of dozens of ETA member companies and provides ETA members the latest and most effective strategies for underwriting and mitigating fraud and risk. The survey reported a representative sample of the number of merchants that ETA members dropped from the payment system in 2013 because of merchant.

Consumers don’t trust retailers with securing their data Slightly more than 50 per cent of consumers feel that the stores where they shop use security systems that adequately protect their financial data against hackers and data breaches, says ‘Global Consumers: Concerned and Willing to Engage in the Battle Against Fraud,’ a study by ACI Worldwide and the Aite Group. Other results include:

Retailer concerns • Nearly three in 10 global consumers (29 per cent) do not trust retailers (e.g., stores, online shopping sites, restaurants, etc.) to protect stored personal and financial data against hacking attempts and data breaches.

July/August 2014

MERCHANT-FRIENDLY PAYMENT SOLUTIONS Monetico, a result of the partnership between Desjardins Group and Crédit Mutuel-CIC Group.

NEWS

• 58 per cent think financial institutions (large multinational institutions, community banks, and credit unions) do a better job of protecting their data than do retailers, or for that matter, government agencies and law enforcement. • Only 55 per cent feel stores where they shop use security systems that adequately protect their financial data against hackers and data breaches, compared to 62 per cent who believe that online shopping websites adequately protect this information.

Mobile customer engagement • More than three in four global consumers (77 per cent) are “very interested” in being contacted about suspicious activity on their cards or accounts via a phone call, email, or text message. • Approximately three in four (73 per cent) prefer that their banks not post transactions to their cards until they respond to fraud alerts.

Consumer awareness • More than four in 10 global consumers (42 per cent) do not recall receiving any anti-fraud information from their financial institution. • More than three in 10 (32 per cent) think theft by a computer hacker is the greatest fraud risk.

Prepaid card implications • In many countries, prepaid card usage and the rate of fraud on such cards correlates. China and India have the highest rates of prepaid card fraud at 17 per cent and 18 per cent, respectively, and very high consumer use rates at 93 per cent and 91 per cent, respectively. • Conversely, in countries with use rates of 70 per cent or less, such as Australia, Canada, New Zealand, and the United States, fraud rates are four per cent or less, indicating that the fraud rate may rise as more consumers use prepaid cards.

Quotes • “Consumer distrust is exacerbated by the widely publicized retail data breaches over the past year,” Mike Braatz, senior vicepresident, payments risk management solutions, ACI Worldwide. • “Retailers have their work cut out for them—to change consumer perception that shopping, be it online or in-store, is unsafe,” Mike Braatz, senior vice-president, payments risk management solutions, ACI Worldwide. • “Consumers want to engage in the battle against fraud. Financial institutions must take a proactive role in not only engaging customers in fraud-alerting activities, but educating them on preventative measures to take to most effectively combat it,” Shirley Inscoe, senior analyst, Aite Group. • “Communication is key when it comes to financial institutions making customers aware of the tools available to fight fraud. This can have a big impact in customer satisfaction and loyalty,” Shirley Inscoe, senior analyst, Aite Group.

PAYMENTSBUSINESS

Time, money, and tech – study reveals Canadians ready to embrace mobile PayPal has released findings from a 15-country survey aimed to understand both universal human attitudes and country-specific variances in perspectives about time, technology, money and other central elements of the People Economy. In Canada, the research reveals that many people are ready to ditch their wallet and head out the door with just their keys and mobile phone in hand. The People Economy is how PayPal describes its belief that people’s lives can and should be more connected, more human, and filled with deeper meaning. People who make, share and collaborate, and those who buy, sell, and trade, all want the same thing: more of a say and less in the way. PayPal’s continued technological innovation, focus on improved processes, and mission to give people direct control over their money are integral to the People Economy. “At PayPal, we always strive to lead as a revolutionary brand. With our rapidly changing environment, we must create based on the needs and changes in the marketplace,” says Christina Smedley, vice-president, global brand and communications, PayPal. “With PayPal’s truly global marketplace, better understanding the key values we’re supporting around the world – both at universal and at country-specific levels – is essential for delivering products that further empower the people we serve. This survey furthers us in that mission.”

The majority of people including Canadians waste up to four hours a day on mundane tasks; what would people do with more time? Whether waiting in line to pay for things, commuting to and from work or sitting in traffic, enduring pointless meetings or calls, or simply running through the day’s errands, more than half of the world (56 per cent), including Canadians, waste up to four hours each day that they would like help recapturing. Only Germany has a significant percentage (19 per cent) of its population that professes being highly efficient and wasting no time. While the fact that Canadians waste up to four hours on the days’ necessities may not be surprising, how each country would spend that time if given the chance varies from country to country. Nearly half of Canadians (49 per cent) would choose to spend the time relaxing – likely at a cottage during the summer months – while Americans (53 per cent) and Brazilians (50 per cent) would spend more time with their friends and family. People in Turkey (55 per cent) and Israel (41 per cent) are likely to catch up on work that they’re behind on, the Japanese would like to treat themselves with solitude (63 per cent), the Chinese seek more physical activity (48 per cent) and Spaniards prefer more time for leisure activities (35 per cent). “While we’re not yet in the business of solving gridlock, we know that whenever we can shave time from the payments process for our 5.5 million active account holders in Canada, we’re giving them back one of life’s most precious resources,” says July/August 2014

News

Nicky Mezo, marketing director, PayPal Canada. “Whether spending that time with family and friends, relaxing, exercising or getting some quiet solo time, the value is immeasurable.”

Technology should make payments simpler, connected and faster, with more choices and opportunities Canadians are not alone when it comes to payment frustrations. People around the world agree that the time and hassle of making a payment are standing between them and their next purchase. Whether it’s the pain of waiting to pay in a store, annoyance at having to carry cash, frustration with lugging around a wallet, or other things standing between people and what they want, the world is ready for what PayPal delivers: the faster, safer way to pay and get paid. People don’t like waiting around. The majority of Canadians (52 per cent) would like to see a world without lineups. Americans, Australians, and people living in the UK share a similar perspective (51 per cent, 52 per cent and 53 per cent respectively). More of us Canadians (38 per cent versus 30 per cent globally) are looking for an easier way to split restaurant bills. When it comes to shopping online, similar to people around the world, one-third of Canadians are frustrated with having to enter payment details or remember multiple pins and passwords. If a site requires a customer to sign up or register before making a purchase, they’re apt to lose more than half of prospective sales in Italy (52 per cent), Canada(51 per cent), and Spain (50 per cent). More than half of Canadians (51 per cent) are annoyed to find added taxes or hidden charges at the last checkout screen.

the house without it. This statistic confirms for businesses that figuring out mobile payments is key to future sales. Canadians are more mobile savvy than others around the world, with the majority (56 per cent) having used a mobile device for an online transaction. In comparison, less than half of Americans do the same.

One in four Canadians is looking for an easier way to pay from their mobile device. If everyone could accept online or mobile payments, nearly half of Canadians (48 per cent) would use their mobile more often to pay for everything from fresh produce to handmade goodies at their farmer’s markets or local stores.

EVERY DAY IS AN OPPORTUNITY.

Where do you go from here? It’s a new era for payment options in Canada, bringing both opportunity and uncertainty. MNP’s Payments Team helps you understand and manage the risks, so you can focus on growing your business. Doug Macdonald, Payments Strategy T: 416.515.5087 E: doug.macdonald@mnp.ca Matt McGuire, AML & Compliance T: 416.263.6959 E: matthew.mcguire@mnp.ca

Canadians ready to embrace mobile While keys lead the list of things people won’t leave the house without, the smartphone is just as important – beating cash and credit cards on a global scale. As they head out the door, twice as many Canadians are reaching for their mobile phone before their keys (30 per cent versus 15 per cent), making sure they never leave July/August 2014

PAYMENTSBUSINESS

POS Now – and into Tomorrow

By Stefano Calderano

PAYMENTSBUSINESS

ake a look at your bulging wallet or pocketbook and think about how much you rely on those trusty debit and credit cards to get through your day – whether it be making a grocery purchase after work, picking up the dry cleaning, or shopping for clothes online. Without a doubt, the growth of online shopping has changed the way people use money to pay for goods and services. Cash has been replaced with the more streamlined payment method of credit cards, but this too will change in the coming year as retail establishments adopt mobile POS solutions to help simplify payment transactions.

©JUSP

Why the future of mobile POS hinges on anticipating evolving consumer behavior Goodbye magnetic stripe cards Imagine walking into your local retail store or restaurant and no longer being able to pay with your trusty magnetic stripe credit cards. While it sounds like something out of a shopper’s nightmare, as soon as next year there will be a monumental shift in the way payments are processed and handled. According to recent payment industry regulations, Canadian merchants have accepted magnetic stripe cards at the point of purchase since 2010 and soon all magnetic strip cards will be replaced by chip and pin cards that offer more security. July/August 2014

While the Canadian market is moving quickly to adapt with banks already ahead of the curve, within the U.S., changes towards chip and pin have been quite slow – so the pressure is on. Contrast this with adoption in Europe and elsewhere in the world where chip and pin is the industry standard. Data security is something that simply cannot be ignored and it is a huge advantage with chip and pin cards. Just take a look back at the massive Target security breach that happened late last year where over 40 million credit and debit cards numbers were stolen from unsuspecting consumers. Since

POS Report

then, the retail chain has been moving fast to integrate chips into its own debit and credit cards, making it the first major retailer in the U.S. to do so. However, transitioning to this new credit card standard is costly, as it means updating the POS as well as the additional costs associated with inserting chips into every credit card. While the emerging chip and pin technologies will dominate the future of payments, the handheld devices themselves must provide PCI security, a level of encryption that will prevent the prying eyes of hackers and thieves. This means that consumer adoption of chip and pin alternatives that have been slowly introduced to the international market is strongly impacting the mobile POS industry. As the industry transitions, eMarketer reports that mobile payments will hit $1 billion this year and will steadily increase to $50 billion by 2017. And while the popularity of mobile payments is slowly growing, mobile loyalty apps have reached an inflection point. Retail establishments will need to ready themselves for a new wave of consumer, one that prefers digital coupons and mobile offers over cash and paper coupons.

mPOS comes of age The market is moving quickly away from the domination of mPOS devices being used by small merchants at craft fairs. Much opportunity exists with professional services adopting these solutions for the convenience and portability they offer to field reps and consultants who are constantly on the move.

Mobile POS technologies harness the elegance of streamlined design – and offer an intuitive and powerful way to process transactions. In some cases already, it seems mPOS has become ubiquitous; large retail chains like Apple stores, local boutiques, and restaurants are all using them. In fact, because there are ways to incorporate mobile point-ofsale devices with traditional laptops (still very prevalent in retail environments), mPOS devices are now bridging the gap between the traditional POS and strictly mobile options. Also, because some solutions utilize web browsers for payment processing software, it can be fairly simple to incorporate mPOS card processing with the established back-end systems without having to depend solely on a mobile app. The promise of mPOS is that it has vast potential to influence how customers pay for delivery services (UPS, pizza, etc.) and the legions of salespeople who visit people offsite, like insurance agents who come to the home to meet with clients. Sales representatives can have the mPOS device along with their mobile or tablet device, and facilitate purchases right on the spot.

Intuitive and powerful POS interface Mobile POS technologies harness the elegance of streamlined design – and offer an intuitive and powerful way to process transactions. The touch screens found on mobile devices allow merchants to July/August 2014

easily train staff through an interface that is familiar to them. These robust solutions also often offer backend analytics that can help unify back-office sales tracking and inventory management. One of the major benefits of the new mPOS devices is that tablet and smartphone POS systems are cheaper and easier to replace than traditional cash registers. When compared to the repair costs associated with legacy POS systems, the cost benefit is immediately evident. For example, traditional systems often require a specialized technician to come out and make repairs, and associated hardware is expensive to replace. Dealing with damaged hardware scenarios can cost the business owner upwards of several thousands of dollars. Small businesses should also take into consideration that such repairs are timeconsuming, which impacts valuable revenue that would otherwise be received if that establishment were in normal operation.

POS transactions. Integrating loyalty programs and mobile coupons will encourage consumers to come back again and again, driving top-line growth for retailers. Mobile POS has provided a way for retail representatives to come directly to a customer in the aisle to process a purchase. The freedom of tablet and phone POS technologies allow more personalized service and prevent long checkout lines that annoy consumers. Apple has been a great proponent of personalized retail, even launching its own mobile app to allow people to ring up and pay for items themselves without even having to speak with a store rep. As merchants consider transitioning to mPOS options to take advantage of the flexibility and technological gains, it’s important to evaluate factors like convenience, security, portability, backend integration, and ease-of-use to find just the right solution to meet the needs of a growing business or enterprise.

Mobile POS provides great flexibility and personal service

ABOUT THE AUTHOR: Stefano Calderano is CEO at JUSP, a mobile POS service provider which has developed a proprietary MPOS device. Before joining JUSP, Stefano had an extensive career in management consulting and retail banking. He was previously a consultant in McKinsey, and then was retail marketing director at Banca Intesa, the largest Italian banking group. The last corporate position was of head of retail and private banking division at BNP Paribas Italian bank, BNL.

Basically the sales process begins much earlier than when a consumer enters a store or restaurant. And since mobile phones have become the remote controls to people’s daily lives, they are ubiquitous, familiar, and ideal to handle

PAYMENTSBUSINESS

POS Report

Stuck on Cash

Businesses must embrace electronic payment or get left behind By Kevin Gonyea

usinesses that cling to a cash-only model are destined to be left behind by competitors who adapt to the way consumers want to do business, says a study by the Martin Prosperity Institute at the Rotman School of Management. The evidence in support of the business and economic benefits of electronic payments is so overwhelming that there would be nothing to discuss if it weren’t for one stubbornly held fallacy – that cash is free. It is not. Merchants bear the costs of processing cash –accepting it, counting and recounting, balancing the till, taking deposits to the bank. There is also the cost of security systems and personnel, and cash that is lost by employee errors or theft. Then there’s the lost opportunities that most cashonly merchants don’t think about because you don’t think about what you don’t see. Market research – including the Tapscott study – shows that people using electronic payment spend more. Thus, limiting customers to cash payments tends to limit a business to a continuous chain of low-value transactions, while frustrating consumers who want to make higher value or impulse purchases. Electronic transactions are faster, which means a merchant can process more sales in a day without adding 10

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staff – another cost savings. Using mobile POS acceptance technology that converts a smartphone or tablet into a point-of-sale device, merchants can ‘check out’ customers literally anywhere. Another lost opportunity is the tourist or business traveler who shows up with a credit card and a fistful of Euros. The cash-only business must either become a currency trader or turn away the customer. Too, the world of online commerce is lost to the cashonly merchant, who is limited to only those customers who show up at the store with cash. Those are some of the reasons why cash-only is a no-win proposition for merchants. Then there’s the non-revenue-related benefits of digital payments. Those benefits explain why most Canadian merchants who accept electronic payments are convinced the cost is worth it. While electronic payments systems incur modest fees, the benefits provide enormous business value, including: • Manage income, deposits, and reconciliations efficiently • Make possible higher value transactions • Attract Internet and techsavvy buyers • Expand customer base and market beyond bricks-andmortar location • Capture share of rapidly growing e-commerce market • Gain insights from big data to make business more relevant to customers

Mostly it’s a matter of good customer service. Electronic payments are the preferred payment by most consumers. Increasingly they are becoming the only method of payment by businesses that find strategic advantage in no-cash policies, such as airlines that don’t accept cash for in-flight purchases. Electronic payments eliminates the need to deal with different currencies and eliminates the time-intensive process of handling and reconciling cash balances, thus shortening aircraft and crew turnaround times. Electronic payment channels also open up the world of big data insight. Small businesses can employ many applications that will help them understand their customers – from the shopping and spending habits of their customers to identifying the time of day when certain products perform better than others. This is available through information captured in electronic payment systems. In addition, electronic payments offer major backoffice benefits. Invoicing, waiting for payment, and chasing after payments have costs that hurt a small business, but electronic payments offer more efficient processes for managing payments, deposits, and reconciliations.

Social benefits The economic and social July/August 2014

benefits for governments from a move to electronic payments include less tax evasion, reduced underground economy, increased tax revenue, and reduced corruption. Canada is changing because consumers want options. A technologically savvy merchant can build a good business by helping consumers shop quickly, simply, and electronically. To thrive, Canadian businesses must embrace changing technologies. Cash-only small businesses can change direction and they can be helped by Canadian government leading by example rather than regulation. Policies should encourage adoption of electronic payments across the entire economy and governments should set the proper example by adopting electronic payments. For its part, the electronic payments industry can also help by educating small business operators on the business benefits of electronic payments and by calculating and publicizing the true total costs. The prescription for the business sector and for the Canadian economy is simple. Embrace the world as it is today – digital, mobile, and innovative – and succeed, or resist change and fall behind. ABOUT THE AUTHOR: Kevin Gonyea is vice-president, head of acquirer merchant relationship management at MasterCard Canada.

POS Report

Future Choices for Canada’s Payment Industry Exactly how the payments system will evolve remains unclear By Nicolas Guay

he Canadian payment industry has been a clear leader in innovation, standardization, and adoption of new technology. But the future evolution of our payment system is less clear as new technologies proliferate. Let’s look at some of the possible avenues for development and what may or may not succeed. Mainstream payment technologies have developed through the major payment networks such as Visa, MasterCard, and Interac. The industry for years revolved around the use of plastic cards with magnetic stripes, then gradually migrated to chip technology. In Canada, that move is fairly complete as just about every credit and debit card features the use of a chip.

Tap and wave technologies As well, we’ve seen a move towards contactless cards with features such as PayPass or payWave where you simply tap the card on the payment terminal and complete a transaction for smaller amounts of money without a PIN or a signature. Interac has introduced its own contactless technology called Interac Flash that is being adopted by some banks. Most credit cards in Canada now have a 12

PAYMENTSBUSINESS

contactless interface. These cards are gaining in popularity as they are ideal for replacing certain cash transactions. If we compare Canada to other markets, Canadians are very big users of contactless payments. A significant number of merchants are deploying compatible terminals and more consumers are starting to pay this way. The next step in the evolution of payments is the adoption of NFC (Near Field Communication) technology – a protocol implemented in smart phones. NFC is a contactless, wireless technology that can do many things, including being able to emulate a contactless card. Essentially, users can download their credit cards onto their smart phones and turn their devices into virtual cards. Most major financial institutions in Canada have a live program on NFC capabilities.

Limitations exist There are a few limitations that still need to be ironed out. NFC is compatible with some smart phones but not all – Apple does not support the technology in any of its iPhones. Users must have the right phones and some phone require an upgrade to the SIM card to make them compatible. So it is not as yet as simple as

we would like. But the system has the virtue of transparency. If a merchant has a PayPass or payWave terminal, NFC will work its magic. Today, NFC has the same limitations as contactless cards when it comes to the amount of money that can be charged but at some point the industry will implement a security code to unlock the card on the phone, allowing for more security and larger purchases. It’s still early days but the trend towards NFC will become widespread in the next couple of years and Canada is at the forefront of this technology in the world. An emerging trend from the U.S. is the introduction of new mobile payment systems in Canada by Square and other providers that cater to small merchants, enabling them to accept payments anywhere without traditional point-of-sale technology. This has created a new class of merchants that didn’t exist before. One of the big problems, however, is that providers like Square offer mag-stripe solutions – essentially a return to old technology – and it misses all the security features built into EMV and chip cards. That’s a major tradeoff. It might be an option for smaller merchants who otherwise wouldn’t have made July/August 2014

a sale at all but they’re taking on a little more risk in the process. Fortunately, we are starting to see solutions that involve chip cards, although they are a bit more complex and costly. They usually involve a standalone device communicating with a smart phone by Bluetooth and requiring a PIN.

Payment apps There are also other payment technologies in the marketplace, for example, bar codes. The most successful example is Starbucks, which has developed a reloadable virtual account for the smart phone that can be scanned at the cash. Tim Horton’s just introduced something similar in Canada. These types of payment methods removes the need to handle cash and speeds up the transaction. For very large merchants with a lot of critical mass, this kind of program makes sense. But smaller merchants would face a number of significant costs, such as developing their own apps, acquiring compatible bar code scanners, and modifying their POS systems. It is not likely a common standard will develop among merchants. Another step in the evolution of our payment system is development of the so-called electronic wallet. The

POS Report

term is used for many thing but the mainstream version would be to implement an NFC system for several cards, creating a virtual wallet that can be accessed seamlessly depending on the customer’s choice of card. Currently, most people have quite a few cards in their wallets. The concept is to have a virtual container for the cards the user wants to ‘carry’ that is secure and easily accessible on a smart phone. It could be a couple of credit cards, a debit card, and even a transit card.

The market in Canada is small and relatively wealthy, with a payment industry that is quite structured. There aren’t many financial institutions in comparison to other countries so consensus on standards has been easier to achieve. That will guide us in the future.

ABOUT THE AUTHOR: Nicolas Guay is Senior Manager – Payment Solutions AT ACCEO Solutions. He has more than twenty years of experience in information technology, including more than fifteen years in the area of payment. Since 2001, he has been contributing his expertise to the Payment Solutions unit at ACCEO Solutions, which includes Canada’s largest pool of experts in this field — around one hundred in all. In recent years, he has played a major role in the migration to chip and contactless technologies, working closely with many Canadian financial institutions. While ACCEO Solutions’ expertise covers all areas of electronic payment, Nicolas’ primary involvement is with business needs, the strategic component, and standards and compliance, working with card issuing banks, payment service providers, and merchants.

Each Click is a Residual Payment.

Security remains key One challenge is security – convincing all the different issuers (banks, transit operators, etc.) that it’s safe to put their cards together in the same container. With an electronic wallet, card information can be stored in a secure location with a trusted third party managing it. The electronic wallet could also be a facilitator for the consumer to select the appropriate card more easily. Payment technology that offers clear benefits to both consumers and merchants can be very difficult to achieve. Consumers want convenience while merchants want to drive business at a reasonable cost and therefore are very sensitive to transaction fees. Meeting both objectives is a challenge. Looking ahead, as choices increase, the marketplace will have a lot to say about which direction our payment system will go. There are currently more solutions than merchants and that consumers are willing to embrace. To get critical mass, consolidation and standardization will be required.

Authorize.Net has paid out more residual payments than any other payment gateway. Contact us to learn why. Call 1.866.437.0491 or visit www.authorize.net

July/August 2014

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POS Report

Trends in Mobile Commerce Technology Canadian migration to m-Commerce is seeing strong advancement

By Mitchell Cobrin

PAYMENTSBUSINESS

anadian merchants are poised to experience a major surge toward mobile commerce (m-Commerce) technology adoption, which we believe will pick up speed in the third and fourth quarters of this year. Shifts in consumer expectations have demanded it and merchants of all sizes across Canada are fully realizing the significant business advantages of incorporating a mobile component as part their business. The concept of m-Commerce is not new for Canadian merchants and while its adoption is steadily rising, all signs point to an activity spike on the horizon. Interest

in mobile point-of-sale (mPOS) solutions, particularly those that leverage the ubiquity of tablets and smartphones, is at an alltime high.

The advancements behind the acceleration What factors are contributing to the rising of this merchant mPOS wave? There is no question that the tablet and smartphone revolution has proven a watershed event. In the mPOS space, both the universal availability of these portable and powerful devices, as well as the ubiquitous broadband infrastructure they demand, have proven effective catalysts for growth. To date, the majority July/August 2014

of mPOS terminals being used in the Canadian market have been traditional wireless made-forpurpose terminals â&#x20AC;&#x201C; which are heavy, clumsy, uncomfortable to carry, and are essentially a single-function device that must be lugged around. This was primarily due to the requirement for EMV, and the business models of payment processors and merchant institutions. Within the past year, we have seen dramatic improvements in smaller, more lightweight form factors for mPOS appliances, including devices that convert mobile communications devices such as smartphones and tablets into full-service mPOS terminals. Sophisticated security,

POS Report

privacy protection, and data encryption measures are now standard operating features in these highly dependable units. They have come a long way and continue to advance.

Mobile EMV was key for Canada The need for EMV (European MasterCard & Visa) compliance in the Canadian marketplace had always presented a technology barrier to m-Commerce until mid-2013. With the introduction of EMV capable readers for mPOS solutions, typical Canadian m-Commerce merchants such as livery drivers, home service contractors, and delivery persons were empowered with this flexible and secure option. Today, after nearly a year of proven mPOS EMV ‘Chip and PIN’ experience in the marketplace, we expect to see a definite increase in its use among Canadian merchants. Furthermore, physical and configuration conveniences such as audio jack and Bluetooth connectivity between certified EMV readers and consumer-level mobile phones and tablets have greatly increased mPOS application friendliness and ease-of-use. Additions of rich functionality that rival and, in many cases, even exceed standard fixed POS stations, are now becoming commonplace.

The wisdom of learning curves As with all new technologies, there are early adopters who quickly jump in and boldly test the initial waters as the rest of a curious market looks on. Their positive experiences

determine how rapidly such technologies move into mainstream use. In this respect, intrepid Canadian merchants, particularly small- and micro-businesses, did not shy away from their due diligence when it came to giving mobile-devicepluggable m-Commerce appliances a try. Their trailblazing early adoption and performance reporting has now pioneered the way for the m-Commerce mainstream accelerated momentum we are anticipating. Merchant services providers also prudently monitored and closely measured m-Commerce experiences in the U.S. They saw firsthand the great risks and consequences of merchant attrition and contract abandonment involved in moving an industry too quickly toward m-Commerce solutions. At times, these neglect rates reached upwards of 30 per cent, particularly with micro-merchants whose business models were temporal or seasonal at best – and whose volume could not viably sustain the low-cost, entrylevel offers that providers were creating to lure these new merchant subscribers. Eventually, they abandoned the equipment, easily leaving their loose contracts behind. The high expense of acquiring such unreliable merchants by underwriting their hardware costs proved to be a poor moneymaking proposition. Many U.S.-based card companies, banks, acquirers, carriers, and other m-Commerce stakeholders and service providers took a beating and lost a lot of what they invested up front, because July/August 2014

they were basically giving away technology in hopes of making up the difference in volume transaction ROI down the road. However, using low-cost magnetic stripe readers as loss leaders in the U.S. is a much different thing than giving away more complex and costly ‘Chip and PIN’ readers here in Canada.

Smarter vetting means better business Canadian merchant services providers now possess the benefit of having learned those hard lessons from U.S. merchants without having undergone the hard knocks themselves. As a result, Canadian acquirers today are much more discriminating in constructing turnkey entry offers to merchants and they’re more particular in their vetting and qualifying criteria, adding more stringent language to contract terms and conditions, such as monthly minimums and early contract termination clauses. Overall, they’re operating more prudently in identifying, recruiting, and acquiring merchants. These lessons learned have added to the confidence of Canadian acquirers for safely moving their merchants toward m-Commerce solutions, which adds greatly to the rising groundswell of m-Commerce adoption now moving across Canada. That said, the success model of mobile-device-based m-Commerce adoption that we have seen literally redefine the payments business in the U.S. is something we can fully count on occurring here in Canada. This is good news for Canadian merchants, as

the opportunity potential in this space is colossal. And now, because of this market learning curve we have seen the U.S. go through, Canadian merchant services providers should also expect to experience less attrition rates among subscribers. Smarter acquisition and less attrition will mean steadily dependable revenue.

Successfully riding the mPOS wave Applying a more discriminating eye toward merchant recruitment, ensuring that merchants co-invest in their solutions so they can share some “skin in the game,” and selecting an expressly mPOSbased technology partner that can provide a low-cost/low risk soup-to-nuts solution that includes hardware, software, and gateway components, together will enable Canadian merchant services providers to successfully benefit from m-Commerce. ABOUT THE AUTHOR: Mitchell Cobrin is a co-founder of AnywhereCommerce and serves as the senior vicepresident North American sales for the company. He has nearly 20 years of sales, marketing, and high growth experiences with the last decade focusing on the electronic and secure payment processing industry. Before founding AnywhereCommerce, Mitchell served as vice-president of sales and marketing at Keystone Industries, where he worked from 1992 until the company was purchased in 2000. In 2000, he pursued his own entrepreneurial objectives by starting Multi-National Corporate Publications (MNCP), a specialty web marketing company that was innovative in developing and mining databases for targeted market initiatives for a clientele ranging from small businesses to Fortune 500 companies. In 2005, Mitchell sold MNCP and began laying the groundwork for establishing AnywhereCommerce, established in 2006.

PAYMENTSBUSINESS

Securing Mobile Life.

Creating Confidence. Giesecke & Devrient offers a comprehensive range of payment products and solutions based on the latest EMV, contactless and dual interface technologies. Our smart debit, credit and prepaid products are available on a wide range of platforms based on secure and highly flexible operating systems. Alongside the comprehensive portfolio of easily configurable card products and card solutions, we offer all services related to electronic payments including m-commerce and transit. Our services include personalization, system integration, project management and technical consulting from a single source. For more information, please visit: www.gi-de.com/ca

POS Report

Payments at the Point-of-Sale:

Is Evolution Meeting Stakeholder Needs? By Catherine Johnston

Who are the stakeholders and what do they want? Standing in the checkout lane, the average consumer likely thinks that the payment is something strictly between themselves and the merchant, but that is far from true. In this industry we know there are acquirers and card issuers as well – but we aren’t done yet. Payment is also influenced by the payment networks, gateways, middleware providers, POS device manufacturers, payment card and chip manufacturers, ISO – the International Standards Organization, EMVCo, the Payment Card Industry (PCI) Council, governments, providers of other software products, cable and network providers, telecommunication networks, cloud suppliers, and others. It is a good thing that they aren’t all trying to get into that lane with the consumer and the cashier. What do they all want? Well, that is simple. They want the payment transaction to succeed, but that is not as 18

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simple as it sounds. Not by a long shot.

It’s just a payment, isn’t it? I remember working as a cashier when I was in high school. We took cash. The most complicated part of the transaction was figuring out how much change to give the customer, because the cash register didn’t figure that out for us. Today we have cash, prepaid cards, debit, gift cards, gift registries, customer loyalty programs, promotions, discounts, manufacturer coupons, and much more. Adding to the complexity is the fact that the customer may split the payment over more than one payment type. The cashier may also have to handle returns, exchanges or layaways, or be expected to ask the customer to join the merchant’s loyalty program. In some cases, the cashier may also promote other products or services at the point-of-sale. In many places, certain customers are sales tax exempt and that also must be handled.

Added to all of this are the steps that have to be taken if anything goes wrong. What if the issuer declines the transaction? What if something goes wrong with the card or the terminal? No matter how simple or complex the payment transaction is, the cashier is expected to complete it and bag the goods in seconds so that the other customers in line don’t get impatient and walk away without completing their purchases. It is enough to make me think that cashiers are miracle workers, but things are going to get more complicated.

Why isn’t the payment status quo good enough? The world of technology that we live in always makes it possible to do many things that the business world cannot justify or price competitively. There are countless examples. At the point of sale, technology also offers many options; but merchants can’t afford to support all of them. It isn’t just the cost of readers for cards, phones, the glasses July/August 2014

that Google would like us to adopt, and other innovations that are in the lab. It is also the cost of space at the point of sale if multiple readers are required to support new payment devices and the added complexity for both the customer and the cashier. Bringing mobile payment to the POS is the latest innovation made possible by technology. Following in the footsteps of the very popular mobile banking apps, mobile payment over the net and in the store is something that consumers are expecting. In Canada, the preponderance of contactless readers makes it easy for merchants to support this innovation, but what about the others.

The temptations and the risks At almost every conference I attend, someone says, “You have to be ready to support everything a customer wants to do.” That of course is pure poppycock. As consumers, we don’t expect merchants to stock every item in every available size and colour. We

POS Report

accept that the costs of doing that would be passed on to us, a cost that we wouldn’t want to bear. Merchants know that their customers usually have more than one way to pay and are fairly confident that shoppers won’t leave unpaid merchandise at the pointof-sale if they don’t support every possible payment option. Their customer will revert to a form of payment accepted by the merchant, rather than leaving the store without the goods they came to purchase. Merchant acquirers are caught between merchants and issuers, needing to accommodate innovations that merchants choose to embrace. The temptation and risk falls

to issuers. While we have over 206,000 retailers, according to Statistics Canada, we have only 29 domestic banks and six cooperative credit associations. Of these, only a few issue payment cards and/or apps. This means that it is a very competitive space where you have to question whether you will lose customers to another financial institution if you don’t offer every innovation. Add to that the value of being first to market or being recognized as a technology leader. One thing is clear. The decision of one stakeholder group impacts others, so the challenge is to find a way to balance everyone’s interests when it comes to the ever evolving point-of-sale.

July/August 2014

Working together As I said earlier, all stakeholders want payment transactions to succeed; and all stakeholders want to have profitable businesses. For that to happen, we have to do two things. The first is to rule out the possibility that we can afford to adopt every new innovation related to payment, because we can’t build the business cases. The second is to bring stakeholders together to discuss the impacts on our systems and the viability of innovations that we do want to embrace. We’ve seen that approach work successfully. We also need to develop a neutral facility where all changes can be tested before they arrive at

the point-of-sale. Chips, cards, terminals, and everything else that is going to find its way to the point-of-sale should be tested for interoperability before it is released to the market. This shouldn’t be mandated by any one body, but should be a cooperative agreement between payment stakeholders who simply want the transaction to succeed!

And then… We can talk about how to move the point-of-sale from its fixed position to where the customer is, but that is for another story. Catherine Johnston is president & CEO, ACT Canada. Chairman, ISCAN – the International Smart Card Associations Network

PAYMENTSBUSINESS

Vertical Market

Payment Trends in the Entertainment Industry Some companies view bitcoins as an ideal payment system for the music industry By Tony Sakich and Julia Patterson

ne of the most exciting developments of 2014 has been the increased use of bitcoin payments in the entertainment industry. Music record labels have been taking the new technology in stride. Some of the largest independent labels, as well as major labels, now accept bitcoin for their music.

It’s all money The very first artist to accept bitcoin was Grammynominated R&B singer Carolyn Malachi. Malachi not only accepted bitcoin for her music, but also headlined the first ever ‘Bitcoin Concert’ in March of 2014. Carolyn received accolades for her decision to accept and advocate for bitcoin. She was selected as an ‘Innovator of the Week’ in Black Enterprise magazine. 50 Cent is another notable musician and entrepreneur who decided to accept bitcoin. He took bitcoin payments for his recently released album ‘Animal Ambition’. This decision was seen as an unexpected one. But, as a savvy entrepreneur, his decision was based on the potential for profit. He stated “Technology is what’s changing the business – gotta get with 20

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it. I take money no matter if it’s coins or dollars.” Because of this, 50 Cent became the highest-profile artist to accept bitcoin. Customers can use bitcoin to buy every item sold on his Shopify web-store (http:// shop.50cent.com), including his new album. G-Unit Records gained a lot of press, and 50 Cent further cemented his image as an entrepreneur with a forward-thinking mindset. In addition to 50 Cent, major label Warner Bros. Records recently worked with the bitcoin payment processor BitPay. The two teamed up to help Mastodon become the first major label band to sell their album for bitcoin. Their album ‘Once More ‘Round The Sun’ debuted at #6 on the Billboard charts, making it the band’s highest placing album ever. The album sales were about 14,000 higher than original projections. As a result of the albums success, more artists and record labels are considering using bitcoin as a new way to sell music. Early adopters can make a splash while also reaching out to a brand-new audience.

Bitcoin skyrockets popularity As record labels and musicians catch the bitcoin bug, music

merchandise retailers are also taking note. Independent music merchandiser, HelloMerch.com accepts bitcoin payments for artists like Death Grips, Deafheaven, Finch, Russian Circles, Reggie & the Full Effect, and Neon Indian. The Death Grips in particular are seen as innovators in the music scene. The group decided to leak their album ‘No Love Deep Web’ in 2012. Their decision made the Death Grips popularity skyrocket while establishing a dedicated fan base. The band is staying true to their outof-the-box style by accepting bitcoin for their merchandise. Independent artists and major labels have both begun to see the benefits of accepting bitcoin. They have seen a significant boost in publicity and have expanded their customer base. Bitcoin payments can also be accepted from global customers, which gives artists a way to gain traction internationally. The bitcoin community is extremely loyal and enthusiastic. The community loves doing business with organizations that are open to accepting bitcoin for their goods and services. This has resulted in new sales to demographics that otherwise would not be interested in a particular good or service. July/August 2014

Heading towards a natural choice Bitcoin is an ideal payment system for artists and companies looking to capitalize on the recent changes in music consumption and distribution. Bitcoin can be broken down to a fraction of a penny, which makes it perfect for microtransactions like the sale of MP3s. Also, music streaming services like Spotify, Rhapsody, and Pandora have been on the cutting-edge of the music industry, so accepting bitcoin in the future seems like a natural choice. As bitcoin gains popularity, we can expect to see it grow into the broader entertainment industry, as well. From video games and concert tickets, to comedy shows and amusement parks, paying in bitcoin will become a convenient and readily available option. ABOUT THE AUTHORS: Tony Sakich is a marketing manager at BitPay. He has been involved with bitcoin since 2012 in the Metro Detroit area where he also worked in the music industry. Tony’s current goal is to evangelize bitcoin to new merchants in a variety of industries around the globe. Julia Patterson is a merchant specialist at BitPay. She got involved with bitcoin in 2012 and has enjoyed helping businesses embrace the technology. Going forward, she hopes to help diversify the type of merchants accepting bitcoin.

Insider Report

Prepaid Cards – More Than Simply Gift Cards Companies are using prepaid for processing insurance claims and are proving that incremental innovations in payments can sometimes be more successful than disruptive innovations.

By Dave Eason

repaid cards such as those from Visa, MasterCard, or American Express continue to gain momentum in the Canadian market. New results from the fifth annual ‘Canadian Incentive Trends Survey’ find that these prepaid cards are growing in popularity with year-over-year growth in 2014. In particular, the survey finds prepaid cards are preferred two times more than retail gift cards and nine times more than company-branded merchandise when it comes to motivating employees. Insights from the research also highlight that Canadian companies are starting to get creative with prepaid card applications, with success extending beyond the realm of human resources and employee incentives. Global prepaid growth is expected to increase at

an annual rate of 22 per cent through 2017, reaching $822 billion1, and it’s not just because of gift cards. Canadian banks have recognized that prepaid cards can provide a universal payments platform that supports a multitude of diverse use-cases that can help Canadian businesses drive innovation in their respective industries.

An innovative use approach Prepaid cards are typically used by corporations as gift cards for employees and customers. For example, one of the world’s leading search engines uses prepaid cards as part of their employee rewards program. The Canadian subsidiary of a leading Japanese auto maker uses reloadable prepaid cards to incent their sales staff. The leading producer of ready-toeat cereal in Canada uses the cards for consumer rebates and promotions. But the success of reward and incentive programs has been the catalyst for new and innovative approaches to managing and disbursing payments beyond the realms of sales and marketing. July/August 2014

For instance, the Canadian company Esorse Corporation uses prepaid cards in an entirely unique way by delivering electronic health and dental claims processing with real-time adjudication and payment services. The company developed the Esorse ‘Hybrid Pay Direct Card’ – the first of its kind – to help reduce the financial burden placed on families who have to pay out-of-pocket for health services. It was originally conceived for helping families with special needs and high healthcare costs, but now all plan holders are benefiting. The concept is simple: cardholders present the prepaid card at their healthcare provider’s office to pay for health products and services covered by their health benefit plan. The health care provider swipes the card to get approval from the benefit plan provider and when approved, uses the card to pay for health products and services in real time. These funds are available exclusively for this purpose and are not available for other types of purchases. The card’s value lies in the elimination of paperwork and how it transforms the claims submission and payment

process in a simple, secure, and streamlined manner. Any healthcare professional, hospital, product, or service provider with a computer and Point Of Sale (POS) terminal can swipe the card, receive approval, and directly receive payment at the time of service. The Esorse card also improves plan holder satisfaction by immediately confirming coverage for services provided, while eliminating out-of-pocket expenses and avoiding the disappointment of having claims declined post service. Plan holders can also check their account balances, plan limits, and more, online 24/7. Finally the platform provides insurers with access to reports in virtually any format required to meet clients’ demands for more comprehensive information, while still complying with the Privacy Act. While Esorse developed its ‘Hybrid Pay Direct Card’ from the ground up to be simple, secure, and convenient, the company uses a managed services model to efficiently deliver the card. A highly customized solution and system-to-system integration Continued on page 28 PAYMENTSBUSINESS

TECHNOLOGY UPDATE

Mitigating Fraud Exposure in Remote Cheque Deposits Mobile banking requires real-time pay/no pay decisions to maximize convenience while minimizing risk

By Rodney G. Vesling

obile technology has made ‘anywhereanytime’ banking a reality. But mobile devices are not only used to check account balances, receive account alerts, or transfer funds. Mobile cheque deposit is an increasingly popular application. In fact, there was a 50 per cent increase in the number of Canadians who would consider depositing a cheque via their mobile device in 2013. Close to half (46 per cent) of respondents to the a September 2013 ING Direct survey who use mobile banking say they would consider depositing a cheque to their bank account using their mobile device, a number that’s more than doubled since 2012 when only 22 per cent of Canadians said they would consider depositing a cheque through this method.”

Convenience vs. risk To meet this growing 22

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demand, banks must offer the convenience of remote deposit capture without increasing their fraud exposure. The good news is that investing in realtime cheque fraud detection will serve in other channels since the technology can also verify cheques deposited at image-enabled ATMs and at tellers. Considering the volume of cheques written by Canadians – an average of four million every business day according to the Canadian Payments Association – the use of instant cheque verification is warranted and can help reduce exposure to forged cheques as well as fraudulently altered and counterfeit cheques. While the Canadian Payments Association (CPA) provides a framework that allows clearers to exchange payments files containing images, participation is not mandatory. What can be in a bank’s control, however, is the instant verification of ‘on-us’ cheques, including personal, business/corporate, credit card convenience cheques, and home equity line of credit cheques. By verifying cheque images in real-time, organizations can achieve three key benefits: 1. reducing fraud 2. improving customer service

3. and achieving operational efficiency. Let’s explore each one. Fraud reduction: Catching a fraudulent cheque at the time of deposit will obviously reduce losses. It can also reduce exposure to fraud downstream. Depositing a cheque is often just the start of a broader fraud scheme that can include depositing the same cheque in multiple channels and multiple bank branches. While the amount of each cheque may be low, the multiple deposits result in a more significant loss for organizations. Instant cheque verification also enables organizations to verify all items, not just large value cheques, thereby expanding fraud prevention. Customer Service: Making funds available immediately is important. If a bank offers remote cheque deposits, customers expect the money will be available. Eliminating payment delays will contribute to the organization’s customer service rating. Customers will also appreciate their assets being protection through effective fraud prevention measures. Operational efficiency: By catching fraud at the point of transaction, organizations can July/August 2014

focus the back-office team on other fraud items processed through in-clearing instead of reviewing items already processed and paid. The team will spend less time on downstream activities, such as customer service calls, fraud item reversals, and affidavits.

How it works Making a pay/no-pay decision in real-time for a cheque deposited at an ATM, teller line, or by mobile deposit can involve the following: • Signature verification: The signature on the cheque is compared, in real-time, with the signature in a reference database. A reference signature should include three examples and be aged 60 to 90 days to provide an accurate reference. Capturing an electronic signature with a high quality input device can eliminate the aging process and the need for additional signature variants. The electronic signature is often of pristine quality and can be used as a reference immediately. • Cheque stock verification: To verify the cheque stock, the software can take into account various elements, including the image of Continued on page 28

Pay Channel

Cash: Critics Don’t Fancy The Facts – Or Want Us To Have The Choice.

By Ron Delnevo

ome people would like cash to go away and because most of those that feel that way would profit greatly from that outcome, they are clearly going to feel quite strongly about it. Yet, inconveniently, cash shows few signs of playing ball with the delusional dreams of those who have vested interests in its demise! Cash continues to be used for around 85 per cent of all retail payments on our planet. For lower value tickets, the statistics are even more impressive. For example, the European Central Bank recently revealed that over 90 per cent of payments under €20.00 are made with cash. With the facts solidly against them, the people who would cry all the way to the bank if cash use declined, resort to flights of fancy.

What cash isn’t. or is it? One tactic they use is to tell us what, in their belief, cash is

not. Examples (with suitable ripostes) include: • Cash isn’t fashionable – don’t be silly! Cash has been around for 2700 years, yet still doesn’t look as tired as last season’s frock. • Cash isn’t convenient – it has 85 per cent market share without being convenient? Then it is lucky for Visa that it isn’t! • Cash isn’t secure – tell that to the FBI! There is far more crime associated with other payment methods, especially card fraud. • Cash is expensive – Noop! Wrong again! Retailers everywhere tell those who are willing to listen that cash is the cheapest form of payment for them to accept and process. Unsurprisingly, perhaps, the critics of cash just don’t want to hear that message. When the anti-cash people realize that knocking ad copy is futile against the world’s most successful payment method, the boys and girls with the multi-million dollar marketing budgets sometimes look elsewhere for what they fervently hope will be winning messaging. And one of those key underlying messages is that, somehow, “cards are clever.” However, it seems odd to July/August 2014

portray a piece of plastic (now sometimes augmented with a moderately sophisticated chip) as clever.

The plastic smile Plastic has, almost since it’s invention, been imbued with negative associations. For example, no one, not even a card marketeer would be pleased to be told they had a plastic smile! Of course, smiling is what you see rather a lot of in card advertisements. Sharply-suited men, complete with smug facial expressions, and groups of women happily shopping, eyes blazing with pleasure, are amongst the most commonplace images. How cards could bring so much joy is beyond everyone, except the marketeers. They, no doubt sincerely, believe their skills can make dull, high APR cards attractive to enough people to keep the profits rolling in. With 15 per cent of payments (at most) being made using plastic, they clearly have some way to go in terms of the powers of their persuasion.

Online with alternative payment options Of course, cards are not the only challengers to ‘King Cash’. Online payments are becoming increasingly popular as Internet shopping captures the public

imagination. However, even Internet shoppers often find cash their most attractive option. In countries such as Germany and Poland, around 50 per cent of Internet shoppers opt to pay Cash On Delivery for their online purchases – no help there for unhappy card marketeers! Mobile payments are also growing in popularity. A multitude of apps are now available for those who are willing to see Smartphones entirely take over their lives. At the moment, only a tiny minority of the world’s population falls into this category but who knows, numbers may grow. Stranger things have happened. Then again, fad is only one letter away from fade and that’s what new crazes do! It is certain that new challengers to cash will continue to emerge. That’s what we need, because economic activity and employment both depend on innovation and diversity. Payment innovations may provide convenience to some. With three billion people (around 40 per cent of the world’s entire population) currently living on less than $2.50 a day, help would certainly be welcomed. Continued on page 28 PAYMENTSBUSINESS

Association Spotlight

The Canadian Payments Association – meeting the current and future payment needs of Canadians (left to right) Sean Rodriguez, Senior Vice-President, Industry Relations, Federal Reserve Bank of Chicago), Jerry Norton, Head of Strategy, Financial Services, CGI, Ather Williams III, Managing Director, Head of Global Payments and Global Strategy, Bank of America Merrill Lynch and Brad Pragnell, Head of Industry, Australian Payments Clearing Association discuss Next Generation Clearing and Settlement Systems in a Payments Panorama 2014 Plenary Panel.

s a key financial market infrastructure, the Canadian Payments Association (CPA) operates core national clearing and settlement systems essential to the movement of hundreds of billions of dollars across Canada each day. In 2013, CPA systems cleared and settled $43.7 trillion worth of payments. The Automated Clearing Settlement System (ACSS) tracks the exchange of retail payments between CPA member financial institutions as a result of customer financial activity each business day, and calculates an overall balance for each financial institution. The Large Value Transfer System (LVTS) sends largevalue and time-sensitive wire 24

PAYMENTSBUSINESS

payments between Canadian financial institutions quickly and continuously throughout each business day, and is used to make payments required to settle the ACSS clearing balances. It’s a key tool for the Bank of Canada’s implementation of monetary policy, and plays an important role in the settlement of Canadiandollar payment obligations arising from securities and foreign exchange transactions. Both CPA systems are supported by a comprehensive framework of rules and standards, and an Act of Parliament. As the center of excellence for payments in Canada, the CPA leads its member financial institutions, businesses, government, and the public July/August 2014

in establishing the rules of the payments highway. Through a network of committees representing financial institutions and stakeholders, the CPA interacts with other payment networks and service providers in the Canadian market, researches emerging payment technologies, facilitates the interaction of CPA systems with others involved in the exchange, clearing and settlement of payments, and facilitates the development of new payment methods and technologies. The Association is deeply committed to meeting the current and future payment needs of Canadians, as demonstrated by recent initiatives focused on modernization and renewal.

Association Spotlight

“Our approach capitalizes on the value of the standard for all payment participants in Canada: reduced costs for those managing multiple standards today, greater domestic and global interoperability, and setting the stage for innovation and efficiencies through enhanced remittance data.”

– Gerry Gaetz, President and CEO, Canadian Payments Association

ISO 20022 The Association has adopted an internationally recognized payment messaging standard – ISO 20022 – as part of a comprehensive strategy to modernize Canada’s payments system. ISO 20022 allows participants and systems in different financial markets (e.g. payments, securities, foreign exchange) to ‘talk’ to each other using consistent terminology or syntax. Over time, this will enable straight through processing and electronic invoicing, enhancing the competitiveness of Canadian businesses and driving efficiencies.

‘Payments Panorama’ As Canada’s payments system evolves, the CPA is committed to keeping the industry and stakeholders informed of developments, through outreach initiatives such as its biennial conference. ISO 20022 was a major topic at ‘Payments Panorama 2014’ in Charlottetown, PE. Featured speakers included industry and government leaders, providing a strategic perspective and insight into the payments industry for today and tomorrow. Keynotes included Larry Schembri, deputy

governor, Bank of Canada, and John Pecman, commissioner of competition. Col. Chris Hadfield, who gave Canadians a front seat view from above and made us look at our world from a different angle, also addressed delegates, imparting useful and practical lessons he’s learned throughout his remarkable career in the fields of leadership, teamwork, collaboration, science, and technology. Perhaps the most tangible of CPA’s recent initiatives is the completion of its Image Rule Project. This was a major milestone for the CPA and its continued modernization of Canada’s payment system. CPA members can now exchange image-based payments among themselves for the purpose of clearing. This has ushered in the most significant changes to cheque processing since the advent of Magnetic Ink Character Recognition (MICR) enabled bulk cheque processing over 50 years ago. Corporates that handle a large volume of cheques now have the opportunity to deploy Remote Deposit Processing (RDP). On-site scanning capabilities will open the time frame window for ‘capturing’ items for deposit (to well after their branch of July/August 2014

account closes) and eliminate the physical delivery (and risk) of transporting deposits to the branch. With this new rule in place, several CPA member financial institutions – including many smaller ones – now offer their customers remote deposit capture (RDC) services. This important step means that consumers can

deposit cheques in their account without going to the bank by simply using their smart phones. The same is true for small businesses, many of which still rely on cheques to receive and make payments and also to meet payroll. The CPA, with the help of its board and stakeholders, is carefully examining the evolution of a next generation clearing and settlement system for Canada. It is also laying the foundation for a new CPA and developing a new governance model for the Association in discussion with the Department of Finance as part of its review of payment system governance. For more information on the CPA and current initiatives visit www.cdnpay.ca.

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Association Spotlight

With another Cardware success completed, ACT moves forward with its next term of strategic leadership teams

he results are in! Our annual Cardware conference was a success with over 300 people coming together to discuss strategy in the payment and digital identity areas. This year we introduced the payment innovation lightening rounds, with eight contestants. The audience voted and the top four (in order) were: DirectCash for their DC Tag, Ingenico for their iCMP, Clearbridge Mobile for ClearPay and MeaWallet for their MeaWallet. We moved our ‘Annual Innovation Awards’ to October. They will be held in in conjunction with the official celebration of our 25th anniversary. Watch our web site for details. We are also planning our members’ only fall networking event and annual general meeting for late September. In July, our strategic leadership teams kick off their second term for the year, as they choose new mandates and deliverables. SLTs are groups of ACT Canada members (five or more) who want to collaborate with other senior stakeholders in a neutral forum to help influence market growth, propel key initiatives forward, or overcome issues. This allows us to move quickly and take advantage of expertise beyond our own internal resources to reduce our necessary investment and minimize risks. Currently we have four teams: Mobile, Point-of-sale, Customer 26

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Authentication, and Multi-App Issuance. For more information, please visit www.actcda.com. Any member may suggest a topic for a new team and we will poll the other members to see if there is enough interest to launch the group. July will also see our first member fee increase in six years; however, existing members will have one more year before the increase applies. A new membership category has been established for start-up companies. As we move ahead with apps for both phones and multi-app cards, it is important that issuers and developers have a neutral forum in which they can meet and discuss their goals. Conditions and pricing may be found on our web site. Now that the Ontario election is over, the Secure ID report will be finished and published so that provincial and federal government organizations can have access to best practices. Digital identity is both a growing opportunity and concern at a time when some government ID is still being printed on paper, so this report is timely. Over the coming months we are conducting two market enquiries related to Point-of-sale issues with the intention of bringing stakeholders together to find mutually agreeable resolutions. The fall takes us back into conference mode as we head back July/August 2014

to the U.S. to talk about EMV. We are presenting an EMV Workshop at the Mobile Payments Conference, October 6 to 8 in Chicago, IL. We were also approached to talk to cyber security specialists about EMV at a meeting in Washington, DC. Our members will benefit when the security bar is raised in the U.S., so we are deeply committed to helping the process. In September, we are meeting with key U.S. merchants at the MAG meeting. November sees us in a booth at Cartes, so please drop by. Here at home we will be working with ITAC, the Information Technology Association of Canada and DIAC, the Digital Identity Authentication Council to advance the work of all three associations related to digital identity. According to the Globe and Mail, the cost of Canadian cybercrime reached $3.2-billion in 2013. Our ability to identify people online to decide whether their transactions can be authorized is crucial. Now that EMV is proven to effectively deal with counterfeit fraud, this is the next area that must be addressed. Thank you to everyone who made Cardware a success and please save June 16 and 17, 2015 for our next Cardware. Catherine Johnston is president & CEO, ACT Canada. Chairman, ISCAN – the International Smart Card Associations Network

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2014

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with its prepaid managed services provider enable Esorse to leverage its existing enterprise systems to keep costs down and focus on its core competencies.

Innovating with prepaid Esorse shows how innovation in payment technologies is not all about the latest and greatest mobile payments app or gadget; innovation in this case means taking advantage of proven technologies and existing payment solutions to make something new and valued. Consumers and businesses are typically slow to adopt new payment technologies because they stray too far from existing payment infrastructure and lack a compelling value proposition. No one will adopt an emerging or alternative payment solution unless it serves the needs of businesses, card holders, the banks who issue them, merchants who have to accept them, and the technical requirements of existing payments platforms (e.g., debit, credit). For example, there has been a lot of ‘noise’ around payment technologies like mobile wallets, but they’ve been slow to gain traction. Alternative and emerging payments often are challenged because existing payment systems already work so well at servicing the customer. “Reinventing the wheel” requires major investment, time, and risk. However, new prepaid applications show how success and widespread adoption

can be found in iterative and incremental payment innovation rather than in the promise of sudden disruptive payment innovation. Many people claim innovation and compliance are two factors that clash in the payments industry, but the opposite has proven to be true for prepaid. In fact, compliance has forced prepaid to innovate and evolve to work within the rigid rules and regulations of the industry, and to successfully deliver value within the constraints of the existing payments infrastructure. Insurance companies, air transportation services providers, and oil and gas companies are all beginning to use prepaid cards in new and creative ways that embrace this incremental innovation, and which is more in tune with how Canada’s big financial institutions work. While prepaid cards continue to grow in favour with Canadian companies as the reward of choice for employee incentives and rewards programs, the cards also present new and exciting opportunities for Canadian consumers and businesses. The time has come for prepaid cards to evolve outside the world of human resources and with the right prepaid partner, the opportunities are virtually limitless. ABOUT THE AUTHOR: Dave Eason is CEO of Berkeley Payment Solutions, a managed services provider that designs and delivers MasterCard and Visa prepaid card programs for corporations, governments, and financial institutions. 1. “2012 Global Prepaid Sizing Study,

Commissioned by MasterCard: A Look at the Potential for Global Prepaid Growth by 2017.” Advancing Insights, Advancing Commerce. July 2012. Web. Sept 2013.

the company’s signature verification solution used to verify cheque images in real-time for mobile, ATM, and teller deposits. www.softpro-na.com

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Continued from page 23

the cheque as well as the positioning of the cheque number and length of a signature line. • Payee line recognition: The software can interrogate the bank’s blacklist or whitelist to automatically reject or process cheques. Standard payees, for example a utility company on the whitelist, will trigger a pay decision. • Leverage peripheral information: The software can also take into account information from other fraud systems to come-up with a final combined score. The rules and weightings used to derive the final score can be custom set, ensuring a more tailored fraud detection solution. Establishing a balance between security and convenience is not easy. When it comes to instant cheque verification of ‘on-us’ cheques, however, there is technology that can make that delicate equilibrium easier to attain, thus providing convenience to the customer while realizing no increased fraud risk. ABOUT THE AUTHOR: Rodney Vesling is president of SOFTPRO North America, an electronic signature and signature verification software provider used by 12 of the world’s 25 largest banks. SOFTPRO’s electronic signature technology can capture a secure e-signature at account opening, both online and in-person, and complements

However – and it is a big however – those who seek to promote payment methods for corporate profit must not be allowed to eliminate choice to suit their own ends. At the moment, 85 per cent of retail payments are made with cash – by people exercising their free and independent choice to do so. If they choose to do differently, so be it. But no vested interest should be allowed to take that choice away from them because, once gone, it would never be recovered. In most places where cash use is falling, this has at least partly been engineered by vested interests making cash less accessible. Mostly this has been brought about through a reduction in ATM numbers. Thus choice has been removed, not freely exercised by the public. Freedom, choice, independence – all gained to no small extent through the existence of cash. That’s the reason its popularity has been sustained for nearly 3000 years – and why we desperately need it continue to remain as a payment option. With apologies to those with a republican leaning – Long Live The King! Ron Delnevo is the executive director Europe with ATMIA. eMail ron. delnevo@atmia.com or call +44-(0)7973210154. Visit www.atmia.com

If you have any editorial ideas contact Karen Treml, Editor, at karen@paymentsbusiness.ca 28

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July/August 2014

Service Directory

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see youR company name here Contact Mark Henry mark@paymentsbusiness.ca 1800-668-1838 x 223

July/August 2014

PAYMENTSBUSINESS

industry Update

ACH Payments and Electronic Funds Transfers By Paul Burak

anada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the Act) obligates certain businesses with money laundering vulnerabilities to identify clients, keep records, and report prescribed transactions, among other things. We’re often asked by payment processors and transaction intermediaries whether they have those responsibilities. We helpfully respond – sometimes. Determining whether the obligations apply depends on facts of the situation.

Is your institution subject to Canada’s AML rules? Some institutions are subject to the Act because of what they are (e.g. a bank) while others are obligated because of what they do (e.g. selling diamonds for cash). Since payment processors aren’t specifically mentioned as being obligated because of their business type, the sections relating to activity based obligations, particularly those related to money services business (MSB) activity, become the most relevant. Specified MSB activities include: • remitting or transmitting funds • issuing or redeeming negotiable instruments • foreign exchange dealing

What constitutes remitting or transmitting funds? Remitting or transmitting 30

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funds involves the transfer or execution of instructions for the transfer of funds. Exemptions include: • transfers using a credit or debit card, if the recipient has an agreement with the payment service provider permitting such means of payment for goods and services; • a transfer where the recipient withdraws cash from their account; • a transfer carried out by means of a direct deposit or a pre-authorized debit ; or • a transfer carried out using cheque imaging and presentment. Though ACH payments are not explicitly mentioned in the exemptions, they would be included under the exemption of ‘a transfer carried out by means of a direct deposit or a pre-authorized debit’. Some types of ACH payments may not benefit from that exemption due to structure and purpose. For instance, a client may request direct deposits of employee salaries and also request separate payments to suppliers for the purchase of goods (without using a credit or debit card). The direct deposit would be considered an ACH payment exempt for any obligations under the PCMLTFA while the supplier payments may be deemed EFTs with corresponding legislative requirements. Even a few qualifying transactions

conducted in a year would qualify a payment processor as a money services business.

What constitutes issuing or redeeming negotiable instruments? Issuing and redeeming negotiable instruments is seldom applicable to a payment processor, since it requires that instruments are those of the entity, not of a third party. Businesses that accept negotiable instruments as a form of payment are considered to be cashing the negotiable instrument and not redeeming it. The redemption would be conducted by the same entity that issued the negotiable instrument and they would be subject to all legislative requirements stemming from this.

What constitutes foreign exchange dealing? Foreign exchange dealing is conducting transactions where currency is exchanged for another (whether electronically, through instruments, or physical currency), which may be effected through ACH transfers. It does not include transactions where change is provided in Canadian currency after the purchase of goods or services (other than any of those in the above mentioned money services business activities) with foreign currency. Any excess funds provided in addition to the July/August 2014

one(s) required to pay for the product or service would be considered a foreign exchange. With the expected passage of the Budget Implementation Act (the BIA), even companies outside of Canada providing foreign exchange services to people in Canada would be covered. The BIA may also result in virtual currencies being considered currencies in Canada and subject them to foreign exchange standards

What do you do if you are covered? Those payment processors considered to be MSBs because of their activities are required to: maintain an updated registration with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), retain records of prescribed transactions, identify customers in cases of prescribed transfers with a value of CAD 1,000 and more, report prescribed transactions to FINTRAC, and develop/implement an antimoney laundering compliance program. Upon registration as an MSB, it’s likely you will be subject to a FINTRAC compliance examination. Your compliance program should be fully implemented and effective prior to examination. Paul Burak is manager – AML compliance, MNP and former FINTRAC examiner. He is recognized for being an expert on anti-money laundering compliance issues for entities of differing complexity.