Payments Business Magazine MayJune 2015 by Lloydmedia Inc

May/June 2015

The Merchant’s Guide to Transactions, Cards & eCommerce

Cards, Cards, Cards

Travel rewards cards, healthcare debit cards, and credit cards also in this issue:

❱ Vertical Market

Delivering an exceptional customer experience

❱ Technology Update

Real-time payments data

❱ Pay Channel - Leveraging RDC Mobile Supplement

Bringing mobile payments to market, securing the next-gen of payments, and looking at cloud-based payments PM 4 0 0 5 0 8 0 3

Table of Contents

May/June 2015 Volume 6 Number 3 Editor Karen Treml karen@paymentsbusiness.ca Publisher Mark Henry mark@paymentsbusiness.ca

COLUMNS & DEPARTMENTS 34 ACT Canada Update

FEATURES REGULAR COLUMNS

Contributors Chris Byrd; Deepak Chopra; Jason Davies; Mark Flamme; Steve Gilde; Fern Glowinsky; Errol Greene; Kevin Grieve; Catherine Johnston; Kurt Mathis; Sally Seston; Gerd Thys

Creative Direction Jennifer O’Neill jennifer@paymentsbusiness.ca

Optimization in Credit Card Processing

Photographer Gary Tannyan 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. ©2015 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.

Travel Rewards Cards Will you be first in wallet for Millennials?

Healthcare Debit Cards Bringing electronic payments to a complex ecosystem

Support insights from the payments industry

The Credit Card in Today’s Payment Space With convenience, globality, and security, the credit card is insulated from its disruptors

PAY CHANNEL Leveraging RDC to smooth the path to straight-through processing

VERTICAL MARKET The payments process: delivering an exceptional customer experience

SEGMENT UPDATE Why traditional payments players should be less traditional

A look at the next generation of payments

Getting up to speed with real-time payments data

Mobile Supplement

TECHNOLOGY UPDATE

Next issue… Made possible with the support of the Ontario Media Development Corporation

July/Aug — A look at the evolution of fraud, cybersecurity, and compliance, as well as an update from SWIFT and a deeper look at remote deposit capture May/June 2015

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CARDS, CARDS, CARDS

Travel Rewards Cards: Will You Be First in Wallet for Millennials? Millennials want to earn quickly and redeem for diverse rewards

W By Sally Seston

ith 76.3 million Visa credit cards in circulation in Canada, and a population of just over 35 million, it is clear that most consumers have several cards in their wallet. ‘Millennials’, those born after 1982, are projected to become 40 per cent of the workforce and over 30 per cent of retail sales by 2020. These consumers have demonstrated that they are motivated differently than the ‘Baby Boomers’. The question marketers need to answer is how to engage with them to build long term loyalty and ensure that your card will be first in an overstuffed wallet. Consumer insights and trends research will point you in the right direction. In order to capture and sustain their loyalty, it’s important to understand three key Millennial needs and ensure your program meets them.

1. Earn fast, redeem fast Millennials crave adventure and discovery. They see the world as an exciting place to explore and seek out novel experiences. For May/June 2015

this reason, the idea of travel rewards is enticing. However, with only 56 per cent of surveyed Canadian Millennials saying that they have achieved financial independence, the Millennials of today have relatively lower income compared to the big spenders they will become, so accumulating points in programs means that rewards are too distant a dream. Most programs require a significant financial investment from the cardholder in order to accumulate the points needed to earn a travel reward, and even Baby Boomers do not earn these rewards on a very frequent basis. Millennials were raised in a world of instant gratification, and marketers and programs need to satisfy their need to earn fast and redeem fast. At the same time, Millennials are a social group. Whether collaborating or socializing, they want to experience what their friends experience and the ‘fear of missing out’ (FOMO) is of a large concern to them. Shortening the timeframe for consumers to find and redeem

for specific rewards removes this fear and encourages Millennials to frequently check social media feeds for program updates and to be connected to their friends that are participating in the same program. This shortened timeframe heightens the immediacy associated with redemption and also allows them to become brand ambassadors through social media. To capture the Millennial’s loyalty using these insights, programs need to develop offers that allow for the fast accumulation of points towards smaller rewards that fit within a realistic cost per point range. This means broadening the range of partners and offers so that customers have greater choices and more urgency to redeem. For example, this could mean offering a large points bonus when a new card member spends $500 within a defined time period, and then offering them the chance to redeem those points for an Uber trip downtown. In a study by PwC, 83 per cent of respondents PAYMENTSBUSINESS

CARDS, CARDS, CARDS want more flexibility in how they spend their loyalty points. Millennials want the ability to not just spend points on merchandise, travel, or redeem them as cash, but also to transfer the points to use where they play. For example, consider the popularity of mobile gaming among them. Candy Crush, a successful smartphone game that is free to play but requires fees to improve gameplay, could be incorporated into a rewards program by allowing the customer to transfer reward points to get an upgrade in level in the game. Programs using insights and market trends to customize rewards according to what Millennials crave will increase the perceived value of the reward without increasing the cost per point. When you offer rewards that satisfy their sense of urgency, you are not just meeting the needs of their habits but showing them that you understand who they are, and they will reward that understanding with loyalty.

2. Technology is a given, make sure it works. Millennials have grown up with technology literally at their fingertips. They are connected to their social network, their financial institutions, their entertainment, and favourite brands through technology at all times. This dependence on technology means they expect little to no problems with usage. With more choices than ever before available at the click of an icon, Millennials frequently base their assessment of your offering on the best of what they’ve seen. If you want to engage 6

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with them, you need to use technology in the correct way to meet these expectations. Your technology must work before it can exceed expectations. Research has shown that gamification – activities with a reward system – keep customers more engaged with your brand. Instead of a smartphone game, it could be an extension of an existing offer. Loblaws’ PC Plus is an example of this: customers are already saving money on groceries, but the loyalty program allows them to save even more through customized deals delivered when they browse the PC Plus app or website. The key to growing Millennial loyalty is to keep them engaged throughout the earning and redemption process, and leaving tokens of appreciation in the form of points or savings through gamification will grow this loyalty. But master the basics before you think about elevating your offering using technology. For example, your technology must be mobile. If your app or website shows up correctly on desktop, Millennials expect the same experience on their mobile devices. Do not make the mistake of launching quickly without fully testing your app. Millennials are early adopters and their social media savvy means that they will share their frustration with poorly tested programs with their broad network. As quickly as they share great apps, they also share ones that fail. A technical solution is critical for any loyalty program that hopes to get acceptance and/or engagement from

Millennials. Make sure that what you offer works.

3. Inclusivity versus exclusivity Today, travel reward programs are all about exclusive offers. Baby boomers like it that way. They want benefits that show they are part of an exclusive club. Millennials are different. FOMO, the fear of missing out, is driven by their desire to enjoy the same experiences as their friends. Their social nature drives their preference for inclusivity. This transfers to their participation in rewards programs. They engage with a rewards program in order to feel included in a network of their family and friends, and their purchasing patterns and activities can be measured according to the hashtags and social media groups that unify them. They broadcast their opinions on brands and products online, to feel included and also to show each other the best rewards and deals. Your loyalty program should provide an exceptional experience consistently at every touch point to encourage positive social sharing. A study by Accenture reveals that 67 per cent of Millennials are more interested in banks that provide tools or services to help them monitor a budget, so give them value-adding content such as tips to save on travel, entertainment, or retail purchases. When Millennials want to redeem, their preference is to experience the reward with their network. But, with limited points earning potential, they are not in a position to redeem for more than one person. If you offer them the option May/June 2015

to have multiple accounts contributing to a reward (for example, allow the two people in the Uber cab to share the fare when they redeem) or to share and allow for one touch purchasing of the same reward by friends (for example, when the first person chooses to redeem for a restaurant gift card, their friends can do the same making the joint dinner a reward for all), you meet their need and encourage more frequent engagement and redemption. Millennials want to earn quickly and redeem for diverse rewards. Recognizing that the traditional travel rewards do not meet these needs and using customer insights to understand their values and technology to engage and allow them to share will ensure your earn and burn offers will convince them to stick around even if a competitor offers a better reward. Sally Seston is a Director with Retail Category Consultants Inc., where she is involved in a variety of projects to drive sales growth and build loyalty for retail clients. A seasoned retail executive with over 20 years of experience, she has held several senior leadership positions with major Canadian retailers, having risen through the ranks of the merchant organization. Prior to joining Retail Category Consultants, she led marketing, business improvement, and innovation initiatives for Loblaw Companies Limited. Her career there started in 1992 when she joined the Category Management Team. She holds a Masters Business Administration (MBA) from the Ivey Business School at the University of Western Ontario and a Bachelor of Science (Honours) in Computer Science from Queen’s University. A sought after speaker, Sally has presented at many conferences throughout North America. In addition, Sally is a member of the Advisory Board for the Payments Exchange. With little sleep and much humour, Sally juggles three children and life split between homes in Canada and the U.S.

CARDS, CARDS, CARDS

Healthcare Debit Cards Bringing electronic payments to a complex ecosystem

W By Chris Byrd

hen it comes to complexity, there are few payment ecosystems that can match healthcare. A myriad of rules govern what gets covered and where, and how much the payer (government or private insurance) pays and what is left to the responsibility of the individual healthcare consumer. These rules are customized based on a number of considerations â&#x20AC;&#x201C; political, budgetary, and employee recruitment, motivation, health, and retention. May/June 2015

All of this is taking place in front of a backdrop of ever escalating healthcare costs. According to the Canadian Institute for Health Information, over the past ten years per capita private sector health spending grew at nearly twice the rate of inflation. Sixty-five per cent of Canadians have some form of supplementary private health insurance, and much of this is provided by their employer. So the cost pressures are increasing on employers as well as individuals. Employers have a number

of options to provide this supplementary coverage, but as they continue to grapple with this cost challenge, they are increasingly turning to Healthcare Spending Accounts (HSAs). These HSAs are used by employers to help their employees and eligible dependents pay for healthcare expenses not covered by the provincial plans. HSAs can be a superior alternative to traditional insurance and a way for employers to not only control costs, but also improve employee satisfaction. PAYMENTSBUSINESS

CARDS, CARDS, CARDS Access to the funds in these accounts, traditionally paperbased and cumbersome, has recently been revolutionized through the introduction of highly sophisticated debit cards. These cards provide a significant increase in consumer convenience and utility while providing a high degree of flexibility to support a wide range employer plan designs. Their functionality goes well beyond that of traditional debit or prepaid cards due to the unique demands of this complex market.

About healthcare spending accounts An HSA is an account with a fixed annual benefit funded by the employer. Each employer can define the amount of benefit and what expenses can be paid from the HSA, and can even set sub-limits for different types of expenses. For example, Employer A may decide to provide $750 for any combination of prescription drug, dental, vision, or

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paramedical expenses (the most popular uses of HSA funds). Employer B may opt to provide a richer benefit of $1,000 for the same expenses, while Employer C provides the same $1,000 but does not cover paramedical. And Employer D may provide a $1,000 benefit, with $500 sublimits for each type of expense. The key word is flexibility, enabling the employer to align the benefit with both its strategy and the wants and needs of its particular employee population. The funds are not taxable to the employee and must be used for qualified expenses. Sophisticated technology simplifies the consumer experience HSAs have been around for some time now. Traditionally, they have been administered in a cumbersome, inefficient manner that is inconvenient to the employee, diminishing the value of the benefit. The traditional process involves the employee paying the provider out of pocket, submitting

“Eighty-one per cent of surveyed Canadian consumers are very satisfied with the card, and near 80 per cent say it has a positive impact on the overall group health experience – a powerful halo effect …” a claim for reimbursement, and waiting for a check or EFT. A little more than three years ago, an attractive new alternative was introduced broadly in the Canadian market – a debit card to access the HSA. Under this approach, the participant receives a special purpose debit card to pay the provider directly from the HSA. There is no need for the employee to incur the negative float of paying out of pocket, and no claim form to fill out and submit – a simple and efficient solution. How does the card work? It is a Visa or MasterCard branded card that can be used at any qualified healthcare merchant that accepts those card brands. The complexity of the market’s needs demands highly sophisticated payment technology to ensure that the card can support the rules and restrictions unique to each employer’s plan. It is the requirement that the funds underlying the card be used only for qualified expenses that gives rise to the need for this sophisticated technology. Some primary examples of the technology’s capabilities include: • Selective authorization by merchant category code – to enable use only at qualified May/June 2015

categories of merchants. For example: doctors’ offices, yes; restaurants, no. • Finer selective authorization by merchant ID or terminal ID – to provide more granular control over where the card can be used. This control mechanism enables, for example, restriction to a credentialed network of providers within a certain category. In other words, select chiropractors rather than all such providers. • Conditioning authorization on specific parameters, such as minimum and maximum transaction thresholds or partial authorization of only a specified percentage of the transaction. • Authorizing a transaction only if it matches data from a third party, such as a prescription drug claim from the employee’s drug plan, to ensure that the card is only being used to purchase a prescription drug. • Flexibility to vary authorization rules by merchant. For example, in a drug store, the rule might be to condition authorization on a match with a prescription drug claim, whereas in a dentist’s office such a restrictive rule would not be used.

CARDS, CARDS, CARDS • Reloadable at any time and in any amount, enabling the same card to be used for subsequent plan years and supporting plan designs with quarterly or monthly benefit grants in addition to the more popular annual benefit. • Although the cards were first introduced for HSAs, the technology allows for multiple sub-accounts, or ‘purses’, to be accessed through the same card. Each purse has its own rules and value. So for example the same card could be used to access an HSA, a wellness benefit usable at fitness clubs, and an executive annual comprehensive health assessment usable at a select group of medical facilities.

Historic perspective These special-purpose healthcare debit cards have been used in the United States for over fifteen years and have become mainstream. It is estimated that there are over 40 million Americans who benefit from account-based healthcare plans that use a debit card – over a quarter of

the employer-based healthcare market. They have proven widely popular with both employers and employees. In Canada, the concept is still relatively new and debit card use is not widespread - yet. Great-West Life introduced the first national program, and it is still the only one of its kind in the market. But that appears poised to change.

Plan members love the card One would think that a new product with the complexity attributes present in the healthcare card would carry a high risk for consumer dissatisfaction. The reality is quite to the contrary. Despite the fact that this is a relatively new and unfamiliar product

that works very differently from a traditional bank debit card, Canadian consumers have reacted with strong enthusiasm. 81 per cent of card users surveyed are very satisfied with it, 85 per cent said accessing their HSA is easier or significantly easier, and 84 per cent said the card helps them manage the cash flow of their benefits. Of particular interest to employers, nearly 80 per cent of surveyed employees said the card had a positive impact on the overall group health experience, indicating a halo effect on the employee’s perception of the employer’s broader benefit program. These are powerful satisfaction scores for a brand new product and are directionally consistent with results in the U.S., where satisfaction scores have grown to 90 per cent. As one Canadian consumer said, the card is “a 10 out of 10.” In the ever-changing landscape of employer

healthcare benefits, where companies are struggling to meet the often-conflicting challenges of increased cost pressure and employee satisfaction and engagement, a debit card to access healthcare benefits may be just the answer. It gives the employer flexibility in plan design, makes budgeting easy, is highly valued by employees, and provides a halo effect on the employer’s overall health benefit offerings. It is a great example of how revolutionary payment technology can bring new life to an existing product and pave the way for sophisticated new approaches. Chris Byrd is President and Chief Operating Officer of Evolution1, Inc., a WEX company. Evolution1 is a provider of software and payment solutions to the employee benefit market, with a focus on healthcare benefits. The company’s solutions simplify the administration of benefit plans that include consumer accounts and are in use in over 100,000 employer plans covering over 11 million individuals across North America. Chris oversees the daily execution of Evolution1’s business and leads the company’s business development, M&A, and industry and government relations efforts. He is a frequent speaker on emerging trends in financial services and employee benefits.

The customer experience: the journey from good to great During this interactive discussion on business outcomes derived from improving the customer experience, we’ll show you why the key to overall success is providing choices that match customers’ expectations.

Direct Marketing invites you to a Free Breakfast Briefing July 9, 2015 • 7:30-10am

Twenty Toronto Street Conference Centre, 20 Toronto Street, Toronto May/June 2015

Presented by

FREE to register www.dmn.ca You must be registered in advance to attend.

PAYMENTSBUSINESS

CARDS, CARDS, CARDS

Optimization in Credit Card Processing

Support insights from the payments industry

I By Errol Greene

PAYMENTSBUSINESS

magine working in an industry that has become so commoditized that most prospects’ vendor decision criteria is based on a single factor – lowest price. As a result, margins are razor thin, meaning support, development, and operational costs must be kept to a minimum. Now, combined with all of these challenges, add an additional hurdle – companies must supply mission-critical customer service support to their customers 24/7, as reliable delivery of the service being provided is considered the lifeblood of their customer base. Furthermore, this industry is highly regulated and evolving daily. What’s an acceptable technology practice today might

well be completely dated and require a complete overhaul tomorrow – by law – and not complying could result in financial penalties and/or massive customer migration to other service providers. Welcome to the credit card processing/payments industry. You’re probably feeling pretty good about your industry right now, aren’t you?

Vanishing margins The battle to win new customers in this highly commoditized market is exceptionally competitive, as the majority of new small businesses search on who is currently offering the lowest cost transaction rate. As a result, most credit card processors operate on margins May/June 2015

between one and two per cent and must rely on enormous volume for revenues. So how do companies effectively support their customers – and win new ones – in this hostile business environment of ever increasing expenses and vanishing margins, while keeping customer satisfaction high? “There are a variety of challenges that are fairly unique to the credit card processing industry,” says Dave Kelly, senior director of risk services for Tsys, a large credit card processor based in Columbus, GA. “Because of the constant threat of data breaches, we’re required by federal regulations to ensure we’re keeping all of our customers’ plus their

CARDS, CARDS, CARDS customers’ data highly secure. We face new threats every day, especially from organized criminals and gangs that hack on a large scale.” No question, on the top of all financial hackers’ wish list is compromising a credit card or credit card processing company. These companies constitute the Mount Everest of hacking targets. “All of this costs a lot of money – and it seems that processing rates get more competitive every day, so the industry is continually asked to find new and more efficient ways to do more, with less,” adds Kelly.

customer choice. By understanding the business of customers and end-users better, credit card processors are in an improved position to recommend the right technology that will remove potential roadblocks in their business. That adds value and differentiation –value worth paying for. Smart companies have realized that investing in technology that can help their customers better target specific markets will help differentiate them in their prospects’ minds.

Streamlining cost not quality

Some companies are also reviewing their top support requests on an ongoing basis, then taking that information and updating their self-service support IVR, or interactive voice response system. This enables them to resolve most customer issues without needing to connect with a live agent. For instance, most customers have similar questions, such as – did a particular charge go through and when will the funds be deposited in my account? By resolving these in an automated format, a large number of support calls never need be connected to a live person, and the customer is happy because their call is more quickly resolved than if they’d had to speak to a live person. Supporting the IVR is an escalation group, comprised of a variety of employees from well-paid in-house veteran to well-trained English-as-a-first-language nearshoring outsourced support who can take calls that can’t be effectively answered by an automated

That translates to needing to be exceptionally efficient in delivering customer support and finding ways to streamline operations without reducing quality of service. So how do successful processors do it? Step one begins with having a better understanding of customers and their needs. By researching and learning how their customers’ customers want to pay and interact, processors can deploy technologies that best support their preferences and target those preferences. For example, a food truck selling primarily to young urban Millennials will likely need to support a quick processing technology that a younger crowd has bought into. Apple Pay or Digital Wallet, which allows for a mobile crowd to move quickly and easily though queues, is a great fit and will likely keep lines shorter, meaning reduced customer defections during short lunch hours when lines can impact

Optimizating IVR – a tiered approach

May/June 2015

system. Nearshoring is a good alternative, as most nearshore agents watch American TV and sports, and are familiar with the culture, leading to a more conversational style of interacting. When combined with veteran Tier 3 in-house agents, AHT (average handle time) per call is reduced significantly, and customer satisfaction scores jump as a result, while keeping costs low. In an era of online customer reviews serving to either drive new business to – or away – from vendors, having a team of well-trained agents with strong communication skills and who are adept at answering questions quickly and solving problems efficiently is proving to be cost-effective and an invaluable benefit. It also reduces management and training costs, so when viewed overall in relation to its impact on customer attrition – and the lifetime value of a customer – it proves to be a very cost effective way to reduce attrition. Additionally, new thirdparty software programs are able to ‘learn’ customer preferences over time, enabling full customer profile snapshot screens to pop up during support calls. By having access to information and past history quickly available to agents, call times can be reduced, further decreasing AHT and support costs at the same time. This ‘tiering’ approach is effective in reducing costs by optimizing support levels based on the lifetime value of the customer. Many companies deploy a model where top customers (Tier 1 companies) who spend the most money go to a team of highly trained veteran in-house agents. The

second tier, made up of still valuable customers, but those who have fewer transactions than Tier 1 customers can be sent to near-shore locations, but at a roughly 30 per cent discount from their in-house peers. Finally, for Tier 3 customers who spend very little, an IVR system can be set up and calls that can’t be handled by that system are routed to very low cost providers in India or the Philippines. This allows for a high level of service to be delivered to key customers, while still keeping costs low on an enterprise level, ensuring the high value customers are less likely to defect to another processor. While the credit card processing industry may be more commoditized and competitive than most, other industries would be smart to look at the support innovations they have brought to the marketplace, and learn how to reduce costs within their own companies, while maintaining high service levels and reducing customer defections. Errol Greene is Solutions Development Director for Clear Harbor, LLC a strategic near-shoring firm based in Atlanta, GA (www.clearharbor.biz) with operations in the Caribbean. Founded by call center industry veterans who had, “seen it done wrong more than done right.” They dreamed of creating a strategic “co-sourcing” company that focused on specific core competencies and delivered world-class customer experience as a result. With this collaborative approach, clients achieve remarkable improvements in customer experience and revenue enhancement, while at the same time, reducing operational costs. To learn more about ways your own company can build a profitable customer service engine, contact Errol Greene, Solutions Development Manager for Clear Harbor, LLC at 678-566-3212, ext. 70304 or email egreene@clearharbor.biz

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CARDS, CARDS, CARDS

The Credit Card in Today’s Payment Space With convenience, globality, and security, the credit card is insulated from its disruptors By Karen Treml

ith the many payment options available today, the credit card continues to be a popular choice for consumers. Its ubiquity is owing to its convenience, global acceptance, and relative security – security that has increased with the evolution of technology from the physical signature to the magstripe to chip and pin. Payments Business (PB) spoke with Catherine Johnston, President and CEO of ACTCanada, about EMV compliance, the future of credit cards, and the effects of mobile payment. PB: While Canada has used chip and pin technology for several years, the U.S. and China, among other countries, are still in the process of EMV migration. What are the barriers to successful U.S. migration by the October 2015 compliance date? Johnston: There are a lot of cards, devices, and software that have to be changed to meet the compliance date. Merchants have to perform end-to-end

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testing to show that they’re EMV compliant, that everything works, and that there are no new problems. There are only so many test labs and only so many cycles available. Given the number of merchants in the U.S. that have to go through the process, statistically it is not possible for them to get there by October. PB: What is a reasonable expectation for ‘largely compliant’? Johnston: Largely compliant is a figure we all talk about in terms of 80 per cent. So when 80 per cent of transactions are completed with a chip reader talking to a chip card, that’s when largely compliant is realized. Industry opinions indicate it will be 2018 or 2019. I think it could be 2019 to 2020. It is important to note that we were not at the 80 per cent mark in Canada when we reached our liability shift date. PB: With other payment forms making their way into the May/June 2015

payments space, will the credit card endure? Johnston: We are going to have plastic for a long time. Cards are easy and convenient, and something people are accustomed to. For a new payment method to have an impact on card usage, it would have to provide everything that cards do – plus more. For example, cards had the benefit over cheques because cards gave consumers something that they didn’t have in the past – the ability to spend someone else’s money for a month at no charge. Cards also provided globality. They can be used anywhere in the world and the payment network guarantees the funds. PB: What do cards currently not offer that consumers perhaps want? Johnston: Consumers say they don’t like the number of cards they have to carry in their wallet. In the early days you couldn’t put more than one payment

CARDS, CARDS, CARDS application on a card because the magstripe couldn’t support it. But today, with chip cards and sophisticated operating systems and software, it is possible to put numerous applications on a single card the way you put numerous applications on your PC, tablet, or mobile phone. So, it is possible to actually reduce the number of cards. PB: What is the barrier to having that ubiquitous card? Johnston: It comes down to a number of things. You can control what goes onto the card if you are the one issuing the card. So would we ever see a card where the consumer chooses anything they want as they do with their PC? That is not likely to happen because of the security requirements of the applications users may select. I can see cards that issuers put out where different existing cards are bundled together, or consumer-selected cards where consumers choose to bundle all of their loyalty cards, as an example. We see multi-app on mobile phones and it can exist on cards. PB: Given the flexibility of cards, is mobile payment really a disruptor? Johnston: I’ve been hearing that we were going to go straight to phones since the 1990s. So it has not been as disruptive as was predicted. In fairness, I remember in the 1980s we were saying chips in five years, and that took much longer. There is a healthy future for mobile but we are still trying to determine, globally, where the money

is. What is it that we can put on a phone that consumers or someone else will pay for? How do we drive revenue in mobile commerce? Until that question gets answered, it is hard to predict at what point we start to prefer phones to cards. We also need to determine why the consumer would want to use their phone rather than pull a card out. One of the things we’ve found very interesting over the last three years is that when we’ve done some research with seniors, including baby boomers, and then with college and university students we found that both groups have similar desires and similar concerns when it comes to cards and mobile payments. It was very surprising to us when the students that we dealt with for the most part said, ‘if you want me to pay with a phone I’m fine with that, but I want a card to go with it and it needs to be a major branded card’. One of the things that we don’t think about when we are designing for a younger generation is that they’ve grown up using technology in a different way than we have. They understand its strengths and they also understand its weaknesses and most of all, they understand their own use of it. I have people that tell me all the time that their children never leave home without their phones. Yet, one of the things we hear from students is that they often don’t know where their phone is, or it is broken, or the battery is dead. So, in the end, I think we will see mobile payments moving forward, doing everything that cards do, and perhaps doing additional things, but I also see May/June 2015

cards staying in the market and doing what they do well. They will coexist – likely equally. PB: There seems to be a concern from the banks that mobile payments are going to change the way banks do business and affect the relationship they have with customers. Do you think these are valid concerns? Johnston: If we are talking about bank issued mobile apps, the relationship between the issuer and the customer is the same as with payment cards. PB: There are some branding issues no doubt, and some issues of someone paying with someone else’s app? Johnston: That’s a different issue and it is a real and quite serious issue. When you take a look at paying through Apple Pay, Google Wallet, or other wallets, if the customer thinks that that is who they are paying through and if they don’t understand that the payment is actually being done through their credit or debit card, then they start to think their financial institution is not at the heart of the payment transaction when they really are. I can absolutely understand why financial institutions are concerned about this. If Apple or Google or any of the others decide to take out banking licenses, will the consumer then think they should be doing their banking with these other organizations? Not only does this erode branding and the sense of loyalty, but the other question that comes to bear is

whether we can afford to have some payment stakeholders regulated – even if only by code of conduct – and not others. And will Canadians assume because we have had the benefits of a terrific banking system, that these other non-regulated ones are in fact regulated? Does that lead Canadians to make assumptions that could put them at risk? PB: In reality, at the end of the day, will one payment method ever prevail? Will payments ever come down to a single form factor or a single card? Johnston: No. No one truly wants things to come down to a single card because everyone has had the experience of walking away from a gas pump or some other transaction and leaving their card behind. People want fewer cards, but they want a backup. And with mobile payment methods, it is the same thing. If you don’t have your phone with you, or if it isn’t working, the back up plan has to be the card in your wallet. For that reason, all of the form factors will continue to coexist.

ACT Canada Insights • Networking • Visibility Since 1989, ACT Canada has been internationally recognized as the stakeholder association that drives payment evolution and digital identity. Stakeholder dialogue drives profitable decisions. Join us. For information, please visit www.actcda.com.

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pay Channel

Leveraging RDC to Smooth The Path to Straight-Through Processing Integrated systems lead to faster reconciliation of cheques, which means lower costs and speedier remittance

I By Kurt Matis

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am waiting for the day when I can pay for everything – groceries, trips, my mortgage –by waving my hand over a sensor on my watch. We’re moving in that direction; at some point, as the cost of smart phones drops and the technology for mobile payments catches up to consumers, technology will advance to the point that both making payments and reconciling remittances become swift and painless. But for now, we use cheques. They’ve stood us in good stead, making it convenient for people to make payments wherever they are. And while cheque use overall is in decline, cheques still accounted for over 50 per

cent of B2B remittances in 2013, according to the ‘2013 AFP Electronic Payments Survey’. Needless to say, we’ll be using them for at least a decade to come. At the same time, organizations from small businesses to enterprises need to ramp up for the inevitable online and mobile advances that are making waves within the payments industry. We need a solution that can process cheques and remittance documents more efficiently, saving us time, improving cash flow, and reducing costs, while helping us integrate multiple payment platforms into one easily managed, low-cost solution. May/June 2015

Believe it or not, cheques are the key to the whole thing. You can ease your organization into the new world by ensuring that you’re capitalizing on the efficiencies and cost savings associated with using remote deposit capture (RDC).

Why RDC? By using RDC, you can streamline your operations, delight your customers, and speed access to funds. Businesses love it because of the convenience of being able to deposit a cheque from anywhere via a computer or a mobile phone. Banks love it because they don’t have to staff as many branches. Consumers love it because they no longer

Pay Channel have to take physical cheques to the bank to deposit them. If you’ve already tried RDC, you may be shaking me off – but hear me out. There’s a fondly held perception that the more complex your operation, the less value RDC adds, because you still have to manually enter information into multiple remittance devices. So by implementing RDC, you’d just be adding another layer of complexity to your already complex accounting system, right? Wrong. The beauty of RDC is that it positions you for straight-through processing (payment acceptance, processing, and posting in a single pass), which helps you create consistency and efficiency in process rules and workflows, no matter which payment method was used: cash, cheque, ACH, credit card, or mobile payment. Remember, each time a set of eyes has to take another look at a payment in process, it costs you money. A more streamlined process reduces costs and errors, and speeds remuneration as well.

Innovation to the rescue Manual data entry is becoming a thing of the past, thanks to advances in scanning technology. High-tech scanners automatically read magnetic ink character recognition (MICR) line data to ensure that the cheque isn’t a forgery and that the amounts in the courtesy (numeric amount) and legal (written letter amount) fields match. The need for manual remittance oversight has dropped accordingly. Before RDC, on average, scanning a cheque cost 40 cents and remittance cost 10

cents – but with RDC, scanning a cheque these days can average around 12 cents and remittance less than five cents. With RDC, you can build business logic into your processes, using intelligent invoice matching to match up customers with their invoice items automatically. MICR scanning can automatically match the cheque sender with their invoice – so even if one of your customers forgets to include an invoice or remittance document with their payment, your system can still identify the customer and apply the payment to their balance as appropriate. By building in business logic, you can determine whether those funds should apply to the oldest balance, the newest balance, or something in between. Taken a step further, when you leverage a centralized payment platform to manage your receivables, you can upload outstanding invoice files and automatically get remittance information within a single user interface. This, in turn, can also leverage business logic to seamlessly post payment information into your back office accounting systems. Using RDC enables you to build automatic reconciliation into your system, as well. If a customer sends a cheque for an amount that isn’t the exact balance due, the system determines how the customer came up with that amount – for example, if a customer remits payment for two outstanding invoice items within a single cheques – and reconciles that automatically. RDC is also ushering in a new age of self-service. Take May/June 2015

mRDC, or the mobile version of RDC, where a customer remits payment by simply taking a photo of a cheque and transmitting it via an app on their mobile device. Originally developed for the consumer audience, mRDC is now being used by businesses to make B2B payments on the fly. Let’s use a food distributor as an example. When the distributor makes a delivery to a restaurant, the restaurant owner can write a cheque or pay by ACH or CC, and get the payment into the distributor’s system quickly and securely via a mobile payment app. Payment is made on delivery immediately, and the driver of the delivery truck doesn’t have to carry around hundreds or thousands of dollars in payments, which can bring even more security concerns into play. Not to mention the potential for delays and misplaced documents that can result from the physical transportation of payments. Combine that kind of selfservice with mobile invoice presentment to accurately associate payments with the appropriate outstanding invoice(s), and you’ve taken the first step in straight-through processing via the mobile channel. Exciting stuff, and much more within reach than you might think. There’s more good news: scanner prices have come down significantly since RDC was first deployed. Price used to be a barrier to entry, but scanner prices have dropped, allowing companies to buy an effective model for $500 (or less) instead of the $2,000 (or more) it once cost. Using RDC means remittance is swifter,

costs are down, and funds are available to the recipient more quickly than with manual reconciliation. For a system that reduces exception handling and speeds up the process of data entry, $500 or even a bit more starts to look like a nice bargain. When you consider moving to RDC as part of a larger move to integrate all your payment acceptance methods and channels into one flexible, easily managed system, it starts to look like a gamechanger.

Next steps If you’d like to position your company for straight-through processing, you need a solution that will integrate seamlessly with your back office accounting and internal systems. The solution should allow you to view transactions, see the status of each deposit, and extract data for bulk uploads and reporting. If you’re ready to start exploring what RDC can do for you, you may want to keep these things in mind: • Commit to streamlining: Have a plan to streamline your financial operations – don’t add complexity to your processing environment without an integration plan. If you keep adding disparate solutions to your system, your system won’t be integrated – it’ll just add another set of reconciliation reports to your workload. Any solution you choose should make it easier for you to adopt straight-through processing – not harder. • Scanner requirements: If you’re in the market for a scanner, look for one PAYMENTSBUSINESS

Pay Channel that can capture images and automatically convert them into the right file type for your system, and then automatically pull information from the document to submit it for processing. Many companies are finding it important to scan not only cheques, but also the up to 8.5” x 14” remittance advices that accompany payments. Make sure your scanner(s) of choice support your unique document size needs as well. • Workflow: Look for a solution that will enable your organization to build in unique business rules within processing workflows to take advantage of available

automation. This will not only increase efficiency, but it might also allow you to repurpose your most valuable resources – your employees – to higher value functions such as data analysis or new product development. • Flexibility: Don’t get tied down to one kind of technology, one financial institution, or one creditcard processor – look for a solution (and a partner) that is flexible enough to grow with your business. You don’t want to have to move to an entirely new solution if you just want to change banks or credit-card providers.

• Find a partner: Look for someone who excels at security and compliance, has experience with mobile processing, and understands the payments industry – particularly straight-through processing. Customers can be slow to adopt new platforms, so look for a partner who has the flexibility and experience to be a good advisor for you as you move forward. There’s a brave new world ahead, and it’s coming at us faster than we realize. Remember: your RDC/ mRDC solution should lead you toward straight-through processing, not away from it.

WOMEN IN PAYMENTSTM SYMPOSIUM 2015

SAVE THE DATES! SEPTEMBER 15 & 16 New this year: Join us at an exciting Awards Dinner on September 15! Award nominations open until June 15 See womeninpayments.org for program and other information

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May/June 2015

Planning for integration now is a great way to prepare for the future of receivables. Kurt Matis is the President and CEO of Financial Transmission Network, Inc. (FTNI). He brings more than 25 years of financial and operational management experience and insight to FTNI’s clients. Before founding FTNI, he co-founded L&M Energy Partners, LLC., where he designed and rolled out the company’s Automated Contract Tracking Software, which is used by customers throughout the U.S. From 1999 to 2003, Matis was the Chief Financial Officer of R.J. Thompson Holdings (RJT), which was acquired by TD Waterhouse. He received his BSBA from the University of Nebraska at Omaha with majors in Finance and Banking, and his MBA from Creighton University, for which he was inducted into the Beta Gamma Sigma Honor Society. Matis holds a CPA certificate with the State of Nebraska and is a member of the AICPA and the Nebraska Society of CPAs.

VERTICAL MARKET

The Payments Process: Delivering an Exceptional Customer Experience P By Fern Glowinsky

ayments are certainly a necessity for business. Time-pressed business owners have come to value simple and effortless interactions with their payment solution provider above all else. A positive customer experience is ultimately defined by how quickly a customer is freed to go back to the work of running their business â&#x20AC;&#x201C; whether that is selling shoes or managing a restaurant. Payment solution providers can evaluate the quality of their customer May/June 2015

experience based on whether they have the right technology and products, seamless delivery, and accessible support.

The right products Product innovation has a significant impact on customer experience. The payments business of just five years ago operated a lot more like a financial service. The technology aspect of the business may have been an afterthought rather than a driving force. Businesses were satisfied with traditional,

hardwired point-of-sale devices and standard card acceptance. A negative or positive customer experience was based on how well those basic needs were met. Fast forward to today and payment solution providers are regarded as technology providers. Many providers are embracing change to enhance the customer experience and have moved past providing only the core tools for getting the job done. Businesses are Continued on page 20

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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

VERTICAL MARKET Continued from page 17

evaluating payment products not only for utility, but for the added benefits they can bring to their operations. Payment companies are increasingly investing in technology and a form factor that supports the ‘everywhere point-of-sale,’ solutions that integrate with business applications and a wider range of security tools.

Seamless delivery of services Full service capability is a key differentiator for businesses looking for a reliable payment processing service. With insourced logistics and repair, fully integrated providers have the ability to manage the quality of service from end-to-end. By not handing off parts of the experience to an outside provider, important pieces of the order fulfillment process, such as order placement, deployment and on-site installation, are streamlined. Full integration offers a faster, more customercentric approach to delivering the products and solutions businesses need. The rise of self-serve is also part of the move toward more seamless service delivery. Self-serve allows customers to retrieve the information they need at any time and empowers them to guide that interaction to a certain degree. Instructional YouTube videos and downloadable manuals are examples of resources customers can use to set up products on their own. Online self-serve tools are expedient alternatives for customers interested in signing up to receive more 20

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information, viewing business reports and making updates to their accounts. The popularity of self-serve is rooted in its convenience and the freedom of choice it gives customers.

Accessible customer support In response to more robust product offerings, customer support needs have also changed. Calls for support that once involved troubleshooting a malfunctioning point-of-sale device have been replaced by queries of a more technical nature. Support calls have become more complex and time consuming as more and more businesses add ecommerce and mobile payment channels to their operations. Issue resolution is no longer as simple as sending a customer a replacement piece of hardware. Payment providers must ramp up their support teams and allocate the right resources to handle a growing number of technology-oriented calls. Social media is an additional avenue of customer care that is growing in importance. Ten years ago, a customer may have taken to email or a handwritten letter to air their complaints. Today, they can opt to amplify their experience broadly on social media. Social media has prompted all service providers to become more accountable to their customers. It should be embraced as an opportunity to showcase a company’s integrity and transparency. Service providers are looking at ways to leverage social media to educate their customers. Platforms like Facebook and YouTube can

be used to identify and direct users to customer support tools such as instructional videos and infographics, as a means to proactively inform rather than passively respond to their comments. Companies can go one step further by fostering a community or forum that allows customers to share with each other to enhance their knowledge of products and services. But a provider cannot forget administration – there has to be a dedicated commitment to observe and participate for it to be successful.

A 360 degree perspective: front and back-end support The ‘back office’ is no longer hidden from view; all customer touch points are in play in today’s payments environment. Back-end support and tools need to match the savvy and sophistication of front-end tools. If the front-end offers an easy customer sign up process and striking visual marketing, back-end operations should consist of an easy onboarding process and around-the-clock customer support. You can lose a customer just as quickly as you gain them if you do not leverage a strong back-end to take care of their individual needs. There are a host of industry disruptors launching new technology into the already crowded payment ecosystem. Back-end support is typically where these companies falter. Emerging companies are looking to make a mark on the industry quickly, and because of that, the depth of investment in their back office operations is usually lacking. Customers are quick to notice May/June 2015

deficiencies in service as soon as something goes wrong and they cannot make a point of contact with their provider in the format they desire. Companies both large and small can run into difficulty if the dependencies of a 360 degree experience are ignored. For example, sales may do a great job of signing a new customer, but the customer experience could easily take a turn for the worse if the order gets stuck in the fulfillment process. Components of the order fulfillment process are not always visible to other parts of the organization and in order to maintain customer focus across different lines of service, there needs to be a dedicated group that polices the end-to-end experience. The job of this group is to remind employees that there is a customer at the receiving end of not only their individual function, but the collective process, and to make that mindset a high priority. In the end, it may be an obvious statement, but it’s incumbent on organizations to deliver an exceptional customer experience, endto-end. An organization’s reputation, success and growth is dependent on it. Customers need to come away from every experience feeling that their needs have been met, and that the path to fulfillment was a smooth one. There is no simple fix to making it work, but looking at your business through a wide lens is a great place to start. As Chief Operations Officer, Fern Glowinsky oversees Moneris’ end-toend customer experience, enhancing operations and service delivery across the company.

Inside:

• Bringing Mobile Payments to Market for Canada’s Largest Coffee Chain • Securing the Next Generation of Payments • Cloud-based Payments

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Bringing Mobile Payments to Market for Canada’s Largest Coffee Chain Implementing best industry practices for HCE/NFC

W By Deepak Chopra

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ith more than 50 per cent of the North American smartphone market adopting Google Android, and the adoption of Android 4.4 KitKat continuing to climb, the market is primed and ready for NFC-enabled mobile wallets. Blackberry 10 devices come HCE-enabled, and in the fall of 2013, Google also enabled Host Card Emulation (HCE) technology on devices running Android 4.4 KitKat. At this rate, millions of mobile devices in North America already have mobile wallet technology in their hands and this is set to grow rapidly. As the market is well primed for NFC and HCE technology, Clearbridge Mobile has paved the way for the industry by building the world’s first commercial rollout of a cloud-based Host Card Emulation (HCE) / Near Field Communication (NFC) mobile payment and gift card solution for Canada’s largest coffee chain. The solution is currently used in more than 4000 franchised locations across

North America, with thousands of mobile payment transactions made daily.

Keys to implementing best industry practices for HCE/NFC Essentially, NFC is a set of standards that allow devices with an NFC chip to communicate with each other over very short distances (inches versus feet). HCE is the ability to mimic a physical smart card (gift card, credit card, etc.) using a mobile device without using the secure element (SE). NFC using HCE has the ability to create a closed loop tap-to-pay application that can seamlessly communicate with NFC-enabled payment terminals. Before the recent advent of HCE, the deployment of NFC services and mobile wallets required access to a secure element (SE) to make a transaction. Multiple parties own access to SE – from carriers to mobile operators – and have their own unique business or technical models. The challenge May/June 2015

surrounding integration between many stakeholders in the NFC ecosystem is one of the primary roadblocks to the deployment of mass-market NFC services. Now, with HCE technology, an NFC payment bypasses the need to connect with the SE; instead, the payment application is hosted remotely within a secure data centre in the cloud. As Canada’s most popular coffee chain, long customer line-ups and frequent bottlenecks at the point of sale (POS) slowed down the ability to serve customers more quickly. Being ahead of the technological curve and embracing the latest mobile payment technologies have allowed the retailer to speed up transactions, reduce long line-ups, and improve overall customer service and experience. The NFC-HCE deployment was rolled out seamlessly by leveraging the merchant’s existing POS (Point of Sale) system. With little to no modifications required to the POS system and no complex infrastructure overhaul required, it helped reduce costs and the technical barriers of deployment. For consumers, the solution offers a faster, secure, and more convenient check out service, allowing them to make a purchase with just a quick tap of their mobile phones. The NFC Application Programming Interface (API) provides a card emulator interface and like most of the system services, are provided libraries, allowing ‘listeners’ to decipher the corresponding NFC event. If the event type is ISO14443 version 4 (used by the existing gift card) the handshake is initiated between the device and the terminal. At the end of the handshake between the terminal and the device, the app responds with the track data. The track data consists of a series of characters associated with magnetic stripe cards that is passed to the POS system for processing. This is the key information passed to the terminal for processing the payment. The details of the byte level data cannot be shared since the format is proprietary. With NFC payments, we know whether the NFC handshake passed or failed. May/June 2015

Testing to validate that correct data is passed to the terminal, and transaction details are correctly updated in the lab and in-store, with the client’s POS and backend systems. Performing testing is crucial and testing with the POS uncovers use cases of the application that would not typically be discovered during development. The examples of the types of tests performed included POS terminal success/failure, application timeout behaviors, network offline Tap to Pay, backend and NFC responses for invalid and inactive cards, NFC success/failure responses, transaction statuses, and types.

relayed to the cloud. The cloud decrypts the token, associates it with the right PAN, and sends the PAN data back to the NFC terminal. The concept of tokenization is not new, however this is the first-of-its-kind implementation in the market. To further bolster transaction security, the PDF417 barcode that is displayed on the mobile device when it is scanned at the POS was also encrypted. This provides additional security and authentication, and prevents duplication to create false barcodes, a security loophole plaguing other NFC mobile payment solutions in the market.

Overcoming key challenges in building a successful HCE/NFC solution

With consumers already toting 575 million NFC-equipped smartphones (growing to 1.2 billion by 2018), HCE based NFC adoption is in its infancy but is on a precipice of exponential growth and set to be an important driver of mobile payment mass adoption. In addition, payment giants such as Visa, MasterCard, and EMV have recently demonstrated support for HCE-based mobile payment solutions and have released their first documentation on developing mobile wallets. In December, RBC Bank became the first financial institution in Canada to implement an HCE mobile payment application pilot. As successful commercialization and support of HCE increases, NFC mobile payment is set to be a mainstream technology and a common method of making a purchase. Furthermore, the significant increase in the shipment of NFC enabled mobile devices will further drive mobile payment adoption rates.

With all mobile payments, a key concern is security. Ensuring the highest standard, end-to-end security throughout the payment loop, from the mobile device, to the merchant’s system to the cloud is imperative. Each mobile payment transaction has its set of security risks and several steps were required to ensure security and privacy. First and foremost was leveraging a secure Payment Card Industry (PCI) compliant environment where sensitive credit card data can be stored, rather than on the mobile application itself. Sensitive payment information held on a mobile device is susceptible to security vulnerabilities. During re-loading and auto reload of account balances, the mobile application makes a ‘call’ directly to the payment processor web service where the sensitive payment information is safely stored, to securely reload funds to the gift card. Tokenization is the next step to opening the mobile wallet from closed to open loop. Tokenization obscures the 16 digit private account number (PAN) data by masking it as a token so that card information is not sent as plain text. Mobile transactions cannot be conducted without the PAN, however, storing PAN data on mobile devices is a security risk – hence the creation of tokens. Tokenization does not transfer track 2 data but rather sends a token to the NFC terminal, which is then

What is next for HCE?

Deepak Chopra is CEO of Clearbridge Mobile. Over the past 15 years, he has become one of the leading experts in the mobile market through various roles including entrepreneur, wireless executive, equity research analyst, and investor. In his role as founder and CEO of Clearbridge Mobile, Deepak leads a world-class team with the goal of building unique and compelling app experiences for the most prominent brands in the world. He leads the operational and business development teams. Before founding Clearbridge Mobile, Deepak was a top-rated sell side equity analyst for over a decade following the technology space. He was best known for his in-depth coverage of the mobile ecosystem. Deepak holds a BASc in Electrical Engineering from the University of Waterloo. PAYMENTSBUSINESS

Securing the Next Generation of Payments As Canada takes to mobile payments, tokenization technology makes transactions safe, secure

PAYMENTSBUSINESS

May/June 2015

By Jason Davies

he era of mainstream mobile payments has arrived with the launch of Apple Pay, Samsung Pay, and others following soon. Tapping our phones to pay is on the verge of becoming the preferred way to pay as innovators find the just-right intersection of convenience and security. This year will see a 1,000 per cent increase in the number of smartphones around the world that are used at least once a month to make an in-store contactless payment, according to a recent Deloitte study. And Canada, as a consistent early adopter of new payment technologies, is poised to lead in this mobile payments revolution. In fact, Canada already leads in North America and much of the world when it comes to mobile readiness – largely because of our adoption of contactless cards. But don’t mistake that eagerness for an irresponsible approach by Canadians, who have made it clear that they require security for their mobile payments. They are simply confident that even as the technology becomes more convenient, it is also safer. At MasterCard, we’re focused on growing awareness and acceptance of mobile and other emerging forms of payment in Canada, and on payment innovations that blend convenience, easeof-use and security.

The evolution of safe ways to pay For nearly 50 years, MasterCard has worked hard to provide consumers with secure ways to pay when, where and how they want, and security has always been at the very core of this work. While our American neighbours are converting to chip cards, Canada adopted these smart cards in 2008. We’ve seen significant reductions in the rates of domestic counterfeit fraud and lost and stolen fraud as a result of implementing chip & PIN. May/June 2015

Now that more than 70 per cent of Canada’s major retailers have embraced MasterCard’s Tap & Go technology, consumers and retailers want even more transactional speed, convenience and security. They want a seamless purchase experience.

the card account number • The cardholder’s information is protected by MasterCard as it’s shared with the merchant and bank • Thus, the cardholder doesn’t risk their card number being compromised

Tokenization: securing mobile payments

Closing the gap between security and convenience

Tokenization is that next step. It is a system that substitutes a token – a stand in – for any consumer payment data to help ensure that privacy and security are always maintained. This substitution provides an additional layer of security by eliminating the need for merchants, digital wallet operators and other transaction participants to store account numbers. MasterCard’s Digital Enablement Service (MDES) is a hosted service for issuers that enables a connected device to safely make purchases or payments digitally. The resulting transactions are protected by the most advanced security technology. MDES helps transform a connected device into a commerce device that can make and receive payments. It enables a token to be locked to a specific channel or device, so if a token becomes compromised, MDES can break the link between the token and the card without disturbing the cardholder. In essence, tokenization gives every mobile device its own vault of changing passwords every time a consumer makes a payment. It manages and secures the cardholders credentials reducing the chance of fraud. All MasterCard transactions on Apple Pay use the platform.

The ideal security system is simple for users – one where there is no trade-off between security and convenience. A signature as security is archaic. Chips and PINs are better, but there is some inconvenience in the need to remember a password. And if the password is broken, the security is broken. Tokenization and digitization have the power to increase security and reduce inconvenience, making the most of the simplicity of tapping a phone to pay. A next, even more convenient and secure step beyond paying with a phone is paying with wearable technology. MasterCard recently announced a pilot project with Toronto-based wearable startup Nymi. The Nymi band is a wearable device that continuously authenticates users based on their unique heartbeat – enabling them to make payments with their MasterCard credit card. Tokenization, combined with the persistent authentication built into the Nymi band, means a consumer could walk into a store, pick up their purchases, hit a button on their phone or wave their Nymi band over a NFC-enabled POS and walk out with their purchases without having to stand in a check-out line. That’s the future of commerce – a future that doesn’t comprise security for convenience, or convenience for security. It’s a future Canadians say they want, which is why the payments industry and MasterCard are committed to making it a reality.

Anatomy of a mobile transaction Here is how security is built into each mobile payment on the MasterCard network: • Once the cardholder first loads their credit card into the device, a “token” is created to represent their card information • Tokens replace the number on your card in each transaction • During authorization and clearing, MasterCard translates the token back to

As Vice-President of Emerging Payments at MasterCard Canada, Jason Davies is responsible for stewarding its digital payment strategy in Canada. He is leading the transition to digital payments not only in eCommerce but in mobile, personal payments, enhanced security, and new ventures. Davies works with Canada’s leaders in digital payments to develop the new operating system of digital commerce in Canada. PAYMENTSBUSINESS

Cloud-based Payments Managing the new payment dynamics

By Gerd Thys

PAYMENTSBUSINESS

ith the launch of Apple Pay, the introduction of Host Card Emulation (HCE) for Android and more recently, Windows for Mobile, it looks like the skies have finally cleared for contactless mobile payment. Cloud-based mobile payment enables a card application to run in the mobile operating system instead of on a hardware secure element (SE), and seems to be the solution everyone was waiting for. It is welcomed by the traditional stakeholders in the payment industry, such as issuing banks, as it allows them to have more control on the total product life cycle - especially when compared to the hardwarebased model. The global card networks such as MasterCard and VISA have quickly endorsed cloud-based mobile payment and have been working on integrating this new means of payment into the existing infrastructure. However, adding ‘mobile’ to the equation requires a new, more agile way of looking at card application management…

Increased dynamics Financial institutions engaging in mobile contactless payments as an issuer, need to be aware of the specific characteristics at the different stages of the card product’s lifecycle. The digitization of cards and the concept of tokenization actually make the process of card issuance and card management much more dynamic. For plastic cards, personalization is about putting static data on the card during a distinct phase in the card’s lifecycle, in the physically closed and secure space of personalization bureaus. Once the card is in the field, opportunities to intervene are limited - for instance, using the EMV mechanism of issuer scripting at the ATM. The end of the lifecycle is similarly clear and simple: the card ultimately expires and is replaced. In mobile contactless payment, card issuance and personalization move into a virtual environment, such as app stores. With a digitized card, the payment application can now be updated simply May/June 2015

and easily without the burden of physically replacing the plastic. When someone changes their handset, they will reinstall their payment application…and at current turnover rates, the life span of a smartphone is much shorter than the average life of a plastic payment card. It is unsafe to store and use the card number (PAN) and cryptographic keys as static data in the vulnerable environment of the mobile operating system. This is where tokenization comes into play: frequently replacing the digitized card’s mobile account related data (including the PAN with a token) reduces the risks linked to stolen credentials. This results in another dynamic process of mobile account management. A number of actors are involved in managing the dynamics in the environment: • The mobile payment platform takes care of the management of the card application. This includes authenticating the device and the user and providing a secure communication between the system and the device. • The cloud-based payments platform is responsible for the digital issuance and the token management. • The digital issuance handles account (data) management and the key management. • The token service provider (TSP) is in charge of the token generation and validation (during the payment transaction processing).

New opportunities With the different roles required to establish and operate a mobile payment environment defined, it is interesting to watch how these roles are being shared out in the emerging landscape. To facilitate the adoption of cloud-based mobile payment, the global (credit) card brands like MasterCard and VISA have taken the initiative to provide tokenization as service. Elsewhere, other parties are providing solutions for card issuers, merchants and mobile wallet service providers to act as a token service provider. It will be interesting to see how much of a role these ‘new kids May/June 2015

on the block’ are able to play in growing the mobile payment space.

the communication protocols between the components in the system.

Beyond the pilots towards global interoperability

With new technology comes new opportunities, and this is particularly true for cloud-based mobile payment. It’s an opportunity for financial institutions to play a lead role and take control… and with control comes responsibilities. In a global payment space there are the obvious external obligations to ensure that the financial institution’s infrastructure seamlessly plugs into the worldwide network. But there are internal expectations too – such as ensuring added value services like loyalty and couponing can be easily integrated into secure payment solutions, using the building blocks provided. The radical switch to software-based security has grabbed a lot of attention. Tokenization, used correctly in a properly configured application, provides the cornerstone to building safe solutions - complemented of course by intensive testing at all stages.

Interoperability has always been the great driver for global payment and with a growing number of people performing payments abroad, either in a physical or a virtual way, it is a prerequisite for success. Cloud-based mobile payment is still very much evolving and we are yet to see how this will result in an interoperable environment. Let’s have look at interoperability from different angles.

At the acceptor side By design, cloud-based mobile payment has limited impact on the card acceptor infrastructure. At the terminal, the emulated card is processed as if it was a plastic contactless card and payment transaction data processing is transparent for the acquiring bank infrastructure. The existing official test infrastructure to support the global card brands has been updated in two ways: • Testing of the contactless EMV interface between terminal and mobile device covers the subtle changes between hardware SE based and software-based card emulation EMV transactions. • Testing of the transaction processing further down-stream between the acquirer, the network infrastructure and the issuer has been extended to support conveying the token related data up to the issuer.

At the issuer side Making the new components connect into the existing issuer infrastructure poses additional, more important challenges. The existing infrastructure may need to interface differently with the new components, and there are strategic choices to be made here: • The perimeter of the ‘own’ system, which determines the data to be exchanged and kept synchronous across the border with 3rd parties. • The choice of the mobile payment technology provider, which will dictate

A novel means of payment with high potential Cloud-based mobile payment gives issuers the opportunity to keep control over the complete life cycle of the payment application. It’s a dynamic, evolving market with new players still finding their positions. With trust playing such a such a key part in customer uptake, interoperability and security are the essential elements. To limit the risks, extensive testing and new certification processes will be high on the agenda for all involved. But the future looks both fascinating and rewarding for everyone, with blue sky opportunities for banks and value-added solutions for customers. Gerd Thys is product manager responsible for the mobile payment test solutions within Clear2Pay’s Open Test Solutions (OTS) division. With more than 15 years of experience in different aspects of card payment and transport ticketing testing, Gerd is particularly intrigued by the migration paths in different markets, triggered by evolution of technology. Gerd has a PhD is Sciences from Antwerp University, Belgium. He is an active participant in standardization organizations.

PAYMENTSBUSINESS

SEGMENT UPDATE

Why Traditional Payments Players Should Be Less Traditional The most successful companies will be those that increase their revenue streams in three key areas … By Kevin Grieve and Mark Flamme

PAYMENTSBUSINESS

n February, the U.S. District Court ruled that American Express’s ‘anti-steering’ provisions reduce its incentive – as well as those of Visa, MasterCard, and Discover – to offer merchants lower discount rates and, as a result, violate antitrust laws. This signalled support for merchants – and looks like another move toward the global trend of lower interchange fees. Both the European parliament and the European Council, for example, recently reached an agreement to cap interchange fees for credit cards at 0.3 per cent and debit cards at 0.2 per cent. Clearly, this trend presents a challenge for financial institutions and credit-card companies, and it’s not the only obstacle. New mobile entrants are sure to take a significant cut of profits from the traditional payments

industry. The Apple Pay wallet has created unique consumer mobile and in-application payment value propositions around convenience, ease of use, and security. According to a Strategy& survey done in collaboration with the Electronic Transactions Association (ETA), approximately 70 per cent of consumers have security concerns around using mobile or in-application payments. But Apple Pay’s unique deployment of biometrics and card-number tokenization has assuaged consumer fears and allowed Apple to enter the payments value chain, unbundle interchange fees, and charge issuers 15 basis points for the reduced fraud risk. Moreover, technology innovations, like the blockchain ledger underlying Bitcoin, will further reduce costs while increasing the speed of crossMay/June 2015

border transactions. Start-ups, as well as established tech companies like IBM and Oracle, are working on advances that could eliminate the role of banks and clearinghouses in this arena – not to mention reduce the overall revenue pool by further lowering transaction prices. As these drivers threaten historic value propositions – such as instrument issuance, transaction routing and processing, and financial settlements – traditional payments players must create new solutions for their customers. Based on our analysis, the most successful companies will be those that increase their revenue streams in three key areas: • Monetizing data • Offering white-label assets • Redefining and unbundling payment services

SEGMENT UPDATE Monetizing data Financial institutions and credit-card companies already possess data assets that can be used to create new value across the digital commerce experience for both consumers and merchants. The key to successfully monetizing this data will be launching products and services that benefit both transaction counterparties across both the consumer and business-to-business commerce experience. Consumers are increasingly going online to shop. They use digital tools to search for products, find the most competitive price, locate deals and offers, make purchases, and earn loyalty and rewards. This year, we estimate that digital tools will influence more than 60 per cent of offline sales. Merchants, meanwhile, are using digital tools to curate the customer shopping experience, provide product information, drive traffic through deals and offers, offer conveniences like ordering ahead, create easy to earn and redeem rewards, and improve marketing ROI. In business-to-business commerce, many processes involve activities to reconcile payment data with other business data. Procurement, for instance, requires reconciling payments to invoices and healthcare providers must reconcile insurance company payments to claims submitted. As these payments digitize, there are increasing opportunities to more tightly link the information and payments flows together to enable straight-through automated processing.

The three most promising data-monetization opportunities are: • Creating a data-sharing coalition. Merchants have a depth of data on their consumers down to the SKU level but no breadth across merchants, while payments players have breadth of data on consumer behavior across retailers but no depth. There are opportunities to create data-sharing utilities and loyalty coalitions that benefit all parties by combining data and creating a richer data set from which to run campaigns. American Express’s multibrand Plenti loyalty program is an attempt to do this; consumers accumulate points at participating merchants no matter what credit card or form of payment they use. • Integrating transaction data with relevant payment data. There are multiple opportunities across industries and functions to improve this integration. The flow of claims information to health care payers from providers and the reverse flow of payments and the explanation of those payments is not efficient today and requires significant manual intervention. Additionally, procurement flows of purchase orders, invoices, and payments between trading parties is often inefficient. Payments innovators are creating solutions for these inefficiencies. For example, Discover has partnered with Ariba to create AribaPay, a solution that links invoice May/June 2015

and payment data together. • Selling access to data. One way to do this is by using consumers’ creditcard transactions’ history to personalize deals and offers. Cardlytics, for example, now partners with Citi, Bank of America, and other financial institutions to analyze cardholder transactions and personalize offers. Matching card transaction data to digital offers, deals, and advertisements enables ‘closing the marketing loop’ for merchants, helping to quantify marketing ROI and refine campaigns. And as merchants shift their ad spend to more targeted and measureable options, they will pay about 10 per cent of the gross sale for a proven closed sale resulting from an offer. Location-based information also has significant potential. Payments players can access real-time transaction authorization data to pinpoint a consumers’ location, or to provide network/processor data on merchant POS locations. On the consumer side, in April of this year, Visa debuted its opt-in Mobile Location Confirmation program, which will verify your location on your smartphone whenever your card is swiped to help prevent credit card fraud. On the merchant side, store locator services, including MasterCard “Merchant Identifier” API and Discover MDP, can be more accurate than merchant’s own data and drive increased foot traffic. Finally, payments data

on sales and fraud trends against an anonymous set of competitors can guide merchant operational and investment decisions. For example, fraud information at the pump level can help fuel retailers prioritize where they should invest in EMV pump upgrades.

Offering white -label assets Most traditional payments players haven’t yet whitelabelled their own technology and infrastructure assets – including their networks, tokenization services, payment standards, and fraud and compliance tools. But doing so is a relatively straightforward opportunity to generate nontraditional payments revenue. In 2013, Visa leased a private version of Visanet to JP Morgan Chase, and other companies can similarly sell access to their network pipes. They can also expand their networks by adding new endpoints with new services. For instance, Visa reported building links to the government of India’s national ID system. Additionally, traditional payments players can improve network functionality, as MasterCard did in clearing and settling points for Points.com. Another way to explore this area is by creating and selling tokenization services, like MasterCard and Visa both do.

Redefining and unbundling payment services Today, a payment typically bundles five value-added features: authorization, speed, information flow, finality, and PAYMENTSBUSINESS

SEGMENT UPDATE receipt account optionality. For example, a wire is a bundle that includes real-time good funds authorization, real-time funds availability, transaction-only information flow, irrevocability, and limited receipt account flexibility. But these features could be unbundled and priced separately as infrastructure innovation continues. Creating options for both payers and payees to specify the features of a transaction would create new value for the customer and new revenue for the payment provider. Theoretically, a consumer might pay extra for an emergency bill payment to have real-time funds availability. And a business

might pay extra for real-time good funds guarantees on a new customer with a thin credit file, but be willing to accept a slower availability/ settlement time of 2-plus days with the bank. Some innovative start-ups are already moving in this direction. HyperWallet, for one, charges their clients (businesses) for the convenience of being able to send payments to a consumer’s account of choice (bank, card, inbox, or portal).

The road to success Traditional payments players are standing at a fork in the road right now. Those that move ahead in new directions are bound to see more success than those that

Fasten your seatbelts. Roll up your shirtsleeves. And prepare yourself for an information packed day.

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