Worldwide payments insights from CMSpi | Q2 2015
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Is European interchange regulation toothless?
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Is the PSR morphing into the UK Payments Council 2.0?
NO HEART. NO COURAGE. NO BRAIN. Why interchange regulation is failing merchants
Fa ir
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Download our 2015 Payments Insights - UK
an erch ge t In
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A merchant’s guide to Zapp mobile technology
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Contents
News and Views 03/ Editorial 05/
2015 Payments Insights - UK
10/
Are US merchants prepared for the upcoming EMV liability shift?
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Industry Event Round Up
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CMSpi’s Payments Workshop
14/
A merchant’s guide to Zapp mobile technology
Special Features 04/
Why Durbin has failed US merchants
06/
Is European interchange regulation toothless?
08/
Is the PSR morphing into the UK Payments Council 2.0?
News and Views
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Editorial Dear Sir/Madam, Ever get the impression you are repeatedly banging your head against a brick wall? CMSpi has been campaigning for interchange regulation for years now and ostensibly, things are moving in the USA and Europe. However, closer scrutiny reveals a disappointing outcome. In this issue, we present three articles covering regulation and regulators, and I have to say I find the current state of affairs very frustrating. On our cover page, we make a clear analogy with the characters from The Wizard Of Oz. No Heart, No Courage, No Brain - pretty much sums up our view of the work of various regulatory regimes so far. The original intentions behind regulation appear to have been tempered to say the least, and in some cases there is a fear that, long-term, little will have changed for merchants. I’m particularly disappointed with early signs from the new payments regulator in the UK, as this is a body I personally campaigned for. I want to see a far stronger representation of consumers and merchants on the advisory board there. Only this will ensure a fair and balanced approach to competing interests. In the USA, circumvention strategies mean that most merchants are suffering increasing ancillary charges. Indeed, we estimate that 30% of the benefits promised by the Durbin Amendment have already disappeared. In the EU, a number of protections promised are unlikely to be implemented short-term. The list goes on... My biggest concern is that many merchants think the war is won and that they can reap the benefits of lower fees and switch attention elsewhere. This is encouraging an erosion of those very benefits. That said, all is not lost, and at least in the short-term, there are material cost savings to be made. There are real opportunities for savvy merchants to gain competitive advantage in the new interchange landscape, and we touch upon these in this edition. CMSpi is fiercely independent, and we refuse to be compromised. We will continue to campaign for fair interchange. The EMV debate in the USA (page 10) is rightly concentrating on the implications for merchants of the liability shift and the investment required to implement. The liability shift is a real danger for many merchants and the clock is ticking. We also expect there to be an increasing and material differential in underlying card charges that will impact on the business case. We have been working with European merchants for many years and there are lessons to learn. Essentially, the EMV business case will differ for each merchant, and the proposition needs to be analysed over the medium rather than the short-term. Finally, in this issue, we continue our commitment to explore the pros & cons of new payment technology from a merchant viewpoint. On page 14 we give an overview of Zapp, a mobile payment, bank transfer solution launching in the UK in September 2015. Looking forward, there is always a need for merchants to look at payments strategically, and there is no doubt that merchants are seeing a long-term decline in cash transactions as they are replaced by new technology. In the next issue, we will be taking a closer look at some of the implications of these changes on merchant operations, and discussing the steps required to maintain competitiveness. Yours faithfully,
Brendan Doyle, CEO CMS Payments Intelligence Please note that any suggestions or comments can be sent to cgodwin@cms-pi.com.
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SPECIAL FEATURE, INTERCHANGE REGULATION
Alistair Combes Director of Knowledge acombes@cms-pi.com
The Durbin Amendment started with high hopes for merchants. Unfortunately, those charged with its implementation have failed to deliver while the payment industry has replaced lost interchange income with a plethora of new charges. Now, more than 3 years later, merchant service charges have reached an astonishing $71bn - far higher than they were pre-regulation. So what went wrong?
Why Durbin has failed US merchants High caps & new fees cause US merchants $9bn of woe. unaffiliated payment card networks were successfully circumvented, and both credit cards and three party card networks have so far successfully managed to dodge regulation altogether.
benefits for themselves. Overall, fee increases have meant that $3bn per annum of the Durbin benefit has been lost, and this figure appears to be on an inexorable rise.
Durbin Impact on MSC
In many ways, the regulators have helped to create a payments landscape where behind-thescenes, opaque and negotiable commercial terms are available to savvy, well-informed and powerful merchants, leaving most merchants at a competitive disadvantage. Rebates, discounts and incentives are being used to widen the gap against a background of rising charges.
$40.00
3.00%
$35.00 2.50% $30.00 2.00% $25.00
$20.00
Durbin was initially forecast to save merchants $15bn - $18bn per annum with a debit card interchange cap of 7–12 cents per transaction3. However, by the time the Federal Reserve had signed the regulation into force
1.50%
$15.00 1.00% $10.00 0.50% $5.00
$0.00
0.00% V/MC Credit
American Express
2010 MSC ($B)
V/MC Debit 2013 MSC ($B)
PIN Debit
Private Label
2010 MSC (%)
Discover 2013 MSC (%)
Perhaps the biggest shame of all is that the majority of merchants think that there is nothing they can do to mitigate these losses.
in 2011, this had been replaced by a far higher cap of 22 cents per transaction4. This, in itself, reduced the potential benefits to $10bn per annum, but for many merchants, especially those with smaller average transaction values, the result has been a significant increase in costs. Additionally, circa 35%5 of all debit card transactions have been exempted from the regulation. Rules requiring debit cards to be functional on at least two
On top of this, the payments industry has bombarded merchants with numerous new charges. For instance, the Visa Fixed Acquirer Network Fee (FANF), introduced in April 2012, has become a 7 figure per annum burden for some merchants, while assessment fees for both Visa and MasterCard continue upwards. Meanwhile, merchant acquirers have relished the opportunity to increase their own profitability by absorbing some of the Durbin
We recommend that all merchants conduct a thorough annual audit of merchant service charges to ensure that their rates remain competitive, charges are applied correctly and opportunities to receive rebates, discounts and incentives are realised. The relationship between merchants, acquirers, card networks and issuers needs to be policed to remain fair. The regulators have left a vacuum post-Durbin and, in the absence of robust regulation, each merchant should look to take advantage of the best options to achieve the fairest and most efficient payment service possible. Unless otherwise stated all figures shown are CMSpi estimates. 1 2 Nilson Report #983 Nilson Report #1041 3 www.federalreserve.gov/newsevents/press/bcreg/20101216a.htm 4 www.federalreserve.gov/newsevents/press/bcreg/20110629a.htm 5 www.federalreserve.gov/paymentsystems/files/debitfees_costs_2013.pdf
D O W N L OA D : 2 0 1 5 U K PAYM E N T S I N S I G H T S CMSpi conduct this research each year to analyse the patterns and trends of the payments industry. The results from our analysis are available to download now at www.cms-pi.com/eu/annual-survey-2014/.
Signs of recovery in cash in transit?
Mobile payments, what’s the fuss?
Polymer banknotes: the calm before the storm?
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SPECIAL FEATURE, INTERCHANGE REGULATION
Is European interchange regulation toothless? Merchants set to lose out as IFR savings are eroded: CMSpi look at the impact on the UK - Europe’s largest card market.
Callum Godwin Research Analyst cgodwin@cms-pi.com
IFR legislation was passed on the 10th March 2015 by an overwhelming majority of 621 votes to 26. This legislation will see domestic credit card interchange fees capped at 0.3% of the transaction value with domestic debit card transactions capped at 0.2% on a weighted average basis. If implemented in its entirety, CMSpi estimates that merchants across Europe will save a total of €4.2bn per annum, or 48%, on their existing interchange bills, although this will differ significantly by merchant depending on transaction profiles. It would be easy for merchants to assume that the IFR represents a firm and final victory for the merchant community in achieving fair interchange fees. However,
European Interchange Fee Regulation (IFR) has finally been signed off by MEPs, however, a review of the final compromise text reveals that what promised to be a thorough, fair regulation of interchange fees has actually become a disappointing let-down.
CMSpi research suggests that for UK merchants, the current proposals issued by Visa and MasterCard fall more than £800m short (per annum) of the European Commission’s original mandate1. We forecast that the £2.41bn UK merchants paid in interchange fees in 2014 should reduce to £0.958bn under full IFR as it was originally understood. However, the current proposals would see annual interchange fees reach £1.763bn – much closer to the 2014 level than the full IFR level. Figure 1: Interchange Costs Cause
Annual Cost
Three Party Exemption
£127,000,000
Commercial Card Exemption
£315,000,000
Visa Debit - No 7c Cap
£363,000,000
Total
£805,000,000
So, why is there such a big gap? The following is a summary of the main issues.
Timelines It will be many months before interchange is capped. Before the regulation comes into force, it needs to be officially endorsed by the Council of Ministers, then the regulation needs to be published in the Official Journal of the European Union and finally, a 20 day waiting period must then be observed. It is then the responsibility of individual member states to ensure that the caps are implemented within six months of the legislation coming into force. Overall, we expect it will be November/December 2015 before the caps will come in,
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SPECIAL FEATURE, INTERCHANGE REGULATION
Figure 2: Interchange Fee Schedule
This exemption is an unfortunate defeat for the merchant community, and the £442m that has been lost to these sources is, in the short-term at least, irretrievable (the latest documentation suggests that third-party issued three party card schemes will come into scope in 5 years).
120,000,000
100,000,000
80,000,000
60,000,000
Visa MasterCard
40,000,000
Three Party 20,000,000
0 Nov-14
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which is far too late considering this debate has been rolling on for decades.
7 cents cap removed from the IFR cap Amendment 30 to the IFR2 made by the European Parliament in April 2014 introduced an important stipulation - the debit card cap would be the lower of 0.2% of the transaction value or 7 eurocents per transaction. For a transaction of €100, the 7 eurocents cap would lead to a reduction of 13 eurocents, or 65%, of the interchange fee paid. However, Article 16(k) of the final compromise text document3 published by the Council of the European Union in January 2015 states that the 7 eurocents per transaction debit card cap will in fact not be initially introduced and will only be implemented if approved when a review of the regulation takes place four years after it is introduced. Instead, an amended structure will be introduced (Article 3) whereby for any given transaction, card schemes are allowed to charge up to 5 eurocents per transaction on a fixed basis and
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Jan-16
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up to 0.2% of the transaction value on an ad-valorem basis, as long as the weighted average interchange fee paid across the entire card scheme does not exceed 0.2%.
For merchants with a high average transaction value, this will have a potentially devastating effect. Up until March 2015, UK merchants did not pay more than 8p for any Chip & PIN face-to-face Visa consumer domestic debit card transactions. With the IFR however, there will potentially be no limit at all. Across the UK, CMSpi estimates that the exemption of the 7 eurocents cap will cost merchants £363m.
Commercial cards excluded Although it was initially unclear whether commercial and three party cards would be included within the scope of the regulation, the final text confirmed that they have been excluded.
Circumvention Article 5 of the final compromise text states that circumvention of the IFR via interchange replacement fees is prohibited, however, the actual wording of the clause only specifies this with regards to interchange. We’d like to see it confirmed that scheme fees are prohibited from replacing interchange fees.
Acquirers Finally, CMSpi are also concerned that merchant acquirers may see the regulation as an opportunity to increase their profit margins by only partially passing on the benefits to merchants. Indeed, in other jurisdictions where interchange has been regulated, such as the United States, there is strong evidence that the profitability of acquirers has seen a marked increase following regulation. If you are unsure of whether or not your business is in a position to receive the full benefits of IFR, please contact CMSpi for a full review of your arrangements - you can reach me at cgodwin@cms-pi.com.
Unless otherwise stated all figures shown are CMSpi estimates. 1 July 2013 European Commission announcement 2 Amendment 30, European Commission text 3 Final compromise text, Jan 2015
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SPECIAL FEATURE, INTERCHANGE REGULATION
Is the PSR morphing into the UK Payments Council 2.0? Inertia set to condemn UK merchants to £1bn of extra costs.
Brendan Doyle CEO bdoyle@cms-pi.com
Having fought for regulation for so long, this is a source of great frustration for CMSpi. In 2012, we launched a campaign for an independent UK payments regulator. This campaign was borne out of years of first-hand experience - witnessing the frustrating burden that fixed, nonnegotiable interchange fees incur on struggling merchants of all sizes across Europe. The campaign included a petition signed by more than 30 of the UK’s largest merchants and a letter to the Chancellor of the Exchequer, George Osborne. Eventually, in March 2013, HMT announced the intention to introduce such a payments regulator 1. Following a public consultation, the PSR initially formed on the 1st April 2014 and became fully operational on the 1st April 2015.
The Payment Systems Regulator (PSR)’s March 2015 Policy Statement includes exemptions for Visa and MasterCard and reveals no strategy with regard to the application of interchange fee regulation (IFR) in the UK, leaving merchants exposed to up to 9 more months of unfairly high fees.
One of the responsibilities of the PSR is to oversee the implementation of IFR in the UK. It is a common misconception that the IFR solves the interchange debate definitively, however, this is not the case. The PSR has the responsibility to ensure that the IFR is imposed fairly and has the power to impose more stringent rules within the regulations.
The PSR has set up a panel designed to, “offer the PSR advice and early input on the extent to which the PSR’s general policies and practices are consistent with its general duties, and how the PSR is achieving its operational objectives”. However, having reviewed the list of members of this panel (below), I have concerns about
Figure 1: Spot the Difference: bankers and ex-bankers on PSR panel2 Payments Council Board
PSR Panel
-
Ex-UK Payments Council
Ex - MasterCard
MasterCard
Barclays
Ex-RBS
Lloyds Banking Group
Metro Bank
RBS
RBS
Chartered Institute of Bankers
Chartered Institute of Bankers
HSBC
Visa
JP Morgan
Ex-Goldman Sach
Santander
Santander
SPECIAL FEATURE, INTERCHANGE REGULATION
its composition, and I fear that it will impact on its objectivity as more than 50% of its members are from a banking background. In fact, it has occurred to me that the PSR panel is beginning to resemble the UK Payments Council, whose shortcomings were one of the reasons for the government’s desire to create a new regulator. I’m concerned this failure to create a balanced panel will compromise efforts to achieve a fair outcome. There are already signs of failure of will. In its Policy Statement3, the PSR announced it has decided to exempt card schemes from its service user directive, meaning that Visa and MasterCard will not need to release information about how interchange fees are calculated. Additionally, the Policy Statement revealed that there is no clear policy from the PSR regarding interchange and, with only a matter of months left until the caps come in anyway, all the indications are that they have no appetite to impose stricter interchange caps.
In other member states, such as France, Spain, Poland and Hungary, regulators have relished the opportunity to introduce fairer interchange fees sooner than the required timeframes.
There are early signs that the PSR will not be as enthusiastic to do so, and I do not anticipate the situation improving in the current environment. Hence, I fear that any attempts made by the card schemes to circumvent the regulation may be ignored by the regulator, to the detriment of merchants and consumers alike. My intention is to raise our concerns with the PSR imminently. I would welcome input from merchants who share our concerns. Email me at bdoyle@cms-pi.com. Unless otherwise stated all figures shown are CMSpi estimates. 1 www.gov.uk/government/consultations/opening-up-uk-payments 2 www.psr.org.uk/about-psr/role-psr-panel www.paymentscouncil.org.uk/who_are_we/our_board/ 3 PSR’s Policy Statement (page 55-58)
News and Views
Sam Appleby Director of Business Development sappleby@cms-pi.com
EMV migration, the term given to the nationwide switch to Chip & PIN technology in the United States is a pressing issue for merchants. Replacing the current mag stripe & swipe process, confused merchants across the US are still not adequately prepared for the upcoming liability shift, set to take place in October 2015. A recent survey from ACI Worldwide has revealed that only 12% of merchants are currently fully EMV compliant, 69% are still working towards compliance and 19% are not at all prepared.
What are the benefits of introducing EMV? The EMV liability shift that is due to occur in October 2015 means that merchants who do not invest in EMV infrastructure will subsequently assume full liability for any fraudulent transactions when accepting cards with EMV capability. By the end of 2015, around half of all Visa, MasterCard, Amex and Discover branded cards will be EMV ready. Meanwhile, figures from the Nilson Report1 reveal that US card fraud losses reached $5.33bn in 2012, only 36% of which was directly borne by merchants. Therefore, due to
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Are US merchants prepared for the EMV liability shift? the mass issuance of compliant cards, it is likely that the majority of the remaining 64%, or $3.4bn, of this fraud will be transferred from issuers to merchants following the liability shift. Even more worryingly, merchants who have not positioned themselves correctly for October will be at risk of being targeted by sophisticated fraudsters through channels such as counterfeit cards. As well as direct POS card fraud, many US merchants have been hit by a number of high profile card breaches over the last 18 months. In other markets, following the shift in fraud liability as a result of introducing EMV, card networks have introduced a different set of interchange fees for EMV and non-EMV transactions. In Europe, where EMV has been widely employed for the past 10 years, “non-secure” interchange fees are often more than double “secure” interchange fees. There are already network fees which penalise non-compliant transactions – for instance, the Transaction Integrity Fee (TIF) – which suggests that rather than reduce existing interchange fees for EMV compliant merchants, the card industry is instead more likely to increase existing fees for non-compliant merchants.
Types of card fraud First Person
When a person opens an account in their own name and spends money with no intention of paying it back.
Counterfeit
A replica card is manufactured by fraudsters and successfully used at the POS. This is largely prevented with Chip & PIN as card chips are almost impossible to replicate.
Card Not Present (CNP)
Online fraud is unaffected by Chip & PIN cards and tends to increase following the introduction of EMV as it becomes targeted.
ID Theft
When a person uses (fraudulently obtained) personal information to gain access to a victim’s card account or to open a new account in their name.
Card Lost/Stolen
Where the physical card is in the possession of a thief. Chip & PIN may not work as the fraudster is unlikely to be aware of the PIN.
What are the costs of introducing EMV? Despite the change in responsibility for fraud, EMV compliance is not a decision to be taken lightly. CMSpi estimates the fixed costs attached to the country-wide switchover to EMV to be $9.9bn (Figure 1), almost 60% of which includes the investment required by merchants to replace the 15 million POS devices in the US that are currently unable to support the compliant cards.
News and Views
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Fact: In 2012, the United States accounted for 47.3% of global card fraud from only 23.5% of total card volume1.
There are also additional indirect costs. The task of training staff to use and support the use of EMV compliant terminals will prove challenging; running parallel
Evidence from Europe suggests that fears over the impact on the POS experience will prove greatly exaggerated. Indeed, major US issuers have undertaken trials to
Figure 1: Potential EMV implementation costs Cost Type
Bearer
Amount ($)
Production of Chip & PIN Cards
Issuers
$2,060,000,000
POS Costs
Merchant
$5,775,000,000
ATM Industry
Issuers/Merchants/IADs
$500,000,000
Banking Costs
Issuers
$1,360,000,000
Debit Schemes
Networks
$170,000,000
Total Cost
to the consumer’s shopping experience, the staff’s efficiency will be integral to the adoption of the new technology.
Should merchants introduce EMV? With an effective ROI of potentially less than 12 months, we recommend that most merchants should look at introducing some form of EMV solution to future-proof their businesses. The net benefits of EMV are not restricted to direct financial benefits; the necessity to upgrade POS terminals to accept Chip & PIN transactions also allows merchants to offer their customers the ability to use the NFC (NearField Communication) technology included in the iPhone 6.
$9,865,000,000
understand the problems that a consumer may encounter at the POS and in many cases, such as those seen by J.P. Morgan Chase and Discover Financial, the resulting customer feedback has led to the decision to rollout EMV signature cards to maintain the current process and mimimise the impact at the POS.
Point 2 Point Encryption (P2PE) v Chip & PIN It is a common misconception that either Chip & PIN or P2PE in isolation will solve security issues. However, whilst Chip & PIN might mitigate the costs of a data breach, it still leaves merchants exposed to reputational and financial damage, plus it does not prevent online fraud. In contrast, while P2PE coupled with tokenisation can eliminate the risk of data breaches, it still does not deal with POS fraud and leaves merchants vulnerable to the burden of the liability shift. Therefore, our recommendation is to introduce both Chip & PIN and P2PE with tokenisation.
For a thorough analysis of the factors merchants need to look at when considering introducing EMV, please see our white paper “Why Merchants Need To Be Ready For The EMV Liability Shift”.
Unless otherwise stated all figures shown are CMSpi estimates. Sources: Paymentsleader.com/will-retailers-be-ready-for-emv 1 Nilson Report #1023
Click to view our website and learn more about the EMV liability shift.
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Events
Dates for your diary 2015 is proving to be jam packed with exciting payments events across Europe and North America - here’s a round up of just a few.
INTERNET RETAILER CONFERENCE 2 - 5 June 2015 | Chicago, USA www.irce.com nd
th
The world’s largest e-commerce event. A diverse group of 200+ experts discussing all areas of the industry, including keynote speaker, Jason Goldberger, President of Target.com and Mobile.
GLOBAL ECOMMERCE SUMMIT 8th - 10th June 2015 | Barcelona, Spain www.e-commercesummit.com The Global eCommerce Summit is a leading international event focusing on the most important trends and developments in global eCommerce, cross-border trade and omni-channel retail. Three days with inspiring key notes, market insights, business strategies, useful business cases and networking possibilities.
MOBILE PAYMENTS CONFERENCE 31st - 1st Sept 2015 | Chicago, USA www.mobilepaymentconference.com Mobile technology continues to be a hot topic in the payments industry. The 2015 Mobile Payments Conference will discuss new mobile commerce solutions.
PAYEXPO 9th - 10th June 2015 | London, UK www.payexpo.com
EFFECTIVE SUPPLY CHAIN FINANCE 3rd June 2015 | Amsterdam, The Netherlands www.eurofinance.com Event aimed at Treasurers who are responsible for their financial supply chain and who want to understand how to enhance working capital, increase liquidity and mitigate risks.
The 2015 event presents five conferences and two workshops with thought-leading discussion on future trends and emerging technologies, ground-breaking case studies and regulatory updates.
CARDWARE 16th - 17th June 2015 | Niagara Falls, Canada www.cardware.ca Cardware 2015 is a payments conference providing insights and networking opportunities for issuers, acquirers, merchants, brands, regulators, solution providers and other stakeholders.
PAYMENTS WORKSHOP 3rd Sept 2015 | London, UK www.cms-pi.com Join CMSpi payments experts for their highly successful free Payments Workshop. Learn about upcoming changes to interchange and how this will affect your business, new mobile technology and the payments landscape. Register early as these quickly fill up!
CMSpi’s Payments Workshop Event FULL
Landmark Hotel London May 21st 2015
FULL
Landmark Hotel London June 18th 2015
CMSpi hosts a number of payments workshops for merchants throughout the year. Here is some information about our upcoming events. This workshop is free of charge and a chance for you or members of your team to gain a better knowledge of how payments operate within your sector, as well as the impact of new technologies and interchange developments. Join other major retailers and reserve your place now as previous workshops have proved extremely popular. If you think this event would be more relevant for a colleague then please pass on the information, however, places are limited to two per company.
REGISTER London Venue TBC Sept 3rd 2015
Agenda Workshop led by industry experts.
Learn about all areas of the payment cycle.
Suitable for beginners and those with experience.
Continued post workshop support and advice.
Previous attendee feedback: “CMSpi delivered an expert overview on how retail will be impacted by the changing payments landscape and new regulatory framework. Well worth attending.” David Brooks, Head of Finance
Places are limited. Reserve your place today. Contact Alex Ellwood on +44 (0) 161 300 8767 or email aellwood@cms-pi.com.
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Regular Feature: New Technology
A merchant’s guide to Zapp mobile payment technology 2015 might just be the year in which mobile finally take its place as a mainstream payment method. After many years of fragmentation and false starts, 2015 may see mobile payments solutions achieving wide consumer adoption following the publicity surrounding the launch of Apple Pay and Samsung Pay. Zapp is a mobile payment, bank transfer based solution which allows real-time payments to be made from consumer to merchant via the faster payments network. Due for a heavily publicised launch in September 2015, could Zapp steal the march on Apple Pay in the UK? For a mobile payment solution to succeed, there are a plethora of requirements that must be met, perhaps the most integral of which is consumer uptake. One of the key drivers in consumer uptake is the willingness of merchants to offer the service to its customers – the classic chicken and egg scenario. This trade-off has been an insurmountable challenge for previous initiatives, so what might be different about Zapp? Backed by VocaLink, the entity responsible for processing the majority of the major UK bank’s transactions, Zapp utilises widely used technology by integrating with its partner banks’ pre-existing mobile apps. This is an approach that should help assist adoption due to the trust
a commitment. In order to maximise their adoption, Zapp will need to increase its current coverage (c.35% of UK current accounts) to the 70% level it is targeting for launch. However, with predictions of coverage equating to approximately 23 million UK consumers, merchants will at least need to review the possibility of starting to accept Zapp payments. CMSpi’s key considerations for merchants contemplating Zapp acceptance are:
associated with financial institutions. In addition to this, UK merchants have begun to react to the changing payments industry by putting agreements in place with mobile payment providers. Zapp seem to be leading the way in merchant partnerships, having signed up major retail chains including Sainsbury’s, Asda and Spar.
These factors have led many to believe that Zapp may become the UK’s leading payments innovation. The solution is focussed on consumer usability, with a fast payment experience, full visibility of the customer’s bank balance and a secure process with a 5 digit passcode requirement. However, despite a multi-million pound marketing initiative, Zapp are yet to sign-up all major banks and acquirers, and many large merchants are still wary of such
Pros • Bank transfer transactions do not have interchange or scheme fees, so Zapp will have an opportunity to offer a pricing structure that is competitive with debit cards. • Zapp claims there are only 5 chargeback scenarios, as opposed to the usual average of approximately 25. • Merchant’s cash flow can benefit from instantaneously sending funds to an acquirer ready for draw down. • Potential to reduce abandonment rates (c.30% for eCommerce).
Cons • Question marks remain over implementation of the solution in a card present environment. • Due to the security measures, it may be difficult to obtain data insights. • Apple’s lock on the NFC element in its phones could exclude Apple customers from “card present” transactions. • Despite many large banks and merchants being signed up to Zapp, there is still a long way to go to establish a user base.
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Zapp says that it will price merchants on a ‘pricing for value’ approach and claims to offer much better value than its main competitors such as PayPal where small businesses can experience large fees - and potentially Apple Pay, depending on the commercial model adopted by Apple in Europe. However, CMSpi understands pricing will be determined by acquirers, leaving opportunities for excessive margins. With its prime targets being merchants in sectors such as transport, gaming, retail and QSRs, Zapp is certainly looking to avoid becoming a platform used purely to pay bills.
Engaging the retail consumers for in-store and online purchasing is certainly no small obstacle. Barclays Ping-it has discovered this difficulty as they are now almost solely used for P2P payments. In conclusion, with the backing of the UK banks and the marketing budget that entails, Zapp will surely benefit from a high-profile launch in September 2015. Despite this, it will remain to be seen if Zapp are able to sustain themselves against Apple Pay’s potential UK inception and the very competitive, alternative payments landscape.
Figures provided by Zapp, January 2015.
Worldwide payments insights from CMSpi | Q2 2015
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