Payment Quarterly | Q3 2016 by Payment Week

q3 2016

ALSO INSIDE: SEAMLESS AND SECURE: navigating the future of e-commerce minimizing the impact of

BREXIT

LOOKING AHEAD

in a world of

EMV

TABLE OF CONTENTS

Q3 2016

MOBILE

Vol. 2 | No. 3

CARDS

Lessons From Pokemon Go: Mobile Wallets, Take Note

EMV Triggering The Great Fraudster Migration

Great Deal of Americans In Denial Over Their Smartphone Behaviors

MasterCard Hosts Their Future of Payments Event at One World Observatory

The Payment Space Is Bursting with Innovation: Industry Initiatives and the Opportunities They Present

CreditCardForum Reveals Leading Retailers Lag On EMV Compliance

EMV’s Losses May Be Contactless Payment’s Gain

SECURITY 8

Looking Ahead In A World of EMV

Are People Ready for Biometric Based Payment Systems?

McAfee Labs Report Reveals New Mobile App Collusion Threats

The M-Commerce Opportunity For the Un-Banked In Emerging Markets

Surprising Growth for Online Grocery Shopping

DIGITAL CURRENCIES

Seamless And Secure Navigating The Future Of E-Commerce

Why Consumers Have Not Adopted Bitcoin

MERCHANT SOLUTIONS

Social Media Blockchain Steem Issues $1.3 Million Payout To Steemit Users

Real-Time Payments Bring New Opportunities Across Industries

Is a Former Secret Service Agent Behind More Bitcoin Thefts?

Retailers: What To Know About Targeting Gen Z

Minimize the Impact of Brexit With A Strong Working Capital Plan

3 Ways Manual Processes Can Rob Your Business

E-COMMERCE

Payment Quarterly | Q3 2016

PAYMENT QUARTERLY - Q3 2016

s we reach the zenith of the summer season, things are just starting to heat up in payments.

As we move closer to the end of the fiscal year, the trends in the payments industry become highlighted, as proven by our fantastic contributors in our Q3 issue. We’ve got the bases covered, with everything you’ll need to know leading up to the Fall season, and indeed Money 20/20. You’ll find this issue to be both informative and innovative, as we’ve culminated pieces discussing everything from securing and simplifying the world of e-commerce, to what’s next in accessing practically all of our devices to act as mobile wallet of sorts.

EDITOR-IN-CHIEF Mike Dautner mdautner@lamilmedia.com

ASSISTANT EDITOR Michael Millington mmillington@lamilmedia.com

WRITER Steven Anderson press@paymentweek.com

As always, security remains at the fore, with nearly every company working tirelessly to make their solutions and applications as safe possible without sacrificing simplicity—something easier said that done, believe it.

ART DIRECTOR

We’re also taking a closer look on the merchant front with solutions like leveraging real-time payments for multiple industries and also what is being done to side-step the headaches and inconveniences plaguing the post-Brexit vote economy.

GRAPHIC DESIGN

And of course, we touch upon the evolution of the card industry; both in regards to keeping it afloat, and ways some companies are making them obsolete. All of this and more can be found right within this Q3 issue of Payment Quarterly, we hope you enjoy!

Mike Dautner

Jason Mongiello jmongiello@lamilmedia.com

Erik Ramirez eramirez@lamilmedia.com

SALES & MARKETING Jason Mongiello (212) 592-0300 jmongiello@lamilmedia.com

CONTRIBUTING WRITERS Bill Zielke Gene Kavner Michael Lynch Laura Listwan Kostas Kastanis Sean Riley Suresh Ramamurthi Tom Roberts Matt Clark

Editor-in-Chief © 2016 Payment Quarterly, Payment Week, and Lamil Media, Inc. Payment Quarterly is published 4 times a year by Lamil Media, Inc. 65 Broadway, Suite 737 New York, NY 10006. For customer service contact us at (212) 592-0300 or email info@lamilmedia. com. For advertising inquiries, please contact jmongiello@ lamilmedia.com or call (212) 592-0300. For more information about reprints and licensing content from Payment Quarterly, Payment Week, or Lamil Media, Inc. Please email info@lamilmedia.com or visit LamilMedia.com. The views expressed in this publication are not necessarily those of the editors or any member of Payment Quarterly. Lamil Media makes reasonable efforts to ensure the timeliness and accuracy of its content, but all content is informational in nature and in no way acts as professional advice, counsel, or services. All other product and service names may be trademarks of their respective companies. Reproduction of any kind is strictly prohibited without prior written consent of the publisher.

Payment Quarterly | Q3 2016

For subscription or advertising details, please contact jmongiello@lamilmedia.com or call (212) 592-0300.

Lessons From Pokemon Go: Mobile Wallets, Take Note I t’s one of the most popular new release video games to show up in quite a while, and with good reason. The Pokémon Go game, which uses augmented reality as a means to bring the world of Pokémon into our own. The sheer popularity of this is making businesses consider what this game is doing so right, and as it turns out, there are lessons afoot for those who offer mobile wallet services. Pokémon Go can help mobile wallet providers with one big issue: repeat use. Many mobile wallet users will try a wallet for one purchase, and then never turn to it again. Some will continue using the wallet but complain constantly about a perceived lack of features. That’s the kind of thing that can hamper an

experience in the long run, and the kind of thing that Pokémon Go shows us a way around. Pokémon Go is being used routinely, and regularly, because of its sheer entertainment value. Customers are using it for 43 minutes at a clip, on average, and that’s longer than a Snapchat or WhatsApp session. Thus, mobile wallet makers should do likewise, routinely adding new features for users that keep them coming back like digital receipts or platform-specific loyalty offers. Further, consider the effect of inapp purchases. Customers are willing to shell out for in-game purchases on Pokémon Go because it makes the experience better for those users. That’s the kind of thing that may be helpful for a mobile wallet system;

Great Deal of Americans In Denial Over Their Smartphone Behaviors

t would seem that the majority of Americans need a wakeup call when it comes to their smartphone habits. A new report released today by Bank of America finds less than one in five, or 17 percent of adults believe they are on the their mobile phones in excess, while over half or 56 percent believe that other smartphone users are guilty of overuse. Beyond that, a mere 10 percent of those surveyed consider themselves “tuned out to the world” while on their device. Another 55 percent believe they “mind their mobile manners.” When asked about others’ mobile

behaviors, the numbers are inversed to 50 percent and 18 percent, respectively. These findings are included in the third annual Bank of America Trends in Consumer Mobility Report, a study that explores mobile trends and banking behaviors among adult consumers who have a smartphone and also an existing banking relationship at any financial institution. In addition, the survey found a consistently growing daily dependence on the same devices. In one average day, millennials, 39 percent, cite they are likely to interact more with their smartphone than any one person. This trend is also leading to the ritual

By: Steven Anderson though there’s a clear risk of losing customers, we’ve seen that some will continue to use a mobile wallet even while complaining about the whole experience. Charging for some upgrades may actually be a better plan. In the end, the biggest lesson to take away from Pokémon Go is the value of features. Those little extra touches can mean so very much to the users, and sufficiently so that they’ll pay for the ability to use them. That’s no mean feat, particularly in an environment stuffed with choices. To get there, however, mobile wallet providers need to offer an outstanding value, not just match everyone else. The more that can be done to distinguish a mobile wallet, the better the chance it will be one of the top brands going forward.

By: Steven Anderson

practice of checking financial statuses via a smartphone of some kind. “This year’s report demonstrates the growing reliance on our mobile devices to navigate daily life and manage our finances – including significant growth in mobile banking and emerging payments,” said Michelle Moore, head of digital banking at Bank of America. “At Bank of America, we want to be where our customers are, which is why we continue to deliver new features, such as cardless ATM technology, that provide increased convenience to our 20 million active mobile users.”

Payment Quarterly | Q3 2016

mobile

MASTERCARD HOSTS THEIR FUTURE OF PAYMENTS EVENT AT ONE WORLD OBSERVATORY

By: Mike Dautner

Editor-in-Chief Payment Quarterly

n July 14, MasterCard held an event at the top of One World Trade to discuss in detail the future of payments and innovations both in regard to product and branding. I had the privilege to attend, and was taken aback by some of what MasterCard has in store, namely everything including MasterPass, MasterCard’s ultimate mobile wallet solution. The trip to the top alone was something to savor, as high definition screens that depict Manhattan Island starting from the days when Henry Hudson first arrived surround the lining of the elevator walls. As you ascend into the heavens, the panoramic view ages, and we move closer to the present, passing the colonial era when Lower Manhattan was at the hub of the city, and a British garrison during the revolutionary war, and onward to the turn of the 19th century as the industrial revolution bats an eye and just like that skyscrapers begin to form around us. We arrive at 2016 and somewhat fittingly, MasterCard directs us into the future.

Payment Quarterly | Q3 2016

The first speaker at the event, Craig Vosburg, President of North American Markets, used the evolution of Manhattan Isle as a metaphor for the change MasterCard has experienced through the years. He spoke in depth about how the nature of payments is changing and how MasterCard is taking notice. He highlighted the importance of consumers feeling a sense of trust in not just a product, but also a brand, and that is something that is in a state of flux as commerce attempts to become more and more connected. The second speaker, Raja Rajamannar, CMO at MasterCard discussed in detail the evolution of MasterCard as a brand. He spoke emphatically about the digital world opening up a new avenue for the company to pursue, which is not as simple as it sounds considering the word ‘card’ can be found directly within the company name. As more and more MasterPass applications begin to rollout the physical card becomes more and more secondary. Although, this turnover will not occur at a rapid rate, as cards remain a staple in the majority of consumer wallets. Despite this, it is important to reinforce the aspirations of the brand. In MasterCard’s case, that means creating a refreshed version of their logo and branding to support the march into the future that is both new and exciting. The last of the speakers was Garry Lyons, Chief Innovation Officer at MasterCard.

He spoke about the technology at MasterCard becoming more frictionless, to meet the expectations of customers. He also spoke in detail with emphasis about brands building and maintaining good relationships with consumers. In order to do this, MasterCard and specifically MasterPass, must deliver their frictionless promise while also reassuring customers of its safety. Security will and must be at fore of innovation, otherwise innovation will not be trusted. Keeping the consumers personal information safe and secure is the most important element to e-commerce by far. Mr. Lyons also discussed MasterCard’s intention of making every mobile device a vehicle for commerce. After the formal presentation, the floor opened to discover some of the innovations first hand. Some of the MasterPass innovations included their mass transit, dining, and travel applications that were sure to thrill. Even a Samsung Smart Refrigerator was on-hand to demonstrate how MasterPass can work directly with the technology to purchase groceries that are low in supply. It was a truly remarkable event overall, and one that I was certainly thankful to have taken part in. Despite the anticipated growing pains, MasterCard need only look forward to the future with an optimistic gaze.

Payment Quarterly | Q3 2016

security

LOOKING AHEAD

By: Bill Zielke

CMO Forter

ews about the shift to EMV has made headlines frequently in the last year, in the build up to the October 2015 deadline and its aftermath. Despite the publicity the microchip cards received, confusion about what was involved and a relative lack of official or governmental education left many retailers online and offline unprepared and many customers confused. Going forward, it is crucial that merchants prioritize dealing with EMV and its consequences in a way that focuses on customer experience and sales. EMV ADOPTION: CARD PRESENT IN PERSPECTIVE The shift has been less smooth than some had hoped, and has by no means been completed. There was widespread resistance to changing over for the deadline itself, which marked the start of the crucial holiday period, and there’s still a way to go - in February of this year, it was estimated that less than 37%

Payment Quarterly | Q3 2016

in a world of

EMV of merchants were able to accept EMV cards. Steps have recently been taken to speed up the process but some retailers feel it’s taken too long already. Conflict has arisen as many retailers complained that they had EMV-ready terminals sitting in their stores for months waiting for official sign-off there weren’t enough people able to certify the machines to meet the flood of demand for their services - and card present chargebacks have risen (in some cases by as much as 50%). The card networks are working on improving both of these problems, but that improvement is a process rather than an event. Walmart and Home Depot are suing over the lack of PIN in addition to chip - something that is likely to become a burning issue going forward. Despite all of this, the numbers of consumers with EMV cards in their wallets and the number of retailers able to accept them (and therefore re-shift liability away) has been increasing at a steady pace. Consumers and retailers alike are adjusting to the change. It might take some time, but when you consider a five year view, it becomes clearer that these sorts of problems are what you might call “teething troubles” - bumps in the road as the journey begins. THE RISE OF ONLINE FRAUD ATTACKS Unfortunately, the same cannot

be said for online retailers and the fraud that they face. There was much discussion among industry experts in the run-up to the EMV deadline about what it would mean for cardnot-present fraud. In other countries, the fact that the new technology made card present fraud more difficult simply encouraged the fraudsters to explore the possibilities of fraud online instead. Memorably, France saw a rise of more than 360% in the five years following EMV. This trend has already begun in the U.S. In fact, online fraud has grown even faster than expected. The Global Fraud Attack Index™ reported that online fraud attacks grew an astonishing 215% in 2015, and that in the holiday period when the fraud attack rate usually drops (because there are so many more good shoppers than usual) it actually rose 11%. EMV is not the only factor at work here, to be sure. The growth of e-commerce, the increasing sophisticated of the online criminal ecosystem which has made possible a kind of “cybercrime as a service”, the power of automation which bots have conferred upon fraudsters, the wealth of stolen data easily available following the numerous hacks of recent years all of these and more play into the rise of online fraud. But EMV appears to have acted as a kind of catalyst, driving fraudsters online as they adapted to a world in which card present fraud had been made more difficult. MORE FRAUDSTERS LEARNING NEW TRICKS In the short term, what this means for online retailers is that many have become overly risk averse, putting barriers to purchase in the paths of their good customers as well as the fraudulent ones. From the more technical fraud perspective, what it means is that many of the current attackers are still new to the online game. A small army of fraudsters has appeared online, but many of them are relatively unpracticed and lack knowledge about the best ways to prosecute their attacks. That will change. Over the next five years, these newbie fraudsters will

gain expertise and experience. There is considerable information readily available to them online to help them learn, including ‘how to’ guides and forums where they can ask questions and share advice. All of this means that while the sheer number of attacks should not continue to rise precipitously for the whole of the next five years, what will probably happen is that the number of sophisticated attacks will increase. Retailers need to prepare for this making sure they can stop sophisticated fraud without compromising consumer experience and blocking sales. SOPHISTICATED THEFT Account takeover has already begun growing, and retailers need to make sure that their systems are able to cope. Looking for the signals that showed you a guest transaction is bad from the start won’t be enough to protect you from cases where a criminal has hijacked the account of a good customer who has made multiple good orders from you over a number of years. You’ll want to be pinpoint accurate about stopping ATO though - the last thing you want is to stop your enthusiastic account-holding customers from shopping with you. There are another two areas which are likely to take off as fraudsters graduate from rookie to experienced status. The first is complex identity fraud, when the criminal knows so much about the customer they’re impersonating that they have all or almost all the avenues

of inquiry covered. We’ve even seen cases where the fraudster managed to convince the bank to add one of their safe houses or forwarding addresses to the victim’s bank details. This kind of fraud involves considerable research, often conducted gently and slowly over a period of time so that no alarm bells are set off, and frequently includes social engineering, when the fraudster strikes up a relationship of some kind with the victim in order to get useful information about their life or information. The second kind of sophistication is technical. For example, the fraudster may have access to a clever new kind of malware, which allows them to take over or track the victim’s computer, or succeed in a novel approach to a man in the middle attack. This kind of fraud is notable because it generally has some new aspect or technique involved. Sometimes the fraudster created the new program or application involved themselves, or had it made to order. Sometimes they have put together existing ones in new ways. However they’ve done it, it can be hard to spot because it’s not like the things you know you’re looking for - it’s new. Retailers therefore face two challenges. The first is to deal with the tidal wave of online fraud that is currently breaking over e-commerce websites of all kinds. The second is to prepare for the next stage, upgrading to the most effective fraud technologies to protect their sites from the more

complex fraud that will become increasingly common. And merchants must do all of this without letting their anti-fraud efforts inconvenience their customers or cost them sales. FRICTIONLESS FRAUD PREVENTION This part of the problem is reflected in another issue highlighted by EMV - the need for friction-free checkout. When EMV adoption led to longer waiting times (as long as 20 seconds) the card networks took action, announcing changes that would speed things up. Exactly the same challenge faces online retailers - but they can’t look to the card networks to solve the problem. Fraud prevention has traditionally added friction and delay to the online process, through rigid rules, requests for further information, and manual review. New technology has removed the need for all of these, but many merchants have yet to make the shift to a consumer-centric approach to antifraud - one which prioritizes customer experiences and sales. EMV alone won’t drive retailers to make this necessary change, but for merchants with an eye to opportunities it may act as a catalyst not only for increased online fraud attacks, but for the move to make fraud prevention contribute to frictionless customer experience and sales growth.

Payment Quarterly | Q3 2016

MOBILE WALLET WARS security

Are People Ready for Biometric Based Payment Systems? By: Steven Anderson

iometrics, as a security system, is a technology whose time has come. The ability to connect a user to an account just by measuring certain parts of a user’s anatomy makes a lot of sense, and some are even starting to wonder if it can be applied in other ways. A recent study from Visa suggests at least one big new way to use biometrics, and it’s a measure a lot of users agree with. The Visa study says that just over two out of three users—68 percent— are interested in seeing biometrics connected to mobile payment systems. That wasn’t the only unusual development out of the survey, however, as it was also found that 73 percent believed that two factor authentication was a secure way to manage customer identity, particularly for things like

mobile payment systems. In this case, two factor authentication not only reflects something a user has—like a card or a smartphone—but also something a user is, like biometric data, or knows, like a personal identification number (PIN) or password. Moreover, biometrics have a great advantage when it comes to speed— like at bars or restaurants, or paying for train tickets—but have one key disadvantage in the form of false positives. A reader that doesn’t catch a fingerprint just right, for example, can be a big problem in biometric security. PINs and passwords, meanwhile, are less secure—they can be guessed or otherwise brute forced around— but accurate. Users generally prefer fingerprint verification by a simple majority at 53 percent of respondents.

Indeed, biometrics aren’t a magic bullet solution. It wasn’t so long ago that a facial recognition system was famously spoofed by the simple expedient of a photograph. While technology has come a long way in a short time, it’s still the kind of thing that’s more “under development” than it is “under control.” Still, planning for such circumstances now could pay off in grand style later; besides, we’re talking about a security system that depends on items always in hand, that can never be forgotten, or taken away from the user without grievous bodily harm. Biometrics likely will be a big part of the security picture in the near future, but in the short term, these systems will need a bit more refinement first.

McAfee Labs Report Reveals New Mobile App Collusion Threats By: Steven Anderson

ntel Security announced today its McAfee Labs Threat Report, June 2016, which reveals the dynamics of mobile app collusion; wherein cybercriminals leverage two or more apps to mastermind attacks on smartphone owners. McAfee Labs has taken a closer look at such behavior across 5,056 versions of 21 apps designed to provide useful user services such as mobile video streaming, health monitoring, and travel planning. However, the failure of users to regularly implement essential software updates to these 21 mobile apps raises the chances of older versions being commandeered for malicious activity. McAfee Labs has pointed out three types of threats that can result from

Payment Quarterly | Q3 2016

mobile app collusion: Information theft: An app with access to sensitive or confidential information willingly or unwillingly collaborates with one or more other apps to send information outside the boundaries of the device Financial theft: An app sends information to another app that can execute financial transactions or make financial API calls to achieve similar objectives Service misuse: One app controls a system service and receives information or commands from one or more other apps to orchestrate a variety of malicious activities. To coordinate mobile app collusion, an individual needs at least one app with permission to access the restricted

information or service, one app without permission but with access outside the device, and the capability to communicate with each other. “Improved detection drives greater efforts at deception,” said Vincent Weafer, vice president of Intel Security’s McAfee Labs group. “It should not come as a surprise that adversaries have responded to mobile security efforts with new threats that attempt to hide in plain sight. Our goal is to make it increasingly harder for malicious apps to gain a foothold on our personal devices, developing smarter tools and techniques to detect colluding mobile apps.”

73%

88%

83%

Compliant

Enrolled

Nonenrolled

SAQ Only

Noncompliant

9736

6971

Scan Count

5727

3430 1327 Refused

1327 No Response

Expired

2194

No Status

2170

SAQ

Scans

1632

1423 SAQ

No Product

One

Two

648

862

Three

Four+

digital currencies

or most of the past decade, Bitcoin has frequently appeared in the news as the modern “revolutionary” currency. Despite Bitcoin’s omnipresence in the media, most consumers still lack a concrete understanding of what it is and what precisely makes it so innovative. For the most part, the average consumer is happy with their daily financial routine of paying with credit cards, spending cash, and writing or sending the occasional check. Because of their lack of understanding and a general reluctance to change financial behavior, Bitcoin has yet to see mainstream adoption amongst consumers. What changes will have to occur for digital finance to leapfrog past analog? Philosophers say that the primary purpose of money is to serve as medium for an exchange of value. For any type of money to become popular, the public must fully trust the sustainability of that value; money must have a track record of maintaining its purchasing power over time sufficient that it could continuously be spent on goods and services. Prior to bitcoin, the world only used fiat currency – money issued by government. If fiat currency were easily replicable, people would simply create copies of it, and that would in turn defeat the currency’s purpose of retaining value. And yet the flaw with fiat currency is that people grant their governments with the power to continue to issue money into circulation. This would essentially create more copies of that currency, a power that government, including the Secret Service here in the United States, ostensibly protects against. A recent example of a country hindering the value of its own currency is the “Brexit” vote. The fear that the British government would print more money in response to the economic consequences of leaving the EU was one of the causes that resulted in the value of the British pound sterling to fall 10% overnight. Fiat currency is too intertwined with fractional reserve banking, which generally works well in times of economic growth. With fractional reserve banking, people give banks

Payment Quarterly | Q3 2016

why

CONSUMERS have not adopted

BITCOIN By: Gene Kavner CEO iPayYou

the power to take money and lend out multiples of it for others to use. This occurs while the banks give an impression that the money will still be completely accessible. If each depositor withdrew their deposits, the banking system would collapse due to the lack of liquidity. Such a collapse was witnessed in 2008 during the housing crisis. Similar crises have occurred elsewhere. In 2013, the country of Cyprus imposed a 48% levy on deposits over 100,000 Euros in accounts in the Bank of Cyprus. Depositors’ funds were effectively taken

away. In June 2015, Greece closed its banks due to financial crisis, preventing their depositors from withdrawing their funds. Enter digital currency, which made its introduction as Bitcoin around the 2008 housing crisis. With Bitcoin ,the government and banks are removed as the custodians of value. Instead, bitcoin ownership is completely secured by an individual through a cryptographic private key, so no entity can loan money to anyone else without the account holder’s consent. This means that money is guaranteed to be in its owner’s possession at all times. Additionally, the total amount of bitcoin that will ever be created is 21 million, which means its value will never diminish based on “printing” more. Due to bitcoin’s decentralized and increasingly popular nature, it has become, in the eyes of many experts, a far more secure store of value than any fiat currency in circulation today. What many outside the technical space do not know is that bitcoin enables almost instantaneous transactions worldwide, allowing people to receive and spend money without ever needing to open a bank account. As a result, bitcoin enables even the poorest with no access to banks to participate in worldwide commerce. Merchants can now receive payments without paying foreign transaction rates or high credit card fees. Bitcoin payments can be made in small quantities, which allows businesses to sell services that either cost little or have very small margins. So the question is, if bitcoin is more financially secure and convenient than fiat currency, then why isn’t most of the world already using bitcoin for everyday expenses? The short answer is: it will, eventually, but not yet. Three main obstacles impede the growth of bitcoin use today: it too wildly fluctuates in value, it is still too difficult to use for the average consumer, and the Bitcoin community needs to resolve limitations on the number of allowed transactions per second. Bitcoin’s fluctuation is a dilemma because the risk of losing money is keeping all except for the passionate believers away. The value of bitcoin is so inconsistent because the

number of people who speculate on the value of bitcoin exceeds the number of people who actually use bitcoin in their everyday lives. This variation is the reason for the latter groupâ&#x20AC;&#x2122;s small size. While it may take some time for bitcoinâ&#x20AC;&#x2122;s value to become stable, this is only a temporary problem. Similar to how the stock value of companies valued under $10 billion fluctuates far more than the stock value of $100 billion companies, the use of bitcoin has not yet grown enough for its value to stabilize. As these $10 billion companies grow and their stocks become stable, they attract increasingly more types of investors due to their diminished risk. The same effect is beginning to happen with bitcoin. The fluctuation of bitcoin price over the last two years has been significantly less than over the years before 2014, which has led to an all-time high in the number of daily transactions. Despite these promising trends, bitcoin is still too complex for some to use. Many people have difficulty understanding how to get a bitcoin wallet, what a bitcoin address is, and how to even obtain bitcoin. Average

users also face significant friction in spending bitcoin; even the most popular sites that accept bitcoin such as Microsoft, Expedia, and Overstock overcomplicate bitcoin payments. Over time, new and improved products as well as services will make using bitcoin far simpler. Although these promising services will enhance bitcoin usability, there is a maximum number of permitted transactions that limits bitcoin expansion. Currently, the maximum number of bitcoin transactions is limited to about five per second. In contrast, there are about 10,000 credit card transactions per second. Therefore, that is quite a gap for bitcoin to overcome before it can truly be used as the regular everyday currency. The bitcoin community is partaking in a healthy amount of debate on how to resolve this limitation. Technically, this limit is self-imposed and could be removed at any time. The challenge among bitcoin users is that there are different perspectives on how to best effectuate this change, and there are already many proposals being discussed about how to make this happen. It may

take time for all of the proposals to result in a concrete plan, but the fact that it is the largest discussion topic in the bitcoin community reflects the desire and motivation to make bitcoin commonplace. Exactly like a time when credit cards were faced with minimal merchant acceptance, their ease of use generated increasing demand with consumers, which led to the overall acceptance of credit card payments. While the first credit card was issued in the late 1950s, many grocery stores didnâ&#x20AC;&#x2122;t accept credit cards as a method of payment until the 1990s. So whether or not you currently see bitcoin payments in your local grocery store or neighborhood coffeehouse just yet, bitcoin is indeed coming of age. After all, digital currency solves fundamental and critical problems for our financial infrastructure and it empowers anyone, without restriction, to inexpensively interact with the world in a matter of seconds. As these problems are solved, one by one, consumers will begin using bitcoin more and more regularly, till its use will be as commonplace as credit cards today.

Payment Quarterly | Q3 2016

Social Media Blockchain Steem Issues MOBILE WALLET WARS

$1.3 Million Payout To Steemit Users

teemit users had countless reasons to celebrate this most recent Independence Day Weekend thanks to a special reward. On July 4, the fast-growing social media site Steemit distributed digital currency payouts worth approximately $1.3 million, or 10% of Steem’s current market cap, to its user base. Early adopters and significant contributors were rewarded for facilitating a highly efficient and collaborative community of members interested in a multitude of subjects such as politics, gardening, and entertainment. This unbelievable multimilliondollar payout details an historic milestone in the phenomenal growth of Steemit, a decentralized social media platform, now in its third month of operation. Regarding the distribution over the

busy holiday weekend, Steemit CEO Ned Scott spoke about how it was the first of its kind in the cryptocurrency world and highlighted a crucial moment for Steemit. “This was an opportunity for us to thank our growing community, to reward them for building a sustainable ecosystem that’s much more than the sum of its parts. Yesterday, more than $1.3 million worth of the Steem supply was distributed into the wallets of thousands of users across the world. From every corner, users have been drawn to Steemit because the system actually rewards thoughtful comments, unlike Reddit or Twitter. The community and the blockchain together power a system that gets better and better every day.” Half of the $1.3 million supply of Steem was distributed in Steem Dollars, which is basically a form of Steem

By: Steven Anderson

worth roughly one US dollar, and half in Steem Power, a vesting currency that supercharges voting power via the platform. “Because it’s based entirely on a blockchain, Steemit shows what social media can look like without censorship. Everything we see on Steemit.com comes from the open source Steem blockchain, so the entire network is replicable on any front-end application. Attempts at censorship can be proven by anyone with a blockchain explorer or another front-end application built on the Steem, so users can feel free to post how they really feel. This freedom is what empowers the Steemit community, and it’s one of the major ways we’re different from centralized, controlling and manipulative social media networks,” said Scott.

Is a Former Secret Service Agent Behind More Bitcoin Thefts? By: Steven Anderson

t’s the kind of thing that Tom Clancy might well have written about at some point, but this is no techno-thriller in the making. Former Secret Service agent Shaun Bridges was sentenced to six years in prison after pleading guilty to laundering $800,000 in bitcoin after the U.S. government busted the Silk Road marketplace. However, new reports suggest that he may have stolen even more than that. One case suggests that he used a private cryptogenic key to steal an additional $700,000 in bitcoin from a Secret Service account. What’s even more disturbing is that the government was advised to move

Payment Quarterly | Q3 2016

said funds three months prior to the theft. The documents do not outright accuse Bridges of stealing these funds. It does, however, state that he was the only individual definitively known to have had access to the account. Prior to starting his 71 month term in prison, Bridges was arrested a second time after he attempted to flee the country. He was found with a bag containing corporate records for three offshore accounts, a passport, and a bulletproof vest. It’s a tangled mess, and it’s going to take a lot of time to get it all sorted out. The question, of course, is why Bridges had extended access to an account full

of a currency whose primary focus is anonymity. This is also one of the biggest problems with crypto-currency in general; while it’s useful as a speculative investment property— heavily speculative—and it can also have value as a regular currency, it’s also developing an odd tendency to draw some less-than-savory elements of society. Strange, yes, but we have to remember that bitcoin is no different from any other tool, from a screwdriver to a shotgun. Each has its place, and just because it can be improperly and dangerously used doesn’t mean we should get rid of it altogether.

cards

triggering the great

FRAUDSTER MIGRATION By: Michael Lynch Chief Strategy Officer InAuth

t is said the only two certainties in life are death and taxes. But we can possibly add another entry to this grim list—thieves. For as long as humans have had possessions and used currency to exchange goods, there has been a group of people determined to take what is not legitimately theirs. When people or organizations take the necessary precautions to fortify and properly secure those possessions—whether it be money, data, or other valuable assets— the thieves and fraudsters predictably migrate en masse to collectively target more vulnerable locations. There are signs such a migration is underway right now with the success of the EMV (Europay, MasterCard and Visa) security standard. This combination of data stored on integrated circuits in

addition to magnetic stripes on plastic cards has proven remarkably effective and is creating an effective firewall against the fraudsters. In our new postEMV world, identity thieves can no longer mass produce counterfeit plastic cards with compromised data. Unfortunately, being shut out of the offline channel means fraudsters are migrating to the more vulnerable digital one. A recent report by PYMNTS and Forter found the rate of online fraud attacks within the U.S. jumped by 11 percent since October and by 215% since last year. This is a sizeable jump considering the rate of digital fraud had remained steady for years, and 40% of U.S. retailers still have not fully adopted the EMV standard as of April 2016. This shift by fraudsters to focus their attention on the digital channel has already occurred in other countries that are further along in the EMV migration. In Canada, for example, counterfeit and stolen card fraud declined by 54% over a five-year period as the country migrated to EMV from 2008-2013. However, this reduction was more than offset by a corresponding rise in cardnot-present (CNP) fraud, which jumped 133% over the same time period. Similar rises were seen in both

Australia and the U.K. where online fraud increased by 80-to-100% in the 3-year period following EMV adoption in both countries. As the statistics bear out, when fraudsters are shut out from in-store fraud by EMV, they will migrate to the next easiest place. This pace is expected to continue to accelerate in the U.S. for the foreseeable future. Research firm Aite Group predicts card-not-present fraud will rise to $7.2 billion by 2020, largely due to a disappearing counterfeit fraud opportunity as a result of the shift to EMV technology combined with strong growth in e-commerce. If you are a security professional looking to fix vulnerabilities, it’s imperative to focus on the digital channel now, particularly mobile as the channel of choice for most consumers. FRAUD TARGET: NEW ACCOUNT OPENINGS One of the biggest targets for fraudsters in the digital channel is the opening of new accounts. Long a process requiring manual review to verify and confirm legitimacy, financial pressures have forced some of these organizations to make it as easy as possible for users to open accounts quickly to generate

Payment Quarterly | Q3 2016

cards

more revenue and gain market share. Unfortunately, this desire for more revenue may be creating an insecure environment for fraudsters to exploit. According to a Javelin Strategy & Research report, the opening of fake accounts more than doubled in 2015. Cybercriminals created fraudulent checking, credit card, loan applications and other accounts using stolen identities from 1.5 million consumers, up from 700,000 in 2014. Once inside with a compromised account, thieves do their dirty work using a variety of different fraud strategies. Understandably, this migration of fraudsters to the digital channel has organizations on edge, particularly bankers. Almost a third of bank security officers listed “identity theft” as one of their top five challenges in a recent American Banker survey. One common fraud method is to steal the identity of a legitimate bank customer, open a new fraudulent account using their information, transfer the savings of the customer to the newly created account, cash out, and disappear. Because these transactions are executed in real-time with little manual review, it’s a challenge for authorities to keep up and catch the perpetrators; recouping the stolen funds is almost impossible. TO PREVENT FRAUD, FIX THE HOLES The best way to combat this form of fraud is to deny fraudsters entry and block them out. To do this it’s necessary to look at the way these criminals’ operate to see if there are identifiable patterns in their behavior. The primary technique utilized by criminals to open new fraudulent accounts is through the use of botnets— distributed attacks using multiple compromised computers orchestrated by one master computer. It is estimated 83% of domestic attacks use this method. Botnet attacks involve velocity— using a computer to open multiple accounts in a short span of time, such as opening 400 accounts in a single day. The simplest path for a fraudster to take is to use the same device over and over

Payment Quarterly | Q3 2016

again to perform the task. Criminals don’t want to throw away a computer or mobile phone for every account they open. Knowing this, suspicious behavior can be identified. For example, a device might get flagged as suspect if it does something odd such as opening two new accounts on the same day. This transaction may very well be legitimate, but it’s marked as worthy of a pause for investigation. SECURITY CAN BECOME AN ENABLER OF TRANSACTIONS This method of fraud prevention— verifying the identity of a device by its characteristics instead of by its actions—is part of an industry-wide evolution towards something experts call “Know Your Device”(KYD) security. In this new paradigm, a consumer’s device is analyzed in real time to assess the riskiness of the device and thereby, of the transaction. Using device intelligence technology to assess risk in this manner allows companies to create two different paths. In one, authenticated consumers can perform transactions with the least amount of security steps necessary and enjoy a frictionless experience. This kind of transaction can be seen in the Uber app, where the user never really has to think about the steps necessary to pay for the ride. It’s all behind the scenes. On the other hand, devices that are deemed high risk can be challenged or denied entry altogether. KYD security is gaining popularity because it works and because it can make security an enabler of transactions, rather than a roadblock to the user’s experience. Today, higher security is often associated with more forms, more challenge questions, and more passwords for users to remember, but with device authentication technology, that’s an outdated notion. This form of security, however, is dependent on being able to accurately and consistently authenticate a device with foolproof identification. For this reason, more financial institutions, retailers and other organizations are offering their own mobile apps. This is because the operating system (OS)

architecture in mobile technology can be leveraged in a way that enables the device to be more secure than a browser. Simply stated, more attributes are available for identification purposes when mobile apps are used than when a browser is used on a desktop or laptop. Some of the risk factors that are detectable on mobile include location inconsistencies, mobile malware detection, jailbroken or rooted status, emulator detection, mobile specific fraud tools, and others. Mobile device authentication technology has the ability to collect hundred, if not thousands, of attributes from a user’s mobile device to create a unique and permanent device identifier. A permanent device ID cannot be reset or wiped from the device, ensuring a 100% positive ID for every device. Much in the way fraudsters were shut out by the success of EMV technology, it is increasingly likely these criminals will next be shut out from the digital channel through the use of permanent device IDs and device authentication technology. We know the moves fraudsters will be making and the technology we can use to stop them. The only remaining issue is putting these processes in place to freeze them out.

THE PAYMENT SPACE IS

BURSTING WITH INNOVATION: INDUSTRY INITIATIVES AND THE OPPORTUNITIES THEY PRESENT By: Laura Listwan SVP, New Product Development, Global Treasury Management U.S. Bank

epending on whom you ask, change in the payments industry is either occurring at a snail’s pace or at lightning speed. Regardless of which side of the debate you may be on, it is apparent that the payments industry poses a prime opportunity for innovation. Innovators abound in the payment space, and the winners and losers are yet to be determined. Here’s a brief look at some of the efforts that could ultimately impact your payment practices and efficiency: FEDERAL RESERVE FASTER PAYMENTS – In October 2012, the Federal Reserve outlined a plan to improve the U.S. payment system within a decade. The plan centers on three areas of improvement: 1) moving transactions faster from origination to settlement, 2) functioning more efficiently and securely, and 3) satisfying end user preferences. To this end, the Federal Reserve is engaging the industry in discussions on how to improve the U.S. payment system. A Fed task force has been created, comprised of various industry stakeholders, and in February 2016 it published criteria for a faster payment system, thus providing guidance on developing and accessing faster payment solutions. SAME-DAY ACH – Same-day ACH will use the existing ACH rails to provide a ubiquitous same-day capability for both credit and debit ACH transactions as all Receiving Depository Financial Institutions (RDFIs) are required to

receive same-day transactions. Existing one-day and two-day processing and settlement will not be impacted. The first phase, which will be implemented in September 2016, will support sameday ACH credits. Same-day ACH debits will become available in September 2017. In the first phase, companies may benefit by using same-day ACH to issue a last payroll payment in case of employee termination, as several states require that the employee receive their final payroll on their last day of employment. In the second phase of same-day ACH processing, companies can offer their consumers expedited payment processing in the case of late or missed payments. C L E A R XC H A N G E ( C XC ) – clearXchange is a network formed in 2011 to move payments from paper to electronic by simplifying the process. Customers of financial institutions in the digital payments network have the ability to send money to anyone with a bank account within the United States, using just their email address or cell phone number. cXc member banks include: Bank of America, BB&T, Capital One, FirstBank, JP Morgan, PNC, U.S. Bank and Wells Fargo. These banks represent over 100 million online banking and 50 million mobile banking consumers. cXc offers both standard (3 business days) and real-time (within 5 minutes) payment processing. Late last year, Early Warning, a leader in fraud prevention and risk management,

Payment Quarterly | Q3 2016

Original Credit Transaction

clearXchange

B2C P2P

Credit (Sept. 2016) Debt (Sept. 2017)

Information Required

Receiver Availability

Same-Day ACH

Application

Type of Payment

TCH Real-Time Payments

Popmoney

B2C P2P

B2C C2B B2B P2P

P2P

Credit (Available)

Credit (2017)

Credit (Available)

Bank Account & Route Transit Number

Debit Card Number

Email Address or Mobile Number

Email Address or Mobile Number or Bank Acct. & Route Transit Num.

End of day (Sept. 2016) By 5 PM local time (March 2018)

Typically within seconds 30 minute SLA

Standard: 3 business days Real-time: 5 minutes

Within seconds

Standard: 2-3 business days Next day: 1 business day Instant: 10 seconds

B2C C2B B2B

acquired cXc. The combined entity will bring together immediate funds availability, integrated authentication and fraud management capabilities into a single platform. While cXc supports both recurring and one-time payments, it is uniquely positioned to be able to support onetime B2C payments. This is because consumers register only once with cXc and then anyone can pay them. Corporations do not need to solicit and maintain banking information with consumers who have already registered with cXc. This provides companies the opportunity to electronify their onetime disbursements to consumers without incurring the expense associated with enrolling the recipients. VISA ORIGINAL CREDIT TRANSACTIONS (OCT) / MASTERCARD SEND – These solutions enable businesses and consumers to send funds to a consumer’s bank account using the debit card network. Companies can send funds to the consumer’s bank account or prepaid card using the debit card number associated with that account. Historically, the debit card network supported credit payments as they related to refunds; with this recent enhancement, payments can be credited to the consumer’s

Payment Quarterly | Q3 2016

account without requiring a purchase. Funds are typically made available within seconds. As with any cardbased transaction, PCI compliance is required. Additionally, each cardissuing institution can establish individual limits. This solution may be attractive to companies that need to make payments to the “unbanked,” as the payments can be made directly to the consumer’s preexisting prepaid card. It also may be a cost-effective method to pay consumers who may be temporarily located internationally. POPMONEY – Popmoney is a personto-person (P2P) payment service developed by Fiserv and launched in December 2010. The service enables consumers to send, receive and request money using an email address, mobile phone number or account number. Popmoney is available at approximately 2,400 financial institutions serving 70 million online banking consumers. Popmoney supports standard (2-3 business days), next-day and instant (in 10 seconds) payment processing and settlement. THE CLEARING HOUSE REAL TIME PAYMENTS INITIATIVE – In December 2015, The Clearing House (TCH), which is owned by 24 of the largest U.S.

Commercial Banks, announced it had signed a contract with VocaLink, the UKbased Faster Payment system provider, plans to develop a comprehensive real-time payment network available to all financial institutions. That network will enable U.S. consumers and businesses to send both real-time payments and payment messages (request for payment, remittance delivery, payment acknowledgment) directly from their bank accounts to accounts at any financial institution using an email address, mobile phone number or account number. The network will be built on ISO 20022 standards which will position it to support cross border commerce and interoperability with other networks as real time capabilities evolve in the global marketplace. The implementation target is early 2017.

CONSUMERS SHOULD KEEP IN MIND THE EMV STANDARD DOESN’T MITIGATE THE RISK OF ALL TYPES OF CREDIT CARD FRAUD, NAMELY THOSE INVOLVING CARD-NOTPRESENT TRANSACTIONS,

CreditCardForum Reveals Leading Retailers Lag On EMV Compliance By: Mike Dautner

reditCardForum, considered a one-stop resource for and by consumers seeking in-depth information, opinions and advice on credit cards, released recently new research that found nearly 45 percent of the largest retailers in the U.S. are presently not compliant with the global EMV (Europay, MasterCard, and Visa) technical standard for payment cards they were formerly expected to adopt. The study that was conducted had some interesting findings as it were, including that of the twenty largest members of the National Retail Federation by volume of sales, nine are currently not entirely compliant with the protocol chip-enabled cards to be inserted rather than reading the magnetic stripe on the back of the card

at the POS. CreditCardForum President and GM Ben Woolsey claims that these figures are significant when you consider the compliance deadline of October 1, 2015 imposed by U.S. card issuers Visa, MasterCard, Discover, and American Express. “It is quite surprising that not all of the major retailers are 100 percent compliant, considering failure to adopt the EMV standard by the specified deadline shifts fraud liability from issuers to merchants and fails to protect in-person consumer payments with the enhanced security offered by chip cards. Having said that, consumers should keep in mind the EMV standard doesn’t mitigate the risk of all types of credit card fraud, namely those involving

card-not-present transactions,” Woolsey said. This research covered multiple data sources that included retailer interviews, forum member survey results, mystery shopping exercises and publicly available information. “It is likely a combination of factors leading to voluntary non-compliance, not least of which is the substantial cost involved in transitioning to new pointof-sale equipment, as well as employee training costs and updating back-end processes and technologies. Feedback from some merchants has been that the custom software they use can be difficult or expensive to integrate with the chip reader. Others I suspect are just dragging their feet,” Woolsey said.

EMV’s Losses May Be Contactless Payment’s Gain By: Steven Anderson

t’s a tale of two mobile payment options: how Europay, MasterCard and Visa (EMV) systems aren’t doing all that well in the recent shift, and how contactless payments by near field communications (NFC) may be able to step in and take over as a result. Though it may sound hard to believe given that credit card companies have been largely behind EMV terminal installations, and without such terminals in place, businesses may be on the hook for fraud involved, the migration to EMV has been filled with problems since before its announcement. Despite the switch taking place back last October, 70 percent of U.S consumers actually have the cards in hand. Never mind the fact that it’s been

almost a year and roughly a third of consumers don’t actually have the necessary cards, because it only gets worse from there. Reports suggest that actually using an EMV card is proving to be a little tougher to get used to than many foresaw, and that’s making each transaction take a little longer than it should. When there are large numbers of transactions, those delays can add up, and when you throw in the numbers of users inadvertently leaving a card behind, that only makes things worse. Merchants, naturally, don’t want to install systems that make a customer experience worse. No one wants the fraud liability, but if no one’s buying anyway, the whole store is shut. That’s where contactless payments are stepping in, offering faster, more

familiar transactions that prevent lines and keep users moving along smoothly. A better customer experience, greater likelihood of return business, and more adds up to a more preferable method. Businesses want return business, and if EMV can’t provide the kind of customer experience businesses—and customers—want, then EMV are likely out. Naturally, EMV makers are frantically working to fix the problems associated with its system, but in order to truly be viable going forward, they’ll have to make these fixes happen quick before inertia can set in and lock them out of the market. People have a lot of choices when it comes to payments today, and for that choice to be EMV, it’s going to have plenty to do and little time to do it.

Payment Quarterly | Q3 2016

E-COMMERCE

By: Kostas Kastanis Head of Strategy Upstream

igh growth markets across regions like Africa and Latin America serve as a huge opportunity for tech companies, particularly in terms of m-commerce. But with less than 10 percent of consumers in emerging markets using credit or debit cards according to World Bank data, traditional m-commerce methods, as they operate in western markets, are not a viable option for most. Though alternative mobile payment options could and should serve as a solution to this problem, regulatory blocks and the fragmented financial landscape of developing markets are holding this effort back. That said, there are a few alternatives that can help open opportunity for m-commerce in emerging markets, despite the challenges present.

Payment Quarterly | Q3 2016

CHALLENGES FOR M-COMMERCE IN EMERGING MARKETS There is a rising demand for services by consumers in emerging markets in general, let alone for digital services and m-commerce. The digital opportunity is potentially worth up to 70 billion dollars according to research commissioned by Upstream, yet World Bank’s Global Findex data indicates that there is a severe lack of access to financial services in lowincome countries, with just 2 percent of consumers having credit cards, and only 7 percent having debit cards. According to GSMA’s reports on Mobile Money, there is a rising trend for mobile payment solutions. There are three main challenges that accompany these types of solutions and explain why mobile money offerings haven’t really taken off: regulatory roadblocks, the complex nature of the partnership between the involved organizations, and the fragmented nature of trade. That said, the majority (50 percent) of the mobile payment solutions we are seeing in the industry occur in Sub-Saharan Africa. The most prominent one is called M-PESA and was implemented by Safaricom, a mobile network operator based in Kenya. One of the major reasons M-PESA took off and saw such success was because it was the first major mobile payments solution initiative.

Furthermore, some of the regulations that have created major hurdles for other companies were not formed until later. Additionally, in other countries besides Africa, these strict regulations surrounding mobile payments have made the implementation process complex and much more difficult. Beyond regulatory issues, mobile payments methods such as mobile money solutions require the joint collaboration of two major institutions - that of a bank and a mobile network operator. Both parties are typically large organizations, often leading to cumbersome partnerships. Therefore, the implementation and deployment of these partnerships are proving much more complex and as a result, offerings that could reach a wide audience aren’t easily materializing. The alternative solutions that are actually launched are of smaller scale and their adoption is not growing at the rate expected. The third challenge that essentially hinders the acceptance of mobile money as a form of payment, is the number of providers that involved in the mobile money network, whether domestically or in international markets. Having a wide network of retailers or vendors translates to increased user activity, as consumers are encouraged to keep their money in their mobile money account, and have more opportunities to use it frequently.

DIRECT BILLING AS A SOLUTION FOR GROWTH REGIONS Despite the inherent challenges that exist for m-commerce in developing markets, there is still potential to provide solutions for consumers in these regions. As it currently stands, mobile money or mobile wallets are based on the need to convert cash to credit via a physical location. That said, there is one method of payment that has proven to be ubiquitous - direct carrier billing. Direct carrier billing is a viable solution mainly because it works by using consumers’ mobile airtime balance. The GSMA reports that mobile phone penetration in emerging markets is reaching 80 percent and, according to Upstream’s 2016 Developing Markets Mobile Commerce report, 45 percent of consumers trust mobile operator billing, making direct carrier billing an effective solution. It proves much

easier to implement, as all consumers have access to it just by having a mobile phone. Making it an even more appealing option, direct carrier billing works well for the payment of digital goods and services, meaning most digital service providers are apt to adapt to this method. With that in mind, digital brands looking to monetize their services or offerings must take into account the intricacies of each market, and the specific profiles of subscribers. For example, they must consider differences in the frequency and amount of airtime top-ups between urban and rural populations, as well as between different markets. Implementing direct carrier billing is not a simple commodity. It cannot work just by enabling or incorporating it as a payment method for a service. It is a science – a combination of identifying the optimal price, and then knowing

exactly where and when to collect fees from the customer. Further, according to Upstream’s research, almost twice as many consumers prefer subscriptions to one-off payments. In fact, subscription micro-payments prove to be the most sustainable business model to monetize consumers in emerging markets. There is enormous potential when it comes to m-commerce in emerging markets. With consumers willing and wanting to make online purchases – both of digital services and tangible goods – mobile network operators and service/good providers who can adopt direct carrier billing are better positioned to address most of the complexities and challenges that are associated with m-commerce in high growth markets.

Surprising Growth for Online Grocery Shopping

he immediacy factor of brickand-mortar shopping has lent itself well to customers who want fresh food, and the idea of buying fresh bread online and automatically getting day-old by the time it arrives hasn’t been appealing. That’s changed recently, as a new Harris Poll study shows that customers are more willing to turn to the Internet for grocery shopping. A third of American consumers, the report notes, have ordered something food-related online in the last few months. Among repeat online shoppers, meanwhile, that number shoots up to 45 percent, and the demographics are looking pretty sharp too. Reports suggest the biggest online grocery-buying market is in collegeeducated millennial parents making at least $50,000 per year and living in urban areas.

Snacks are the biggest online buy at 20 percent, followed by non-alcoholic drinks at 17 percent. That’s about the same percentage as interest in several other areas, including meat, seafood, produce, dry goods and dairy products, with the range hovering in around the 15-17 percent level. The biggest draw is variety of products—which has long been an advantage of Internet shopping—as 52 percent of respondents cited that. Another 25 percent, roughly, cited the ability to cut down on shopping trips by ordering some things right online. Given that U.S consumers will spend around $42 billion online for groceries annually—and that up 163 percent against last year—understanding the market is a vital operation to prepare accordingly and take advantage of these gains. I confess to shopping for snacks online. I once bought my mother a nice

By: Steven Anderson

set of Godiva chocolates for Mother’s Day, and let’s be honest, not many mothers out there aren’t into a little chocolate. For those hard-to-find snacks and drinks, online shopping delivers the same value it delivers anywhere else. This is actually conditionally good news for brick-and-mortar; it wasn’t losing customers as most of the things bought online weren’t stocked anyway. Though it’s lost opportunity, it’s also lost inventory that might have been too small a quantity to make worth stocking. Here, online grocery shopping can be a complement for brick-and-mortar shopping; what isn’t available at one can be had at another, whether it’s milk for the week or specialist cheese. The two working together can represent a real opportunity for brickand-mortar stores to expand into online ordering, and potentially wrest some of that market back from Amazon et al.

Payment Quarterly | Q3 2016

E-COMMERCE

By: Sean Riley

SEAMLESS

SECURE

NAVIGATING THE FUTURE OF E-COMMERCE

wo large-scale trends are coming to a head with merchantsat the crux: the digitization of payments and increasing e-commerce fraud. The former was an inevitability with consumers’ desire to make payments how and when they want using emerging devices, such as smartphones. The latter was similarly inescapable as EMV began to bring enhanced security to the brick-andmortar channel and as more consumers brought their shopping to the online/ digital channel. During 2015, online, or card-not-present (CNP), fraud increased 215 percent[1] and, according to Aité Group, CNP fraud is likely to double to $6.4 billion by 2018.[2] “Today, the lines are blurring between brick-and-mortar and virtual commerce,” said Arvind Ronta, Director of Commerce, Security, & Data Products at Discover. “Digitization continues to increase in the retail world, consumers expect to complete transactions on their terms, and merchants are focused on new ways to increase their sales. All of these factors are converging and creating an abundance of data and priorities for merchants, from better understanding their customers, to enhancing security across their sales channels.” While the converging trends present a challenge for merchants, there are plenty of opportunities as well. The valuable information available to merchants regarding customer behavior is greater than ever, especially given the varied methods with which consumers can interact both at brick-andmortar locations as well as online. “Merchants are looking for better targeting and marketing attribution,” Ronta added. “They want fewer fraud losses, as well as fewer declined good sales. And last, but certainly not least,

and

Payment Quarterly | Q3 2016

they want to increase sales.” On the other hand, he explained, “Consumers have their own expectations. They want secure transactions—with zero disruptions. They want a smooth, seamless and convenient shopping experience. And they want to be rewarded for their patronage with relevant, valuable offers that will incent them to return to that same merchant.” Discover leverages its closed-loop model and big data platform to better target customers with loyalty incentives, such as those available through Discover’s rewards offerings. These initiatives leave consumers feeling like they are receiving personalized attention from merchant brands. “Discover is uniquely positioned to help merchants both satisfy the growing demands of consumers and fight online CNP fraud,” Ronta said. “Due to our unique infrastructure, we work with issuers, merchants, and cardholders to create innovative solutions, meaning we can help bridge the gap between consumer data and consumer engagement. One such solution is a rewards platform that enables merchants to provide Discover cardholders with relevant online offers, which can drive incremental spending.” After the groundwork has been laid, ensuring that these interactions turn into sales is dependent upon a merchant’s readiness to accept whichever payment method the customer is comfortable using. Consumers are becoming accustomed to seamless payment experiences that remove any friction from the process. Whether customers want to pay by tapping their smartphone, or with a chip card at a mobile point-of-sale terminal in the store, it is essential that merchants are ready to complete a transaction. Those that effectively

support mobile payments at this early stage will benefit greatly as consumer adoption swells — projections from Aité Group place mobile sales as high as $487 billion by 2020. Protecting this rapidly expanding CNP channel is the next step to a holistic commerce experience. Defending against threats while avoiding potentially disruptive delays in transactions can be achieved with a multi-layered approach to security, according to Ronta. The combination of data validation via the Discover Verify+ solution, along with Fraud Alerts and 3D Secure 2.0, can drastically mitigate the risk of fraudulent charges and potential chargebacks. “To battle online fraud, we offer holistic fraud solutions that balance merchant and cardholder expectations,” Arvind said. “We approach fraud solutions in a layered manner, so that they work in tandem to provide multipoint protection across the entire online transaction process. Merchants can best position themselves for a safer checkout by also taking a layered security approach—considering all payments channels, from in-store to online and mobile.” To read more from Discover Network, visit Discover.DiscoverNetwork. com/Perspectives.

Payment Quarterly | Q3 2016

MOBILE WALLET MERCHANT SOLUTIONS WARS

REAL-TIME PAYMENTS BRING

NEW OPPORTUNITIES ACROSS INDUSTRIES

the benefits of faster payments and how the financial industry can capitalize By: Suresh Ramamurthi CEO Yantra Financial Technologies

he challenges deterring the adoption of faster payments in the U.S. are widely acknowledged within the financial industry and very little progress has been made to overcome these hurdles for numerous reasons, including regulatory and compliance concerns. In fact, it often takes more time for an individual to send money to another location than it does to travel there and this is incredibly frustrating for todayâ&#x20AC;&#x2122;s increasingly mobile consumers. Nonetheless, faster payments initiatives are gaining momentum. A report by Accenture revealed that in 2014 alone, the U.S. attracted approximately $10 billion in financial technology (fintech) investments. Furthermore, the most popular investment category is payments, which received 54 percent of U.S. fintech funding in 2014. As the industry begins to recognize the comprehensive benefits of accelerated payments in various business verticals and fintech investments continue to rise, the industry will likely witness more

Payment Quarterly | Q3 2016

successful partnerships between banks and technology companies to make faster payments a universal reality. A system that facilitates realtime payments would be particularly valuable to insurance companies and healthcare providers, as a faster payment process would revolutionize traditional approaches to direct deposit, money transfers and payroll. Todayâ&#x20AC;&#x2122;s technology makes it possible for businesses to exercise more control over the disbursement of payments, and doctors and hospitals can leverage faster payment technology to process and complete payments for insurance claims. This enables providers to view the amount billed for their services and how much they got payed, and then direct the funds into the bank account of their choosing in real time. Insurance companies and healthcare providers can also determine the exact timing of payments and make the money available in real time, simplifying a complex process. Lending is another sector that would benefit from real-time payments.

Lenders that are capable of delivering funds in real time as soon as a loan application is processed can experience a significant competitive advantage. Existing technology makes it possible for instant disbursement of funds, which has the potential to revolutionize marketplace lending as well. This could open up opportunities for SKU-based lending, where consumers scan items with their smartphone and obtain financing for it. The stock-keeping-unit number would provide the necessary product information. Marketplace lenders can then determine if the consumer qualifies for the loan within seconds and if so, the money would then be delivered to the consumerâ&#x20AC;&#x2122;s account instantly, enabling commerce in a powerful and efficient way. Furthermore, a real-time payments system could support conditional and contextual payments that are based on several circumstantial factors. The value of such a system is illustrated in the example of refueling a fleet of cloud-connected cars. An owner of a car dealership often needs to transport cars to a different lot and hires independent contractors to drive the cars. The owner needs to find a way to track the cars, allow the drivers to refuel the cars at a predetermined gas station, and then pay the drivers upon completion of the drive. The owner can accomplish all of this using real-time payments that evaluate contextual information when approving transactions. When one of the drivers uses a debit card at a gas station to refuel the cloud-connected vehicle, the technology behind the bank account can check the vehicle identification number to ensure it is the correct car and view the miles since the last fill up to confirm that the transaction makes sense. As a result, purchases can be limited to certain gas stations, giving the dealership more control over when and where vehicles are refueled. This same technology also allows parents to limit how far from home their children can drive. Or consumers can restrict payments to certain purchases at specific stores within a set timeframe; so a parent could create a debit card for a child that could only be used during lunch hours within the

zip code of the child’s school. These examples showcase the varied and numerous use cases for real-time and contextual payments technology. Advancements in technology have made it possible to resolve the problems with the financial industry’s current methods of moving money. With the availability of data in real time, financial institutions can comprehensively analyze transactions in seconds, ensuring the validity of a transaction. Financial institutions can also designate risk levels to specific transactions, based on predetermined criteria. Leveraging this criteria and the accessibility of data enables institutions to deeply understand the activities their customers are engaged in, and with whom they are conducting transactions. This ultimately helps financial institutions quickly detect and respond to potential fraud, effectively protecting customers. Additionally, building out a system of application programming interfaces (APIs) allows financial institutions to access multiple payment networks

and channels, providing a single way to interact with several connected partners and giving the end user access to multiple payment networks and channels. This also ensures that the payments system is flexible and process friendly, resulting in a financial institution’s ability to quickly add new product and service capabilities to the system. Recognizing the efficiency of APIs and access to real-time data will be critical in bringing faster payments to fruition on a universal scale. Financial institutions and fintech startups should work together strategically, capitalizing on real-time data and the flexibility of APIs, to ensure the success of a faster payments system. Rather than ignoring the regulatory and compliance standards that perpetuate the financial industry, fintech companies must realize that they have to work within the regulatory constraints of the U.S. banking environment. Conversely, financial institutions must be willing to collaborate with fintech companies to deliver innovative services that meet

the needs of today’s consumers. Fintech startups and financial institutions that focus on productive collaboration will empower the delivery of next-generation banking services. By partnering together, application developers, software engineers and banks can build new digital banking and real-time payments apps on established financial infrastructure, meaning promising fintech startups and forward-thinking banks can validate innovative products and services, while ensuring compliance. The combination of a collaborative approach between banks and fintech firms, along with access to a functioning digital banking platform, also offers a huge opportunity for financial institutions to provide solutions to businesses in a variety of industries that face specific pain points. Together, fintech companies and the financial industry can work together to develop products and services that anticipate market needs across multiple verticals, and deliver concrete benefits to businesses and consumers.

Retailers: What To Know About Targeting Gen Z By: Steven Anderson

or quite some time now, retailers have been focusing efforts on marketing toward the millennial shopper, and with good reason. Millennials have the disposable income, after all, and have a certain set of interests and demands. Those who do the best of meeting those interests and demands get first crack at the money. However, some have noticed that millennial shoppers won’t be top dog forever, and have started swiveling attention to the next big thing in retail: Generation Z. A study from Interactions, a retail marketing firm, revealed that Generation Z, or Gen Z, has a set of interests that are thankfully not too dissimilar from what the millennial shopper wants. So far, Gen Z shoppers are “extremely digitally savvy.” Yet, in an odd departure, a majority of Gen Z

shoppers—64 percent—often prefer to shop at brick-and-mortar stores. Nearly 75 percent of Gen Z shoppers like to shop in stores that offer “an engaging in-store experience,” similar to Urban Outfitters. According to these findings, having a brick-and-mortar presence with room for digital operations may be important. Gen Z shoppers have particular desires of stores they shop at: the stores must be clean, the staff must be both friendly and knowledgeable, and the checkout experience must be “positive” (a point where mobile payment systems can often come in handy, particularly those that don’t require much contact with a specific checkout area at all). However, Gen Z shoppers in a 64 percent majority, prefer to shop with cash rather than with mobile payment app or even credit or debit card.

Social media presence is also very important to Gen Z. Sixty percent of Gen Z shoppers will shop with stores that actually interact with the shopper via social media. Gen Z shoppers will even use social media for buying decisions; 82 percent have had a buying decision influenced by social media. That’s a lot to take in, particularly the part about physical store presence. With some careful planning a store can be ready for the upcoming Gen Z shopper, who is technologically savvy but prefers to pay cash in a brick-and-mortar shop. Being ready with social media presence and easy access to information about available items should go a long way towards helping on this front, but with Gen Z approaching the prominence now held by millennials, being ready for the change will be particularly important.

Payment Quarterly | Q3 2016

MERCHANT SOLUTIONS

MINIMIZE THE IMPACT OF

WITH A STRONG WORKING CAPITAL PLAN

By: Tom Roberts Director of Network Operations PrimeRevenue

orking capital has always been a key indicator of financial health, but the current geopolitical and economic climate suggests this metric will bear more weight. In light of Brexit, this is especially true for global corporations with complex supply chains. In these cases, volatility must be counterbalanced by agility. The supply chain has to be responsive and competitive throughout (and despite) periods of economic turbulence. Unlocking working capital that has become trapped across the supply chain is critical to achieving this goal. One solution is for companies to extend payment terms with their suppliers, thereby increasing the company’s

Payment Quarterly | Q3 2016

average days payable outstanding (DPO). Having greater control over cash flow enables the company to increase and optimize working capital in ways that can be transformational to the business. Those funds can be used for new innovation or competitive initiatives, to weather economic or industry volatility, and to protect or grow margins. Money that has traditionally been tied up in accounts payable can now generate income and strategic advantage in the marketplace. But what about the financial health of suppliers? Longer payment cycles can have an adverse impact on suppliers, many of which are more vulnerable to the economic dynamics in play. It’s one thing for a global corporate to miss Wall Street’s revenue expectations; it’s another for a much smaller supplier to experience a stall in cash flow from its largest customers. THE UPSIDE OF SUPPLY CHAIN FINANCE? THERE’S NO DOWNSIDE Supply chain finance is a cash flow optimization tactic that allows both companies and their suppliers to benefit from extended payment terms.

By implementing a supply chain finance program, companies can provide the option for qualified suppliers to get paid early by selling their invoices to financial institutions participating in the program. Unlike other early payment programs, the full amount of the invoice is paid less a nominal processing fee. One thing that makes supply chain finance an attractive tactic is that suppliers also benefit from material improvements to cash flow. For some, it makes them less susceptible to economic or geopolitical volatility. For others, it allows them to make much needed capital improvements to their business or to fund new innovation initiatives (e.g. equipment upgrades, investment in IT, etc.). These factors strengthen a supplier’s financial health and competitive advantage in the marketplace – and, in some cases, its business opportunity with its largest customers. Furthermore, all of this occurs without negatively impacting the company or supplier’s balance sheet. Rather, it enables both parties to meet and exceed objectives such as improving working capital and earnings

before interest, taxes, depreciation, and amortization (EBITDA) as well as reducing risks of supply chain disruptions. This is in stark contrast to other financing options such as direct lending or early payment programs. Direct lending impacts the company or supplier’s equity-to-debt ratio, which has a long-tail impact on financial health. Because supply chain finance is a true sale of receivables, it has no effect on either party’s balance sheet. For suppliers, the interest rate paid for a loan can be 10 or more times higher than the processing fee paid in a supply chain finance scenario. Early payment programs, like dynamic discounting, are supplierinitiated programs where suppliers offer customers a discount on invoices in exchange for early payment. While that decreases time-to-revenue, suppliers are paid less than the balance of their receivables. Factoring works in a similar way in that suppliers sell an invoice to

a bank in return for earlier, but partial, invoice payment. In supply chain finance, there is no tradeoff between time-to-cash and revenue. Companies can extend payment terms to optimize cash flow, while suppliers can trade their receivables to financial institutions for near immediate payment. Best-in-class supply chain finance programs include multiple funding sources to ensure that funding is always available regardless of geography, industry and prevailing economic conditions.

applies to suppliers. In a time when economic volatility is on the rise, companies should consider supply chain finance as a way to improve the overall health of their supply chains. It’s also a strong risk mitigation tool. What happens when a company’s key suppliers go out of business, or can’t function at optimal capacity? Strong supplier health is even more critical during soft or turbulent economic conditions. Supply chain finance provides the win-win solution to make sure all facets of the supply chain are operating at peak performance.

A WIN-WIN FOR BOTH ENDS OF THE SPECTRUM When offset by a supply chain finance program, extended supplier payment terms can be advantageous to all parties involved. It’s important to note the size of the payoff. Where a direct loan may increase a company’s working capital by $15 million per annum, supply chain finance can add $200 million. The same scale of benefit

Payment Quarterly | Q3 2016

MERCHANT SOLUTIONS

WAYS MANUAL PROCESSES CAN ROB YOUR BUSINESS By: Matt Clark COO Corcentric

ompanies that are still using manual-based methods show a willingness to put up with the inconveniences that come with relying on these outdated methods. Without automation, companies don’t have a controlled environment in which they can manage and collaborate on purchasing activity and transaction information. Failure to properly adopt automation leads to a harmful increase in errors, a decrease in competitive edge, and a lack of focus on core functions. THE ERRORS ADD UP Companies that don’t have automation are typically dealing with high volumes of paper, such as POs, invoices, and checks. All this paper leaves companies vulnerable to mistakes and missed payments, ultimately costing precious resources. In a recent report Corcentric did with PayStream Advisors called the “2016 P2P for Indirect Spend Report” the study found that making early payments to vendors is one of the easiest money saving tactics for companies, but relying

Payment Quarterly | Q3 2016

on manual processes can make this almost impossible. The inefficiencies that result from manual processes impact time, money and resources. The leading causes of missed early payment discounts according to the study include lengthy approval cycles, manual routing of invoices and missing information on invoices. All of these issues are easily remedied by automation. One automation solution that companies look to is e-payments. Today, enterprises turn to e-payments for opportunities to increase efficiency when it comes to cash management. The conversion of paper payments to electronic is also a way to maintain accountability to protect against fraudulent activity. And finally, e-payments can significantly lower overall spend management costs and fees, most notably check processing and ACH fees as well as postage and printing of checks. Non-fraudulent and error-free records are also essential in order to avoid or successfully maneuver through an audit. An audit involves a thorough review of income and expenses for a business and it’s important to realize that the only way to avoid issues with the IRS is to ensure all records are error-free and up to date. Automation tools provide a streamlined workflow with added visibility throughout an organization, saving employees time and reliving stress during an auditing process. LOSING AN EDGE ON COMPETITORS Technology is evolving at a rapid

speed and companies choosing not to adopt automation processes may be cast in an unfavorable light compared to competitors. No matter the offering, the technology space is more crowded than ever. Every day a new company shows ups promising to be better, faster, and more groundbreaking than the next. Whether these claims prove to be true or not, customers value a company that can keep up with the latest advancements in the space. Customers and prospects may see a company’s manual processes as a red flag, signifying an unwillingness to break away from traditional systems and a hesitancy towards future innovation. Not only can new business deals be lost but a company’s industry reputation could be at stake. LACK OF FOCUS ON CORE FUNCTIONS Manual processes typically require an increased focus on making sure no issues disrupt daily business. This type of micromanagement can potentially eat up hours of an employee’s day; hours that are better served coming up with new and innovative ideas to advance the company. Effective use of automated workflow means that the time previously spent on processing invoices in a manual environment can be redirected toward more meaningful work. Instead of handling inquiries, management and staff can spend the time strategically analyzing data related to payments made, and project future costs and trends more easily. Rather than relying on the inconsistencies of manual processes, employees are allowed to focus on moving the business forward. So why are companies not automating, when it can save them time and money? Low adoption rate is mostly due to a lack of awareness of the benefits and a hesitancy to move away from established legacy systems. The mindset of, “If it’s not broken, why fix it?” needs to change and become,“What else can we be doing?” Automation is just one step toward this goal. The benefits for businesses are numerous, including less errors and increased efficiency, and can be felt throughout an entire organization once implemented.

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