Payment Quarterly | Q2 2016 by Payment Week

q2 2016

ALSO INSIDE: INSIGHTFUL HOW-TO’s:

fraud, security, mobile

VENTURE OUT!

5 innovative startupsv

dollars &

sense

THE NEW NORMAL IS MOBILE, AND BIG DATA IS LOOKING AT THE NEW WAYS PEOPLE ARE SPENDING

70 .

MILLION

It’s more than a big number. It’s a big opportunity. Discover Network delivers over 70 million loyal cardholders* to businesses in 185 countries around the world. Welcome to buying power on a global scale. Welcome to Discover.

Visit DiscoverNetwork.com

*Nilson Report #1033, January 2014

TABLE OF CONTENTS MOBILE

Q2 2016

Vol. 2 | No. 2

CONSUMER VALUES

5 Ways Wearables Are Improving the Way We Shop

22 Studies Show: Consumers Still Use Cash Often

Mobile Bill Payments: State of the Union

25 How Mobile Payments Can Address Consumer Needs

Unbanked & Mobile Payments: What’s Popular Now, And What’s Next?

26 Restaurants Ready to Send Back EMV

10 Informing the Mobile Banking Experience with Behavioral Data 14 Mobile Payments Represent Just Three Percent of All Transactions 14 Fiserv Introduces Immediate Funds Service in the U.S. 15 Facebook Messenger as Point-of-Sale System, with Apple Pay Built In?

SECURITY 16 Conflicting Forces: Payments Security, Abandonment and E-Commerce Success 17 IdentityMind and ONPEX Team Up to Offer Risk-Managed Payment Platform 18 The Nefarious Nine: Data-Security Threats To Businesses 20 Cyber Insurance Rates Drop as Fewer Hacks Spotted 20 Ethoca-Pegasystems’ Partnership Steps Up Fight Against Fraud

26 Costco’s Visa Cards Will Offer Better Rewards and Cashbacks Compared to AmEx

E-COMMERCE 28 4 Tips to Boost Offline Sales Using Online Channels 29 Contextual Payments a Key Step Towards Maximizing Conversions 30 Amazon Sets Stage to Take on PayPal With Expanded Payment Options

PROCESSING 31 High Risk Merchant Processing: Big Opportunity Still Exists in the Marketplace 33 It’s Time to Stop Thinking Of Payments Integration as a Necessary Evil 34 Of Boiling Frogs and the Myth Of Sisyphus 36 In The Market For A Partner? Choose Wisely

TRANSACT 16 - SPECIAL ISO EDITION

elcome to TRANSACT 16 Powered by ETA!

It is an exciting time for the payments industry and we know you are as excited as we are about what has already occurred in the past few months, as well as what is set to transpire in the near future.

While bouncing around from booth to booth we hope you’ll take the time to dive into our latest Payment Quarterly to get an inside look at some of the titans, and some of the newcomers of the playing field. We are proud to have put together an issue that will keep you in the know regarding some of hottest topics that are currently trending in security, mobile, e-commerce, brick-and-mortar merchant tools, and consumer values. It’s the ‘who’s who’ of the ‘who knows’ as far as we’re concerned; because if there is anything constant about payments it’s that the door is constantly revolving, with one improvement replacing another. We have taken great measures to ensure that this issue greatly reflects the standard set within the payments industry, and can serve as your guide whether you’re doing the rounds on the showroom floor, or perusing via your device of choice in the comfort of your home. We want you to enjoy our Q2 edition of Payment Quarterly, and to keep your eyes sharp for what is on the horizon for payments.

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

ASSISTANT EDITOR Michael Millington mmillington@lamilmedia.com

SENIOR ART DIRECTOR Jason Mongiello jmongiello@lamilmedia.com

ART DIRECTOR Erik Ramirez eramirez@lamilmedia.com

DIRECTOR OF MARKETING Jason Mongiello (212) 592-0300 jmongiello@lamilmedia.com

PRODUCTION MANAGER Jason Mongiello jmongiello@lamilmedia.com

Mike Dautner

Editor-in-Chief

CONTRIBUTING WRITERS Lucy Maher Robb Gaynor Nirnay Sinha David Poole Hakan Nordfjell Dustin Lewis Tom Pierce Erdal Yazmaci Manish Patel

Ben Yaniv Chechik Jeff Shavitz Matt Ozvat BC Krishna Stephen Sheinbaum Steven Anderson Melanie Macinas Asif Imtiaz

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

Payment Quarterly | Q2 2016

5 WAYS WEARABLES ARE IMPROVING THE WAY WE SHOP By: Lucy Maher

f you think we don’t have room for another connected device in our pockets or purses, you might be right. Placing one on our wrist is another story. Need proof ? Last year, 39.5 million Americans over 18 years old used wearable devices, an increase of 57.7 percent over 2014, according to eMarketer. This rise is estimated to continue, with 81.7 million adults expected to be using wearables by 2018. [1] The reasons for wearables’ growing popularity vary, including giving consumers the ability to better monitor their health and fitness and keeping them organized when onthe-go. Wearable devices, such as with Apple Watch and others, are also improving the way we shop by receiving communication and alerts and making payments hands-free. On the retailer side, wearables allow brands to send targeted messaging to customers instore and offer discounts to improve conversion. “Tech-savvy retailers willing to invest in marketing through wearable technology can place themselves a step ahead of competitors as these devices grow in popularity,” said Soumya Chakrabarty, Director of Research & Development at Discover. “For example, brands can push out notifications that send shoppers personalized offerings, increasing conversion and driving interest and loyalty.” STREAMLINING PRODUCT SEARCH BY PAIRING SMARTWATCHES WITH BEACONS One way to engage with wearables in stores is by coupling them with strategically placed beacons. In this scenario, a customer heads to his or her local retailer, and is seeking help from a sales associate to help with a question or locate a product. If this retailer is leveraging beacons placed throughout the store, shoppers armed with wearables don’t have to worry

about finding staff, since they can use their device both to navigate a store’s aisles and access valuable information. A quick scan of an item followed by a few taps of their watch, and they can retrieve such information as sizing, materials, or location. STREAMLINING PAYMENTS With the advent of Apple Pay, Android Pay, and Samsung Pay, mobile payments are gaining popularity among consumers and the technology to accept these forms of payment are becoming available at major chains and smaller retailers alike. Wearables could change the game by making these transactions even easier, favoring a flip of the wrist over pulling out a phone. According to an eMarketer study, 48 percent of consumers said they would use a wearable device if it could make an in-store payment, and 67 percent said they would prefer to use a wearable device over a smartphone to make an in-store payment.[2] BETTER DISSEMINATION OF DISCOUNTS Thanks to post-purchase opt-ins, the average shopper now receives regular emails about online and in-store deals and sales. But for those steering their shopping cart to the cash register, pulling out their smartphone to scan through hundreds of emails to find an offer can be difficult, if they remember to search for these mobile coupons at all. Wearables could fix that by allowing consumers to take advantage of discounts by swiping their wrist over a scanner at the time of purchase, applying the coupons to their bill during checkout. TARGETED MESSAGING While push notifications and beaconenabled messaging aren’t new, the growing success of reaching shoppers via these technologies is partially thanks to wearables. That’s because they don’t require shoppers to pull out their phones to get these messages.

[1] eMarketer, “Wearable Usage Will Grow by Nearly 60% This Year”, Oct. 28, 2015 [2] eMarketer, “Wearables: The Next Mobile Payment Device?”, March 3, 2015 [3] PWC, “Wearable Technology Future is Ripe for Growth – Most Notably among Millennials”, October 21, 2014

What’s more, these technologies allow a retailer to access shoppers across channels, lessening cart abandonment. A retailer can alert a customer to items left in their cart as they pass the physical store. This retailer can also send a customer a message letting them know that an item they were browsing online is in stock at the store nearby. BETTER OVERALL CUSTOMER EXPERIENCE In its 2014 study, The Wearable Future, PWC found that 72 percent of consumers said it was very important for wearable technology to improve customer service. The most vocal group was busy parents – 76 percent of whom said they wanted wearable tech to make shopping a more pleasant, efficient experience.[3] Smart retailers targeting these shoppers may turn to wearables to tackle customer service gaps and increase the efficiency of their workforces. By arming sales associates with devices that can check inventory, pull up product specifications, and even take payments, retailers can get rid of the need to go to the back of the store or visit a separate computer terminal to perform these tasks, creating a more seamless retail experience. “As brands are considering their end-to-end customer journey, they should think about how to integrate these devices into their overall marketing strategy,” added Chakrabarty. “Wearables offer merchants a fast and simple way of interacting with customers on-the-go and can push out relevant, personalized messaging in order to enhance customer loyalty.” To read more from Discover Network, visit http://discover.discovernetwork. com/perspectives/

Payment Quarterly | Q2 2016

MOBILE

By: Robb Gaynor

Chief Product Officer Malauzai

eople are wondering if the hype is true – do people actually make payments on their phones? Some look at Apple Pay and the other major “Pays” to try and answer this question. Some look at stand-alone payment apps like what Starbucks has done to gain insight. Another option is to look specifically at mobile banking usage to bring a different perspective to light. Mobile banking has many features and mobile payments has become part of that landscape. Today there are two methods for paying bills within mobile banking. Picture Pay, taking pictures of bills to

Payment Quarterly | Q2 2016

pay, and traditional Bill Pay, entering biller details manually. Traditional Bill Pay is usually also offered or accessed via Internet banking while Picture Pay, in contrast, is exclusive to mobile, primarily because it relies on the mobile camera. Both bill pay solutions have been offered for some time and, in fact, some banks and credit unions have rolled out both simutaneously. In addition to Bill Pay and Picture Pay, there are a few other select services worth considering when it comes to mobile banking usage – debit card management, where users can turn on and off your card in the mobile banking app, and person to person payments (P2P) where users can transfer money to a friend. Let’s first put overall mobile banking usage in context. All of this usage data is part of Malauzai’s proprietary research, pulled from live mobile banking apps from more than 375 financial institutions during the month of March 2016. What features do people really use? On average, a typical user logs in 20.5 times per month. For

users who have an auto login or quick balance feature, this average jumps to 36 logins per month, more than once a day. Mobile banking users are highly engaged. The most used feature is account balances followed by checking transaction history. Seventy percent of the time someone logs in, all they do is check balances and history. The top feature beyond balances and history is Internal transfers; about 35 percent of mobile banking users make a transfer at least once a month. Next in line, viewing check images and deposit images makes up around 30 percent. Remote Check capture comes in with a strong 20 percent of active mobile banking users making deposits monthly. Rounding out the list is contact details/branch locator with about 15 percent of active users performing a search for contact details monthly. So where does Bill Pay sit? Low; in fact, quite low. Just 5 percent of active mobile banking users make an actual payment monthly using traditional Bill Pay. Picture Pay is even lower at 3 percent of active users taking pictures

to pay bills monthly. And debit card management? Pretty good usage – about 15 percent of mobile banking users access the debit card feature monthly to check on card status, turn the card on and off or to ask for an ATM or POS limit increase. When tracked separately, about 4 percent actually turn the card on and off monthly. P2P paymentsare also quite low in volumes; less than one to two percent of active users are making P2P payments monthly. Payments in mobile banking are all over the place. Lots of users make internal transfers (35 percent) but not everyone would consider this a true mobile payment. Lots deposit checks (20 percent) are also not really payments by any classic definition. Card management is high (15 percent), but again, is not a direct mobile payment, even though when you turn the debit card on and off you are at least directly impacting payment behavior. P2P, like with Internet banking, is failing to really engage users of mobile banking. Bill Pay and Picture Pay comparison is also interesting. The average payment value is higher for traditional Bill Pay at $306 per payment compared to $255 for Picture Pay. Payment volume is similar with active users making 3.26 payments per month with Bill Pay and 2.85 per month with Picture Pay. Picture Pay also processes different types of bills. The single largest category of bills paid with Picture Pay are medical bills. 75 percent of Picture Pay payments are what is called “pay-again,” meaning the user does not take another picture but rather pays an already established biller/payee. Most surprisingly, 3 percent of Picture Pay volume comes via the desktop; the service is offered via Internet banking, so users are taking pictures and transferring them to their desktop, possibly scanning bills. Picture Pay is clearly not limited to mobile banking. The highest average dollar value of both services comes from iPad users, who make payments with 25 percent higher values than their SmartPhone counterparts. So what is going on; how do we explain all of this usage data? First, it must be said that clearly mobile

payments, when considering a wider definition, are engaging users of mobile banking. Transfers, deposits and card management top this list, all demonstrating the long term potential for the mobile channel. The low Bill Pay numbers are not surprising. Most people who use Bill Pay are on “recurring payment autopilot;” billers were set up ages ago and most payments

“IT MUST BE SAID THAT MOBILE PAYMENTS, WHEN CONSIDERING A WIDER DEFINITION, ARE CLEARLY ENGAGING USERS OF MOBILE BANKING.” are recurring.The fact that only 5 percent access mobile to make a oneoff payment is, again, not surprising. Picture Pay appeals to different users, those who have not set up all of their billers/payees in Internet banking. You can think of Picture Pay and traditional Bill Pay as complimentary and additive. So really about 10 percent of active mobile banking users make a bill payment monthly. And card

management is just simply a hot and convenient feature with 15 percent of active users doing something with their debit card monthly. Mobile payments and payments via mobile banking are here to stay. Active users of mobile banking have voted with their behavior; they are using all sorts of payment-oriented features in the app and are consistently coming back for more. As service depth increases, overall mobile banking is also gaining usage (like when card management was introduced). All of this sets a good foundation for the future. A future where more and more payment activities are consolidated under a “mobile-umbrella.” Someday, we will make all our payments, even POS checkout (thank you to “The Pays”) via a mobile device. Today, it is clear that mobile banking is a driving force in mobile payments and the engagement is good. Banks and credit unions must strive to launch those services they can deploy today in preparation for a future where the mobile banking app also allows for POS checkout, just like The Pays. Yes, eventually, all credit unions and banks will need to have a mobile wallet embedded in their mobile banking app. That day will come, but it is not today. Until then, launch these other services, build usage and learn. The future of mobile payments is already here.

Payment Quarterly | Q2 2016

MOBILE

UNBANKED & MOBILE PAYMENTS:

WHAT’S POPULAR NOW,

AND WHAT’S NEXT? I

t is impossible to paint a picture of a typical unbanked consumer of today. The profile of such a consumer varies from person to person. Geography, livelihood, culture, personal experience, and family history all make each person unique. There are, however similarities among the world’s unbanked population, particularly in developing nations. And global mobile money adoption rates are encouraging. According to GSMA, the number of registered mobile money accounts globally grew to nearly 300 million by the end of 2014. That’s only 8% of all mobile connections that could benefit from mobile money services, and with these services available in 61% of developing markets at the start of 2015, there is great potential for even more explosive mobile money growth in the next couple of years. In my experience working with financial services companies and merchants to provide options for unbanked consumers, there are clear mobile money services that have been most popular with unbanked consumers. One shouldn’t underestimate the extreme savviness of these consumers. First, they’re powerusers of their mobile phones. Second, they know how to get access to financial services that have lower fees—they’ve become very knowledgeable with circumventing traditional methods of using, storing and sending money that would be more expensive.

Payment Quarterly | Q2 2016

The following services are what the world’s unbanked consumers have adopted more frequently in the developing nations of the world. AIRTIME TOP-UP It all started with airtime top-up. GSMA stated that 62.3% of the global product volume of mobile money services in 2014 was made up of airtime top-up. Since a majority of mobile plans in developing nations are prepaid, airtime top-up has been understandably popular with consumers in these regions. Airtime top-up allows people to purchase additional minutes or data using mobile money in their stored value accounts. If consumers are relying on their mobile phones as primary methods of communication in addition to using the devices as mobile wallets, it’s easy to use up prepaid allowances (and fast). That’s why airtime top-up has been so popular in developing nations—convenience and urgent need. DOMESTIC AND INTERNATIONAL REMITTANCE Airtime top-up has arguably led to the prevalence of remittance services in unbanked communities. Consumers realized they could use airtime top-up to send to members of their family or friends who needed mobile minutes or data. Over the past couple of years, this service has evolved into sending family and friends mobile cash via their phones domestically. For the first

By: Nirnay Sinha VP of Financial Inclusion Products and Partnerships Mozido

time, people had the convenient ability to send money to the people they care about—all because of basic mobile services evolving through adoption and usage. Not only is domestic remittance convenient, it’s also significantly safer than traveling with wads of cash or sending an envelope of cash with a friend to deliver the money to family members. Domestic remittance eventually evolved into international remittance. Many skilled workers in developing nations will work on visas in other nations while they send money internationally back to their families in their home countries. Prior to mobile money remittance, sending money across borders was nearly, if not completely, impossible. Governments around the world have been catching up to this technology as well, so the service is not only compliant with trade and tax laws, but is also safe and extremely convenient. Giving families the ability to exchange funds at the drop of a hat has opened an incredible amount of doors, allowing people to pay bills faster, buy food when they need it, and improve their livelihoods, for example. P2P PAYMENTS Person-to-person (P2P) payments is another form of remittance, but one that also evolved from domestic and international remittance services. There are two main types of P2P payments: consumer-to-consumer (C2C) and

consumer-to-business (C2B). C2C payments represent the domestic and international remittance covered above, and C2B payments are where developing nations are seeing especially promising activity. In Africa, for example, where M-Pesa is the dominant mobile currency, customers can pay taxi drivers with mobile money—in fact, many taxi drivers will request or require this to avoid unpaid fares. In other areas of the world, stand-alone merchants and mom and pop sellers can use C2B mobile payments to more easily sell everyday goods and services to people without fear of being robbed of their cash earnings. Even in developed markets, C2B mobile payments are starting to pick up popularity among consumers and major retailers. However, unbanked markets are still leading the way in this space. BILL PAY Using mobile wallets to pay bills is a relatively newer area of mobile money services among unbanked consumers. Regardless of the novelty, the convenience of mobile bill pay has led to increased usage and popularity of mobile wallets. GSMA found that mobile bill payments increased by over seven million transactions in 2014. Utilities like electricity are generally provided to consumers on a prepaid basis in developing nations. Without the ability to pay via mobile wallets, citizens have to physically go to the electricity company or an authorized dealer and wait in long lines to pay their bills. With mobile bill pay, both consumers and businesses benefit—consumers can turn their lights back on at the push of a button and service providers can increase business with more frequent and recurring transactions. WHAT’S NEXT FOR MOBILE MONEY SERVICES AND THE UNBANKED? I believe that financial services that are generally available only to citizens with access to traditional banks and financial tools will be more accessible to unbanked citizens. Generally, the more advanced a financial service is, the costlier it is for a business to provide. However, mobile helps to level

the playing field in financial services because of the lower operating costs. Basically, it costs businesses less to offer mobile versions of financial services than more complicated services that include a network of touch points and devices. Take microloans, for example. These can range from the equivalent of few dollars to around $50, $100 or more. Generally, microloans (also known as microlending) target unbanked consumers who don’t qualify for traditional loans and need a certain amount of cash fast in order to help pay bills or cover unexpected expenses (like healthcare). Some microloan consumers are even more innovative with their use of microloans, like women in developing nations who are looking to become entrepreneurs or find more independence through access to financial services for which they normally wouldn’t qualify. I expect microloans will join the list of “most popular mobile money services” in twoto-three years. Mobile insurance is also a promising area for the future of unbanked mobile money services. Before mobile was an option, insurance companies were reluctant to take on unbanked consumers as customers due to liability. But because mobile insurance programs

can be a lot more cost-effective for both the provider and the insured, the industry is seeing a shift. With telecom companies leading the way, unbanked citizens can get access to life, healthcare, farm and several other types of insurance programs via their mobile device. The policy payments can be rolled into the mobile customer’s plan and it’s a winwin for consumers, who get access to affordable insurance, and mobile service providers, who increase business and customer retention. I expect we’ll see more prevalent adoption of mobile insurance programs in around five years. It’s an exciting time to be involved in the mobile payments technology space, especially as the world works to bring mobile money services to areas of the world who use it most. The unbanked are leading the global mobile payments adoption rates. Yet the most popular mobile money services for unbanked are still ripe with opportunity for increased adoption. Once these standard services—remittance, C2B payments, mobile bill pay, etc.—climb to higher adoption rates of around 70% or more, we’ll begin to see the more advanced services like microloans and mobile insurance take hold.

Payment Quarterly | Q2 2016

MOBILE

INFORMING THE

MOBILE BANKING EXPERIENCE WITH BEHAVIORAL DATA By: David Poole Senior Strategist SapientNitro

BANKING IS ABOUT TO HAVE ITS “UBER” MOMENT. A confluence of trends means that, by 2020, traditional banks will not be the necessity that they are today. Instead, people will be able to assemble their own services from a variety of providers. In this new world, competition will be based around the experience provided, not the product offered. And, more often than not, the experience will be driven by mobile devices. We conducted an 8-month study to understand exactly how customers are using their smartphones for retail banking. Using digital activity logging technology, as well as surveys, we were able to see (and learn from) every smartphone activity – at a millisecond level – of our U.S. panel of over 800 people. The objective of the research was to understand how people use their smartphones to bank. What are the patterns – the combinations of interactions and perceptions – that represent the state-of-the-art in smartphone banking today?

people

not consumers or users “SMARTPHONE BANKING IS GETTING FASTER. WE FOUND THAT THE DURATIONS OF SMARTPHONE TRANSACTIONS ARE VERY SHORT – ON AVERAGE, JUST 28 SECONDS.“

other key findings include 10

• Most smartphone bankers visited their banks’ digital counterparts 5.5 times per week (median). • Smartphone banking is widespread, with 77% of respondents using their smartphones to manage their finances. • The most common activities of smartphone bankers are transactional. • Most mobile banking occurs on Fridays and from 10 AM to 8 PM. • Mobile banking is not predominantly on-the-go, but rather occurs mostly at home. • Smartphone banking activities are most commonly characterized by distraction or multitasking.

Payment Quarterly | Q2 2016

Together, this data suggests that banks should optimize for mobile moments comprised of high frequency, low-duration banking behaviors. Such a design should prioritize a quick login, optimize transaction times, present information pre-login, and even consider retaining states between sessions. This also raises intriguing questions around the future of interactions between people and their banks. How do banks ensure ongoing relationships with their customers? Likely, it will mean that banks must create touch points that will bring their brands to life. From live events and popup stores to phone calls and annual financial reviews (along with many other methods), banks must create opportunities to speak with their customers. Banks have an obligation to alert and communicate with their customers. When necessary, triggers should be used to prompt customers at the right time. SMS and app-based alerts are

table stakes. Leading banks must shift from simply generating data to creating intelligence that can be used by banks and customers alike. For example, intelligence can be used to alert customers of issues (such as low balances). More so, it can be used

to deliver smarter recommendations around transferring money into savings, flag a high-spending period, or communicate the likely under-insurance on a home. New messaging platforms also represent an opportunity area for SMS banking. We anticipate that more banks will integrate with messaging platforms such as WhatsApp (600M users), Facebook Messenger (500M users), or WeChat (aka Weixin, with 468M users) to provide urgent banking information, customer service, and even payment capabilities.

blended not physical or digital

Branches remain an important – if not essential – channel. Indeed, a recent study shows that customers prefer branches for complex services such as sales and advice. We’re also seeing the development of a set of new branch options of varying sizes and sophistication. The smartphone is no replacement for quality human-to-human interactions, but (increasingly) those interactions can come through purely digital channels or a hybrid experience of digital and in-person. This data suggests that the branch will remain an important – but diminishing – channel and that we’ll see a shift towards a hybrid, digital/physical mix with a focus on consultative and advisory services.

Payment Quarterly | Q2 2016

MOBILE

Customer experimentation with mobile payments is common. A majority (58%) of participants in our study reported having used mobile payments on their smartphones at least once. And among those who use mobile payments, we saw a median usage (frequency) of 3.3 times per week. In five years, the payments landscape will be transformed; we may see a time when Google and Apple – or other technology companies – will control much more of the retail payment landscape. Those transactions may still use specific account numbers, and credit may be offered, but the power in those relationships will swing from bank-issued cards to smartphone and wearable technology vendors. How do banks maintain relevance in this environment? First, they should focus on adding value beyond the transaction – through financial advice and consulting services, for example. Second, they should be as easy to do business with as possible (to minimize churn) and allow people to manage their money via these smartphone tools. They must focus on the customer experience, particularly by optimizing their app-, mobile web-, and web-based offerings.

MOBILE PAYMENTS ARE TRANSFORMING THE RELATIONSHIPS BETWEEN PEOPLE AND THEIR FINANCIAL SERVICE PROVIDERS - UNLOCKING A RELATIONSHIP THAT HAS EXISTED FOR DECADES AND ENABLING TECHNOLOGY FIRMS TO INCREASINGLY CONTROL THAT RELATIONSHIP.

innovation

not shiny objects, or tech for tech’s sake WEARABLE DEVICES ARE EMERGING (BUT NOT YET MAINSTREAM) Wearables represent a key aspect of mobile technology’s future. Still, this innovative category remains lightly used. Just 10% of respondents own a smartwatch, with only 1-in-4 (24%) of those using it for financial management. For the most part, smartwatch users reported activities that mirrored smartphones, including reviewing

Payment Quarterly | Q2 2016

balances and transferring money. But other activities surprised us: Paying bills and reviewing budgets came in as the fourth and fifth most frequent activities (respectively). We’re still early in understanding the full potential of watch apps, but they’re useful for much more than just paying bills, reviewing balances, and approving transfers. For example, Betterment offers fund allocation, while Robin Hood enables the buying

and selling of stocks. Apps are already being developed to do much more, with voice inputs and personal assistant technology further contributing to the proliferation of these devices. At this point, it would be wise for banks to invest in evaluating this technology. Over the next few years, banks should lay the groundwork for widespread adoption. Customers want incremental improvements more than breakthrough innovation Banks are increasingly focused on reducing costs and maintaining the status quo as they grapple with limiting budgets and waves of new technology. So, in terms of prioritizing innovation, how should banks balance their investments between incremental and new features?

Many participants (22%) mentioned a desire for their mobile banking app to add new features, such as mobile check deposit; however, more consumers (34%) simply want their existing apps to work better. They mentioned a better user experience (16%), an app that doesn’t crash (5%), the ability to customize alerts and better account information (10%), and better performance (5%). In addition, the third most common response was that people wish that their apps rewarded them for mobile banking – some sense of sharing the cost-savings from using the digital channel. And in terms of security, 7% called for improved security, with half being interested in biometrics features specifically. CONCLUSION Contemporary mobile banking usage shows that smartphones are the indispensable connection point between banks and their customers. People are blending the digital and physical channels in the store, at the branch, and on the go. Therefore, banks must transform themselves to respond – they must be more agile and connect across organizational silos by design. Banks should continue to improve performance and simplify their mobile experiences, but they must also have a strategy for creating deep and meaningful interactions with customers outside of those 28-second interactions. Such a strategy should be founded on an understanding of the person, not the user or customer, and should be more sophisticated than customer journeys. The experience-led bank must change its calibration to reach the customer. Understanding people’s patterns and tools; embracing the blended reality of smartphones, web, call centers, ATMs, and branches; and opening the door to innovation will enable the banks of today to still be essential in another decade. For more key findings and implications, download the full study at sapientnitro.com/insights

Payment Quarterly | Q2 2016

MOBILE

Mobile Payments Represent Just Three Percent of All Transactions By: Steven Anderson

hile the notion that only around one in every 33 transactions in the United States takes place with mobile payments, that’s not exactly bad news. With only three percent of transactions in the U.S carried out this way, that could mean there’s plenty of room for growth. It could also mean there’s not a lot of interest. Most mobile-related payment activity, reports note, takes place online rather than in stores, generally because it’s much easier to make payments from the platform that’s doing the shopping. That’s not stopping mobile payment platforms from trying to move past smartphones and into more physical applications. Visa, for example, is working on its Visa Ready program, which opens up payments from wearable devices like smartwatches or

even smart glasses. In the United States, mobile payments have some major competition on hand; debit cards are the lion’s share of payment transactions, coming in at 38 percent. Cash is a clear runner-up, with just 29 percent of payments, followed closely by credit cards at 27 percent. Finally, we have mobile devices, representing just three percent of all transactions. Customers are having a hard time seeing a reason to turn to mobile payments, reports note, with a lack of easy-to-use loyalty programs or built-in coupon redemption systems two major possibilities for the field. Given that 37 percent of United States customers consider mobile payments more of a gimmick than a viable payment method, there’s a clear separation here between the retailers’

desired outcomes and customers’ common perception. Worse, only a “small number” of these are said to be “fully confident” about things like security. Better security and better rewards are really the only way to draw new users. If people can use cash or debit cards, they will continue to do so through sheer inertia if absolutely nothing else. Getting mobile payment users out of this pool will require a reason, and that can be done with better rewards programs. Focusing on security will also be vital, up to and potentially including a protection similar to credit cards, about how a user will never be responsible for bogus charges. The strategy seems reasonable enough, and the sooner it’s put to work, the sooner users will boost mobile payment use.

Fiserv Introduces Immediate Funds Service in the U.S.

nternational financial services technology solutions provider Fiserv has introduced the Immediate Funds service, which will help financial institutions offer their customers instant access to their funds from checks deposited through a teller, a mobile device or an ATM. The Immediate Cash service will use a patented decision engine in order to find out if there are ample funds available for withdrawal. The algorithm will also provide automatic protection against return losses and contribute to enhanced customer experience, said Fiserv in a press release. Fiserv recently commissioned a research on small business and

Payment Quarterly | Q2 2016

consumer segment. Conducted by Lieberman Research Worldwide, the research data found that immediate access to funds “resonates across all small business and consumer segments.” 58 percent of the respondents of the research said that “accelerated funds availability” offered from their financial institution would be “extremely appealing.” Furthermore, a focus group on checkcashing behavior said that “they would prefer to receive such a service from their primary financial institution.” On the other hand, 20 percent of the participants who were “highly interested” in getting immediate access to funds were small business owners.

By: Mike Dautner

60 percent of them said that they need fast access to funds in order to meet unexpected business expenses and to clear payroll payments on time. Commenting on introducing Immediate Funds, Pat Korb, the President of Financial & Risk Management Solutions of Fiserv said that “Financial institutions can meet a critical need by offering real-time funds availability when it matters most to customers, such as covering an unexpected expense or purchasing essential business equipment.” “Life moves fast, and people and businesses want their money to move fast, too,” he noted.

Facebook Messenger as Point-of-Sale System, with Apple Pay Built In? By: Steven Anderson

ith more and more younger users turning to messaging systems instead of email, it’s not surprising to see these systems get some further augmentation to draw in more users. Facebook Messenger is no different, and Facebook is set to not only add pointof-sale (PoS) systems to Messenger, but it also may be poised to bring in Apple Pay functionality besides. The early reports suggest that Facebook Messenger may allow users to go to stores and pay for items directly from the app, completely bypassing credit card terminals at the store level. Users will not only be able to pay while physically at the store, ostensibly using the store’s systems, but also pay directly from Messenger. This isn’t exactly a new development; Facebook’s Mark Zuckerberg noted that the company was set to work with other payment providers like Apple to bring systems into play for in-app purchases or for a complete system. While it’s not strictly necessary, according to reports, that it work with Apple Pay, the idea is to make the connection so as not to be overtly competitive with Apple Pay. It could potentially prove a competitor, but that’s not necessarily the first goal. This is a great possibility for the company, as it represents a means for Facebook to allow users to keep better connected to brands, and that means more valuable ad space. Since Facebook users could directly connect to a brand—up to the point where it could take users’ orders and purchases—that would make Facebook’s advertising real estate all the more valuable. It would essentially up the amount of time users spend on the

site, by allowing them to run the entire customer process from start to finish. It would also provide new potential revenue, particularly if Facebook became a payment processor, taking a percentage of each transaction. Facebook has needed some revenue streams beyond advertising for some time, especially given that advertising is so dependent on total user numbers that can fluctuate. A system like this might be exactly what the company needs, taking advantage of its huge reach to draw in payments and taking a cut accordingly.

THE EARLY REPORTS SUGGEST THAT FACEBOOK MESSENGER MAY ALLOW USERS TO GO TO STORES AND PAY FOR ITEMS DIRECTLY FROM THE APP, COMPLETELY BYPASSING CREDIT CARD TERMINALS AT THE STORE LEVEL.

Payment Quarterly | Q2 2016

SECURITY

CONFLICTING

PAYMENTS SECURITY, ABANDONMENT AND E-COMMERCE SUCCESS

FORCES

By: Hakan Nordfjell

SVP of eBanking & eCommerce Gemalto

n every aspect of life and business, competing priorities complicate critical decisions. A can’t coexist with B, C means you have to sacrifice D, having a stronger E means resigning yourself to a weaker F. The e-commerce ecosystem is no different, and many of those tradeoffs or compromises are magnified when it comes to the hyper-competitive and quick-evolving realities that online merchants face every day. With eMarketer and Forrester Research predicting that U.S. e-commerce sales will reach $392.5 billion and $355 billion this year, respectively, the opportunity for e-retailers to compete for consumers’ pocketbooks has never been greater. Online brands and wholesalers are slashing prices, making checkout simpler and more rapid than ever, and

Payment Quarterly | Q2 2016

doing everything in their power to ensure that shoppers make it through to clicking that “Buy” button. However, as the swell of online customers and sales rises, so does another (sometimes competing) priority: payments security. The currently reality is consumer convenience and the prospects of record sales often take precedence, resulting in a deprioritization of payment security. There’s a significant amount of highly personal data changing hands or “in motion” during high-tide shopping seasons, a large reservoir of payment data “at rest” in the cloud being stored for future purchases, and a high volume of online transactions being made with lacking oversight or security controls. That combination makes this commerce channel a prime target for fraudsters. Javelin Research estimates that card not present fraud (most of which is online) will account for $19 billion in losses by 2018. So what has been done to prepare for that uptick? The unfortunate answer is…not much. To be fair, all players in the e-commerce space are caught in a classic catch-22. If they try to enhance security by instituting additional steps like 3D Secure, which presents a consumer with a password or code via their mobile device or web portal

to verify their identity before buying, they can risk user abandonment and losing the sale. But if they continue relying on static CVV numbers, the three-digit code printed on the back of a card that acts like a PIN during an online transaction, that information can be stolen just as easily as other card owner details and abused by someone who doesn’t even have the physical card in-hand. Payment brands and e-retailers are trying to make online purchase processes as frictionless and familiar as possible, but also understand the importance of keeping customers secure – they just haven’t found the magic formula to appease both priorities. It’s undeniably tricky to balance business priorities, but convenience and security are two that should constantly be at the top of e-retailers’ and payment providers’ lists. Ignoring one or the other can be costly, both in terms of losing potential customers outright or having to bear the costs of fraud committed against customers in a weak state of security. Those outcomes can ruin reputations, relationships and both parties’ financial well being in an instant, so ways to achieve e-commerce success without having to sacrifice either focal point are long overdue.

While no technology is going to be the silver bullet, here are a few

for consideration that can improve payment security without affecting the checkout experience:

Tokenization implemented through online or mobile wallets (like Visa Checkout or

MasterCard MasterPass, which are ultimately still funded by a card), mitigates risk of fraudulent purchases because the token can only be used between one and 10 times. If a fraudster somehow intercepts the tokenized data, it can only be used on a limited number of rogue purchases (if at all), rather than indefinitely or until a consumer cancels their card, as when stolen from a pure credit card transaction.

Digital CVV numbers

constantly change the data a fraudster would need to verify a deceptive online payment. The three-number CVV code becomes electronic on the back of a credit card and changes frequently, so the buyer needs to have the card in-hand, not just card info copied down. This is a technology that needs to be implemented and deployed by issuing banks and other card providers, but works seamlessly with all e-retailers who currently ask for a CVV code on their payment portal, plus their acquiring banks and processors.

Fraud management software is a layer of security

that sits on top of online merchants’ portals and analyzes the device being used to transact as well as past purchase behaviors on that device. It can recognize and authenticate individual consumers’ purchase patterns and profiles, and instantly validate common purchases. If the transaction isn’t familiar, it gets rejected or an additional verification action is triggered when absolutely necessary.

IdentityMind and ONPEX Team up to Offer Risk-Managed Payment Platform By: Melanie Macinas

-commerce and financial technology company IdentityMind Global has joined forces with the Online Payment Exchange (ONPEX)—a partnership that will enable a single integration to manage credit card payments, risk management, fraud prevention and anti-money laundering compliance. The award-winning ONPEX offers a white-label cloud payment solution that powers hundreds of merchants, banks, acquirers, PSPs and ISOs in more than 90 countries. It integrates card processing with alternative modes of payment on a single omni-channel Platform as a Service (PaaS) and helps speed up businesses expansion.

With ONPEX as IdentityMind’s key partner, the latter further improves its service offerings, which includes fraud prevention solutions that integrate realtime and historical payment data. With the partnership, IdentityMind clients will be able to incorporate both payments and fraud within the same interface. This reduces the cost and complexity of payments and fraud prevention processes. The partnership also allows online merchants to stay ahead of the increasing card-not-present (CNP) fraud rates due to EMV adoption and FinTech payment models expansion. Garrett Gafke, IdentityMind Global President and CEO, commented, “We are excited to partner with ONPEX, a

solid, and award-winning white-label payment platform that focuses on simple, automated and transparent payments. ONPEX will help us deliver integrated payments into our Risk Management Platform.” Christoph Tutsch, CEO of ONPEX, said, “Online merchants continually demand more sophisticated and integrated payment and risk management services. IdentityMind is presenting the market with an innovative level of integration between payments and fraud prevention that will benefit our clients and merchants greatly. We are excited to be working closely with them as partners in this endeavor.”

Payment Quarterly | Q2 2016

SECURITY

THE NEFARIOUS NINE DATA-SECURITY THREATS TO BUSINESSES By: Dustin Lewis Director of Network Operations Forte Payment Systems

Payment Quarterly | Q2 2016

ata theft is a constant threat to companies that do business of any kind online, and despite the fact that the threat landscape is always evolving, security experts say digital crimes are largely predictable. Year after year, most breaches and security incidents fall into nine categories, and different industries tend be the targets of just two or three of those types of threats, according to the analysts who compile the annual international Verizon Data Breach Investigations Report (DBIR). Data breaches can involve human error, crime ware, insider theft, physical loss, web app attacks, espionage, point of sale intrusions, and payment card skimming. Denial of service (DoS) attacks are included although they’re not breaches, because they increasingly serve as a distraction while criminals steal data or install malware. The DBIR calls these common threat categories the “nefarious nine.” Learning which threats are most dangerous to your business can help you develop better prevention and response programs.

POINT OF SALE SYSTEM BREACHES LEAD INCIDENTS IN HOSPITALITY, ENTERTAINMENT, AND RETAIL More than 90% of the hospitality industry incidents reported in 2014 involved POS system compromise, along with 73% of entertainment and 70% of retail incidents. In order to reduce the likelihood of a POS intrusion, update and strengthen your POS device passwords; eliminate remote access to your POS software; ensure that all employees, vendors, and partners with access to your company network adhere to strict password guidelines; limit internet access via your POS system; and keep your POS software patched and protected with antivirus and firewall software. PAYMENT CARD SKIMMERS AFFECTED FINANCIAL SERVICES, RETAIL, AND MINING ATMs, fuel pumps, and retail checkout POS devices are frequent targets, and experts say that both large and small retailers can become skimming victims. Merchants who handle card-present transactions must familiarize themselves with the PCI-

DSS guidelines and Visa’s best practices on tampering prevention. These include locating POS terminals where employees and security cameras can monitor them, using PCI-DSS compliant equipment, and installing data cables and power supply cords in a way that makes them inaccessible and/or hard to identify. HUMAN ERROR IS A BIG PROBLEM FOR MANY INDUSTRIES A surprising amount of data theft is opportunistic. DBIR researchers found that 60% of the reported 2014 incidents in this category were down to human error. The IBM 2014 Cyber Security Intelligence Index attributed a remarkable 95% of all data-security incidents to human error. Miscellaneous errors, a broad category that includes human mistakes and system glitches, was the leading cause of data theft in healthcare, the second-largest cause in entertainment and education, and the third-largest cause in retail and hospitality. The three most common types of mistakes were sending sensitive information to the wrong recipients, placing information that was supposed to remain private on public web servers, and improper disposal of private data. Experts recommend that all employees use extreme caution with auto-fill email address forms, data disposal, and web publishing protocols.

POS BREACHES, SKIMMING, AND HUMAN ERROR are the most common threats to merchants in retail, hospitality, and entertainment. The remaining categories in the “nefearious nine” are less likely to affect merchants and more likely to impact heavy industry, government, and professional services including finance: • Insider misuse of data was the primary cause of loss in administrative and mining sectors. • Digital espionage was the biggest threat to manufacturing and professional services. • Crime ware unrelated to espionage or POS hacking was responsible for the majority of confirmed 2014 incidents in the educational, public, and financial services sectors.

• Physical loss or theft of devices containing valued data was the third-highest loss vector for the healthcare industry, fourth-highest for education, and the secondhighest for other services. • Denial of service attacks did not directly cause any data theft, although the retail and hospitality industries were frequent victims of attacks that disrupted service for legitimate users.

• Web app attacks, many using stolen credentials, were the second-largest threat within the financial services and information industries, but they didn’t lead in any industry’s threat landscape.

ADDRESS THE LARGEST THREATS FIRST Merchants, especially those in hospitality, retail, and entertainment, can greatly reduce the likelihood of data theft by working with their payment service provider to ensure PCI-DSS compliance and to evaluate their point of sale software and hardware setups. An experienced PSP can also be a partner in preventing transactions from known fraudulent IP addresses, identifying potentially fraudulent transactions, and notifying the merchant. Regular reviews and updates of payment system security, along with regular training for employees on safe data handling procedures, can sharply reduce your company’s risk of falling prey to digital data thieves.

Payment Quarterly | Q2 2016

SECURITY

Cyber Insurance Rates Drop as Fewer Hacks Spotted By: Steven Anderson

rotecting data is vital to companies’ continued operation, particularly when it comes to payment data. Those companies that can’t, or won’t, do the job often lose face, causing customers to go elsewhere in search of better protection of data. A new report from Reuters suggests that cyber insurance rates—and yes, there’s such a thing as cyber insurance— are in decline because there are fewer major hacking efforts taking place. Rates dropped for retail and healthcare companies as the number of high-profile breaches for the first quarter of 2016 fell off, which is a huge change from what many in the industry were expecting. Especially given that recent major hacking efforts for places like Anthem and Target saw rates on the rise.

Since those recent efforts aren’t so recent any more, pricing for insurance against the attacks has decreased, resulting in a more stable market. A million dollars’ worth of insurance went from $21,642 in 2015—up 28 percent against 2014’s numbers—to just $18,756 this year, down 13 percent. Naturally, such good news may not last, so those interested in picking up insurance may want to do so before the next high-profile hit—and there likely will be one before too much longer— strikes. However, there’s a point to consider here: maybe security has just gotten better. We all know that the Europay, MasterCard, Visa (EMV) system is now pretty much universal for major retailers; about the only holdouts left are the smaller firms who believe that the actual costs to upgrade systems

outweigh the potential costs of breaches. We’ve seen advancements in encryption come out as well, and more systems are considering the use of perimeter defense—firewalls and the like—as well as internal defenses, making systems a little harder to breach. This may fend off all but the most dedicated hackers, which means fewer hacks overall. Still, it’s early in 2016. We’ve got a long road ahead, and plenty of opportunity for hackers to get involved. Those companies that want to take advantage of the lower rates likely should while they’re there to enjoy, and potentially consider locking in the rates now. Things are quiet on the hacking front for a change, though just how long that will last is anyone’s guess.

Ethoca-Pegasystems’ Partnership Steps up Fight Against Fraud By: Melanie Macinas

thoca, a provider of collaboration-based solutions that help card issuers and ecommerce merchants boost card acceptance and prevent ecommerce fraud and disputes, has inked a deal with software company Pegasystems to further improve dispute resolutions and eliminate chargebacks. The partnership, which comes hot on the heels of Ethoca’s collaboration with TSYS, further streamlines its Global Collaboration Network, allowing issuers and merchants to connect to the antifraud solution. Ethoca’s new partnership will empower card issuers to automate the resolution of customer service and fraud-related disputes without the costly, people intensive chargeback

Payment Quarterly | Q2 2016

process. Ethoca does away with the costly chargeback process through the Ethoca Alerts, its flagship service that provides merchants an early warning on confirmed customer disputes and fraudulent transactions allowing them to immediately resolve complaints. Through this, issuers also cut back on chargeback-related operational costs and expedite the recovery of dispute and fraud losses. With the partnership with Pegasystems, card issuers using Pegasystems’ Smart Dispute for Issuers will be able to easily plug into the Ethoca Network with minimal IT effort, expedite fraud and dispute recovery process and get rid of manual intervention.

Smart Dispute integration will initially be offered for customer dispute transactions to be followed by support for confirmed fraud. Scott Andrick, Industry Principal, Retail Banking and Cards, Pegasystems, Inc, commented, “Every cardholder dispute or fraud incident is a moment of truth for card issuers that can potentially make or break the customer relationship. “Our integration with Ethoca will immediately benefit many of the world’s top card issuers that recognize the opportunity to significantly reduce the cost of customer disputes and fraud while sparing their cardholders from the pain of slow, archaic chargeback processes.”

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+

CONSUMER VALUES

STUDIES SHOW:

CONSUMERS STILL USE CASH OFTEN By: Tom Pierce

Chief Marketing Officer Cardtronics

h, Hasbro. The game manufacturer is issuing a new version of its iconic Monopoly game and replacing the familiar cash with debit cards and scanners. Doesn’t Hasbro know that when players pass GO, they prefer cash? While credit and debit cards are popular and new cashless payments players keep emerging, retailers and others should take note: Consumers still make it clear that betting against cash is a losing proposition. Recent surveys underscore consumers’ desire for cash. Consumers choose to use it more frequently than any other payment instrument, a Federal Reserve study found. Similarly, a late 2015 survey sponsored by Cardtronics, the world’s largest retail ATM owner / operator, revealed that while consumers are using a mix of payment methods, time and time again, cash is number one in a variety of spending scenarios, and this despite the availability of mobile payments.

Payment Quarterly | Q2 2016

WHY DOES CASH REMAIN ON ITS THRONE? There are several reasons. Cash is convenient. In the same survey, when asked for reasons why they choose cash over other payment methods, two-of-three adults said because: Cash is convenient. It’s easy to use and it just works. Cash can’t be hacked. Forty-two percent of the Cardtronics’ survey respondents also cited cash’s ability to keep personal information safe as one of the reasons they choose cash over other payment options. Consumers, in fact, have grown increasingly wary of the safety of debit and credit cards. A 2015 grocery store shopper survey by Balance Innovations, a payments software solutions provider, found that only 35 percent of shoppers were “very confident” in safely using their debit or credit cards. It also found that if shoppers are making changes to their payment methods, they are most likely to make greater use of cash (55 percent). Cash is king for small-value and P2P transactions. Nearly 70 percent of the Cardtronics survey’s respondents reported using cash for smaller items and 78 percent answered cash when asked what type of payment they use to pay someone back (P2P). In fact, cash was the number one answer in a variety of spending scenarios – from convenience store purchases (63 percent) and grocery store shopping

(52 percent), to small businesses (49 percent) and restaurants (53 percent). Looking at specific spending categories, the Fed study agrees with Cardtronics’ data on cash’s dominance in P2P, and also found cash to be the leading payment instrument for buying gifts; food and personal care supplies; entertainment; transportation; and medical, education and personal services. Likewise, Cardtronics’ data found consumers use cash in leading fashion for snacks away from home (67 percent); taxi fare (62 percent); bar tabs (54 percent); farmer’s markets (72 percent); splitting a restaurant bill (64 percent); and tipping (78 percent). Why does this matter? Understanding how consumers pay for items can help retailers deploy merchandising offerings, targeted promotions and other product placement offerings. CASH MAKES UP SINGLE LARGEST SHARE OF CONSUMERS’ MONTHLY TRANSACTION ACTIVITY According to the Federal Reserve study, the average American consumer made 59 transactions during its monthlong study, and 23 of them involved cash. That means, at 40 percent, cash comprises the single largest share of consumer transaction activity, followed by debit cards at 25 percent and credit cards at 17 percent. The survey found that electronic payments and checks each accounted for 7 percent, with all other payments representing less than 5 percent. Text and mobile payments barely registered at less than one-half of one percent. When layering this Federal Reserve study finding with additional data from Cardtronics’ consumer payments survey, it appears that Americans purchase a fair number of smaller, less expensive items every month. In the Cardtronics study, 78 percent of surveyed consumers report using cash for purchases under $5, and nearly 60 percent answered likewise for purchases that are $5 to $10. It’s not until the $21 benchmark that card-based payments outperform cash.

UNDERSTANDING HOW CONSUMERS PAY FOR ITEMS CAN HELP RETAILERS DEPLOY MERCHANDISING OFFERINGS, TARGETED PROMOTIONS AND OTHER PRODUCT PLACEMENT OFFERINGS.

OTHER ISSUES AT PLAY There are other issues that strongly suggest cash won’t be dethroned soon. Consider the newest cashless payment player: mobile payments. Consumers aren’t quickly embracing mobile, and it’s not for lack of awareness given the high-profile marketing campaigns of Apple and Samsung. While security concerns are one answer to the question of slow adoption, that is not the big answer. Thus far, mobile payments have been the answer to a question consumers aren’t currently asking, because the act of paying today in brick-and-mortar stores isn’t broken. Whereas the mobile payments experience is friction-filled due to the relatively modest fraction of stores accepting this cashless form of tender, cash is accepted virtually everywhere and cards are far ahead of mobile by this measure. As it stands in the U.S., mobile payments are a form-factor disrupter for today’s card payments, with retailer acceptance for the former severely lacking compared to the latter. Even if acceptance was equal, again, cash and cards aren’t broken at the physical point-of-sale. What will make the mobile payments experience more valuable, and thus worth switching to

is the big question, and one without an answer at this time. WHY CASH HAS A BRIGHT FUTURE Retailers and financial institutions may benefit from knowing some surprisi ng payment patterns Cardtronics’ survey discovered about Millennials – those born between 1980 and the mid-2000s. One substantial finding: Nearly half of Millennials (45 percent) report they tend to pay more with cash today than they did a few years ago. That was the highest percentage among all demographic groups. Millennials are equal opportunity payments users, embracing both new technology and increased cash usage. One explanation for why: budgeting. According to the Cardtronics study, 40 percent of Millennials choose cash over other payment methods specifically because it helps them control spending and stay on budget. And in a finding that suggests retailers might want to install onsite ATMs, one-in-four Millennial respondents say they spend either 75+ percent or all of the cash they withdraw the very same day they used an ATM. These patterns are critical and positive news for the future of cash, because

Millennials are now the largest, most diverse generation in the country’s history, and the one that’s been shaped the most by technology.

LISTEN-UP MONOPOLY In the Depression, many people bought something only if they had the cash for it. While that mindset definitely has changed since then with the advent of cards and mobile payments, cash will persist as a potent – and popular – payment method for the foreseeable future. As for Hasbro and its Monopoly change, dropping paper currency is a decision disconnected with reality and may backfire with American consumers. Judging by the court of public opinion that is social media, reaction was mixed, at best, with many parents lamenting the lost learning experience of counting cash to help children understand the value of money. More than that, a debit card is a sorry substitute to a fistful of cash when reminding a sibling who’s in the lead. The people have spoken, Monopoly, and they want cash.

Payment Quarterly | Q2 2016

MOBILE WALLET CONSUMER VALUES WARS

Payment Quarterly | Q2 2016

ver the past few years, payments industry has seen many exciting developments both on the business and the consumer front. Especially considering how the digital transformation continues to gain momentum every day, we will continue to see our payment habits transforming overtime – thanks to the launch of new technologies and numerous industry giants stepping into this business. Following ApplePay, AndroidPay and SamsungPay, many large-tier banks in the United States have also announced their own wallet programs. However, most of these wallet programs still do not/cannot address consumer needs. By offering consumers the option to use proximity payment, these programs are onto something, but it is not quite enough to satisfy consumer needs alone without value-added services like inapp payments, loyalty, couponing and so forth. Many people are still having trouble using their cards for making payments in taxis, transit, parking, self-service devices and gas stations. To address all these needs, retailers, issuers, solution providers and service providers (ISOs, Payment Gateways) need to bring their forces together and work on the best solution collectively. Otherwise, consumers might not find enough factors to change their payment habits. In the U.S., there are still people using checks to carry out a payment transaction. The new payment methods offered to consumers need to address one pain point of consumers and it should be supported by other factors such as earning points or gifts. Offering consumers a convenient, fast and secure payment method is crucial to acquire new consumers. Many merchants, retailers, gas stations and transit operators are seeking such innovative ways to acquire new customers and service existing ones in a better way. Mobile wallets may offer numerous attractive payment options to get attention of consumers – one of many is being able to make payments at the gas station pump without leaving the car. It is generally not a preferred

how

MOBILE PAYMENTS can address

CONSUMER NEEDS By: Erdal Yazmaci General Manager Cardtek way for consumers to walk into the shop every time they fill up their tanks. Well-designed mobile wallets can bring very attaractive options to consumers, allowing them to pay with their mobile wallets while they are still inside the car. The technology behind this life-changing solution works when the gas station customer pulls into one of the pumps. The customer’s mobile phone communicates with the pump automatically via iBeacon, Wi-Fi, GPS, etc., which activates the pump to register where the car is to enable the closest pump for filling the tank. This payment option gives the merchants the opportunity to recognize

and identify consumer when he/she is in the aisle, and merchants might offer personalized loyalty campaigns to keep their consumers satisfied. In this payment method, consumers can easily choose the product they want to buy via their mobile app and carry out a payment transaction with one of their credit/debit/prepaid cards registered in their wallets. In this payment option, the transaction amount is calculated by merchant pump automation system and confirmed by consumer, so the risk of fraud is significantly reduced. In addition to the aforementioned service providers, there recently has been an increased usage of mobile wallets in the public transportation space. With the high demand from consumers for convenient and secure solutions to digitize their transit cards to their mobile phones, it is now possible to purchase tickets, store them and use them via mobile phones in stations. Without having to track down a top up terminal, such as kiosks, TVMs and retailers, passengers can now easily use their smartphones to access ticketing options/prices, different passes (monthly, daily, etc.), in addition to campaigns and special discounts. They can also easily chose one of the products they want to buy and choose a digitized card on their smartphones to buy a ticket. Tickets are thensecurely stored on their devices and can be easily used in transit entrance points. Although it looks like these recent developments in the payment industry have been flooding in recently, with so many players in the industry, it looks like the mobile wallet wars will continue for some time. Issuers, wallet providers or retailers, who can effectively address consumers’ needs, will win the game in mobile wallets wars. There are hundreds of wallet options in the market, however the ones better equipped with latest technologies, flexibility and security will have the advantage in this competition. Nobody knows and/or can guess who the winner of this game will be, but everyone agrees that whoever makestheir consumers’ needs their prioritywill have the upper hand.

Payment Quarterly | Q2 2016

CONSUMER VALUES

Restaurants Ready to Send Back EMV T he move to Europay, MasterCard, and Visa (EMV) payment cards has left a lot of businesses unclear about their stance regarding the matter. Restaurants, meanwhile, aren’t handling EMV chip cards in any way different from magnetic stripe cards, and a new report from Heartland Payment Systems says that status quo will likely be the status quo for some time to come. The basic belief is that, essentially, restaurants are too small of a target to go after, and so, most fraudsters will avoid restaurants as the risks are greater than the reward, even though the risks are slimmer. Who will use a stolen card to buy a hamburger? Perhaps more noteworthy is that, while the risks are slim, the costs of making upgrades to handle EMV are particularly onerous to slim-margin

operations like restaurants. Though pressures to upgrade are not only already high but also growing, restaurants are also facing down a market that may not even be using cards much longer anyway. Restaurants are focusing on how to respond to mobile payment systems and the like, while also protecting against data breaches and add extra features like loyalty programs. EMV, therefore, just isn’t much of a priority right now in a field where businesses are trying to get the most out of every dollar spent. It’s not just frugality limiting the action, though; some note that chipbased transactions can move slower than the ordinary, and having to slow down the flow of a restaurant in a meal rush would only damage the overall customer experience. There are several factors working

By: Steven Anderson

against EMV transfer in the restaurant market, especially given how mobile payments in general are coming into play. While EMV was really a refinement of standard card-based systems, the problem here is that mobile payments are the next step away from cards altogether, a technological development that leapfrogs EMV itself. So the notion that restaurants would be hesitant to upgrade when another upgrade will likely be coming up makes more than its share of sense. Restaurants shying away from EMV may be a short-term risk, but it’s one that may ultimately pay off by not requiring restaurants to waste money on a technology that could be outdated in a year or two. The dice have been cast, so to speak, and only time will tell how it all works out.

Costco’s Visa Cards Will Offer Better Rewards and Cashbacks Compared to AmEx By: Asif Imtiaz

hile some Costco customers are worried that their co-branded American Express card will be discontinued by their favorite warehouse come June 20, it might turn out to be a good news for Costco members. Costco will end its longstanding tie with American Express, but they will issue new Visa cards to members. Apparently, these Visa cards can be used everywhere and shoppers will be earning better rewards from the new program. According to CNN Money, the new Costco Visa cards will offer customers 4% back on the first $7,000 they spend on gas and after that, they will continue to enjoy 1% back. The former American

Payment Quarterly | Q2 2016

Express card only offered 3% back on the first $3,000 worth of gas. Furthermore, Costco members using the new Visa card will enjoy 3% cash back while using it in restaurants and could be eligible for select travel purchases. Costco members will be given a voucher for their cash back rewards, which they can later redeem at Costco for cash for making additional purchases. Compared to the 2% cash back offered by the American Express card on restaurant expenditures, the Visa card from Citi will provide significantly improved rewards. Commenting on the distinct features of Costco’s new Visa card, Virginia C.

McGuire, a personal finance content writer for NerdWallet’s Content Team, said that the new card will offer better rewards to consumers who will use it for regular gas purchases, restaurant meals, and occasional travel. “If you spend a lot on gas, restaurants and travel, this card has pretty great rewards,” she said. To make the transition a seamless process, all current American Express cardholders will be automatically enrolled into the new Visa program along with any accumulated rewards they already have on their AmEx card. Besides the $55 annual fee to be a Costco member, the new Visa card from Citi will not incur any additional annual fees.

Simplifying payments innovation, fueling commerce. Commerce in our digital era is more than buying online. It’s about transforming systems, processes and the buying experience. In a complex world of rapid innovation and high expectations, success demands collaboration. Vantiv is the workbench for electronic commerce. We put our team’s experience to work for your business — paving the way for payments now and into the future.

To learn more about how we can help you fuel commerce, visit us at booth #400 or visit vantiv.com

MOBILE WALLET WARS E-COMMERCE

TIPS

TO BOOST OFFLINE SALES USING ONLINE CHANNELS By: Manish Patel

CEO Brandify, Where2GetIt

dvertisements and valuable content can bring your audience to your website, but what is driving them to your store? Even though customers are able to view and purchase items online, over 90 percent of consumers are still more inclined to buy at a physical location. Some techniquesâ&#x20AC;&#x201D;like direct mail and business cardsâ&#x20AC;&#x201D;are old-fashioned ways of driving your offline sales, but modern strategies are offering more advanced techniques for connecting with your consumers digitally. Keep up with your audience and build on-site relationships with these four tips. CONNECT WITH MOBILE USERS A large percentage of your consumers are using their mobile devices even when they are already in your store. According to a Wanderful survey, 77 percent of clients have searched online for product information while shopping, and the growing millennial audience is particularly likely to engage in this at 85 percent. One way to encourage customers to visit your store is by merging the online and off line shopping experience through mobile applications. You can accomplish this by giving customers the option to quickly order items via mobile for same-day, instore pickup. Be sure to highlight the

Payment Quarterly | Q2 2016

benefits of this option, such as cutting out lengthy checkout processes and shipping costs while delivering instant, face-to-face service. LISTEN AND RESPOND TO CUSTOMER REVIEWS A large percentage of your conYour customers want to know what people are saying about your products and services. 63 percent of consumers are more likely to make a purchase from a site that has reviews, and visitors who read the reviews have a 6 percent higher average order value than those who do not. Reviews can improve things like customer confidence, SEO, and credibility. Afraid of negative feedback? One study found that negative reviews actually boost client trust by 68 percent if a customer complaint is immediately rectified. By addressing customer concerns, you demonstrate listening willingness to your audience in order to improve your products and experiences. A positive review of an exceptional customer experience will motivate shoppers to visit your business in search of the same encounter. MONITOR YOUR SOCIAL MEDIA PRESENCE Another way to receive and use feedback to drive offline sales is by monitoring social media conversations regarding your brand. Show customers

you are ready to answer their questions and talk about their concerns by networking through your social media platforms. Facebook and Twitter are extremely valuable channels for customer interaction because they allow you to have a one-on-one connection with your patrons. You can also create virtual window shopping opportunities through sites like Pinterest to give your customers a sneak-peek at the items they will find in your store. Also, consider offering coupons that can be shared with friends and brought to your business for promotional items and discounts. GO TO THE CUSTOMER WITH GEOLOCATION SERVICES Soon, Google Maps will introduce similar technology to smaller companies in the space that already offer offline turn-by-turn voice direction and the exploration of local businesses for users with low connectivity. This means that being involved with location-based mobile targeting will be incredibly beneficial to your business moving forward. Only 23 percent of retail marketers are utilizing geo-targeting for mobile marketing, giving businesses that implement this strategy an early adopter advantage. A successful way to get in on geolocation services is to drive offline sales through targeted mobile coupons. Become a part of location-based social media platforms like FourSquare and encourage your customers to checkin to your location. This will show the popularity of your store to locals, prompting loyal customers to continue to visit and inviting new customers to get involved.

Understanding online shopping behavior in the digital age will benefit your offline sales strategy by giving you the knowledge you need to explore new ways to connect with your clients. They value retail experiences over simple transactions, so it is time to show them you can offer more than online exchanges. These four tips will help guide your target audience to your location by keeping you updated with their search and purchase preferences.

By: Ben Yaniv Chechik VP of Product Zooz 2016 TOP TREND: A WINNING BATTLE FOR CONSUMER ATTENTION The Fintech industry is extremely dynamic, with new e-wallets, alternative payment methods and mobile apps popping up practically every day. While the industry is constantly producing new ways to pay, it is also creating new channels for purchasing with these various payment options. Following the recent contextual marketing trends, Fintech is developing to enable direct payments within targeted ads, social media posts and other contextual offers. Contextual marketing is one of the rising trends that we are witnessing in 2016 in the retail industry. It refers to a targeted marketing strategy that encourages conversions and engages customers by analyzing their online journeys and making relevant offers through targeted content. Contextual marketing has been around for a while, but the concept has evolved considerably in order to contend with the amount of content to which the

modern-day consumer is exposed. While the average consumer spends 5-6 hours a day consuming this content online, only 2% of that time is actually spent purchasing online. The savvy merchant can boost conversions by offering the right message to the right prospective customer at the right time – or by contextual marketing. Contextual payments, on the other hand, will ensure that consumers act on the targeted content and complete a purchase. When retailers successfully combine personalized content with familiar payment methods, they offer “contextual payments,” delivering an enjoyable customer journey that ultimately inspires brand loyalty. CONTEXTUAL PAYMENTS: TURNING CONTENT INTO CONVERSIONS Offering contextual payments is a way to harness the customer engagement generated through contextual marketing, by both targeting consumers with customized offers and enabling them to act on the offer and pay for it. Today, for example, if a prospect is searching for cheap flights to Mexico online, the merchant might offer a vacation package in Acapulco. The immediacy of the offer and instant opportunity to pay keep the prospect within the transaction funnel, and there is a greater likelihood that the purchase will occur. If the user could somehow see the

Acapulco offer and pay for the vacation package without navigating away from the ad, pop up or social media post, the conversion rate would be higher. This strategy can be particularly effective for impulse shoppers who might not complete transactions if given the chance to think twice about making the purchase. Furthermore, marketers are finding that for most shoppers a customized appeal is insufficient in itself: in order to truly engage a prospect, immediate payment options must be available. CONTEXTUAL PAYMENTS: THE PRACTICALITIES When it comes to making contextual payments a reality, a major focus of Fintech developers is how to enable these real-time transactions as well as the factors that influence the prospect’s likelihood to convert. The building blocks of any contextual payments approach will involve both marketing and payments strategy. Many of these key elements constitute major trends in the Fintech world in and of themselves. They include: GLOBAL REACH, LOCALIZED OFFERS AND OPTIONS One of the major benefits of e-commerce is the ability to reach audiences around the world, and globalizing online commerce has been and continues to be a top trend

Payment Quarterly | Q2 2016

E-COMMERCE

in e-commerce. Merchants using contextual marketing need to take this into account, offering relevant promotions rich in local color. National and religious holidays, cultural interests and even local weather need to be factored into targeted marketing efforts. Localization is equally important for promoting contextual payments. Consumers are unlikely to make a purchase if they are unable to pay with familiar, regionally-preferred payment methods or if the checkout doesn’t include localized tax calculation and package delivery options. REAL-TIME DATA ANALYSIS AND REPORTING Data is at the cornerstone of all modern innovation, enabling contextual offers and intelligently determining what will appeal to each customer. Marketing technology today centers on data-driven reporting of consumer behavior and preferences, which inform targeted ads. Most merchants don’t realize, however, that data is equally important to providing an immediate and

frictionless payment process. Much of today’s Fintech development centers on using data to make payments faster and more secure. The ability to analyze a customer’s location, payment method and other payment details is allowing merchants to assess fraud risk and intelligently route payment traffic to providers that can optimize payment acceptance. SEAMLESS OMNI-CHANNEL SUPPORT In today’s world, the ability to offer targeted ads across consumers’ devices and shopping channels has become a basic marketing tenet. Merchants must take for granted that when a consumer is initially attracted to a targeted ad or post online, he or she may choose to make the actual purchase via a mobile app or tablet – or even in-store. Personalized messages must be carried across channels for effective contextual marketing The same is true of payments. Payment technology today is designed to recognize users across their devices and enable them to pay seamlessly

with their payment methods of choice wherever they decide to make their purchase. THE NEXT FRONTIER: SOCIAL MEDIA PAYMENTS We still have a long way to go before contextual payments become a part of the day-to-day online experience. However, Facebook, Uber and PayPal are collaborating to bring us closer than ever to contextual payments via social media. In December 2015, the companies announced that Facebook users can now order and pay for Uber rides via Facebook Messenger. In many ways this small step in social payments technology is a major leap in making contextual payments a reality: existing technology is enabling an entire secure checkout process in the context of a social media platform. As the year continues, we can expect more breakthroughs in “social commerce,” as well as the development of technology that enables real-time transactions in other contextual offers, encouraging increased conversions and, ultimately, brand loyalty.

Amazon Sets Stage to Take on PayPal With Expanded Payment Options By: Steven Anderson

etailers offering their own payment systems isn’t exactly new, but it is a fairly bright idea, allowing companies to offer the convenience of a payment system without the expense of a middleman. Amazon has recently been spotted putting a lot more into its own payments options, and reports suggest it may be in a position to take on PayPal before much longer. The program, called Pay With Amazon, gives the current roster of 304 million account holders the ability to shop not just with Amazon, but with other merchants as well. Users need only sign in with an Amazon account on the sites that accept Pay with Amazon, and then, users can use the currently-registered credit

Payment Quarterly | Q2 2016

cards and shipping details just as if said details had been manually entered on other sites. Merchants accepting Pay with Amazon, so far, include Southwest Airlines and the GoGo in-flight WiFi service. Retailers connected with Shopify can also get in on the action, at last report. Amazon has one major problem in terms of drawing interested retailers; many retailers are competitors with Amazon, and as such, may not have an interest in offering up data for the retail juggernaut to put to use. There’s a clear advantage in convenience, but that advantage may be counterbalanced by the data that may be used to cancel out other competitive advantages.

Given that over 23 million Amazon customers so far have put Pay with Amazon to work with non-Amazon merchants, and just over the last two years, this may be a moot point. Customers may want access to the service too much for businesses to refuse; a business that won’t give the customer base what it wants is likely to lose that customer base. Pay with Amazon might be a welcomed addition to the lineup here, giving merchants a way to tap into a new customer base who want the convenience and perceived safety of working with Amazon. For those businesses that sell what Amazon doesn’t, the opportunity is too clear-cut to pass up.

PROCESSING

HIGH RISK MERCHANT PROCESSING

Big Opportunity Still Exists in the Marketplace By: Jeff Shavitz Founder Alternative Merchant Processing

he overwhelming majority of merchant level salespeople that I speak with are focused on selling traditional merchant processing services. Given the competitive marketplace, have you ever considered selling to a different marketplace and other services – and I’m not referring to cash advance, gift cards, check services – or how about non-traditional and high risk merchants? I know you’ve heard the term “high risk” for years but never felt that you wanted to dip your toe into this exciting arena of merchant processing. Read on and hopefully by the end of this article, you will be interested at least to give it a try. What is high risk processing? Having been in the industry for most of my career, we have all heard the term “high risk” for years, but do you really understand this market, the nuisances that differentiate it from conventional processing and the profitability opportunities? It is completely different from the conventional restaurant or retail store that falls under “conventional processing.” The industry of high risk merchant processing continues to change and evolve within the payments ecosphere. Companies that were once considered traditional merchants are now considered high risk and vice-versa. New merchant industries with the advent of emerging technologies are being born, and payment processors, banks, acquirers, issuers, the Association (i.e. Visa and MasterCard), American Express, Discover, loyalty companies, PCI companies and other players within the payments industry need to find their fit within the industry. Credit card processing companies play

a significant and important role as they are the conduit between the high risk merchant and the Associations. They also play the part of providing real service and value to the online store or retail merchant. The industry is fluid and applications like Apple Pay continue to reinforce the ubiquity of the payments marketplace. Although Apple Pay is currently focusing on the retail merchant, we must anticipate that these new solutions will become apparent in the high risk credit card space in the near future. Apple is not interested in the payments industry; Apple is interested in selling more iPhones and their senior management understands that joining the payments space will do just that. With 10 million being sold in the first day of launch the iPhone is incredible, with Apple Pay being one of the most innovative features of this new model. Credit card payment processing companies are facing significant challenges with their risk underwriting and credit risk managers needing to determine which merchants to accept. Unlike Apple Pay and the retail merchant, high risk and hard to place merchants cover a variety of industry types from the relatively new market of vapor/electronic cigarettes, debt collection, the adult industry and hundreds of other vertical types. Other high risk industries include Sports Information, Nutraceuticals, Escort, Pharma, Travel and Vacation Properties, Ammunition Stores, Collection Agencies, Medical Marijuana, Herbal Supplements, Medical Discount Plans, Dating Services and many online stores – there are hundreds of other industry verticals but this provides a framework of some of the business types.

Payment Quarterly | Q2 2016

PROCESSING MOBILE WALLET WARS

Why consider high risk? Lots of reasons, but let me start with three big ones: profitability, margins and competition. The world of conventional business has been and will continue to be more competitive with interchange plus pricing. Why work at 10 basis points in the retail sector when you can sell at interchange plus 100 basis points? We work hard and deserve to make a fair wage for our efforts. The profitability ties into the margin compression. High risk merchants are still having difficulty locating bank partners that appreciate and understand their business types. Once you have that relationship, it’s worth real money. Finally, competition. The competition in retail is nuts – wouldn’t you agree? I feel like every person I know is now selling retail merchant processing. However, every person I know is NOT selling high risk merchant processing. Like in any business, you must become an expert of your craft. Whether working part-time or full-time selling high risk merchant processing, learn and understand the lingo of high risk, reserve accounts, etc. and develop a solid relationship with your bank partners to offer a solid relationship for your merchant. Even Congress is now getting involved with high risk merchant accounts with

Payment Quarterly | Q2 2016

the launch of Operation Choke Point. Launched in 2013 by the United States Department of Justice, Operation Choke Point investigates banks in the United States and the business they do with payment processors, payday lenders, and other companies believed to be at higher risk for fraud, money laundering, and terrorist financing.

APPLE IS NOT INTERESTED IN THE PAYMENTS INDUSTRY; APPLE IS INTERESTED IN SELLING MORE IPHONES AND THEIR SENIOR MANAGEMENT UNDERSTANDS THAT JOINING THE PAYMENTS SPACE WILL DO JUST THAT. High risk merchant accounts could be public or private companies or CEOs with good or bad credit. It’s important to understand that the term “high risk” or “hard to place” merchant is not a negative reflection on the

business – it’s just a fact that these industries are placed into a different underwriting bucket than that of your local neighborhood restaurant or dry cleaner where risk and chargeback ratios are significantly less. Hopefully this will provide you with some quick background on high risk. Having spent the past 10 years in high risk industry with the formation of Alternative Merchant Processing, I’ve learned from speaking with many industry experts that MLS salespeople haven’t embraced the opportunities in the high risk space. My thought for the MLS – do not stop selling your core merchants; however, I would suggest committing 10%-15% of your time cultivating these new relationships in this market as profit margins are greater. Why not round out your merchant portfolio with a combination of traditional and high risk merchants? I, like many of you, started in the traditional space and I wanted to share my thoughts about this marketplace that may be synergistic to your selling efforts to help compliment your day-today work and help grow your income. If you really love the world of high risk merchant processing, start selling it more full-time and watch your residuals exponentially increase.

t wasn’t that long ago that payments integration was just considered a necessary evil. Relying on antiquated technologies, traditional payments integration was a monthslong, somewhat grueling process. For most developers, it was something that simply had to be endured – a means to an end. The last thing on their minds was how to innovate on top of the process. But technology never rests. And as new payments technologies have evolved, payments platforms have begun to take on new, more interesting personalities. The emergence of modern APIs has empowered developers with the ability to build applications faster and more efficiently. In our internet dominated world, one of the beautiful things about today’s APIs is that they can be accessed from anywhere via mobile devices and websites. As some might be inclined to note, this isn’t your parent’s payment integration. I’d like to take it a step further by noting that it’s time we stop thinking of payments integration as a necessary evil. Because payments functions have typically been “set it and forget it” features of applications that only get updated a few times a year, most developers aren’t often payments experts. In order for payments experiences to get better, it’s important to make it easier for developers to access the tools required for payments integration. Eventually, as payments become integral features of applications, we will see the functions become updated as often as once a month. The breadth, scope and accessibility of today’s payments integration are exciting – and just barely tapped. For

it’s time to

STOP THINKING of

PAYMENTS INTEGRATION as a

NECESSARY EVIL By: Matt Ozvat VP of Developer Integrations Vantiv

example, if you’re thinking about adding a loyalty or marketing program to your platform or merely making sure auto-updater and recurring payments works at your end, you should be able to add to your solution using APIs. Additionally, to foster innovation, an open ecosystem allows developers to pull the best solutions from different sources, enabling them to create unique experiences that are customized to what their business and their customers need. Although we live in a complex world, it’s important to make commerce and payments innovation available to everyone. By creating open source platforms for developers to build innovative payment applications via easy to use, modern APIs, and an integrated sandbox environment for application testing and certification, we can make it possible for virtually anyone to create new, accessible payments applications. Payments companies and API providers should strive to make integration with their solutions as simple as possible to encourage developers to use their platform. The companies that make it easier for developers will be the ones that will gain momentum and help foster further integration. Rather than being exclusive, intimidating, and painful, today’s payments integration options present intriguing new possibilities to developers of all types and sizes. Forward thinking companies that can provide developers with the resources they need to simplify payments innovation for their customers, can provide a well thought out payment integration map – but you get to choose the path forward.

Payment Quarterly | Q2 2016

PROCESSING

of BOILING FROGS

and the

MYTH OF SISYPHUS Why our response to financial fraud is always slow, and doomed to stay that way.

By: BC Krishna CEO MineralTree

Payment Quarterly | Q2 2016

he story goes like this. Place a frog in a saucepan of scalding hot water and it does the sensible thing and rockets out immediately. However, place a frog in a pan of tepid water, slowly bring the water to a boil, and the poor critter, oblivious of rising risk, simply cooks to death. The Boiling Frog story is an apocryphal one – but the fable is neatly representative of our attitudes towards emerging financial and payment fraud. Why are we – individuals and enterprises – so slow to react to abundantly reported incidents of fraud? Payments fraud is a problem that nearly everyone is painfully aware of, and it appears that far from getting addressed, the problem just keeps getting worse! According to J.P. Morgan and the Association of Financial Professionals, a staggering 73 percent of companies were targets of payments fraud in 2015, up from 62 percent in 2014. And even scarier, most payments fraud

occurs right here in the U.S. In fact, a recent study by Barclays found that the U.S. is responsible for 47 percent of the world’s payments fraud, despite only accounting for 24 percent of total worldwide payment volume. In just the past few years, there have been a slew of high profile data breaches at major retailers. The Home Depot attack will be a difficult one to forget, especially if your credit card was one of the 56 million that were stolen. Target’s breach was just as bad, with 40 million credit card numbers stolen, along with 70 million email addresses, phone numbers and other pieces of personal data. For businesses, things aren’t looking much better. The FBI reported that instances of Business E-mail Compromise (BEC) scams were responsible for $1.2 billion in fraud globally in just the past couple of years. Technology firm Ubiquity Networks reported that it lost $46.7 million to such a scam. And it took months for commodities trader The Scoular Co. to even realize that one of its executives

wats wiring money to a Chinese bank after being “instructed” to do so. BREAKING THE CYCLE OF APATHY AND OVERREACTION Elizabeth Kübler-Ross, who studied death in terminally ill patients, wrote in her famous book On Death and Dying that survivors of a loved one’s death go through distinct emotions: denial, anger, bargaining, depression, and acceptance. Fraud is not on par with death as a form of loss. However, human beings at institutions – banks, businesses, and even homes – follow similar patterns of emotion when it comes to managing fraud risk: • Denial – “It’s not happening at our organization…” • Under Investment – “Well it’s not as big as they make it out to be…” • Explosive loss – “I guess I better do something about it…” • Threat of Regulation – “Please, Congress, I promise I’ll self regulate.” The problem is that banks and businesses have trouble making the decision to proactively invest in fraud detection technology. It is really difficult to justify spending money to mitigate fraud when there appears to be scant evidence of it from emerging schemes. As recent history suggests, every organization will ultimately suffer a breach and loss. Not shockingly, it is inevitable that just about every organization is affected either directly or indirectly by financial fraud. And, after a potentially explosive loss, implementing fraud mitigation technology and controls is wise, but not without feelings of self-reproach.

begins to look less attractive. In fact, it may well transpire that the cost of fraud mitigation outstrips the cost of fraud loss! After all, why continue to invest in fraud mitigation when the losses are low? This question is a rhetorical one. We all know the answer, but we also know the incredible competition for scarce resources. Risk mitigation efforts (unless required by regulation, contract, or fiat) generally lose out to revenue enhancement. In summary, when organizations are successful in implementing fraud detection technology (even if later than ideal) success is demonstrated only through the absence of fraud, which is a really hard thing to get your head around. Are the investments really working, or is the quantity of attacks down? THE GOOD GUYS INCUR COSTS, THE BAD GUYS REAP PROFITS The rationale for investments on either side of the transaction is so fundamentally different that this too is worth pondering. To fraudsters – the bad guys – investments in fraud produces revenue. For banks and businesses – the good guys – investments in fraud mitigation are a cost. Here’s a frightening truth: fraudsters are investing more in fraud than banks and businesses are investing in fraud detection. Yes, banks and businesses are trying to prevent fraud, but they want to do it at the lowest possible cost.

Remember, the upside of investing in preventing fraud can’t be measured; it’s only possible to measure the downside. Fraudsters, on the other hand, are constantly trying to maximize their yield, and they’ll stop at nothing in order to derive new forms of revenue. For example, The Home Depot breach occurred thanks to a sophisticated custom strain of malware that Home Depot’s security team had never seen before. As a result, the bad guys were able to remain unnoticed for five months. So what are banks and businesses to do? Will they ever break out of the cycle of apathy, overreaction, denial, under investment, explosive loss, and threat of regulation? We have seen scant evidence that they will. When forced to do so – our august institutions will do the right thing. In the Myth of Sisyphus, Albert Camus writes about the absurd heroics of Sisyphus. The gods condemned Sisyphus to ceaselessly push a rock up the mountain, only to have it roll back down under its own weight. Banks and businesses are absurd heroes in the theater of fraud management. They are doomed to react late, question investments, reduce their investment, and then watch the rock of fraud roll back down the hill, all to start start over again. Like the myth of Sisyphus, fraud management is tragic, but the hero is real and conscious. We must celebrate the efforts of banks and businesses, but we must also lament their absurd task.

SUCCESS BREEDS OVERCONFIDENCE When investments are made in fraud detection, they always follow a negative yield curve. First, investments always lag because of the prevailing emotion of denial, and are justified against known or demonstrable loss. When fraud mitigation efforts start to effectively reduce known losses, the “yield” from the investments in fraud detection

Payment Quarterly | Q2 2016

PROCESSING

IN THE MARKET FOR A PARTNER? By: Stephen Sheinbaum Founder Bizfi

odern alternative finance was in its infancy during the recession. It has come of age since, in both its ability to serve small businesses and its appeal as a career path. There are hundreds of companies in alternative finance now, and they have captured the attention of both Main Street and Wall Street. With an influx of companies in the industry, there are many more opportunities for partnerships than ever before. To find those with the most growth potential, independent sales organizations and professionals, we need to ask eight key questions of their potential associates:

TECHNOLOGY UNDER THE HOOD Alternative finance has gotten to where it is through an extremely astute use of technology. The leading companies have devised ways to mine big data and have created proprietary programs to speed applications, pre-qualifications, approvals and funding, and, to assess risk. This may not be the case at every shop, however. Ask open-ended questions about the technology at your potential partner company; ask how the technology affects your participation in the company’s business. If there is work to be done to integrate your back-end systems with your partner company, you need to know sooner rather than later.

Payment Quarterly | Q1 2016

CHOOSE WISELY TIME & EXPERIENCE IN BUSINESS: I don’t just mean when the business you are thinking of partnering with was founded, because most of the companies now in the alternative finance industry are fairly young. But not every young company is as young as it seems: You need to go beyond the founding date in its history to ask how long the company’s principals have been in alternative finance. That’s because many of the heads of the newest companies got their start working for the industry’s pioneers, and they have experience other companies may not. Knowing the pedigree of a company’s executives can also give you a clearer indication of their approach to the businessand your efforts on its behalf.

FUNDING PRODUCTS OFFERED If you were selling shoes, would you rather just have one design or several different styles? The analogy is apt in alternative finance today. Many companies began by offering just one funding option, usually short-term finance based on credit card transactions. Now, however, your small business customers will likely be looking for a range of choices, and they may not know which will be the best for their particular situation. The leading alternative finance companies have branched out to offer many different funding options and by partnering with a company that has a variety of different products, you increase your chances of a successful transaction and a satisfied client.

RATES AND COMMISSIONS You need to know how you are going to be compensated for your hard work. Rates and commissions on your work are just two of the many questions to ask, and perhaps not even the most important. Ask for a copy of the funding company’s rate schedule (you may need to sign a nondisclosure agreement to get this) or have a broad conversation about points. This is also the time to ask questions about the company’s clawback policy, which governs what happens if, despite your best efforts, a deal goes south. You should know that many leading alternative finance companies have eliminated clawbacks in recent years.

DOCUMENTS NEEDED TO CLOSE While many of the top alternative finance companies have created technology to gather information critical to its underwriting, you still may be asked to do some legwork. As part of your due diligence on your potential partner, you should ask about what client information you will be expected to gather, how much time you will have to gather it, and how it will need to be submitted to your partner company. Can you, your staff and your back-end operations handle the required document flow? What changes might you need to make to handle the paperwork most efficiently?

TIME NEEDED TO CLOSE We live in an “on-demand” age, and the desire for instant service has most definitely extended to alternative finance. While funding through these companies has almost always been faster than funding through a traditional bank or credit union, alternative finance has gotten even faster. Technology today trims hours, and days, off the application and funding process. You need to know up front what the expectations will be for you in this faster funding cycle. Will it change your 9 to 5, Monday to Friday work schedule?

WHAT PARTNERS THE PARTNER HAS This last point is becoming increasingly important to alternative finance companies. The leaders recognize that while small businesses need funding, they also need services from accounting and invoicing to marketing and taxes. These additional services can all be selling points in your prospecting conversations, and they can help you to do more business. Be sure to also ask what services your partner company expects to be adding. Are these partners nationwide or local to your area? Do they have specific industry expertise your clients need in sectors like food service, franchising or healthcare? Can they suggest partners or services which will help grow your operations?

WHAT SERVICE THE PARTNER WILL PROVIDE The leading alternative finance companies have developed extensive front- and back-end systems to make its operations more efficient, so you need to ask what technology and services they will be sharing with you. Will you get a whitelabel version of its site to run under your own banner, or will you be getting an application program interface (API) your tech department will need to integrate into your systems? Will closing and merchant servicing be handled by its customer service staff--or by you?

Alternative finance is a fastmoving and fast changing industry. It is expanding to offer more products and larger funding amounts to an expanding universe of small businesses in America. But not every partner company is equal: Be sure to do your due diligence before jumping in.

Payment Quarterly | Q1 2016

THANK YOU TO ALL OUR CONTRIBUTORS

ADVERTISE IN OUR

NEXT ISSUE OF PQ! Reach more than 10,000 payment industry professionals looking for in-depth analysis and critical insights on the emerging payments market. Owned and published by Payment Week, Payment Quarterly magazine is available in both print and online formats. Whether you are looking to increase brand awareness, build new partnerships, or gain qualiied leads, our team will work with you one-on-one to build a campaign that will meet your goals and t your budget. Email jmongiello@lamilmedia.com to learn about bundled pricing! Q3 2016 Deadline:

June 3, 2016

To Reserve Advertising Contact: Jason Mongiello Director of Marketing jmongiello@lamilmedia.com (212) 592-0300

Smarter Solutions For Secure Payments We are at

Stop by Booth 511

Established

1998

Resellers@USAePay.com

866.490.0042

USAePay.com