Transaction Trends December 2013

Transaction trends The Official Publication of the Electronic Transactions Association

| December 2013

The

buzz about

bitcoin

Exploring the impact and viability of this new currency ALSO INSIDE: Glimpsing the Future of Mobile Commerce Highlights from ETA’s Strategic Leadership Forum

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Transaction trends The Official Publication of the Electronic Transactions Association

Vol. 18 | No. 10

cover story 10 The Buzz About Bitcoin

By John Manasso Proponents see Bitcoin—a “crypto” currency that involves a secure push payment and thirdparty mediation—as an up-and-coming digital currency popular for overseas transactions since it avoids international banking fees.

Others foresee roadblocks to widespread adoption as regulatory bodies consider the currency—and express concern over its potential use for financing illicit activities.

10

FEATURES 18 SLF Delivers Executive-Level 20 S PE C I A L S E RI E S

14 The Future Is Bright for Mobile Commerce

By Rona Distenfeld Experts predict half of e-commerce in the United States will be conducted on tablets and smartphones by 2017. As consumers embrace mobile wallets and seek more direct interactions with retailers from their electronic devices, payments professionals will be called to help merchants integrate mobile commerce into their everyday business strategies.

depar tmentS 4 6 8

ETA Gateway

Insights from ETA’s CEO, Jason Oxman

Industry News

Trends, strategies, and news in the payments business and ETA member community

Thought Leadership on the Next Generation of Payments

By Meghan Cieslak The 2013 Strategic Leadership Forum in Scottsdale, Arizona, drew together more than 400 industry executives to discuss advocacy, emerging markets, federal oversight, and more.

Startup Stories: Justifiable Risk

By John Manasso Riskified, a four-year-old startup specializing in high-risk transactions, has found that being located in Tel Aviv has many benefits—including the ability to work remotely from Israel’s version of “Silicon Valley.”

22 Ad Index 24 Industry Insider

The Formula offers an operations and sales-management solution for banks, ISOs, and MSPs 6

Merchant’s Corner

The top five merchant misconceptions about cybercrime Transaction trends | December 2013 3

ETA Gateway

Accelerate Your Business With ETA

T

he past year has been a time of record growth for ETA: More than 525 global payments and technology companies are now ETA members. We also broke attendance records at our two signature annual events, expanded our advocacy initiatives with the launch of our new political engagement program and ETAPAC, and added new staff to serve our growing membership.

And we are just getting started. We look forward to continuing to support your business in 2014. ETA is committed to adding value to your success as a payments executive. And we are increasing that value, providing you with more of the education and resources you need and helping you turn knowledge into performance

Editorial Policy: The Electronic Transactions Association, founded in 1990, is a not-for-profit organization representing entities who provide transaction services between merchants and settlement banks and others involved in the electronic transactions industry. Our purpose is to provide leadership in the industry through education, advocacy, and the exchange of information.

The magazine acts as a moderator without approving, disapproving, or guaranteeing the validity or accuracy of any data, claim, or opinion appearing under a byline or obtained or quoted from an acknowledged source. The opinions expressed do not necessarily reflect the official view of the Electronic Transactions Association. Also, appearance of advertisements and new product or service information does not constitute an endorsement of products or services featured by the Association.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided and disseminated with the understanding that the publisher is not engaged in rendering legal or other professional services. If legal advice and other expert assistance are required, the services of a competent professional should be sought.

Transaction Trends (ISSN 1939-1595) is the official publication, published 10 times annually, of the Electronic Transactions Association, 1101 16th St. N.W., Suite 402, Washington, DC 20036; 800/695-5509 or 202/828-2635; 202/828-2639 fax. Postage paid at Pittsburgh, Pennsylvania, and additional mailing offices. POSTMASTER: Send address changes to the address noted above.

Copyright © 2013 The Electronic Transactions Association. All Rights Reserved, including World Rights and Electronic Rights.

No part of this publication may be reproduced without permission from the publisher, nor may any part of this publication be reproduced, stored in a retrieval system, or copied by mechanical photocopying, recording, or other means, now or hereafter invented, without permission of the publisher.

4 December 2013 | Transaction trends

in a variety of exciting new ways.

Accelerate your business at the ETA Show 2014. ETA is the doorway to your next partnership, client, or business deal. Registration has officially opened for the ETA Show 2014, and we’re back in Vegas. With a newly expanded schedule and more than 1,000 companies representing 24 countries, this is the event of the year to get business done.

Expand your knowledge with ETA’s professional development programs.

Use ETA’s member communications and education to ensure you have an ear to the ground on all things payments related. From monthly webinars to member-only access to the latest trends, reports, and surveys—you can truly be in the know. In addition, ETA offers the payments industry credentialing program, ETA CPP. The ETA CPP program sets the standard for professional performance in the payments industry and is a symbol of excellence.

Amplify your voice through our

political engagement programs. Let your voice be heard by helping us advocate for your business interests. With the launch of The Voice of Payments™ (VOP), ETA’s political engagement program, ETA ensures that your voice will be heard in Washington. VOP is designed to inform and involve ETA members, citizens, media, legislators, and regulators on public policy and its importance to the survival, advancement, and success of the world-class electronic payments community.

One final note: Membership renewal notices were recently sent to your primary contacts. If you haven’t already, I encourage you to stay involved and renew your membership today. An ETA membership is truly a membership worth having.

Kind Regards, Jason Oxman Chief Executive Officer Electronic Transactions Association

Electronic Transactions Association 1101 16th Street NW, Suite 402 Washington, DC 20036 202/828.2635 www.electran.org ETA CEO Jason Oxman COO Pamela Furneaux Director, Education and Professional Development Rori Ferensic Director, Membership and Marketing Del Baker Robertson Director, Communications Meghan Cieslak Publishing office: Stratton Publishing & Marketing Inc. 5285 Shawnee Road, Suite 510 Alexandria, VA 22312 703/914.9200; fax 703/914.6777

Publisher Debra Stratton Associate Publisher & Editor Josephine Rossi Managing Editor Lia Dangelico Editorial/Production Associate Christine Umbrell Art Director Janelle Welch Contributing Writers Meghan Cieslak, Lia Dangelico, Rona Distenfeld, John Manasso, Bryan Ochalla, and Heather Varian Foster Advertising Sales Steve Schwanz or Fox Associates (800/440.0232; adinfo.eta@foxrep.com) Fox Associates Offices Chicago 312/644.3888 New York 212/725.2106 Detroit 248/626.0511

Subscriptions: 202/677.7411

Phoenix 480/538.5021 Los Angeles 805/522.0501 Atlanta 800/440.0231

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BUSINESS DONE Whether it’s new business opportunities, educational resources or keeping abreast of the latest trends and technologies, the ETA Show is where business gets done in payments. From iconic brands to the most promising startups, you can connect

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INDuSTRYnews Retail Sector Sluggish on PCI Compliance

Credit Gains on Debit for First Time in Two Decades A more than 20-year trend of U.S. debit card volume and purchase transactions gaining on credit cards ended in 2012, according to The Nilson Report. Credit and debit card spending in 2012 totaled $5 trillion, with credit cards accounting for 53 percent of purchases and debit cards accounting for 47 percent. The Nilson Report estimates that by 2017 credit cards will make up 55 percent of purchase volume and debit will make up 45 percent, with total spending projected to reach more than $7 trillion.

info GRAPH 37%

Most retailers across the U.S. and U.K. have not implemented key security requirements that could help deter cyber attacks, according to a report by Tripwire Inc. and Ponemon Institute.

As highlighted in their findings, the Payment Card Industry Data Security Standard soon will require businesses to implement and perform penetration testing. It also will clarify different methods of secure authentication and session management so businesses can better protect themselves against various cyber attack methods.

Other key findings include: • Only 41 percent of the retail sector uses penetration testing to identify security risks.

• Only 34 percent of the retail sector

fast FACT

Ninety-five percent of U.K. shoppers have at least one loyalty card, according to SAS Inc.; of that group, 40 percent are less likely to do business with a company if it doesn’t offer loyalty programs.

U.S. Merchants Struggle to Meet Demand for Omni-Channel Payments Percentage of Merchants Accepting Payments in More Than One Channel

16% 8% Two channels

measures the reduction in access and authentication violations to assess risk management efforts.

• Only 44 percent of the retail sector has fully or partially deployed file integrity monitoring.

Three channels

65%

21%

Four or more channels

Source: SecureNet Payment Solutions, “Multi-Channel Merchants & Payments”

6 December 2013 | Transaction trends

Why Merchants Are Competeing Through Multiple Channels: Consumer Demand

Percent of consumers that shop in more than one channel

Percent of consumers that shop in four or more channels

News from the association

AROUND THE HORN 3Delta Systems partnered with AOC Solutions, Inc. to allow consumers who pay for business purchases on AOC’s EnCompass platform to securely transmit confidential payment information to their vendors using AR-Exchange.

ABC Financial announced Dani Thompson as regional sales director of California, Arizona, and Nevada. Allied Wallet partnered with Paysafecard to allow merchants to accept another payment method for international e-commerce. CSR announced a partnership with Pulse8 to expand information security services that help providers and health-care organizations identify and reduce risk, costs, and penalties. Cynergy Data named Afshin Yazdian as its new chief executive officer. EVO Payments International announced an alliance with PKO Bank Polski, and completed acquisition of a controlling interest in Banco Popular’s merchant acquiring business in Spain.

First Data Corporation announced Rogers Software and SuperSalon, its salon management software, have achieved certification to integrate First Data’s TransArmor data encryption and tokenization solution into their point-ofsale systems across the U.S. Harbortouch unveiled its payment terminal, Perkwave, which enables merchants to accept the latest smart card and mobile payment technologies. Infinite Peripherals introduced the Infinea Tab M, a mobile POS device compatible with the iPad mini. Ingenico announced its Telium 2 range is now certified with Emerging Markets Payments requirements, and will partner with Stratix to provide merchants a fully managed best-in-class mobile POS payment technology and support. JetPay Payment Services hired Jeffry A. Beene as senior vice president for risk management. Mozido announced Mike Love as president and chief operating officer; Minaz Sarangi as executive vice president and chief information officer; David Luther as executive vice president, global business development, and chief marketing officer; and Adolfo Salume and Robert E. Turner as new board members. Signature Card Services announced a partnership with Alternative Payments.

TransFirst announced an alliance with ShopKeep POS to offer the ShopKeep POS iPad point-of-sale system to TransFirst customers.

TSYS promoted Andrew Mathieson to group executive of relationship management, and announced it is now offering TSYS Merchant Insights to customers.

Make Your Voice Heard in Washington: Become a Payments Advocate One of the biggest issues ahead for the payments industry as a whole is government action. It is vital for payments industry leaders to actively engage the legislators and regulators that impact how we do business. ETA is the leading organization in Washington advocating for the payments community, providing a unified voice across the industry for all of its members, both large and small.

With the launch of our new political engagement program,The Voice of Payments, ETA is amplifying your voice in Washington. Policymakers must know what is important to payments professionals, how the payments industry affects their constituents, and the importance of the payments industry to the economy. With experience in Washington, ETA offers members strength in numbers, as well as up-to-date information that is essential when navigating the current legislative and n ETA Show 2014 regulatory framework.

Mandalay Bay The Voice of Payments™ makes it easy for you Las Vegas, NV to connect with your federal legislators.Act now to April 8-10, 2014 participate in our current initiative: Congress has an opportunity to act on legislation that will create a n 2014 ETA Strategic much-needed uniform national standard for reportLeadership Forum ing data breaches.Your voice can make a difference The Breakers on this critical issue for our industry. Learn more Palm Beach, FL about the issue and get involved by visiting www.

October 7-9, 2014 voiceofpayments.org.

CALENDAR:

New Members ETA is pleased to welcome the following companies to its membership. To inquire about a membership with ETA, please contact Del Baker Robertson, director of membership and marketing, at dbaker@electran.org. @Pay Albuquerque, NM www.atpay.com

iStream Financial Services Brookfield, WI www.istreamfs.com

BlueSnap Inc. Campbell, CA www.bluesnap.com

Payment Processing Consultants Inc. Pittsford, NY www.ppcsales.com

CarePoint Managed Services LLC San Diego, CA www.mycarepointservices.com CORD Financial Services Arlington, TX www.cordfinancial.com

Settlement Recovery Group Jersey City, NJ www.srgllc.com The Formula San Jose, CA www.the-formula.com

CORRECTION: In “The Evolution of E-Text” on page 20 of the October 2013 issue of Transaction Trends, Jamie Savant was incorrectly listed as a co-founder of GTS Group.

Savant is co-founder and partner of The Strawhecker Group.

Transaction trends | December 2013 7

MERCHANT’S Corner

Top 5 Misconceptions About Cybercrime A better understanding of breaches can help merchants fend off data thieves

By Heather Varian Foster

W

hether you’ve been in business for years or you’re just getting your small business off the ground, the requirements for securely accepting credit and debit card payments can seem overwhelming. Meanwhile, cybercriminals are taking advantage of merchants’ confusion and missteps to steal cardholder information for a quick profit.

An October 2013 study by Javelin reported that, in 2012, payment data breaches resulted in the compromise and subsequent fraudulent use of 4.4 million Americans’ credit or debit card information.Yes, it is a big problem.

No merchant is outside the reach of data thieves. Because of this, PCI developed a DSS to help merchants better protect themselves and their customers’ payment information. Now in its third version, the PCI DSS is a set of security best practices that are based upon the latest breach trends and technology developments.

A Data Breach Can Happen to You ControlScan and Merchant Warehouse recently teamed up to get small merchants’ thoughts on securing their customers’ payment information, specifically with regard to the PCI DSS. Of the more than 600 respondents to our Payment Security and the SMB survey, 69 percent were at least somewhat familiar with the data security standard.

Those familiar with the PCI DSS told us many things about their concerns, attitudes, and preferences surrounding data security and cybercrime.We were encouraged to see an increasing level of security awareness among respondents, as well as a greater number reporting they had completed their annual PCI compliance validation process—70 percent in 2013 versus 50 percent in 2012.

Even with a growing awareness of the PCI DSS, payments industry statistics 8 December 2013 | Transaction trends

show that data breaches can and still do happen every day. As of June 2012, Visa data showed that attacks against small merchants were on the rise in the United States, noting a 15 percent increase in the total number of reported compromise events from 2010 to 2011 alone.

payment card data is a PCI DSS no-no, other controls must be put in place to stop cybercriminals from capturing data in transit. Small business POS systems are a target of choice for data thieves because they are often under-protected, allowing Internet-probing tools to en-

Knowing how your business works with payment data enables you to make informed decisions about the security controls needed to protect it.

The purpose of this column is to better understand the common misconceptions many merchants have about payment security, the PCI DSS, and their business’s breach risk.

Misconception 1: “My business is too small for cybercriminals to bother with.”

Merchants who only periodically accept credit cards or who have many lowdollar transactions can fall into the trap of thinking that their businesses are unattractive for cybercrime. The truth is, data thieves don’t typically seek out victims based on volume, but on ease of access.

If your payment system or its transactions are visible (or easily compromised) by their tools, cybercriminals will happily take your customers’ data and add it to their stockpile of information for sale.

Misconception 2: “I don’t store any data, so I’m not at risk.”

The adage “data at rest is data at risk” can be misleading. While storing

ter and infect them with data-skimming malware. Once placed, POS malware can go undetected for months or even years.Whether it’s an e-commerce shopping cart or a physical store, cybercrime activity is robust in this area and should not be overlooked.

Misconception 3: “I have an IT guy, so when it comes to security, I’m covered.”

Only 15 percent of respondents to our Payment Security and the SMB survey designated themselves in an IT capacity. Interestingly, more than half of these respondents do not consider themselves to be the organization’s security expert. IT and security are not always synonymous, and third-party merchant service providers are not always applying payment security best practices. It’s important to ensure your service providers are in full compliance with the PCI DSS and have made security a priority. Less than half of our survey respondents said they require their service providers to be PCI compliant.

Misconception 4: “A data breach would have little to no financial impact on my business.”

We asked small merchants what impact they thought a breach would have on their business and 47 percent said“little”or“none.”

The truth is, businesses that have suffered a breach are suddenly responsible for a multitude of costs, including card brand fines and fees, forensics investigation and customer notification costs, and system repairs and upgrades.The good news? Ponemon’s 2013 Cost of Data Breach Study found that U.S. merchants with a strong security posture and an incident response plan in place spent an average of $42 less per record in recovering from a breach event.

Misconception 5: “I have my own security practices; the PCI DSS is overkill.”

As the organization that maintains the PCI DSS, the Security Standards Council is dedicated to staying on top of the latest cybercrime statistics and trends. This knowledge goes into the standards so that merchants can effectively protect themselves. Thirty percent of our

survey respondents hadn’t yet completed their PCI compliance validation, with the majority saying they were either “still working on it” or “it isn’t a priority.” If your business has put the PCI compliance process on the backburner, now is the time to raise its priority level to make its best practices part of your business as usual.

Trading Misconceptions for Best Practices Of the merchants we surveyed who said they were familiar with the PCI DSS, more than one third said they “just completed the paperwork” in order to achieve and/or maintain compliance.That’s not the intent of the PCI DSS, however.

The first step in truly understanding and complying with the PCI DSS involves partnering with your merchant account provider, IT resources, and other service providers (if any) to understand what happens to your customers’ payment data as it leaves their hands and enters your data processing, storage, and transmission systems. Knowing how your business works with payment data

enables you to make informed decisions about the security controls needed to protect it.

Your own checks and balances should be a part of how you conduct your daily business. These should include formally designating someone, whether he or she is an internal employee or an external resource, to be accountable for data security. In addition, incident response planning and security awareness training for staff members are simple, cost-effective measures to put in place.

Payment security and compliance is an everyday exercise in vigilance and requires time and persistence.The annual PCI compliance validation process is a point-intime confirmation that your business has all of the applicable security best practices in place. This means that throughout the year, your business is implementing and reviewing key policies in order to stay a step ahead of the bad guys. TT Heather Varian Foster is vice president of marketing at ControlScan. Reach her at hfoster@controlscan.com or on Twitter at @hvf14.

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[ COVER STORY ]

The Buzz about

Bit coin The next big thing or fleeting fad?

By John Manasso

KEY NOTES 8 Bitcoin faces numerous obstacles to wide acceptance, including federal regulation, scarcity, volatility, and reputational issues.

8 A growth industry has sprung up around the digital currency, with numerous startups trying to carve a niche.

8 In November, federal authorities acknowledged the benefits of Bitcoin and other digital currencies, signaling their willingness to accept them as legitimate currency and rallying Bitcoin’s price above $800 per unit.

10 December 2013 | Transaction trends

B

ehind frosted-glass double doors on the fifth floor of Atlanta Tech Village, a nondescript office building in the city’s upscale Buckhead district that formerly held the city’s weekly business newspaper, sit the offices of BitPay. Obscuring the path of entrants to the office of co-founder Tony Gallippi lies a brown beanbag the size of a flattened Volkswagen Bug. The 15 employees, about half of whom were hired from out-of-state, toil at work stations devoid of cubicle walls. Perched above the entrance are numerous clocks showing the time in various cities around the world—perhaps a hint at the new office BitPay is opening in Amsterdam or to the fact that the company is one of several, including Coinbase and Circle, that help to process payments for merchants around the globe that accept Bitcoin. For the initiated, Bitcoin is a four-year-old, digital, so-called “crypto” currency that helps to avoid nettlesome international banking fees, has the added benefit of security, and does not entail the risk of chargebacks for merchants who accept it.

While some digital currencies have run afoul of the law as of late, Bitcoin has managed not to. Here’s how it works: Bitcoin involves a “push” payment, much like sending a text, in which no personally identifiable information (PII) is involved, making it both impervious to identity theft and irreversible. A group of research-

ers from the University of California-San Diego and George Mason University further describe Bitcoin transactions this way: “ Bitcoin requires third- party mediation: A global peerto-peer network of participants validates and certifies all transactions; such decentralized accounting requires each network participant to maintain the entire transaction history of the system, currently amounting to over 3 gigabytes of compressed data.”

When Gallippi and fellow co-founder Stephen Pair, onetime fraternity brothers at Georgia Tech, started BitPay in September 2011, they were the only two employees. One year later, they hit the 1,000 mark in terms of merchants for whom they process payments. In January 2013, they received their first round of venture capital funding and began hiring employees.

At that point, Gallippi, a former sales/marketing executive and options trader, relocated from Orlando to Atlanta.With Atlanta serving as something of a hub for the payments industry, the two co-founders believed it to be the ideal location. As of September this year, BitPay hit the 10,000-merchant mark.

“We typically get added as an alternative payment option on businesses’ websites,” Gallippi explains. For example, if a consumer is shopping online, and about to checkout, and his or her shopping cart reflects the applicable tax and shipping charges, the next choice is payment options: PayPal, credit cards, and maybe Google Checkout.

“Hopefully, soon you’ll see a BitPay or Pay with Bitcoin button everywhere.That’s where we want to be.”

While BitPay—which says it is currently profitable—embarks on its expansion, its mere existence raises this question: Does the industry have to concern itself with Bitcoin, specifically, or, more broadly, other digital currencies?

Alarmingly Innovative Gallippi says Bitcoin “rebuilds a better set of rails” than credit card payments. He jokes that “we want [payment processors] to be scared and run away as long as possible.

So, it’s good that there’s all these headlines that say, ‘Bitcoin is scary. Bitcoin is bad.’” T hat “scary” theme took on renewed urgency on October 3 when Ross William Ulbricht, the operator of the website Silk Road, which accepted Bitcoin to finance the sale of illegal drugs, was arrested in San Francisco, reportedly sending the value of Bitcoin plunging from a rate of one Bitcoin-to-$140 to one Bitcoin-to-$110.

In a more serious moment, Gallippi says he thinks as time passes Bitcoin will be used more and more on the back end of a lot of applications. He likens it to the dawn of the Internet when businesses wondered to themselves whether they should have built e-commerce sites.

Transaction trends | December 2013 11

[ COVER STORY ] “The companies that actually went ahead and built websites were miles ahead of their competitors who tried to wait,”Gallippi says.

“So, I think there’s a lot of underlying technology here that is pretty useful. It solves the whole not-present problem with credit cards.”

While Gallippi says he fields calls from executives who work for industry giants, as they debate what to do about Bitcoin, a growth industry has sprung up around the digital currency with numerous startups like BitPay trying to carve a niche. In July, investors Tyler and Cameron Winklevoss—made famous for their time at Harvard when they worked with Facebook founder Mark Zuckerberg to develop a social media website, roles glamorized in the film “The Social Network”—filed a proposal with the Securities and Exchange Commission that would allow any investor to trade Bitcoins in the same way one might trade stocks.

Even Jennifer Shasky Calvery, director of the Financial Crimes Enforcement Network (FinCEN), a bureau within the Treasury Department, spoke last June of the desire not

proven their capacity to empower customers, encourage the development of innovative financial products, and expand access to financial services.And we want these advances to continue.

“However, equally important is the need to ensure integrity and transparency.”

Campaigning for Expansion While federal regulators continue to study and decide what to do about digital currencies, Bitcoin faces numerous obstacles to wide acceptance. One is the aforementioned potential threat of federal regulation.Another is scarcity, as a finite supply of Bitcoin exists. Even when all of the Bitcoins have been “mined”—a computer-programming process that is expected to end in the year 2140—only 21 million Bitcoins will exist in the currency supply.T here also is the issue of volatility, which was noted earlier, although Bitcoin proponents believe that in time, as more coins are mined and come into use, that issue will solve itself.

Lastly, reputational issues exist. Because Bitcoin is an open-source protocol, it can

“A whole host of emerging technologies in the financial sector have proven their capacity to empower customers, encourage the development of innovative financial products, and expand access to financial services. And we want these advances to continue.”

—Jennifer Shasky Calvery, Financial Crimes Enforcement Network, U.S. Treasury Department

to stifle innovation arising around digital currencies through over-regulation.

“I will not deny that there are some troublesome providers out there,” says Shasky Calvery, who adds that her agency’s mission is “to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.” According to Shasky Calvery,“That is balanced by a recognition of the innovation these virtual currencies provide, and the financial inclusion that they might offer society. A whole host of emerging technologies in the financial sector have 12 December 2013 | Transaction trends

be used for a variety of illicit activities, such as selling drugs, weapons, or money-laundering—as was the case in the FBI’s arrest of Silk Road’s Ulbricht. According to the indictment, Silk Road provided “a platform facilitating the sale of controlled substances and malicious software, among other illicit goods and services, and further facilitating the laundering of proceeds from such sales, through the use of a payment system based on Bitcoins, an anonymous form of digital currency.”

At BitPay, Gallippi says the company rejects with some frequency merchants who want to sign up for the service. Sometimes they are online gambling sites. Other times,

the merchants are more deceptive. BitPay employee Crystal Campbell, who works in sales and support, reviews all merchant applications. She ensures they have valid addresses and that what they say they are selling matches up with their websites.

While Bitcoin-philes grudgingly acknowledge its seedy underbelly, those same proponents nonetheless are pressing for its expanded use.To fight negative perceptions, a group of businesses executives have formed Digital Asset Transit Authority (DATA), an organization with a mission to enact best practices and dissociate Bitcoin and other digital currency-related companies from those that engage in illegal practices.

“At the forefront of emerging payments, virtual currency, and other financial technology innovations, our companies are pioneering new services with potential to reduce the friction and cost of payments substantially and make low-cost payment services available to hundreds of millions of individuals and businesses around the world,” DATA posted on its website as part of its mission statement.

Washington, D.C.-based attorney Jacob Farber, senior counsel with Perkins Coie and a member of the firm’s Technology Transactions & Privacy practice, is advocating for Bitcoin to receive approval from the Federal Election Commission (FEC) so that consumers can use it to make political contributions.

In September, the Conservative Action Fund PAC asked the FEC to approve rules governing the use of Bitcoin for such purposes.

Farber, who represents the Bitcoin Foundation, supported the request and provided the FEC with written comments arguing for acceptance.

While foreign nationals could use Bitcoin to circumvent U.S. campaign laws, which bar such individuals from donating to campaigns, Farber says authorities’ ability to track Bitcoin and to know exactly which individuals own them renders that point moot.

“Yes, it’s a concern, but it’s a concern in the same way that any form of contribution where you don’t have in-person verification is a concern,” Farber explains.“That was sort of the thrust of our comments. This is not a case of first impression for the FEC. It’s already, in several contexts, approved contributions through a vehicle where the user essentially provides identifying information and then attests to it. All political contribu-

Payments Insiders Weigh in on Bitcoin Glenbrook Partners, a strategy consulting and research firm that focuses on the payments industry, conducted an international survey focusing on Bitcoin. Those surveyed included representatives of private equity executives and venture capitalists, merchants, government regulators, consultants, consumers, entrepreneurs, and financial institutions. The largest group, almost 27 percent, comprised payment service providers.

Two questions generated the most interesting responses. First, a combined 67 percent responded either “definitely” or “likely” that Bitcoin will impact international remittance providers, such as wire transfer services. Another 62 percent responded “definitely” or “likely” that Bitcoin will force central banks to take action to limit or eliminate what Glenbrook calls “math-based currencies.”

Many in the industry appear to think that the issue of Bitcoin will resolve itself, as 61 percent believe PayPal will “definitely” or “likely” support it as part of its digital wallet in the future.

However, it’s clear that Bitcoin provokes polarizing beliefs among industry professionals.

While 27 percent responded “definitely” or “likely” that Bitcoin will be forgotten in three years, a larger percentage—31 percent—responded “definitely” or “likely” that Bitcoin will replace how money is moved in 10 years.

It’s possible that that divide could exist among younger and older industry professionals, although Glenbrook did not analyze the data from a demographic point of view.

“Even though it was not a majority, a lot of people thought that Bitcoin, in fact, and math-based currencies are going to be a permanent part of the scene,” says George Peabody, senior director at Glenbrook. “This was a survey that went out only to payments industry insiders, essentially, yet to see that level of belief to be generated from Bitcoin’s presence in their consciousness in certainly under a year, it’s pretty astounding.”

tions are, to some extent, a trust-based system. I don’t think Bitcoin presents a unique case in that regard.

“We argued in the comments that there are some features of Bitcoin that no other contribution system has in that you have this universal ledger that records every Bitcoin transaction ever made. Period. And so, if you did have illegal activity around contributions, you certainly have a very facile tool for investigating it that you might not have in other forms of contributions. So, we don’t see it as a particularly significant issue.”

While advocates are fighting for Bitcoin acceptance on fronts such as political campaigns, it remains difficult to use the digital currency for more practical matters—like buying groceries or a car.

“When you’re traveling, you can’t pay for a hotel—with very, very, very few ex-

ceptions,” says Sarah Meiklejohn, a doctoral candidate at the University of California-San Diego who is studying cryptography and who has researched Bitcoin.“I think there’s kind of this hurdle of getting regulatory bodies to be comfortable with Bitcoin and not sort of actively hunt after every Bitcoin company and crack down on them and make it hard for them to operate. And then the other thing, of course, is just getting normal people to want to use Bitcoin, which I think, ultimately, translates into getting to the point where it’s usable.”

Meiklejohn says it’s hard to answer what will help to bridge the use of Bitcoin from the more abstract to the more concrete. In some ways, the dilemma is akin to that of the wider adoption of mobile payments: A credit card swipe is so easy for consumers that payments industry companies have run into a degree of

obstacles in trying to incentivize consumers to get them to make the leap to mobile payments. One can only wonder what incentives Bitcoin could offer consumers—besides the obvious ones of security and fewer international banking fees—as its promoters work toward wider acceptance.

“One thing, as I said, you need to sort of make it possible so there’s an infrastructure issue,” Meiklejohn clarifies.“So, you need, for example, a smartphone app. If the register is running some version of this app, let’s say their Bitcoin wallet, and then on your phone you’re running your Bitcoin wallet, then you’d be able to do that transfer—standing at a register. Right now, that’s not possible.

“A lot of venture capital money has been pumped into Bitcoin startups, so I think this will be something we will see soon. But first you need that infrastructure, so that’s a hurdle already. And then, of course, once it becomes possible, you need to give me some compelling reason why I should use it—the inertia issue. Right now, I’m paying for my groceries with my credit card and perfectly happy to continue doing that… . So, I think that’s the hardest part of the question.”

Tomorrow, the World At BitPay, Gallippi says he thinks his company presently owns 90 percent of the market share. In an optimistic moment, he hopes his business grows 10-fold again in 2014 and that he is processing for 100,000 merchants. He talks of opening the European office and how so many European businesses already are built to accept multiple currencies (which Bitcoin, in a way, is).

He and an employee tell the story of a merchant who became frustrated with PayPal over having its accounts frozen for two months.They say it’s one of many and that disgruntled merchants have translated into new business for BitPay. Yet the question lingers: Is such growth sustainable?

“I hope so,” says Gallippi.“We want to do it again.”

Whether BitPay has simply created a small, niche market for itself or if it is poised at the vanguard of a major new wave remains to be seen. TT John Manasso is a contributing writer to Transaction Trends. Reach him at john_manasso@yahoo.com.

Transaction trends | December 2013 13

[ FEATURE ]

The future is

bright for mobile

By Rona Distenfeld

B

y 2017, nearly half of all e-commerce in the United States and United Kingdom will be conducted on tablets and smartphones, according to Windsor Holden, research director at Juniper Strategies.Tablets are expected to lead the charge, with the average payment amounts on tablets higher than those for purchases made on desktops.

While security on tablets currently trails behind smartphones, that lag will diminish since users tend to perceive tablets as simply smaller, more portable laptops, with ease of navigation an added bonus.While the United States and United Kingdom are adapting the fastest, Germany, France, and other European countries are coming along, and Japan has a long history of purchasing via handsets, even pre-dating real smartphones.

KEY NOTES 8 Consumers see tablets as simply smaller, lighter laptops, and they are leading the charge toward mobile commerce.

8 Ease of navigation with seamless payment integration is key to mobile’s success.

8 Change will be rapid, with time measured in months rather than years.

14 December 2013 | Transaction trends

This is the current state of mobile commerce, and, with 2017 right around the corner, it’s obvious that mobile will continue to become the norm for a large and growing segment of the population.Today, more than 15 percent of Facebook users are mobile only, and 800 million of its 1.15 billion subscribers use mobile at least some of the time.

Where does it go next, and who will drive the new paradigms? The possibilities seem limited only by imagination. Here are some prognostications from experts in different parts of the field.

Relationships Return “Technology used in tasteful, smart ways establishes a relationship between a retailer and a customer that isn’t dependent on an individual salesperson and his or her knowledge base,” says Dom Morea, senior vice president of advanced solutions and innovation at First Data.“It makes the relationship continuous even if the salesperson moves on.This is a very real opportunity, and order size will increase when retailers can offer specific products and services tailored to each individual.”

commerce

Morea considers this scenario as version 1.0 of this mobile strategy, but retailers are interested and early-adopter consumers are seeing more than the cool factor. Mobile commerce is currently being used by companies like Starbucks to let consumers order and pay from their tablets or smartphones, then just grab and go when they get to the store—no standing in line or waiting. Starbucks customers are embracing this technology in the markets where it’s available.

That kind of usage will become more seamless and effortless during the next 12 to 18 months, according to Morea, with the

focus on helping consumers move across channels so savings, loyalty, and convenience are automatic and reliable. Mobile wallets will link credit or debit cards, identity, virtual coupons, and more to a consumer’s account.

Special offers and savings will be applied without any extra steps, and retailers will deepen their relationship with consumers and make more relevant offers. As consumers come to expect the convenience and security of this technology, more retailers will be forced to buy in to remain competitive. Although the current number of stores and restaurants where consumers can use

their mobile wallets is small, that number will grow in the next few years.

A great example of how consumer demand has already encouraged the growth of this technology is the Boston transit system.

Perhaps because of the city’s large student population, consumers expected to be able to buy their transit tickets on their mobile devices, just as they were purchasing everything else. That pushed Boston to become the first city in the United States to offer mobile transit purchasing, and, within the first two months, 10 percent of ticket sales were coming through mobile channels.

Transaction trends | December 2013 15

[ FEATURE ] The Network Will Be Key The payments side of the technology can handle those types of transactions. Commerce-enabled applications are already out there, and, when they are done right and combined with loyalty strategies, tech-savvy consumers see the value and willingly adopt.

The next phase of growth and adoption will come as the consumer experience is honed.

“All the banks we deal with have mobile commerce on the top of their priority list,” says Dan Latimore, senior vice president at Celent. “The big question is, how do you serve up the right offer, at the right time, with the right frequency?” Latimore maintains there is demand from the consumer side. Consumers want apps that can save them money, but no one will be able to do it all on their own. It will take partnerships, and different models are possible. Who will make the offers? The bank? The cell phone company? An ISP? An aggregator? Some other third party? And do you let consumers tell you what they want or use their historical purchase data to base offers on behavior rather than expressed preferences?

Analytics will be a big differentiator, according to Latimore. The technology will become commoditized, but a company’s customer base and the insights it gleans as it exploits Big Data will remain unique.

Latimore foresees a next generation where everyone who shares on social media, buys online, or checks in via Facebook or FourSquare becomes part of a mobile commerce network. For example, you could walk by a bar and be told that your friends Mike, Lisa, and Tim are inside, and get a virtual coupon for a free drink if you go join them right now. T he idea of combining social and commerce isn’t new; it’s what made successes of Tupperware, Avon, and lingerie parties.

Take that dynamic into the future, and you could see applications that bring people in the same location together to shop or eat in a more ad hoc way.

Say Goodbye to Traditional Marketing Another possibility is a democratization of the sales process. Picture a system that pays commissions when you talk about a product or company on your social media accounts and one of your networked friends goes and buys it. The key to any innovation on this front will be keeping it simple and easy for 16 December 2013 | Transaction trends

In an age when shopping has become truly commoditized, mobile commerce technology can re-introduce the relationship factor even as it heralds the end of the traditional point of sale. consumers. iTunes is a perfect example of the power of simplicity; it wasn’t the first to offer music downloads for purchase, but it offered a better way to do it.The process went from 10 steps to three, and sales soared.

Finding a similar model to reward consumers for leads could result in an increase in consumers as brand advocates.

Other changes Latimore thinks are possible include an end to direct mail/email marketing campaigns. Instead, analytic data will let companies push the right offer at the right time to each individual consumer based on a combination of many years of historical purchase data and recent data gleaned from social media. (Have a baby?

Get offers for diapers.) Consumers can even reach out through social media to ask what companies can do for them. Need a

new refrigerator? Consumers can research to find the model with the features they want, then, rather than checking prices at different places, they could ask retailers to make them an offer that could be a combination of price, warranty, delivery, and service. Retailers could find themselves bidding for business instead of advertising to drive traffic.

Mobile is changing traditional advertising, too. Quick response (QR) codes are already everywhere, but start looking for them to appear on outdoor signage directing you to the closest place to buy the product. For example, McDonalds could use coded bus stop ads for Big Macs to let you scan your location or your destination and find the closest McDonalds. It could even give you an instant coupon to sweeten the deal.The technology for this already exists—it’s just waiting to be deployed.

Applications also will let individuals offer services directly to each other. Ride sharing services are one example that’s already here.

Individuals with cars register on a ride share site in their city to give rides.When you need a ride, you enter your pickup location and destination, and negotiate a fee that is paid into the ride-giver’s account. As this mobile commerce ecosystem grows to include the sharing economy, you might “rent” tools you rarely use to other people for their one-time or occasional need. Banks could play the role of middleman to ensure that funds are transferred safely.T he potential for barter exchanges also is there, although the Internal Revenue Service is likely to have concerns about the tax implications.

Customer Experience Focus Scott Forshay, senior strategist at Mutual Mobile, sees another side to mobile commerce: “You can’t judge success or failure just by the transactions done on a device.T he bigger im-

plication is the ability to influence purchasing decisions at the brick-and-mortar site or earlier. It’s about giving the customer a great experience through the device.”

To Mutual Mobile, mobile commerce is part of a holistic approach that lets a brand move its narrative with the consumer from touchpoint to touchpoint.This can be driven from the consumer end, as users research online, scan QR codes on store shelves for instant reviews and offers, and pay with mobile wallets. It can also be driven from the retail side, where companies use the technology to create a truly personalized experience.

One example of that is J. Hilburn, whicharmed its style consultants with iPads loaded with the company’s full line of offerings as well as specific information on each individual customer, from style preferences to measurements. The bespoke men’s wear provider, which sends style consultants to meet with customers in their homes or offices, increased sales 67 percent and got positive customer feedback. Stores like Nordstrom’s are using similar technology to give a personal shopper experience to established customers.

In an age when shopping has become truly commoditized, mobile commerce technology can re-introduce the relationship factor even as it heralds the end of the traditional point of sale. Customers won’t stand in lines in the future to pay at registers; instead, they’ll be able to pay for a product with their mobile devices as they pull it off the shelf.

This evolution of the payment process will present retailers with a new challenge as the opportunity for the register “impulse buy” disappears along with the register lines.

Mobile commerce also will be influenced and driven by technologies and devices no one has thought of yet, so the ways it may grow are still open to the imagination. One thing all these experts agree on is that making a seamless, easy consumer experience that enhances their lives by saving time or money or effort will be key to deployment.

“We can say with confidence,” asserts Holden,“that the future of commerce will be increasingly mobile and that the future is exceptionally bright.” TT Rona Distenfeld is a contributing writer to Transaction Trends. Reach her at rona@sbcglobal.net.

Transaction trends | December 2013 17

[ FEATURE ] Former congressman Bart Stupak speaks at the SLF political engagement luncheon.

ETA CEO Jason Oxman and President Kim Fitzsimmons at the SLF political engagement luncheon

SLF Delivers Executive-Level Thought Leadership on the Next Generation of Payments Speakers provide practical guidance on navigating the changing landscape of payments

By Meghan Cieslak

T

he payments industry is in a time of tremendous change.

No component of the ecosystem has stood still—new competitors, new technologies, and shifting customer behaviors have all contributed to today’s dynamic landscape. A host of companies are poised to take leadership of the mobile commerce market. Technology companies, credit card companies, e-commerce brands, network operators, financial institutions, and individual merchants are among the players battling to capture consumer mindshare and gain control

18 December 2013 | Transaction trends

of this transformational market.

At the 2013 Strategic Leadership Forum in Scottsdale,Arizona, more than 400 industry executives—the largest in ETA history— gathered to hear leading experts share their strategies for overcoming the challenges presented by this new, dynamic marketplace.

The following are some highlights from those conversations.

The Importance of Advocacy One of the biggest issues ahead for the payments industry as a whole is the complicated world of government regulation.As a result, ETA has launched its new political engage-

ment program, The Voice of Payments (VOP), designed to inform and involve ETA members, citizens, media, legislators, and regulators on public policy and its importance to the survival, advancement, and success of the world class electronic payments community. VOP also gives consumers the tools necessary to ensure elected officials hear the voices of their constituents on issues of importance to the $4 trillion payment processing industry.

At the SLF political engagement luncheon, ETA CEO Jason Oxman announced the newest tool to the VOP arsenal—a political action committee. T he ETAPAC will seek

contributions from members of the trade group to fund its activities. “Advocacy is a business expense that executives are wise to make,” Oxman said. T he PAC will remain nonpartisan, making campaign contributions to Republicans and Democrats who promote the industry’s interests.

The event’s keynote speaker, former Congressman Bart Stupak, discussed the importance of engaging with legislators.

Stupak stressed the importance of making the voice of the payments industry heard in Washington.“You either have a seat at the table or you’re the dinner,” Stupak stated.

With his expertise gained from 18 years of service in Congress, 16 of which were spent on the House Energy and Commerce Committee, former Congressman Stupak has a long history of engaging with business groups.

The launch of The Voice of Payments™ is part of ETA’s broader enhanced legislative outreach efforts. A mong increased advocacy efforts on behalf of members and the launch of the ETAPAC, ETA also has doubled government relations staff and registered a lobbyist to increase its reach on Capitol Hill.The ETA political team’s “tireless activity is phenomenal,” ETA’s President Kim Fitzsimmons said, noting that it has already lobbied for a oneyear delay of a requirement that acquirers match Tax Identification Numbers to report merchants’ transactions to the Internal Revenue Service.

Emerging Market Trends and Technologies The payments space has been crowded with new technologies entering the digital payment arena each month. At SLF, attendees got firsthand insight into the latest new developments.This year ETA added an innovative startup competition, the Payments Next Zone (PNZ) and the E-Pay Innovation Award, that showcased game-changing technologies that empower the underbanked.This “Shark Tank”-like live competition showcased innovative new electronic payments technology products that help underserved communities. The showcase culminated with a judging panel and the presentation of the the E-Pay Innovation Award—a check for $10,000—to the product with the potential to make the most profound impact on the global market.The competition is the result of a generous grant from the Bill and Melinda Gates Foundation.

A growing number of entrepreneurs are

seizing on the opportunity both to improve the financial services experience for the world’s poor and to expand the mobile pay business model.

Similarly, the Gates Foundation has invested significantly in education and awareness about banking services to underbanked populations through initiatives like the E-Pay Innovation Award. One of the keynote speakers, Janine Firpo, deputy director, financial services for the poor at the Gates Foundation, discussed the foundation’s strategy of increasing digital financial services availability to underbanked people, which reduces costs and the threat of theft and corruption and increases connectedness in the global marketplace.

The winner of the E-Pay Innovation Award, Money2Ethiopia, provides consum-

on how they can navigate the current marketplace.“You are seeing new entrants in the marketplace” he said.“It is going to get more competitive so you have to think about what that means for you. It might be a great opportunity for partnerships.”

Bob Carr, CEO of Heartland Payment Systems Inc., predicted that federal regulators will continue to crack down on merchant processors.The reason for steppedup federal oversight, Carr said, is that independent sales organizations haven’t policed themselves effectively. “There are some egregious practices in the industry that are still going on,” he said. “Who polices that?”

After Carr’s remarks, Jason Oxman told that audience that such illegal behavior is not common in the payments industry in 2013.

“You are seeing new entrants in the marketplace. It is going to get more competitive so you have to think about what that means for you. It might be a great opportunity for partnerships.” —Ed Labry, First Data ers in the United States a fast, reliable, low cost, and convenient way to send money to loved ones back home. The company was founded in 2012 by members of the Ethiopian Diaspora, who were confronted by a basic problem.There were simply no safe, legal, and cost-effective options to send money to Ethiopia.

The View from the Top Federal regulation was a main theme throughout the forum. Representatives from the Consumer Financial Protection Bureau (CFPB) and the Federal Reserve were on hand to discuss the most pressing issues ahead for the payments industry. Dan Quan, senior advisor to the director and head of Project Catalyst at CFPB, and Susan M. Pandy, director, payment strategies at the Federal Reserve Bank of Boston, gave attendees an insider’s perspective on the road ahead for mobile payments. Given that mobile payments is an emerging channel, regulators are looking closely for any potential coverage gaps in laws and regulations.

Ed Labry, vice chairman of First Data, also looked at the effect of new technologies on the industry. In his keynote address, Labry gave some practical guidance to attendees

To ensure that remains the case, the association has formed a Best Practices educational initiative. Developed with the input of dozens of ETA member companies, this industry education is designed to help ETA member companies detect and prevent bad merchant behavior that would harm consumers who use electronic payments networks.“That’s an initiative we have under way,” Oxman told the audience.

Among other predictions, Carr also said decoupled debit “will become the fastestgrowing alternative payment type.” He cited successes such as Princeton, New Jerseybased Heartland’s own closed-loop campus debit card programs, which rely on decoupled debit. In decoupled-debit systems, debit cards tap accounts not held by the issuer, typically using the automated clearing house network.The ACH, he added, will achieve“instant settlement” sooner than many might think. An effort to introduce same-day settlement in the ACH foundered last year when the network’s biggest bank users voted the initiative down. TT Meghan Cieslak is director of communications for ETA. Reach her at MCieslak@electran.org.

Transaction trends | December 2013 19

»

Startup Stories: Riskified

Justifiable Risk With Israel-based Riskified’s business model, merchants might find high-risk transactions a thing of the past

By John Manasso

I

t’s hard to imagine how a small country that is surrounded by hostile neighbors and thus requires mandatory military service could become a hotbed for technology companies.

But that is exactly what has happened in Israel.

One such startup, Riskified, which specializes in processing high-risk transactions for merchants, began simply: with two people in an apartment. One co-founder, Eido Gal, spent four years in the Israel Defense Force, and that experience gave him the training he needed to eventually start his own technology company.

According to Gal’s biography on Riskified’s website, he “served as a team leader in the special intelligence community” of the Israeli military. In theory, that sounds like a fully armed soldier performing the dangerous task of knocking on doors to ferret out potential terrorists; in reality, it represents something quite the opposite. Gal explains that his work mirrored the duties of the U.S. National Security Agency: high-tech electronic surveillance.

“I think in Israel, there’s a lot of high-tech startups and a vibrant high-tech community. A lot of that has to do with people, like myself, who get a lot of their training from the intelligence community within Israel,” Gal says.“It’s kind of a well-known fact that the people who finish in those units go off to certain aspects of security and risk and ‘Big Data.’

“From an early age, we’re able to figure out this huge system; it’s very complex. We learn a lot, get a lot of responsibility, get a lot of hands-on training, and it’s very practical-oriented. It’s not a lot of theoretical sciences that are more similar to a university.”

We’re No. 2 As with any high-tech community, Israel’s has been nurtured by

Riskified | Tel Aviv, Israel

Riskified Co-Founders Assaf Feldman and Eido Gal the venture capital industry that has sprung up around it. Riskified received its initial seed money from a fund called Genesis Partners.

Founded in 1997, Genesis Partners has more than $600 million under management, according to Eyal Kishon, PhD, its founder and managing partner.

Israel’s population is less than 8 million people, less than the state of Georgia in the United States. Consequently, it would seem that finding good startups in which to invest might be easier than finding the proverbial needle in a haystack. Not so, Kishon says.

“The high-tech scene is very, very big,” he says. “The Tel Aviv

www.riskified.com

Founders: Eido Gal and Assaf Feldman Employees: 15 20 December 2013 | Transaction trends

area is second only to Silicon Valley in the number of startup technology companies.

Ten or 12 venture capital funds are operating from Israel. All the big name venture capital funds from the United States travel to Israel and invest in Israel on a regular basis.The Tel Aviv area is a very good scene for us, specifically, when it comes to certain cyber security and software.

“It’s a little more related to the cyber security side.There is a lot of expertise being developed in Israel for the purpose of state security.”

No Risk, No Gain After completing his military service, Gal went to work for a series of companies in the payments sector: PayPal, Fraud Sciences, and BillGuard. Fraud Sciences, which was based jointly in Tel Aviv and Palo Alto, California, was bought by eBay in 2008 for $169 million. Fraud Sciences’ business model was to verify buyers’ identities and to accept orders seen as suspicious. BillGuard is an app that allows users to track their spending and save money.

When Gal set about founding his own venture and deciding what it should be about, he fell back on those experiences.

He studied statistics regarding fraud and declines. In particular, he cited the Visa CyberSource Fraud Report, which Gal refers to as the “Holy Grail of statistics” for the industry. He points to a statistic that says merchants lose 1 percent of paying volume to fraud, but, more significantly from his perspective, the merchants themselves also decline between 4 and 7 percent of submitted payments.

“These are not transactions being declined by the processor; these are merchants who are proactively saying, ‘You know what? I’m afraid of chargebacks. I won’t accept these transactions,’” Gal says.

“The second interesting number is, ‘How many of these transactions being declined are good?’”

From his previous career experience, Gal knows that approximately 80 percent of those transactions actually were good, but they simply represented false positives in the system.The business model he developed, which sounds somewhat analogous to that of the former Fraud Sciences, was to ask merchants to refer those high-risk

WORDSTOTHEWISE � Startups are hard work. Riskified Co-founder and CEO Eido Gal suggests that if you want to create your own startup, know that it’s a lot more work than you think it is. “That’s the number one thing about a startup,” he says. “It’s fun. It’s great. I love it. It’s hard.” � Patience is a virtue. When you’re working on a startup, remember that things take time. Others will not work on your timetable. “You’re used to running so fast by yourself and doing everything quickly—building and iterating a product in no time. You’re always surprised when sometimes the world around you doesn’t work that fast,” Gal says. � “When you’re running on startup time, you’re very energized, working until late hours, and there’s no bureaucracy. But once you get to the sales office of a large organization, it takes time. They’re a lot of people in the middle and legal departments and product departments—every kind of department imaginable. You want to pluck out your hair and say, ‘Let’s get it over with.’ But it’s a fun process.” � Don’t overthink. When getting into the risk end of the payments industry, “really look at it from a data perspective,” Gal suggests. “We see merchants acting from the gut a lot of the time. They might get 10 chargebacks in a month from international orders, and then they would close off all their international business, even though it makes no sense from a dollar perspective. So I tell them, ‘Take a second, look at the numbers, see if you can eliminate certain things. But don’t close yourself off to business.’ Risk should be an enablement to business.

It should never stop you.”

transactions to Riskified, which would only take a fee if it were able to approve the transaction.

“The pricing structure is very aligned with merchants,” Gal says.“That differs very greatly from other fraud solutions that say, ‘This transaction is behind a proxy, it’s highrisk, don’t accept it.’”

To explain, he uses a hypothetical example of a transaction that he says most fraud protection companies would advise a merchant not to process: a consumer using a credit card in the United Kingdom with an IP address from France and a shipping address at a hotel in New York.

“What our technology does is make sense of those mismatches,” Gal states.“So, maybe we have an automated caller that’s able to say,‘Well, this person used to work in France, so that’s why the credit card is from there; he is currently residing in London, and that’s why the IP is there; and he’s going on vacation to New York, that’s why he’s shipping it there.’”

From merchants who are manually submitting transactions to Riskified, Gal says his company is able to approve 74 percent of the transactions.

For Kishon, the venture capitalist, the investment has been well worth it. He says he has personally fallen victim to having transactions declined. He has an Israeli credit card, and if he tries to buy something on an American website, sometimes his personally identifiable information could get misspelled in translation, leading to a denial.

“I think it’s fascinating,” he says, “The ability to decipher between good and bad transactions and honest transactions that just don’t look that great is very interesting. It’s kind of a no-brainer… It sounds straightforward. The implementation, software and the code are very complicated.”

Riskified has grown to 15 employees, including two the company hired last September. To enhance its profile, the company joined the Electronic Transactions Association earlier in 2013. As it evolves, one Transaction trends | December 2013 21

»

Startup Stories: Riskified

strategic decision Riskified faces is whether to open an office in the United States.

Gal, the CEO, who once worked in the Boston area, says the decision is a dilemma that many Israeli startups face.

“How do I expand the business from doing the millions to the tens of millions?” Gal says. “Once the classical answer was you have to open a U.S. office, but I think, in the last few years, a lot of companies, at least initially, stay in Israel because there’s a big focus problem once you start having two offices in such different locations. As the CEO, you have to split your time between the offices, and then your presence is kind of not really felt in the Israeli office, or, if you stay in the Israeli office, you’re not in the American office—you’re not there to build the American office and train them in the company culture and values and how it works.”

Gal says this dilemma has been settled, to a degree, in recent years as an influx of Americans have come to Israel and opened up possibilities for sales and marketing teams, which, he says, has historically has

“The ability to decipher between good and bad transactions and honest transactions that just don’t look that great is very interesting. It’s kind of a no-brainer… It sounds straightforward.

The implementation, software and the code are very complicated.”

—Eyal Kishon, PhD, Genesis Partners

been the biggest problem for hiring in Israel. Plus, according to Gal, Israeli startups can accomplish much remotely. Riskified just completed a $500,000 deal and closed it completely via telephone and video conferencing.

Having said all of that, Gal claims limits still exist on startups that elect to remain solely in Israel. One challenge is working with Silicon Valley, which sits 10 time zones away from Tel Aviv.

“In the next year, we’ll probably stay focused in Israel—the entire team,” Gal says, “but after that, probably, we’re going to have a presence or an office in the States as well.”

For a growing company like Riskified, it’s a good problem to have. TT John Manasso is a contributing writer to Transaction Trends. Reach him at john_manasso@yahoo.com.

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Industry Insider

The Formula for Success

One company’s Cloud-based platform offers a single solution for acquirers, ISOs, and MSPs

By Bryan Ochalla

A

lthough the software-as-a-service solution offered

by The Formula basically has been in development since the early 1990s, when co-founders— and brothers—David and Michael McMackin first entered the industry, many in the payments industry only recently learned of it.

That’s because, for the majority of those 20 years, the McMackins and their employees “mostly operated from behind the scenes,” explains David, the San Jose, California-based company’s CEO. (Michael serves as its president.)

The current structure of the company’s operations and sales-management solution, which has been refined over the past two decades and currently assists acquirers, ISOs, and MSPs with various operations “We offer it all in an and sales functions, “basically is a end-to-end, integrated re-branding of our past technoloplatform that comprises gies that have been brought out of stealth mode,” he adds. all of the tools, strateThe McMackins only started progies, and technologies moting The Formula, as it currently that our ISO, MSP, and exists, last year because “some of bank clients need... and those companies ... really like for their strategies and technologies we think we’re pretty to be their own,” says David.“If you unique in that regard.” have, say, 100,000 merchants, you’re probably not going to want to re—David McMackin, CEO lease your proprietary software and technologies and strategies out to the world because that’s your competitive edge.”

David believes the present iteration of The Formula’s Cloud-based platform will offer a similar competitive edge to the banks, ISOs, and MSPs that tend to make up the company’s client base. It provides merchant acquirers with a “flexible, reliable, and secure” suite of tools and strategies that cover enterprise management, sales, and everything in-between.

Specifically, the enterprise-management portion of The Formula’s customizable solution touches on analytics, financials, management, operations, and service in the following ways: • The analytics tool focuses on reporting and system analysis (so clients can “know what you want to know, when you want to know it,” according to the company’s website.)

24 December 2013 | Transaction trends

• Its financials tool is a “comprehensive administrative, accounting, reporting, and auditing environment” that can track both internal personnel and independent sales representatives as well as parse out sales residuals on individual contracts, roll up information based on sales groups or representatives, and ensure all parties are fairly accounted for.

• The management tool bolsters clients’ ability to manage internal processes and oversee sales-team integration.

• Meanwhile, the operations tool streamlines, standardizes, and automates a client’s operations and fulfillment functions (including client boarding and servicing).

• Finally, the service tool aims to deliver “timely, relevant, and personal service” across all enterprise channels.

The sales portion of T he Formula’s solution combines online tools and strategies in an effort to: • Drive recruiting and optimize hiring with tools dedicated to finding new candidates, hiring, and managing an expanding sales force.

• Enhance marketing using an easy-to-access knowledge database that enables enterprise-wide distribution and management of operations, sales, and marketing materials.

• Power lead generation via an integrated contact management system that, according to David, helps sales people “manage their days, manage their contacts, and manage their referrals.”

• Deliver 24/7 training thanks to an online training and testing center that features educational video modules covering systems, tools, documentation, and both basic and advanced industry knowledge.

Of The Formula’s solution, David says, “There are some really great players on the market that focus on recruiting.

There are some really great players that provide customer service software. There are some really great players that can drive sales, or deliver virtual training.Well, we offer it all in an end-to-end, integrated platform that comprises all of the tools, strategies, and technologies that our ISO, MSP, and bank clients need for driving tens of thousands of merchants through their programs, and we think we’re pretty unique in that regard.” TT Bryan Ochalla is a contributing writer to Transaction Trends. Reach him at bochalla@yahoo.com.

reliance: having confidence based on experience; putting trust in

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