Transaction Trends July/August 2014 by Content Communicators, LLC

SHOW MERCHANTS HOW MOBILE PAYMENTS ENHANCE SECURITY PAGE 17

TRANSACTION trends The Official Publication of the Electronic Transactions Association

| July/August 2014

An inside look at the journey toward mainstream consumer adoption

Mobile

migration ALSO INSIDE: ETA E-Pay Innovation Winner Uses Payments for Good Portfolio Compliance Tactics That Work

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TRANSACTION trends The Official Publication of the Electronic Transactions Association

Vol. 19 | No. 5

COVER STORY 10 Mobile Migration

By Julie Ritzer Ross Although the journey for mobile payments adoption in the United States has been slow, it is undoubtedly changing the shopping experience forever. Hear from industry experts and consumers themselves about mobile going mainstream and what it takes to get there.

FEATURES 14 S PECIAL S ERIES

17 Tra n s a c t i o n Tre nds ’ Exc l u s i ve

By John Manasso Studies show that participating in the digital economy can provide those in the developing world a financial safety net. ETA E-Pay Innovation Award winner STRO is tapping the mobile phone to bring a lifeline to the poor and unbanked around the world.

Payments security is top of mind for consumers, and this year’s guide is designed to arm merchants with practical knowledge of mobile payments acceptance and the enhanced security they provide. Use it as a tool to start the conversation with your clients today.

Startup Stories: Power to the People

Second Annual Merchant Guide to Mobile Payments

DEPAR TMENTS 4

ETA Gateway

Industry News

24 The Last Word

Insights from ETA’s CEO, Jason Oxman Trends, strategies, and news in the payments business and ETA member community

Risk in Review

Communication tactics for reaching your portfolio compliance goals A variety of activity elicits ETA response in DC

Ad Index TRANSACTION trends | July/August 2014 3

ETA Gateway

Activity and Promise in the Months Ahead

or better or worse, our industry is in the spotlight amid a flurry of activity around payments security technology in Washington. Following recent high-profile data breaches, legislators and regulators are understandably concerned about the security of their constituents’ sensitive information. As Congress and regulator s set their sights on cybersecurity, ETA is providing information and serving as the voice of payments. Our position is simple: Technological innovations—not government regulation— will best protect consumers. ETA is on guard against well-intentioned new regulations or legislation that will inadvertently suppress those marketplace innovations best positioned to address the threat of cybercrime.

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 eight 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. POSTMASTER: Send address changes to the address noted above. Copyright © 2014 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 July/August 2014 | TRANSACTION trends

In the months following highly publicized data breaches, ETA has been advocating tirelessly for its members. From meeting with Capitol Hill staffers to hosting numerous educational briefings for policymakers, ETA has made sure that the voice of the industry is being heard here in Washington. Members of Congress have even cited ETA’s work during recent debates. To learn more about how you can participate in our advocacy efforts right now, visit our political engagement program, The Voice of Payments, www.voiceofpayments.org, and make your voice heard today. Our industry takes center stage at the most important payments networking event of the year—ETA’s Strategic Leadership Forum, October 7-9, at The Breakers in Palm Beach, Florida. With keynote addresses by First Data Chairman and CEO Frank Bisignano and Discover Network’s Diane Offereins, and the best high-level networking opportunities in

payments, this is the must-attend event for payments industry executives. Join us and capitalize on the knowledge of hundreds of frontline leaders, business visionaries, and senior-level professionals who are advancing the payments industry. Register right now at http:// electran.org/events/slf14/register. I look forward to seeing you at the Strategic Leadership Forum! As always, I love hearing from our members. Please send me your ideas on how ETA can help fulfill our mission to grow the payments industry. TT

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

Editor Josephine Rossi Editorial/Production Associate Christine Umbrell

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 SVP, Government Relations Scott Talbott Director, Industry Affairs Amy Zirkle

Contributing Writers John Manasso, Julie Ritzer Ross, Josephine Rossi, Scott Talbott, and Jake Young

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INDUSTRYnews Report: Get Your Fingerprints Ready The integration of fingerprint sensors in high-end smartphones and tablets will drive 5.5 billion people globally to use mobile and wearable biometric technology by 2019, according to London-based research and consultancy firm Goode Intelligence, which specializes in mobile security, authentication, and biometrics industries. The integration with mobile devices “will subsequently be quickly followed by other innovative biometric technologies deployed as part of either FIDO Aware solutions, proprietar y-device OEM-led initiatives such as Touch ID, or integration into multifactor authen-

tication platforms,” said a press release. The firm also predicts that Apple will integrate biometrics, possibly heartbeat recognition, into its iWatch smart watch device later this year. “We are very much at the beginning of another transformational aspect of authentication—the use of wearable technology for authentication purposes, in particular leveraging the next wave of biometric technology to create seamless, continuous, authentication,” says Alan Goode, founder and author of the report. “What will be truly transformational about the use of biometrics on wearable devices is the birth of the uni-

versal authenticator: a device that intuitively knows who we are, where we are, and what we want to do and can open doors—both physical and virtual.”

AROUND THE HORN

info GRAPH

ACI Worldwide has appointed Stephen

June Same Store Dollar Volume Growth by Industry 3.0%

Total Food/Beverage Stores (Supermarket/Grocery) Food Service/Drinking Places (Incl. Restaurants/QSR) Gasoline Stations

4.7% 4.1% 2.3%

Hotels Leisure

7.1% -1.2%

Retail Services Travel

1.2% 3.8% 4.9%

-2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8%

Note: Data shows aggregated year-over-year same store sales activity for card-based payments. Source: First Data “SpendTrend report,” June 2014 edition

6 July/August 2014 | TRANSACTION trends

Peters as vice president, solutions consulting, for business in Australia, New Zealand, and Asia Pacific. Compass Plus has extended the functionality of its TranzWare Internet Banking product to provide the registration of cards issued by other financial institutions. Dwolla has launched Dwolla Direct, a new service that enables users to send businesses money directly from their bank accounts. First Data has launched PayLucky Solutions for legalized online and offline gambling and gaming. The company also recently announced $3.5 billion in private placement by KKR Capital Markets. Topcreditcardprocessors.com has named Merchant Warehouse the third best credit card payment processing company for June 2014. Powa Technolgies announced the completion of its Alpha program and rollout of its advanced PowaPOS Software Developer Program to independent software vendors globally. Banco Nacional de Costa Rica has selected VeriFone’s VX Evolution line of portable EMV and NFC capable POS terminals for its merchant customers throughout Costa Rica.

NEWS FROM THE ASSOCIATION

New Economic Studies Target Operation Choke Point ETA recently released two economic studies that find that Operation Choke Point is imposing considerable costs on reputable businesses while having little impact on fraud.The studies, commissioned by ETA and released by NERA Economic Consulting and First Annapolis Consulting, each examine the benefits and costs of Operation Choke Point and find the program is unlikely to achieve the intended result of denying access to the financial system to wrongdoers, and would impose significant costs on the overall economy. “By holding payments companies responsible for merchant fraud, federal law enforcement officials are targeting legitimate businesses and harming both merchants and consumers,” says Jason Oxman, CEO of ETA.“These studies demonstrate that industry self-regulation, such as ETA’s recently published Guidelines, will do more to detect and eliminate fraud than this well-intentioned, but misguided, federal intervention.” Both studies are available to members and advocate for voluntary industry self-regulation as the most effective tool to detect and eliminate merchant fraud. The findings contend that reliance on voluntary industry guidelines, such as ETA’s “Guidelines on Merchant and ISO Underwriting and Risk Monitoring,” avoid the unintended consequences of Operation Choke Point and similar enforcement policies, while providing the flexibility necessary to adapt to a rapidly changing marketplace.

2014 SLF Keynote Speakers Announced ETA recently announced that Frank Bisignano, chairman and CEO of First Data, and Diane Offereins, president of Discover Payment Services, will keynote the exclusive 2014 Strategic Leadership Forum (SLF). “The ETA SLF is where executives chart the future of payments through strategy-focused discussions and networking in an ideal setting,” said ETA CEO Jason Oxman. “This is the only place for frontline leaders to cut through static and engage with their executive peers. I am thrilled that Frank Bisignano and Diane Offerins, true industry luminaries, will headline the ETA SLF.” Since assuming the position of CEO and chairman, Bisignano has rapidly repositioned the 42-year-old company from traditional processing to a product and technology solutions provider for merchants and financial institutions. In his first six months, Bisignano unveiled a new tablet-based POS solution for smalland mid-sized businesses, and engaged and/or acquired leading technology startups. Prior to joining First Data, Bisignano was the co-COO for JPMorgan

Chase and the CEO of mortgage banking at JPMorgan Chase. Offereins has been with Discover since 1998 as executive vice president and held the title of CIO prior to overseeing Discover’s payments networks. She has led

CALENDAR: n 2014 Strategic Leadership Forum

The Breakers Palm Beach, FL October 7-9, 2014 Registration now at http://electran.org/ events/slf14/ n TRANSACT 15:

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. BitPay Atlanta http://bitpay.com PPRO Financial LTD London http://ppro.com

PULSE, a business unit of Discover, since 2006, and added responsibility for Discover Network and Diners Club International in 2008. Prior to joining Discover, Offereins served as senior executive vice president for MBNA America. The ETA SLF will take place October 7-9 at The Breakers in Palm Beach, Florida. Registration is open now at http:// electran.org/events/slf14/.

Meet Amy Zirkle, Director of Industry Affairs ETA recently hired payments technology expert Amy Zirkle as director of industry affairs. Prior to joining ETA, Zirkle served as senior economist and regulatory affairs advisor for TMG, where she worked on a range of technology matters, including mobile payments in the developing world. She also has extensive work experience in both the financial services and technology sectors, including at ETA member American Express and at the former MCI Communications (now ETA member Verizon). Zirkle holds a master of science degree from the Massachusetts Institute of Technology (MIT), where she served as a research associate at the MIT Media Lab, and a bachelor’s degree, magna cum laude, from Queens College of the City University of New York. TT

TRANSACTION trends | July/August 2014 7

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[ COVER STORY ]

Mobile

migration Expert insight, data, and consumer opinion on mobile’s seemingly nomadic path By Julie Ritzer Ross

10 July/August 2014 | TRANSACTION trends

woman enters a coffee shop, but instead of waiting for service, she heads to the front of the queue and picks up the cup of coffee she already has ordered and paid for via her smartphone. Once reluctant to share any information with merchants, a man opts in to receive special offers from his favorite retailer, which are “pushed” to his smartphone whenever that merchant detects that he is in one of its stores. The man’s wife searches for a dress, and while she had traditionally headed straight to her local store to find one, she peruses several different channels on both her smartphone and home computer before making a purchase. While these fictitious scenarios differ, they underscore a single point of truth: The manner in which consumers shop and pay for merchandise is rapidly changing, and the use of mobile technology to get the job done is here.

The Journey

KEY NOTES 8 While U.S. consumers have been slow to adopt mobile wallet technology, Isis Wallet boasts 600,000 registrations, and that number continues to double month-over-month.

8 Several factors appear to be behind consumers’ hesitation to fully embrace mobile, including lack of knowledge at the retail level, the number and disparity of mobile payments players, and the lack of multi-wallet acceptance among retailers.

8 Consumer interest in geolocation is on an upswing, and the vast majority are willing to share location data with merchants in exchange for “something valuable,” such as a mobile coupon or digital offer.

8 More consumers also are engaging in multichannel shopping via their smartphones and are expecting the whole brand experience to be similarly accessible.

Despite years of industry chatter, mobile payments as a whole have yet to reach mainstream status in the United States. Figures released earlier this year by research firm Gartner pegged total global mobile payments at $235.4 billion in 2013, up from $163.1 billion in 2012. By contrast, mobile payments in North America totaled a mere $37 billion last year, a modest increase from $24 billion executed the year before. The Yankee Group has similar findings. Results of a recent report indicate that only 16 percent of mobile device owners had made in-store purchases with their smartphones as of early 2014 (Yankee Group published the research in March). Of those using mobile wallets, 73 percent are doing so fewer than five times per month. “The harsh reality is that despite billions in investment across the ecosystem, adoption of mobile payment technologies has been far from illustrious,” says Jordan McKee, a Yankee Group analyst and the author of the report. On a more anecdotal front, Square, which was once considered a major player in the mobile wallet space, announced in mid-May that it had pulled the plug on its Square Wallet option, citing insufficient adoption by consumers and merchants alike (even among those in the San Francisco area, where Square originated). The wallet fold-

ed despite support from Starbucks, which began accepting Square Wallet payments in late 2012. For reasons unknown, Starbucks customers were reluctant to use Square Wallet instead of the coffee chain’s own app; Starbucks’ executives contend that consumers who already had become comfortable with the Starbucks app “unfortunately” saw no reason to switch to Square Wallet. The only possible exception to the slow wallet adoption rule is Isis, created by the consortium comprised of AT&T, T-Mobile, and Verizon Wireless. Although Isis declines to quantify its number of actual users, it claims that some 600,000 U.S. smartphone owners have signed up for Isis Wallet, and that number continues to double monthover-month. At its inception, only a few devices accommodated the wallet, which requires near-field communication (NFC) and a secure subscriber identity module (SIM) card. However, upward of 70 devices currently support it. Isis Wallet also comes preloaded on 14 Android-based smartphones; the consortium reports that other models of Android smartphones will soon incorporate the app. Meanwhile, in addition to local businesses and the retail outlets of AT&T, T-Mobile, and Verizon Wireless, a number of retail and hospitality heavy-hitters, among them Duane Reade,Walgreens, Rite Aid, RadioShack, Toys ‘R’ Us, Foot Locker, American Eagle, Champs, and Jamba Juice, have committed to accepting payments made with Isis Wallet. In May, Jamba Juice CEO James D. White told Information Week that Isis Wallet transactions represent a “growing percentage” of the chain’s total transactions nationwide, with its stores experiencing “more than 50 percent monthover-month growth in wallet use.” TRANSACTION trends | July/August 2014 11

[ COVER STORY ] White attributed Jamba Juice’s success in large part to its Million Smoothie promotion, which offered customers a free small smoothie or 12-ounce juice each time they paid for another purchase at a participating Jamba location using the wallet. The promotion sparked what White called “habituation”—it encouraged users to try Isis Wallet, in turn convincing them of the ease of doing so and getting them into the habit going forward.

The Obstacles Several factors appear to be behind consumers’ failure to fully embrace mobile payments and mobile wallets. Analysts say the sheer number and disparity of mobile payments players in the marketplace is partially to blame; the list has come to include banks, payment networks, retailers, wireless carriers, and the companies that make digital wallets themselves. More importantly, merchants that do accept mobile wallet payments are not likely to accommodate multiple varieties of wallets, “putting the onus on consumers to first identify retailers that support the technology as a whole, and then determine which mobile wallet is accepted at which individual stores,” says Lori Breitzke, president, E & S Consulting in Atlanta. Although she and other industry consultants think mobile wallets may gain traction in the United States if merchants were to jump on the bandwagon in large numbers, most retailers remain reluctant because installing the necessary new payment software and hardware is too complicated and/or expensive. What are consumers themselves saying? Transaction Trends talked to customers of Old Navy, Delia’s, Gap, Bloomingdale’s, J.C. Penney, and Lord & Taylor stores at Willowbrook Mall in Wayne, New Jersey, in early July. Several said they are shying away from mobile payments—or from mobile wallets, at least—based on the belief that the benefits do not outweigh the disadvantages. One man in his early 20s and a woman in her mid-50s said they do not understand the “point” of a mobile wallet if payments generated with it are not universally accepted. A “twentysomething” female said that carrying a wallet “really is no more trouble” than using its mobile counterpart; thus,“there is no real incentive to switch.” 12 July/August 2014 | TRANSACTION trends

Experts also cite this “utility factor” as a reason for the public’s reluctance to migrate to mobile. Most, if not all, mobile apps—including the popular Starbucks app—are not linked to credit and debit cards. To use them, consumers must establish a stored value account that is replenished via a credit card (or, in the case of Starbucks, a credit card or a PayPal account) and draw upon it whenever a purchase is made. Consumers will only prepay for things they buy very frequently, says Breitzke. Then, there is the complication of a lack of knowledge at the retail level. McKee cites complaints among consumers that in many cases, retail store associates are unaware of the mobile payment option available and have no idea how to proceed with transactions. Similar observations have been made about employees’ lack of familiarity with mobile apps that feature integrated payment capabilities. Feedback from industry experts and end users alike indicates that inducing consumers to wholeheartedly embrace mobile will necessitate not only widespread merchant acceptance, but other changes as well.The addition of loyalty components, the incorporation of targeted offers, and the ability to order and pay for items before setting foot in a bricks-and-mortar location top the list, McKee and Breitzke say. “This is where the activity is,” concurs Michael Boland, senior analyst, BIA Kelsey, a New York City-based mobile and digital research firm. Boland cites PayPal’s Order Ahead and Pay At Table apps as examples. With Order Ahead, consumers can place and pay for orders from restaurants on their mobile devices, then go straight to the head of the queue to pick them up. The Pay At Table app allows restaurant patrons to use their mobile devices to expedite their checks and settle their tabs. For its part, Square is replacing Square Wallet with a mobile payment app called Square Order, now in test phase in San Francisco and New York City.The app works like Order Ahead and includes a feature that notifies users when their orders are ready. Loyalty has been a centerpiece of a handful of mobile apps, among them LevelUp, with which payments are completed by scanning a QR code. The more they use the app to pay for purchases at

one of more than 14,000 participating merchant locations, the more rewards (e.g., discounts and freebies) they receive. LevelUp currently has a user base of more than 1.5 million consumers, according to the company.

Location, Location, Location Meanwhile, consumers’ interest in engaging with merchants through mobile technology—specifically, geolocation—is on an upswing.“In just the past 12 months alone, we’ve seen a significant transition in focus from mobile payment acceptance to a wider focus on improving the retail experience,” says Henry Helgeson, CEO, Merchant Warehouse. Statistics cited in Merchant Warehouse’s most recent “State of the Payments Industry” report (issued in June 2014) indicate that 78 percent of consumers are interested in using their smartphones while shopping; accessing deals and coupons ranked among functions they would like to perform with the devices. Even more telling, 77 percent of 1,000 consumers who participated in a study conducted by ResearchNow and mobile marketing firm Swirl expressed a willingness to share location data with merchants in exchange for “something valuable,” such as a mobile coupon or digital offer. Similarly, more than 50 percent of individuals queried by network technology vendor Cisco claimed discounts would constitute a sufficient incentive to share personal information. Some retailers leverage mobile technology for location marketing initiatives, for instance, passive monitoring of radio signals from customers’ phones to detect when they have entered a store and/or are frequenting (or not frequenting) specific displays. Others harness WiFi, providing it free in-store in exchange for the ability to access information about consumers’ location and shopping habits. However, some merchants have begun to venture one step further with Bluetooth-based geolocation technology. Apple’s iBeacon is one example. It uses Bluetooth Low Energy and a geofencing component to “find” customers. Macy’s recently rolled out iBeacon to monitor how long shoppers remain in a particular department and whether they have made a purchase. If a shopper lingers in a department with-

out making a purchase, the system pushes out a financial incentive. iBeacon has been deployed in six of Macy’s stores; chainwide implementation is underway. Similarly, regional drug store chain Duane Reade is pilot-testing iBeacon in several of its New York City stores. In this case, the app has add-on features that enable consumers’ phones to receive offers when customers approach a store rather than after they have passed through the front door, as well as coupon offers based on their shopping histories and current location in-store. Three shoppers queried by Transaction Trends at a Duane Reade location in midtown Manhattan (New York City) in early July said they had opted in to iBeacon specifically because they did not want to miss out on targeted coupons.They had no qualms about being “tracked” because they had been assured that their location information would not be shared with any other entity.

vide feedback about the product(s) and the shopping experience. Specialty retailer Guess has jumped into the fray as well. The merchant recently unveiled a new mobile app for iOS and Android devices that is designed to provide “a seamless shopping experience” across all stores and its online channel. The app offers personalized customer services, local store and fashion updates, and high-resolution image and video displays of merchandise based

on customer preferences. Mobile payments and mobile payment technology continue to evolve and change; merchants must keep up with such evolution if they are to remain competitive going forward. As Boland puts it, “It may be changing, but it’s not going away.” TT Julie Ritzer Ross is a contributing writer for Transaction Trends. Reach her at jritzerross@gmail.com.

New Paths More consumers also are engaging in multichannel shopping, such as beginning the task online and completing it in-store. While merchants are focusing on the use of tablets and the like to facilitate this process (arming associates with hand-held devices so that they can take orders for out-of-stock items and arrange for them to be picked up or shipped from another location), consumers are, increasingly, using smartphones to complete multichannel shopping activities. The multichannel/“omnichannel consumer expects everything to be readily available at his or her fingertips and for the whole brand experience to be similarly accessible,” with mobile as a linchpin, says one consultant at PricewaterhouseCoopers. If recent developments are any indication, merchants are striving harder to fulfill such demand. For example, Sears has introduced a “Shop Your Way” mobile app that allows consumers to purchase merchandise on their mobile devices and incorporates mobile-supported in-vehicle pickup. After placing their orders, shoppers drive to a Sears store and enable GPS on their mobile phones to initiate the pickup. Merchandise is brought directly to consumers’ vehicles, where they can use the app to verify the transaction and proTRANSACTION trends | July/August 2014 13

Startup Stories: Social Trade Organization

Power to the People ETA’s 2014 E-Pay Innovation Award winner taps the ubiquitous mobile phone as an instrument for change in the developing world By John Manasso

hen Social Trade Organization (STRO) was founded in the early 1970s in the Netherlands, debit cards were toddlers’ age and credit card purchases were made with an imprint on a piece of carbon paper. How times change. As a nonprofit that aids the poor in the developing world, STRO has not strayed far from its original mission of improving the environment. Now, it is attempting to fix the same problem with modern solutions—and make a foray into the payments industry. At the end of the 1990s, the organization advised people in Argentina and began developing a PHP software, according to Henk van Arkel, STRO’s CEO. Then, at the beginning of the 2000s, STRO found money in its budget to start seriously working on payment systems that can help to create more opportunities in poorer areas. Fast-forward to April of this year, when STRO was awarded the $50,000 top prize in the 2014 ETA E-Pay Innovation Awards, which is funded by The Bill & Melinda Gates Foundation.The award was for Cyclos, STRO’s software product that helps connect the unbanked in the developing world to the formal economy through the use of mobile phones.

Entree Into the Modern Economy Research indicates that “financial inclusion” helps to lift the poor out of poverty. Financial inclusion is considered the ability to participate in the modern, digital economy—as opposed to relying solely on cash and, to an extent, barter systems, which many of the poor in the developing world do. A July 2012 Gates Foundation report on financial inclusion described how many 14 July/August 2014 | TRANSACTION trends

Henk van Arkel

Roder van Arkel

Social Trade Organization

www.socialtrade.org Founded: 1970 Today: Has initiatives in Uruguay, Brazil, Honduras, Costa Rica, and El Salvador and has research and support groups in Holland, Spain, Norway, Austria, and Portugal. poor in the developing world can temporarily pull themselves out of poverty, but also how they can easily slip back into it during social and economic shocks. Participation in the modern economy can prevent this dynamic. Of the 2.6 billion people who live on less than $2 per day, 78 percent do not have a bank account, according to the report. “If available at critical moments, effective tools for savings, payment, credit, and insurance can play a key role in determining whether a poor household is able to capture an opportunity to move out of poverty or weather a shock without being pushed deeper into poverty,” the report said. STRO designed Cyclos so that banks, microfinance organizations, and small trading

networks in the developing world can use it at very low cost. In essence, Cyclos is a kind of payment system. “By delivering cheap software to those local banks or national banks or the banks in those countries, we hope to be able to offer bank accounts to people in developing countries at a really low price,” says Roder van Arkel, project manager for Cyclos and the son of the nonprofit’s CEO. He has a master’s degree in economics and organizational sciences and specialized in international economics. Most banking systems in the developing world are closed banking systems, meaning that funds may be transferred only among those who hold accounts at the same bank. Cyclos enables individuals to transfer funds between individuals or entities that do not have accounts at the same bank, says Roder van Arkel. Cyclos is highly customizable:“You can offer your customers multiple accounts in multiple currencies,” he explains.“You can offer them a savings account, a trading account. You can create accounts on the fly. You can configure that in Cyclos so you can, in some sense, really determine what kind of product you want to offer to this kind of market. Cyclos has the ability to configure all of these things.” Participating in the digital economy can provide those in the developing world a financial safety net. Family members living far apart can more easily and securely send funds to their relations. This saves both large amounts of time that otherwise would be spent traveling to present the money, as well as the expense of the travel itself. It also removes the threat of theft or falling victim to loan sharks.

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Startup Stories: Social Trade Organization

“Also, they are inclined to save a little bit, if they already have their money in a bank account,” says Roder van Arkel.“It’s easier to open a savings account, which is good for them, of course, because that gives them a little buffer in a financial situation.”

Product Placement STRO offers two products: Cyclos 3 and Cylcos 4. Cyclos 3 is free and open-source; Cyclos 4 is closed-source.Those seeking to use Cyclos 4 pay STRO a small fee. “The amount of money we ask is really low compared to other organizations,” says Roder van Arkel.“Actually, most kinds of organizations that offer the kind of software we do are not interested in most of our clients because they don’t have enough money to make a successful business. So, in that sense, we really offer a unique product to a market that is otherwise not served.” STRO targets both the urban and rural poor for its product. One of the anachronisms of the modern world is the ubiquity of mobile phones in the developing world. For example, mobile subscribers in Africa grew in the 10 years starting in 2001 from 25 million to 650 million. By 2015, that number is expected to hit 925 million, according to the Gates Foundation report. The genius of Cyclos is leveraging the mobile phone as an instrument for change and financial inclusion. “For example—it’s quite extraordinary— they don’t even have running water or sewage, but [they have] a prepaid phone. Almost all families in African countries and developing countries, they have a mobile phone,” says Roder van Arkel.“So using this mobile

phone, they can transfer money using USD or SMS.You see in Kenya this really happens quite a lot.” While the simple issue of recharging a cell phone would appear, on the surface, to pose an intractable problem in remote areas, Roder van Arkel says modern ingenuity also has found solutions. “There are solar panels, they charge people to charge their phones,” he says.“… Other people can come to them.This charging point [is] the most basic solution, if there really are no power outlets. In a lot of poor countries, there are some buildings with electricity where people can charge phones. It depends on the area.” And while even in the United States there are some rural areas that do not have great cell phone coverage, this also is not much of an issue in the developing world. “In general,” he says, “the coverage is quite OK.”

Global Expansion Written in Java Enterprise Edition, Cyclos has potential uses in the West, as well as in Africa and South America, where much of STRO’s efforts are focused. The group is working on an experiment with the European Union, involving the Spanish and Portuguese governments, which are struggling through depressed economic conditions and, at times, have been unable to pay government contractors. Contractors can wait four or six months to get paid, says Roder van Arkel, so the idea is to create a closed system in which the contractor is allowed to borrow on the promise that it will get paid in a fixed amount of time.

The borrowed amount is time-stamped and when the time arrives, the cash is inserted into the account. As innovative as STRO may be, it has run into some issues that a for-profit might not experience. One is a basic function for any for-profit business—marketing. “A little bit of a weak point of ours,” Roder van Arkel says. “We really have invested a lot in Cyclos and built a really nice product…. but the marketing part is not so strong. In that sense, we have a website. We do interviews like this.We do our best. But I think a lot more companies who are looking for this kind of thing could benefit from our software, but they don’t always know that we exist.” With the notoriety coming from the E-Pay Innovation Award, that could be changing. Another challenge unique to a nonprofit is the need to solicit funds from donors. A for-profit company could simply plough profits back into research and development. Henk van Arkel says the concept of funding banking software to help the poor was not an easy sell to STRO’s donors. Instead, STRO proposed specific projects with clear results and presented the software aspect as a specific activity for that project. “As long as we deliver the promised results, donors are happy,” Henk van Arkel explains.“The fact that in the meantime all these projects together made it possible to realize Cyclos was just an extra win.” TT John Manasso is a contributing writer to Transaction Trends. Reach him at john_ manasso@yahoo.com.

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16 July/August 2014 | TRANSACTION trends

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TRANSACTION trends

Merchantsâ&#x20AC;&#x2122;Guide to

Mobile Payments Discover how mobile payments enhance security, integrate marketing and loyalty offers, and improve the overall customer experience

Merchants’Guide to

Mobile Payments

What’s In It

for You?

ot since the advent of the credit card has payment technology so significantly shaped consumer behavior. With 6 billion mobile phone subscriptions globally, mobile communications are having a profound effect on people’s lives, both socially and financially. As a merchant, this means that consumers are walking around your store with a little computer in their hands that allows them to compare prices, read reviews, find deals, and inform their friends—all within the confines of your store. But how can you harness this new tool and ensure that it is working for you, not against you? If you are an online retailer, you need to leverage the power of this phenomenon to your advantage by providing a truly optimized mobile web and/or native application experience. If you are multichannel, then you need to plan support for your mobile consumers, no matter the channel. For merchants and business owners, mobile payments present a unique opportunity to connect with customers and deliver value in a more personal way. Merchants should accept mobile payments not just because it’s the latest trend, but because it can enhance and deepen their relationships with existing customers—as well as be a prime reason to attract new customers. In a nutshell, digital wallets and mobile payment platforms offer opportunities to integrate marketing and loyalty programs with sales. Location-based interactions provide tailor-made customer experiences. Isis is one example, providing a free mobile app that uses near-field communication (NFC) technology to let consumers pay and save at stores with just a tap of their smartphone. The Isis Wallet holds participating payment and loyalty cards while organizing offers and coupons for any-time access. Additional frictionless payment options also are emerging. For example, TabbedOut, a mobile app fully integrated with point-of-sale (POS) systems, allows restaurant customers to order, pay bills, split checks, and redeem offers directly

18 July/August 2014 | TRANSACTION trends

As a merchant, the benefits of mobile payment acceptance will vary depending on your type of business and your customer demographics, but here are some of the benefits to expect when deploying a mobile payment system: Consumer Data—Many mobile payment services also include online transaction reports. These reports can provide a better understanding of your consumers’ behavior and information on how to better service their needs. For example, you could use this data to ensure that the favorite products of your best customers are always in stock, or that you deliver targeted, promotional offers for products that consumers desire. Consumer Control—Mobile payments empower your customers and allow them to pay with their preferred method and funding mechanism, while easily controlling all of their loyalty and reward points in a single place. Flexibility at the Register—Some mobile payment solutions allow consumers to check out directly from their mobile device and never have to go to your register. Mobile technologies allow consumers to make purchases utilizing their devices anytime, anywhere. Merchants can enable consumers to shop utilizing mobile browsers or apps while at home or in the store. When ready to complete the purchase, the consumer simply executes the transaction. The merchant’s systems receive notification and the goods are ready for pickup at the customer service counter. This can also be coupled with a mobile checkout or tablet-based point-of-sale system that allows the merchant to interact with the consumer and complete the sale on the sales floor. Speed of Checkout—Using their mobile device, consumers can automatically administer daily deal programs and special coupon offers. Scanning a QR code for a payment tied to an offer can be significantly quicker than keying the offer into a computer, then processing the payment. Enhanced Security—Mobile devices provide more security than standard magnetic stripe credit cards. Phones can be locked with a password; all mobile payment applications can be set to require a password, and phones can be configured to have all of their data wiped remotely.

Want To Learn More About Mobile?

The Electronic Transactions Association (ETA) has compiled a comprehensive list of free resources—including a glossary of terms, whitepapers, webinars, and best practices—to help merchants learn more about growing your business with mobile payments. Visit www.electran.org/mobile or ask an ETA Certified Payments Professional for more information.

from their phones. Another example is Beacon technology, which emits a short-range wireless signal that triggers an app in a customer’s phone when he or she walks into a store. If a customer has explicitly approved the location, it will allow the merchant to provide numerous services, including access to order history and the ability to charge without tapping or swiping a card or device. Mobile payments and digital wallet solutions also hold great promise to impede and prevent fraudulent activities on our payments systems. In addition to the same security inherent to traditional plastic cards, mobile payments offer new ways to secure payment transactions. This second annual Transactions Trends’ Merchant Guide to Mobile Payments is designed to help merchants adjust to the changing payments landscape with practical knowledge regarding mobile payments acceptance and the enhanced security these innovations provide. ISOs and acquirers can also use this as a tool to start the conversation with their clients.

Mobile 101 The term mobile payment is defined as the ability for a consumer to use a mobile device to initiate a payment at the point of sale (POS) and to interact with merchants for mobile offers and the tracking of loyalty points. The mobile wallet is a mechanism whereby the mobile device has access to a variety of payment vehicles (ACH, debit, credit, prepaid, gift) via an application accessed through the mobile device. The mobile application provides a secure tool for access to the wallet, along with various authentication mechanisms that must be validated prior to making the final payment. With some wallets, the payment information is contained on the mobile device, while other wallets utilize the Cloud or remote systems for authentication, communication, and payment processing. In addition to accessing payment vehicles, the wallets can access loyalty programs, coupons, instant rewards, and daily deal promotions, all of which can be redeemed via the mobile device at the POS.

How Secure Are Mobile Payments? Following a recent series of large-scale, high-profile data breaches at major retailers, consumers are understandably concerned about the security of their sensitive information. Fortunately, members of the payments industry are working together to identify and deploy the best solutions. These new innovations in data security are adding even more technologically advanced fraud prevention tools to the payments infrastructure. Consider: • Mobile payments provide robust security with multiple authentication layers, including passwords, visual verification, text verification, geolocation, and even biometrics. • Mobile payments offer device- and Cloud-secure storage as well as enhanced tokenization so that account information stays encrypted for the entire transaction. • P hones are more easily noticed when missing than cards, which allows for quicker deactivation of payments. The mobile transaction lifecycle has

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TRANSACTION trends | July/August 2014 19

Merchants’Guide to

Mobile Payments similarities and differences when compared to plastic card transactions. From an infrastructure standpoint, transactions that occur via the mobile device largely rely on the same network that exists in plastic card transactions. The primary difference between the two transaction types lies within the transmission technology, credential storage, and authentication procedures that occur at the POS. Mobile wallet technology provides encryption technology, PIN/password entry, and numerous other security technologies to protect payment credentials. Mobile also adds to new layers of authentication that are not easily managed or addressed in a physical card-present ecosystem. The chart below provides an overview of the mobile payment technologies available and how they work. Let’s take a look at how they mitigate risk and enhance data security. NFC (Near-Field Communications). Consumer payment credentials are

stored in a chip embedded in their mobile device. As compared to plastic cards, where the payment credentials are stored on the magnetic stripe and are unencrypted, NFC keeps the payment credentials encrypted, thus making skimming, data theft, and subsequent fraud more difficult. Additionally, NFC has multiple authentication options. Cloud-Based. The payment credentials are stored in the Cloud and the security is governed by compliance with the Payment Card Industry Data Security Standard, protecting data in transit and at rest. As compared to plastic cards, where payment credentials are stored on the magnetic stripe and not encrypted, Cloud flow at the POS with physical entry keeps the payment credentials encrypted, thus making skimming or other theft of credentials more difficult. Initial loading and validation of credentials into storage are the major areas of concern, but methods for securing this “issuance” of the credential have been proposed by industry

groups such as The Clearing House Secure Cloud and Visa Tokenization. Carrier Billing. Direct carrier billing (DCB) is a mobile payment method that is an alternative to using a credit or debit card. There are no security concerns regarding sharing personal financial data such as credit card or banking information. Charges are placed directly on consumers’ mobile phone bills. Magnetic stripe cards provide the lowest levels of security at the POS as unencrypted credentials are embedded physically onto the plastic card. Mobile devices provide enhanced security capabilities, including passcode protection, and secure chip technology, as well as both device and Cloud-based encryption and tokenization capabilities. Using a mobile device to initiate a transaction soon will be as common as swiping a card, and consumers will benefit from the enhanced security that such technology can provide. TT

Mobile Payments Options

These major mobile payments technologies are currently on the market in the United States:

Type NFC or Contactless

Image-Based, Barcode, or Cloud-Based

Carrier Billing

Initiation Method

POS Needs

Processing Method

Short-range wireless RFID technology using secure authentication and credentials on the mobile device transmits card information to the POS.

POS terminal capable of reading RFID and software capable of processing the NFC transaction in the POS or credit card terminal.

NFC as it exists today is a “tap-and-go” process. Once read, the transaction processes as a regular credit or debit card.

Consumers utilize a mobile wallet or app on their mobile device to securely access their account data. Once authenticated, a barcode or other image is presented on the mobile device, and the merchant uses it to process the transaction. For Cloud-based, the necessary information to process is conveyed over the air to the POS.

Optical image scanner capable of reading twodimensional barcodes, depending on the wallet being accepted. For Cloudbased, a POS system capable of securely being connected to the Internet.

POS system is enabled to scan the barcode as a tender type. Transaction settlement is typically between the wallet provider and the merchant. For Cloud-based, the POS accepts the card information and processes it through its existing connections.

Purchased goods and services are charged directly to a user’s mobile bill or account.

New hardware is not required, but a relationship with a carrier billing provider is necessary.

Process is between the carrier billing system and the merchant’s host environment. Today, this is not used in retail, nor for physical goods.

20 July/August 2014 | TRANSACTION trends

RISK IN REVIEW

Breaking the 30/60/90 Compliance Barrier

Strategies and tactics for meeting goals and boosting engagement By Jake Young

hat’s your portfolio’s PCI compliance objective? How do you measure success? While each acquirer’s and ISO’s compliance program is different, many start with a specific goal in mind. It could be a total compliant goal (get merchants PCI compliant) or it could be an engagement goal (get merchants enrolled in a PCI program, but not necessarily require their compliance). The good news is that regardless of your program, there are several proven strategies that can help effectively increase compliance while using the least amount of resources. And although this article will discuss compliance goals, the same principles could be applied to increase engagement. For example, if your goal is 30 percent portfolio compliance, you must get at least 50 percent of merchants engaged in a PCI compliance program to reach your 30 percent compliance goal. Let’s take a look.

Goal: 30 Percent Compliant A great initial goal for those who are starting from scratch is to get your portfolio up to 30 percent compliant. And the first place to start is your website. If you’re stressing PCI compliance, information can’t be hidden behind a login screen. Ensure your merchants know PCI compliance is something you need them to accomplish—and not optional information—by making it a noticeable part of the home page. You can do this by highlighting PCI’s mandatory status in website copy, emphasizing the importance of security, and linking to your preferred PCI vendor website. Some acquirers also place their partner’s logo on their site, which

Goal: 60 Percent Compliant

helps merchants make the connection between the partner and the processor in subsequent communications. The next step is direct mail. Think of it this way: Did you enjoy cleaning your room as a child? Probably not.Your merchants feel the same about PCI. How many times did your mom have to remind you to clean your room? A single letter informing merchants about PCI will likely be ignored. Don’t take it personally; your merchants are busy running their businesses. Remind them with follow-up letters, and eventually you’ll get a result. Be sure your letter is written on bank letterhead and sent directly in a bank envelope. Merchants have a relationship with you, and may not know or trust your PCI vendor. Also consider sending out the initial letter to merchants via snail mail, and then following up with an email one week later. One ISO that employed this tactic saw engagement rates jump up a full 10 percent.

Time to raise your portfolio above 30 percent, but to do so requires a bit more work from you and your vendor. Email communication is probably the best mechanism boosting your numbers, bar none. Just like snail mail, the most effective emails look like they come from you, not your PCI partner. To reach 60 percent compliance, you will need to increase your email delivery, while ensuring you don’t overwhelm your in-house call center. Depending on your organization’s customer service capacity, this may mean 25 emails per week or 1,000 emails per day. Repetition and consistency are the keys that make the difference. Emails that come on the same day of the week, at the exact same time, with the exact same call to action are more effective than emails landing in inboxes sporadically. If your organization is seriously struggling with compliance rates, test your email campaigns. One firm started by sending an email to 25 of its merchants every Friday night. The next week, they sent 50 emails. They kept increasing their rates, sending the same email every week for four months straight. The result? Total portfolio compliance rates shot from 4 percent to 70 percent in four months. Also keep in mind that the more emails you send, the better your customer service needs to be. Your compliance rates won’t rise if merchants are frustrated because they’ve been on hold for 10 minutes and can’t get questions about PCI compliance answered. Many acquirers and ISOs let their PCI partner deal with the majority of customer service calls, and that’s just fine as long TRANSACTION trends | July/August 2014 21

as merchants are happy and quickly receiving the help they need. Finally, assess your noncompliance fees. In our experience, PCI compliance rates always jump after noncompliance fees are introduced or hiked. In fact, one of our partners catapulted from 50 percent total compliance to 80 percent in three months after introducing a noncompliance fee. Just remember, the object is to persuade, not punish.

Goal: 90 Percent Compliant The last 30 percent is the most difficult jump. It takes the efforts you exerted to achieve 60 percent, and requires even more brute force, sweat, and determination to climb just a few more percentages. If you already have an email campaign, keep it up. Take a look at the emails you’re sending and strengthen the message. Add additional information such as supplementary PCI material, related webinars, infographics, and videos. Include quicker calls to action, the threat of a new (or higher) fee, or a promise to stop processing.The latter will get their attention; however, you have to be willing to follow up on your threats. Don’t be the parent that counts to three with no consequence, or they’ll walk all over you and you won’t get the compliance numbers you want. There also is another option: Consider changing from a stick approach to a carrot approach. Reduce annual compliance fees or provide breach protection as a reward for merchants who are compliant.

Last-Ditch Efforts It certainly may seem as if merchants don’t care about security. No matter how many emails you send and no matter how big you set your fine, you can’t budge them. But if you’re really determined to get that last stubborn percentage, try one or both of these tactics: • B oost the noncompliance fee. All merchants have breaking points. If they haven’t responded to your typical fee, raise it a bit each month until they finally call. • Stress compliance, or cut service. Develop intolerance for noncompliant merchants by refusing to board those that aren’t already validated, and threaten to stop processing for merchants that aren’t compliant.The majority of banks with more than 90 percent total portfolio compliance follow this ideology. The bottom line is that no technology out there will force merchants to take action.You can have the slickest PCI portal or the coolest breach prevention technology, but sometimes that doesn’t matter to merchants. If you’re serious about your goals, it all comes down to your communications. TT Jake Young is director of business development for SecurityMetrics. Reach him at jyoung@securitymetrics. com.

22 July/August 2014 | TRANSACTION trends

THE LAST WORD

Current State of Play in Washington, DC Congress focuses on OCP, CFPB goes mobile, and biometrics raises privacy concerns By Scott Talbott

n the weeks since my last column, ETA has continued its effort to push back in Washington against Operation Choke Point (OCP), an effort by federal regulators and the Department of Justice to hold banks and processors responsible for illegal or fraudulent acts by a merchant or ISO.The payments industry is opposed to this broad approach because is it over-inclusive, targeting banks and processors that are simply engaged in the act of processing. ETA recently testified before Congress about the harmful effects of OCP, offering ETA’s “Guidelines on Merchant and ISO Underwriting and Risk Monitoring” as an example of a better solution to fighting fraud. Our lobbying team has met with numerous policymakers, congressional offices, and federal regulators. ETA’s grassroots effort, the Voice of Payments, was utilized by 250 ETA executives to sign a petition to members of Congress in opposition to OCP. Here’s a look at what else is going on: Data Security Stalls. Months after the highly publicized data breaches at Target, Neiman Marcus, and other retailers, Congress is at an impasse on the myriad proposals introduced on data security. After numerous hearings early in the year in both the House and Senate, neither chamber has been able to move a proposal out of committee. However, it is still important for the payments industry to continue to weigh in and let Congress know that a national standard on breach notification is critical. CFPB Examines Mobile. In June, the Consumer Financial Protection Bureau (CFPB) launched an inquiry to find out how consumers are using mobile financial services. The CFPB is keenly interested in what role mobile can play in providing services to unbanked and underserved consumers who may have limited access to traditional banking systems. The CFPB inquiry is broad and seeks information from interested parties on a variety of issues, including how consumers currently use mobile technologies to access financial services, and matters dealing with privacy and data security. Finally, the CFPB also is examining whether data breaches

24 July/August 2014 | TRANSACTION trends

are more common on mobile devices as compared to online financial services. ETA is working with our members to prepare a comment letter that will provide our views to the agency as to the vital role the burgeoning mobile arena can play in providing secure, convenient, and affordable services to all consumers. Facial Recognition Meets Privacy Concerns. The use of facial recognition technology is expanding and gaining popularity as a means of reducing fraud. However, this innovative technology raises important privacy questions that address how biometric data is being collected and stored. The Department of Commerce’s National Telecommunications and Information Administration has convened a privacy multistakeholder process regarding the commercial use of facial recognition technology. The goal of this process is to develop a voluntary, enforceable code of conduct that will craft privacy safeguards for the commercial use of facial recognition technology. ETA has formed a working group to examine the issue. Industry Needs Your Involvement. So how do we, as an industry, let policymakers know our position on the various issues facing the industry? ETA members are encouraged to establish or strengthen relationships with lawmakers in their state or district. We encourage you to use the August recess to schedule a meeting at your work site so policymakers can see how your organization operates and the processes you have in place for facilitating commerce while protecting consumers. ETA is holding regional Policy Days in cities around the country to bring together members of Congress and ETA executives to discuss issues facing the payments industry. Please contact me for more information about using the upcoming August congressional recess to set up in-district meetings with your members of Congress. TT Scott Talbott is senior vice president of government affairs for ETA. Reach him at stalbott@electran.org.

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