Transaction Trends July/August 2016

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TRANSACTION trends July/August 2016

THE OFFICIAL PUBLICATION OF THE ELECTRONIC TRANSACTIONS ASSOCIATION

Going Global

Insights for your next move in e-commerce

ALSO INSIDE: Global Alternative Payment Methods PAGE 10

Third Party CrossBorder Facilitation PAGE 14

2016 ETA SLF Preview PAGE 19

Former Assistant Secretary of Commerce on Brexit PAGE 24

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contents

The Official Publication of the Electronic Transactions Association Vol. 21 | No. 4

features 10 Transaction Trends Exclusive CE Series: How the World Pays

By Ed McKinley and Josephine Rossi Although card-based payments are still winning the market share in the United States, it's not always the case abroad. We explore various alternative payment methods from around the world as a primer for expanding international payment options to merchants.

(ETA CPPs: After you read the article, take the online quiz to earn two CE credits!)

14 The Simplicity of Complex Transactions

By Ed McKinley The diversity of payments methods around the world has created a need for third-party facilitators, gateways, and processors to help merchants, acquirers, processors, and developers navigate the technical and cultural complications of global transactions. Here's how they do it.

19 The Top 5 Questions for Payments Businesses Known for its high-level discussion among the brightest senior-level payments professions, the 2016 ETA Strategic Leadership Forum is back in Palm Beach.

This year, subject-matter experts will address the most pressing questions surrounding the industry and how to lead successfully into the future.

departments 4 @ETA Announcements and ideas from ETA’s CEO Jason Oxman

6 Intelligence Vital facts and stats from the electronic payments world

8

Politics & Policy Timely political, economic, and advocacy updates affecting your business

22 Comments

Mobile payments and financial inclusion

23 A d Index 24 P eople James P. Moore discusses “Brexit” and its possible consequences.

TRANSACTION trends | July/August 2016 3

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 SVP, Government Relations Scott Talbott Director, Industry Affairs Amy Zirkle Publishing office: Content Communicators LLC PO Box 223056 Chantilly, VA 20153 703/662.5828 Subscriptions: 202/677.7411 Editor Josephine Rossi Editorial/Production Associate Christine Umbrell Art Director Janelle Welch Contributing Writers Jacqueline Cremos, Ed McKinley, Josephine Rossi, and Scott Talbott Advertising Sales Alison Bashian Advertising Sales Manager Phone: 703/964.1240 ext. 280 Fax: 703/964.1246 abashian@conferencemanagers.com 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 six 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 © 2016 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 2016 | TRANSACTION trends

@

ETA

Welcome to the New World of Payments!

T

echnology is bringing payments to the next level, and this industry makeover has inspired ETA to add new events that reflect the ever-changing state of our industry.

ETA’s next technology-inspired TRANSACT Tech event is at Boston’s MIT Media Lab. TRANSACT Tech Boston provides ETA members the opportunity to engage with leaders in the hub of payments innovation, bringing together seniorlevel executives from fintech startups and venture capital firms. Following our hugely successful TRANSACT Tech Atlanta and New York events, we’re bringing payments and technology together on the most innovative technology campus in the East. If you’re in New England and a payments professional, you need to be there.

As the payments landscape evolves, legislators and regulators are taking notice. On September 21, ETA will host our annual Payments Fly-In on Capitol Hill, where top industry leaders will have the chance to meet with members of Congress and federal regulators. The fly-in is a critical opportunity for ETA members to speak directly to lawmakers and regulators, and provide insight into the integral role payments plays in driving the U.S. economy. And then on September 22, ETA will launch our premiere FinTech Policy Forum to help our members navigate the increasingly complicated legal and regulatory landscape. This event will feature industry experts, members of Congress, and regulators discussing privacy, data protection, mobile technology, online small business lending, and increasing access to the underserved.

From October 19 to 21, ETA will host our annual Strategic Leadership Forum (SLF), the only payments event designed to be C-worthy, at the Breakers resort in Palm Beach, Florida. SLF brings together all of the payments leaders to chart the future of financial services. With powerful figures come exponential results, and SLF is the intimate event necessary for top-level executives to network and learn from the visionaries shaping our industry. We know that introductions are made, deals get done, and relationships are cemented at SLF—you simply can’t miss it.

With payments rapidly transforming, it’s important for ETA to offer our members the best content available. Every one of our events is created with your business in mind, and we look forward to seeing you this fall!

Jason Oxman Chief Executive Officer Electronic Transactions Association

INTELLIGENCE

EMV Transition Credited for Decreased Counterfeit Fraud Following the October 2015 liability shift and transition to EMV chip-enabled cards, counterfeit activity fell 18 percent in the first quarter of 2016, according to new data from Auriemma Consulting Group (ACG). A wave of high-profile data compromises had led to a significant increase in counterfeit activity over the past several years, but counterfeit fraud fell to its lowest level since early 2013 in the first three months of this year.

Counterfeit fraud losses have declined steadily relative to other categories since the industry’s EMV liability shift took effect late last year, and have decreased by nearly one-fourth since their peak in late 2014, according to ACG. “The EMV migration has reached an inflection point for card issuers,” says Ira Goldman, who leads ACG’s line of fraud control executive groups. “Chip card technology, coupled with normal-

Fast Fact

Twenty-one percent of young Americans aged 23-34 say they make all or most of their purchases with cash, down 18 percentage points from five years ago.

Among all age groups, younger Americans have shown the most striking drop in using cash. In contrast, those aged 35-54 saw a two-point drop, while those 55 and older saw a six-point drop.

ization of fraud in the wake of major national breaches, is beginning to have a major impact.”

The switch to the EMV standard was enacted, in part, to help protect against counterfeit card use at pointof-sale systems. These cards now account for 66 percent of credit cards in circulation—and more than 80 percent of cardholder spending, according to ACG data.

As counterfeit fraud decreases, criminals are shifting to other methods of attack. Incidences of identity theft, fraudulent applications, and lost/stolen cards are increasing in frequency and levels of financial loss, reports ACG. In fact, card-not-present activity (online and mobile fraud) has increased 12 percent, and account takeover, a form of identity theft conducted using social engineering tactics, has risen 37 percent year-over-year, according to ACG. “These shifts in the distribution of fraud were expected, but the magnitude of change is somewhat surprising,” Goldman says.

Many companies are taking preventative measures to combat emerging threats, including adding extra layers of protection and one-time passcodes, to make online purchases safer. Card issuers also have implemented more sophisticated risk-scoring models, new fraud rules, and identity authentication technologies, including voice biometrics, to detect and prevent account takeover and other attacks.

Source: Gallup, June 2016

TRANSACTION trends | July/August 2016 5

INTELLIGENCE Cash: A More ‘Painful’ Payment Method?

Researchers have identified a link between method of payment and emotional investment in a purchase. Studies led by Avni M. Shah have found that paying by cash or check (versus credit or debit cards) increases consumers’ emotional attachment to a purchase. Shah, an assistant professor of marketing at the University of Toronto, initiated the studies while at Duke University, working with colleagues to conduct several studies exploring the consequence of paying with cards.

The researchers carried out and published their findings in the February 2016 issue of the Journal of Consumer Research. “The form of payment clearly influences the subsequent value of the purchase to the consumer, even when the objective monetary cost remains constant,” Shah and her co-authors report. “Technological advancements with regard to payment (e.g., credit/debit card, Google wallet, PayPal, and other mobile and online payments) are ever increasing the psychological distance from payment, making spending less and less painful.”

In one study, consumers were sold identical mugs for $2. Half were told they could only pay by cash; the other half were told they could only pay by credit or debit card. Those same consumers were later asked to sell the mugs back; those who had paid by cash asked for an average of $6.71—nearly $3 more than the card-using buyers, who sought an average of $3.83 when selling their mugs.

Another study explored charitable

donations: Consumers were given either $5 cash or a $5 voucher and asked to donate to one of three charities previously unknown to them. When asked how connected they felt to their chosen charity, the participants who donated by cash reported feeling more connected to their charity than those who donated by voucher—a finding the researchers found to be particularly interesting since the consumers had not used their own money for the donations.

Infographic U.S. Acquiring Industry Share of Volume vs. Share of Growth

Percentage of Industry Volume

ISV Distribution 3%

ISV Distribution 10%

Payment Facilitators/ Other Aggregators 5%

Payment Facilitators/ Other Aggregators 19%

Marketplaces 3%

Sources: First Annapolis company reports and First Annapolis Consulting research

6 July/August 2016 | TRANSACTION trends

Percentage of Industry Growth

Marketplaces 23%

Internet of Things Elicits Impulse Buying As more and more consumers embrace the Internet of Things (IoT), payments transactions are becoming quicker and easier for would-be buyers. IoT devices— those with embedded and networked sensors that are able to transmit information and allow consumers to purchase directly from the device—are showing up across industries and sectors.

IoT devices such as Amazon Dash buttons (WiFi-connected devices that reorder your favorite product with the press of a button), Amazon Echo/Alexa, and Samsung Family Hub, as well as payment-enabling apps are becoming more relevant and easily accessible to consumers in their homes or offices.

The new reliance on IoT and other mobile devices creates an environment for greater impulse purchases, according to a new report from Javelin, “2016

Online Retail Payments Forecast.” Almost half of all dollars spent online will come from online purchases made using a mobile device by 2020, fueled by contextual shopping, “mobile first” mentality, and increasing reliance on mobile devices, according to the report.

Javelin predicts that 49 percent of online purchases will be made using PCs or laptops, while 51 percent of online purchases will be made via mobile devices, including IoT devices, by 2020.

“As consumers move to a ‘mobile first’ mentality when it comes to ecommerce, they are relying on the most frictionless payments to complete purchases on the go," says Michael Moeser, director of payments at Javelin. “Consumers will increasingly gravitate to using payment forms that offer the easiest, fastest, and most secure payment

methodology, particularly one that also integrates shipping/billing addresses as this removes the challenges of typing on a smaller phone keyboard.”

Fast Fact

“By 2025, biometric authentication will be standard for trillions of annual payments and information transactions, and by 2030 physical payment mechanisms such as debit and credit cards will become inconvenient and increasingly not accepted.”

Source: Maxine Most, Acuity Market Intelligence

Moves & Mergers ACI Worldwide appointed Marco Bravo vice president for its Latin America operation. Bravo is a former Microsoft Corp. and IBM Corp. executive.

Holli Targan, an attorney and partner with Jaffe Raitt Heuer & Weiss, P.C., has been elected as a director of the Merchant Acquirers Committee (MAC) Board of Directors for a two-year term. She previously participated for 12 months on the MAC Board as an advisor to the MAC president. Targan, a past president of ETA, is chairperson of Jaffe’s Electronic Payments Group, and specializes in credit and debit card processing, fintech, ATM, and payment systems law.

Kount Inc., a fraud prevention company, has named Lisa Dean as senior vice president of sales. Dean previously worked at ThreatMetrix and IBM Corp.

National Benefit Programs (NBP) has announced the expansion of its leadership team, with Sonny Wooten taking the new position of vice president of business development.

Wooten, who currently serves on the South-

east Acquirers’ Association Advisory Board of Directors, will deliver NBP’s innovative retention and revenue solutions to the marketplace, working with ISOs, acquirers, and processors to meet the needs of their merchant customers. He also will explore new opportunities to continue NBP’s growth trajectory.

National Merchants Association has named Tim Reynolds director of member support. Reynolds will be responsible for leading the member support division and overseeing ongoing care for new and existing merchant clients for the company.

National Merchants Association also has announced the appointment of Butch Hildebrand to director of sales, and Angelo Ponzi to the position of chief strategy officer.

Fran Fischer, who is the strategic sales and business development manager for Payscout subsidiary APS, was named to the ACA International Council of Delegates. ACA International is a trade group for credit and collection professionals.

TRANSACTION trends | July/August 2016 7

&

POLITICS

POLICY

Face Time A new premier event, annual fly-in, and other activities underpin ETA advocacy activities

By S co t t Ta lb o t t

A

s the world’s largest payments industry trade association, ETA is the industry voice, heard both in Washington, D.C., and in state capitals nationwide.

ETA is the leading organization advocating for the payments community. Federal and state policymakers have a huge effect on how we do business—and this influence is only growing stronger. ETA’s government relations efforts are important to your business. As a result, having a voice in politics and policy is crucial for all ETA members.

As the payments landscape evolves, legislators and regulators are taking notice. On September 21, ETA will host our annual Payments Fly-In on Capitol Hill, where ETA members will meet with members of Congress and federal regulators. The fly-in is a critical opportunity for ETA members to speak with lawmakers and regulators, and provide insight into the integral role electronic payments plays in driving the U.S. economy. On the following day, September 22, ETA is hosting the inaugural FinTech Policy Forum to allow policymakers and the payments industry to discuss the increasingly complicated legal and regulatory landscape around payments.

This event will feature industry experts, members of Congress, White House officials, and regulators discussing privacy, data protection, mobile technology, online small business lending, increasing access to the underserved, and more.

The number of work days for the second session of the 114th Congress is rapidly decreasing. Congress will have a brief window in September, and then again in late November and December, to advance any legislative agenda. Meanwhile, federal regulators and state legislatures remain active as they try and grapple with the modern payments world.

I am pleased to share below highlights from our recent advocacy initiatives in addition to a preview of what’s in store for the payments industry in the months ahead.

Administration and Legislation

The White House held a FinTech Summit in early June, and ETA and ETA members were present. The summit focused on the major fintech topics: inclusion, regulatory environment, online lending, Big Data, and more.

Meanwhile, Chairman of the House Financial Services Committee Jeb Hensarling (R-Texas) and Rep. Randy Neugebauer (R-Texas) have each introduced a bill to repeal the Durbin interchange restrictions. In addition, ETA will continue to press for passage of a single federal standard before the end of the year.

ETA also will continue to fight Operation Choke Point, keeping the pressure up and using the revised “ETA Guidelines on Merchant and ISO Underwriting and Risk Monitoring” as an example of how best to reduce and eliminate fraud.

Regulation

ETA has been briefing state regulators on the intersection of 8 July/August 2016 | TRANSACTION trends

the modern payments system and existing money transmitter laws. The New York Department of Financial Services has issued proposed regulations to require banks and money transmitters to tighten up their anti-money laundering (AML) programs. Chief compliance officers will be subject to personal liability for filing incorrect attestations that their organizations’ AML programs comply with the new requirements. ETA submitted comments opposing the proposed regulations. The rulemaking remains pending.

ETA also filed an objection to an effort by the state’s Department of Financial Services to treat payment processors as money transmitters. We are working with the Department of Financial Services to address concerns raised by the state’s actions. The Consumer Financial Protection Bureau (CFPB) has issued a proposed regulation to limit the use of pre-dispute arbitration clauses. ETA opposes the proposal and is drafting a comment letter. Our position is that arbitration is cheaper and faster, and garners a higher reward for consumers than class actions.

The CFPB is preparing to issue its final regulation on prepaid cards. The regulation dictates disclosures, requires underwriting of overdraft feature, and places other restrictions on the prepaid cards. ETA opposes the regulation and submitted a comment letter outlining our concerns.

Last year, the Federal Communications Commission (FCC) reclassified broadband internet service as a telecommunications service, thereby taking it out from under the jurisdiction of the Federal Trade Commission (FTC). The

FCC issued proposed privacy and data security regulations that are quite prescriptive. ETA filed comments urging the FCC to follow the FTC’s lead and encourage voluntary selfregulation rather than subject broadband providers to stricter and more onerous privacy and data security regulations than other entities operating in the internet space.

State Legislatures

In Washington, ETA continues our efforts to oppose the state’s Department of Revenue proposed treatment of the merchant discount as taxable revenue to processors. We are working with local retailers and restaurants. South Carolina enacted an AML law that for the first time will regulate money transmitters. The law is based on the Uniform Money Services Act and will be administered by the state Attorney General. The Attorney General’s office is expected to propose implementing regulations.

A bill is pending in the Pennsylvania General Assembly to update and modernize the Money Transmitter Law. The bill has been passed by the House and is being considered by the Senate. The good news is that the bill creates an exemption for agents of the payee. Some of the other provisions of the bill, however, have raised concerns that ETA has addressed in a letter to the members of the Senate Banking and Insurance Committee. TT Scott Talbott is senior vice president of government affairs for ETA. Reach him at stalbott@electran.org.

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GOING GLOBAL

How the World Pays Alternative payment methods that go beyond the plastic card

By Ed McKinley and Josephine Rossi

B

rand names like Visa, MasterCard, Discover, Amex, and PayPal seem as familiar to Americans as the stirring strains of the “Star Spangled Banner” or the comforting aroma of mom’s apple pie baking in the oven. But the online payment types that hold sway in other countries—schemes with names like Boletos, SOFORT, POLi, Konbini, Qiwi, and Yandex—can strike Americans as completely alien.

It’s not just the sound of those words that can seem impossibly unfamiliar in the United States. The names often stand for payment methods that don’t necessarily get a lot of attention on these shores. While American consumers tend to make their online purchases with credit or debit cards, people in other countries often prefer bank transfers, local debit, installment payments, electronic wallets, virtual currency, carrier billing, or schemes that involve cash, according to Todd Ablowitz, president of Double Diamond Group, a payments consultancy.

“It really is a country-by-country discussion,” Scott Fitzgerald, senior vice president and head of marketing for BlueSnap, a global payments facilitator, says of the vast array the world’s payment vehicles. “You go to certain countries and there are great preferences within the consumer base to use noncard-based online payment methods.”

Some U.S. payments providers might feel like avoiding those exotic payment alternatives altogether, but that won’t work for long in the era of globalization, warns Tom Layman, president and CEO of Global Vision Group, a payments consulting company. Americans online merchants have no intention of turning away potential, international customers who want to conduct transactions with the payment methods they are most comfortable using.

10 July/August 2016 | TRANSACTION trends

Luckily, payment facilitators that maintain relationships with acquiring banks in other countries can help U.S. merchants and acquirers sort out the seemingly impenetrable morass, observers say. But American ISOs and acquirers should learn all they can about the payment methods used in other countries instead of simply entrusting the details to facilitators, they maintain.

It’s worth the effort because there’s a lot at stake: About 3.4 billion of the world’s 7.5 billion inhabitants have internet access in their homes, according to internetlivestats.com.

What’s more, that penetration figure may not take into account the people all over the world who don’t have the internet at home but can go online at work, in cyber cafes, or at a cousin’s house, suggests Michael Moeser, director of the payments practice at Javelin Strategy & Research.

Meanwhile, the world appears poised to become more complex, not less. Alternative payments will account for more than half of global e-commerce by 2019, with e-wallets surpassing cards as the most popular form of payment, according to a report from acquirer and processor Worldpay.

As the world races toward e-wallets, the payments scene is fragmenting instead of centralizing, Fitzgerald maintains.

Keeping up with the changes and trying to code to all of the emerging payment methods presents an unmanageable task for merchants and, thus, justifies using facilitators, he says.

At the same time, other types of alternative payments remain rooted in cash-based transactions. Visa and MasterCard have achieved popularity in most places but don’t address the needs of the unbanked or those deemed unworthy of credit, Moeser says.

Culture and the evolution of the payment system play a role in why these payments persist regionally, says Marc Abbey, managing partner at First Annapolis who specializes in merchant acquiring and global initiatives. “For example, you see card-based installment lending in Latin America to much greater degree than revolving lending, on a relative basis. And I think that reflects a cultural preference to installments,” he says.

It’s a big world with room enough for lots of differing ways to pay, observers say. Smaller payments providers thinking about expanding their international payment options for their merchants beyond the major card types should get a feel for the geography, says Abbey. “Most e-commerce merchants are not global. They’re regional at best, so their needs are going to be specific for that region,” he says.

Earn ETA CPP Continuing Education Credits Read this article, then visit electran.org/eta-cppquiz-how-world-pays to test your knowledge and earn 2 ETA CPP CE credits per quiz!

TRANSACTION trends | July/August 2016 11

But there’s also an economic question, especially for any small payment processor who is thinking about expanding, he adds. “These payment forms all have different rate-volume characteristics, so there will be different economics associated with supporting different sorts of payment forms. But in general, you know, go where the volume is.”

Companies and governments are updating alternative payments, but their efforts don’t disguise the fact that they’re tinkering with the huge system of money brokers that dates back to the Middle Ages, Layman notes. In one example, today’s alternative payments might help guest workers in the Middle East convey funds to their families back home in Karachi just as the Hawala system did hundreds of years ago, he says.

ALTERNATIVE PAYMENTS WILL ACCOUNT FOR MORE THAN HALF OF GLOBAL ECOMMERCE BY 2019, WITH E-WALLETS SURPASSING CARDS AS THE MOST POPULAR FORM OF PAYMENT. To get started on the path to a cosmopolitan view of payment methods, Transaction Trends presents the following explanations of alternative payment methods from around the world. The list is selective, but it provides an initial look at the basics of cross-border transactions and how the rest of the world pays.

North America

A 13,000-location Mexican convenience store chain called OXXO manages transactions for consumers who make purchases online or need to pay utility bills, says Moeser.

When checking out online, consumers choose OXXO, which provides a bar-coded voucher. They print out the voucher,

take the voucher to an OXXO store and pay in cash. OXXO remits the funds, minus a fee, to the merchant, and the merchant ships the merchandise. The invoice is valid for up to three days. If it expires without a payment, consumers have to start over if they still want the merchandise, he says.

In Canada, the nonprofit Interac Association not only functions as a local direct debit system but also works as online banking for online purchases. The country’s five major banks created Interac in 1984.

South America

A system called Boleto Bancario, which translates as “bank ticket,” has become popular in Brazil, where many consumers don’t have credit or debit cards, says Moeser. After making an online purchase, people can print out a ticket with a bar code and a due date. They pay by taking the ticket to an ATM and transferring the funds, or by taking it to a lottery house or a store that acts as an agent, where they pay for the purchase in cash. The system then remits the funds to the merchant’s bank account, and the merchant ships the merchandise. After the due date, the consumer can pay only at the bank that issued the ticket. Boleto Bancario is used for about 18 percent of online purchases there, he says.

At stores in Brazil, merchandise often carries a sign with a message like “6X,” says Ablowitz. That means a consumer can present a debit card to purchase the item, and the merchant will deduct a sixth of the cost each month until it’s paid off.

Interest rates vary according to the terms, Moeser points out.

Allpago, a German company based in Brazil, helps Brazilians make online purchases from sites in other countries.

Cards in Brazil don’t usually work outside the country because the government prohibits that in an effort to stem capital flight, a danger in an inflationary economy, he notes.

In Peru, a system called PagoEfectivo, meaning “cash payment,” issues a numeric code, Moeser observers. Consumers can use internet banking to pay or go to a store that acts as an agent and pay there in cash. The agent then remits the funds to the merchant, who ships the merchandise. “It gives you more sense of security” because fraudsters can’t reuse the one-time code, he says.

Meanwhile, Argentinians split their online purchases almost evenly between cards and cash-based services such as PagoFacil and RapiPago, according to published reports.

Cards are popular in Chile, while Servipag, a local payment method, also has significant market share, reports say.

Europe and the Middle East

In the Netherlands, major banks cooperated in the creation of a payments method called iDEAL that resembles an online bank transfer. By 2013, iDEAL accounted for 60 percent of internet transactions there, according to the “Global EPayments Guide” made available online by Adyen, a payments tech company. American online merchants that fail

Bonus Content: Experts from around the world discussed going global at TRANSACT 16. Log into http://bit.ly/2acHZwh to hear all of the audio sessions.

12 July/August 2016 | TRANSACTION trends

to accept iDEAL find consumers often abandon purchases, Fitzgerald notes.

Consumers in Germany choose SOFORT and Giropay for a large percentage of transactions, Fitzgerald explains.

Both operate as online banking. Open invoice transactions, where a third party pays merchants and then collects from consumers after delivery of the merchandise, are also popular there, reports reveal.

Russian consumers rely on cash-on-delivery (COD) payments for about two-thirds of online purchases, Moeser notes. Cards account for less than half of online purchases, and e-wallets hold significant market share. Qiwi and Yandex are reportedly among popular e-wallets there.

SEPA, which stands for Single Euro Payments Area, provides the infrastructure for a simpler, lower-cost alternative to cross-border card transactions for consumers in a number of European countries, Moeser explains. “SEPA is the single most important factor in why cross-border interchange for debit cards and credit cards are so low in Europe,” he asserts.

Rates are 20 basis points for debit and 30 basis points for credit, he adds. Even countries that don’t use the euro can belong to SEPA. In Sweden, about 40 percent of online payments go through a company called Klarna, published reports say.

Klarna reportedly differs from other payments providers because its open invoice system pays the merchant immediately and collects from the consumer later. Most companies collect from the payer before sending along the payment to the merchant. Klarna has expanded its operations to Finland, Norway, and Denmark. Online banking also accounts for a major portion of online transactions in Sweden, sources say.

Cards, often cobranded with Visa or MasterCard, are used for most online transactions in the United Kingdom, France, Ireland, Italy, Spain, and Israel. Online banking predominates in Poland, and prepaid cards are growing in popularity in Turkey.

Asia

Chinese consumers make many of their purchases with the Alipay e-wallet, notes Fitzgerald. “Alipay is your big kahuna in China,” Moeser says. “People who couldn’t get a card can get these Alipay accounts. I’m told they have close to 800 million accounts.” China’s Tenpay, part of the Tencent social network, is a competitor.

UnionPay serves as China’s equivalent of Visa and MasterCard, Moeser says. UnionPay Merchant Services works with the banks as an acquirer, he notes. In terms of the value of transactions it processes, UnionPay’s global ranking is third, reports say, trailing only Visa and MasterCard.

In India, 45 percent of online purchases are COD, Moeser says. “I certainly wouldn’t want to be the delivery guy because you’re going to get mugged at the end of the day,” he says half-jokingly. In his view, COD also seems less-than-ideal for consumers. “It’s bad enough sitting around waiting for the cable guy,” he opines. “You don’t want to wait for the delivery man too.”

India’s RuPay, named for a combination of “rupee” and

“pay,” functions as the subcontinent’s Visa and MasterCard, according to Moeser. Online banking, which features bill pay for recurring expenses, also figures heavily into Indian’s online transaction scene, he says.

Mobile payments are growing in the Philippines with SMART Money and Global GCash among the leaders, according to Moeser. As in many countries, COD remains an important way of paying there. Meanwhile, Filipino entertainers and workers are performing or working in other countries and often choose to take advantage of money transfers.

Carrier billing has achieved popularity in South Korea, where online purchases can appear on a consumer’s wireless phone bill, notes Ablowitz. Indonesia has seen carrier billing earn a small slice of the market, Moeser notes.

An over-the-counter payment method in Thailand called 123 issues a reference code after a consumer chooses merchandise online. The consumer uses the code to pay at any of 35 locations. The retailer then receives the payment and ships the goods, according to the company website.

In Japan, Konbini convenience stores manage payments for utility bills and tickets to concerts, theme parks, airlines, and other services, reports say. It’s described as completing online payments offline.

JCB, the Japan Credit Bureau, issues cards in 20 countries and has 62 million cardholders. It has signed an agreement with Discover Financial Services for reciprocal card acceptance.

Online banking accounts for nearly half of online purchases in Malaysia, while cards account for about 80 percent of online purchases in South Korea, Taiwan, and Thailand.

Africa and Australia

Vodafone’s m-pesa has achieved popularity in Kenya, where many remain unbanked, Ablowitz says. The service, also available in Tanzania and a number of other African nations, enables users to deposit funds in accounts on their phones by visiting airtime resellers or other agents. They can then use text messages to send the funds to merchants.

POLi, an online payment option, provides an alternative to cards by enabling users to pay through internet banking services, according to the scheme’s website. The service doesn’t require registration and charges no fees.

Even with the diversity of payment types available these days, additional forms seem likely to spring forth, observers agree. “Payment types evolve to meet unmet needs,” notes Ablowitz. “Maybe there’s a high percentage of unbanked, maybe it’s a poor credit environment, maybe it’s availability of mobile prior to the banking of the country.” In any case, Ablowitz says the choice of payment type comes down to a single factor: “It’s all about personal preference.” TT Ed McKinley is a contributing writer to Transaction Trends.

Reach him at edmckinley773@yahoo.com.

Josephine Rossi is editor of Transaction Trends Reach her at jrossi@contentcommunicators.com.

GOING GLOBAL

THE SIMPLICITY of Complex Transactions How third-party facilitators help to create seamless, international shopping experiences $

By Ed McKinley

T

he late folksinger Pete Seeger was quoted as saying that “any darn fool can make something complex; it takes a genius to make something simple.�

His words of wisdom could apply equally well to cross-border payments. It takes an army of third-party facilitators, gateways, and processors to help merchants, acquirers, processors, and developers navigate the technical and cultural complications of international e-commerce and m-commerce transactions.

14 July/August 2016 | TRANSACTION trends

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Those third parties are dealing with country-to-country transactions spawned by the internet, which has made shopping a global experience. These days, it’s easy for consumers to conduct online research on a product and decide to buy it—only to find they’re on a site maintained by a retailer that isn’t located across town or even across the country, but instead, is half a world away. That’s OK with most consumers—as long as the purchase doesn’t become a hassle.

But it’s not so easy for merchants and their payments providers to hold up their end of the bargain by making it easy to buy internationally on their sites. To get an idea of how complicated it is, think of the amorphous mass of differing payment methods, currency exchange rates, laws, rules, regulations, and local customs within a single region—such as Asia-Pacific—and then multiply that by the number of regions in the world, urges consultant Rick Oglesby, president of AZ Payments Group LLC and a partner in Double Diamond Group LLC. In fact, accepting e-commerce or m-commerce payments from absolutely anyone in the world would require merchants and their service providers to deal with about 220 different ways of paying, says Caroline Hometh, managing director of RocketPay Group LLC, a Boston-based international payments consultancy. Global payment methods range from the card brands familiar in the United States

to bank drafts, e-invoices, prepaid cards, and e-wallets, says Hometh. Methods that seem exotic to Americans can dominate transactions elsewhere, observers agree.

Scandinavians might prefer Klarna; the Chinese have Alipay and UnionPay; Germans have their own versions of PayPal-like transactions; Israelis, Argentinians, and Brazilians favor installment payments; and Canadians use iDeal, a type of bank draft.

“Visa and MasterCard are very dominant in the United States, but they’re not as strong in other countries,” says Oglesby. It’s important to accept funds in the way customers want to pay, he maintains. In Germany, for example, consumers pay for less than 10 percent of their online purchases with credit cards, explains Neeraj Gupta, senior product manager for Vantiv, a processor that strives to assist with international payments.

Instead, Germans prefer SEPA, a way of pulling funds directly from bank accounts, and SOFORT and Giropay, which push funds from bank accounts, he says.

That diversity of payment methods gives rise to a need for merchants and acquirers to find third-party facilitators, observers agree. Facilitators can match retailers with the right service providers in a process that, according to Oglesby, looks “more like a quilt than a blanket.”

TRANSACTION trends | July/August 2016 15

One Motive, Many Methods

Retailers who find their customers concentrated in just a few parts of the world can avail themselves of facilitators that specialize in those regions or with a services provider that knows how to handle transactions almost anywhere.

Whatever their scope, facilitators should know what payment methods consumers prefer in the parts of the world they cover regularly, and they should have the technical means to accept those methods.

Besides handling different payments methods, facilitators also deal with a welter of changeable foreign exchange rates. The United Nations recognizes 180 currencies, and retailers should be able to accept all of the types commonly used in the areas where they’re doing business. Settlement also can occur in multiple currencies, so transaction-processing platforms have to allow for that complexity too. Once again, facilitators can come to the rescue if they have or can get access to the hardware that can handle the complexities.

Making the process even more complex is the fact that taxes and tariffs also vary from country to country, notes Thad Peterson, a senior analyst at Aite Group.

He attributes the rapid growth in the number of thirdparty facilitators to the man-made and machine-made complications retailers and acquirers face in cross-border payments.

Among the machine-oriented challenges is the fact that the hardware and software used to convey electronic transactions don’t always mesh as well as they might with whatever systems exist on the other side of the border, Oglesby says. Deals that enable one entity to process on behalf of another can help facilitators smooth the way, he maintains.

Facilitators also operate or have access to servers located in various countries, says Chester Ritchie, executive vice president and head of U.S. operations for Zooz, an Israeli-based tech company with offices in San Francisco.

Server location matters because some countries stipulate where they must be positioned to keep personally identifiable information (PII) safe, he says.

The State of Things

Cultural differences also cast a shadow over cross-border payments. Some variations come down to differing societal values, such as the tendency of Europeans to safeguard consumers’ privacy more aggressively than Americans. That gap can affect what information changes hands during cross-border transactions, and facilitators keep that in mind as they monitor the European Union’s progress as it contemplates changes in its rules.

Other cultural challenges don’t necessarily arise from varying views of how society should work; instead, they simply result from decisions someone made ages ago. The lack of street numbers in some countries, for example, can require big changes in evaluating potential transactions.

In place of an address, a home or business might have a 16 July/August 2016 | TRANSACTION trends

colorful description of where it’s located, notes Hometh.

U.S. gasoline pumps may ask for a numeric U.S. zip code, only to face an alphanumeric Canadian postal code that just won’t compute, Oglesby maintains.

That doesn’t even begin to take into account the need to comply with all sorts of local standards that vary from place to place. What’s more, additional challenges are rooted in coordinating logistics when the parties involved don’t share a common language and are operating to circadian rhythms determined by their widely differing time zones. “Don’t have an American mindset,” Hometh advises. “I manage my business within their cultural rules— not mine.”

Those cultural differences certainly don’t indicate fraudulent intentions, but malfeasance does figure large in cross-border payments. Some regions, particularly Eastern Europe and parts of Africa, have become infamous for harboring large numbers of criminals bent upon defrauding merchants and their customers. But wherever they’re based, fraudsters often target international transactions.

So the cyber tools designed to ferret out fraudulent payments have become finely tuned to detect cross-border transactions. Such tools often tend to decline some transactions simply because they’re “foreign” or because of where they originate. The higher risk of cross-border transactions also results in higher transaction fees. “It’s harder to catch the bad guy if he’s in a different part of the world,” says Deana Rich, a consultant who specializes in risk and underwriting.

With enough transactions in a particular country, retailers can benefit from having an acquirer or banking relationship to bring fees down to domestic levels and eliminate needlessly declined transactions. Facilitators often make that happen for retailers by giving them the equivalent of a local merchant ID, observers say. “That’s how you get those approval rates higher,” notes Oglesby.

“A Canadian card being used in the United States is going to get declined more often than a Canadian card used in Canada.”

Sometimes the card brands bill the higher fees for cross-border transactions to the cardholders, says Ritchie.

Someone who buys something for $15 sees that charge on his bill and then sees another charge for $4 that substantially increases the cost of the merchandise and often creates confusion, Ritchie says. That’s another reason Zooz connects with 45 acquirers around the world to gain local advantage for its merchants, he maintains.

The amount of help retailers receive from facilitators can determine their place in one of three categories of cross-border payments optimization, according to Gupta.

At the lowest level, retailers can simply require customers to pay in dollars. Merchants at this level operate without much optimization; thus, they have higher fees and the largest number of declines.

At the next level, facilitators can help retailers set up their e-commerce store to accept other currencies but rec-

Trends in C2C Cross-Border Payments Consumer-to-consumer (C2C) cross-border payments—often a matter of a worker sending funds to the folks back home through Western Union or one of its competitors—are changing profoundly in the digital era, according to Talie Baker, an Aite Group analyst. It’s happening to a large degree because startups are disrupting the market by using technology to reduce costs and figuring out new ways of helping the world’s billions of underbanked citizens, Baker says.

Take the example of incumbents who find that most of their transactions still occur in person, she says. A sender could walk into an office in the United States and wire funds to an office in Mexico, where the recipient would walk in and collect the money.

But that’s changing. Newcomers are positioning for remote mobile transfers of funds, Baker continues. “Mobile phones are the only access a lot of people have to financial services in the third world, so a lot of remittances are starting to happen digitally—although it’s not the primary method at this time,” she notes.

About 7 percent of remittances are already happening digitally, Baker says. Some corridors are leading the way, with a large numbers of digital transfers taking place between the United States and either India or the Philippines. Meanwhile, transfers from places like the United States to Mexico tend to remain heavily face-to-face, she says.

At the same time, social networks, like Facebook, are facilitating C2C international transactions, Baker says. Western Union, to provide one example, has announced a partnership with WeChat in China that will enable consumers to use the Western Union platform to go into the WeChat messaging app to send funds. “That’s another big trend that’s going on right now,” she says of the social networks.

Simultaneously, Bitcoin and blockchain technology are bring-

oncile in dollars. Here, transaction fees are reduced by at least one full percentage point, and approvals increase by about 10 percent because the facilitator helps the merchant operate more like a local company.

At the highest level, merchants set up offices or stores outside their home country to establish a “presence” elsewhere and obtain the advantages of a locally based entity. At this level, the merchant achieves local settlement, meaning, for example, that customers pay in euros and the transaction is settled in euros, Gupta says.

To test which level works best—middle or highest— merchants might consider setting up websites that cater to 10 countries in their currencies and languages, Gupta suggests. Where demand is greatest among those 10 countries, the merchant might want to establish a physical presence, he says.

ing down the cost of funds transfers and making them happen more quickly, Baker says. Companies are using the technology to make instant transfers, she says, by converting a local currency to Bitcoin, sending it, and then exchanging it for the other local currency. “The consumers may or may not know they are using Bitcoin­—it depends upon how savvy they are,” she notes, adding that “there are quite a few companies out there doing that now.”

Mobile money, which is digital currency stored on a cell phone, also is trending, Baker says. It’s big in countries that lack financial services infrastructure, like parts of both Africa and Asia, she notes. Mobile money also includes high-end companies that consumers use to avoid fees when they exchange currencies, like dollars for pounds.

Alternative remittance products, another trend, include a scheme that enables a consumer to place value in an account in a store in another country and grant access to that value to anyone he or she designates, according to Baker. A sender in the United States could, for instance, place $100 in a Walmart in Mexico and make it available to a relative. “The person sending the money is controlling how the money is being used,” Baker suggests.

Bill pay, another growing cross-border phenomenon, facilitates transactions like paying tuition for a student in another country, Baker says. The sender places the funds with the institution instead of with the individual, she notes.

Prepaid cards also are helping to ease cross-border C2C funds transfers, Baker maintains. The sender can purchase a gift card online or in a convenience store and then call a relative abroad and give him or her the PIN. The recipient can go to a designated store and use the PIN to purchase goods.

Seamless Shopping for All

Wherever merchants choose to operate, facilitators also can help create a seamless omni-channel experience for shoppers when merchants have stores in more than one country, Hometh says. If a consumer buys merchandise online that’s shipped from Country A but wants to return the purchase at a bricks-and-mortar store in Country B, adding inventory management technology to the payments platform can expedite the whole transaction, she notes.

In fact, Hometh views international omni-channel retailing as the latest aspect of cross-border electronic commerce, which began about 16 years ago. She expects omni-channel across borders to grow strongly in the next few years but advises service providers that it’s not too late to enter the field.

TRANSACTION trends | July/August 2016 17

Meanwhile, social media is creating worldwide marketing platforms that are helping smaller and smaller merchants sell internationally, says Oglesby. “It used to be just the big leagues that would even consider selling stuff in an international market,” he notes, “but now anybody can generate a marketing presence around the world, and it often happens without even trying.”

Facilitators say they find themselves working with ISOs, usually super ISOs, that want to develop the capacity to handle cross-border transactions or at least find the right partners for doing so. Smaller ISOs often are taken aback at the expense of starting such projects and the complexity of continuing to pursue them, observers contend. Processors should have plenty of approaches to international commerce “on the shelf ” to supply ISOs that want to offer such services to their merchant clients.

“The ISO needs the expertise to match the products to the merchants,” Oglesby suggests. “The processors may have the solutions, but they don’t convey them to the merchants.” The competitive advantage for ISOs can reside in their knowledge of the processor’s products, he says. Some ISOs develop their own cross-border products to create additional competitive advantage, he notes.

A processor, such as Vantiv, creates some of the technology to facilitate cross-border payments and obtains some of it through third parties, Gupta says. Either way, Vantiv can blend the offerings to present retailers and ac-

quirers “a single throat to choke—even if we have partners behind the scenes,” he says.

A World of Opportunities

Cross-border transactions represent a tremendous opportunity for the payments industry in Oglesby’s view. The requirements for international e-commerce are so complicated that even the biggest retail chains don’t mind seeing their in-house staffs hire outside facilitators, he says.

Hometh agrees, noting that most of her clients are among the largest merchants.

Moreover, the planet’s so big and conditions vary so much among countries that “it’s hard to find one service provider that has the world wrapped up in a bow,” Oglesby says. “It takes months or years to set up your infrastructure in a particular region or country.”

Accomplishing that can prove expensive, so most retailers wouldn’t want to take on the entire expense alone, Oglesby says. Facilitators, on the other hand, can obtain commitments from a number of clients and thus spread the cost, he explains.

It’s just another step in seeming like the genius that Peter Seeger mentioned—the one who can make a welter of confusion feel a bit more like simplicity. TT Ed McKinley is a contributing writer to Transaction Trends.

Reach him at edmckinley773@yahoo.com.

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The Top 5 Questions for

Payments Businesses Identify the most pressing issues facing the industry—and learn how attending the Strategic Leadership Forum will help you address those challenges

W

hat are the questions that keep payments professionals up at night? As we wind down the last few months of the year and look to 2017 and beyond, we can observe several issues that may alter the transactions arena. Perceptive senior-level industry professionals should be able to anticipate these ETA Strategic Leadership Forum changes and successfully lead their companies The Breakers, Palm Beach, Florida, October 19-21 Visit www.electran.org or call 866/382.6338 x270 into the brave new world of payments. With that in mind, ETA has planned a number of important sessions for this year’s Strategic Leadership Forum (SLF) that payments pros should consider mandatory.

Here, Transaction Trends shares some of the questions surrounding the future of the industry and explains how subject-matter experts will address these issues at the SLF in Palm Beach in October.

TRANSACTION trends | July/August 2016 19

1. Are we ready for Round II of the EMV transition?

It’s been almost a year since the first round of U.S. migration to EMV took effect. Many companies—and consumers—have successfully adapted to the transition: Visa recently announced there are 326.8 million EMV chip cards in the United States, and 1.3 million merchant locations able to process EMV transactions. In addition, EMV-based merchants have reported a 35 percent decline in counterfeit fraud, according to the Visa data.

Still, questions surround the EMV transition. Some merchants have complained of long wait times and unexpected expenses related to purchasing the software, certification, and testing needed to install chip-card terminals. In addition, some consumers are expressing frustration with the longer transaction times required of EMV cards, according to Bloomberg.com.

In the midst of those challenges, we are facing a new EMV deadline: Card readers at banks and gas stations, which were exempted from the 2015 deadline, are required to transition to EMV acceptance by October 2017.

Is the payments industry ready to continue moving forward? This question will be answered during the SLF session “EMV: Round I Down, Round II To Go—What the Future Holds.” David Tente of the ATM Industry Association will moderate a panel of EMV experts, including Verifone’s Shan Ethridge and Worldpay’s Sarah Arvin, to explore how the payments ecosystem has implemented chip technology, and how merchants and consumers have adapted and responded to the market changes. These experts will look to the future to predict how “Round II” will see ATMs and automated fuel dispensers prepping for the October 2017 liability shift deadline. Plan to be in attendance to explore how the lessons learned from the 2015 deadline can be applied to assist acquirers, merchants, and consumers during the pending transition.

2. How can we prepare for more sophisticated data breaches?

As fast as we are implementing advanced cybersecurity measures to protect payments from data breaches, criminals are developing new, advanced methods to illegally extract transactions data. As many as 88 percent of global organizations do 20 July/August 2016 | TRANSACTION trends

not believe their online defenses are sufficient to meet their needs regarding data breaches, according to a survey by cybersecurity firm EY. The company found that 40 percent of companies in the retail sector do not plan to increase spending on cybersecurity measures—which may be putting payments data of millions of consumers at risk.

While companies have gotten better at dealing with cyber threats during the past few years, “the scale of threats is increasing,” says Ken Allan, EY’s global information security leader, in a wallstreetdaily.com article. “And, unfortunately, the sophistication of the attacks is increasing faster than mitigating actions against those attacks.” As fraudsters develop inventive new ways to maliciously attack payments systems to steal private card data, the payments industry will need to continually adapt to protect transactions information.

How can payments professionals ensure their products are best positioned to protect consumer information? How can they convince their clients of the importance of preparing for emerging cyberthreats? This topic will be covered during the SLF session “The Data Breach of the Future.” Payments experts in the security arena will explore the kinds of attacks that may take place during the next three to five years. SLF attendees will learn what the next wave of breaches will bring, as well as tips on how to stay ahead of the hackers of tomorrow.

3. How will “the Internet of Things” affect payments?

Manufacturers and consumers are increasingly turning to the Internet of Things (IoT) to facilitate purchasing, so much so that IoT has been called “the next Industrial Revolution.”

Shoppers are starting to rely on Amazon Dash buttons, Amazon’s Echo/Alexa, and Samsung Family Hub to make quick purchases. Wearable IoT has become commonplace, with many consumers making purchases via smartwatches and fitness trackers from companies such as Apple, Samsung, Alibaba, and American Express. New appliances often have built-in IoT capabilities, and automobile manufacturers are offering “connected cars” that give a new meaning to the term “mobile device.”

More Hot Topics at SLF

Given these innovations, it’s no wonder that a new report from BI Intelligence predicts there will be 34 billion IoT devices connected to the Internet by 2020, up from 10 billion in 2015. Nearly $6 trillion will be spent on IoT solutions over the next five years, according to the report. As the payment process for various products becomes more automated, and fewer people rely on cash, mobile payments, integrated billing, and automated payments will become business as usual.

This industrial revolution will be the focus of discussion at the SLF session “The Internet of Things.” A panel of industry experts well-versed in technologies will share information on the IoT devices that will have the most impact on the U.S. economy, how payments professionals can work with merchants to integrate their products into the IoT stratosphere, and how to make IoT transactions even more seamless.

Payments executives won’t want to miss this important conversation that will help prepare attendees for the big changes to come in mobile purchasing.

4. What do acquirers value most when investing in payments companies?

During the past several years, the payments industry has been ripe for mergers and acquisitions (M&A) activity. Some companies have opted to acquire smaller firms to increase their technical expertise and grow their product offerings, while others have merged with an eye to market expansion.

In 2015, five of the top 10 largest M&A deals occurring in the financial technology and information industry were in the payments segment, according to a white paper published in April by Berkery Noyes Investment Bankers. The white paper also predicts that, “as companies continue to pursue electronic bill payment and online payments to eliminate paper bills, the payments sector may see more mergers in that space in the future.”

Payments professionals who are considering jumping into the M&A fray need to be fully educated about the acquisitions process to ensure a profitable sale or merger. SLF attendees will learn more about this topic from the session “Wheeling & Dealing: M&A Activity in the New World of Commerce.” A panel of professionals with M&A experience will offer insights into the viewpoints of buyers and investors, as well as the criteria they use in valuing businesses for sale.

The discussion will be moderated by Greg Cohen, president of ETA and co-president of iPayment Inc., and the panel will include Ben Malke, a partner at F-Prime Capital, Tim Willi of Wells Fargo, as well as a number of other M&A experts.

5. How will SMBs profit from the advent of Small Data?

We all recognize the impact Big Data has had on the U.S. merchant economy: “When we get excited about Big Data, we’re excited about the possibilities that our ability to analyze all of this information can bring to life—like doctors and health-care companies using Big Data to predict epidemics, as

In addition to the questions discussed in this article, even more hot topics will be addressed during the SLF in Florida. Register now for SLF 2016 to make sure you don’t miss these important sessions: Keynote Presentation: Given by Dwolla CEO Ben Milne, one of Forbes’ “Disruptors of the Year” Political Perspective on Payments: Moderated by Edward Marshall, a partner at Arnall Golden Gregory LLP The Merchant Perspective on Payments: Moderated by Mark Horwedel, CEO of Merchant Advisory Group CEO Roundtable—The Evolution of the Processors: Moderated by ETA CEO Jason Oxman Mobile Shopping in the U.S.: Presented by GfK’s Tim Spenny, sharing findings from GfK’s FutureBuy® survey

highlighted by Forbes in 2015, or scientists leveraging data to predict and remedy global food shortages,” wrote Benjamin Grossman, co-chair of ETA’s Big Data Subcommittee and co-founder and CEO of Pinpoint Intelligence, in a recent ETA guest column. During the past several years, payments professionals have led merchants in harnessing the power of Big Data to predict sales trends, individualize offers, right-size inventory, and even prevent fraud.

More recently, we have begun to hear about the advent of Small Data. Small Data is “the democratization of data collection, storage, and analytical tools that makes insights about small businesses accessible and intuitive,” Irv Henderson, cofounder and CEO of Talech, recently told Transaction Trends.

In more basic terms, Small Data “is simple Big Data accessible to the small business owner,” says Shaun Donaghey, founder and CEO of Generator Payments. “Whilst Big Data has relied on specialist skills, tools, large budgets, and platforms to leverage, Small Data provides a simple, cost-effective, and intuitive way for a small business owner to benefit, if done right.”

Given the almost countless possibilities, how can payments companies support small- and medium-sized businesses (SMBs) in understanding Small Data, and leveraging it to their advantage? This topic will be discussed at the SLF session “Small Data/Big Effects.” A panel of experts— including Henderson, Donaghey, and Womply’s Cory Capoccia—will discuss the importance of Small Data to the U.S. market, and how merchants from SMBs can profit from the data, and better run their businesses, by using simpler analytics.

In addition, the panel will discuss how merchant service sales teams should evolve to offer solution-based sales—to remain relevant and create “stickier” merchants in an increasingly datadriven business climate.

If you haven’t already done so, register now for the 2016 Strategic Leadership Forum—and come prepared to hear the voices of the profession offer answers to your most pressing payments questions. TT TRANSACTION trends | July/August 2016 21

COMMENTS

Serving the Underserved Why mobile is the key to financial inclusion

By Jacqueline Cremos

E

very day, our industry is finding new ways to use technology to create economic opportunities and empower the least advantaged among us. The Federal Reserve just released a study on the growing consumer usage of mobile financial services like mobile banking and mobile payments.

This new data suggests that unbanked and underbanked consumers, who lack access to traditional financial services altogether or heavily rely on alternative—and often costly—financial programs, can reap some of the benefits of the financial sector through mobile applications. ETA has released a whitepaper examining the ways in which payments companies are serving the financially underserved.

Although it may seem like everyone has a bank account, in reality unbanked and underbanked consumers are a large (if often overlooked) demographic in the United States. A 2013 survey from the Federal Deposit Insurance Corporation (FDIC) found that 7.7 percent of U.S. households were unbanked (i.e., had no bank account), and 20 percent were underbanked, meaning that they had a bank account but also used an additional financial service (e.g., a money order, check-cashing service, tax refund anticipation loan, pawn shop loan, payday loan, auto title loan, or a paycheck advance/deposit advance). Together, unbanked and underbanked households represent 34.4 million U.S. households, or nearly a third of the population. Globally, about 2.5 billion adults lack any kind of access to financial services provided by regulated institutions.

Consider all the activities that depend on a bank account: saving up for short-term emergencies or long-term milestones (e.g., college or retirement), obtaining a credit card, paying bills online, taking out a mortgage, or obtaining a loan to start a small business. These all become exponentially more difficult—even impossible—without reliable access to banking.

22 July/August 2016 | TRANSACTION trends

Research conducted by the International Monetary Fund (IMF) shows that improving access to financial services (and particularly credit) stimulates economic growth in developing countries by facilitating entrepreneurship. As you remove barriers to credit (e.g., high fees, daunting bureaucratic requirements, and information asymmetries that specifically disadvantage small borrowers), it becomes easier to start or grow a business, and so economic output naturally increases.

The World Bank has found that, in countries with stronger financial sectors, growth tends to disproportionately benefit the poor, whose incomes rise faster compared to poor people living in countries with less developed financial sectors. Access to a bank account or credit helps households better manage risk and afford short-term emergencies, such as medical bills. Financial inclusion is a win-win proposition—good for individuals and households that are struggling to gain a foothold, and good for the overall economy. Because banking and credit access are closely related, it’s hard to get one without the other.

Respondents to the Federal Reserve study who identified as underbanked reported using both mobile banking and mobile payments services at much higher rates than fully banked respondents. Of the underbanked respondents, 55 percent said they used mobile banking in the year before the study, compared to 39 percent of fully banked respondents. That is, the underbanked were 40 percent more likely to report having used a mobile banking service than the fully banked.

And underbanked respondents were 70 percent more likely to have made a mobile payment than fully banked respondents. One explanation for this phenomenon may be that underbanked consumers rely more heavily on their cell phones to access the internet (perhaps lacking a computer or any other

channel of online access). The Pew Research Center found that about 21 percent of the U.S. population relies mostly on their cell phones to go online. The implication of the Federal Reserve’s finding is that providing financial services to underbanked populations can be accomplished through mobile platforms because many underbanked consumers are already used to using these devices for these purposes. With 70 percent of underbanked respondents owning a smartphone (the same rate as fully banked respondents), there’s a large customer base that’s well suited to mobile financial solutions.

Accurately measuring the proportion of the U.S. population that is unbanked or underbanked can be difficult. That’s because alternative financial services providers tend not to keep track of their customers, and cash is hard to trace. But we know that mobile payments are gaining traction across several demographics, including the very groups that are statistically likelier to be unbanked or underbanked: minorities, poor people, and younger people. Across the board, 24 percent of mobile phone owners reported having made a mobile payment in the 12 months prior to the survey (up from 12 percent in 2011). Mobile payment usage was highest among the following: • Minority groups: 32 percent of black respondents (nearly one in three), 29 percent of Hispanic respondents, and only 19 percent of white respondents reported using mobile payments. Additionally, 56 percent of Hispanic respondents reported having used mobile banking in the 12 months prior to the study, while 50 percent of black respondents and only 37 percent of white respondents did so. According to the FDIC, there are nearly 16 million black and Hispanic households in the United States that are either unbanked or underbanked. (Note: Although the Federal Reserve and FDIC

studies define and use varying ethnic and race categories, this article focuses on the categories used in both: white, black, and Hispanic.)

• Lower-income groups: 41 percent of respondents making less than $25K/year compared to 29 percent among respondents making $25-$40K/year and 19 percent among respondents making $40K-$75K/year.

• Younger age groups: 32 percent of respondents aged 30-44 and 30 percent of those aged 18-29 reported having made a mobile payment in the last 12 months. Rates of mobile banking usage were highest among respondents aged 18-29 (67 percent compared to 43 percent for the population as a whole).

The trends observed in the behavior of underbanked consumers seem to persist when reviewing the groups that traditionally lack—or are systematically denied—access to financial services.

What are the implications of the Federal Reserve’s findings for the aims of financial inclusion? Making mobile banking more convenient is one way for financial institutions to reach underbanked consumers. But the goal of financial inclusion is not necessarily to give everyone a bank account. In many cases, it’s simply not practical, or even feasible, for an unbanked consumer to open and regularly use a bank account. Developing economies lack the infrastructure or sufficient branch locations to enable widespread bank account ownership. Here in the United States, opening a bank account often requires producing more than one form of identification (a parallel to the challenge of obtaining voter ID), prov-

ing citizenship or residency, and travelling to a branch during the workday. Strengthening the alternative financial services that underbanked consumers rely on would benefit those consumers who struggle with the barriers to accessing financial services.

Mobile money services have enjoyed success in other countries. By some estimates, there are more than 100 mobile money systems serving more than 40 million customers worldwide. Roughly one quarter of these customers (many of whom live below the poverty line) are served by Vodafone’s m-pesa, which currently operates in seven countries. Rather than encouraging people to open savings accounts or take out loans, mobile money services are a new set of “rails” for transmitting value, with local cash agents (often airtime resellers or retailers) serving as the network end points. m-pesa users are safer from muggings because their cell phones are much less visible than cash; they tend to pay less in transaction fees than they would to cash checks or place money orders; and they can start building a history of transactions that financial institutions can later use to determine creditworthiness.

Here in the United States, prepaid cards can function in the same way that mobile money services do abroad. These are networkbranded (think Visa, Mastercard, Discover, etc.), general purpose, reloadable prepaid cards that can be refilled either with cash or via direct deposit. ETA strongly supports prepaid cards as a tool for expanding financial inclusion, not least because they’re mobile-friendly.

Most prepaid cards can be loaded onto smart-

phones, making it easy to view your balance and top it up. Having your paycheck deposited directly onto a prepaid card reduces—or even eliminates—your dependence on a bank account. Prepaid cards tend to be more secure than mobile money services; consumers are 100 percent protected from liability for fraud (just like with a conventional debit or credit card). Prepaid cards offer many of the same benefits as mobile money services—but with added convenience and security—making them an excellent choice for unbanked and underbanked consumers here in the United States.

Unbanked and underbanked consumers are a huge, untapped market. KPMG estimates that the financially underserved market represents nearly $1.3 trillion in wages. As underbanked consumers gain access to financial services, starting with electronic payments and moving onto more sophisticated financial services (e.g., savings, credit, and insurance), they create enormous value for our economy.

The Federal Reserve’s research adds to an existing wealth of evidence suggesting that mobile platforms are a promising, if underused, way to reach people who lack access to robust financial services. There’s a promising market for apps that make it easy and convenient to save and spend money. And the payments industry is up to the challenge of finding new ways for consumers to benefit from mobile financial services. TT Jacqueline Cremos is ETA’s program support specialist. Reach her at jcremos@electran.org.

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TRANSACTION trends | July/August 2016 23

PEOPLE

James P. Moore As the former U.S. Assistant Secretary of Commerce, James P. Moore oversaw programming for U.S. privatization assistance to the Soviet Union during the Perestroika period and negotiated trade and economic agreements for the United States. He currently is the head of the Business Society and Public Policy Initiative at Georgetown University’s McDonough School of Business. Here, he discusses “Brexit” and its possible consequences.

The following has been edited for length and clarity. A fuller edited version of the discussion is available on the Transaction Trends website.

How has consumer spending been affected and how could Brexit affect future cross-border transactions?

For British citizens, the upcoming period of uncertainty is leading them to cut back on both their spending and cross-border transactions.

The British pound took an immediate beating with the passage of Brexit and became a signal of potentially tough days ahead. Uncertainty and a sense of potential risk always create a sense of caution and delay.

Could Brexit affect fintech activity across the E.U.?

London has become an especially busy hub for startup companies recently. Investment and regulatory “friendliness” made it so, as well as the receptive environment dramatically bolstered, in part, due to the perception of the U.K. as the front door to the European Union and beyond.

That political and economic dynamic is now over, and a new one is about to take its place.

Unless pressed for time, companies and potential startups will be carefully waiting to see how Brexit affects economic and business dynamics.

In the end, it will not be as severe as critics predicted, nor as minimal as supporters advanced.

Should we then expect to see companies moving to other countries like Germany?

Absolutely. The question is not “if ” but “how.”

Business models put in place by global cor-

24 July/August 2016 | TRANSACTION trends

porations that assumed that the U.K. would continue to serve as a gateway to the E.U. now must do some business soul-searching. If the same rules adopted for the same marketplace apply to a 27-nation economy, transactions will thrive in that setting. The U.K. is now the proverbial odd man out—the perceived outlier at this moment. Companies will be tempted to hold on to a remnant of their U.K. presence but will need to determine how a presence in Germany or France or even a small country like Luxembourg will provide better entry to a large consumer base.

Mainstream media outlets are talking of a “domino effect.” Is this likely?

It is a mistake to see Brexit as a U.K. phenomenon. It is not. The frustration that “faceless bureaucrats” in Brussels have overtaken national identities and self-determination has been growing across the continent. The concern was only raised dramatically after hundreds of thousands of refugees from the Middle East landed on the doorsteps of E.U. nations.

Political movements in countries such as the Netherlands are now calling for a “Nexit” vote to offer the same kind of referendum that British voters faced. Having said that, I think that all E.U. countries will be waiting for a grace period to see how Great Britain copes with its secession from the E.U. before treading too far on their own. It also should be understood that a critical psychological barrier has been broken

via Brexit. Not only will E.U. nations consider taking the same path down the road, but individual national provinces will consider “detaching” themselves from their own countries and declaring state independence in their own right.

We are going through a monumental, untested period in the evolution of globalization.

On a scale of 1 to 10, how important is Brexit to the electronic transaction processing ecosystem?

Electronic transaction processing is itself a serious enhancer of globalization. It behooves governments and businesses alike to work with one another to find ways to reduce barriers where the results produce “win-win” situations. Rather than come up with a rating number, let me just say that the question is not so much what the impact will be on the ecosystem itself because it will not be great. Water will seek its own level at the end of the day. The real question will be the volume of manufacturing and services trade and how that translates into electronic transaction processing.

The ecosystem for electronic transaction processing in the aftermath of Brexit is still alive and well. While we are trying to anticipate what the bigger impact of Brexit will be for the future, we can take comfort that the footprint of the industry will continue to be felt, evolve, and be ever present in the lives of consumers everywhere. TT —Josephine Rossi

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