Transaction Trends by Content Communicators, LLC

Transaction trends |

The Official Publication of the Electronic Transactions Association

January/February 2013

Nine major trends that every payments professional should be watching

game changers 2013â&#x20AC;&#x2122;s

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Transaction trends The Official Publication of the Electronic Transactions Association

Vol. 18 | No. 1

cover story 14 2013’s Game Changers

By Julie Ritzer Ross Nine major trends are expected to shake up the playing field this year, including “incentivizing” mobile wallets, an increase in Passbook-enabled apps, integration of couponing platforms into social networks, and more.

FEATURES 18 ISO to PSP

32 Special Series

Edited By Josephine Rossi At the ETA Technology Committee Roundtable, payment industry experts from across the country discuss the the emergence of PSPs, customer service trends, and how acquirers and ISOs will operate in the future.

By John Manasso For more than 35 years, Heartland Payment Systems has demonstrated perseverance and fairness even in adversity.

Startup Stories: Force of Nature

depar tmentS 6 Industry News Trends, strategies, and news in the payments business and ETA member community

10 Risk in Review

34 Ad Index 36 Industry Insider CSR translates compliance requirements into a language its customers understand

Updating your PCI program for 2013 and beyond

Transaction trends | January/February 2013 3

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 monthly, 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. Copyright ÂŠ 2013 The Electronic Transactions Association. All Rights Reserved, including World Rights and Electronic Rights. No part of this publication may be reproduced without permission from the publisher, nor may any part of this publication be reproduced, stored in a retrieval system, or copied by mechanical photocopying, recording, or other means, now or hereafter invented, without permission of the publisher.

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

Publisher Debra Stratton Associate Publisher & Editor Josephine Rossi Contributing Editor Angela Hickman Brady Editorial/Production Associate Christine Umbrell Art Director Janelle Welch Contributing Writers Lia Dangelico, John Manasso, Julie Ritzer Ross, and Chris Taylor Advertising Sales Steve Schwanz or Fox Associates (800/440.0232; adinfo.eta@foxrep.com) Fox Associates Offices Chicago 312/644.3888 New York 212/725.2106 Detroit 248/626.0511 Phoenix 480/538.5021 Los Angeles 805/522.0501 Atlanta 800/440.0231

Why should I do business with an ETA CPP? By obtaining your payments processing solution from an ETA CPP, you can be sure that your representative is knowledgeable about the products and services he recommends and has the expertise to recommend the best and most appropriate solution for your business. Your ETA CPP has made a significant personal (and financial) commitment to his or her profession and has agreed to adhere to the Electronic Transactions Association (ETA) Code of Conduct.

For more information visit: www.electran.org

4 January/February 2013 | Transaction trends

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INDuSTRYnews AROUND THE HORN

ACH Network Poised to Drive Small Businesses Small U.S. businesses have tremendous potential to further adopt safe and efficient electronic payments that are facilitated by the ACH Network. In 2011, the Network processed more than 20 billion transactions with a value exceeding $33 trillion, according to Janet O. Estep, president and CEO of NACHA—The Electronic Payments Association. Sending and receiving payments via the ACH Network provides small businesses with opportunities to realize systematic cost and operational efficiencies—which also have positive environmental implications—while making safe transactions between employees, suppliers and vendors, and even customers, says Estep. NACHA and FIS recently released a research brief, “Still Paying With Paper: Small Businesses Continue to Write and Receive Checks,” based on a survey of 2,249 small businesses, which revealed that 46 percent of paper checks written, not including government checks, involve small businesses. To reduce such dependency on checks, and even cash,

small businesses alternatively could choose to transact ACH credit payments, which include the direct deposit via ACH transaction type. Small businesses employ 43 percent of the work force, but only one third offer direct deposit via ACH for payroll—an opportunity to reduce the 2.7 billion payroll checks generated by small businesses, according to the report. For small businesses, the use of emerging technologies such as mobile direct payment via ACH also is an area of opportunity, potentially expanding reach to a broader range of customers. Direct payment via ACH also could help curb the 41 percent of small businesses that pay other businesses with checks. The understanding of the various attributes of electronic payment options is important among small businesses as well as among consumers and business customers, says Estep. The cost, time, and environmental efficiencies, coupled with safety and security afforded by direct bank-to-bank ACH payments, are some of the benefits to help small businesses drive the economy in the United States.

fast FACT More than 75 percent of consumers interested in e-wallets would prefer to obtain e-wallet services from their primary bank or financial institution, according to the annual Consumer Payments Preferences Study. 6 January/February 2013 | Transaction trends

Charge Anywhere LLC announced it is teaming with RBM/Redeban Multicolor S.A., franchise manager for MasterCard Worldwide, to provide mobile payment solutions in Colombia. Clearent unveiled a new Application Status Report that gives sales partners real-time insight into the status of merchant applications. CSR has earned certifications from all five International Association of Privacy Professionals credentialing programs, including United States, CIPP/C, CIPP/E, Government, and Information Technology. EVO Payments International, previously EVO Merchant Services, has reached an agreement with Deutsche Bank for the sale of Deutsche Card Services, and named James Kelly as CEO. Financial Transaction Services has acquired two affiliated payment processing companies: Dependable Payment Processing and Discount Payment Processing. First American Payment Systems named Cody Yanchak as director of sales, financial institutions; promoted John Newton to director of sales, strategic partners; and announced it will contribute to the ongoing development of PCI Security Standards as the Council’s participating organization. First Data Corporation and FEXCO announced the expansion of the GlobalChoice dynamic currency conversion solution in Canada. Gemalto was selected to provide Telecom Italia with its complete mobile financial services suite. Ingenico announced the European launch of its Next Generation Loyalty solution for retailers and quick-service restaurants. My Clear Reports announced the integration of the Exactor Sales Tax Compliance Suite into its MCR virtual business center. Tabbedout expanded its mobile payment platform by offering hospitality merchants a CRM solution. TSYS has signed an agreement to acquire ProPay.

INDuSTRYnews PCI Compliance Programs Focus on Revenue Generation In 2012, the focus of PCI compliance programs shifted from the topic of risk, placing more emphasis on revenue generation, according to “Risk and Revenue: Second Annual Survey of the Acquirer’s Perspective on Level 4 Merchant PCI Compliance,” a recent report by ControlScan. The report provides insight on survey findings from various angles, including acquirers’ business categories, portfolio sizes, and reported compliance rates. According to the report, 59 percent of acquirers charge an annual participation fee of $71 or more, up from 50 percent in 2011. Of acquirers with the lowest compliance rates, 83 percent reported charging higher annual participation fees, compared to 46 percent of acquirers with higher compliance rates.

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News from the association

n Register for the 2013

Annual Meeting & Expo Online registration for the 2013 Annual Meeting & Expo is now available. Visit www.electran.org/am13 for details.

n ETA Website Relaunch Visit www.electran.org to explore our newly revamped website with an attractive layout and improved functionality.

CALENDAR :

New Members ETA is pleased to welcome the following companies to its membership. To inquire about a membership with ETA, please contact Del Baker Robertson, director of membership and marketing, at dbaker@electran.org. Amazon Payments Seattle, WA www.payments.amazon.com Amdocs Management Limited United Kingdom www.amdocs.com

Payment Processing Alliance Kansas City, MO www.paymentprocessingalliance.com Web Shield Limited United Kingdom www.webshieldltd. com

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Expo Ernest N. Morial Convention Center New Orleans, LA April 30-May 2, 2013 www.electran.org/am13 n 2013 Strategic Leadership

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ISO Corner RISK IN REVIEW

Getting Compliant in the New Year

Acquirers and ISOs should re-evaluate their PCI DSS programs to satisfy new requirements By Chris Taylor

tatistically speaking, 70 percent of your portfolio isn’t PCI compliant. According to SecurityMetrics’ 2012 Payment Card Threat Report, 71 percent of merchants store unencrypted payment card data on their business network, an action in total contradiction with the PCI Data Security Standard (PCI DSS). Because the rate of stored, unencrypted card data declined only a quarter of a percent (0.24%) from 2011, the data indicates this trend will most likely continue—unless acquirers and ISOs use their influence among merchants to stop the problem. Unencrypted card data is any credit or debit card information, such as primary account numbers, stored in plaintext on business networks. On average, 73 percent of businesses store an average of 114,611 cards per machine, according to the report. Even a seemingly insufficient amount of stored cards can greatly increase risk and liability for both acquirers and merchants. Both surprising and embarrassing, the report also revealed that the financial industry is the primary culprit of unencrypted card data storage. Twenty-one percent

2012 Statistics on Data Breaches 71% of merchants store unencrypted payment card data on their business network. 11% of merchants store magnetic stripe track data. The three most impacted industries are financial, hospitality, and retail, accounting for 55% of the total unencrypted payment card data storage. 61% of online attacks begin with or utilize automated crimeware toolkits. Harvested payment card details can be purchased on the black market for an average of $2 per card. Source: 2012 Payment Card Threat Report, published by SecurityMetrics.

of unencrypted cards originated from the financial industry, including such organizations as banks, credit unions, and insurance agencies. (Before organizing a merchant campaign to liberate your portfolio of dangerous unencrypted card data, you may first wish to run a card discovery tool on your own organizational network.)

What This Means for Acquirers With an investment of a few hundred dollars, hackers can effortlessly discover

unencrypted cards on merchant systems with automated crimeware toolkits. The more card data stolen, the greater the merchant’s risk of potential fines and penalties. If a merchant is compromised and doesn’t have the resources to pay for the breach, the penalties may automatically transfer to that merchant’s acquirer. Furthermore, if an acquirer portfolio is not compliant, the value of that portfolio may significantly decrease in the eyes of potential investors.

Supplementary Programs Savvy acquirers understand their merchants have too many business responsibilities to attend to something as “invisible” as unencrypted payment information. They also realize that even merchants determined to remain PCI compliant might miss something, even if they believe that they validated PCI compliance. To combat the negative statistics surrounding merchant storage of unencrypted credit cards, acquirers should look toward supplementary programs to assist in portfolio security and risk reduction. More acquirers each year implement data discovery tools as a regular component of their PCI program. Many acquirers, merchants, and IT experts are realizing that a simple card data discovery tool will considerably reduce 10 January/February 2013 | Transaction trends

With the wrong PCI vendor, you may find yourself trying to repair customer trust. The wrong PCI vendor will frustrate your merchantsâ&#x20AC;&#x201D;possibly to the point of attrition. Simplify PCI validation and strengthen customer relationships by offering SecurityMetricsâ&#x20AC;&#x2122; award-winning merchant support. Call 801.995.6860 or visit www.securitymetrics.com/remodel to start your PCI remodel today.

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ISO Corner RISK IN REVIEW any chance of card data theft. Though mainly used to eliminate card data from a business network, card data discovery tools can be used as risk aggregators for acquirers. They help acquirers immediately know the risk of their portfolio by the amount of cards each merchant finds, and can enforce new standards of security on individual merchants accordingly. By knowing if a merchant has no card data, acquirers can focus security strategies on the higher-risk portion of their merchants.

Cover Your Bases Unfortunately, merchants regularly and accidentally overlook aspects of compliance attestation and mistakenly believe their network is 100 percent secure. After considering that acquirers might ultimately be responsible for a merchant’s compromise fees, a breach coverage program that covers acquirers is vital to mitigate risk. The industry has begun to hedge merchant liability on risk-segmented categories

by selecting breach coverage programs to surround a portfolio, concentrating compliance efforts on risky merchants first.

Morphing PCI Programs As security becomes more technology-driven, so has PCI compliance. While physical processes and procedures for card handling remain important, new technology has been created to provide faster and more comprehensive solutions for payment security. After a few years of successful merchant compliance attestation, many PCI programs plateau, leading some acquirers to fall into the trap of overlooking PCI compliance. When PCI compliance stagnates, acquirers fail to capitalize on past successes and do not meet the overall goal of minimizing portfolio risk. When acquirers become discouraged with the results of a security program, liability and risk skyrocket as security diminishes. Forward-thinking acquirers are transforming their old or unsuccessful PCI plan into a fresh program complete with

the latest PCI technology—including card data discovery tools, breach protection, portfolio risk segmentation, improved management tools, and new communication strategies.

Purge Yourself of Stagnant Security Acquirers and ISOs should evaluate and make necessary changes to their PCI DSS programs to satisfy new merchant, organizational, security, and industry requirements. Rid your portfolio of unencrypted card data, update your technology, revamp PCI goals, and remember the influence you have with your merchants. Ask yourself if your organization’s PCI program is prepared to stay ahead of hackers. By updating your program with the appropriate services, programs, and products, you will prepare to meet the future of merchant/ acquirer security. TT Chris Taylor is manager of channel marketing for SecurityMetrics. Reach him at christaylor@securitymetrics.com.

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[ COVER STORY ]

2013’s

Game Changers

Nine major trends—from Big Data to t-commerce— shake up the playing field this year

By Julie Ritzer Ross

s has been the case for quite some time, the electronic payments industry continues to change at a rapid pace, making it difficult for industry professionals to discern which trends are worth noting. In this issue, we take a look at the trends that will have the greatest impact on ISOs, MSPs, solutions providers, and others over the next 12 to 18 months. Convergence Creates Mobile Momentum. An increasing number of mobile wallet stakeholders, from technology and solution providers to merchants themselves, are acknowledging that incentives are the key to true mobile wallet adoption by consumers. “Although there will be exceptions to the rule, it’s becoming increasingly clear that once the novelty has worn off, the advantages of using a mobile wallet over swiping a credit or debit card through a device, or doing

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14 January/February 2013 | Transaction trends

a tap-to-pay, are negligible or non-existent,” says Soumen Ganguly, a principal of Altman Vilandrie and Company, a technology, telecom, media, and energy strategy consulting firm. “Additional encouragement needs to be offered in order to build traction.” In the coming year, such traction will be generated through multiple convergences, including the synchronization of customers’ loyalty card accounts with digital wallets so that real-time rewards balance information and redemption vehicles reside in the Cloud and on mobile devices, says Dom Morea, senior vice president and division manager for First Data. Mobile wallet capabilities will be leveraged far more frequently than ever before to extend personalized marketing offers and promotions directly to customers, and consumers also will be given the option to store gift card information in mobile and digital wallets, reload their accounts, and apply the balances to purchases as yet another usage incentive, he adds. Ganguly and Morea agree that ISOs, in the role of trusted advisors to merchants, can capitalize on this trend by assisting clients not only in selecting from among the various mobile wallet, mobile payment, and gift and loyalty offerings, but also in deciding how and to what degree these technologies should be integrated. “If ISOs cannot do this themselves, it will be incumbent on them to partner with entities that can, as part of a complete package,” Ganguly notes.

Passbook Picks Up Steam. While “incentivizing”

Nation follow close behind. In October 2012, coupon aggregator Coupons.com launched Passbook coupons for more than 20 retailers, including Old Navy, Barnes & Noble, and Petco, while loyalty marketing/couponing providers Codebroker, Eagle Eye, Yowza!, and Valpak have created apps or microsites that deliver vouchers to the app. “Interest from smaller merchants, many of which are looking for new ways to set themselves apart from larger competitors, is on an uptick as well,” says Andrew Phillips, founder and director of Flon Solutions, a “pass” solutions developer. Phillips believes Passbook—and perhaps similar iterations—has great potential to garner mainstream status in the near future, in part because merchants require only a simple iPhone app, rather than special hardware, to scan “passes” and transmit information to a central server for authentication. The ability to keep all offers in one digital location, instead of keeping track of myriad paper instruments, will be a selling point for end-users. Apple plans to update Passbook this June. “At that time, it will most likely add a new feature—linking the app to iTunes accounts,” Phillips claims. “There are 750 million credit cards connected to iTunes accounts around the world, and this will enable iPhone users who have become accustomed to using Passbook to suddenly be able to use it as a payment solution. Apple has indicated to many partners that this is its long-term strategy—evolving into an electronic payments player in its own right.”

the mobile wallet will almost certainly bolster adoption Mobile Couponing Makes Waves. Even outside in 2013 and beyond, many observers foresee a similar the realm of mobile wallet and Passbook, mobile coucontender—the Passbook app built into the Apple iOS 6—as makponing initiatives are quickly advancing along the path ing an equally significant mark within the electronic payments to supplanting, or at least catching up with, their paper counterarena over the next few months. Passbook lets iOS 6 owners re- parts in terms of distribution. A November 2012 report by Juniper ceive, manage, and redeem offers (coupons), tickets, and loyalty Research estimates that more than 500 million consumers will points delivered in the form of “passes.” receive coupons on their mobile devices Delivery occurs via email, web, SMS, or diin 2013, a 30 percent increase from last rectly into Passbook via a brand-specific, year. The integration of couponing platPassbook-capable app available in Apple’s forms into the leading social networks—as 8 Apple’s Passbook and similar App Store. To use these passes, consumers evidenced, for example, by Valassis’ launch iterations have great potential to get click on them and wait for a barcode to of a “Red Plum Social Savings” app built on mainstream status in the near future, in appear; merchants scan the code to exethe Facebook platform—ranks among part because merchants require only a cute a discount, redemption, or purchase. catalysts for the trend. simple iPhone app, rather than special Geo-location capabilities within the app Many industry observers anticipate hardware, to use them. allow passes to be sent and received in acthat access to mobile coupons will, in 8 Many industry observers anticipate cordance with time- and location-specific the very short term, motivate consumers that access to mobile coupons will triggers. For instance, should it detect that to transition to using their smartphones motivate consumers to transition to an individual is walking past a certain store as mobile payment devices, regardless of using their smartphones as mobile or restaurant, a special offer or promotion whether they have a mobile wallet. Indipayment devices, regardless of whether is automatically generated, and an audible viduals polled in a study by Javelin Strategy they have a mobile wallet. alert signals the person to open Passbook & Research deemed mobile coupons the 8 A growing number of merchants to find it. benefit most likely to sway them to use a are relying on Big Data to better Support for Passbook is already coming smartphone-based payment system. understand what consumers want, from multiple merchant factions. Passbook“Mobile coupon adoption can drive when they want it, and how they want enabled apps for online movie ticket purconsumers to look to their phone for to pay for it, as well as to more precisely target offers made available in-store, veyor Fandango and retailers Target and deals, which leads to payments,” says Kelly online through mobile channels, and Walgreens reportedly rank among the top Passey, executive vice president, business via social networks. free apps in the App Store; those for Ticketand product development, at Access Develmaster, American Airlines, United, and Live opment, which creates couponing and dis-

KEY NOTES

Transaction trends | January/February 2013

[ COVER STORY ] count solutions. He notes that the move toward mobile couponing appears to be “playing out most aggressively” in “everyday spend categories and markets, such as grocery, apparel, and restaurants.”

Cloud Opens New Doors. The much-touted Cloud

is driving the evolution of electronic payments technology in several areas. Notably, recent months have seen the advent of Cloud-based Europay/MasterCard/Visa (EMV)-certified mobile POS solutions, such as CardExpo Mobile from CreditCall. In late November, the company announced plans to begin licensing its EMV Level 1 software library. T he use of such software should reduce the EMV terminal development cycle by 18 months, while also reducing terminal development costs, thereby facilitating efforts to help merchants migrate to the EMV standard, said Jeremy Gumbley, the firm’s chief technology officer, during a presentation at the recent Cartes chip-card expo in Paris. “You make the terminal dumb and put all the (EMV) complexity in a data center,” Gumbley said.“There’s a screen, a keypad, and a prompt to the cardholder, but that’s all. It’s all being driven by an app at a data center.” In another vein, the Cloud is carving a path for heightened development and adoption of mobile POS solutions with enhanced reporting and store management capabilities. Examples include ShopKeep, from the New York-based vendor of the same name; NCR’s NCR Silver, which operates on such devices as Apple iPads and iPhones; and the iPad-based suite of POS solutions from Revel Systems. ISOs will need to expand their solutions menus to accommodate the trend or lose out to value-added resellers (VARs) that are scurrying to do the same, observes Chris Ciabarra, Revel Systems’ co-founder and chief technology officer, adding that smaller merchants are starting to follow Tier 1 retailers’ lead in replacing all or part of their traditional fixed POS systems with mobile hardware. He cites as an example Goodwill Stores’ replacement of legacy POS hardware with iPads in 23 locations “This year, we see mobile devices as a serious game changer when it comes to retail, whether they cause merchants to completely rethink the manner in which their store associates interact with their customers, or whether they view them as a traditional replacement for the entire traditional POS suite,” says Greg Buzek, president of IHL Group, a global retail and hospitality technology research firm.

Big Data Booms. Big Data—a means of managing

voluminous quantities of information and harnessing it to sharpen the competitive edge rather than merely storing it away—is, for lack of a better word, getting bigger. No matter their size, a growing number of merchants are relying on Big Data to better understand what consumers want, when they want it, and how they want to pay for it, as well as to more precisely target offers made available in-store, online through mobile channels, and via social networks. “The requirement to understand the consumer has taken on new meaning,” with a significant amount of “behind-the-scenes work going on to drive customer behavior,” explains Esmeralda Swartz, chief marketing officer of “relationship monetization solutions” provider MetraTech. One increasingly common use of Big 16 January/February 2013 | Transaction trends

Data is item-based collaborative filtering, wherein consumers’ buying histories and transaction data are harnessed to generate recommendations and drive additional purchases. In certain instances, consumers are being presented with pricier options based on varying parameters. For instance, Swartz reports, travel aggregator Orbitz determined, through Big Data, that Mac users were willing to pay as much as 30 percent more than Windows users on hotels. Consequently, customers in the Mac group are receiving different, and sometimes costlier, hotel offers through the Orbitz website.

“As the t-commerce market expands, there will definitely be room for industry players to develop and sell supporting applications.”

—Andrew Schrage, Money Crashers

Loyalty Gets Carded. Consumers’ overwhelming

desire to simplify the shopping process without sacrificing rewards is leading to a move to tie-in loyalty offers with credit and debit cards. “Card-linked offers, seamlessly integrated with credit or debit cards, is being seen by forward-thinkers as the most straightforward approach, and we expect a lot more of that going forward,” says Tim Hanlon, CEO of The Vertere Group, a digital media and marketing advisory firm. The Vertere Group currently is working with several acquiring banks on the development of seamless offers linked to credit cards in virtual fashion. A majority of these are being configured with Big Data to foster their appeal to consumers. T-Commerce Takes Off. In the t-commerce scenario, consumers watching programs on web-enabled television sets and mobile devices can utilize the technology to purchase items promoted during and/or associated with their shows. Some players, notably eBay and PayPal, have launched apps that sync with programming content and enable direct sales to consumers. With Watch With eBay, consumers input their ZIP code and television service provider into the app, then touch a “Watch With eBay” button to indicate which program they are watching. Keywords associated with the given show and eBay listings are then used to generate product matches through which viewers can sort and subsequently place bids or execute purchases. For its part, PayPal has inked a deal with cable provider Comcast Corp. and TiVo, under whose terms Comcast subscribers can pay for items seen on television with their PayPal accounts and those who see an advertisement on TiVo with a “buy now” tag will be able to pause the show, purchase the depicted item(s) via PayPal, and return to their program.

Third-party t-commerce applications are evolving as well. One application in this category, TV Wallet from Delivery Agent of San Francisco, works with more than 40 TV channels and cable providers. To use the service, consumers register their credit and debit cards and PayPal information with the service, then shop and pay with their remote controls after signing in by entering their phone numbers and PINs. “As the t-commerce market expands, there will definitely be room for” industry players to develop and sell supporting applications, and with heavy-hitters like eBay and PayPal already on board, 2013 should bring significant activity on this front, says Andrew Schrage, founder of Money Crashers, a financial and payments think-tank.

New Billing Models Break Old Molds. Plain-

Payment Solutions Go Global. The “globaliza-

vanilla subscription payment methodologies are being eschewed in favor of custom-tailored billing models wherein customers can pay per use—for instance, to download individual songs or to store a certain amount of data instead of incurring a monthly fee for the same privilege. “Subscription payment models are dead,” asserts Chris Couch, chief operating officer of billing solutions provider Transverse. “Just as they demand targeted loyalty offers, consumers want a customized billing experience.” With the Cloud now wellentrenched, payment processing entities can easily help merchants transition to the customized format. Meanwhile, merchants are moving away from standalone billing solutions to those that integrate with other systems, including, but not limited to, customer relationship management and finance and accounting, says Tom Dibble, CEO of Aria Systems Inc. Again, it will be increasingly incumbent on payment processing providers to add these solutions to their technology suite.

tion of retail” is spurring the evolution of payment solutions and other products that enable merchants to easily accept payments from customers throughout the world, says Ralf Gladis, director of Computop Inc., a payment service provider. Gladis points out that the new PCI Point-to-Point (P2P) Visa and MasterCard security standards render it possible to connect POS and mobile POS devices to e-commerce payment platforms, which in turn transform the latter into global solutions. “Those POS devices are cheaper and agnostic to geography—the same device works in the U.S., Europe, and China,” Gladis explains. “P2P POS terminals can be promoted to merchants as reducing IT efforts because they can employ the same type of POS devices everywhere in the world and get the same standardized reporting as well as multi-channel fraud protection. “In our business, we also see a fast-growing demand for international payment methods—international payment and currency conversion,” he continues. “As with all technologies in electronic payments, it is a moving target.” TT Julie Ritzer Ross is a contributing writer to Transaction Trends. Reach her at jritzerross@gmail.com. Transaction trends | January/February 2013

[ FEATURE ]

ISO to PSP

At the ETA Technology Committee Roundtable, experts debate how acquirers and ISOs will compete with the new kids on the block, merchant aggregators Edited by Josephine Rossi

ach year, the ETA Technology Committee convenes a group of thought leaders to participate in a roundtable discussion at the annual Strategic Leadership Forum. This year the conversation took place in Palm Beach, Florida, and focused on the emergence of new payment service providers, known as PSPs or merchant aggregators, to serve small micro-merchants’ transaction processing needs and how they will affect the traditional merchant acquiring business model. In this Transaction Trends’ exclusive, we’ll share these experts’ rationale on new rules for PSPs, customer service trends, how acquirers and ISOs will operate in the future, and more. Participants included: • Sarah Owen, vice president, personalized marketing and loyalty, First Data Corp., Technology Committee chair, and Roundtable Subcommittee member and moderator • Steve Chu, business development manager, Layered Technology, and Roundtable Subcommittee chair and moderator

18 January/February 2013 | Transaction trends

• Todd Ablowitz, president, Double Diamond Group • Scott Goldthwaite, SVP of product management and marketing, Planet Payment, and Roundtable Subcommittee member and moderator • Will Graylin, chairman, PaymateUSA • Doug Hardman, founder and CEO, SparkBase, and Roundtable Subcommittee member and moderator • Kishalay Kumar Anal, associate vice president, ISTS Worldwide, and Roundtable Subcommittee member and moderator • Greg Lewis, CEO, PaymateUSA • Barbara Patterson, senior business leader of emerging products and innovation, Visa Inc. • Joe Pappano, SVP and director of merchant services, Vantiv • Deana Rich, president, Rich Consulting • Joe Villamil, VP of business development, POS Portal, and Roundtable Subcommittee member and moderator • Billi Jo Wright, VP of partnership development and management, WorldPay Excerpts of the discussion follow.

MODERATOR: As an acquirer, how are you competing when your processor may offer the same or similar solutions and may market them as such? How do you react to that environment, and how do you promote yourself? BILLI JO WRIGHT: WorldPay is in a unique position because we are both an acquirer and a payment processor, but with the market being as competitive as it is today, we’re constantly developing products and services that are going to drive new customer acquisition while also retaining the customers that we already have. Within this industry, there’s constant movement of merchants from one processor to another. So, while we are constantly working to earn new business, it’s equally important that we do everything we can to retain our existing customers. We all try to differentiate from one another by creating varying product offerings along with pricing and service models that provide unique solutions. But, in reality, we all offer the same services, have the same costs, and manage to the same risks. As margins start to become tighter and focus continues to narrow within like spaces, what we offer and how we offer it becomes critical to developing a niche within the market. For example, WorldPay took a product that was already out on the market, partnered with a financial services company (who bundled it with banking services and remote deposit capture), and brought it to market with a new name. This approach is repeatable with various partners and retailers time and time again. In this case, we are focusing on bundling services that will create value propositions to connect merchants with their banks by enhancing their existing relationship. This creates large distribution opportunities for WorldPay that will also create the “stickiness” factor to retain customers. Yes, there’s an obvious competition within the market, but competition has existed for some time. We just have to continue to strategize and offer products and services that we think are going to give us the edge and that niche that we’re looking for. MODERATOR: Does the micro-merchant risk profile differ much from traditional merchants in these industries? And, is there something different for an ISO to be aware of when proposing the service to a potential merchant?

WILL GRAYLIN: I think the risk profile is definitely different for different kinds of micro-merchants. When you think about folks who are aggregating on behalf of micro-merchants, the rules, and the risk model, you really have to be very specific, depending on what audience you’re going after. If you’re fanning out the net—like Square or PayPal—you have one set of rules that you can apply to determine whether those merchants are good or risky. And then, you have to continue to monitor those guys. For aggregation, there are those who fan the net. But there are also those who will look at a very specific set of micro-

merchants that are more vertically oriented. They may have information on those types of merchants—contractors, for example. They have ratings for contractors, and they know the behaviors of these contractors, because they have previous information. Now, that risk continues to shrink, and you can develop other kinds of rules to determine whether you let them in or let them transact. So, customizing the risk profile and being able to dial the knobs for how you let somebody in is important. If you make it too hard, obviously, you kind of keep out a whole bunch of folks that may not want to go through that process with you. If you make it too loose, then you could potentially let in folks and increase your own risk model. I think you have to be very specific about the type of merchants you target and dial the knob—not only on the risk standpoint, but also on pricing. You have to be competitive to that segment of the market that you are going after, if you are vertically driven. And, you also have to be competitive in the pricing standpoint, if you’re horizontally driven, in relation to the likes of Squares, Intuit, or PayPal.

“I don’t think it takes an army of people and a huge arsenal of money [to participate in aggregation]. I think it just takes some knowledge, some experience, and some help from an acquirer partner or another party.” —Todd Ablowitz

TODD ABLOWITZ: The other thing you have to think about is the settlement of funds from the merchant account into the sub-merchant account. Most ISOs don’t have any capability to do funding or risk management on that funding. So, if an ISO is considering doing aggregation, it’s not just about identifying risk on the front-end. In fact, they may choose to let a few more through the door on the front-end and manage it more carefully on the back-end. GRAYLIN: If you’re talking about how ISOs would deal with the micro-merchants and how they could or could not play in the aggregation game, the important thing to understand is that ISOs traditionally have not been dealing with the boarding, monitoring and, settlement aspects of risk management. And, if they don’t have those vehicles already built—which folks like PayPal have spent many, many years perfecting and building— it’s a major challenge and hurdle to get over. So, those are some Transaction trends | January/February 2013

[ FEATURE ] pieces that need to be acquired in order for ISOs to participate. And that’s why you see specific players in the PSP arena that are putting those arsenals together.

ABLOWITZ: But I don’t think it takes an army of people and a huge arsenal of money. I think it just takes some knowledge, some experience, and some help from an acquirer partner or another party.

“Today, aggregation is being thrown out there as the way to reinvent an industry. But, in order for aggregation to be successful...there has to be a value proposition that’s being provided.” —Joe Pappano JOE PAPPANO: When you look at aggregation today, everyone always wants to assume it’s the micro-merchant, the Square model. In actuality, we’re seeing different verticals—whether high-risk or low-risk verticals—and people playing a different role in the value chain. So, the assumption of you have to have all the boarding tools—the settlement, the funding, and the billing—that’s not necessarily the case with the new aggregators today, because they all have a uniqueness, and they’re going to go to their acquirer and say, ‘I need you to focus on your core competency,’ which is settlement, which is funding, so on and so forth. MODERATOR: How does an acquiring bank reconcile having two different security and compliance requirements? PAPPANO: I don’t know if I would call them different; I would call it an extension of what historical acquirers have had to do to date. Now you have to have the internal infrastructure, because there’s a lack of visibility into that sub-merchant or micro-merchant that’s being boarded and you are sharing the risk and exposure. Before, somebody like Vantiv or our sponsor bank, Fifth Third Bank, would control our own destiny based on our decision. Now, we are doing a thorough due diligence on the aggregator to make sure they have the financial wherewithal and the cyber insurance in the event of a breach. Instead of underwriting many, we’re operating one, and we’d better be darn confident that that entity has the tools and gives us the visibility. Now there’s an element of trust, because of that lack of visibility, and we’re collectively sharing in that risk. At Vantiv, what has changed is that we had to create different departments internally. We had to create new feature function20 January/February 2013 | Transaction trends

ality, new boarding tools, and new raw data files. We had to give better visibility that allowed us to create a harmonious environment with that aggregator, knowing it was a two-way street, and we were both on the hook in the event of any breach.

MODERATOR: Does the income stream from a micro-merchant warrant the effort? GRAYLIN: It depends on which vertical or horizontal segment you’re going after. With the horizontal segments, if you’re fanning out the net too wide and catching every small fish, on average, the transaction volume coming in is somewhere around $300-$350 per month. So, when you take that calculation, you realize that the profitability per merchant can be fairly small. And, in some cases, depending on how you price things, you may even lose money, depending on the ticket size. So, you have to be very careful about the target segment that you’re going after. Now, having said that, 99 percent of tier 1, 2, and 3 merchants today came from a startup or a small company. So, as you’re fanning out the net and you’re catching some of these fish, some of them grow up to be bigger fish, if you can keep them. So, for some aggregators, that’s part of the tactic—many of them are also looking at how they can move up market. For the vertical aggregators, it’s a different picture. And, for the vertical aggregators, they are looking at segments with which they maybe have more familiarity. Those transaction volumes, if you’re talking about things like contractors, could be significantly higher. So, that profitability ratio could be very different. And you could, because of that, provide better levels of service, even if you are an aggregator. This applies not only to aggregators, but to all of us acquirers and ISOs alike. The key question that you have to ask yourself is, can you just sustain yourself on the basis points that you’re trying to get? Or, are you trying to provide more value to the merchants? And, as we’re moving toward mobile payments and mobile commerce, the context is that you can provide more than just the payment services. And, if you can then start to provide more value to the merchants, that’s when, I think, things become interesting. So, if it’s just technically on those basis points, it may not make as much sense. But, if you take it as an aggregate, and if you take it as building merchant relationships, seeing some of them grow, fostering their growth, and then trying to earn more revenue, I think that’s what everybody ultimately wants. MODERATOR: Is the Starbucks and Square collaboration seen as an opportunity or a threat to ISOs, acquirers, etc.? ABLOWITZ: I think it’s both. It’s a big threat because it’s an indication of what we can expect to see more in the future. Square is clearly not just going after micro-merchants. I saw Jack Dorsey speak a couple of years ago, and it was clear from that his ambition was huge. He wants to be the next Steve Jobs. He wants to have the next Apple. And he’s not going to stop at anything less than success. We saw it with micro-merchants.

“I personally [believe] startups create opportunity and can help the industry because they’re opening so many doors for consumers to do things in different ways.” —Deana Rich He’s now indicated that he’s going after big merchants. A lot of people think that he’s going after that for little or no profit. It’s pretty clear from some of the business development deals they’ve done, and what their advertising says, that they’re going after the mid-market as well. So, why is it an opportunity? Because necessity is the mother of invention. This industry was founded on people who are entrepreneurs. When you get a company like a Square and they build a $3.25 billion valuation, there’s going to be a lot of opportunity for the entrepreneurs that don’t operate in the upper echelon and can make a business case off the bread crumbs that Square is throwing aside.

MODERATOR: Considering how easy it is for micro-merchants to open mobile accounts, do you worry about potential data breaches? PAPPANO: We’re always worried about breaches, that’s part of what we inherited by being in this industry. Today, aggregation is being thrown out there as the way to reinvent an industry. But, in order for aggregation to be successful, to be profitable, and to create a better consumer experience, there has to be a value proposition that’s being provided. In many of the low-risk spaces—charity, bill payment companies, school lunch programs, the rental industry—when you go back and you look at what’s the common source, it’s the gateway. So everyone who boards our system, obviously, has to be PCI compliant, but we also spend a lot of our time monitoring that technology company or that gateway to ensure it has the right cyber insurance, the right discipline, the right data flow going back and forth. So, I’m not necessarily worried about the small micro-merchant every day; I’m more concerned about that gateway that’s facilitating that transaction. Because, not one company, not one technology or individual, is going to solve the individual micro-merchant. There’s going to be inherited risk. But, if you go to the common source that’s facilitating the movement of that transaction, that is where we’ve spent a lot of time, energy, and effort understanding how can we put that in a best-in-class environment. MODERATOR: New startups in the space are obtaining lofty and perhaps unsubstantiated valuations compared to the existing profit of payment companies. How does this hurt or help the payment industry?

DEANA RICH: Just as we’ve discussed, they’re both a threat and an opportunity. They’re going to hurt and help us. That’s always the way it is with change. It presents great opportunities, but it also creates some pain points for the pieces of the industry that are staid and resist change because they like it the way it was yesterday. I personally lean toward believing startups create opportunity and can help the industry because they’re opening so many doors for consumers to do things in different ways. For example, there are going to be new currencies that are kind of on the edge right now. We see Bit Coin, and we see different things out there that are new and just starting to catch on. As we pay closer attention and help them learn how our industry works and teach them our pain points, then we’re going to actually help them, which then makes them help us. So, I see it as a really great opportunity for our industry.

“As we move from an ISP to a PSP, we’ve found that we have to be experts in settlement. We need to do everything... to make sure that settlement is done properly, and that the information is made available so that merchants... can do their own resolution.” —Greg Lewis

MODERATOR: What is the expectation on customer service and support in this space? GREG LEWIS: We’re Paymate, and we compete against PayPal. We’re an Australian-based company that moved to the United States. Most of our merchants are relatively small businesses or micro-merchants/hobbyists. The level of customer service that they require depends on their question. If they ask about their money, the level of customer service goes up substantially. For the most part, because many of our merchants—which number about 14,000 at one given point in time—are small businesses, we have a huge effect on the cash flow. If they aren’t asking a cash-flow oriented business question, then they didn’t really have any defined expectations of customer service. But, the minute a deposit wasn’t made or a chargeback came through, at that point, they expected one-on-one customer service. And, we did our best to support it, which then proved that you better have a very strong risk-management profile, and you better have automation, or those small merchants will drive you crazy ringing the telephone. Transaction trends | January/February 2013

[ FEATURE ] MODERATOR: So, when the question doesn’t have to do with cash flow, are you directing them to automated sites to get answers? LEWIS: No. Previously, the first interaction was an email because of the time zone difference. A lot of our customer service was driven out of Sydney, Australia. So, if we did get an email, then, normally, we would do that research. And, if it was a really simple resolution, we would email back. One of the things that we found that we ended up doing, was educating businesses on how to run their business. That was a sidebar of customer service. Since then we’ve learned how to use that to provide valueadded services. But, normally, we would pick up the phone and have a phone interaction when somebody had a money issue. RICH: One of the things that I’ve noticed with the PayPals and the Googles, and now the Squares and the Stripes of the world, is that they are really pushing toward email customer service and online chat customer service, but not phone customer service. There are some companies you can’t even get on the phone, even if it is a money issue, which is the one issue customers scream most about. But, also, as the consumer becomes younger and younger, they don’t expect the phone to be picked up. They won’t call because they prefer to email you. They don’t want to be caught in IVR bad zones, where all they’re doing is pushing their number 24 times. They’re actually socialized to email, and they’re socializing us on this end, to some degree. As I mentioned previously, those who are new to the market are changing us, and that’s one of the things we need to pay attention to. So, as the market continues to evolve, it may be less expensive to take on that micro-merchant. You’re not going to have to add bodies to your customer service phone bank because customers are more accustomed to a slightly delayed response in those noncritical issues, and they’re used to it not being on the phone. LEWIS: As we move from an ISP to a PSP, we’ve found that we have to be experts in settlement. We need to do everything that we possibly can do to make sure that settlement is done properly, and that the information is made available so that merchants, particularly a younger element of our marketplace, can do their own resolution. The older ones don’t know how to read the reports—they don’t even know the reports are there, for the most part. So, we have found that technology like YouTube, which we will certainly utilize, and having a comprehensive reporting mechanism in a merchant portal, hopefully, will resolve any of the other issues we have had. But, we’re not necessarily going to go to the push-button phone program on day 1. WRIGHT: Customers want a choice in how they receive service and support. As the competition increases, customers are going to become less tolerant of some of the service models that are being offered today, and that’s something companies can capitalize on. As we start to see this market evolve, it will 22 January/February 2013 | Transaction trends

“It’s important to remember... that no matter what the acceptance solution is—whether it’s Square or others—the transaction itself flows down the payment networks.” —Barbara Patterson

be important for the industry to develop support models that deliver both live customer support as well as self-service models for the savvier, self-sufficient merchants. We just need to be smart on how we market those models to our customers to drive support costs down.

MODERATOR: Square certainly was one of the innovators at merging PSPs with mobile payments and targeting a whole new segment of the market.What is Visa’s perspective on the viability of the Square business model and the underlying market strategy for the company? BARBARA PATTERSON: Visa believes that Square helps the payment industry in its efforts to bring electronic payments to a segment of the market that historically has not been easy to serve—the small merchants. We believe that this provides the ability to accept Visa credit and debit cards, which, of course, means more transactions running through Visa. Like Visa, Square is helping bring the benefits of electronic acceptance to small merchants that traditionally only accepted cash. More merchant acceptance means more value to consumers and more ways to pay. Just for transparency, Visa is an investor in Square, which means that transactions are flowing over Visa Net. It’s important to remember, however, that no matter what the acceptance solution is—whether it’s Square or others—the transaction itself flows down the payment networks. And, at the end of the day, that’s what we do. So we think it’s a good opportunity for both Square and Visa. MODERATOR: What are the key merchant segments and merchant profiles for PSPs to maintain a profitable business? PAPPANO: When you take a look at those companies who have historically enabled payments, they were the technology and gateway companies. And they were isolated to their various support fees that they were charging. We’ve seen a reinvention of these technology companies, as we’re moving toward Cloud point-of-sale systems and things of that nature, in which the technology companies are carrying more weight, more understanding, and they’re being educated far better about the movement of electronic transactions. In do-

ing so, they’re creating more of a one-stop shop that bundles in their support, servicing, and software fees. And they also wrap merchant acquiring into that. In this very creative landscape, some people are saying, ‘I’m going to give merchant acquiring away for free.’ But now, they’re focusing on the marketing engine. We look threefold at the industry: You have the point of interaction, you have traditional merchant acquiring, and then you have data analytics. And the technology companies have realized they carry far more weight. That is where the value is being created, and they are enabling the ability to accept any form of payment through that software, gateway, hardware, software. That is where the margins are being made and why it’s becoming profitable to be an aggregator when you have a unique discipline. Then you can have an acquirer that helps manage the networks, the routing of a transaction, making sure interchange is being optimized accordingly. It creates a win-win.

seeing more seamless and fluid applications. Square has about 14 data elements they ask for in the application process. But they’re doing a very effective job of getting to know the customer, which is the first part of anti-money-laundering. In this progressive underwriting model that is gaining enormous traction, they then look at the merchant or sub-merchant continuously over their life cycle. As the merchant grows the amount of volume that they do, they become more risky. They also start to hit triggers that both the government and risk models will tell you to focus on. And, as you move through your life cycle as a sub-merchant, you’re going to get asked more questions. I think the question to think about is, ‘How do you get the information you need at the right time in the sub-merchant’s life cycle?’ Or, as they become a merchant, ‘How do you properly assess their risk and properly comply with what the regulations say?’

MODERATOR: How do ISOs effectively compete against products being offered by the PSPs, both on price and by the products themselves?

PAPPANO: Imagine all the consumer data that we have access to now. Many of the technology companies, through ongoing evaluation of that card holder and through social media, have these tools to determine if Joe Pappano is on Facebook or LinkedIn. And, if so, what are his behaviors? What does he do? So, it allows you to forgo that extensive due diligence up front because you now have access—most of it free access—to data that with the right tools and resources, you can constantly follow the behavior and pattern of Joe Pappano over time to make a calculated risk. Is he going to be a good acceptor or is he not? Innovation is going to take us to creating a more seamless boarding process and a more proactive customer experience. The data exists; we just need to use it in a meaningful way. And that’s what many of the ISOs or third-party engines should be leveraging their acquirer to ask: How do I get access to this, and how can I create a better customer experience on the front-end from a boarding perspective?

LEWIS: ISOs are not going to go away. They’re going to continue to find ways to operate. There’s a series of ISOs that have already converted to PSPs. They have found that it may be more challenging than they previously thought, because the underwriting does require a better understanding of your customer base than they had to worry about before. Boarding and settlement also may be issues. ISOs have always had a chance to custom price to the specific customer or specific vertical. And it appears that the PSPs of 2011 and 2012 have pretty much flat-priced across the board. We don’t really see how we can meet our customers’ needs, which are not only the micro-merchants, but also the small to medium businesses, with just a blended rate. We’re going to have to be very creative in our pricing model, so that we can address the needs of specific verticals. I’m not sure that there’s a particular advantage or disadvantage by being an ISO versus a PSP. The question is what is your business model, what verticals are you going after, and how does it fit within what you’re offering? So, at this point, I don’t see that big of a difference. I see a lot of ISOs wanting to become a PSP, and in discussions, I’m not sure they fully understand why they want to do that. But I’m anxious to see what this event in 2013 offers us, so that we can ask ISOs how the transition went. MODERATOR: Due to increased sensitivity to money laundering in today’s business environment, can we expect a more stringent application process for mobile payments? ABLOWITZ: If you’re paying close attention, you can see that we’re moving to a less stringent application process, at least on the very front end. That runs counter to where the regulatory moves are going. I’m not an expert on anti-money-laundering, so I’m going to take this from a marketing perspective. We’re

WRIGHT: Regarding the data elements that are being removed from the application process—a lot of it has really nothing to do with anti-money-laundering. What we’re able to do with a merchant self-service online application and the user authentication products that exist today, in my mind, may actually be moving us toward a more secure process. It also is important to have good monitoring and processes on the back-end to mitigate AML risk. MODERATOR: What is your opinion on actually being able to bring consumers to the merchants in this new model? How would a PSP do this? RICH: It’s a requirement. They wouldn’t do it if they weren’t bringing the consumers to the table. And, to go back to a point Visa made earlier, bringing more consumers to the table (that probably weren’t there before) is putting more payments through the payment system. Anytime we bring another electronic payment through the system, we all make more money. So, it’s fabulous. And, when companies like Level Up figure out Transaction trends | January/February 2013

[ FEATURE ] ways to attract more consumers through tying coupons to behavior, they’re going to get more of those smaller sales from consumers who want the benefits provided; it’s fabulous. We’re in a fabulous change period that’s going to be really great for the entire industry. In the end, we’re going to end up making more money because of it, just in different ways and in different places.

ABLOWITZ: We’ve seen some examples where consumer behavior can be moved. For example, Groupon has continued to have some success moving consumers to merchants when they match up a consumer who really likes that awesome deal, and the merchant that’s willing to take 25 percent off the ticket price to get that new customer. While very successful, it’s an imperfect model and has room for improvement. If you look at some of the numbers, Big Data—which is really the fundamental of what we’re talking about here—is projected to be a $52 billion business by 2017. This is a huge trend. This is going to be an important area that is going to drive the industry, and it’s going to get investment dollars. I don’t think we have even begun to see growth hit the hockey stick trajectory yet. And, with all that money going into it, you’ll get the Silicon Valley braintrust working on it, and they’re going to figure out how to get the right consumer to the merchant. What will be really interesting to watch, is when you start to get a whole bunch of merchants competing to get the consumer in the store with all kinds of different, clever offers, and then you’ll see a lot of clash. GRAYLIN: The value-add is actually twofold. One is finding and bringing consumers back to the merchants; the other one is keeping these consumers that come in. With mobile solutions and technology that’s being brought to bear, we’ve been focusing really on the first leg of that three-legged stool, which is acceptance—either in a physical or virtual environment. But, the second and third legs are essentially the consumer’s wallet app—not just a wallet account, but the wallet app, and how you interact with that app. How do you then create offers and deals and loyalty so that you can pull them back and also make your offers known? Those three pieces, those three legs of the stool, all have to integrate. Because it’s such an early stage in the overall growth of m-commerce, we’re now seeing the pieces are disparate. There are folks that are doing loyalty, doing offers. There are 130-plus wallet players that are out there, and 95 percent of them probably won’t be here in the next two or three years. But, if they are disparate, they don’t work together and they don’t create that value. So, if we can tie all three pieces—I think people are marching in that direction—we can consolidate some of these different technologies and package it really easily so that the PSPs, ISOs, and acquirers can offer it to the merchants. Now we’re talking about something that is of value. PAPPANO: The challenge is you have NFC, QR codes, Isis, Merchant Exchange, Google E-Wallet, the EMV mandate, data analytics, PCI compliance security, mobile. How does a mer24 January/February 2013 | Transaction trends

chant navigate the complexities of the payment landscape when there’s so much change going on? The problem is it’s almost sedating the industry into inactivity because they don’t know where to go. We’ve got to create some sense of calmness and clarity in the space that says, we don’t know what some of this is going to look like, but you don’t have to make change for change sake. When that winning technology starts to play out, you have to have a seamless, integrative platform to be able to provide any alternative payment that’s accepted, because we all know it’s not going to be one; it’s going to be multiple. And how do you enable all of your merchants or PSPs or payment facilitators to be able to accept any and all payments? That’s going to be our collective challenge in this space.

MODERATOR: Do you think the viral nature of mobile payments and their easy implementation is driving adoption by traditional merchants as well as micro-merchants? ABLOWITZ: I think we’re already seeing it at every level. A year-and-a-half ago, I went into Nordstrom and saw a shirt I liked, but they didn’t have my size. So, the associate comes over, takes out his iPod, scans the barcode of my shirt, presses the size I want, and finds it at three nearby stores. He does all of this from his iPod, standing right next to me. He presses the one I want, swipes my card, and the shirt is sent to my home. So that’s a mobile payment right there. And that is one of the largest merchants in the country. They’re one of the leaders in this. Many people also have used mobile payments at the Apple Store, Home Depot, Lowes, and many others. So, on the acceptance half of the equation, we’re already seeing it across the board, and you’re going to start seeing it in mid-sized merchants as well. You’re going to see an enormous amount of pressure on oldschool point of sale, especially the cash register manufacturers. They’re going to get the pressure first. EMV is going to keep some attention on the traditional point of sale, so the VeriFones and the Ingenicos of the ecosystem will still have some success because of the need for a PIN pad. But I would really pay attention to MICROS, NCR, and companies like that. They are going to have enormous pressure from the iPods, iPads, and smartphones. MODERATOR: The small micro-merchants can get their swipers, essentially, for free, or they can spend hundreds or thousands of dollars on traditional POS terminals.What is the impact on the traditional POS terminal providers? ABLOWITZ: EMV is going to continue to direct attention to the point of sale. You still need to have something secure and easy to use for a consumer at the point of sale. But, over the long run, if you can take risk out of the system, then maybe a PIN isn’t the most effective way to validate something. For example, Apple bought a company called Authentech. They make just about all the fingerprint swipers you see on computers. I think people will be authenticating themselves to their phone, and then they’ll use a phone-to-phone or a phone-to-presence

type of connection. But that’s a number of years off. Also, while iPods and iPads are going to be very effective inside stores, they’re not going to completely overrun the existing infrastructure overnight. It just doesn’t work that way in payments. So, I think there will still be lots of devices sold, and you’re not going to see those traditional POS hardware companies go bankrupt anytime soon.

WRIGHT: Don’t you think, as EMV comes about and the merchant has to make a decision on whether they have to buy an EMV-compatible device, or perhaps a POS such as an iPad that’s going to be cheaper, that they’ll start going in that direction? ABLOWITZ: I think they definitely will in some cases. However, the minute you start adding a PIN pad to the back of that device, and that PIN has to be PCI 3.0, you start getting all of that overhead, so it starts to change the equation between the two. I definitely think there will be a lot of those in the marketplace. But I think that you will see merchants continuing to use traditional PIN pads in that environment, as well. GRAYLIN: In terms of POS, it’s going to be really based on how they react going forward. When George Walner, founder of Hypercom, started inventing the first POS terminals back in 1982, he said that he was looking at turning the telephone into something that facilitates electronic commerce. And, how do we add a little magnetic swiper on to a telephone? With the network, at that time, just getting the transactions through the telephone network was a major challenge. Today, we’re talking about how to get a little magnetic striped reader on a smartphone. Not too much different, but we’re essentially facilitating the last form factor of money, which is the account number and the transfer of that account number from one place to another. A lot of the technologies associated with what we deal with today, including EMV, are born out of that necessity to transmit that account number securely from one place to another. In fact, we really have to examine whether or not we really should be investing that much money in that direction. EMV is not a new technology; it’s more than a dozen years old. Chip and PIN was facilitated mostly in Europe to help develop offline capabilities so you can batch a transaction, because telephone calls are so expensive. Today, the network and communications are practically free. So, are we really going to go toward that? If we’re looking at the EMV migrating into the United States, there are a lot of challenges associated with that particular technology. The least to mention is congruence between Durbin and EMV and how the issuers feel. When are they going to actually issue the cards, in what format, and so forth? So, lots of complexities and lots of money anticipated to be spent there. But what benefits are we really achieving through that whole initiative? Because of the inertia that’s going on, the POS providers are still going to be in business for some time to come. We’re not going to get rid of mag-stripe anytime soon or EMV or NFC. Those technologies will have their path. 26 January/February 2013 | Transaction trends

The real question for them is what’s going to happen next and are they going to participate, because none of them participated in the e-commerce revolution. They had the opportunity at the time, but they all missed that boat. Here comes m-commerce with both physical and virtual colliding, and if they play their cards right, they could play a significant role. But it depends on their DNA and how they leverage the assets and work with these new innovations. The verdict is still out, and I think some of them are being more aggressive than others. I can’t predict whether Ingenico, VeriFone, or even Pax, for that matter, are going to change, but they do have opportunities by being a technology service provider in the middle.

MODERATOR: With the new PSPs coming in the marketplace, what is the key to differentiation? PATTERSON: As in most industries, we really believe that competition is a positive thing because it stimulates innovation and creates choice for the consumer. A key to differentiation is going to be the ability to provide value-added services on top of payments. By providing these features and services to the customers, they’ll help to facilitate not just payments, but true value-add to clients. You’re starting to see this with solutions like ones that we provide with V.me by Visa and alerts capability. So, engage the consumer in controlling their own destiny in terms of where their card is used. So, you’re not relying just on the point of sale. New companies are providing tools to merchants that help them engage with their customers. So it’s about facilitating and enabling a deeper relationship that goes far beyond just payments. When we think about where we play in this space with our V.me digital wallet, it’s about providing value-add services for partners that help facilitate frictionless commerce and, most importantly, security. It’s not just about transmitting card information between one party and another. With the convergence of in-person, mobile, online commerce, we understand that, at the end of the day, for the consumer, it’s got to be frictionless, and it’s got to be open to all forms of payment that consumers already have. It’s got to be about what they utilize today: Make it accessible from every environment, simple, easy to use, and most importantly, secure. As we look at trying to solve the evolving needs of the consumers, the merchants, the financial institutions, it really has to be about delivering more than just payments. We look at solving it from a consumer and merchant perspective, allowing consumers not only to store their payment information and shipping information, but also giving them access to alerts, creating thresholds, creating opportunity for value add, so that information comes to them. Innovation is important, in terms of finding the right partner and figuring out how you’re going to provide that complete experience, not just to one side of the equation, but across the value chain. TT

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