Transaction Trends July/Aug 2013 by Content Communicators, LLC

2013 ETA Annual Meeting & Expo Wrap-Up page 20

Transaction trends The Official Publication of the Electronic Transactions Association

Cloud Cover

July/August 2013

Cloud-based POS and processing solutions offer merchants a cheaper transition to mobile acceptance. But itâ&#x20AC;&#x2122;s not one size fits all.

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Transaction trends The Official Publication of the Electronic Transactions Association

Vol. 18 | No. 6

cover story 8

Cloud Cover

By Julie Ritzer Ross Cloud-based POS and processing solutions are beginning to take hold, offering merchants decreased costs and an easier transition to mobile acceptance. But payments experts advise proceeding with caution, as issues surrounding security, hardware support, and Internet connectivity differ by merchant. 8

20 Payments Get Real

FEATURES 12 Consumer-Driven Advances By Rona Distenfeld Today’s consumers have high expectations in terms of their payment experiences. Successful merchants must be able to accommodate demands for mobile payment options, customized rewards, and safer transactions.

16 Special Series

Startup Stories: It’s Not Rocket Science, Exactly By John Manasso An engineering and mathematics background helped Total-Apps.com’s Rey Pasinli create a company that relies on referrals and high-tech back-end systems to foster more engaged client relationships.

depar tmentS 6

ETA Gateway Insights from ETA’s CEO, Jason Oxman

At the record-setting ETA 2013 Annual Meeting & Expo, keynote speakers discussed the realities of the burgeoning mobile payments explosion with more than 3,000 payments and technology industry executives, venture capitalists, and media.

19 22

Future of the Business New merchant acquirers have altered the landscape, but the payments industry continues to be an attractive sector.

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

Ad Index

Industry Insider Fuze Network’s payment gateway facilitates movement of funds onto a card account.

Transaction trends | July/August 2013 3

ETA Gateway

The Future Looks Bright for ETA

he first half of 2013 has been a time of explosive growth for ETA. The scope of the association has broadened considerably in this relatively short time. More than 90 new companies have joined us in the past year, meaning that ETA now represents nearly every major company in the payments industr y. With more than 3,000 attendees a n d 2 0 0 ex h i b i t i n g companies, the 2013 Annual Meeting and Expo broke all records. Payments and technology industry executives, venture capitalists, and media from 10 countries were there to experience the next generation of innovation in payments. These are exciting times for our industry, with unprecedented new business opportunities for ETA members. ETA is expanding into Europe with the launch of the International Acquir-

Editorial Policy: The Electronic Transactions Association, founded in 1990, is a not-for-profit organization representing entities who provide transaction services between merchants and settlement banks and others involved in the electronic transactions industry. Our purpose is to provide leadership in the industry through education, advocacy, and the exchange of information. The magazine acts as a moderator without approving, disapproving, or guaranteeing the validity or accuracy of any data, claim, or opinion appearing under a byline or obtained or quoted from an acknowledged source. The opinions expressed do not necessarily reflect the official view of the Electronic Transactions Association. Also, appearance of advertisements and new product or service information does not constitute an endorsement of products or services featured by the Association. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided and disseminated with the understanding that the publisher is not engaged in rendering legal or other professional services. If legal advice and other expert assistance are required, the services of a competent professional should be sought. Transaction Trends (ISSN 1939-1595) is the official publication, published 10 times annually, of the Electronic Transactions Association, 1101 16th St. N.W., Suite 402, Washington, DC 20036; 800/695-5509 or 202/828-2635; 202/828-2639 fax. Copyright © 2013 The Electronic Transactions Association. All Rights Reserved, including World Rights and Electronic Rights. No part of this publication may be reproduced without permission from the publisher, nor may any part of this publication be reproduced, stored in a retrieval system, or copied by mechanical photocopying, recording, or other means, now or hereafter invented, without permission of the publisher.

4 July/August 2013 | Transaction trends

ing Forum (IAF), a new educational and networking event that will take place in London September 17-19 at the Millennium Gloucester Hotel and Conference Center. The IAF will bring together experts and industry leaders from around the world to tackle issues of importance to acquirers, banks, ISOs, processors, and suppliers. IAF is a unique opportunity for global acquirers and payment companies interested in exploring business opportunities outside the United States. ETA’s Strategic Leadership Forum (SLF) will take place October 15-17 at the Montelucia Resort and Spa in Scottsdale, Arizona. Join us and capitalize on the knowledge of hundreds of frontline leaders and business visionaries who are advancing the payments industry. Top executives at the nexus of technology, mobile, and e-commerce will share smart techniques and explore the next generation of innovative ideas. If you have an innovative product that you want to showcase, check out our two new features: the Payments Next Zone

& E-Pay Innovation Award and the Startup Showcase & Challenge. Visit www. electran.org/events/slf13 for more information. And of course, our 2014 Annual Meeting and Expo is right around the corner. Next year, we are back at the Mandalay Bay in Las Vegas, April 8-10, 2014. With the expo floor already more than 80 percent sold, we expect to have another record-breaking year. The 2014 ETA Annual Meeting & Expo is the ideal venue for positioning your company and its products and services for success. Reserve your space early—the expo floor is filling up quickly! Thank you for being a part of ETA’s continued success. I look forward to working with you throughout the year to help you grow your payments business. Kind Regards, Jason Oxman Chief Executive Officer Electronic Transactions Association

Electronic Transactions Association 1101 16th Street NW, Suite 402 Washington, DC 20036 202/828.2635 www.electran.org ETA CEO Jason Oxman COO Pamela Furneaux Director, Education and Professional Development Rori Ferensic Director, Government and Industry Relations Mary Weaver Bennett Director, Membership and Marketing Del Baker Robertson Director, Communications Meghan Cieslak 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, Rona Distenfeld, John Manasso, Bryan Ochalla, Julie Ritzer Ross, and Mike Strawhecker 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

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INDuSTRYnews EMV Expected to Accelerate Mobile Adoption Many banking and payments professionals believe EMV is poised to drive the adoption of mobile technology, according to survey results by ACI Worldwide. Almost 50 percent of respondents believe the U.S. migration to EMV will result in consumers turning away from card-based transactions in lieu of mobile payments. Those surveyed also admitted that there are challenges to rolling out the new payment systems. When asked what specifically they felt would be the biggest challenge to EMV imple-

mentation, respondents answered as follows: • N early one in three (32 percent) noted that rolling out hardware updates (like POS terminals, ATMs, etc.) would present the largest issue. • Twenty-six percent believed the biggest challenge would be educating and training business constituents along with driving consumer awareness and adoption. • Twenty-four percent said they were most concerned about meeting compliance and liability shift deadlines.

Infographic Two Thirds of U.S. Banks to Deploy Mobile Wallets in 2013 5.5% 8.7% 20.2% 34.4% 10.4%

20.8%

Fully agree

Agree

Slightly agree

Slightly disagree

Disagree

Fully disagree

Source: “Monetizing Payments: Exploiting Mobile Wallets and Big Data,” Clear2Pay, NGDATA, Finextra

6 July/August 2013 | Transaction trends

fast FACT Globally, 15 percent of all retail purchases of physical goods are made using mobile devices, according to new analysis by Adyen Payment Services.

UK Study: Expectations Overambitious for Contactless Payments Less than 10 percent of United Kingdom residents have made a purchase using a contactless card in the previous month, according to a survey conducted by Compass Plus. Although professionals believe the mass adoption of NFC and contactless payments will take place over the next one to three years, the survey findings revealed that 40 percent of the public does not understand contactless payments. Security concerns appear to be holding contactless payments back, with more than 30 percent of survey respondents ranking contactless cards as the least secure method of payment, 26 percent saying paying with a debit card on the Internet was the second least secure, and 24 percent saying mobile payments were third.

News from the association

AROUND THE HORN BluePay is partnering with Payfirma to offer merchants a tablet POS system that integrates BluePay’s payment platform and Payfirma’s tablet solutions. BridgePayNetwork Solutions installed its NexGen storage system, a database management solution. CHARGE Anywhere announced that three of its mobile payment solutions have completed the registration and certification process on the MasterCard mobile POS program website. ePaymentAmerica launched its Yapyzal brand for direct credit and debit card purchases on social media. Equinox Payments appointed Chris Dismukes as VP, North American client group; Leonard Biankin as VP, supply chain and service operations; Dustin Howard as VP, chief information officer; and Nancy Ribble as VP, professional services. First Data Corporation is partnering with MPayMe Ltd. to target markets in the Asia-Pacific region, and introduced the next phase of its Pogo mobile payment solution. Heartland Payment Systems named Tony Capucille chief sales officer, launched SmartLink Food Safety Monitoring, and was named to Fortune magazine’s 2013 Fortune 1,000 list. Intrix Technology welcomed Suzanne Coleman as its director of information technology. Merchant Warehouse welcomed LightSpeed as a preferred partner on its Genius platform. Nomis Payments and Recombo announced a partnership that automates the new merchant account sign-up process for the Nomis Discretion Manager. PayPros released Decline Minimizer, an automated card updating service that minimizes the impact of declined transactions. Priority Payment Systems created the Priority MedPay platform to address the collection challenges faced by medical providers. ProfitStars introduced BusinessManager for financing the patient payment sector of medical claims. SilverEdge announced The Core, its rebranding effort with a new mobile platform, new website, and expanded services. TriSource Solutions announced its comprehensive merchant acquiring platform specifically for payments service providers and payments facilitators. VeriFone is partnering with CardSpring to integrate its web service platform into VeriFone’s PAYware Connect gateway.

Advance Your Career With ETA’s Professional Development Programs ETA offers a number of professional development programs through a variety of delivery channels, all designed to increase your skills and competencies, including:

CALENDAR :

ETA UNIVERSITY (ETAU)—Courses address key facets of the industry that are necessary for expanding your knowledge and expertise, and they are designed to meet the needs of ISOs, financial institutions, processors, vendors, and service providers.

International Acquiring Forum Millennium Gloucester Hotel London, UK September 17-19, 2013 2013 ETA Strategic Leadership Forum Montelucia Resort & Spa Scottsdale, AZ October 15-17, 2013

WEBINARS—Live and on-demand webinars provide interactive and media-rich presentations on relevant hot topics in the electronic payments industry. Presented via a web-based tool with accompanying audio, sessions are typically one and two hours long and can be accessed anywhere.

EMV, The Fundamentals (From Acquirers to Issuers) Two-Day EMV, Contact, Contactless, and NFC Mobile Workshop London, UK October 30-31, 2013

ETAU ONLINE—These cutting-edge, online educational seminars will enhance your knowledge in a wide variety of topics relating to electronic payments.Web-based certificate courses are interactive, engaging, and designed to fit high-level learning into busy schedules. For more information, visit www.electran.org/professional-development.

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. Banc Certified Merchant Services LLC Hilliard, OH www.banccertified.com

Merchant Defense Spanish Fork, UT www.merchantdefense. com

Genesis Payment Processing Group Clarence, NY www.genesisppg.com

Merchants Capital Access Melville, NY www.merchantscap.com

HomeServe Stamford, CT www.homeserveusa.com

NVMS Inc. Manassas, VA www.nvms.com Pay Cash Now Tulsa, OK www.paycashnow.com

PayPoint Ventures Pacific Palisades, CA Quatrro Processing Gurgaon, Haryana, India www.quatrro.com Retriever of Chicago Mokena, IL www.retrieverofchicago. com Treliant Risk Advisors Washington, DC www.treliant.com

Transaction trends | July/August 2013 7

[ COVER STORY ]

CLOUD cover KEY NOTES 8

loud-based payment processing C and POS can occur in one of three flavors: public, private, or hybrid. Some experts believe hybrid Clouds may prove to be the best option for a majority of merchants.

8 Merchants with limited or slow Internet connectivity will face more challenges in the Cloud.

8 Given the current push toward PIN debit and incentives for EMV acceptance, investing in any Cloudbased payment solution that lacks support for either technology could prove disastrous.

loud-based solutions’ security C should include encrypting or tokenizing data when it is stored in the Cloud, PCI SLP Level 1 compliance, PA-DSS compliant components, and mobile security best practices.

8 July/August 2013 | Transaction trends

Merchants move to Cloud-based POS and processing solutions to enjoy cost savings and expanded capabilities. But it’s not for everyone. By Julie Ritzer Ross

he winds of change are blowing as increasing numbers of merchants are considering a transition from traditional payment processing to Cloudbased solutions. For payment processing and POS, the Cloud “is extremely attractive from a financial standpoint,” says Henry Ijams, founder and managing director of PayStream Advisors, a payments research and consulting firm headquartered in Charlotte, North Carolina. While the costs for deploying legacy POS and payment processing systems is run anywhere from $3,000 to upward of $50,000, Cloud-based options can be had for around $1,000 per POS lane or device, and sometimes less than that. (With the Cloud, POS and payment processing software are run in Software as a Service (SaaS) mode rather than installed on a merchant’s PC.) And, there’s more. In a Cloud-based scenario, “thin client” hardware, such as tablets and smartphones, can replace Windows PCs and all payment acceptance peripherals because software is accessed from a remote server. “This is where the lure of the Cloud is for merchants that want to accept mobile payments,” Ijams

says. “In fact, the majority of our clients that are going with Cloud do so in line with a shift toward mobile payment acceptance.” Some merchants are finding service and support less problematic on the Cloud side because periodic software updates occur automatically and transparently at the server level. Backup and recovery requirements are streamlined because applications and associated data reside in a redundant server farm, instead of on in-store PCs that have to be backed up every day. Other issues bear consideration, however. Payment professionals advising merchants on Cloud solutions must discuss with clients five key areas before making any move to the Cloud.

1. Public, Private, and Hybrid Cloud-based payment processing and POS can occur in one of three flavors: public, private, or hybrid. In a public Cloud, system components are not owned or controlled by the merchant. Public Cloud services are typically delivered from a “pool” or “cluster” of systems to provide multiple customers (merchants) with access to shared computing resources. In a private Cloud, components are controlled by the merchant alone; systems can be located across multiple facilities that are owned by the merchant or a third party. Either merchants or a Cloud service provider (CSP), provisioned for use by a single entity, owns the systems and components. A hybrid Cloud is a combinations of private and public Cloud infrastructures. In a hybrid Cloud architecture, sensitive data reside in a private Cloud, and ancillary data, such as customer relationship management data and data needed for day-to-day operations, reside locally and in a public Cloud. While there may be exceptions to the rule, some experts believe hybrid Clouds may prove to be the best option for a majority of merchants. Public Clouds pose some data security risks, and although Transaction trends | July/August 2013 9

[ COVER STORY ] adopting a Cloud-based architecture can reduce implementation expenditures, opting entirely for a private Cloud is generally cost-prohibitive for small- to medium-sized (SMB) merchants. “It’s important to remember that a Cloud-only solution will also have risks because it generally cannot function if the Internet connection is down,” says Rob Bertke, senior vice president of product management at Sage Payment Solutions. Hybrid Cloud solutions can allow offline access to information regarding products and inventory or customer details, and in some instances payment information can be saved offline for transmission at a later juncture if necessary. “Another advantage to hybrid solutions is that since merchants’ data is stored locally as well as in the Cloud, that data may be available should a merchant choose to discontinue using a Cloud service,” Bertke notes. Some sources find the decision less clear-cut.“It’s very hard to generalize—it’s really about who is running the servers,” says Donald E. Apgar, ETA CPP, senior vice president of business development at Integrity Payment Systems, an MSP. “It may sound like data is more secure if a CSP or other provider is running a private Cloud with its own servers in its own offices, but scale is important, too. Public Cloud solutions often utilize much larger third-party server farms that operate on a significantly larger scale, meaning that the fixed overhead of state-of-the-art access control and offsite redundancy are spread over a larger user base and ultimately cost less.”

2. Speed and Connectivity For Cloud-based POS and payment processing to be effective, payment acceptance devices must be able to communicate frequently, quickly, and reliably with the server running the application. Merchants with limited or slow Internet connectivity will face more challenges in the Cloud. Some programs store all data at the server level, meaning that almost every entry or keystroke requires communication with that server.“Unless their Internet connection is reliably fast, merchants will see some latency in using an application like this,” Apgar says. Most “good” POS applications available in SaaS format feature a certain degree of local computing capabili10 July/August 2013 | Transaction trends

PCI Security Standards Council Cloud Guidelines The PCI Security Standards Council earlier this year published the PCI DSS Cloud Computing Guidelines Information Supplement, a product of its Cloud Special Interest Group (SIG). The supplement builds on the work of the 2011 Virtualization SIG, while leveraging other industry standards to provide guidance around several primary areas and objectives. The document features an explanation of common deployment and service models for Cloud environments, including how implementations may vary within the different types, as well as an outline of various roles and responsibilities across the different Cloud models and guidance on how to determine and document these responsibilities. Covered as well are PCI DSS considerations, specifically, guidance and examples to help determine responsibilities for individual PCI DSS requirements, along with segmentation and scoping considerations. Challenges associated with validating PCI DSS compliance in a Cloud environment and business and technical security considerations also are highlighted. Download the guidelines at www.pcisecuritystandards.org/security_standards/ documents.php.

ties, he explains. For instance, their configuration enables communication between servers and payment acceptance hardware, such as iPads, to occur only at key times, usually at the end of each transaction. A few vendors have introduced solutions designed to minimize Internet connectivity and related obstacles. New York-based ShopKeep’s POS application, which is built on a Cloud platform, allows iPads to function as cash registers. (ShopKeep earned ETA’s 2013 Technology Innovation of the Year Award.) In the event of an Internet outage, transactions can still be rung up via the application, with payment and other data synced to the system when it goes back online.

to non-EMV-compliant merchants beginning in October of 2015), investing in any Cloud-based payment solution that lacks support for either technology could prove disastrous, sources claim. And don’t forget about solutions upgrades. Cloud-based mobile payment processing solutions, in particular, require 20 to 30 upgrades annually to keep up with changes in the Apple and iOS platforms, according to Ijams.When advising merchants on transitions to the Cloud, Ijams and his colleagues advocate that any solution on the roster of finalists be not “only mature, but bolstered by an active schedule of upgrades and broad platform support.”

3. Support and Upgrades

4. Expanded and Specialized Capabilities

Cloud-based POS solutions differ significantly in terms of hardware support. The value to individual merchants of handling certain payment methods—like PIN debit and EMV chip-and-PIN—cannot be discounted when selecting from among them. “In some cases, these hardware options can be supported, but not always,” observes Kevin Lee, president of Hosted Payment Solutions at ControlScan, a PCI compliance and security solutions provider. Given the current push toward PIN debit and incentives for EMV acceptance (including the shift of liability for fraudulent transactions that becomes applicable

A number of ISOs and MSPs are advocating to clients Cloud-based solutions because they accommodate vertical marketspecific payment acceptance requirements and may deliver more bang for end-users’ technology buck. “It’s the same as with any solution,” says Apgar. As an analogy, he points to Microsoft PowerPoint installed on a laptop computer or accessed and run online through the Office 365 portal. “Either way, PowerPoint is the same program, has the same features, and does the same things,” Apgar explains. “If PowerPoint isn’t helping to get presentations done because it lacks critical features,

then it’s not the right software, regardless of how it is delivered.” Promoting Cloud-based payment solutions that suit the narrowly defined needs of a particular vertical segment is especially important when that segment is outside the traditional retail realm. For instance, reimbursement parameters mean private practitioners, hospitals, clinics, laboratories, and similar entities must be able to match payments back to individual procedures and treatments, offers Brian Clubb, director of product management and financial services at Emdeon, a provider of healthcare revenue and payment cycle management solutions. In recommending the Cloud, ISOs also are pointing to the ability of Cloud-based solutions to integrate payment processing with ancillary front- and back-end components—such as loyalty, accounting, ecommerce hosting, and inventory management—as well as overall enhanced store reporting.“The better Cloud-based services have iOS and Android apps and provide instant, real-time sales data at merchants’ fingertips, with web-based reporting that allows them to manage their POS from anywhere,” says John Luzzi, senior vice president, EVO Payments International.

“THE KEY COMPLIANCE DIFFERENCE BETWEEN THE PUBLIC AND PRIVATE CLOUD IS THE PCI-DSS CERTIFICATION REQUIREMENT. PUBLIC CLOUD OFFERINGS ARE NOT YET COVERED BY PCI, BUT MERCHANTS SHOULD SEE THAT THE VENDOR HAS PUBLISHED A PCI REPORT OF COMPLIANCE.”

5. Security and Disaster Recovery

—STEVE BACASTOW, MOZIDO

Security roles and responsibilities for Cloud-based POS and payment processing vary by Cloud type, notes Lisa Anderson, director of product management at Voltage Security, a security solutions provider. In a private Cloud environment, merchants remain solely responsible for ensuring that system components are in compliance with the PCI-DSS. However, in public and hybrid scenarios, the responsibility is shared depending on which party “holds” which data. “It’s important to document responsibilities and roles and ensure that all parties are in agreement,”Anderson says.“And it is ultimately merchants’ responsibility to ensure that CSPs protect cardholder data.” Cloud-based solutions’ security can be shored up by encrypting or tokenizing data when it is stored in the Cloud. In fact, merchants should avoid any Cloud-based solution that does not do so. Just as critical is merchant verification that a given Cloudbased solution is PCI Level 1 compliant,

and that any installed components of the solution are PA-DSS compliant. If any part of the solution runs on a mobile device, merchants also must verify that the software providers use mobile security best practices. “The key compliance difference between the public and private Cloud is the PCI-DSS certification requirement,” says Steve Bacastow, senior vice president of operations at Mozido, a global provider of multichannel transaction services. “Public Cloud offerings are not yet covered by PCI, but merchants should see that the vendor has published a PCI Report of Compliance.” Securing a private Cloud-based solution is “very possible” in light of the caliber of today’s technology, notes Bacastow, but he advises merchants not to assume that a private Cloud solution provider has implemented all of the available controls, including distributed denial

of service mitigation, network intrusion detection, file integrity monitoring, and port and application scanning. Finally, because the “brains” of any Cloud-based system are in the Cloud rather than on a terminal, the establishment and testing of disaster recovery plans remain paramount. The failure of any Cloud site will have a negative impact upon every merchant that uses a given Cloud service; the more merchants in the customer base, the greater the importance of proper backup and a method of rapid bounceback from disaster. While Cloud-based payment processing and POS may not be a viable alternative for all players, it’s a phenomenon that cannot be ignored. TT Julie Ritzer Ross is a contributing writer to Transaction Trends. Reach her at jritzerross@gmail.com. Transaction trends | July/August 2013 11

[ FEATURE ]

ConsumerDriven Advances Consumers’ relationship with technology and their instant-gratification expectations fuel the next generation of payments By Rona Distenfeld

KEY NOTES 8

ew class of consumers expects N more from shopping and payment experiences, and are redefining the POS experience.

8 Continued investments and innovations in security and mobile payments are essential to future success.

8 Peer-to-peer payments are usurping some traditional models, especially when it comes to microloans.

12 July/August 2013 | Transaction trends

hile the payments business is driven by consumer activity, historically, changes were driven by the industry. For example, in the 1970s, ATMs became widespread because banks were looking for a way to cut costs, but many consumers balked and continued to use tellers for basic transactions. To encourage ATM usage, a few large banks announced they would charge a fee for teller transactions, infuriating many customers. It is hard to imagine that happening today. “People prefer not having to talk with anybody, which is one reason online shopping has been so successful,” says Mitchell Hollin, senior partner at investment firm LLR Partners. The ATM was a harbinger of this trend, and online shopping, texting, and social media are just some of the ways this has become the norm. Consider these four consumer-driven trends:

• Facilitating mobile payments. “Mobile is huge,” says Zilvinas Bareisis, a senior analyst at Celent. “The growth in smartphones and tablets is changing the way people shop, and hence how they pay.” In fact, the May 2013 Internet Trends report, produced annually by Mary Meeker and Liang Wu of KPCB, showed that mobile traffic, as a percent of global Internet traffic, grew to 15 percent from 10 percent in 2012. Meanwhile, the percent of Groupon NA transactions conducted via mobile was up to 45 percent at the beginning of this year, and PayPal saw $14 billion in payments on mobile devices in 2012, up from just $4 billion in 2011. PayPal expects to hit $20 billion this year. Bareisis points out that the change in shopping habits is greater than the change in payment methods. Credit cards are still king, whether the transaction takes place on a PC, in person, or on a mobile device.

Innovations such as digital wallets still process the ultimate transaction through a credit or debit card. But that doesn’t mean changes aren’t starting to happen on several fronts.

• Building a valuable customer experience. Hollin sees a different class of customer evolving with different expectations. “Younger consumers have grown up with technology.They want an enhanced experience and they are willing to share their personal information in exchange for value, such as special offers, discounts, coupons, and loyalty privileges.” They are “already working on capabilities that allow the consumer to link or attach loyalty programs or virtual coupons/offers to payments made on the card of their choice,” says Dom Morea, senior vice president of advanced solutions and innovation at First Data. “The offers are instantly redeemed when a relevant purchase is made without any

further action by the consumer.” The advantages from the merchant side are the potential for more business, greater customer loyalty, and better data analytics. Starbucks’ mobile loyalty app now accounts for 10 percent of the company’s sales, according to First Data. By tying offers and redemption directly to the payments process and tracking offers to their source, when and where they were redeemed, and whether the buyer becomes a return customer, data collection is greatly improved and the analysis is more precise. Hollins also sees merchant acquirer generalists being pushed out by specialists.“Focusing on an industry, such as hospitality, restaurants, or gyms, and adding value specific to the business puts these niche merchant acquirers in a better position to take processing business away from generalists.” PayPal has already developed some innovative value-adds that go beyond simple discounts or coupons. The eBayNow app, a service that is currently available in the Bay Area and New York City, allows con-

sumers to find and purchase an item and have it delivered to their location for a flat $8 delivery fee.The number one item purchased on this service? Cell phone chargers. Another PayPal service lets consumers make an Internet purchase, decide after they buy which funding source to use, and delay payment until the product is delivered. The merchant is paid immediately, but the customer’s account isn’t charged until he or she has the item. How can PayPal afford to do this? “Roughly $6,000 per second goes through the PayPal network every day,” says Anuj Naya, senior director of communications for PayPal.“We can afford it, and it allows the consumer to better manage his money and how he wants to pay.” Other smart value-adds that Naya sees include programs by Jamba Juice and Starbucks that let customers order and pay on their mobile device, then grab their order and go when they get to the store. No lines, no waiting. Transaction trends | July/August 2013 13

[ FEATURE ]

Peer-to-Peer Payments There is a quiet revolution taking place, as peer-to-peer networks bypass traditional payment systems. BitCoin is probably the most clear-cut example. This crypto-currency is slowly gaining favor with investors and users. Eleven million bitcoins are now in circulation, and the system has grown by 500 percent, yearto-year. Transactions are validated and distributed in real-time using a P2P network secured and regulated through cryptography rather than a government agency. Bitcoins can be purchased using actual currency or earned in exchange for computer processing power for the system. It’s this ability to “mine” bitcoins, and then exchange them with other users for goods and services, that puts Bitcoin completely outside the payments system. Kickstarter, the web-based microloan source, helps entrepreneurs get the funding they need to complete artistic projects or launch small businesses. Users promote their Kickstarter project via social media and donors give without expectation of any kind of return, in most cases (although artists

• Redefining POS. “POS is moving from point of sale to point of service,” says First Data’s Morea.“Instead of being about cash, check, or credit, consumers are starting to look for payment options that give them discounts, award points, or redeem coupons, all automatically. Credit cards work fine in their present form. It’s really about the

can sweeten the pot by promising a special showing or first dibs on a CD). While donations are currently made using established payment methods, like PayPal and credit cards, Kickstarter has replaced the more recent trend of the creator running up his or her own credit cards and having to pay that money back with its associated interest and fees. Donors are more likely to give what they can afford, rather than tap a credit card. Lending Club is another example of a P2P network replacing an established funding source. Designed as a funding source for entrepreneurs, the site lets ordinary investors review projects looking for funding and loan money to the ones they think have potential to provide a return on their investment. Lending Club has grown 300 percent year-to-year, and almost $2 billion in loans has been issued. These borrowers are eschewing using their credit cards or traditional banks in favor of turning to their peers. Investors can provide the funds via various avenues, so some transaction fees are going into the payments system, but the bulk of the profits is redirected to the P2P network.

additional value-added services that wrap around that.” A very basic example is the express pay key fobs being used by some gas stations. The consumer can tie the fob to his or her choice of credit card or bank debit. Using the fob also offers convenience and speed, and Exxon gets a competitive advantage while it avoids the cost of running a credit card operation.

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“Gamification” also is affecting how consumers engage. They want interaction rather than messages, and some savvy retailers are testing this now. Gilbarco Veever and Root, the nation’s largest gas and convenience store chain, is testing a program in which the gas pump recognizes customers when they pull in and offers them a fast game to win a free soda or collect points for free gas. The chain also is testing a program that lets customers use a Cloudbased mobile wallet to pay at the pump or in the store. Mobile wallets are another example of a changing POS experience. It’s not just about moving a plastic credit or debit card to a virtual version on a smartphone. Instead, a mobile wallet can deliver relevant offers, timely ads, and the ability to buy and pay within that experience. Convenience also is a consumer factor, driving success for mobile apps like TabbedOut, which lets bar customers pay their tabs from their phones when they’re ready to leave rather than flagging down the bartender and having to wait. Hollin sees point of sale moving away from cash registers to tablets. “It’s already happening fast in restaurants and retail and changing the shopping experience for consumers, while also enabling data collection. It’s more efficient than legacy solutions because you can do more at a fraction of the cost and time, but it leaves legacy vendors exposed by the cost of replacing their infrastructure.” Tablets are hot, but they’re not the only game in town. Consumers may want to be able to use virtual coupons with bar codes, tap and pay, and other virtual payment methods. Merchants have to decide which technologies to invest in to make the shopping

experience a positive one.And even those that continue with traditional payments will need to embrace the fact that credit cards are changing. By 2015, chip cards, already in use in all other G20 countries, will replace mag-stripe cards in the United States, forcing merchants to invest in new technologies while offering more data capabilities.

• Continued security enhancements. As consumers expect to pay for purchases their way, anytime, anywhere, virtually or in person, security has to keep up.“The business model is going to be affected,” says Morea.“Fraud detection, level and type of security measures, cost structures mandated by issues, and variations in association networks will all be elements that have to be weighed and considered as processors try to safely enable the full range of transactions.” The promise of safer transactions can also be a value-add when the value can be translated clearly to the consumer. Features like embedded chips in cards that can be wiped remotely in case of theft offer security and peace of mind that a consumer immediately understands. The traditional payments business, with its investment in legacy systems, will have to find a way to become nimble and put the focus on the consumer to ensure it remains vital in the years to come. TT

Rona Distenfeld is a contributing writer to Transaction Trends. Reach her at rona@sbcglobal.net.

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Startup Stories: Total-Apps.com

It’s Not Rocket Science, Exactly Total-Apps.com blasts off with the help of technological innovation and client service By John Manasso

or those who say that one does not need to be a rocket scientist to succeed in the payments industry, well, they have not met Rey Pasinli. Pasinli, co-executive director of Total-Apps.com since he founded it in 2007, fell in love with e-commerce while he was studying for his master’s degree in business administration at Pepperdine University during what he facetiously referred to as the “dot-bomb era,” 1998 to 2001.

Before that, he worked as, indeed, a rocket scientist. A mechanical engineer by trade, his spheres of expertise included working on the International Space Station and the F-22 fighter jet, and designing black boxes for satellites. That engineering and mathematics background was instrumental when he started designing systems to prevent Internet fraud, which emerged as a thorny issue during the infancy of e-commerce. Pasinli’s initial foray into the payments

Total-Apps.com Aliso Viejo, CA Founded: 2007 Monthly Processing Volume: $30 million Employees: 9 Rey Pasinli

16 July/August 2013 | Transaction trends

Linda Pasinli

Jason Taylor

space was focused mainly on processing for high-risk merchants, relying on his sophisticated systems’ ability to successfully root out and eliminate fraud. “We focused on being, basically, the trash bin of all the agents, ISOs, and the processors here in the United States,” Pasinli says. “Back then, I would simply cold call a processor and say, ‘What do you do with your declines? I’ll take them.’ I ended up working with more than 100 banks globally to broker their declines into competing banks.” Pasinli describes those years as a “wild ride.” Back then, he also contracted with about 300 agents whose merchants fell into various categories, some of which were those with unusual, unsustainable, or risky business models that weren’t palatable to most United States-based underwriters. In a bit of sad irony, Pasinli came to a realization. After about four years of often working 12-hour days for six days a week, he found that he, too, had developed an unsustainable business model, like some of the merchants for which he was processing. He was in his early 30s and had big dreams. He thought he would hire people to manage his problems for him while he sat back and collected his millions.

“The problem was that as my revenues grew, my overhead grew just as much,” he says.“Managing 18 staff members was like trying to manage a herd of cats, for lack of a better description.” Pasinli used a metaphor to describe the error in his business plan: continually trying to fill a giant bucket that had a hole at the bottom. Alas, he could not fill it fast enough before all the water streamed out. Finally, in late 2006, he elected to shut down and walk away. He lived off his residuals, took time off to travel, and consulted on the side. In the ashes of that business, he conceived Total-Apps.com.

High-Tech and High-Touch Not surprisingly, in many ways,Totals-Apps. com represents the antithesis of his initial failed efforts. For starters, Total-Apps.com does not use agents. Instead, it relies almost exclusively on referrals. In addition, it only has nine employees, three of whom are its tightly knit principals—Pasinli, his wife Linda, and Jason Taylor, Pasinli’s former neighbor in Newport Beach, California. Linda Pasinli, Total-Apps’ vice president of business development, previously worked as a recruiter, helping

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to place executives, some of whom were placed in companies involved in the payments space. Taylor worked in operations for Hyundai Motors America, managing call centers that handled service contracts. Taylor, whose undergraduate degree from the University of Texas is in organizational management and who also has an MBA from Pepperdine University, says his current role as co-executive director is completely different from his former corporate one. He said at Hyundai he had a very defined and structured role. “At Total-Apps you wear multiple hats sometimes,” he says.“It’s ever-changing. It’s the landscape, the fact that we’re a tech company. What people bring to you and what fits and what doesn’t, it’s a lot of fun. At Total-Apps, credit card processing is a commoditized product that we’re adding value to. So how do you do that? It’s much more challenging.” Part of the idea for Total-Apps came when Pasinli examined what remained of his portfolio after closing down his former company. The high-risk merchants from what he called his cowboy heyday were all gone. Steady, reliable merchants endured, including retailers, mom-and-pop merchants,

Startup Stories: Total-Apps.com

and small e-commerce businesses, forming the core of the new business. As he built the new business, he started realizing that as he cut deals on price, it became a race to the bottom that he could not win. T hat’s when he decided that bringing valueadded services was the way to go. “So we invested a lot of money in technology,” he says. “Our website and our back-end systems are all home-built; they are all custom-made.We have the largest website on the Internet related to merchant accounts.We have about 3,500 pages and are growing daily. “Our goal is to augment that processing to help (merchants) grow, not to just replace a commodity.”

Transparency and Honesty When Total-Apps.com launched, it did so with a completely rebuilt customer relationship management system. It featured applications that could be fully completed online, with digital signatures, electronic underwriting, and templates for pricing, equipment, and site inspection. “I have the ability with a button to submit my merchant account to underwriting, to call up the attachments included—all of the supporting docs, every single field is filled out correctly, there’s no missing signatures,” Pasinli says. “It’s a very powerful, liberating tool. Instead of our internal staff spending 80 percent of their time trying to get a merchant account application submitted to underwriting, we now spend 80 percent of our time talking to our clients. “That allows us to have a more engaged relationship.We really get to dig deep into our clients to get to know what is working and what doesn’t work. After having seen 15,000 merchants come through our doors over the years, we’ve learned a lot of tricks.We know which shopping cart works great with which content management system, which gateway, and how to optimize that and how to spin it with coupons and loyalty and rewards and email marketing.” Pasinli says because so many of Total-Apps’ processes are automated, his staff’s conversations with merchants tend to revolve around analyses to increase the merchants’ sales by “10, 50, or even 100 percent in the next year.” He says those conversations render questions about price irrelevant. And that brings up a selling point to merchants that would have seemed heretical to an ISO in the past. Most of TotalApps.com’s merchants are on month-to-month contracts and can cancel at any time. “It’s an incentive for us to perform,” Pasinli says.“It gives the merchant a lot more comfort, which increases our sales. If it doesn’t work, they can just unplug and go somewhere else so it’s a win-win for both parties.” Pasinli says deceptive practices don’t work in today’s climate.The policy is about transparency and honesty. Because Total-Apps has only one agent, the company relies on referrals. It has about 700 companies with which it refers clients back-and-forth on a daily basis. Additionally, because of the desire to maintain a squeaky clean image for its brand,Total18 July/August 2013 | Transaction trends

Apps constantly monitors and revises those relationships. With a model that operates on the idea that small and quality merchants are preferred, Total-Apps enjoys a low attrition rate. Currently, the company processes for approximately 1,500 merchants but it is acquiring almost 100 new accounts per month, with a processing volume of about $30 million per month. Total-Apps’ portfolio grew by 480 percent in 2012 and the company is on track to double that in 2013. It has applied to Inc. magazine’s annual list of the 5,000 fastestgrowing companies in the country. The concept of 95 percent of the company’s business coming through referrals is “based on the fact that we’ve done a good job,” Taylor comments. “People won’t refer their friends and family to someone they don’t trust. You won’t find negative stuff on us on the web and there’s a reason why: We’re not here for the general masses.We’re here to help clients.We built it based on ‘our success is their success.’”TT John Manasso is a contributing writer to Transaction Trends. Reach him at john_manasso@yahoo.com.

WORDSTOTHEWISE n Be more than just the lowest-priced processor. “If you sell on price, you don’t deserve to be in the industry because you’re not doing your job,” says Rey Pasinli, co- executive director of Total-Apps.com. “Our job is to provide service to the merchants that makes their business grow. So what’s the service you’re going to sell?” n Prioritize technology. “You’ve got to work with somebody who has online applications,” Pasinli says. “We’re not the only guy who has online applications. There are other people who have online apps. It makes your life easier. Work with a bank processor, develop your own, build your own, or buy your own. You’ve got to leverage technology because if you don’t, the competition will, and you’ll be extinct.” Adds Total-Apps’ Jason Taylor, co-executive director: “If you don’t have tech, you won’t have a mode to protect yourself, and there’s no reason for your clients to stay. That’s really where the difference comes in.” He points to some of his company’s competitors who lack a web presence. “No social interactions, no reviews, no presence whatsoever to communicate,” he says. “The kids today don’t really want to talk with you. They want to click and make it go. They don’t really want to fill out a 15-page application in order to do that.” n Get creative and innovate now. “What worked five or 10 years ago might not work today,” Pasinli says, “so how am I going to learn from my mistakes and do better?” “Innovate or get out,” adds Taylor. “That’s where we are right now. Either sell your portfolio or become a tech of some kind because if you don’t, you’re not going to be around in two years.”

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Transaction trends | July/August 2013 19

David Nelms, CEO and chairman of Discover Financial Services

Michael Abbott, CEO of ISIS

Payments

Get Real

Keynote speakers address record-setting crowd on the realities of mobile commerce at the ETA 2013 Annual Meeting & Expo Of Presidents and ‘Stars’

A perennial favorite event at the ETA Annual Meeting & Expo is the President’s Dinner and the ETA Star Awards, which recognizes individuals and companies that have made a significant difference in the payments industry through innovation, business practices, or contributions to the association. The 2013 honorees include: Distinguished Payments Professional: Diane Offereins, executive vice president, payment services, Discover Financial Committee of the Year: Mobile Payments Committee Volunteer of the Year: Curt Hensley, founder and CEO, Impact Payments Recruiting (ISO Practices Committee) Member of the Year: Deana Rich, founder and president, Rich Consulting Business Partner of the Year: Discover Financial ISO of the Year: Priority Payment Systems Technology Innovation Award: ShopKeep POS

20 July/August 2013 | Transaction trends

rom April 30 to May 2, the Ernest N. Morial Convention Center in the heart of New Orleans hosted more than 3,000 payments industry-related professionals—the largest number in ETA history—to talk business, strategize, and unveil cutting-edge products and services. At the ETA 2013 Annual Meeting & Expo, attendees got a firsthand look at the technologies and mindsets that are rapidly transforming the electronic payments industry. Judging from the more than 200 exhibitors across 150,000 square feet of floor space (the largest in ETA’s 23-year history), and the addition of the Mobile Pay Zone pavilion and Payments Next Zone showcase, mobile commerce—undoubtedly—was the center attraction this year. Keynote speakers from industry giants used the opportunity to discuss the realities of the teetering mobile payments explosion. Michael Abbott, CEO of ISIS, hit the ground running during his opening address by tackling one of the biggest questions on everyone’s mind:Why hasn’t mobile commerce taken off? “Mobile phone has taken over so many aspects of our lives, but it has not taken over the mobile wallet yet.” Part of the reason, he says, is that consumers are overloaded with coupons, key cards, rewards, and other types of loyalty promotions, while merchants are throwing money at new technology solutions without knowing the real return on investment. “Now imagine your wallet being a repository for these physical items you pick up on Sunday morning, that instead it becomes a rich two-way communication channel,” he noted. Rather than fumbling for key cards or sifting through a laundry list of irrelevant coupons at the end of their shopping receipts,“consumers want

a personalized, one-to-one communication that makes their lives simpler.” The problem in getting to the next step is a business systems challenge, according to Abbott. Mobile operators need standards, scale, and a supply chain that’s building near-field communications (NFC) into its devices. They also need a reason to invest. Banks need security and the assurance that their investment represents scale. “The trick for merchants’ [acceptance] is that it can’t just be for the big guys. Mobile payments has to be there for everybody. And it’s critical that you choose a technology and a standard that can benefit everyone…not just a select few.” Consumers want fundamental control of their financial transaction, and they want something that is easy to use. “ Complex geo-targeted, time-decoded offers are really cool and they make for great blog posts, but consumers are not ready,”Abbott said. Consumers need to understand how to use a mobile wallet first, he continued.“Watching other people pay with their phones, you get [how to use] it.” Abbott also reminded the audience that the technology is already embedded in most phones and terminals, and NFC is an open standard, anyone can use it. “The technology occurring outside of mobile payments is spectacular.” He predicted the market will tip somewhere over the next 36 to 48 months. Where should the industry go from here? First, invest in contactless now. “What we saw in Austin and Salt Lake [ISIS trial locations] where we worked with a lot of ISOs and acquirers—is that they…. very aggressively said, ‘We are going to use this as a differentiation point,’” Abbott explained. Acquirers should also rethink their value proposition. It’s all about partnerships, he explained. Start small but think big and innovate; scale fast. In the same vein, David Nelms, CEO and chairman of Discover Financial Services, cited innovations as the heart of the payments industry’s evolution during his keynote. “The changes of the past are nothing compared with the changes we are going to be experiencing in the future,” he noted. “We need to welcome advances in technology, new industry players, changes in consumer behavior, and opportunities amongst the changing landscape of our industry.” Like Abbott, Nelms emphasized the

Innovation Incubator One of the biggest highlights of the ETA 2013 Annual Meeting & Expo in New Orleans was the inaugural Payments Next Zone and E‐Pay Innovation Award competition. Funded by a grant from the Bill & Melinda Gates Foundation, the E‐Pay Innovation program awarded a $10,000 prize to the exhibitor whose product has the most potential to make a profound impact on the global market by providing financial services to underserved communities. The winner of the competition was Trak, a mobile payment card reader, app, and payment platform provider for Latin America. The startup firm demonstrated Boleto, a product that enables individuals without credit cards and bank accounts to shop and pay using their smartphones. “[By participating in the competition,] we learned that there are almost 67 million adults in the United States who are underbanked, and our mobile payment solution levels the playing field for the unbanked populations in both developed and developing countries,” says Keith White, founder and CEO. “The opportunity to meet and network with so many other professionals and mobile payment startups in the electronic payments space, and get their feedback about our solution, was powerful.” All ETA 2013 Annual Meeting & Expo exhibitors were eligible to win the E‐Pay Innovation Award. Among them were the winners of ETA’s first Payments Next Zone scholarships, also funded by the Bill & Melinda Gates Foundation and selected by a panel of expert judges. In addition to Trak, the scholarships provided three other industry startups with free exhibit space at the event to demonstrate their products: • Act-Pay Inc., a payment market facilitator that provides merchant control and customer security in electronic payments • Digital Wallet Plus, which creates a secure buying experience for online buyers and sellers • GTSG (Global Transaction Services Group Inc.), which demonstrated real-time mobile donations authorized through bankcard networks for quick funding to nonprofit causes and humanitarian relief efforts. “Mobile is touching everyone, banked or unbanked,” says Michael Wafford, GTSG chairman and CEO. “The interest to utilize mobile technology to provide humanitarian benefit locally or globally is a wonderful use which benefits both sides of the transaction, the donor and the recipient.”

crucial role smartphones now play in consumers’ lives.“It’s clear that the phone will eventually become the access device for the point-of-sale, versus cards and physical wallets,” he said. Moreover, financial services apps are the fastest-growing apps—50 percent year-over-year.“That’s actually double the growth rate of social media apps,” he noted. Smartphones also are blurring the lines between payments and commerce. “Commerce and payments will seamlessly blend as omnichannel shopping takes hold. Merchants and payments providers are working on solutions that will provide the consumer with a consistent experience across all channels….including ways to integrate rewards and loyalty programs.” Nelms also used his platform to recant his previous predictions of RFID leapfrogging EMV technology:“EMV has too much momentum globally, skimming fraud is rising, and phone standards are going to take

time to work out.” Rounding out his discussion on ways to capitalize on mobile commerce, he touched on the familiar advice of leveraging value-added services via Big Data and partnerships.“Information about money is becoming nearly as important as money itself,” he said. Barely existent a few years ago, the “consumer footprint” is now enabling the industry to learn about consumer behavior to develop meaningful value-added services based on that information.“Valueadded services…are table stakes for mobile digital wallets,” he said. “Partnerships also make sense,” Nelms concluded, “especially in payments because new players must still contend with intricacies of regulatory issues, network infrastructure, and the chickenor-the-egg dilemma that comes with product innovation—issues that payments industry players have been grappling with and solving for years.” TT Transaction trends | July/August 2013 21

ISO Corner Future of the Business

Is This the End of Merchant Acquiring? While undoubtedly changed, the payments industry isn’t dead. Here’s why. By Mike Strawhecker

hen reading and hearing some recent comments from Wall Street analysts and media outlets on the payments industry, Mark Twain’s famous remark,“Reports of my death have been greatly exaggerated,” comes to mind. For example, following the cancellation of the WorldPay auction, Reuters reported, “Once a lucrative sector, payment processing has come under pressure from increased competition and technological change that has seen many companies struggle to retain their customers and maintain their pricing models” (“Bain, Advent Cancel Sale of WorldPay’s U.S. Unit,” May 2013). This theory was supported by citing the TransFirst and First American Payment Systems cancelled auctions, as well as First Data’s apparent shopping of its financial services business. While the emergence of new merchant acquirers (i.e., Square) has no doubt altered the industry ecosystem and increased competition, the insinuation that WorldPay, TransFirst, and First American Payment Systems cancelled their auctions because of the influence

of these new players is quite a stretch. Reuters assumes that all payments companies are exposed to the same competitive threats and that those valuations are strictly based on sector attractiveness. This is inaccurately painting the entire industry with a broad brush. The fundamentals of the payments industry remain strong and the industry continues to be an attractive sector for investment.

Why WorldPay Cancelled It seems simple, but sometimes a reminder is needed: It takes two agreeing sides to make a deal. The following factors—estimated using data from the Reuters article—may have led WorldPay to cancel the auction (see chart below): • B idders were likely below the low end of the offer range near $800 million, equating to an EV/EBITDA multiple of 7.3 times, which is well below current market valuations. • T he average multiple of the public payments companies listed in the chart is 9.1 (HPY, GPN, T SS, VNTV), the same as the high multiple of WorldPay. Unless given no other alternative, a seller would not settle for

Enterprise/EBITDA Multiple Analysis 9.0

HPY

8.2

GPN

YTD 2013/WP2012 9.6 9.5 9.1

9.0 7.3

TSS

VNTV

WorldPay

(High)

(Low)

Source: TSG Metrics, Yahoo! Finance, InFinancials.com, Reuters, S&P 500

22 July/August 2013 | Transaction trends

S&P 500

less than market. •B idders’ growth projections may be more conservative than that of the seller, leading to a lower multiple and a difference in agreed upon value. This is one of many drivers that are unknown. Ultimately, and most importantly, it would seem that WorldPay’s ownership saw more value in retaining the asset than other reinvestment alternatives. The fact that they did not sell at a 7.3 multiple indicates ownership is confident in WorldPay’s future performance. If the owners had sold at a 7.3 multiple, it would have supported the argument that “the best days in payments are gone,” given that the owners did not see a positive future for WorldPay.

Square, a Threat? Over the past two years, there has been no topic more discussed in the payments industry—except, perhaps, for Sen. Dick Durbin (D-Illinois)—than Square. Some of this notoriety undoubtedly comes from the Jack-Dorsey-created-Twitter effect and the inherent media platform that it provides. However, Dorsey’s contribution to the industry has been profound indeed. Some companies, such as PayPal, had already simplified acceptance, and some, such as ProPay, had the technology. But Square combined these two ideas and marketed its product to the masses of micromerchants. Does this mean Square is a threat of disintermediating traditional merchant acquirers as some analysts have opined? It depends. In a price-neutral scenario, the threat of disintermediation to acquirers depends primarily on four factors: merchant size, distribution, product, and vertical focus. • Merchant size: The smaller the average merchant size within a portfolio, the higher the risk of disintermediation as this is Square’s sweet spot in regard to boarding and pricing a merchant. At

The U.S. Merchant Market (Est.)

% of Visa & MasterCard Sales Volume

150 Largest Merchants

50%

100,000 Largest Merchants

30%

250,000 Medium Merchants

12%

6.5 Million Small Merchants

25 Million Micromerchants

Square’s Market Share

<2% (-2 million merchants

Traditional Merchant Market

New Merchant Market Source: TSG estimates

present, Square’s average merchant processes less than $5,000 annually versus the small- and medium-sized business (SMB) acquiring market average of $166,000, according to data from The Strawhecker Group’s (TSG) SMB merchant database of 1.6 million merchants from 11 portfolios. Additionally, micro/ aggregated merchants experience loss rates that are on average roughly 70 times higher than the market average; the typical merchant portfolio has a diversified concentration of merchant sizes and types. • Distribution: Acquirers with a more generic offering and a heavy reliance on non-integrated distribution may be more exposed to the disintermediation threat than others. However, Internet and retail store-based distribution models will likely be difficult to successfully execute outside of the small/micromerchant market; larger merchants are more likely than their smaller merchant counterparts to demand levels of customer service associated with a dedicated sales agent/point of contact. • Product: T rends in acquiring have moved from payments being the only product sold to payments being packaged with other “business management” products. ISOs and acquirers with niche payments solutions tailored to a specific merchant vertical or integrated through business management software typically experience higher retention rates due to high switching costs (and difficulty of switching) among their merchant clients. • Vertical focus: ISOs and acquirers ser-

vicing merchants that lack the need for a tailored solution or a software integrated solution are likely more exposed to price competition than their specialized counterparts due to lower switching costs. It is likely that the vast majority of these merchants do not exceed a certain size in annual volume; the larger a merchant is, the more it will need and benefit from a specialized or integrated solution. The threat to merchant acquirers is drastically different based on the makeup

of the previously accepting card market of 7 million, as the chart above shows. Square’s influence has been immense in that it helped create a new card-accepting micromerchant market.With this new market, merchant acquiring is not a zero sum game. For example, according to data collected by TSG, gross dollar volume attrition for merchants with dollar volume from $0 to $25,000 annually actually decreased from -31 percent to -24 percent during Square’s rollout and subsequent growth period

With the emergence of Square and other companies, the potential card-accepting market now includes more than 20 million micromerchants. of their portfolios and how they provide their services. Is the influence of companies like Square affecting auctions of payments companies, as some are arguing? Given the data on the chart, one could argue that it shouldn’t be.This is the case because the majority of Square’s merchant base primarily comes from an entirely new card-accepting merchant market.

A New Market The U.S. card-accepting merchant market was once estimated at 7 to 8 million merchants.With the emergence of Square and other companies, the potential cardaccepting market now includes more than 20 million micromerchants on top

from July 2010 to December 2012, which strongly suggests that Square is not taking its share from incumbent acquirers. Despite the opinion of some outside the industry, the payments industry continues and will continue to be a dynamic, attractive, and growing market built on a recurring revenue model and the increased usage and acceptance of electronic payments. TT Mike Strawhecker is vice president and director of The Strawhecker Group Metrics and a member of ETA’s Research and Communications Committee. Reach him at Mikes@ thestrawgroup.com. Transaction trends | July/August 2013 23

Industry Insider

Push a Button, Swipe a Card

Fuze Network’s reCHARGE solution enables bill payments, cash deposits, and prepaid reloads with ease By Bryan Ochalla

ave Wilkes, founder and CEO of Salt Lake Citybased Fuze Network, describes the company’s reCHARGE solution as “the perfect marriage between the POS system, the merchant acquirer, the merchant, and the consumer or cardholder.” More specifically, reCHARGE “fuses existing networks to enable bill payments, cash deposits, and prepaid reloads with the same effort to make regular purchases,” according to the company’s website.Wilkes says the idea came to him while he pondered unmet needs related to the payments business after leaving the previous company he helped start, Galileo Processing. His exper ience with that prepaid processor and program manager helped him become “familiar with prepaid cards, how the infrastructure works, [and] how the consumer adoption and behaviors work,” he says, and helped him decide on Fuze Network’s direction. “Based on that knowledge, we devel—Dave Wilkes oped a payment gateway that facilitates the movement of funds onto a card account— similar to how you can load a prepaid card,” he adds.

“We’ve found that about a third of the transactions... are coming from the same consumer on multiple card accounts.”

Many Benefits The Fuze gateway is intended to benefit acquirers and merchants as well as consumers. “If I’m out deploying terminals, and I have a portfolio of merchants that have my acquiring services embedded on them, wouldn’t it be nice if those merchants could just hit a button and swipe a card and process a payment onto [a customer’s] Capital One or Discover or Home Depot card?” Wilkes explains. “That’s basically what we’ve developed

24 July/August 2013 | Transaction trends

and deployed to over 10,000 locations so far.” The reCHARGE solution offers merchants and consumers ease of use and convenience.“All they have to do is walk into an ACE Cash Express, a Fidelity Express, a Pay-O-Matic, or any number of retailers like Walmart, go into a checkout lane, swipe their credit, debit, or prepaid card—it doesn’t matter what kind of card; if it has a mag-stripe and if it’s eligible, it’ll work—and hand their cash to the [merchant]. “The [merchant] hits the same button he or she would to activate a gift card or load a gift or prepaid card,” he continues, “and then the transaction is routed from the POS system into the gateway that we’ve developed, and from there it goes to the card issuer and posts as a credit to the card account.” Merchants do not need to purchase additional hardware or equipment.“It’s very quick and simple and easy to use,”Wilkes says, adding that if cashiers “can push a button, swipe a card, and accept cash from consumers,” they can use his company’s product.

Repeat Business Merchants and acquirers, especially, also benefit from repeat business associated with use of the reCHARGE solution. “We’ve found that about a third of the transactions that are coming in from the platform are coming from the same consumer on multiple card accounts,”Wilkes shares. “So, they’re not just coming in, doing one transaction on one card and then, at some point in the future, coming back in and using a different card,” he explains. In addition, he and his colleagues at Fuze Network have found that “after a new cardholder tries this service at one of the many locations that currently offers it, 72 percent of the time they come back and use it over and over and over again.” Wilkes isn’t too surprised by that statistic, he says: “If you just cashed your paycheck and you have three credit cards and you need to make a payment on all [three]… it’s pretty easy to take care of all of it right then and there. Three swipes, three transaction fees, and you’re done.” TT Bryan Ochalla is a contributing writer to Transaction Trends. Reach him at bochalla@yahoo.com.

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