Transaction Trends March 2013 by Content Communicators, LLC

Transaction trends The Official Publication of the Electronic Transactions Association

March 2013

Washington

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Technology issues are ripe for congressional crackdown this year ALSO INSIDE: The Latest FraudPrevention Programs Security as Part of the Mobile Evolution

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Transaction trends The Official Publication of the Electronic Transactions Association

Vol. 18 | No. 2

cover story 8

Washington Watch

By John Manasso Technology and privacy issues are top concerns in possible legislation this year. Among others, the Location Privacy Act of 2012, which focuses on mobile apps, may be reintroduced, and the Electronic Communications Privacy Act could be amended to alter rules regarding the government’s access to consumer records.

FEATURES 12 Full Circle Fraud Remedies

18 Special Series

By Julie Ritzer Ross Card companies are implementing and expanding fraud-prevention programs—and extending responsibility to acquirers for spotting criminal activities. ISOs, MSPs, and even merchants are expected to do their part in helping issuers identify fraudulent behaviors.

Startup Stories: Playing the Long Game By John Manasso Treating merchants as part of the family and incentivizing all employees is part of the business strategy at Elite Merchant Solutions, where the focus is on service and a low attrition level. 12

depar tmentS 6

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

Ad Index

Risk Management Taking mobile payments to the next level

Industry Insider Tabbedout simplifies payments at bars and restaurants

18 Transaction trends | March 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 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 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.

Processing Network

The

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4 March 2013 | Transaction trends

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 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, Travis Lee, John Manasso, Bryan Ochalla, and Julie Ritzer Ross 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

25 YEARS

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2012 - $32 Billion processed annually for nearly 300,000 businesses 2012 - EVO acquires Deutsche Card Services (DeuCS) opening up to 39 countries worldwide, becoming... EVO Payments International 2012 - EVO acquires PowerPay 2012 - EVO chooses Deutche Bank as its new BIN sponsoring bank 2009 - $20 Billion processed annually for over 235,000 businesses 2008 - EVO’s international expansion begins with the opening of EVO Canada

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2004 - $10 Billion processed annually 2004 - EVO’s first telecenter opens, driving leads to its partners 2004 - MSI is re-branded to EVO Merchant Services, differentiating itself from the competition 2003 - 24 hour technical support and customer service built in-house 2002 - Alliance partnership programs started and sets the standard for all portfolio builders

1990s

2000 - Risk department is brought in-house 1999 - Underwriting department issues its first merchant number 1990 - Terminal and supply deployment department created 1988 - MSI (now EVO) processes first merchant application

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INDuSTRYnews U.K. and U.S. Consumers Slow to Adopt Mobile Wallets Although mobile phone usage in the U.K. continues to grow with nearly 60 percent market penetration, a recent report by London-based ICM Research revealed that consumers don’t appear to be ready for mobile wallets.

A mere 8 percent of respondents claimed to use their mobile devices to make payments, citing security issues as a primary concern. More than half said they would consider using mobile wallets if the security issues were resolved. Inadequate branding and marketing efforts could also be a reason it has stalled in the region, according to the report. In a separate study from comScore, the current U.S. digital wallet landscape remains fragmented among providers other than PayPal because of low consumer adoption rates as well. Although PayPal topped the list with 12 percent consumer usage, other major digital wallet providers have far fewer consumers who have used them: Google Wallet, 8 percent; MasterCard PayPass Wallet, 3 percent; and Square Wallet, LevelUp, and V.me, all 2 percent.

fast FACT Consumers under 35 prefer to pay with debit cards and cash, according to Auriemma Consulting Groups, with 44 percent having no interest in using credit cards as their main method of payment.

AROUND THE HORN BilltoMobile announced its platform is now available for U.S. Cellular subscribers. BOKU also announced a partnership with U.S. Cellular, giving BOKU merchants the ability to offer a carrier billing option to U.S. Cellular subscribers. Charge Anywhere announced its distribution partnership with Tech It Easy Ltd. to provide mobile payment acceptance in the Virgin Islands. CSR Executives earned certifications from all five International Association of Privacy Professionals credentialing programs. Cynergy Data hired Alvin Mayers to its management team to champion aggres-

6 March 2013 | Transaction trends

sive product development. Elavon has partnered with NCR Corporation to combine NCR’s tablet and mobile-based POS technology with Elavon’s payment processing and distribution channels. Groupon released a new version of its Groupon Merchants app for Android (v2.2) that incorporates the Groupon Payments solution to allow merchants to accept card payments on their mobile devices. Ingenico will partner with Creative Mobile Technologies LLC to offer taxicab drivers in the U.S. a mobile payment solution that accepts EMV chip-based payment cards, NFC-enabled mobile phones,

contactless cards, and magnetic stripe cards. Newtek Business Services has hired Randy Sagar as executive vice president of business development. PayPal and NCR have partnered to integrate PayPal’s digital wallet technology into NCR solutions. SecureNet Payment Systems has appointed Joni Floyd as executive vice president of merchant operations. Shazam has announced Shazam Bolt, an app for smartphones and tablets that allows financial institutions to offer free, mobile account access to Shazam debit cardholders. Sterling Payment Technologies was recognized as the

News from the association

U.S. Travel E-Commerce Surpasses $100 Billion U.S. travel e-commerce sales were up 9 percent in 2012, reaching $103 billion, according to a recent report from comScore. Air travel accounted for nearly two thirds of all travel spending while growing 10 percent compared to 2011. “Travel is a leading online commerce category, and despite being a pioneer in the sector 15 years ago it is still growing at nearly double-digit growth rates and remains very competitive,” says John Mangano, VP of comScore marketing solutions for retail and travel. “With the online channel driving such a high percentage of dollars within the broader travel industry, understanding the competitive landscape is essential to determining the most effective sales and marketing strategies.”

ETA Wins Gates Grant to Promote Payment Innovation n

CALENDAR : 2013 ETA Annual Meeting & Expo Ernest N. Morial Convention Center New Orleans, LA April 30-May 2, 2013 www.electran.org/content/ view/841/516/

ETA will use a grant awarded by the Bill & Melinda Gates Foundation to propel innovation in the payments industry at the 2013 ETA Annual Meeting and Expo, April 30-May 2 in New Orleans. The funds will help support the Payments Next Zone, a designated area that will highlight the latest and greatest developments on the show floor. Six startups will be offered complimentary space in the Zone to promote their innovations. ETA also will present the E-Pay Innovation Award of $10,000 to the startup that exhibits the most innovative e-payment product or technology for the global market.

2013 ETA Strategic Leadership Forum Montelucia Resort & Spa Scottsdale, AZ October 15-17, 2013

Now Is the Time to Take Your ETA CPP Exam

Simple online registration and convenient test-taking locations. Don’t miss the next test application deadline on April 1. Apply today at www.electran.org/cpp.

New Members winner of the 2013 Best Channel Vendor award in payment processing services from Business Solutions magazine for the fifth year in a row. Total Merchant Services hired Matthew A. Mignona as director of ISO/sales partner acquisitions and Heather Campbell as director of marketing. TSYS signed an extension agreement with Payment Alliance International to provide front-end payment processing solutions and support for back-end merchant accounts. VeriFone Systems has announced a mobile payment acceptance solution compatible with the iPad mini.

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. Benseron Information Technologies Naples, FL www.benseron.com Cardsmart Merchant Services Inc. Las Vegas, NV www.cardsmartchoice. com GO3Solutions Inc. New York, NY www.go3solutions.com

Goldman Sachs Irving, TX www.gs.com

Swipe for a Cause Portsmouth, RI www.swipeforacause.com

Quantum Merchant Services Saint Paul, MN www.quantumgo.com

TMS Warwick, RI

RDS Payment Services Marietta, GA www.rdspos.com

Y2Payments Peoria, IL www.y2payments.com

Socure New York, NY www.socure.me Transaction trends | March 2013 7

[ COVER STORY ]

Washington Watch By John Manasso

From cracking down on apps using geolocation data to exploring solutions for combating identity theft, Congress will be eyeing technology this year

echnology, it seems, always leaps several steps ahead of the laws that govern it. So it should be no surprise that with the rapid innovation involving mobile phones, mobile applications, and—near and dear to the heart of ETA and its members—mobile payments, the U.S. Congress plans to scrutinize a number of issues in this sphere in the next 12 months. Congress’s interest has been piqued because of the privacy issues that are involved with mobile apps and the resultant data they collect, says Alysa Hutnik, an attorney with Kelley Drye and Warren LLP and a past chair of the American Bar Association’s Privacy and Information Security Committee. Nonetheless, Hutnik says that Congress and federal agencies are aware that this sector of the economy is an innovative one whose work they do not necessarily want to discourage.“I think there’s awareness and there’s always a delicate balance,” she says, referring to an $800,000 settlement on February 8 March 2013 | Transaction trends

1 between the Federal Trade Commission and social networking app developer Path Inc. on charges that it illegally collected personal information from children without their parents’ consent. In terms of legislation that could affect mobile payments as a whole, the industry needs to be on the lookout for a bill from Sen. Al Franken (D-Minnesota), who chairs the Senate Judiciary Subcommittee on Privacy, Technology and the Law. Franken’s legislation is particularly interested in issues that involve a cell phone user’s geolocation data. Geolocation information is essential to mobile payments because it helps to verify the user’s location, among other roles it plays. In the last session, Senate Bill 1223, dubbed “Location Privacy Protection Act of 2012” (LPPA), was introduced “to address voluntary location tracking of electronic communications devices.” Franken’s concern is that several applications—dubbed “stalking” apps by some—can be stealthily installed on a user’s mobile phone, allowing a third party to track and follow that individual, without his or her knowledge. Domestic violence and child kidnapping crimes are at the heart of the issue, and women’s groups have wholeheartedly supported Franken’s proposal. One of the problems Franken’s proposed legislation has encountered is that it is not so easy to turn off geolocation via the phone settings. Geolocation must be turned on for an individual to dial 911. Franken also expressed alarm at a Wall Street Journal investigation that found 47 of the 101 most popular apps transmitted their users’ locations without consent. “Someone who has this information doesn’t just know where you live,” Franken said during a committee hearing in December.“They know the roads you take to work, where you drop your kids off at school, the church you attend, and the doctors you visit. But the companies that collect our location information are not protecting it the way they should.” As initially submitted, the LPPA bill sought to limit geolocation data to third parties only in cases in which they had provided “express authorization” for an app to do so. Not only could such a law inhibit mobile payments—depending on how it was written—but it also could potentially

stifle innovations with online couponing and advertising. In December, ETA CEO Jason Oxman sent a letter to committee chairman Patrick Leahy (D-Vermont) and the ranking member Charles Grassley (R-Iowa) to address some of the industry’s issues with the bill. The letter read in part,“The payments industry is providing enormous benefits to consumers through innovation in mobile payments, allowing for a safe and secure alternative to cash, access to funds in geographically remote areas, secure storage of payment credentials, electronically transmitted discounts, offers and loyalty rewards, and much more.” Oxman emphasized in the letter that such location information helps both to prevent fraud and also to lower processing costs for merchants. He noted that “this well-intended legislation could have the deleterious effect of stifling nascent innovation in this vital industry segment.” It seems those concerns were taken to heart. When the bill was passed out of the Senate Judiciary Committee, it included protections for the industry. A broad exception was carved out to protect against fraud and to favor property protections. As a result, a third party would continue to be able to collect such data if it were acting in a “good faith” belief. The third party would not need to be right on its belief—wording that would appear to protect the industry’s interests. The LPPA died when the last session ended. Nonetheless, Franken is expected to reintroduce the bill at some point in the new one. When he does, those exceptions carved out for the payments industry are expected to remain. The timing of when he will reintroduce the bill remains somewhat up in the air. Early in the session, the Judiciary Committee’s work has been dominated by headline-grabbing issues, namely gun control and immigration.

Consumer Privacy The LPPA is not the only foray by the Judiciary Committee into the arena of mobile payments. Leahy also is looking into updating the Electronic Communications Privacy Act (ECPA), which concerns the law enforcement end of things like geolocation, emails, and messages sent via social media, such as those on Facebook.

In late November, Leahy issued a statement about why he wanted to take up the ECPA again.“The whole thrust of my bill is to remedy the erosion of the public’s privacy rights under the rapid advances of technology that we have seen since ECPA was first enacted 30 years ago,” the statement said. “In particular, my proposal would require search warrants for government access to email stored by third-party service providers—something that of course was not contemplated three decades ago.” Leahy introduced an amendment at the time that included several provisions. The one that would seemingly affect the payments industry the most involves the government’s access to consumer records. “The provision eliminates the confusing and outdated ‘180-day’ rule that calls for different legal standards for the government to obtain email content, depending upon the email’s age,” the amendment reads.“The provision also requires that the government notify the individual whose account was disclosed, and provide that individual with a copy of the search warrant and oth-

KEY NOTES 8

The Location Privacy Protection Act of 2012 was introduced in the last session “to address voluntary location tracking of electronic communications devices.” Expect it to reappear this year.

The Electronic Communications Privacy Act may be amended to require the government to use an administrative or grand jury subpoena to obtain certain kinds of customer records from a service provider.

The National Telecommunications and Information Administration, a wing of the Department of Commerce, has convened working groups on mobile application transparency meetings. They’re working on a long form and a short form privacy policy that an app user would have to consent to.

8 The National Strategy for Trusted Identities in Cyberspace would create a single username and password for each individual user of the Internet, and its major impetus is to combat identity theft. Transaction trends | March 2013

[ COVER STORY ] er details about the information obtained, within three days.” Additionally, that section would be amended so that the government could use an administrative or grand jury subpoena to obtain certain kinds of records from a service provider, including “customer name, address, session time records, length of service information, subscriber number, and temporarily assigned network address, and means and source of payment information.” As the ECPA pertains to privacy rights, somewhat like the proposed LPPA, it is possible that the LPPA could be combined into the ECPA for one larger piece of legislation, especially since both have originated in the Judiciary Committee. Another sign that mobile payments are emerging as a hot topic of interest for Congress is the fact that both the Senate and the House of Representatives held hearings on the subject in 2012, according to Mary Weaver Bennett, ETA’s director of government and industry relations. Bennett characterizes the hearings so far as “information gathering” and “noncontroversial.”

POS

“We expect that work to continue,” she says.“There have been no bills introduced as a result of those hearings. Investigational hearings will continue in those bodies and they will learn more.”

Codes of Conduct In terms of other congressional action that could affect ETA members, it’s possible that a large cyber security bill that failed to pass in the last session could be revived, Bennett says. The biggest issue looming over the industry, although one that is hard to pinpoint in terms of timing, is that Congress could again look into action regarding interchange.When the Fed issued new interchange rules in the summer of 2011, the move sent shockwaves throughout the industry. Mobile phone technology also has received attention from numerous federal agencies. Among the most prominent is that from the National Telecommunications and Information Administration (NTIA), a wing of the Department of Commerce, which has convened working groups on mobile application transparency meetings.

Amy Schoppman, an attorney with Webster Chamberlain & Bean LLP, has attended the meetings on behalf of ETA. She says the group is about one third of the way complete with a process to develop non-binding suggestions for app developers.“It’s a template they can use for a privacy or transparency code of conduct,” she says. “The group as a whole is working through particular definitions and whether or not we want to approach an agency about enforcement, but that’s well into the future.” Schoppman says many app developers—perhaps naively—are unaware that they are collecting sensitive information. The most sensitive of that information falls into four categories: personal (such as Social Security number and date of birth), health, financial and, of course, geolocation information. The working group, which consists of such opposing interests as lawyers representing app developers and others with privacy concerns, agreed to come up with a long form and a short form privacy policy that an app user would have to consent to. Schoppman says that on behalf of the

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ETA’s Government Relations Committee, she would continue to help the NTIA working group to develop an appropriate definition of “ financial services.” She estimates that the process will be completed by May or June. The group has numerous meetings scheduled, including one April 4.

Identity Theft While the NTIA’s effort represents work on a nuts-and-bolts issue, another sector of the Commerce Department is working on something a bit more inventive and perhaps far-reaching. This one has the potential to become high-profile because it’s an initiative directly from the White House and could affect virtually every Internet user. Called the National Strategy for Trusted Identities in Cyberspace (NSTIC), it seeks to create a single username and password for each individual user of the Internet, and its major impetus is to combat identity theft. The NSTIC website says it seeks to improve passwords and “include a vibrant marketplace that allows people to choose among multiple identity providers—both private and public—that would issue trusted credentials that prove identity.” NSTIC’s goals are to make use of the Internet faster, more convenient, safer, and more private.The program also would be voluntary. NSTIC would accomplish its mission by creating an “Identity Ecosystem.”The goal of creating that ecosystem, according to NSTIC’s website, is that “individuals, organizations, and underlying infrastructure, such as routers and servers, can be authoritatively authenticated.” “They’re trying to get a grasp on the whole universe of what they need to consider,” says ETA’s Bennett. She says NSTIC might eventually write a rule, but she does not expect one to come in the near future. ETA will continue to be involved with NSTIC. In terms of rule-writing among government agencies, a last item of concern for ETA members is that the Consumer Financial Protection Bureau will at some point this year announce its new rules governing pre-paid cards.What’s unknown is how a January ruling by a federal appeals court will affect the operation of the CFPB and, consequently, the publishing for those rules. In January, the court ruled that several recess appointments made by President Obama were unconstitutional. What appears to be of some dispute is whether CFPB Director Richard Cordray’s appointment also is unconstitutional. The White House maintains that the appointment meets with constitutional muster. However, Senate Minority Leader Mitch McConnell (R-Kentucky) disagreed, as did the lead lawyer for the plaintiffs in the case, former White House counsel in the George H.W. Bush administration, C. Boyden Gray. “The illegality of Cordray’s appointment casts serious doubt on the legality of CFPB actions implemented since his appointment,” Gray said in a statement. If that is the case, then the rules regarding pre-paid cards could be thrown into flux. TT John Manasso is a contributing writer to Transaction Trends. Reach him at john_manasso@yahoo.com. Transaction trends | March 2013

[ FEATURE ]

Full Circle Fraud Remedies By Julie Ritzer Ross

Card brands, acquirers, ISOs, and merchants collaborate to help form cloak of protection

12 March 2013 | Transaction trends

n November of 2012, First Bank of Delaware and the U.S. Department of Justice reached a settlement in which the bank agreed to pay $15.5 million to resolve claims it had defrauded consumers by allowing more than 2 million debit transactions totaling more than $100 million to be processed without proper customer authorization.According to a DOJ statement, the bank had established direct relationships with “several fraudulent merchants and third-party payment processors, working in cahoots with a large number of additional fraudulent merchants.” The DOJ also alleged that First Bank had been aware of, but ignored, the fraudulent activities, which included return rates in excess of 50 percent on remotely created check (demand draft) transactions executed through the third-party processors. One ISO that was involved in the incident—Landmark Clearing Inc.—also was sued by the Federal Trade Commission for processing millions of dollars in

remotely created payment orders (RCPOs) on behalf of suspect merchants whose return rates were as high as 83 percent. Landmark settled the matter with the FTC. The DOJ and the FTC are more closely scrutinizing online fraud and acquirer involvement today. In fact, the FTC has established a “working group” to examine sales agent activities. State attorneys general also are jumping on the bandwagon. “[The First Bank of Delaware] case—and there will doubtless be others like it—should serve as a strong reminder to all acquirers that government intervention and oversight are on the rise,” says Martin Elliott, head of Americas acceptance risk and global brand protection at Visa. “More than ever, it is imperative for acquirers to ensure that agents comply with card association regulations, and that they and their agents board only merchants whose transactions are legal from every angle, including what is being sold and how.”

Visa’s Efforts

the Visa Merchant Trace system to identify merchants whose accounts have been closed by their banks in the past; those that accept high-risk merchants may, Elliott says, be compelled to undergo annual Visa-initiated assessments of their activities if they meet “certain thresholds” for transaction volume. Visa has deployed multi-layered data analysis to identify potentially illegal processing activity, with acquiring banks now required to help the card association collect data on their merchants. Visa notifies its acquirers about any merchants suspected of processing prohibited transactions, and acquirers are responsible for investigating and addressing the situation. Merchants and acquirers face penalties if they fail to do so, and acquirers that fail to follow GBPP guidelines may be barred from boarding high-risk merchants for a certain period of time. • New agent registration regulations—In accordance with a regulation introduced last year, acquirers that wish to sign new high-risk agents must register them with Visa. • Third-party acquirer review and investigation—Visa requires review of acquirers with a seemingly high volume of GBPP violations or who have high-risk merchants with excessive chargebacks. Investigators assess whether acquirers are properly monitoring and controlling agents’ portals to ensure proper portfolio management and if they have and are enforcing formal policies to govern underwriting.

Not surprisingly, Visa has implemented a number of programs and practices aimed at addressing the issues Elliott describes. These include the following: • Global Brand Protection Program (GBPP)—The GBPP is intended to prevent merchants from processing illegal or unethical credit card transactions, such as those involving the sale of drugs without a valid prescription, deceptive marketing practices, incorrect coding of online gaming transactions, and the use of fraudulent websites to solicit donations or payments to entities posing as official government bodies. MasterCard’s Efforts GBPP applies to acquiring merchant banks, ISOs, and agents Similar initiatives undertaken by MasterCard include the that contract with high-risk international online and mail or- following: der/telephone order (MOTO) merchants, as well as to inter- • Business Risk and Mitigation (BRAM) Program—The national merchants and merchants BRAM program restricts access to the that operate in high-risk segments, MasterCard system by merchants whose such as online tobacco sales, direct products and services may pose significant marketing, and Internet gaming. Alfraud, regulatory, or legal risks, according 8 MasterCard and Visa fraudprevention efforts extend significant though not previously characterized to an association spokesperson. It was creresponsibility to acquirers for spotting by Visa as high-risk, merchants that ated in part to enforce MasterCard rules fraud. sell “drugs, drug proprietaries, and prohibiting acquirers from engaging in or druggist sundries,” as well as online supporting any illegal merchant activity, 8 ISOs and acquirers have created councils and communities to help drug stores and pharmacies, also are including selling or offering for sale prodexpose the latest fraud-related affected by the program. ucts and/or services other than those in developments and brainstorm means Under the program umbrella, acfull compliance with applicable law, selling of mitigation. quiring entities must register any or offering for sale products and services 8 Some acquirers and processors new high-risk e-commerce or MOTO (even images) that are patently offensive are using merchant monitoring merchants; banks must do the same and lack serious artistic value, and infringesolutions and services to address fraud for all Internet payment service proment upon the intellectual property rights and reduce their own risk. viders (IPSPs) they use for high-risk of others. 8 With real-time web session merchant accounts and any of their As part of the program, MasterCard uses intelligence, merchants can isolate ISOs that solicit high-risk card-nota comprehensive Internet monitoring sercyber-criminals and either prevent present accounts. Acquiring banks vice to ensure it has robust and current them from committing fraud or are required to check the Terminatprofiles of high-risk merchants conducting minimize the volume of attacks. ed Merchant File and participate in business in the MasterCard system.The ser-

KEY NOTES

Transaction trends | March 2013

[ FEATURE ] vice also lets the association pursue remedial actions with acquirers that may unknowingly be facilitating transactions for merchants engaged in infringement and other illicit activities. Addressing attendees of ETA’s 2012 Strategic Leadership Forum, Linda Kirkpatrick, group head of customer performance integrity, franchise development, at MasterCard, said BRAM had been effective in decreasing fraud. E-commerce fraud alerts for issuers—Under MasterCard rules, merchants can refuse any authorized card-not-present transaction they suspect is fraudulent.The e-commerce alerts advise issuers when a given merchant has opted to do so. MasterCard maintains that this information-sharing reduces chargeback rates.

All Together Now ISOs, MSPs, and others also can play a role in helping issuers identify criminals and criminal activities, especially given the increasing pace of security-thwarting schemes. Experts believe the onus is on the ISO/MSP community to immediately convey to issuers details about anomalous activity revealed by their own internal risk-monitoring systems. Such activity may include fraudulently established collusive merchant accounts and credit cards, says Don Weary, vice president, merchant management, for Sage North America. “Providers can, should, and do share information surround-

ing fraud trends that originate with issuers and can be of help to these issuers” in bringing to light “compromised credit cards, possible identity theft, or collusive merchants,” Weary says. “Early detection and notification minimize the exposure on accounts that could impact both the issuer and the provider.” Still, some ISOs claim it isn’t sufficient. Given the level of criminal activity in the electronic payment space, ISOs and acquirers have created councils and communities to help expose the latest fraud-related developments and brainstorm means of mitigation without compromising customer or cardholder data, says Mike Vaughn, vice president, customer activation, for Total Merchant Services. “With the advent of various social media outlets, these communities have become larger, and the volume of information has also increased, leading to greater knowledge of fraud trends, as well as the ability to monitor their adoption,” he says. However, issuers, concerned about maintaining the security of issuer data, have traditionally been reluctant to divulge more than bare-bones information with the ISO and acquirer community. While the protection of issuer data is indeed important, Vaughn observes, “there is great value in ISOs, acquirers, and issuers combining forces to prevent fraud and minimize risk in the payments ecosystem.” In another vein, “smart”acquiring entities are avoiding threats by taking a hardline approach when boarding mer-

Why should I do business with an ETA CPP? ETA CPPs have the knowledge and experience to recommend the best and most appropriate payment solutions for your business. ETA CPPs have made a significant personal (and financial) commitment to the profession and agreed to adhere to the Electronic Transactions Association (ETA) Code of Conduct.

For more information visit: www.electran.org/cpp 14 March 2013 | Transaction trends

[ FEATURE ] chants, says Elliott. A cquiring banks and agents should ask themselves whether, if they did not have a financial reserve, they would readily sign each merchant applicant, MasterCard advises. Some acquirers, along with other payment processing players, are using merchant monitoring solutions and services to address fraud and reduce their own risk. For example, BlueSnap, a provider of payment solutions and services to online merchants, recently inked a deal with G2 Web Services LLC of Bellevue, Washington. Under terms of the agreement, G2 Web Services continually examines merchants’ websites to confirm what they’re selling online and whether it is legal. Regular assessments of BlueSnap’s merchants’ compliance with card network rules and its own terms of service are conducted via Internet monitoring technology and the work of human risk analysts. Each potential violation is reviewed and confirmed by two risk analysts and, if determined to be a valid risk, reported to BlueSnap via a secure case management portal.

Merchants’ Role Merchants also are adopting sophisticated fraud-fighting technology. MasterCard, for example, is developing different fraud assessment and monitoring tools for the merchant community. Its web session behavior tracking system maps normal web flows and then monitors every click on the e-commerce site in question, computing threat scores based on traffic and flow patterns that fall outside the norm. With such real-time web session intelligence, merchants can isolate cyber-criminals and either prevent them from committing fraud or minimize the volume of attacks. Another solution facilitates fraud-scoring of individual customers by e-commerce merchants, based on the “behaviors” they exhibit during online shopping sessions, such as the speed with which they navigate the merchants’ websites. “Traditionally, merchants have used standards compliance and signature-based models to thwart fraudsters, but the inherent flaws of this approach are readily apparent,” says Tony Gambacorta, head of field services at Silver Tail Systems, which harnesses web session intelligence to prevent fraud and information security threats. “Compliance sets too low a bar, and signature-based models do nothing to stop novel attacks. By contrast, a behavior-based approach gives merchants an understanding of the ‘how’ in addition to the ‘what’ of their transactions with customers.” Gambacorta says merchants should be made to understand that click speed, along with malware indicators and navigation patterns, is an excellent web behavior benchmark. Fraudsters engaged in scripted sessions move through websites at a different speed than “normal” browsing users. Malware indicators can pinpoint unusual occurrences, such as simultaneous e-commerce Website log-ins from diverse locations on a single computer. Legitimate consumers, Gambacorta states, “don’t log in from Atlanta and then from Lagos 30 seconds later. 16 March 2013 | Transaction trends

“Traditionally, merchants have used standards compliance and signature-based models to thwart fraudsters, but... a behavior-based approach gives merchants an understanding of the ‘how’ in addition to the ‘what’ of their transactions with customers.” —Tony Gambacorta, Silver Tail Systems

“As for navigation patterns, I recently saw a case in which fraudulent orders placed by multiple individuals had one odd trait in common: They’d all come directly from the same underground forum page,” Gambacorta adds.“When we accessed the forum, we found detailed instructions for committing fraud on the targeted website.” Merchants also are showing interest in monitoring solutions that can reveal other fraudulent acts perpetrated by a particular criminal once a single incident has been pinpointed. “With multi-layered link analysis technologies, merchants can quickly identify other suspect transactions, even when a fraudster attempts to change all the payment information on the transaction,” explains Dave Britton, vice president, industry solutions, at 41st Parameter, a provider of global fraud prevention solutions. “It is able to accomplish this by tying together all the transactions originating from the same device,” be it a PC, laptop computer, tablet device, or smartphone. “I think we all see that there’s no cloak around any of us, nor will there ever be,” Elliott observes.“Everyone has a stake in the game.” TT Julie Ritzer Ross is a contributing writer to Transaction Trends. Reach her at jritzerross@gmail.com.

Startup Stories: Elite Merchant Solutions

Playing the

Long Game Elite Merchant Solutions earns points with fairness, consistency, and teamwork By John Manasso

Milmeister

Elite Merchant Solutions Van Nuys, CA Founded: 2002 Annual processing volume: $2.5 to $3 billion Employees: 52

18 March 2013 | Transaction trends

efore he got into the payments business, Justin Milmeister, ETA CPP, worked in commercial real estate. One of the reasons he fell in love with payments is that it is different “in every regard” from from commercial real estate. The payments industry offered the lure of recurring revenue, which brought a feeling of security. “In commercial real estate, you only get each sale,” Milmeister says.“There’s no residual on that. It’s a onetime shot and you have to be continually developing relationships and have a little luck. If you have a bad month or a bad six months or three months, you could be in bad trouble financially. This is much more stable and predictable.” So, in 2002, Milmeister founded Van Nuys, California-based Elite Merchant Solutions (EMS). Today, the company has 52 employees spread among four offices and ranks among the Nilson Report’s top 100 processors, a distinction the company has held for five years running. EMS’ annual processing volume is between $2.5 and $3 billion. Milmeister’s guiding ethic in building EMS was to provide top-notch customer

service—something indispensable to the merchant—to avoid becoming a commodity. As he began researching the industry, Milmeister constantly heard the same complaint from merchants, “I can’t get a hold of my rep.” “There were always issues and problems,” he says. “More often than not, they were not being taken care of to their satisfaction.” Although EMS takes on new businesses when they are passed along, it’s not the company’s focus, says Milmeister. In fact, he said he prefers a more experienced target group: those who already have worked with several processors.

Hitting Singles The high service level begins with EMS’ employees, whom, he said, are “highly compensated” and all have W-2 status.“It’s why we have a long tenure for our employees,” Milmeister says. He refuses to outsource customer service, saying that approach is too risky in the event that a merchant does not get a prompt or adequate response. “We really incentivize (employees) to feel they are part of this company so that

when they do well, the company also does well,” Milmeister says.“Some companies keep it in their pocket at the top level, so to speak.” Whether it’s holidays, late nights, or weekends,“there’s no sleeping in this organization. It’s a 24-hour business.” “We really baby our merchants,” adds Gloria Soble, the company’s regional sales manager and its first inside employee. “My philosophy is you become part of our Elite family. We like for people to call us direct. I like to stay personally involved with my merchants, go that extra mile. People call me sometimes on weekends. “To me, it’s not just important getting the business. It’s important what you do once you get it. When they call with an issue, we follow through until it’s done.” While EMS has merchants in every category code, its niche is with hotels, high-end restaurants, and car dealerships. The ISO’s pricing strategy is to “make pennies for years rather than dollars for days,” says Milmeister. “That means, basically, we’re not trying to hit home runs,” he says.“We’re hitting singles. There’s not a lot of room for someone to come in and undercut our pricing, so, therefore, our service always takes over and the merchant we really target knows the difference and they don’t leave. We have a very low attrition level when all things are being compared.” To inculcate the kind of customer service the company is looking for, EMS does a lot of internal testing to make sure it finds the right employees, whether they are in tech support or customer service and retention. On top of that, the company offers annual bonuses using a formula that is based on how well the company did while also gauging employees’ tenure and their individual contribution. Milmeister believes that employees outside of sales reps deserve to be rewarded because they handle merchants’ sensitive information. “We realize there’s a chain here,” he says. “One link can’t be broken. The sales guy has to sell the account but then the admin has to get them downloaded for years to come. Both are required to make everything work. So, too often people are focused on rewarding sales reps and incentivizing them. We feel strongly [about]

Milmeister and Soble

WORDSTOTHEWISE n Don’t be easily fooled by what seem to be great offers, Milmeister advises sales reps, especially newcomers to the industry. “They come in and they just look at price and don’t understand the components,” he says. “It’s just smoke and mirrors—the ads and brochures. An honorable company will give you everything up front and another one will try to give you a false outlook of what you’re really getting just to sell you on going with their company.” Milmeister says he’s seen ads that offer an 80 or 90 percent split of revenues, but once a rep gets through all of the fine print, it’s more like what his company offers, a 15 percent split. “We don’t want any surprises,” he says. “We’re very generous in everything that we do.” n Hire a bankcard attorney, Milmeister also advises reps. “The language and the agreements, they’re not your norm. It’s a specialty practice. You can’t just get any corporate lawyer to look at the agreement. They won’t understand some of specifics related to the bankcard industry.” n Persevere, advises Soble. She also notes that it’s not the kind of job, if you want to succeed, that you can necessarily leave at the office when the workday ends. “Just work hard,” she suggests. “Don’t give up. Take care of your merchants. Doing this, it takes a while to get going. If you’re willing to put in that hard work, the rewards are great.”

Transaction trends | March 2013

Startup Stories: Elite Merchant Solutions

incentivizing staff because we understand how vital they are.” “We’re really proud of the company we built,” adds Soble. “We just have so much integrity. I love it. Our merchants are very important to us.”

Bonus Points Beyond customer service,EMS offers helpful programs to its merchants, including a loan program. Restaurants, in particular, take advantage of the program because banks often don’t like to loan to them, considering restaurants a risky bet because of their high failure rate. Elite’s program doesn’t ask the merchant to give personal guarantees, nor does the ISO file a Uniform Commercial Code-1 Financing Statement, which acts like a lien. Elite will loan a merchant up to 100 percent of its credit card processing with a target payback schedule of six months. (It also offers longer and shorter repayment schedules.) The repayment amount is flexible, depending on the merchant’s processing. “The way it works with us is if you had a great month, you take the loan back faster,” Milmeister says.“If you have a slow month, it’s not going to inhibit your business because your payments

“To me, it’s not just important getting the business. It’s important what you do once you get it.” —Justin Milmeister, ETA CPP

are based on your volume.” As Milmeister is something of a latecomer to the payments industry, he has sought to make up for lost time. One way he did that was by taking ETA’s Certified Payments Professional (CPP) exam. He was in the second class that ETA offered in early 2012. Starting in the first quarter of 2013, EMS planned to offer financial incentives for its staff to earn their ETA CPPs. “The reason I decided to get that designation is because I’m always striving to learn more and to showcase what I know,” he says.“I’ve been doing this for nearly 11 years now and the original programs did not have any training manuals or guides. You either knew it or didn’t. There was

nothing provided.They’ve since moved to providing study materials. “I thought it was a great accomplishment to earn the designation with just my sheer knowledge and not just studying what were the likely answers to the test. You had to know how all the components worked from sales, to service, etc., all the different complementary products.You really had to have broad knowledge to get that designation.” Just as Milmeister likes to be well rounded in terms of his chosen career, he also likes for the company to be that way. Elite Merchant Solutions gets involved in charity—for example, working with nonprofits that benefit the homeless. Its charities include Toys for Tots and the Los Angeles Union Rescue Mission. “If you constantly take, take, take, you’re not a complete person,” Milmeister says.“I’ve been very fortunate in my life, and I want to be able to help out those who are less fortunate or have run into some bad luck.” Bad luck is a fate that Elite Merchant Solutions appears destined to avoid. TT John Manasso is a contributing writer to Transaction Trends. Reach him at john_manasso@yahoo.com.

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ISO Corner RISK MANAGEMENT

State of Security

Why the mobile evolution must leave status quo behind By Travis Lee

hile retailers are embracing mobile to drive incremental sales, the payments marketplace is focused on how mobile payments can change the industry. However, there is still much to be done to ensure mobile payments work securely and seamlessly for merchants, consumers, and issuers. Mobile payments cannot simply emulate card payments on mobile devices; such a strategy should be viewed as a transitional measure as it forgoes the opportunity to introduce incremental value into the payments ecosystem and address security concerns and compliance costs related to credit and debit card acceptance.

Today’s Mobile Payments Space Most current mobile payments initiatives are aimed at replicating card-based payments on mobile devices.These mobile initiatives are encountering challenges, in part because card-based payments continue to be convenient and reliable, and in part because mobile payments can add cost and complexity without offering security improvements and revenue-generation value. Consumers have expressed concerns over the security of mobile devices for storing payment cards and other sensitive credentials. Regardless of the effectiveness of current security measures, the industry will need to educate consumers to explain mobile security and allay associated fears. In addition, merchants experience added complexities when mobile payments emulate card payments. Currently, most mobile payments propagate the benefits and shortcomings associated with card-based payments. Merchants who accept these payments receive the benefits of card payments acceptance “at par,” while maintaining their PCI compliance responsibilities—an area that has recently garnered much attention as merchants struggle to secure sensitive cardholder data within their environments. Card-emulation mobile payment systems lack scalability. The value chain— 22 March 2013 | Transaction trends

from issuers and payments products, to mobile network operators (MNOs) and mobile devices—has a fragmented nature. Issuers, trusted service managers (TSMs), and MNOs must work together to establish a complex network of business relationships in order for payments products to be enabled on consumer mobile devices.This complexity represents a significant barrier to issuers, MNOs, and their TSM partners to achieving coverage of the market.

Providing Value Although there is plenty of debate on the topic, there does not appear to be a current solution that caters to the needs of all of the key stakeholders—consumers, merchants, and issuers—while minimizing risk in the ecosystem.

a standardized process will help control merchants’ investment risk in a new payments infrastructure. Beyond that, merchants also are looking for opportunities to reduce overall cost of payments while driving top-line growth. The prevailing card emulation payments models fall short on addressing these critical merchant needs, which is why merchants have not stepped broadly into the proximity mobile payments arena. Consumers’ needs. The most frequently cited direct benefit to consumers associated with mobile payments is convenience—the belief that mobile payments eliminate the need for consumers to carry their leather wallets filled with cards, while incorporating mobile loyalty, gift, and coupon credentials. Undoubtedly, integrated

The industry needs a model that offers... value to key stakeholders while ensuring security and scalability that will drive adoption. The industry needs a model that offers incremental value to key stakeholders while ensuring security and scalability that will drive adoption and enable market penetration. Each type of stakeholder’s needs must be considered during this process: Merchants’ needs. The industry will need to consider merchants’ cost concerns and standardization needs in implementing a new mobile payments model. Merchants demand payments solutions that do not propagate their costly responsibilities to secure sensitive consumer data. Complying with PCI mandates costs retailers billions of dollars every year, and they are seeking payments alternatives that offer a path to mitigate or eliminate this liability. Merchants require greater standardization and normalized processes for acceptance of mobile and alternative tenders;

smartphone applications present opportunities to offer consumers a much richer shopping experience, simplifying their ability to pay and accept promotions from their favored merchants. Nonetheless, many industry studies indicate that a significant majority of consumers lack confidence in the security of mobile device platforms for storing sensitive account credentials and originating proximity payments. The industry should look to develop a mobile payments solution that addresses consumer concerns about security, while also enabling a richer and more integrated shopping experience. Issuers and alternative providers’ needs. The current card emulation payments model can offer increased risk at increased cost for many traditional issuers. For the foreseeable future, issuers will be

co-issuing plastic cards and working with TSMs to provision their products within mobile wallet applications. This model adds cost and results in card credentials being exposed in more places. Current mobile payments models involve intermediaries that complicate issuers’ ability to control direct relationships with their customers. In addition, the complexity of working through TSMs and MNOs to get payment credentials securely provisioned onto consumer mobile devices creates friction in issuers’ ability to penetrate the market, limiting the scalability of mobile issuance. For alternative payment service providers, the mobile form factor presents an opportunity to gain acceptance at brickand-mortar merchant locations. However, if merchants are to embrace these alternative tenders, they must be processed with increased standardization and normalization; merchants cannot afford to invest in separate software, hardware, and employee training across a broad range of payment tenders.

The Solution The payments industry can benefit by embracing the mobile channel as an opportunity to enrich payments for merchants,

consumers, traditional issuers, and alternative payment service providers. The industry should develop mobile payment solutions that offer merchants relief from their current PCI and data liability burden, while addressing consumer concerns about security. New solutions should remove cardholder data from the consumer device and manage the association of the cardholder data in the cloud, thus securing the consumer and removing cardholder data from the merchant PCI data scope. What’s more, the industry should ensure the mobile payments system achieves a level of uniformity across disparate tenders, while offering incremental reporting or other analytics that align with merchant objectives to leverage the mobile channel and improve conversion on their marketing spend. The industry also should keep in mind the solution must be scalable and offer reduced risk for traditional issuers. All participants will benefit from a more open and flexible platform that complements or incorporates technology enhancements like EMV, existing and new methods of proximity communications (i.e., NFC, QR codes, acoustic methods, etc.), and new payment tenders. When retailers, consumers, and issuers are presented with mobile payments

options that are characterized by these benefits, mobile payments will begin to penetrate the broader mobile commerce market. While mobile payments continue to grab the bulk of the payments marketing “buzz,” today’s consumers will have to continue carrying their leather wallets until virtually all merchants can accept a payment from mobile devices. However, there are early opportunities to offer mobile solutions, enabling consumers and merchants to enjoy more of the benefits associated with loyalty programs and retailer-branded payment tenders—products that consumers often don’t have with them when they visit the stores. Mass adoption can begin once these early solutions offer some of the benefits and security features for more general purpose payments products. At that point, the payments industry will be offering its constituents near-term value through improved risk mitigation, better security, and a migration path to a payments ecosystem that is envisioned to rely more on mobile technology than on plastic. TT Travis Lee is product marketing director for Transaction Network Services and a member of ETA’s Fraud and Risk Committee.

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mobile + tech + commerce The FUTURE of Payments is HERE RegisteR

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www.electran.org/am13 Transaction trends | March 2013 23

Industry Insider

Eat and Run

Tabbedout brings bar and restaurant owners, servers, and customers an easy option for settling the tab By Bryan Ochalla

ike any good startup, Austin, Texas-based Tabbedout got its start as a solution to a problem. Eight years ago, co-founder Rick Orr came up with the idea that now serves as the company’s backbone after he grew tired of waiting 50-plus minutes for servers at area bars and restaurants to present his check and process his payment. Orr thought there had to be a better way to do business. Tabbedout allows customers to open, view, and pay tabs with their phones while also enabling merchants to capture order history and preferences and otherwise enhance the guest experience. Before launching Tabbedout in 2010, Orr (who now serves as executive vice president and general manager) and co-founder David Lemley worked on building the mobile app and developing relationships with POS vendors in the hopes that they’d agree to integrate Tabbedout into the systems they provide to bars and restaurants. Since then, Tabbedout—both the company and the product—have grown by leaps and bounds. “We started off with just one local POS company here in Austin, but today we’re integrated with eight POS systems, which cover about 75 to 80 percent of the available hospitality market,” says Kevin McKeand, vice president of strategic partnerships and major account development. Full Menu Those POS vendors—as well as their hospitality-focused clients and even the consumers who frequent them—may be interested in the Tabbedout software and business model for a whole host of reasons. On the consumer side of things, there’s the fact that the Tabbedout app—available for Android and iPhone users—allows them to quickly and securely pay for drinks and meals using their phones. It also allows them to receive and redeem in-app discounts and offers, share feedback, and view their purchase history.

24 March 2013 | Transaction trends

On the merchant side, the main attraction is likely to be that, because the software is integrated into their POS systems, bar and restaurant owners don’t have to invest in additional hardware to make use of Tabbedout. They also don’t have to change their existing merchant processors or otherwise disrupt their operational flow should they decide to invest in this solution. Additionally, Tabbedout enables the aforementioned businesses to automatically and securely capture all sorts of valuable customer information—including order history, item preferences, visit frequency, and amounts spent— and distribute it to staff. Such data enables merchants to reward customers with discounts and offers as well as respond to and manage feedback—all of which gels with what McKeand considers to be Tabbedout’s standout features. Made to Order Unlike the solutions of its main competitors,Tabbedout was specifically built for full-service restaurants and bars. “There are mobile payments companies out there that offer apps ... more focused on quick-service businesses like bakeries and coffee shops. They won’t work in a restaurant or a bar,” McKeand says. A customer “certainly isn’t going to hand his or her phone to a server and say, ‘Here, take my phone, scan it, and then bring it back.’” Tabbedout recently expanded with a quick-service solution that works similarly to the one employed by companies like Starbucks—with a key difference being that Tabbedout’s app creates a QR code that instructs the merchant’s POS system to close out the customer’s check electronically. Tabbedout also began offering CRM capabilities to its clients in January. “Merchants want to know, in real time, which customers currently in their bars or restaurants have Tabbedout,” McKeand says, and the company’s mobile-optimized website (as opposed to an app) will give them that information. In addition,“they’ll be able to see that person’s history at the restaurant or bar and push out offers or discounts to them.” TT Bryan Ochalla is a contributing writer to Transaction Trends. Reach him at bochalla@yahoo.com.

trust:

reliance on the integrity, strength, ability, surety of a person or thing; confident expectation of something

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