Transaction Trends Sept 2013 by Content Communicators, LLC

Transaction trends The Official Publication of the Electronic Transactions Association

September 2013

Federal Oversights FTC casts an increasingly watchful eye on payments

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Transaction trends The Official Publication of the Electronic Transactions Association

Vol. 18 | No. 7

cover story 12 Federal Oversights

By John Manasso Changes may be coming to the payments industry, as the Federal Trade Commission considers increasing regulations intended to minimize privacy and security risks for consumers. Some fear payment processors will be held responsible for the actions of a handful of unscrupulous merchants, and more. 12

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Forum Preview: Where the Innovators Are

Startup Stories: Blame It on Rio

Scottsdale, Arizona, will host this year’s premier event for executive-level payments professionals. Attendees will benefit from networking and information sharing among visionary leaders in the industry.

By John Manasso TrakGo.com’s unique online payments tool, designed for use in Brazil, was awarded the E-Pay Innovation Award at ETA’s 2013 Annual Meeting & Expo.

depar tmentS 4

ETA Gateway

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

Merchant’s Corner Savvy payments professionals will set the stage for merchants to benefit from Web 3.0

Insights from ETA’s CEO, Jason Oxman

23 24

Ad Index Industry Insider Sysnet offers “merchant intelligence” tools

Transaction trends | September 2013 3

ETA Gateway

ETA is the Voice of Payments in Washington

rapped up in everything the payments industry does today and will do tomorrow is the complicated world of government regulation. ETA is the leading organization in Washington advocating for the payments industry and a key source of information for legislators and regulators. In recent months, the Federal Trade Commission (FTC) and other federal agencies have stepped up enforcement activity against payment processors. Law enforcement agencies are targeting ISOs and processors as part of investigations into merchants that violate consumer protection laws and FTC rules. Naturally, these actions give rise to an industry-wide concern about the potential liability of innocent processors. On behalf of our more than 500 payments industry members, ETA is taking action to address this serious issue. ETA is uniquely positioned to facilitate a

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 September 2013 | Transaction trends

dialogue between our members and regulators in Washington. As part of that effort, the ETA Board of Directors recently approved a best practices project to address merchant on-boarding and ensure that law enforcement focuses its efforts on merchants that break the law. I’m optimistic that the work of ETA on this important initiative will address regulators’ concerns while continuing to allow for the innovation that is so crucial to our industry’s success. ETA is committed to keeping our members informed and engaged about laws and regulations that impact our industry.Today’s payments professionals need to know how to navigate the complex legislative and regulatory environment. On page 12, you’ll find an update on the work we are doing here in Washington on your behalf.We also post regular updates on ETA’s trendsetter blog. In addition, ETA’s Voice of Payments is the largest payments industry grassroots network in the country.Voice of Payments gives consumers the tools necessary to ensure elected officials hear the voices of their constituents on issues of importance

to the $4 trillion payment processing industry. ETA is also preparing to launch its first-ever Political Action Committee. The official ETA PAC launch will take place during the ETA Strategic Leadership Forum, October 15-17 in Scottsdale, Arizona, where you can learn more about how ETA PAC will help advance the payment industry’s policy goals. ETA will also be hosting a Government Panel at the ETA SLF. The panel will feature high level regulators and legislative staff who will give attendees their insight into the legislative and regulatory landscape for the payments industry. It’s another great reason to attend the ETA SLF, the payments industry’s best executive networking event (including a world-class golf networking opportunity) of the year. Read more on page 17. To register, visit http://electran. org/events/slf13/. I look forward to seeing you soon! 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 Small, Medium Businesses Expand Mobile Payment Adoption Forty percent of small- and medium-sized businesses (SMBs) accept payments at the point of sale using a mobile credit card reader attached to a smartphone or tablet, according to an ongoing study by BIA/Kelsey. Of those surveyed, 16 percent plan to incorporate this capability within the next 12 months. Many of these SMBs also are using mobile technology to draw in customers, with 32 percent saying they employ mobile advertising for promotions, up from 28 percent in 2012.

Prepaid Cards Gaining in Popularity By the end of 2014, a projected $167 billion will be loaded into prepaid card accounts— a 42 percent increase from the amount loaded in 2010, according to a recent study by Consumer Reports.The study evaluated 26 different prepaid cards on value, convenience, safety and fee accessibility, and clarity and found that enhancements and features have secured prepaid cards as a viable payment method for consumers, rivaling bank debit cards. The top five prepaid cards on the market include the Bluebird card with direct depos-

Infographic Consumer Awareness of Authentication Solutions to Secure Online Payments 84%

it, the H&R Block Emerald card, the Green Dot Bank Issued Prepaid card, the Approved card with direct deposit, and the Approved card without direct deposit. Other key findings of the report: n Many popular prepaid cards are not necessarily cheaper than other prepaid cards and do not provide the option of making both electronic payments and payment by paper check. n Several prepaid card issuers offer convenient features—such as the ability to make payments electronically or by paper check, account management tools like text message alerts, and mobile remote deposit capture—but some fail to clearly explain these features to consumers. n While all of the reviewed cards claim to offer some form of protection for consumers against fraud and mistakes, these policies often are vaguely defined. n Fee information often is hard to find and difficult for consumers to understand.

Static security questions Familiar

19%

Unfamiliar 81%

fast FACT

Geolocation 26%

78% One-time password 24% 0%

20%

40%

60%

Source: Javelin Strategy & Research, Online and Mobile Retail Payments Authentication Report

6 September 2013 | Transaction trends

80%

100%

Proximity mobile payments should reach $58 billion in the United States by 2017, according to projections by eMarketer.

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AROUND THE HORN AnywhereCommerce announced its mobile POS technologies are gaining traction in Canada as a result of its participation in the Visa Ready Program. ControlScan created a new “smart” Payment Card Industry Self-Assessment Questionnaire. Credorax hired Rod R. Katzfey as vice president of enterprise sales and business development for North America. CrossCheck announced the development and certification of its standard and conversion guarantee applications on TechTrex’s PrimeTrex One all-in-one payment terminal and check scanner. CSR won the 2013 Global Excellence Award for Outstanding New Product/ Service for its patent-pending CSR Breach Reporting ToolKit solution. Cynergy Data hired Michelle Talbott Daughtry as vice president to direct company growth through ISO partnerships, and now offers its customers the American Express OnePoint Program. First Data announced a strategic merchant services partnership with Talmer Bank and Trust in Troy, Michigan. Heartland Payment Systems launched mySchoolBucks, a mobile payments application for parents of school-aged children to manage school-related fees. Isis announced an agreement with American Express to integrate the card network’s Serve digital payments platform. MasterCard debuted its MasterPass service in the UK. Merchant Warehouse announced partnerships with POSiOS and RetailEdge, and appointed Russell Harty as senior vice president. Newtek hired Thomas Harkins as chief credit and risk officer. North American Bancard launched its NAB Swipe Free Tablet Placement Program, and founder and CEO Marc Gardner was named the silver winner in the Executive of the Year category of the 2013 International Best in Biz Awards. Paragon Application Systems completed the MasterCard Third-Party Accreditation Program. Payment Alliance International was selected by Rite Aid for its turnkey ATM Program. PayPal and MoneyGram announced a partnership to allow PayPal’s U.S. customers to withdraw money at MoneyGram locations in the U.S. Pivotal Payments is celebrating its 10-year anniversary in business. SecureBuy released a fraud solution for call centers, which keeps card data out of the call center. Shopify announced its platform enables online merchants to accept credit card payments without a third-party provider. Total Merchant Services announced the opening of its new Canadian office in Toronto. Total Systems Services completed its acquisition of NetSpend. TransFirst announced the renewal of its agent bank merchant services alliance with City Bank Texas. VeriFone Systems launched VeriFone Point, a payment-as-a-service solution.

8 September 2013 | Transaction trends

News from the association

ETA Market Research Report Shows Strong Payments Industry Growth The Electronic Transactions Association released its U.S. Economic Indicators Report for the second quarter of 2013. Published quarterly with analysis from The Strawhecker Group (TSG), the 18th edition of the report shows the industry continued to outperform the traditional market sector during the second quarter. The report surveys the state of the electronic payments industry alongside key macro- and microeconomic data points. Armed with this information, ETA members can judge how the payments industry performs in various economic climates and in comparison to major economic indicators. TSG’s Gross Value Profit Index (GVPI) shows the value of merchant portfolio revenue streams using data from the 1.6 million merchants that represent 20 percent of the U.S. brick and mortar merchant market. As of Q1 2013, these merchants had processed over $168 billion in annual volume. According to the 2013 ETA Strategic Leadership Forum report, the GVPI shows a growth rate of 16 Montelucia Resort & Spa percent since the fourth quarter of 2010. Scottsdale, AZ “The U.S. Economic Indicators Report October 15-17, 2013 shows the electronic payments industry continues in a steady growth pattern, with EMV, The Fundamentals (From merchant portfolios growing in response Acquirers to Issuers) Two-Day EMV, to new market opportunities,” said ETA Contact, Contactless, and NFC Mobile CEO Jason Oxman. “The U.S. economy Workshop continues to recover, and trends in the London, UK electronic payments industry continue October 30-31, 2013 to look positive. ETA’s latest economic report provides ETA members a vital tool to assess their own position in the marketplace.” The report examines the “disintermediation threat” posed by new entrants to the merchant acquiring industry, which appears to be limited to the smaller, nonspecialized merchant market. In general, gross pricing is at nearly the same levels as it was in 2009, indicating very little price compression. Additionally, the report tracks the performance of a $100 investment in 2007 in an index of select industry companies that represent the “TSG Payments Index” (TSGPX). In the second quarter of 2013, the TSGPX grew 14.8 percent from the first quarter of 2007. T hat is compared to just 1.9 percent growth in the same period in the S&P 500 index. A $100 investment in the TSGPX in Q1 2007 would now be valued at $246, while the same investment in the S&P 500 would be valued at $113. The report also provides a review of 80 industry enterprise and merchant portfolio transactions from 2000 to 2012, showing that net revenue multiple averages rebounded in 2012 after dropping following the recession.

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MERCHANT’S Corner

Web 3.0: The Next Big Thing Social commerce offers merchants new opportunities for growth By Rey Pasinli

or those of us who remember, we used AOL and Netscape Navigator to browse the Internet back in 1993. Websites were primarily static and built for consumer consumption.We went online to read the news and horoscopes, check email, order pizza, and find our soul mates on dating sites. That long-gone era was identified as “Web 1.0” and it lasted for 10 years.Then everything changed. Social media exploded into cyberspace in late 2003, and we were catapulted into the Web 2.0 era. Unlike Web 1.0, current Web 2.0 websites feature dynamic content that is constantly changing and, most importantly, is user-created in real time. We upload videos to YouTube, tweet our

terest, celebrities tweeting product offers to their fans, and millions of Christmas morning videos showing kids unwrapping the coolest electronic gadgets. We’ll transcend from being solitary consumers to more of a social consumption machine. Instead of thinking, “Should I buy this?” we’ll ask the masses for their opinions and recommendations. “Likes” and other affirmations will become more powerful than the lowest online price. Social commerce is the next stop on the Internet super highway, and the payments industry will be one of the biggest beneficiaries of this progress. So, what exactly is social commerce? The simplest example is a guy tweeting a beer to his buddy at the bar. In this scenar-

thoughts, connect with old friends on Facebook, and create collages of things we like on Pinterest.We’ve been hooked on social media for 10 years, and now we’re on the precipice of the next evolutionary step.

The New Social Experience Web 3.0 is the convergence of everything to date. It will transform the web into a single ecosystem that combines commerce and social media. By the 2013 holiday season, we’ll see our friends’ gift lists on Facebook, digital coupons posted on Pin10 September 2013 | Transaction trends

io, a peer-to-peer transaction starts with the sender selecting the account (credit, debit, checking, or savings) from which to push funds. The funds reside within the mobile wallet app used by both the sender and the recipient.When the electronic transfer is successfully completed, the recipient is notified and simply selects the account (prepaid debit, checking, or savings) into which the funds should be deposited. PayPal has had this functionality for years, but the ability to tweet a beer at the bar is a novelty for some.

Taking this example one step further, consider Twitter as a massive direct marketing engine. It’s easy to imagine Paris Hilton perfume or VIP concert tickets being sold to fans via Twitter. Now imagine this Twitter payment platform generating millions in donations for local and national elections or for the Red Cross during the next major natural disaster. YouTube, Pinterest, Instagram, Vine, and Facebook will be even bigger social marketplaces because they support streaming video. Videos convert and sell much better than static pictures or text can. A video of a Taylor Swift concert will sell more than a picture of a concert ticket, which will sell more than just the text “concert ticket” appearing in someone’s Facebook feed. The technology already exists to convert the last frame in a video into a checkout page that can securely process a credit card transaction. It is only a matter of time before we start seeing these payment-enabled videos virally marketing on social media sites.

Changing the Game With smartphones, mobile wallets, highspeed connectivity, and social networking in the hands of every millennial, we can expect these types of social commerce interactions to become commonplace in the next five years. More importantly, they create new categories of electronic transactions and will significantly add to overall electronic transaction processing volume. With the emergence of social payments, the electronic payments industry will enjoy a significant increase in processing volume. Internet dating membership didn’t even exist before 1993, but 20 years later, it’s a multibillion dollar industry. Apple revolutionized the digital music industry with iTunes in 2003 and drove billions of dollars in new transaction volume. After the company created the iTunes App store in 2007, the payments industry enjoyed the benefits of another multibillion dollar boost of new credit card processing volume. T he following year, Groupon and

other daily deal vendors exploded on the scene and subsequently resulted in billions of additional transactions. Similarly, with the emergence of social payments, our industry will enjoy the benefits of never-before-seen transaction types. For example, what were once cash transactions will evolve into electronic payments. Just as teenagers shifted from physical cash purchases at record stores to online card purchases, consumers will use tweets and other electronic methods instead of handing a $10 bill to their buddy at the bar. Likewise, we should see billions in payment transactions in the form of peer-to-peer payments, electronic concert tickets, cashless donations, and myriad new payment options yet to be conceived. More importantly, social commerce will lubricate and accelerate electronic payments. The major social media platforms—Facebook, YouTube, Twitter, Instagram, etc.—all have one factor in common: Advertising is their primary source of revenue, which helps to boost their value into the billions. These social media platforms will evolve into giant marketplaces to compete head-to-head with mature e-commerce retailers, such as Amazon, craigslist, eBay, Groupon, Google, and others for shoppers’ dollars.

How Merchants Can Prepare

bakery could offer a buy-one-get-one-free offer via Twitter. The e-cigarette retailer could implement a “turn in your last cigarette pack and get a free e-cig for $1” social media campaign to get new customers into its database. The enterprise retailer could incorporate online videos about recent product purchases and then promote “share with your friends and get free shipping” to get everyone virally spreading the word. Web 3.0 payment tools are slowly starting to come online today. We’ll see more exciting opportunities emerge in the coming years as the technology matures. By focusing on how we can better serve our merchants with social media payments now, we’ll be better prepared for the next explosive round of growth for our industry. If we fail to master this emerging technology, the same disruptors we’re threatened by today will once again marginalize our value proposition to millions of merchants in the future. It’s in our best interest to fully grasp this evolution so we can reap the benefits for the next decade and beyond. TT

There’s no doubt the next evolution in payments will be Web 3.0 or the emergence of social payments, so what are you doing today to help your merchants prepare? First, we need to start thinking bigger and envision how each merchant we meet could utilize social payments. Every merchant, from a startup cupcake bakery to an e-cigarette vendor marketing to millennials, to enterprise-level retailers targeting their biggest holiday spenders, will eventually look to the payments industry for solutions. T he second step for providing social payment solutions is to find out your clients’ needs. Ask them if they have a Facebook page for their store. “Like” that page and look at what types of marketing messages are being posted. Did the cupcake bakery offer a two-for-one deal? Did the e-cigarette store start promoting its loyalty program? Has the enterprise retailer ever provided discount or coupon codes to its followers? These are the important actions toward building a loyal social media presence. Make sure that every merchant you work with utilizes these basic social media tools to grow their online profiles. Finally, plan and take steps to integrate a social media offer into the merchant’s current offers. For example, the cupcake

apriva_universal_transaction_trends_mag_half_pg_horz_ad_2013_v1.1_printer.pdf

Rey Pasinli, MBA, is executive director of Total-Apps and a member of ETA’s Technology Committee. 4/2/13

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[ COVER STORY ]

Federal Oversights The FTC ramps up regulation with several targeted efforts

By John Manasso

rom mobile payments to remotely created checks, the Federal Trade Commission (FTC) is starting to flex its muscles in areas that affect the electronic payments industry, particularly mobile. In April, the FTC made a formal request for comment on the intersection of mobile phones and consumer privacy and security issues, or what it calls “The Internet of Things.” It plans to follow up by conducting a workshop on November 19 that will no doubt lead to new rules in this area. Among the Electronic Transactions Association’s greatest concerns regarding potential action relating to data collected on mobile phones is that in its zeal to protect consumers’ privacy and security rights, the FTC could adversely affect the incredibly interconnected system that has allowed mobile payments to flourish. “Any privacy guidelines addressing smart technology should include protections for consumers who use their mobile phones to initiate mobile payment transactions,” the ETA wrote in its official comments to the FTC. The FTC also was looking to create new regulations in another area. A proposed amendment to the Telemarketing Sales Rule that would ban sellers and telemarketers from accepting remotely created checks (RCCs) and three other payment

12 September 2013 | Transaction trends

methods. In reaction, ETA CEO Jason Oxman gave a strongly worded defense of the practice in a June op-ed piece featured in The American Banker. In the piece, Oxman noted that the “FTC has been seeking to hold payment processors financially responsible for the full amount of harm suffered by consumers at the hands of unscrupulous merchants” and warned that if the Commission goes too far, it could hurt small and emerging businesses and possibly force ISOs and acquirers not to process for e-commerce businesses and those that handle cardnot-present transactions. “So the FTC should tread carefully against processors and pursue only those that clearly know the merchant’s conduct violates the law or deliberately turn a blind eye to unlawful conduct,” he wrote.

Increased Scrutiny Deborah Lodge, a partner in Patton Boggs’ Washington, D.C., office who specializes in legal regulations that govern privacy and e-commerce, says the FTC “absolutely” is showing an increased willingness to regulate the payments industry. She pointed to a case in March in which the FTC banned a company named Automated Electronic Checking (AEC) from processing payments and fined it $950,000.The FTC does not have jurisdiction over banks, but it does have jurisdiction over non-banks in the financial services area. “The interesting thing about that case and about a couple of others the FTC has brought recently is that the FTC is charging that the respondents or defendants knew or should have known that something was going on because,

KEY NOTES

T he FTC “absolutely” is showing an increased willingness to regulate the payments industry, according to experts.

I n its zeal to protect consumers’ data privacy and security rights, the FTC could adversely affect the incredibly interconnected system that has allowed mobile payments to flourish.

CEO Perspective:

NACS v. Federal Reserve August 21, 2013 – I attended the status conference in the D.C. District Court today in NACS v. Federal Reserve, the merchant appeal of the Federal Reserve’s implementation of the debit interchange/routing provisions of the Durbin Amendment. In the hearing today, Judge Leon asked attorneys for the Federal Reserve what the Fed’s plan is in the wake of the court’s decision striking down the implementing rules related to debit interchange rates and debit network competition. The Fed announced what by most accounts was a surprise – that the Fed and the merchant plaintiffs had jointly agreed that they would ask the court to stay its decision pending appeal. Judge Leon asked the merchants’ counsel for an explanation, and counsel explained that the merchants feared that if the Fed’s rules are vacated (struck down entirely) by the court during the appeal of the court’s decision, there would be NO rules in place regarding debit interchange fees, which would allow debit issuers to charge merchants whatever they wanted. The merchants explained to the court that they would rather continue to pay 21 cents per debit transaction for the next year or so while the appeal is pending, rather than pay what they called the unregulated market rate, which they claimed was upwards of 50 cents per transaction before the Durbin Amendment was implemented. Judge Leon said he was not inclined to grant a stay. Both the Fed and merchants represented to the court that would jointly seek a stay from him, and if he denied it, they would jointly seek

a stay from the D.C. Circuit Court of Appeals. The Fed and merchants also agreed that they would jointly seek an expedited appeal from the D.C. Circuit, in the hopes that a decision from the Court of Appeals would be issued prior to the end of its next term in May 2014. The parties said they would file their notice of appeal with the D.C. Circuit today, and that they would file their request for a stay pending appeal by the end of this week. Judge Leon asked the parties to file, by August 28, briefs setting out their arguments regarding his authority to order the Federal Reserve to issue interim rules to replace the rules he found unlawful. Such interim rules would, according to Judge Leon, remain in force while the appeal to the D.C. Circuit was pending. The attorney for the debit card issuers, who filed an amicus (friend of the court) brief, stated his belief to the court that it lacked any authority to order the Fed to conduct such an interim rulemaking proceeding. So as it stands today, the Fed’s rules regarding debit network routing and debit interchange, found unlawful and vacated by the D.C. District Court, are still in effect because Judge Leon stayed his own decision while he awaits briefs, and then issues his own ruling, on whether he should stay his decision pending appeal and/or should instruct the Fed to write interim rules during the appeal. ETA will continue to monitor the case. —Jason Oxman, ETA CEO

proposed amendment to the Telemarketing A Sales Rule could force ISOs and acquirers not to process for e-commerce businesses and those that handle card-not-present transactions.

E TA calls for MPS providers to “clearly and plainly” explain the purposes for collecting and using payment-based PII. Transaction trends | September 2013 13

[ COVER STORY ] for instance in that case, there were very high return rates,” she says. “The FTC took the position that, then, A EC should have known that there was probably something wrong there, that there was some deception or some failure on the part of consumers to consent to the charges. So, I do think the FTC is becoming more active in that area in terms of what responsibilities they believe that the processors have—if overall there is something that looks odd or something they should investigate.” Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau (CFPB) use a standard of “unfair and deceptive and abusive acts and practices” to assess banking institutions. Lodge says those agencies are looking to the FTC for guidance because “the FTC has been interpreting those kinds of standards for a long time”—giving the FTC heightened influence in the industry, as the CFPB, in particular, has begun to look at regulating certain aspects of the payments industry, such as prepaid cards. “I do think FTC is being more active in that area, and I think all financial institutions really are well advised to take heed of these developments,” she says. “The Telemarketing Sales Rule is another dimension, of course, because now the FTC is essentially proposing to ban certain kinds of payments in certain kinds of situations.”

Data Collection, Consumer Protection In its press release announcing proposed rule-making on “The Internet of Things,” the FTC noted its concern regarding mobile phones’ abilities to open car doors, turn off home lights, adjust thermostats, and to allow physicians to monitor remotely vital signs such as blood pressure and blood-sugar levels. Then, the press release wandered into somewhat speculative territory and into the kind of area that businesses in the payments industry rely upon to sell merchants new technology—and provide added value for their services—such as digital couponing. 14 September 2013 | Transaction trends

“I DO THINK FTC IS BEING MORE ACTIVE IN THAT AREA, AND I THINK ALL FINANCIAL INSTITUTIONS REALLY ARE WELL ADVISED TO TAKE HEED OF THESE DEVELOPMENTS.” —DEBORAH LODGE, PATTON BOGGS

“In the not too distant future, consumers approaching a grocery store might receive messages from their refrigerator reminding them that they are running out of milk,” the release read.“At the same time, the data collection and sharing that smart devices and greater connectivity enable pose privacy and security risks.” The FTC plans to look into a number of areas, including which services and products make use of this “connectivity (including prevalence and predictions),” which companies “make up the smart ecosystem,” the future uses of smart technology, and how consumers can benefit from this technology. The FTC also asked how it should weigh the risks of potential societal benefits, such as those it mentioned in the health-care field and in energy efficiency, by allowing the collection of “de-identified data.” In its comments to the FTC regarding the collection of such personally identifiable information (PII), the ETA suggested some consumer protections. PII “will not be used by third parties without their knowledge or consent,” the ETA’s statement read. “… Thorough privacy guidelines will govern the collection, use, storage, and sharing of PII and should be applicable to all entities in the (mobile payment solutions) ecosystem…. In short, MPS providers should clearly and plainly articulate to consumers the purposes for which they collect and use any payment-based PII.”

With respect to the proposed rulemaking as it affects the Telemarketing Sales Rule, the FTC seeks to crack down on fraud and so-called bad actors. The Telemarketing and Consumer Fraud and Abuse Prevention Act became law in 1994 and one year later the FTC issued the TSR, which has provided consumers with protections such as the “Do Not Call” list. The rule also puts RCCs in the FTC’s crosshairs. Unlike debit and credit cards in which consumers are able to deny charges, consumers do not enjoy such protections with the use of RCCs, making them a fertile ground for con artists and their ilk. While the FTC sounds fairly determined to ban RCCs, it has left the door cracked open slightly to keeping them— if it hears compelling arguments in defense of RCCs. In its notice of proposed rule-making published in the Federal Register, the FTC notes that it previously considered banning RCCs in 2003 but elected not to as consumers’ payment options were more limited. However, that is no longer the case. “In light of these changes in the marketplace, the Commission preliminarily finds that the risks from using these payment methods in telemarketing transactions exceed the benefits of permitting their use,” it said. “At the same time, the Commission wishes to explore whether there might be legitimate reasons that telemarketers use these payment methods instead of

other available payment mechanisms.” The FTC goes on to note that consumer protections regarding RCCs vary from state to state.

Floor Movement On July 18, the U.S. House of Representatives Energy and Commerce Committee’s Subcommittee on Commerce, Manufacturing, and Trade held a hearing on the need for federal legislation on data breaches. The ETA provided a written statement for the hearing, outlining its belief that “a uniform national standard for data breach notification will best address the rights of consumers” when personally identifiable information is “truly at risk.” Presently, most businesses in the industry try to follow the standard set by California, the largest state that also happens to be at the forefront of such law because so many technology companies call it home. To that end, on May 16 the California state senate unanimously passed a bill that would extend the state’s law to apply to all email ad-

dresses, passwords, user names, and security questions and answers for online accounts. The current law, enacted in 2003, requires notification to consumers of breaches involving Social Security numbers, driver’s license numbers, and credit card accounts. Despite that July 18 hearing on data breaches, legislation continues to come out of the Congress at a glacial pace, owing to the political polarization in Washington. Amid those circumstances, it’s difficult to know when another piece of legislation that affects the payments industry might get a vote on the Senate floor. An update to the Electronic Communications Privacy Act passed the Senate Judiciary Committee in April with bipartisan support. A spokesman for Judiciary Committee Chairman Sen. Patrick Leahy (D-Vermont) said it was possible that the full Senate could take up a vote before the August recess, but it did not happen. Among the major points of the bill is one that would require government agencies to obtain a search warrant

before accessing consumers’ digital content—a subject that became a hot topic after leaks to the media by National Security Agency contractor Edward Snowden. According to a summary provided on the website of Leahy’s office, “The bill would update this law to improve the privacy protections for electronic communications information that is stored or maintained by third-party service providers.” While PCI Data Security Standards suggest that companies not store PII, this provision obviously would affect any that do or did. Proposed changes to Section 3 of the law also reaffirm “current law to clarify that the government may use an administrative or grand jury subpoena in order to obtain certain kinds of electronic communication records from a service provider.” Those include “means and source of payment information.” TT John Manasso is a contributing writer to Transaction Trends. Reach him at john_manasso@yahoo.com.

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[ FEATURE ]

ETA SLF preview

Where the innovators are The 2013 ETA Strategic Leadership Forum promises innovation-focused speakers, sessions, showcases, and awards

When?

October 15-17, 2013

Where?

Montelucia Resort & Spa in Scottsdale, Arizona

Who Should Attend? The sessions at Strategic Leadership Forum 2013 are aimed at anyone who considers themselves to be a leader in payments, including but not limited to the fields of technology, mobile, and e-commerce. Why Attend? Participating in this event will help you and your colleagues survey your own organizations as well as allow you to network with other payments executives in a relaxed environment.

othing says innovation like gathering business visionaries and senior-level leaders at one event for three days of thought-provoking discussion and networking. At this year’s Strategic Leadership Forum, October 15-17 in Scottsdale, Arizona, top executives involved with technology, mobile, and e-commerce will explore the next generation of innovative ideas that are advancing the electronic payments industry. Keynotes include Bob Carr, chairman and CEO of Heartland Payment Systems; Janine Firpo, deputy director, digital financial services at scale, for the Financial Services for the Poor team at the Bill & Melinda Gates Foundation; and Ed Labry, vice chairman of First Data. Nine other speakers will lead sessions focusing on emerging technologies, market trends, and perspectives from around the industry. Transaction trends | September 2013 17

[ FEATURE ] For example, the “Innovation in Mobile and Beyond at the POS” panel, moderated by Dan Kramer, senior vice president of marketing and merchant services for London-based SHAZAM, will feature a panel of experts who will address the advances in POS technology that are inherent to ensuring merchants have the latest tools for seamless integration of new card technologies. Specifically, they will discuss how EMV, contactless, mobile, and other payment technologies are making their way into retailers across the country. In addition, they will talk about the “need for speed” at checkout, and how retailers are looking to access technology and processing services that provide a seamless customer experience while ensuring their satisfaction after standing in line. Another noteworthy session will, as its title suggests, address “Merchant Innovation.” This segment—to be moderated by Elavon’s chief strategy officer, Brian Mahony—will bring the industry’s most important stakeholders—its

5 Ways To See Scottsdale

customers—on stage for brief presentations followed by an audience Q&A. These customers-turned-panelists will discuss how their payment strategies are evolving and what they expect to demand of the payments industry in the future. They also will cut through the hype and offer a bit of perspective by chatting about what they consider to be the payments industry’s current fads versus what they consider to be the trends that will reshape their strategies as we Scottsdale golf ll as shape what the industry in general does to remain viable. Additional sessions of note for this year’s event: • “ A Case Study: Partnership Challenges in a Complex Payments Ecosystem.” A number of new technology startups that have entered the payments field in recent years are augmenting and even redefining the shopping experience at the point of

sale. They are seeking deeper integration into the payments flow and, along with that, causing a shift in the incumbent partnership model. This session—moderated by Stoyan Kenderov, head of mobile at Intuit—will call on two successful partnership case studies to show how traditional ISOs can partner with technology companies to create winning value propositions and generate new business. • “ Big Data in Payments.” Moderated by Tranzlogic’s Charles Hogan, a panel of leading technology experts will discuss Big Data and how it does—or will—affect the payments industry. They also will weigh in on who stands to win or lose from this exploding market sector. • “ Hot and Crowded: Trends in Payments, M&A, and Financing.” The payments space is changing rapidly, as suggested by the new players, new

Stumped by what to do before and after the main event? Check out these five popular activities: Looking to do a bit of walking while taking in the sights and sounds of this city? The Scottsdale Public Art Program’s website (www.scottsdalepublicart.org) offers a self-guided 60-minute walking audio tour of some of the more than 50 eye-catching public art pieces in the downtown corridor. The 10 mostcelebrated pieces—such as the Soleri Bridge and Plaza, which made its debut in December 2010 and serves as a landmark of downtown’s Scottsdale Waterfront—are part of the tour.

18 September 2013 | Transaction trends

Relax on a day-long exploration of Arizona’s newest wine community in the scenic Verde Valley just south of Sedona. Detours of Arizona (www.detoursaz. com) offers a fully guided tour, featuring stops at four wineries and highlights of some of Sedona’s most picturesque landmarks including Bell Rock, Cathedral Rock, and Airport Mesa Overlook. Beyond the views, you’ll likely meet one or more of the winery owners as well as taste a variety of full-bodied reds and crisp whites during this full-day tour.

technologies, and new geographies—not to mention new terms, such as disruption, disintermediation, and commoditization—that are popping up these days. Or is it? Merchant Warehouse’s Greg Cohen will lead a group conversation with the people who are financing future of the payments ecosystem.

Now Entering the Payments Next Zone Along with all of the in-depth sessions and expert speakers, this year’s Strategic Leadership Forum will offer attendees another noteworthy opportunity to engage with innovators. The opportunity in question: Tuesday, October 15’s Payments Next Zone. The result of a generous grant from the Bill & Melinda Gates Foundation, the 90-minute Payments Next Zone will turn the spotlight on a select group of startup companies in the space by allowing them to take the stage and describe and demonstrate their innovative electronic payments technology products or services that target unserved or underserved communities. The showcase will culminate with a judging panel presenting the E-Pay Innovation Award—as well as a check for $10,000—to the company with the product that has the potential to make a profound impact on the global market by delivering financial services to unserved and underserved individuals or communities worldwide.

• “ Legal and Regulatory Issues: Privacy, Cybersecurity, Mobile, and More.” This session, led by ETA CEO Jason Oxman and Susan Pandy, PhD, director of payment strategies for the Federal Reserve Bank of Boston, will help attendees understand how business can bridge the gap between payments innovation and responsible stewardship of financial transactions. While Pandy will cover the Boston Fed’s research and analysis of market trends, as well as policy development of standards and security in the mobile payments channel, U.S House and Senate congressional staff responsible for payments issues will discuss what they see coming on the horizon in Washington. TT

Try something out of the ordinary: Visit the recently opened (in May) Butterfly Wonderland, www.butterflywonderland. com. Part of the Salt River Pima-Maricopa Indian Community’s Talking Stick Cultural and Entertainment Destination, this one-of-a-kind museum boasts the largest butterfly pavilion in the United States. Don’t miss the lush rainforest atrium, where thousands of butterflies from around the world fly freely.

Prefer wooden clubs to wooden barrels? Scottsdale is home to a number of great golf courses. For example, the SunRidge Canyon Golf Club (www.sunridgegolf. com) recently upgraded its practice facility with a new 1,600-square-foot performance center, home to the Jim McLean Golf School. Featuring indoor and outdoor hitting bays outfitted with the latest Trackman launch monitors, the new performance center also offers a club-fitting suite and fitness studio for flexibility, stability, and strengthtraining programs.

Get adventurous on the just-launched www.adventureinscottsdale.com and peruse lists of outfitters like 360 Adventures (www.360-adventures.com)—a tour company that offers guided rock climbing, mountain biking, hiking, backpacking, and canyoneering—and Green Zebra Adventures (www.gogreenzebra. com), which helps visitors navigate the desert’s rugged terrain in a Tomcar. Another option: Pick up a copy of the Desert Discovery Guide to find all sorts of hiking, biking, climbing, and riding suggestions, as well as a trail index that includes difficulty ratings. Transaction trends | September 2013 19

Startup Stories: TrakGo.com

Blame It on Rio U.S. entrepreneur’s mobile solution taps unbanked market in Brazil—and wins the ETA E-Pay Innovation Award By John Manasso

eith White figures it’s in his blood. His grandparents were entrepreneurs.At a time when small business ownership among African-Americans in the South was rare, his father’s father owned a gas station in Tampa and his mother’s father worked as a carpenter. White traced his own first entrepreneurial venture to a paper route he had as a child. After graduating from Howard University with a degree in marketing, he began working for IBM and Eastman Kodak, selling to the District of Columbia and federal governments. His first venture as an entrepreneur in his adult

life came when he launched a television syndication company that distributed ethnic movie titles he licensed from the likes of Warner Brothers. Then there was an Internet video portal called ZoogaTV that came slightly too late, although White did have negotiations in 2009 to sell it to Universal Media before it went out of business. In 2010, he created a mobile media platform for use in the Dominican Republic called MobiAmericas. com. His partners included Sony and Orange. Fast forward to 2011. That’s when White created Boleto, an online payments tool for use in Brazil. At the 2013 Electronic Transactions Association Annual Meeting & Expo in New Orleans,

Trak www.trakgo.com Founder and CEO: Keith White

White

20 September 2013 | Transaction trends

Processing Volume: Trak’s Boleto online payments tool represents 20% of Brazil’s nearly $12 billion e-commerce transactions volume

WORDSTOTHEWISE n To have a break-out idea, you have to be laser-focused— like an Olympian in training. “For the last two-and-a-half years, it’s exclusively what I’ve focused on day in and day out,” says Trak Founder and CEO Keith White. “Because of the focus, we’ve been able to refine our business model and come up with some [innovative] solutions. It’s not easy to get above the noise.”

WINNING THE ETA E-PAY INNOVATION AWARD WAS “A VERY STRONG VALIDATION WITHOUT QUESTION. WE’RE HONORED TO HAVE RECEIVED IT.” —Keith White, founder and CEO White’s company,Trak, won the E-Pay Innovation Award for the product.The company received $10,000 along with the award, which is funded by the Bill and Melinda Gates Foundation. White says winning the award was “very strong validation by, certainly, a panel of experts in the payments industry.” Since then, Trak was one of 18 companies (selected from a pool of 200) that presented at the June TechBuzz Capital Connection conference in Washington, D.C., in front of an audience of 800 potential investors, industry professionals, and other startups. “I recognize it as strong traction for us,” he says.“We have had interest from potential investing partners that was probably somewhat lukewarm. But after seeing and learning a little bit about the award, we want to re-engage with new as well as previous potential partners. So, it’s been a very strong validation without question. We’re honored to have received it.”

Market Leverage In some ways,Trak is the classic tale of the small, tech startup company. White funded the venture with the financial help of a group of eight family members and friends. The company consists of White, a chief procurement officer, and two marketing people, as well as a vice president of business based in Brazil. It also has a team of eight developers, programmers, and graphic artists. Just as prepaid cards in the United States have introduced the unbanked to the electronic banking economy, the idea is that Boleto will perform a similar role in Brazil. According to a study by the Brazilian Central Bank, the percentage of unbanked Brazilians is roughly 30 percent—or about 60 million people. “In Brazil they have a lot of different payment schemes that are outside of the traditional card brand payment options,” White says. “Boleto is one specifically in the e-

n Solutions must be extremely easy for the consumer. “Make the solution—in terms of ‘sign in, sign up, check out’— really simple,” says White. “You have to offer something in your solution that people really want, as opposed to going along with the herd and putting something out that may work, may not. The mobile space is evolving very rapidly. There are new players that are jumping in. Certainly, in the United States, it’s a tremendous amount of competition, not so much yet in developing countries, particularly Brazil. But, that will change in 2013.” n Know your segment of the mobile payments space. “There’s a lot of innovation going on in software,” White explains. “And then you have the mobile wallet and shopping apps—and payment apps related to those shopping apps. I think you’ve just got to focus on one and come up with a very strong solution. We’re focused on the unbanked. We also have solution for the banked. Our solution is very easy to use, very convenient.”

Transaction trends | September 2013 21

Startup Stories: TrakGo.com

commerce space. Now we’re introducing them into the mobile payment space. Brazil is a strong test bed for creative or different payment options that tap into the ability to enable the unbanked or those without credit cards to be part of the formal economy.” Brazil’s gross domestic product in 2012 was $2.253 trillion U.S. dollars with a population of 198.7 million, according to the World Bank, which listed its income level as “upper middle.” In 2012, Brazil posted a 0.9 percent growth rate, down from 2.7 percent in 2011 and a wild 7.5 percent rate in 2010. These factors make the country a natural target for innovations in the payments space. White says Boleto represents 20 percent of e-commerce transactions, according to the card association in Brazil. Brazilian e-commerce totaled nearly $12 billion U.S. dollars last year. Henrique Riberio Filho is the CEO of a Brazilian online payments company called Software Express. White credited Filho with being instrumental in providing local knowledge to help get Trak off the ground in Brazil. Filho explained in an email why a product like Boleto has proved so useful to the economy there: Brazil has a large underground economy, which makes it difficult for many workers to have bank accounts. Like certain workers in the United States who are expected to declare cash tips on their income taxes, creating a bit of a loophole, Filho says Brazilian workers who cannot prove the source of their revenues are barred from holding bank accounts. Nonetheless, mobile phones in Brazil are equipped with a prepaid capability, he says. “Because (of) that, a big portion of our people can have phones because their prices are subsidized by the telephone companies and, as the service is prepaid, the customers don’t need to prove their revenues or have a bank account,” Filho explains.“Prepaid is a common payment plan in the cell phone industry in Latin America and Brazil.”

Tech Advantage Boleto is a barcode payment ticket that contains the customer’s unique purchase data and Trak’s bank information. Boleto is emailed to the buyer’s smartphone. Customers can take their printed ticket or any other proof of the email to any Brazilian bank or to other selected outlets such as post offices, lottery agents, and supermarkets to receive cash payments. From there,Trak sends the verification to the payment provider and the customer can go to the retail store for pickup or delivery of the item that he or she purchased. White says he likes that the Brazilian market has what he calls “first-mover’s advantages.” “There’s not a lot of competition,” he says.“That really appeals to me and we’ve done well with that model.” 22 September 2013 | Transaction trends

The technology for Boleto took about four months to create. White worked closely with his team of programmers to draw up his concept. For someone who did not study computer programming or engineering in college, he has learned quite a proficiency in creating technology. “I was the person who had to communicate what I wanted the site to look like, what features I wanted the site to have, where I wanted certain functionalities, how navigation should flow,” White says, describing the process from his previous ventures, starting with ZoogaTV.“ And so I kind of started with that and worked real closely with developers.” He says he learned a lot from that experience and then took the platform to the Dominican Republic, where he worked closely with a developer to create the mobile architecture for the platform.“He really taught me a lot. I think in working very closely with the developers over time, I learned a lot and am able to do what I just explained when it comes to communicating what is required to developing.” While he is conversational in Spanish, White does not speak Portuguese. How-

“BRAZIL IS A STRONG TEST BED FOR CREATIVE OR DIFFERENT PAYMENT OPTIONS THAT TAP INTO THE ABILITY TO ENABLE THE UNBANKED OR THOSE WITHOUT CREDIT CARDS TO BE PART OF THE FORMAL ECONOMY.” —Keith White, founder and CEO ever, he says most executives with whom he deals, banking or otherwise, speak English. He also says his experience with MobiAmericas.com helped him to get his feet wet in a smaller country like the Dominican Republic before attempting something on a larger scale in a bigger economy like Brazil’s. Trak has had some conversations with partners about adapting Boleto to the U.S. market, but White says those remain only conversations. For now, the company is looking at continuing its foray into Brazil. “We are on the forefront of bringing forth some additional cutting-edge technology in the payments space,” he says. “We also expect to beta test our Trak wallet solution in Brazil with one of the

largest acquirers in the market, and that will be happening in the next couple of months. We expect to continue to innovate and bring new mobile solutions to the market as early as this year. In addition to the features and functions of Boleto, we already [have] some cutting-edge stuff on the drawing board that we’re really, really excited about.” For a small startup that has won an award from the Gates Foundation, it sounds like Trak has reason to be so excited. TT John Manasso is a contributing writer to Transaction Trends. Reach him at john_manasso@yahoo.com.

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Transaction trends | September 2013 23

Industry Insider

Sysnet Global Solutions’ Hat Trick

The Dublin-based company has assisted with IT, security, and compliance. Today, it’s supporting the payments space. By Bryan Ochalla

he staff of Sysnet Global Solutions has worn a lot of hats over the past 24 years. Back in 1989, the firm offered IT support and services, as Sysnet began its existence “working with large companies to install hardware and to support contracts for banks or large retailers,” shares Gabriel Moynagh, CEO of the Dublin-based company. A decade or so later, Sysnet pivoted its offerings to expand into the world of IT security. “The whole IT services side of the business had dropped away quite a bit by then,” Moynagh says, “because a lot of the large companies we’d been working with until that time were starting to support their own contracts, their own hardware. “A l t h o u g h w e were only a small company with just a few employees at the time, we knew quite a bit about protecting data,” he adds.“So, when PCI DSS came —Gabriel Moynagh about, we were well positioned to become a qualified security assessor in that space.We had the right engineering and the right people to do it, and we got involved very early on.” Perhaps unsurprisingly, Sysnet recently broadened its scope of service to those in the payments space: “We realized that we have an opportunity to help acquiring banks and ISOs interact in meaningful ways—by introducing them to content, educational material, products, or services—with their merchants as they go through the compliance process every year,” Moynagh explains. “We really want to help acquirers and ISOs present themselves more as business partners than just processors of credit card transactions,” he adds.

“We really want to help acquirers and ISOs present themselves more as business partners than just processors of credit card transactions.”

Better Communication Sysnet accomplishes that goal with a pair of components that comprise Sysnet.air, a web-based compliance-manage24 September 2013 | Transaction trends

ment and “merchant intelligence” solution. For instance, one of those components, called Compliance Maker, helps acquirers and ISOs better communicate with their merchant clients. “It’s often hard for them to communicate with smaller merchants, especially,” says Moynagh. Compliance Maker, however, enables acquirers and ISOs to “dynamically present relevant content” to their customers. “If a merchant tells us [while going through the compliance process] they’re using a particular POS terminal, we can have a pop-up message appear that says something like, ‘Did you know this particular terminal is not EMV compliant?’” he explains.“So, [acquirers and ISOs] can use Compliance Maker to communicate with their merchants about certain kinds of issues.”

An App Store for Merchants The other Sysnet.air component, Market Maker, helps acquirers and ISOs improve their relationships with clients. Moynagh describes it as “basically an app store for merchants. “There are a lot of companies in the software-as-aservice or Cloud space these days who are developing very niche apps for very niche sectors,” he adds. “So, we decided to create a marketplace that would allow these companies to present their solutions to the right merchant at the right time.” Specifically, as a merchant works its way through Compliance Maker, it may discover it’s missing a policy document or some other solution that’s needed for it to become compliant. “That’s when the merchant is introduced to, say, five anti-virus apps [via Market Maker],” Moynagh says. The overall goal, he adds, is to “help change perceptions, because acquirers and ISOs really are trying to help these small businesses with their everyday challenges. And if they can demonstrate to their merchants that they can help them sell more of whatever it is that they sell, they will build loyalty and change the perception of acquirers and ISOs [from] just being a processor of transactions [to being] some sort of business partner.” TT Bryan Ochalla is a contributing writer to Transaction Trends. Reach him at bochalla@yahoo.com.

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