Transaction Trends September 2014 by Content Communicators, LLC

2014 ETA STRATEGIC LEADERSHIP FORUM PREVIEW PAGE 14

TRANSACTION trends The Official Publication of the Electronic Transactions Association

| September 2014

Bitcoin: Where Do We Go From Here? Opinions vary on what this potential disrupter means to payments

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TRANSACTION trends The Official Publication of the Electronic Transactions Association

Vol. 19 | No. 6

COVER STORY 10

Bitcoin: Where Do We Go From Here? By Julie Ritzer Ross Industry experts predict that Bitcoin and other digital currencies will ultimately gain acceptance by retailers, the financial services sector, government regulators, and consumers. But the road to to get there may be slow going, as valuation volatility, security concerns, and transaction approval times prevent some from embracing the crypto-currency. 10

FEATURES 14 Powerful Minds Unite in

18 S P E C I A L S E RI E S

By Bryan Ochalla Senior-level payments professionals will arrive at the ETA Strategic Leadership Forum next month ready to network and learn about the industry’s opportunities and challenges surrounding new technologies, Big Data, EMV, international payments, and more.

By John Manasso ETA E-Pay Innovation second-place award winner moWoza has been called the “Amazon for Africa.” The company capitalizes on mobile strategies to assist African immigrants in purchasing products to send back home.

Palm Beach

Startup Stories: The Enabler

DEPAR TMENTS 4

ETA Gateway

Industry News

Insights from ETA’s CEO, Jason Oxman Trends, strategies, and news in the payments business and ETA member community

Future of the Business

Meeting micromerchants’ needs: ISOs versus alternative payments providers

24 The Last Word

Building business connections through ETA events and resources

Ad Index TRANSACTION trends | September 2014 3

ETA Gateway

Gaining Momentum

s CEO of the Electronic Transactions Association, it is my sincere pleasure to update you on some of the exciting new advances ETA is making on your behalf. At ETA, advancing your business is our job. ETA offers cuttingedge news and information; facilitates business expansion and connections; provides industry information, education, and certification; and advocates on issues critical to our members’ success. In the past year, ETA gained additional momentum in our relentless pursuit of industry growth. We’ve added 180 new member companies, broken attendance records at our two signature annual events, ex-

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 eight times annually, of the Electronic Transactions Association, 1101 16th St. N.W., Suite 402, Washington, DC 20036; 800/695-5509 or 202/828-2635; 202/828-2639 fax. POSTMASTER: Send address changes to the address noted above. Copyright © 2014 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 2014 | TRANSACTION trends

panded our advocacy initiatives, produced even more educational resources, and added new staff to serve our growing membership. ETA Is Accelerating Your Business through proactively addressing new competitors, new technologies, and shifting customer behaviors in payments. ETA Is Amplifying Your Voice. As the leading organization advocating for innovation in payments, ETA offers a comprehensive suite of services to make your voice heard. ETA Is Expanding Your Knowledge through original, essential, and unbiased information. We are committed to building upon this growth by adding four new staff positions to directly and efficiently address your needs and to support our essential

work advancing the payments industry. As we expand, we are restructuring our dues model to deliver the most value to our members. Please visit the last page of this magazine to learn more about how ETA is working for you. ETA Membership means you’re gaining the skills for moving forward, the edge for seizing opportunities in the changing marketplace, and the expertise for becoming an even more valuable player for your organization. Thank you for being part of ETA, the only organization leading and representing the global payments industry. TT Sincerely, 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, Membership and Marketing Del Baker Robertson Director, Communications Meghan Cieslak SVP, Government Relations Scott Talbott Director, Industry Affairs Amy Zirkle Publishing office: Content Communicators LLC PO Box 223056 Chantilly, VA 20153 703/662-5828 Subscriptions: 202/677.7411

Editor Josephine Rossi Editorial/Production Associate Christine Umbrell Art Director Janelle Welch Contributing Writers Brandes Elitch, John Manasso, and Bryan Ochalla, Jason Oxman, Julie Ritzer Ross, Josephine Rossi Advertising Sales Linda Baker Advertising Sales Manager Phone: 703/964.1240, ext. 13 Fax: 866/466.9187 Lbaker@conferencemanagers.com Alison Bashian Phone: 800/335.7500 Fax: 440/232.0398 alisonb@bashian.com

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INDUSTRYnews Retail Industry Hardest Hit by Data Breaches in Q2 The retail industry had more data records compromised than any other industr y during the second quarter of 2014, with more than 145 million records stolen or lost, according to SafeNet’s Breach Level Index (BLI) for the second quarter of 2014. In addition, the company also announced the results of a global survey in which nearly 40 percent of adult consumers said they would never, or were very unlikely to, shop or do business again with a company that had experienced a data breach. This sentiment increased to 65 percent if the data breach involved customers’ financial and sensi-

tive information. Other highlights from the second quarter BLI: • B etween April and June of this year, 237 breaches compromised more than 175 million customer records of personal and financial information worldwide. • 1 75,655,228 records were stolen in the second quarter. This equates to 1,951,724 records stolen per day; 81,321 stolen per hour; and 1,355 stolen per minute. • M alicious outsiders are responsible for compromising 99 percent of the records and 56 percent of the inci-

info GRAPH Data Compromise: Methods of Intrusion 31%

Weak passwords*

25%

Unknown**

12%

File upload flaw Vulnerable off-the-shelf software*** SQL injection Phishing

10% 8% 6%

Authorization flaw

Remote file inclusion, physical access, or directory traversal

* Includes passwords from VPN, SSH, remote desktop, application administration, etc. ** Insufficient evidence to determine the mechanism of intrusion (due to poor logging practices or an attacker adept at covering their tracks) *** Includes unpatched software and zero-day attacks Source: 2014 Trustwave Global Security Report

6 September 2014 | TRANSACTION trends

dents this quarter, more than any other source. • H ealth care incurred 23 percent of incidents, but only accounted for less than 1 percent of all records stolen during the quarter. • Identity theft was the leading cause of breaches, accounting for 58 percent of all incidents and 88 percent of all records stolen. • E ncryption was used in only 10 of the 237 reported data breach incidents. Of those, only two were secure breaches in which encryption restricted the access of stolen data. • T he United States accounted for 85 percent of records compromised worldwide and 74 percent of all reported incidents, more than any other country. Germany followed with 10 percent of all records stolen. • Financial services breaches decreased significantly from the first quarter, down from 56 percent to less than 1 percent of records stolen in the second quarter. “While it’s not surprising that sophisticated cybercriminals are gaining access to critical data stores, what is surprising is that only 1 percent of breached records had been encrypted,” says Tsion Gonen, chief strategy officer, SafeNet. “The benefits of encryption have been known for some time, but companies just aren’t doing it. It’s the security industry’s equivalent of f lossing your teeth. Everyone knows it’s good for you and the technology is proven, but only a small percentage of companies do it well.”

Prepaid Cardholders Among Leading Users of Mobile Payments U.S. prepaid card users are not only ready for mobile payments, they are already leading users, according to Prepaid and Gift Cards in the U.S., 4th Edition, a recent report by market research publisher Packaged Facts. “Thanks to the evolution of online and mobile technology, it’s apparent that card loyalty is not garnered from the card itself, but from the features that increasingly surround it, meaning the widening ecosystem through which the cardholder can engage easily with financial services products, services and educational tools,” says David Sprinkle, research director. Smartphone penetration is higher among groups underrepresented by traditional banking products and services,

according to the survey results. Roughly 89 percent of consumers from underbanked households, and 64 percent of consumers from unbanked households, have a smartphone. In addition, younger adults (ages 18 to 34) do more card shopping and have a wider variety of cards in their wallet. Based on survey results, Packaged Facts estimates that prepaid cardholders age 18-34 have an average of 2.3 prepaid cards in their wallets. While direct deposit clearly influences cardholder retention, it is not enough to keep these cardholders engaged. Mobile-forward platforms with options such as P2P and bill payment will invariably entice 18 to 34 year olds to linger longer, says the study.

CALENDAR: n 2014 Strategic Leadership Forum

The Breakers Palm Beach, FL October 7-9, 2014 Registration now at http://electran.org/ events/slf14/ n TRANSACT 15:

AROUND THE HORN Bluefin Payment Systems announced that

More Than 575 Million U.S. Cards To Feature EMV in 2015

its PCI-validated PayConex Point-to-Point

In a recent forecast, nine of the country’s largest payment card issuers who participate in the Payments Security Task Force (PST) estimate that they will have issued more than 575 million chip-enabled payment cards by the end of 2015. “These numbers reflect the significant momentum behind the adoption of EMV chip in the United States,” says Ryan McInerney, president of Visa Inc. “By the end of next year, these issuers estimate that one in two of their U.S. payment cards will be chip-enabled, which represents real progress given the scale and complexity of this overall effort.” The task force plans to update the issuer forecast regularly and expand it to include acquirer and merchant perspectives on EMV chip terminalization. To promote adoption, the task force is working to identify best practices around merchant testing and certification to help significantly reduce the testing and implementation time. “The pace of EMV adoption is rapidly accelerating with many institu-

Gyft Inc., a digital platform that enables

Encryption (P2PE) Solution is now available through the company’s Virtual Terminal product. First Data has acquired

consumers to buy, send, manage, and redeem gift cards using mobile devices.

Heartland Payment Systems recently acquired Leaf, creator of a mobile POS tabtions already issuing EMV chip cards, and even more coming onboard every month,” says Guy Chiarello, president, First Data. “First Data is strongly encouraging all institutions to launch their EMV plans immediately, and not wait for the October 2015 liability shift. Issuing EMV now will benefit consumers by making the most secure payment card available sooner, while reducing fraud losses and enhancing payments system security for all.” Among the next priorities for the task force is identifying an actionable, long-term roadmap to deliver a consistent level of security for payments in the digital and physical environments. Part of this will include providing clarity around enhanced security solutions like tokenization and point-topoint encryption.

let specifically designed for commerce.

TransFirst Inc. has publicly filed a registration statement on Form S-1 with the Securities and Exchange Commission for a proposed initial public offering of its common stock. ProPay Inc., an ISO owned by processor TSYS, plans to offer its merchants a Cloud-based, real-time identity verification tool from ThreatMetrix. TSYS also recently released its 2014 Consumer Awareness Data Security Study. TRANSACTION trends | September 2014 7

INDUSTRYnews 3 in 10 Don’t Trust Retailers’ Data Security

fast FACT

Twenty-nine percent of more than 6,100 consumers across 20 countries do not trust retailers to protect stored personal and financial data against hacking attempts and data breaches, according to the second of a two-part global fraud study by ACI Worldwide and Aite Group. “Retailers have their work cut out for them—to change consumer perception that shopping, be it online or instore, is unsafe,” says Mike Braatz, senior vice president, Payments Risk Management Solutions, ACI Worldwide. Among the other findings: • Fifty-eight percent say financial institutions do a better job of protecting their data than do retailers, government agencies, and law enforcement. • Fifty-five percent says stores where they shop use security systems that adequately protect their financial data against hackers and data breach-

Millennials ages 18 to 24 view their

mobile phone as most important to their daily lives es, compared to 62 percent who believe that online shopping websites adequately protect this information. • M ore than three in four are “very interested” in being contacted about suspicious activity on their cards or accounts via a phone call, email, or text message. • M ore than 40 percent do not recall receiving any antifraud information from their financial institution. • Thirty-two percent say theft by a computer hacker is the greatest fraud risk.

(96 percent)—even more so than the Internet, deodorant, and their toothbrush, according to Bank of America’s Trends in Consumer Mobility Report 2014.

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[ COVER STORY ]

Bitcoin:

Where Do We Go From Here?

Four years and $262.18 million in venture capital later, what’s up with this potential disrupter? By Julie Ritzer Ross

KEY NOTES 8 The number of retailers and other entities now accepting or planning soon to accept Bitcoin payments is highly indicative of its progress, say experts.

8 The financial services sector and government regulators are carefully embracing Bitcoin, which may eventually lead to more activity on the consumer side.

8 The continued growth of mobile payments and e-commerce, coupled with an increased interest among consumers to make crossborder payments without currency conversion, bode well for the virtual currency’s staying power.

8 Critics say valuation volatility, coupled with the absence of fraud protection, will continue to push merchants and consumers away from Bitcoin in the short term.

8 Other obstacles for merchants,

10 September 2014 | TRANSACTION trends

payment processors, ISOs, and issuers include slow transaction approval time and the inability to “unspend’ funds.

n August 6, Global Payments Inc., one of the world’s largest providers of global payment solutions, announced that it had signed a referral agreement with BitPay, a provider of business solutions for Bitcoin digital currency. The agreement gives Global Payments the right to incorporate the crypto-currency into its product suite and to offer Bitcoin payment acceptance capabilities to any of its merchants worldwide. The move comes in the wake of ongoing controversy and scrutiny, including concerns that Bitcoin can be used for illegal activities, ranging from drug trafficking to terrorism, and consternation over its volatility, underscored by the constant rise and fall of its value since its inception in 2009. But might Bitcoin now be on a steadier road to mainstream acceptance?

Trailblazers The Electronic Transactions Association (ETA) supports the advent of Bitcoin and accepted Circle and BitPay as members of the association earlier this year. “We applaud ETA members Global Payments and BitPay on their innovative new partnership,” ETA CEO Jason Oxman said in a statement when news of the agreement broke. “BitPay was the first virtual currency company to become an ETA member, and we expect more such partnerships as the payments industry innovates for the future. Today’s announcement further demonstrates the commitment of ETA and the payments industry to embracing new technologies.” The number of retailers and other entities now accepting or planning soon to accept Bitcoin payments also is highly indicative of progress, according to Gil Luria, managing director, Wedbush Securities. The attraction is that in leveraging the Internet as a payment conduit, Bitcoin bypasses some of the obstacles inherent when currency moves through traditional banking systems. Circumventing these barriers could save merchants (and consumers) money by lowering or eliminating transaction fees. Several major cyber-retailers of physical goods have boarded the Bitcoin acceptance train. Overstock.com already allows Bitcoin for domestic payments, and this month it will begin accepting

the virtual currency from international customers. The roster of other heavy-hitting e-tailers in this category is long, and includes 1-800-Flowers.com, TigerDirect, and Newegg, a computer hardware, software, and appliance retailer whose annual revenues exceeded $2.8 billion in 2013. Similarly, Square announced in March its intention to accept Bitcoin for online purchases, and in June, Digital River added Bitcoin as a payment option for its online merchants. Expedia will soon accept Bitcoin for all hotel bookings, making it the first major travel company to accept payments in crypto-currency.The travel giant may consider expanding the Bitcoin option to other areas of its business, including flights, according to a company spokesperson. Additionally, U.S. satellite service provider DISH Network, which has more than 14 million payTV subscribers, plans to start accepting Bitcoin payments later this year—a move that will make it the largest company to accept Bitcoin to date. On the bricks-and-mortar side, Wilmington, North Carolina-based jewelry chain REEDS Jewelers now accepts Bitcoin in its 64 locations, as well as on its website. Similarly, the Sacramento Kings, a franchise of the National Basketball Association, has begun to accept Bitcoin as payment at its home stadium and online. “As far as increased (merchant) adoption goes, that such trendsetters as Overstock and others are giving a nod to the (Bitcoin) technology shows…it’s not just computer nerd money anymore,” says David Drexler, a spokesperson for My Coin Solution, a Bitcoin consultancy.“It’s serious business.”

Feds and Regs Developments unrelated to merchant adoption also point toward more widespread consumer acceptance. In late June, California Gov. Jerry TRANSACTION trends | September 2014 11

[ COVER STORY ] Brown (D) signed into law a bill that removes possible state-level obstacles to alternative currencies like Bitcoin. The legislation repeals what backers say was an “outdated” California law prohibiting commerce using anything but U.S. currency. Moreover, ATMs that exchange dollar bills for Bitcoin have been popping up across the United States, albeit primarily in major cities. A congressional office building in Washington, D.C., now houses such an ATM. Rep. Jared Polis (D-Colorado) reportedly was the first person to use the Bitcoin ATM on Capitol Hill to exchange a $10 bill for 0.02 Bitcoin. Indicators that the financial services sector and government regulators are carefully embracing Bitcoin may eventually lead to more activity on the consumer side, say Timothy A. Karpoff, former director of the U.S. Treasury Department’s Office of Financial Institutions Policy and now a partner in the Washington, D.C., law firm Jenner & Block, and Israel “Izzy” Klein, a principal at the Podesta Group. In a blog entry published on the website Republic 3.0, they note that investors have created one of the first “Bitcoin swaps, bringing the virtual currency into the complex financial world of derivatives but also bringing it some much-needed stability.” A wellfunctioning derivatives market, the executives assert, will permit merchants to benefit from the Bitcoin system without incurring any risks associated with its volatility. In addition, the IRS regards Bitcoin

as taxable property, rather than money. “Whether or not the IRS’ position is correct,” Karpoff and Klein conclude,“clear federal tax rules will allow merchants and legitimate users of Bitcoin to transact with confidence” and give the virtual currency an extra boost in consumers’ estimation. Meanwhile, experts see other factors as boding well for Bitcoin and other forms of virtual currency in the future. The continued growth of mobile payments and e-commerce, coupled with an increased interest among consumers in the ability to make cross-border payments without worrying about currency conversion, ranks among them, says analyst Deborah Baxley, principal, cards and payments, Capgemini Financial Services. “Virtual currency acceptance is on a five-year timeline, and will also be pushed along by the fact that eventually, not every nation will have its own currency. Virtual currency will have a role as a unified currency.”

Not So Fast But Bitcoin has as many critics as it does proponents, and no matter when—or if—the crypto-currency makes it big, challenges and consequences for the electronic payments industry lie ahead. In some observers’ view, the continued volatility of Bitcoin renders it not ready for prime time, meaning that ISOs and processors may have trouble selling merchants on acceptance. According to the Consumer Financial Protection Bureau (CFPB), the exchange rate

of Bitcoins to U.S. dollars fell by up to 61 percent in a single day last year. In 2014, the value of Bitcoins has dropped by as much as 80 percent in one day, the CFPB reports. This volatility, coupled with the absence of protection for consumers and merchants, will continue to push both sides away from Bitcoin in the short term, says Damien Hugoo, product manager at Easy Solutions, a mobile banking security solutions provider. He points out that Bitcoin is not regulated by any governmental entity, and consumers have no recourse should they become the victims of the increasing number of hackers who have developed sophisticated means of stealing virtual currency online. “In order to see wide acceptance, consumers will need the same zero liability protection they get with their debit and credit cards,” Hugoo says, adding that consumers need to also perceive value in the digital currency. “Bitcoin exchanges will tell you that you are going to save money when shopping with Bitcoin, but it’s just really a lure for retailers to attract new customers,” Hugoo continues. “If, hypothetically, Bitcoin were accepted everywhere, there would not be any cost savings from using it, (and consumers) could end up paying more for goods if Bitcoin is still as volatile as it is today.” Marzban Kermani, business analyst and application coordinator at e-commerce consulting firm Lyons Consulting Group, corroborates Hugoo’s comments. He says that although some merchants

Bitcoin’s Wild Ride: 2009-Present January 2009: Initial release November 2010: U.S. Bitcoin economy surpasses $1 million

June 2011: The Great Bubble of 2011. On June 2, valuation is $10/US per Bitcoin. It jumps to $31.91 on June 8, then drops back to nearly $10 on June 12

Source: www.historyofBitcoin.org, www.coinbase.com, The New York Times online

12 September 2014 | TRANSACTION trends

March 2012: Nearly 50,000 Bitcoin stolen after security breach at web host Linode; largest Bitcoin theft to date

March 2013: FinCEN declares Bitcoin users subject to regulation only at the point of USD-BTC exchange October 2013: FBI seizes 144,000 Bitcoins worth $28.5 million (U.S.) while shuttering online black market Silk Road

November 2013: The price of one Bitcoin reaches previous all-time high of US$1,124.76 on November 29, up from just US$13.36 on January 5; price subsequently drops into the $700 range

have been Bitcoin trailblazers, the lack of data and evidence of profitability stemming from the use of the crypto-currency are contributing to minimal usage. Until these factors change—and until there is some regulation as well as a decrease in Bitcoin’s volatility—“there will be no major acceptance of the currency” on consumers’ and merchants’ part.

Shoptalk

March 2014: Xapo, a Bitcoin vault, announces first Bitcoin-based debit card; card is linked to Xapo Bitcoin wallet

100 B

10 B

100 M

10 M

Then, there are other problems, such as the differences between settlement procedures for credit card transactions and for Bitcoin transactions, says Michael Flaxman, CEO of CoinSafe.com, a provider of Bitcoin software for ATMs. With the former, transaction approval (or denial) comes almost instantly, but customers can initiate chargebacks weeks later. By contrast, Bitcoin transactions are confirmed by a globally distributed ledger called the “Bitcoin blockchain”; after about an hour, it becomes impossible to “unspend” the funds. “The actual cryptography behind this is very complex and speaks to the core of the Bitcoin protocol, but what it means in practice is that Bitcoin transactions in person are a little tricky,” Flaxman says. “For small transactions, many merchants are comfortable releasing their products instantly, but for larger transactions, the store may want to wait some number of minutes—or even a full hour if it’s an item like a car.This is completely unnoticeable when people shop online with Bitcoin, but can be a big barrier to in-person adoption. There are

February 2014: Bitcoin exchange Mt. Gox crashes; speculation that currency’s future is in jeopardy begins

Snapshot: Network Daily Transaction Volume Average

Bitcoin

Xoom

Ria/Afex

Western Union

Discover (Discover)

Source: Coinmetrics.com, August 21, 2014

a number of companies working on solutions to this problem, and it certainly won’t stop Bitcoin, but it is part of the reason we see so much more Bitcoin use online than in person.” Just as significant are the interchange fees. Bitcoin payment processors offer a rate of 1 percent and “do not have chargebacks; even better, we will probably see those fees decrease over time,” Flaxman notes. “Conversely, traditional payment processors charge on the order of 3 percent, and (merchants in) highrisk industries face another 1 percent or more in chargebacks.” Flaxman and other sources say such a discrepancy will eventually spur competition, putting pressure on payment processors to lower their fees. However, observers say, chargeback fraud and the slower pace at which traditional payment processing occurs means these organizations will never be able to offer rates as low as

August 2014: CFPB issues advisory, cautioning consumers to “be aware of potential issues with virtual currencies such as unclear costs, volatile exchange rates, the threat of hacking and scams, and that companies may not offer help or refunds for lost or stolen funds”

PayPal

Discover (Pulse)

AMEX

China Mastercard Unionpay

Visa

Volume ($)

those available from Bitcoin processors. If industry observers agree on one point concerning Bitcoin and other virtual currencies, it is this: Wherever Bitcoin goes from here, there will be obstacles for merchants, payment processors, ISOs, and, likely, issuers as they figure out how to accommodate alternative currencies. “As the concept of Bitcoin evolves, all of these entities will face challenges,” says Kermani. “From all indicators, it seems that the Bitcoin concept will survive. However, it is too early to say what type of maturity curve it will follow before gaining widespread acceptance. As it matures, some entities will adapt, transform, and continue to thrive—and others will simply vanish.” TT Julie Ritzer Ross is a contributing writer for Transaction Trends. Reach her at jritzerross@gmail.com.

September 2014: Overstock.com accepts international Bitcoin payments; CEO Patrick Bryne tells The New York Times in late August, “Bitcoin saves us so much money” that he intends to donate 4% of Bitcoin sales to foundations supporting its adoption TRANSACTION trends | September 2014 13

[ FEATURE ]

Powerful Minds

Unite in Palm Beach Payments professionals prepare for the next level of opportunities at the 2014 ETA Strategic Leadership Forum By Bryan Ochalla

itting into the changing payments landscape is a goal for many industry professionals as new technologies and new partnerships reshape the playing field. When payments industry professionals attend the 2014 ETA Strategic Leadership Forum (SLF) next month, they will be gain information and insight about what their companies will need to do to achieve success in the payments space of the future. Attendees at the 2014 SLF, October 7-9 at The Breakers in Palm Beach, Florida, will “walk away from this event with 14 September 2014 | TRANSACTION trends

a better sense of this industry, of themselves, and of their role in the changing payments landscape,” says Charles Hogan, co-founder and chief executive officer of Tranzlogic and chair of the SLF program planning committee. Attendees at the Forum can expect to capitalize on the knowledge of hundreds of frontline leaders, business visionaries, and seniorlevel professionals who are advancing the payments space. Industry executives will learn how to best position their companies by attending informative sessions on a variety

of topics geared toward strategic-level thinkers, as well as participating in numerous networking activities.

Strategic Sessions Participants in the 2014 SLF should come prepared to learn about both nearand long-term shifts in the industry, according to Hogan. The SLF planning committee designed the program “to get a touchpoint on all of the major issues affecting the commerce space—it’s hard to even call it the payments space anymore—today,”

says Greg Cohen, an ETA board member and chief revenue and strategy officer at Boston-based Merchant Warehouse. Cohen also is a member of the SLF program planning committee. “In the sessions, you’ve got what some of the investors are thinking about, what some of the experts are thinking about, and what some of the CEOs are thinking about.” Attendees will learn valuable lessons from the many trends-focused sessions and panels, which will cover “what’s real versus what’s just hype,” says Cohen.“They’ll hear CEOs and other executives and experts talk about what’s really taking off in this industry, or where real value is being created.” For example, participants will learn how to take advantage of new technologies during the session, “The Changing Landscape of Acquiring: Are You a Technology Company Yet?” Led by iClassPro’s Chris McNabb and FrontStream Inc.’s Nina Vellayan, along with moderator Todd Ablowitz of Double Diamond Group, this session will explain why many industry experts believe EMV, mobile payments, tokenization, omnichannel payments, and Cloud-based software are at the heart of the industry’s value proposition—and how they are the key to differentiation, market leadership, and client retention. The session, “Next Generation Payments: The New Face of Who’s Paying Is Changing the Rules for Who’s Playing,” will focus on how young consumers are impacting the industry. As Millennials become an increasingly important part of the consumer-spending ecosystem, their heavy mobile usage, comfort with sharing information, and desire for a frictionless purchase process will have profound implications for how traditional payments processing must evolve to meet the likely demands of a streamlined, omnichannel, customer-decision journey. This thought-provoking session—featuring McKinsey & Company’s Robert Byrne, BitPay’s Anthony Gallippi, CARD.com’s Ben Katz, and EY’s Margaret Weichert—will address the challenges and opportunities inherent in this changing landscape. SLF participants also will learn how to take advantage of data analytics to deliver

unprecedented, value-added offerings to clients during “Leveraging Big Data to Your Advantage.” Four Big Data experts, including Vantiv’s Scott DeAngelo, Merchants’ Choice Payment Solutions’ Todd Linden, CAN Capital’s James Mendelsohn, and Aperia Solutions’ Andrew Sisson, will cover the current climate of this burgeoning industry, opportunities and obstacles related to Big Data, and how your organization can benefit from implementing a Big Data technology initiative.

Some of the savviest investors from different stages of the investment cycle will share insights about where they’re placing their bets for the next few years during “Put Your Money Where Your Mouth Is.” Moderated by FT Partners’ Steve McLaughlin, this Wednesday morning session will feature tips and techniques from Sean Banks of TTV Capital, Dan Rosen of Commerce VC, and Zach Sadek of Parthenon Capital Partners. After 10 years of PCI oversight and bil-

TRANSACTION trends | September 2014 15

[ FEATURE ] Meet the 2014 SLF Keynote Speakers Tim Tynan, who will give the opening keynote on Tuesday, October 7, is Bank of America Merchant Services’ newest CEO—a position he assumed a few months ago. Tynan is responsible for all business aspects of his organization, which is a joint venture owned by First Data Corporation and Bank of America and also is the largest payments processor, measured by card transaction volume, in the United States. Diane Offereins, who will lead Wednesday morning’s keynote, is Discover Financial Services’ executive vice president as well as its president of payment services. In addition, she also is member of the Discover Financial Services Executive Committee. Prior to overseeing Discover’s payments networks, Offereins,

lions of dollars in breaches, will PCI become irrelevant with the adoption of EMV and the evolving payments ecosystem? Or is EMV simply PCI 3.1? Industry veterans Joan Herbig of ControlScan Inc. and Jonpaul Leskie of Interwov LLC will explore these questions during the session, “Not Your Parents’ PCI Panel.” SLF participants also will gain exposure to the latest information on international payments during “Expanding Payment Products Outside of the United States.” One of the many benefits of all of the change in the payments industry is the border-crossing opportunities that have presented themselves in its wake. Several overseas payments company executives will lead this session and discuss new opportunities, as well as some of the key regulatory and industry initiatives from consumer convenience, fraud prevention, transparency, and security perspectives. These sessions, as well as the keynote presentations (see sidebar, “Meet the 2014 SLF Keynote Speakers”), have been designed to address “the topics that are most relevant to and prevalent within the payments industry today,” says Hogan. Based on feedback received from industry experts as well as attendees of past events, these are the topics “that are on 16 September 2014 | TRANSACTION trends

who has been with the company since 1998, acted as CEO. In addition, she has led PULSE, a business unit of Discover, since 2006, and added responsibility for Discover Network and Diners Club International in 2008. Thursday’s keynote will be provided by Frank Bisignano, who was appointed First Data Corporation’s CEO, as well as a member of its board of directors, last year. In March of this year, he was named chairman of the board in addition to his role as CEO. Since assuming this position, Bisignano has moved to rapidly reposition the 42-year-old company from a traditional processing business to a provider of product and technology solutions for merchants and financial institutions.

the minds of and most applicable to payment ISO owner-operators and acquirers—specifically, the owners, managers, and decision makers at those companies.”

Getting Personal Beyond the informational sessions, SLF offers many opportunities for high-level discovery and interaction. Participants will have many opportunities to network with colleagues and get to know industry newcomers.“One of the things we always try to do at this event is provide plenty of opportunities for people to exchange information,” says Cohen. “It’s not just about sitting in a room and listening to speakers or panels; it’s also about talking to and networking with vendors, suppliers, partners, and even competitors.” For example, this year’s golf tournament will take place on the morning of October 7 at the Breakers Ocean Course. This venue is an ideal location for golfers who want to be challenged—and payments executives seeking potential new business partners. The Tuesday and Wednesday evening networking receptions, sponsored by Bank of America Merchant Services, will provide another setting for attendees to circulate, mingle, meet, greet, and more. Wednesday’s networking lunch will

feature an appearance by U.S. Senator Johnny Isakson (R-Georgia), a lifelong businessman who is serving in his fifth decade of public service to the state of Georgia. The much-anticipated CEO Roundtable will take place on Thursday. Top executives from the nation’s largest ISOs will lead the discussions, including North American Bancard’s Marc Gardner, Merchant Warehouse’s Henry Helgeson, ETA CPP, and Priority Payment Systems’ John Priore. The main goal for this year’s Roundtable is to impart real-world strategies and techniques that touch on the next generation of innovative ideas and that, as a result, help participants and their organizations navigate the increasingly crowded payments landscape. “Our industry is at an inflection point,” Hogan says of the programming that’s being prepared for the 2014 ETA Strategic Leadership Forum. “And our goal for this event is to help key executives and decision makers deal with and even take advantage of all of the change that is occurring right now and will continue to occur in the future.” TT Bryan Ochalla is a contributing writer to Transaction Trends. Reach him at bochalla@yahoo.com.

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How one small company supports cross-border transactions while selling empathy to the unbanked of Africa By John Manasso

▲ ETA CEO Jason congratulates Founder Suzana Moreira for moWoza’s 2014 ETA E-Pay Innovation Award.

www.mowoza.com Founded: 2012 Locations: South Africa and Mozambique

18 September 2014 | TRANSACTION trends

hen Suzana Moreira was pursuing her master’s degree in business administration at Imperial College London, a case study on innovative business models caught her interest. Cemex, a Mexican-based cement company, had created a subsidiary in the United States named Construmex whose purpose was to target the remittances of Mexican immigrants back home. Instead of sending money to family members in Mexico, participants in the program could use Cemex’s expertise to finance and purchase building materials to build or renovate a home or business. Moreira, a South African citizen, conceived a similar business idea that she wanted to apply to her native continent. In 2012, she founded moWoza, a company that bills itself as“a Collaborative Commerce Platform” and “the SMS mobile shopping solution for grassroot communities in Africa.”

“I think that’s what kick-started the entire idea,” Moreira says of her epiphany with Cemex. “I thought, ‘There’s just so many migrants in South Africa who are also sending goods back home. But how can I make this so much more efficient?’ That’s when I thought perhaps we can use the mobile phone because everyone has a mobile phone in Africa.”

Purposefully Lower-Tech Although still in its relative infancy, moWoza was awarded the $20,000 second-place prize in the 2014 ETA E-Pay Innovation Awards, at the TRANSACT 14 conference in April. The award is funded by The Bill & Melinda Gates Foundation. Moreira learned of the competition on the Facebook page of the Unreasonable Institute, which helps to mentor entrepreneurs who are “tackling the world’s greatest challenges.” The institute says its goal“is to help each of these ventures

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scale up to meaningfully impact the lives of over one million people each.” moWoza’s target group is micromerchants, mostly in urban areas.“It started off with remittances and how migrant workers in South Africa were really struggling to support their families,” says Moreira.“Instead of sending money back home, they were sending products because products in South Africa can be bought far cheaper than products can be sourced in the neighboring countries. So because of price discrepancies, you can build a whole business around it.” moWoza’s model has changed slightly since then. It no longer focuses solely on remittances, as the need to serve “informal traders also existed.” Because of its business model, moWoza has earned comparisons to Western Union and other businesses of that type. When asked if moWoza was like an Amazon for Africa, Moreira agrees, saying that it could be compared with “a very small version” of Amazon or the Chinese e-commerce giant Alibaba. However, the company has some distinct differences: moWoza only can be accessed with a mobile phone and is mainly a business-to-business site. Most of moWoza’s customers do not have smartphones. Instead, they use what (in the United States) would be considered older mobile phone technology. (moWoza is working on a mobile app for smartphones and looking at potential partners to build it.) Understanding that its customers tend to be low-tech, moWoza caters to their needs. For customers to make a purchase, they must first register with moWoza, which markets the goods for purchase through either printed brochures or images that it text messages to customers.The brochures and texted images include product codes. When a customer wants to make a purchase, he or she sends a text with the product code and a quantity. moWoza texts back to the user the amount of the transaction for confirmation. Customers pay using a mobile wallet and receive a mobile receipt. moWoza notifies the customer on the progress of the transaction and delivery via text, and drops off the orders in secure areas for easy pickup by the receiving party. “We are offering a level of security or assurance that sometimes customers didn’t have when they were either sending goods or ordering goods across borders,” she says.“So we also take away the inconvenience of having to travel across the border and the costs associated with all of the travel.”

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Curiously, moWoza’s technology and business model are somewhat similar to that of the E-Pay Innovation Award’s first-place winner, Social Trade Organization (STRO). STRO developed a software product called Cyclos, which helps connect the unbanked in the developing world to the formal economy through the use of mobile phones. “The two businesses are very similar,” Moreira says.“It’s really interesting because just a few weeks before going to Las Vegas a friend actually said to me that I should look at this company because it’s very similar. So I did look, and I think they’re far more advanced than what we are.”

moWoza has only five employees, four of whom are based in South Africa. But Moreira hopes the $20,000 award will help the company to expand and offer more services. She is using those funds to help build a financial product to sell to customers and is currently in talks with several mobile phone operators. “We are looking first to bank these customers because they are unbanked or semibanked,” she says. Expanding to other markets is not out of the question either, although such a move would be well into the future. Most of moWoza’s customers tend to be in urban areas, and delivering to more rural areas is a step the company has not yet elected to take. “We are keen to deliver to the last mile,” she says.“[But] what we find here, especially here in Mozambique, is that people can’t afford the goods, so it’s a slightly different issue.” moWoza’s customers are extremely price conscious. Consequently, they come and go. Marketing to such a transient customer base is not the easiest task. The company relies on word of mouth but also has partnered with associations to reach their target audience.“That’s still something we’re working on,” Moreira says. By the end of 2014 or early

WORDSTOTHEWISE � Be close to your customers. “I think people forget to do that,” says Suzana Moreira, founder of moWoza. “You have to be so close, so close to your customer. You must know your customer—sell empathy. Somebody expressed it so well the other day: You’re selling humanity. That’s what you should be doing, especially in these markets (in urban Africa). Be empathetic toward the customers, the customer’s situation, what they are going through.” � Get into the mobile space. Moreira’s company uses mobile phones, SMS, and mobile wallets to conduct its sales. “The mobile space is still very young, so there’s still a lot that can be tested,” she says. “The whole industry is still in its infancy. The time is now.” � Be patient. moWoza started in 2012 and has undergone its share of changes. “People forget that Facebook is not a three-year wonder. Facebook has been around for 10 years, if not longer, so they didn’t just become this overnight success. They’ve been around for a long time. Yes, things do take a little bit longer than what one expects, so you’ve got to be determined to stick it out.”

2015, the company hopes to launch an information-sharing campaign as a way to recruit customers. It might take some time for moWoza to accomplish the Unreasonable Institute’s goal of making an impact in the lives of one mil-

lion people, but Moreira and her small company appear to be well on their way. TT John Manasso is a contributing writer to Transaction Trends. Reach him at john_ manasso@yahoo.com.

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TRANSACTION trends | September 2014 21

FUTURE OF THE BUSINESS

Micromerchant Boarding: Is It Worth It?

Given their risks, micromerchants may be better served by alternative payments than traditional ISOs By Brandes Elitch

ny credit officer at an acquirer or bank can underwrite a Fortune 500 company. But underwriting a very small business that has no history, no assets, no collateral, no hard assets to liquidate, a small inventory, and an unsubstantial personal guarantee is going way out on a limb. In the past, ISOs would make up for the underwriting gap by relying on personal guarantees, placing holds on funds during settlement, and establishing a reserve account. However, regulators have recently held ISO principals as “personally liable” when they knew, or should have known, that a merchant was exhibiting symptoms of fraudulent behavior. In these cases, the fines have been substantial. Micromerchants pose a very real and substantial risk in this regard.

Calculating the Risk Varying estimates put the number of micromerchants between 10 million and 25 million. Though this is a large pool, there are many risks associated with underwriting these entities. Before taking the plunge to start underwriting micromerchants, ISOs should consider three questions to determine whether doing so may be profitable: • What is the value proposition of the services that we are offering? • Do they make sense for this merchant? • If so, how can we make money doing business with this merchant? Researching these questions is important. Many micromerchants that sign up never actually use the service, or if they do, never have any real volume. In 22 September 2014 | TRANSACTION trends

that case, there is no real benefit to the ISO. Some micromerchants sign up for processing, but many of them fail to light up. And some micromerchants that have successful startups may never meet the threshold for full underwriting. Sometimes, the merchant really does not need additional payment processing services—it might only conduct a dozen transactions a month with repeat customers who simply mail a check without ever seeing a return item.

Solutions—Now and in the Future Micromerchants do not need the same payments supplies as small businesses. A small business needs a cash drawer, barcode scanner, receipt printer, customer-facing display, ability to accept loyalty and gift cards, integration with card swipe readers to accept chip and PIN (and magstripe), inventory management, custom reports, and a connection to social media for promotions. But not every merchant requires these supplies. And while some processors are considering advanced payments, such as biometric payments with fingerprints, such services may never be needed at micromerchants. How do you cost-effectively help a micromerchant with data-loss prevention, privacy, and security, and what do you charge for doing so? Fraud management is about balancing security versus access. Large merchants can afford to have internal and external resources to address this challenge. Large banks and processors can use Big Data to track factors such as how often a user typically accesses an account from a mobile device, how quickly the user types

in a username and password, and the geographic location from which the user most often accesses an account. This might work well for a large merchant, but it may not be needed by a micromerchant. With online fraud and the potential for fraud in the mobile space, some industry experts advocate two-factor authentication. Chip and PIN fits this requirement, but it only works when there is a payment terminal to prove that the card and the PIN associated with it are both in the same place. You can’t authenticate a card online because the tablets don’t have card readers for the consumer to use (but an iPhone 5 with a fingerprint reader might work). Somehow, a cost-effective means of managing risk has to be found for small merchants with small budgets. Traditional underwriting in the micromerchant space is a bit like practicing a lost art, such as blacksmithing, or remembering telephone numbers. The three mainstays for micromerchants have sidestepped the underwriting issue via a different business model than the traditional acquirer, and, surprisingly, it seems to be working. Moreover, it’s worth noting that a number of companies already offer alternative solutions for micromerchants: •S quare. Square has been called a “disruptive innovation.” The traditional setup process for an acquirer involves the ISO physically going to the merchant to verify that the business really exists, getting a signed agreement and all supporting documentation, and doing the hardware and software deployment and instal-

lation and training, etc. Square does away with all of that. The consumer pays with a credit or offline debit card via an iOS or Android smartphone or tablet. The merchant can manually enter the card information or swipe it. The consumer can set up a tab to pay with his or her name or barcode using stored card data using the Square Wallet. Square uses SSL and PGP encryption, and nothing is stored on client devices (e.g., card numbers, magstripe data, and security codes). Square is an entrenched player now, and is an obvious POS choice for a micromerchant. • P ayPal. PayPal has 110 million active users. You can get a PayPal MasterCard and redeem points or get cash back, or you can get a PayPal Business Debit MasterCard, and withdraw your balance at any ATM and get 1 percent cash back on qualified purchases. With PayPal, you can request money, sell on eBay, sell with Classifieds or on your website, and fundraise. You can send money online, internationally, via your mobile phone, and even to a family member. In addition to processing online payments, PayPal owns BillMeLater, which allows consumers to apply for

credit to be used to cover a purchase today to be paid for in the future. PayPal is such a pervasive presence on the Internet that it would almost seem to be a mandatory offering for a micromerchant. PayPal also offers a reseller program:“Through the Payf low Reseller Program, authorized resellers gain exposure to thousands of online merchants. Payf low Link hosts payment processing on PayPal servers, and Payflow Pro conducts all transactions and processing right on the merchant’s e-commerce site.” • Google Wallet. Google has 425 million users. Even if only a quarter of those users signed up, they would rival PayPal for user count. All Gmail users can use the Google Wallet for payments and money movement, as long as they activate Google Wallet. The user can store debit and credit cards and loyalty and gift cards and redeem sales promotions, all on a mobile phone. This is an obvious choice for the consumer, and thus the merchant must pay attention and be part of the process. • Apple. Apple has a huge user base but hasn’t entered the payments space yet. Watch this space.

Look Before You Leap Square, PayPal, and Google Wallet have their own solutions to the risk conundrum. If the user is preregistered and, even better, if the user prefunds a settlement account, risk can be contained. Big Data can be used to further identify consumer payment patterns. Underwriting the merchant is more problematic, but if daily settlements are capped at a modest number, the risk may be manageable for micromerchants. If you are selling card processing, the obvious question is: Where is the revenue stream for the ISO? The reality is, for the most part, there is none. Practically speaking, a micromerchant could sign up for one or all of these services without ever speaking to an ISO, or any other third party. This is not to say that there are not other opportunities, but the ISO must focus on where to add value, and it may be elsewhere than the traditional payment processing space. TT Brandes Elitch is director of partner acquisitions at CrossCheck Inc. and a member of the ETA Risk and Fraud committee. Reach him at brandese@ cross-check.com.

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THE LAST WORD

Seize the Opportunities How ETA is making advances on your behalf By Jason Oxman

t ETA, advancing your business is our job. ETA offers cutting-edge news and information; facilitates business expansion and connections; provides industry information, education, and certification; and advocates on issues critical to our members’ success. In the past year, ETA has gained additional momentum in our relentless pursuit of industry growth. We’ve added 180 new member companies, broken attendance records at our two signature annual events, expanded our advocacy initiatives, produced even more educational resources, and added new staff to serve our growing membership. Let’s take a look at how ETA is working for you. Accelerating Your Business. By proactively addressing new competitors, new technologies, and shifting customer behaviors in payments, we are helping you build your business connections. In 2014, ETA expanded our event offerings to focus on networking among our members. The ETA Annual Meeting & Expo was completely rebranded, reformatted, and repositioned into TRANSACT 14: Powered by ETA.The inaugural TRANSACT 14 was the largest event in ETA history and showcased educational opportunities with eight conference tracks, increased trade show floor hours, and the best networking events in payments. We also added new individual events and networking opportunities, including the International Payments Day, Mobile Payments Day, and Silicon Valley Day. All of ETA’s events provide members an opportunity to cement relationships and create brand awareness among key industry players. Attending ETA events is essential to industry success. Amplifying Your Voice. As the leading organization advocating for innovation in payments, ETA offers a comprehensive suite of services to make your voice heard. We dramatically expanded our government relations activities by registering our first in-house lobbyist, adding new staff, and adding new tools to our arsenal with the launch of our political engagement program, ETA Voice of Payments, and ETAPAC. ETA acted as the voice of the industry following the recent data breaches, ensuring legislators and the media know that payments are safe, reliable, and secure. We’ve held more than 100 meetings 24 September 2014 | TRANSACTION trends

with legislators and regulators and participated in interviews with dozens of national media outlets. We’ve also launched a successful advocacy campaign against Operation Choke Point (OCP). In California, we helped to defeat a bill that would have made the use and acceptance of EMV cards a state law. ETA also works internally with industry stakeholders to represent the member companies in industry discussions on EMV, security tools, and other technology implementation. Expanding Your Knowledge. ETA strives to provide its members with original, essential, and unbiased information. Our publications—Transaction Trends, ETA Currents, and Trendsetter blog— keep members on top of the latest industry trends. From the advocacy work being done by ETA to thought-provoking, in-depth reporting, ETA ensures you are in the know. We also offer the only industry-developed professional credentialing program—ETA CPP—as well as ETA University courses, which address key facets of the industry that are necessary for expanding your expertise.Take advantage of our live and on-demand webinars that explore current and hot topics in the electronic payments industry, and learn effective strategies to combat fraud with the new ETA Guidelines on Merchant and ISO Underwriting and Risk Monitoring. Improving Your Membership. ETA is committed to building upon this growth by adding four new staff positions to directly and efficiently address your needs and to support our essential work advancing the payments industry. As we expand, we are reconfiguring our dues levels to deliver the most value to our members, from small businesses to multinational corporations. ETA membership means you’re gaining the skills for moving forward, the edge for seizing opportunities in the changing marketplace, and the expertise for becoming an even more valuable player for your organization. Be sure you are leveraging that membership by actively participating in the only organization leading and representing the global payments industry. TT Jason Oxman is CEO of ETA. Reach him at joxman@electran.org.

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