Transaction Trends Fall 2019

Exclusive! Jodie L. Kelley Named ETA CEO |

PAGE 4 Fall 2019

Vertical

ALIGNMENT

ISV partnerships establish opportunity in niche markets

ALSO INSIDE: Fall Advocacy Efforts PAGE 8

Real-Time Payments in the U.S. PAGE 16

Modernizing B2B Payments PAGE 19

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contents

The Official Publication of the Electronic Transactions Association Vol. 24 | No. 3

features 12 Vertical Alignment

By Christine Umbrell

Many payments companies are looking to partner with ISVs for their sophisticated software programs and pathways into niche markets—a mutually beneficial arrangement in terms of scale, distribution, and attrition. Here’s how they are doing it and tips for forging strong relationships.

16 Getting Real

By Josephine Rossi

Globally, faster payment systems have been around for decades, but modernizing the U.S. landscape has been slow going. Now that the Fed has thrown its hat into the ring, that may all change. We explore how we define real-time payments and its benefits, and what will drive domestic adoption in the near future.

19 Taking Care of Business

By Michael Coleman

As late adopters of digital payments, businesses in the B2B space offer payments professionals, software developers, and other new and existing players “tremendous” opportunity. Several experts ponder what’s next for B2B as fintech automates and replaces legacy systems for handling payments, collections, and more.

departments 2 @ETA Announcements and ideas from ETA 3 Intelligence Vital facts and stats from the electronic payments world and ETA

8

Politics & Policy Advocacy priorities this

fall

10 Industry Affairs Competition and mergers bring about significant opportunities

22 Payments Insider The many use cases for QR codes

23 A d Index 24 P eople Finix Chief Executive Officer and Co-

Founder Richie Serna talks about new payments models, software, and getting funded TRANSACTION trends | Fall 2019 1

Electronic Transactions Association 1620 L Street NW, Suite 1020 Washington, DC 20036 202/828.2635 www.electran.org ETA CEO Jodie L. Kelley Vice President, Strategic Partnerships Del Baker Robertson Director, Communications Laura Hubbard SVP, Government Relations Scott Talbott Vice President, Industry Affairs Amy Zirkle Director, Regulatory Affairs Philip (PJ) Hoffman Publishing office: Content Communicators LLC PO Box 938 Purcellville, VA 20134 703/662.5828 Subscriptions: 202/677.7411 Editor Josephine Rossi Editorial/Production Associate Christine Umbrell Art Director Janelle Welch Contributing Writers Lori Breitzke, Eric Brown, Michael Coleman, Alicia Roisman-Ismach, Patrick Nolan, Josephine Rossi, Scott Talbott, Christine Umbrell, Kimberly Wheeler, and Amy Zirkle Advertising Sales Alison Bashian Advertising Sales Manager Phone: 703/964.1240 ext. 280 Fax: 703/964.1246 abashian@conferencemanagers.com

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 four times annually, of the Electronic Transactions Association, 1620 L Street NW, Suite 1020, Washington, DC 20036; 800/695-5509 or 202/828-2635; 202/828-2639 fax.

POSTMASTER: Send address changes to the address noted above.

Copyright © 2019 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.

2 Fall 2019 | TRANSACTION trends

@

ETA

An Introduction to an Industry

M

y first weeks as chief executive officer at ETA have been a headlong dive into the dynamic and innovative payments technology ecosystem and the association that is committed to driving its

success.

During this time, one word has repeatedly come up: “bold.” It’s a word that captures the vibrant nature of this exciting, rapidly evolving industry, and it’s a word that ETA leadership has embraced as our own vision of the future of ETA. “Bold” most certainly describes the payments industry. ETA members are driving and shaping the way commerce is done. The way we pay for groceries or a babysitter, the way we register and pay for classes, the way we get from one place to another are all fundamentally different than just a few years ago. Every day it is easier, faster, and more secure to engage in commerce—and it is our membership that is creating the products and services driving that change. The transformational trajectory of this industry is what captured my imagination and ignited my excitement to join ETA. That same transformational spirit must also define the work and growth of ETA. Our association must be as dynamic and innovative as the members we represent. The capacity to be audacious, to exist at the leading-edge, and to embrace disruption will allow us to succeed and, in doing so, drive the success of this industry.

Our association must be as dynamic and innovative as the members we represent.

Next year, ETA will turn 30. We are excited to celebrate our past, but more importantly we are looking toward the future and focusing on how to best partner with our members to drive your success in this new era. I look forward to meeting with you and hearing your thoughts on how we can best serve you and this fascinating ecosystem that we are all a part of.

Jodie L. Kelley CEO Electronic Transactions Association

INTELLIGENCE

Fast Fact

fizkes/Getty Images

Forty-four percent of business owners in the United Kingdom who have fallen victim to payments fraud, or knew a business that had, said it has impacted their stress levels. More than one in five (23 percent) said it negatively affected their health and well-being, and 5 percent said they had considered suicide as a result.

Americans Seek New Tech and Traditional Service ing from 29 percent last year to 44 percent in 2019. That growth may be due, in part, to increased awareness of these services, which rose to 81 percent—up 8 percent from last year.

Use of contactless cards remains low among American consumers: Fifty-five percent of consumers with a contactless card have used the “tap” feature to make a purchase.

Consumers also indicate a preference for managing their accounts digitally, with 40 percent saying they would prefer to receive text message alerts about potential unauthorized use. Nearly two-thirds of respondents (61 percent) would like to receive mobile alerts every time their card is used to make a purchase.

Although consumers are embracing the convenience of digital banking and payment technologies, the survey showed they still prefer to talk to a real person, via phone or in person, when they have a problem with a payment card. Among those surveyed, 72 percent of consumers would rather talk to a customer service representative over the phone to resolve an issue. And while younger consumers between the ages of 18 and 24 are the most active mobile users, they also are the most likely age group to seek customer support in person, with 16 percent saying they would visit a branch if they had a problem with their payment card.

Source: “Business Fraud Report: United Kingdom 2018-2019,” Vocalink/Mastercard

Rawpixel/Getty Images

Americans want the best of both worlds when it comes to financial services, according to the “2018 Consumer Payment Study” from TSYS. Increasing numbers of U.S. consumers are trying out the latest payment technologies, but they still appreciate the personal touch of oldfashioned customer service when they encounter an issue, according to approximately 1,200 Americans with debit and credit cards who participated in the study.

The eighth annual survey found that consumers are increasingly using mobile payment options.

This is especially true of younger consumers—82 percent of people aged 18-24 are familiar with in-app payments, and 27 percent of this group has loaded a debit card into a mobile wallet. Those numbers contrast sharply with the over-65 age group, in which only 41 percent are familiar with in-app payments and a mere 3 percent have loaded a debit card into a mobile wallet.

Among all age groups, consumers most often use their mobile banking apps to view balances (93 percent) and check recent transactions (82 percent).

Meanwhile, peer-to-peer (P2P) payment growth continues to accelerate, according to the study, with the number of respondents who reported using P2P payments jump-

TRANSACTION trends | Fall 2019 3

INTELLIGENCE

Moves & Mergers Sam Pfanstiel has been named director of security consulting services at ControlScan. Pfanstiel, who has more than 20 years of senior IT management and payments security experience, will provide consulting and assessment services for payment solution technologies and study the impacts of third-party solutions on merchant payment environments. Pfanstiel also serves as vice chair of ETA’s Risk, Fraud, and Security Committee.

Kabbage entered into an agreement to acquire assets of Radius Intelligence, a small-business data platform. The purchase allows Kabbage to more deeply understand and serve small businesses as it adds insights from over 20 million U.S. small businesses to its platform.

Payment Alliance International (PAI) has acquired Massachusetts-based ATM operator ISA-Ecash. The acquisition adds more than 40 financial institution customers with 960 ATMs located throughout the Northeast to PAI’s existing nationwide network of more than 75,000 ATMs. The acquisition also encompasses ISA-Ecash’s ATM Manager Pro software offering.

Repay Holdings Corp., a provider of vertically integrated payment solutions, has acquired TriSource Solutions, a company that provides back-end transaction processing services to independent sales organizations.

Paysafe Group has appointed Richard Swales as its chief risk officer. He will assume overall responsibility for the group’s global risk strategy, comprising its enterprise, merchant, and consumer risk functions.

Swales has more than 30 years of experience in the risk industry, and he joins Paysafe from PayPal, where he spent the past nine years in various roles, leading its global risk, compliance, and governance strategy.

Visa Inc. has acquired Payworks GmbH, a Munichbased developer of cloud-based POS payment gateway software. Visa announced it intends to integrate Payworks’ technology with that of another Visa property, CyberSource, and offer the combined product to merchants and acquirers.

Wells Fargo & Co. has named Colleen Taylor as head of Wells Fargo Merchant Services. She will be responsible for strategic direction and management of the merchant services business and a joint venture with Fiserv.

4 Fall 2019 | TRANSACTION trends

Jodie L. Kelley Named ETA CEO

Jodie L. Kelley has been named chief executive officer (CEO) of ETA. Formerly senior vice president and general counsel of BSA, Kelley assumed her new role the week of September 3.

“The board and I are thrilled to announce an exceptional new CEO to lead and grow ETA as we approach our 30th anniversary next year,” said Kevin Jones, president and chairman of ETA and CEO of Celero Commerce. “The payments technology industry is dynamic and expanding, and ETA has a vital role to play during this period of growth and innovation. Jodie is the right person to guide ETA to significant growth that provides enhanced value and a unified voice for our industry.”

Kelley brings to ETA more than 25 years of experience managing and providing strategic guidance to large organizations. At BSA, she oversaw the primary revenuegenerating activities for the organization, managed programs that support the software industry in more than 30 countries, and acted as spokesperson for BSA and the business software industry in front of a wide variety of audiences.

“I am honored to join the Electronic Transactions Association,” Kelley said. “As the payments technology industry grows in both size and importance, ETA must grow along with it. With the help of the board, I look forward to evolving the association at this pivotal time. I am committed to further expanding ETA’s already significant advocacy efforts, increasing our member education programs, and providing more networking opportunities. The payments technology industry is dynamic and so is its trade association. I am excited to work with ETA’s talented staff to advance the goals of this important industry.”

Kelley succeeds Jason Oxman, who stepped down as ETA’s CEO in January to become president and CEO of the Information Technology Council. ETA’s interim CEO, Amy Zirkle, remains with the association.

Cards Remain Global Online Shoppers’ Payment Method of Choice

courtneyk/Getty Images

Seventeen percent of consumers around the world make online purchases at least once a week, and 26 percent make online purchases at least once a month, according to a recent examination of global purchasing trends captured in the “Online Shopper Behavior Survey” conducted by 2Checkout between May and July 2019.

Credit and debit cards remain the most popular method of payment for online purchases, favored by 63 percent of respondents, with 39 percent also using PayPal, 12 percent using mobile payments, and 10 percent using direct debit methods.

“Localized” commerce sites that allow shoppers to pay using their local currencies also are preferred, according to the survey. And while consumers appreciate the online options currently available, 76 percent of respondents noted that data privacy and security are top priorities.

Consumers also purchase a wide array of goods online, according to the report. Many respondents purchased digital goods, including software products (purchased by 53 percent of respondents), mobile apps (33 percent), online books (20 percent), movies (18 percent), and concert tickets (19 percent). Computers and electronics topped the list of physical goods at 36 percent, followed by clothing and accessories (33 percent), and mobile phones and tablets (30 percent).

Rewards Beat Discounts for Consumer Engagement Companies that offer reward-based promotions report higher year-over-year revenue growth and average profit margin per customer compared to those that offer discounts, according to new research from Blackhawk Network. The main reasons rewards programs are offered, according to the research, are to deepen engagement, build loyalty, and show appreciation to program participants.

While 87 percent of program managers surveyed report reward programs being highly valued by customers and 79 percent report that rewards programs positively impact business performance, only 47 percent offer reward programs to customers, according to the Blackhawk researchers.

Across the industries surveyed, programs offering digital rewards were the most popular. Ninety-two percent of respondents cited digital gift cards as

the most powerful digital incentives, followed by unique codes for online gift cards (90 percent), online gift card catalogs with point-exchange offers (89 percent), digital open-loop prepaid cards (87 percent), and reward cards that can be added to mobile wallets (86 percent).

Program managers reported prioritizing convenience, cost-effectiveness, and speed of delivery in selecting reward options for their incentives programs.

“Businesses have long seen the value in rewards programs, but many are overlooking the measurable demand for consumer reward programs,” said Theresa McEndree, vice president of marketing at Blackhawk Network. “Today, rewards programs are easier to implement with fully digital, personalized, and customizable options that can be simply managed and quickly delivered.”

JPMorgan Chase & Co. in August informed customers that, beginning in early 2020, they would no longer be able to use the Chase Pay app to pay with their smartphones when shopping in stores. The app, which launched four years ago, will continue to be available to pay for purchases made on the websites and apps of retailers that accept Chase Pay payment.

Noting that many merchants are emphasizing their “buy online/pick up in-store” options, JPMorgan seeks to capture a larger share of online retailers in the coming months, according to reports.

Phatchara Bunkhachary/Getty Images

JPMorgan Announces End of In-Store Use for Chase Pay App

TRANSACTION trends | Fall 2019 5

INTELLIGENCE

Sixty-four percent of global consumers have adopted financial technology solutions, according to the “EY Third Biennial Fintech Adoption Trends Survey.”

The adoption rate is growing faster than anticipated, according to EY, mainly due to the fact that well-known and mainstream financial institutions—such as banks, insurers, and stockbrokers—have begun offering fintech solutions.

Consumer awareness of fintech services is high across five main categories, including money transfer and payments, budgeting and financial planning, savings and investment, borrowing, and insurance.

Three-quarters of survey respondents have used a fintech solution for money transfer or payments. Nearly half (46 percent) of

fintech adopters say they are comfortable with their bank sharing their financial data with other organizations in exchange for better offers on products or services. And 47 percent of consumers are willing to use financial services from a nonfinancial services company if that company is working in partnership with a traditional financial services company.

Emerging markets are leading the way in adoption rates, with 87 percent of consumers in both China and India using fintech solutions, according to the study. In the United States, consumer adoption has grown to 46 percent, up more than 29 percent over the past four years. Meanwhile, adoption rates among small and mediumsized enterprises (SMEs) in the United

monsitj/Getty Images

Fintech Adoption Booms

States is at 23 percent.

Fintech solutions are expected to continue to grow in popularity, according to EY, as consumers and SMEs become increasing familiar with fintech products and services and are drawn to the attractive rates and portability associated with these solutions.

Despite the high-profile takedown of Altenen—a major hacker hub—in May 2018, the financial services sector and related industries continue to face a daunting threat landscape, according to two new reports.

IntSights’ recently released “Banking & Financial Services Cyberthreat Landscape Report” identified significant fallout from the January 2019 megabreach known as “Collections #1-5,” in which roughly 2.2 billion records of login credentials and personal information from around the world were leaked to hackers. Those breaches were largely responsible for a 129 percent year-over-year increase in leaked credentials.

Among other key findings was a 212 percent year-over-year increase in instances of compromised credit cards, which were primarily used to make small purchases to reduce the risk of being detected. The report also identified a 102 percent year-over-year increase in malicious applications, such as fraudulent mobile banking apps that imitate major blue-chip banking apps. That type of malicious application is particularly concerning 6 Fall 2019 | TRANSACTION trends

BeeBright/Getty Images

Cybercriminals Launching More Intricate, Targeted Attacks

because more than one-third of consumers are fooled by fraudulent banking apps, according to IntSights.

The reports also found that cybercriminals are honing and expanding their attacking methods. The IntSights report found that banking and financial services organizations were targeted in 26 percent of all malware attacks in 2018, more than any of the other 27 industries studied. Ransomware also continued to pose a significant threat, enabling criminals to execute costly denials of service, such as the February 2019 incident at a bank in Mexico.

Similarly, Accenture identified “big game hunting,” or threat actors and groups targeting institutions for financial gain, as a trend in its recently published “2019 Cyber Threatscape Report.” More cybercrimi-

nals also are sharing tools that automate the process of mass-producing malicious documents to spread malware, according to the report.

In addition to sending malware to internet users via phishing emails, some cybercriminals are now executing malware attacks executed through web browsers and targeting online merchants and retailers. And threats are expanding throughout the supply chain.

“The global interconnectedness of business, the wider adoption of traditional industry cyberthreat countermeasures, and improvements to basic cybersecurity hygiene appear to be pushing cyberthreat actors to seek new avenues to compromise organizations, such as targeting their supply chains—including those for software, hardware, and the cloud,” Accenture noted.

ETA HAPPENINGS Summer is over, and school is back in session for students across the country.

At ETA, school for payments professionals didn’t take a break. The education department was busy creating new resources, courses, and materials for payments professionals looking to take their payments careers to the next level this fall.

ETA CPP Kickoff Course In August, ETA launched the ETA Certified Payments Professionals (CPP) Online Review Course. The course will prepare those considering becoming an ETA CPP for success on the exam.

Students receive a solid overview of the seven domains of payments covered in the ETA CPP exam: the electronic payments model, sales, pricing and interchange, operations, products, risk, and compliance. The course is now available online, from anywhere in the world, at any time of day, to help aspiring ETA

CPPs become certified.

For more information, visit www. electran.org/education/eta-cpp-onlinereview-course.

ETA CPP Exam The next 30-day testing window for the ETA CPP exam takes place in December.

Apply online by November 1 to secure your spot and become a certified ETA CPP for the new year. The computerbased ETA CPP examination is administered by Castle Worldwide through a network of more than 375 testing centers in cities across the United States.

Visit www.electran.org/certification/ eta-cpp-program for more information.

ETA Webinars ETA hosted webinars during the summer that are now available to ETA members online. Here’s a quick review of the recent webinars available for streaming: • “Cash Discounting and Surcharging:

What Payments Companies Need To Know” explains how cash discounting and surcharging work, what payments providers need to do in order to implement them, and how these products are affecting the payments industry.

• EMV 3-D Secure standards are changing the landscape for e-commerce. If you enable mobile or e-commerce payments for merchants, check out this important webinar to hear directly from EMVCo representatives on the changes coming to the ecosystem.

• The applications of blockchain for financial institutions extend beyond payments. Speakers from major acquirers and blockchain startups explore what distributed ledger technology means for payments companies, global markets, and trust in a new digital environment.

Visit www.electran.org/education/webinars to access these webinars, which are free for ETA members. TT

TRANSACTION trends | Fall 2019 7

&

POLITICS

POLICY

Gearing Up for an Active Season ETA and payments advocates will be speaking out on data and privacy issues, tariffs, state sales tax collection, and more

By Scott Talbott

B

y all measures, it will be another busy fall season for the payments technology industry and its advocates.

This year we’ve seen both the culmination of trends we predicted—public policy advocacy on both the federal and state levels relating to privacy and taxes—and some developments in new areas, including a trade war with China, the ongoing reorganization of our country’s trade agreements, and the release of a proposal to create a new real-time payments rail.

As policymakers across the country work to write policies for the modern payments world, now is the best time for payments technology professionals to be aware of—and, most critically, engaged in—advocacy on behalf of our industry.

The dual forces of tightening budgets and a higher profile of the fintech and payments industry have resulted in increased interest in the industry. Policies enacted over the next 12 to 24 months will shape future products, and we must create a positive policy environment that encourages continued development of fintech. Therefore, payments professionals must be sure to stay abreast of, plugged into, and engaged with ETA’s work in the advocacy arena so that we can all collectively grow the payments industry.

As we approach this critical junction in the year, here’s the situation for payments technology at the federal and state levels of government in the United States and abroad, and the ETA tools to become a payments technology advocate with us.

Privacy Concerns

As more industries tap into the power of using data to do everything from fighting fraud, underwriting loans, and verifying identities to facilitating transactions and personalizing content, there is a growing appetite among consumers and lawmakers to create a harmonious set of standards and definitions that protect the privacy of data in the marketplace.

Payments technology companies harness data in important ways—fighting fraud, creating more inclusive credit products, expanding the availability of merchant acquiring products, and securing transactions using tools like biometrics.

Policymakers are right to pursue laws and regulations that protect the privacy of consumers while making it possible for innovation to thrive in the industry. The challenge faced by payments advocates is to ensure that policymakers understand and appreciate how data powers a safer and more innovative ecosystem. With heavy-handed, one-size-fits-all regulation 8 Fall 2019 | TRANSACTION trends

or policy that turns a blind-eye to the holistic value data provides to payments companies in fighting fraud and protecting consumers, we all lose.

Another challenge in the privacy arena is the growing activity on the state level. With a divided federal government, progress on important issues like privacy is slow-moving.

They don’t call the U.S. Senate the world’s most deliberative body for no reason, after all. Generally speaking, where the federal government lacks, the states pick up the slack. As populous, and therefore powerful, states like California enact and implement complex privacy laws, the urgency for federal action grows. As we’ve seen in the past, a patchwork of 50plus laws on any issue, let alone one as complex as privacy, is not a recipe for innovation. That said, ETA has been and continues to be very active on the state level. We’ve conducted fly-ins in California and have been active in more than half of the state governments in 2019 alone.

ETA believes in the importance of protecting privacy and fighting fraud. That’s why we are advocating that Congress create a uniform national privacy standard that permits the use of data to fight fraud, maintains flexibility, and promotes global leadership by promoting commerce and harmony with other countries’ consumer privacy laws. If privacy laws do not allow for the payments industry to fight fraud, we will see an increase in fraudulent activities, which harms the entire ecosystem.

More on the Federal Front

Two other important issues have sprung up for the payments industry at the federal level in recent months. The first is the ongoing evolution of America’s trade with other countries, and China in particular. In an effort to support American innovation and protect American intellectual property, the U.S. government has taken a new look at existing trade, and in some cases levied tariffs against certain products imported from China, including in point-of-sale devices and cash registers. ETA has been active in opposing these tariffs. We’ve testified twice this year before the U.S. Trade Representative, speaking as the unified voice of our industry against tariffs that increase the cost of doing business for our members, American business owners, and consumers. Further, ETA has supported the ratification of the United States-MexicoCanada Agreement to enable our members to do business across the borders of North America and the world.

And this summer, the Federal Reserve announced its plans to

create a real-time payments rail for financial institutions. ETA participates on the Faster Payments Council, and our members recognize the importance of real-time payments, if done correctly, as an enabler of more innovative payments products. ETA will continue to advocate for policies that support growth, innovation, and an open and competitive marketplace. (For more information on real-time payments, see page 16.)

State Activities

Outside of privacy, legislation that changes the form and function of how our members do business continues to be an issue requiring attention at the state level. The most enumerative are proposals that establish real-time sales tax collection by placing tax collection and payments to state governments on the plates of payments processors, ISOs, and other payments technology firms.

While it’s understandable that state governments would want faster access to sales tax funds, payments professionals know these proposals create a complex, expensive, and stifling burden that harms consumers, merchants, and ultimately the government itself. ETA has found considerable success in opposing these measures and is currently working with industry advocates to ensure that the policy environment at the state level stays competitive and enables innovation.

Get Involved

These efforts become exponentially more successful the more ETA members are involved in making their voices heard in

Washington and across the country. As we face another busy season of advocacy, ETA relies on its members to be powerful resources for policymakers to understand and appreciate our complex ecosystem. And there has never been a better time to become involved.

For example, this summer ETA launched The Voice of Payments: It Pays To Be Heard, a grassroots advocacy project that provides ETA members with free resources and engagement opportunities to advocate on the state and federal levels. In September, ETA held our annual Payments Fly-In on Capitol Hill, which brought hundreds of payments executives and leaders to Washington, D.C., to meet with members of Congress and regulators to speak about the pressing issues facing our industry.

ETA membership unlocks access to these tools and many others—including a dedicated team of experts and lobbyists committed to making your voice and perspectives heard in governments across the world. The most important step you can make to advocate for our industry is to continue to support ETA with your membership and your engagement in our policy activities.

Together, we can keep payments growing through good public policy. TT Scott Talbott is senior vice president of government affairs at ETA. For more information, please contact Talbott at stalbott@ electran.org or Grant Hannah, government affairs coordinator, at ghannah@electran.org.

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TRANSACTION trends | Fall 2019 9

INDUSTRY AFFAIRS

Mergers, Acquisitions, and Innovation With consolidation comes the need for industry knowledge and experience

By Amy Zirkle

A

wildpixel/Getty Images

t ETA, we like to make predictions. We work hard every day to create a community that brings together investors with entrepreneurs, innovators with industry experts, engineers with sales people—and to do that successfully, we need to have some foresight and insight into the direction of the industry.

About a year ago, we talked about the “tech”-ification of payments: the ever-growing presence of high-tech, sleek, sophisticated, simple, and wholly innovative payments technology as well as the industry’s move from simple products to revolutionary approaches.

The payments industry’s growth is built on this technological innovation that enables the development and deploy-

10 Fall 2019 | TRANSACTION trends

ment of new products and services to bring speed, security, and sophisticated solutions to commerce. The transformational change is taking place at a far more rapid pace. Think about where we are with mobile payments, the disruption of the POS terminal, the expansion of software, growth of new types of payments businesses—this represents a paradigm shift in payments that is fueled by technology and will continue to shape the future of the industry.

ETA predicted this would bring even more activity in industry mergers and acquisitions (M&A). What a year it’s turned out to be. Even if this is the first time you’ve opened Transaction Trends, you’re probably already aware of the truly incredible season our industry has had in downright jaw-dropping M&A deals.

Although the amount of activity between 2018 and 2019 hasn’t changed from years past, according to an analysis from GP Bullhound, the value of those deals has doubled.

In some cases, we’re seeing the marriage of merchant acquiring power players with fintech providers adjacent to the acquiring industry looking to capitalize on the rocketing growth our space is experiencing. In others, we’ve seen strategic mergers of existing acquirers, allowing them to be more competitive by diversifying lines of business and product offerings.

Up and down the value chain, there’s no reason to expect this trend to halt. After all, according to an analysis published last February, there are 5,779 fintech startups in the Americas alone. And over half of American financial institutions have established partnerships and relationships with fintech firms. The value of fintech investments globally is 34 times higher than it was a decade ago, according to an analysis from Deloitte.

The market is capitalizing on the rapid growth of payments fueled by changing consumer behavior and more innovative products in our industry. Electronic payments transactions are set to grow over 10 percent through 2020, with intense growth in the mobile arena. In fact, the value

of mobile POS payment transactions is expected to grow at an annual average rate of over 35 percent through 2021, with growth at a rate of 23.6 percent in 2023, according to data from Statista. By that latter date, there will be more than 6 billion users of digital payments, with 1.6 billion of them using mobile POS products.

With the consolidation of the industry, the changing payments sales channels recognize they must be knowledgeable of industry trends and the impact those new technologies will have on serving customers better. In this age of “tech”-ification, ETA is helping them to position themselves as payments consultants to meet the needs of current customers and work to engage new customers.

At ETA, we’ve noticed firsthand the changing landscape of payments by the evolving composition of our membership.

While traditional ISOs, processors, and acquirers are still a defining chromosome in ETA’s DNA, like our industry, ETA’s growth has been boosted by the proliferation of software vendors, payment facilitators, integrators, and startups.

These new association members offer products from credit card acceptance, to employee management software, online small business lending, mobile wallets, and cryptocurrency products—and nearly everything in-between.

The opportunities for the payments industry are signifi-

cant. I am incredibly optimistic and eager to see what the next great thing will be. This current pace is defining the present—and will fuel the future. ETA members are the vanguards of this innovation, and, as the industry’s association, we are dedicated to being as innovative and dynamic as the industry we support. We are truly focused on advancing this community with the products, services, events, and resources that will help all of our members grow.

Even with the competition and mergers in the space, there are still significant opportunities for new entrants into the payments industry. The ability and awareness to harness technology, design creative product solutions, and serve growing market segments provides a rich point of entry for new players.

I’m not sure what buzzy word we will come up with to describe the next era of payments. But, I am sure that the payments providers, technology companies, and solutions that power the merchant acquiring community will continue to drive the future of commerce through innovative distribution and acceptance models and the proliferation of new products and services. TT Amy Zirkle is vice president of industry affairs at ETA. Reach her at azirkle@electran.org.

TRANSACTION trends | Fall 2019 11

By Christine Umbrell

12 Fall 2019 | TRANSACTION trends

VERTICAL

shironosov/Getty Images

Partnerships with ISVs empower payments companies to provide niche merchant solutions

ALIGNMENT

T

oday’s consumers have come to expect and even demand solutions tailored to their needs in every aspect of their commerce interactions—including the payments piece. “Consumer preferences have changed, driven by technology and accessibility,” says Steve Callis, executive vice president of global IPS and e-commerce at Elavon.

It’s becoming ever more important for payments companies to provide solutions that simplify the transaction for consumers while adding value for merchants.

Partnering with independent software vendors (ISVs) is one way that payments companies are accomplishing those goals.

“ISVs give us the opportunity to provide holistic solutions and get to our customers quickly,” says Callis. And because many ISVs offer solutions targeted to specific verticals, “it helps us as acquirers, through partnership, in not only reaching those niche or specific verticals through distribution, but in enabling us to offer a breadth of products and services … across a wide variety of broad market and specific niche vertical offerings.”

Meeting Consumers’ Targeted Needs

Today’s consumers are seeking on-demand and real-time services as well as convenience and security. “Online, in-store, mobile—whatever the acceptance channel is,” consumers expect a seamless experience, says Callis. “Naturally, ISVs are fitting into the model and solving problems from a business standpoint, with their point-of-sale [POS] capabilities and software capabilities.”

Many payments companies are looking to partner with ISVs for their sophisticated software programs and pathways into verticals—“both core verticals that we [already] support and niche verticals where we have other expertise or areas of focus,” Callis says. ISVs are offering “a tremendous channel of distribution for us that we look to leverage,” and, in turn, those ISVs are seeking payments companies’ ability to offer channel and scale back to them, from a distribution standpoint.

One area where payments companies are finding it particularly profitable to partner with ISVs is in reaching verticals that encompass lots of small businesses. Some of these entities—for example, private schools, wineries, and charities—don’t have their own “tech shops” and need assistance in implementing newer payments technologies into their systems, says Ralph Dangelmaier, CEO of BlueSnap, a company that has experienced a rapid uptick in working with ISVs over the past two years. These smaller entities are often willing to

pay a higher fee on the payment side to avoid responsibility for technical configuration, says Dangelmaier, who adds that about half of BlueSnap’s business comes from ISVs. Working with ISVs and other partners “has been a core component of our strategy over the last few years,” particularly for smaller businesses, says Mark Bunney, director of market strategy at Ingenico Group. “The marketplace is evolving, especially at the SMB part of the market. In the past, they would have a standalone payment terminal. … Now we are seeing more and more companies offering that full business software solution,” he says. “But for that business software to be offered, you’ve got to have that ISV relationship … as you start going into verticals and the different subsegments of the verticals. You have to work with a wide variety of ISVs in order to provide the right solution for the merchant.”

Each vertical requires specific business applications, says Bunney. “When you look at your strategy and which markets you want to go after, you have to look at who are the right software providers. They’re going to be critical in order to have a successful solution that can be deployed, implemented, and then supported throughout the lifecycle.”

Not only can ISV partnerships aid in problem-solving within particular verticals—they also can help prevent attrition, says Garima Shah, chief business development officer at Priority Payment Systems. “When you look at a nonintegrated merchant versus an integrated merchant, the attrition rate for a nonintegrated merchant is close to 18 to 20 percent, and their lifetime value is pretty short,” she says.

For an integrated merchant, on the other hand, the attrition level is usually less than 5 percent, according to Shah.

Partnering with ISVs allows payment companies to find additional unique products and services for their merchants to help improve their sales and increase revenues.

TRANSACTION trends | Fall 2019 13

Upright Opportunities

Certain verticals are evolving so quickly that there is plenty of opportunity for tech-savvy payments companies and their partners.

In the recently published “Goldman Sachs-ETA Merchant Acquirer, ISV, and ISO Survey,” 64 percent of respondents said vertical-specific software offerings are the most effective way of increasing market share. And while respondents currently see the greatest traction with integrated software solutions in the restaurant, education, and nonprofit verticals, they expect that hospitals, financial/legal services, and government will gain the most traction in the coming 24 months.

Among survey respondents who believe that integrated payments enable acquirers to create a “stickier” merchant base and improve long-term economics, more than half noted that the most effective strategy to increase market share is via vertical-specific solutions that add unique capabilities tied to a particular industry.

PARTNERING WITH ISVS ALLOWS PAYMENT COMPANIES TO FIND ADDITIONAL UNIQUE PRODUCTS AND SERVICES FOR THEIR MERCHANTS TO HELP IMPROVE THEIR SALES AND INCREASE REVENUES. Several payment experts agree that healthcare is one of the “hottest” verticals right now, and that integrated software solutions can help payments companies break into this space. “We are all consumers of healthcare,” explains Callis.

Consumers are bearing more of the responsibility from the payments side in terms of deductibles, co-pays, and other out-of-pocket expenses, and they expect a seamless payment experience. Providers need to adapt to patient expectations and offer more flexible payment options in a “retail-type” model, says Callis.

Software solutions can ease healthcare providers’ pain points when responding to consumers’ needs. “By integrating payment technology with an EMR or patient management system, our IPS partners can offer a holistic patient financial experience—for example, bringing together capabilities such as appointment scheduling, insurance eligibility and estimation information, and payment acceptance enables healthcare providers to determine what the patient will owe and collect co-pays, co-insurance, and outstanding balances at the time of service,” explains Callis. “Integrating payment technology with patient profile data available in EMR systems enables healthcare providers to offer patient portals and mobile apps where patients can schedule appointments, review medical 14 Fall 2019 | TRANSACTION trends

records, request prescription refills, pay their bills, and much more—all in one place.”

Bunney agrees that healthcare is an opportunity area for payments providers—with partnerships playing a larger role.

“Whether it’s a hospital system or a physician’s office, that’s an area where we’ve found success” working with revenue cycle management software solutions, he says. “It’s very much a partner-centric solution set.”

Bunney also points to retail as a space where significant growth may be coming. “Retail is fully penetrated generally with EMV solutions. … However, what’s starting to happen, and what will accelerate in 2020 and 2021, is that they’re going to refresh.” He explains that retailers, particularly larger retailers, implemented new solutions five or six years ago in preparation for the EMV migration. But now those same businesses are considering updating their solutions, he says— and many of those updates will require software integration.

Similarly, in the restaurant vertical, payments companies are partnering with ISVs to meet diners’ evolving preferences, says Callis. “You look at order-ahead and pay-at-table capabilities—this is rampant in Europe, and we’re starting to see it more and more become adopted in the U.S.” Integrated solutions are being leveraged in the spa space, too, says Callis. “With an ISV, we can offer everything to run their business, from scheduling massages, facials, and manicures/pedicures to coordinating internal staff schedules, and [we can] layer in payments over their website, loyalty programs, etc. It becomes a more holistic solution,” he says. And similar solutions are needed in gyms, to enable the scheduling of classes and personal trainers while accepting payments.

In hospitality, hotels already have robust property management systems, but many locations are creating more of “a global ecosystem within the hotel experience, through their restaurants and gift shops and cabanas out by the pool—all the things a hotel is looking to provide patrons,” Callis says.

“That guest experience has evolved quite a bit—so that ISVs and payments providers need solutions and technology that will be able to integrate into that core property management system to be able to then provide that guest experience.”

Dangelmaier points to education as another bright prospect. “We’re seeing a lot of education. … The schools are very fragmented,” with different companies accepting payments for tuition, books, parking services, meals, and the multitude of other products and services needed on educational campuses. BlueSnap has made significant inroads in the education vertical, thanks to its ISV partnerships, says Dangelmaier. “We never would have been able to break into that space without having the platform integration.”

There’s even new opportunity with the government and public sector space, according to Callis: “With funding delays, revenue fluctuations, and rising costs, it’s important for sector institutions to collect those payments faithfully and reliably, and through digital payments means that ISVs within the public sector are able to provide.”

Finding the Right-Fit Partner

Partnering with ISVs provides opportunities to reach more merchants and boost profits—but the partnership must be mu-

tually beneficial. Payments companies looking to tap into a particular vertical “have to understand who are the right software providers to work with,” says Bunney. While some ISVs play across several different verticals, “in other cases, there are very specific ISVs that have been specifically tailored to a particular vertical,” he says.

Bunney cites the example of the golf niche: “There are particular ISVs that only focus on the golf marketplace. And that’s who you would have to go off and work with to provide a solution” at a golf course. “So it can get very, very granular.”

Shah says seeking out ISVs with complementary services is critical. “If a payments company is really good at signing or working with restaurants, they shouldn’t then go and try to find ISVs who are B2B,” she explains. “It’s important to know your strengths. The goal for the salesperson is to find the most products and services that will actually help their clients, thereby increasing their overall revenue. So if I’m really good at selling in hospitality or in restaurants, I should be looking for ISVs that are really good for my market”—for example, online ordering companies.

“Look for companies that will add value to your merchant because, at the end of the day, what we’re trying to do is … bring more value to what we do,” adds Shah.

Transparency is key to these relationships. If one partner is getting all the benefits out of the relationship, it might be because there wasn’t a prior clear discussion about how the two companies were going to work together, suggests Shah. “So, it’s important to discuss things at the onset—like who’s going to handle support? And how is the revenue going to be paid?

And what do I get for what I’m giving to you? Those are the things that are really important to discuss up front.”

“Any company that’s looking to get into a new market or a new segment, they really should do their due diligence and understand what the ecosystem looks like,” adds Bunney. Do your research to ensure the ISV can offer the appropriate product or solution to meet the needs of the merchant. “You have to be thoughtful.”

Bunney and Dangelmaier also say a payment company should ensure its value proposition aligns with that of the ISV, and it should be willing to educate the ISV. “It’s kind of like dating before you get married,” says Bunney. “You have to determine the problem you’re going to be solving, and what you want to jointly achieve by working together. And if these things are in alignment, you’re starting off in a good spot to bring a new solution to the market. And if not, it may not be a good fit.”

Dangelmaier offers an example: “If you’re a business that’s selling SaaS data backup storage for businesses, probably putting ApplePay in there is not a good idea,” he explains. “But if you’re running events for consumers—say bike races—you probably want ApplePay. So you really have to sit down and think who is the shopper, and get [the ISV] to write the right product.”

“It isn’t just about product and price,” agrees Bunney. “Is there the right support model? What sales and marketing help or assistance can be involved? What does the provider provide from a market position? ... The goals of Company A

and Company B need to align. You want to do business with someone you trust. But at the end of the day, you also want to make money.”

Last year, BlueSnap “created a ‘partner team’ that actually manages the ISVs and partners—helps them with training, gives them ‘go-to-market kits,’ makes sure that if there’s a new regulation, we really contact them and make sure they’re integrating to what we think are the latest things in fraud and compliance,” says Dangelmaier. This is particularly important when trying to work within a vertical that may be new to the payments company.

BlueSnap has created a second team that calls on ISVs, “so we’re consistent in how we do revenue shares and integrations,” Dangelmaier adds. This can be useful since some relationships “never really get off the ground,” he says. “So you have to pick and choose who you work with.”

Ingenico similarly has two different sales teams dedicated to its partners. “Two-thirds of our sales team is focused on working with partners and making them successful,” says Bunney.

Partnering for the Future

ISVs will continue to play a critical role in the payments space as companies seek to provide total solutions for merchants, sources agree.

“One of the cool things with ISVs, we can figure out how to get into other industries,” explains Dangelmaier. “We’ve gone to education conferences, fashion conferences, wine conferences, delivery conferences. These are things we never would have gone to—but the ISV is dragging us into it.” In return, payments companies train ISVs on new payments options.

Bunney also believes there will be momentum in the ISV partnership space, but he notes that there may be greater growth in some areas than in others. “The growth will come from different verticals that have not fully implemented EMV solutions,” he predicts. Healthcare, for example, “is a newer market for EMV solutions and is not fully penetrated yet. This is also the case with Tier 3 or smaller hotels and restaurants that are still in process with implementing EMV today.”

And there will continue to be opportunities for payments companies that enable merchants to elevate their businesses, Bunney adds. “We’re seeing that merchants want to do more; they want to interface and interact with the consumer, through simple things like value-added services or wallets, or marketing/advertising, or even loyalty-type solutions. We’re starting to see more people think about how they can drive a better consumer experience.” Because of this, payments professionals that collaborate with ISVs to provide services and systems that enhance the customer experience stand to benefit the most.

Bunney says he tries to put himself in the minds of the consumers and determine what they want out of their transaction experiences—realizing that these preferences will continue to evolve over time. “What does the consumer want?

Because that’s going to drive what our solutions are going to be, working with the rest of the partner ecosystem.” TT Christine Umbrell a contributing writer to Transaction Trends. Reach her at cumbrell@contentcommunicators.com.

TRANSACTION trends | Fall 2019 15

GETTING

REAL

U.S. financial institutions and the Federal Reserve are ramping up efforts to provide faster payments solutions

By Josephine Rossi

A

lthough the United States has lagged behind its international counterparts in adopting a system of real-time payments (RTP), experts are watching with optimism as more U.S. stakeholders begin to engage in modernizing the customer experience for swift and easy payments.

Other nations have been quicker to get on board with fast-pay technology, mostly because of governmental mandates to do so. But a stronger strategy in the United States is unfolding as financial institutions and fintechs work to develop new solutions, The Clearing House (TCH) grows its RTP transaction volume, and now the Federal Reserve plans to launch its own service to propel faster payments in the United States.

Say What?

These recent developments are instilling confidence about the future of RTP among U.S. proponents. Still, sources say even basic conversations about what’s next for RTP can go south quickly because global and domestic markets are confused about what “real-time” or “faster” payments actually mean.

Compared to traditional payments, a “faster payment” is distinguished by the availability of final funds in seconds or minutes on a 24/7/365 basis, according to Dan Faxel, assistant vice president at the Federal Reserve Bank of Chicago and member of the Fed’s Strategies for Improving the U.S. Payment System team, who discussed the topic at the 2019 TRANSACT conference. “Even a wire today, although typi-

cally it goes pretty fast, you still have bank processing that takes it a few hours,” he told the audience.

Clearing and settlement define how Javelin Strategy & Research differentiates payments in its March study of 200 global payment methods. “Faster payments” are those that post and settle within 24 hours, while “real-time payments” post in less than one minute but take up to 24 hours to settle, according to the report. “Instant payments” post and settle “in a continuous cycle with all activities occurring in less than 60 seconds.” “[Real-time payments] means something different everywhere,” says Krista Tedder, head of payments research for Javelin and co-author of the report. “For example, Japan is touted as one of the first to go real-time payments; however, they’re not. They’re batch, but they’re fine with that, and they’re happy calling it ‘real-time payments.’”

(For the sake of this article, we will use RTP as an umbrella term to encompass all variants in the current market.)

In its fifth annual “Flavors of Fast” report last year, FIS also measured the state of RTP around the world. It defined a “faster payment” as “interbank fully electronic payment systems in which irrevocable funds are transferred from one bank account to another, and where confirmation back to the originator and receiver of the payment is available in one minute or less.” FIS further limited the report’s scope by excluding card-based transactions, “niche real-time global settlement systems,” and “any payment system that includes paper origination.” The research also omitted cryptocurrencies.

Bonus Content: Learn more about real-time payments in the United States and Canada from the 2019 TRANSACT session, “Progress on the Path of Payments Improvements.” Log in and listen to the session via the ETA member portal.

16 Fall 2019 | TRANSACTION trends

ktsimage/Getty Images

The semantics confusion stems from the lack of a national definition or system of instant clearing and settlement, compounded by private companies trying to brand products to consumers with skewed perceptions, according to Tedder.

She cites as an example Early Warning Services, which markets its Zelle peer-to-peer (P2P) payments service as RTP because money posts to the recipient’s account in less than 60 seconds. The funds, however, do not change banks for 24 hours via ACH or proprietary interbank rail, she notes.

Meanwhile, consumers do not necessarily know the difference unless funds are delayed, or they experience a problem. “They also think that paying with a credit card is real time, because they walk away knowing it’s paid,” she notes.

Bountiful Benefits

Even if they don’t fully understand the technology, consumers and businesses alike stand to benefit from faster systems of payment, say sources.

The most obvious value is to those living paycheck to paycheck in the United States. RTP adoption would go a long way to help alleviate income inequality, according to Aaron Klein, a fellow at the Brookings Institution, who submitted a letter to the Federal Reserve during its comment period on faster payments last year.

“In the aggregate, high-cost cashiers, ‘pay day’ lenders, and bank overdraft fees totaled around $34 billion of revenue in 2015 (collection fees would add to this),” he wrote in a blog post summarizing the letter. “There are no precise estimates as to what share of that figure would be fixed by real-time payments. A conservative guess of 20 percent would result in about $7 billion in savings a year to lower-income families directly from real-time payments.”

Elena Whisler, head of enterprise global product management at FIS, takes a consumerist view on what is driving the trend toward RTP. It’s simply how people in 2019 live their daily lives, she says. And in that way, some of the benefits are intrinsic.

Most people communicate and receive information immediately via social media and text messages. “You pretty much get any data at any point you want, in your personal life. As that moves forward, it moves into business and how people work,” she says. “They want real-time information and to do things in real time—whether that’s clarifying an invoice or managing cash at a certain time.”

While many examples of RTP advantages focus on P2P solutions, Whisler says from a business-to-business (B2B) perspective, a simple example of a benefit is improving payment reconciliation. “The process is extremely onerous, takes a lot of time,” which delays closing of invoices on the books and keeps revenue from being recognized or invoices from being paid, she explains.

“If we can focus on that, in real time with information, and confirm it in real time, the person on the receiving end can reconcile it faster and earlier,” she says. With strengthened processing, a business can get money faster, significantly increasing cash flow.

Solid benefits can be derived for businesses when there is an “emotional demand for payment,” too, according to Erika Baumann, a senior research analyst for the Aite Group’s wholesale banking and payments practice. “Think of insurance. A catastrophe happens. Your house burned down. Or something has happened, and you need access to money immediately and don’t want to worry about a bank. This could really be a differentiator and impact the loyalty of a consumer.”

TRANSACTION trends | Fall 2019 17

Merchants looking to lower costs associated with interchange fees can integrate RTP for card-present transactions that otherwise would have been processed as a debit card payment. They are already circumventing fees via other solutions, says Tedder. “You’re seeing companies like Starbucks doing stored value so they can reduce their cost. At the end of last year, they had $1.6 billion in their bank of stored value— people waiting to buy coffee. They don’t have that $6 cup of coffee interchange, they also have money in the bank, so they can make some interest on it, and they reduce their costs.”

During the TRANSACT session, Faxel pondered a more esoteric gain: establishing a technical framework that people can iterate. “If we can build a system, say, like a Google Maps did, which enabled Uber and a lot of different things … faster payments could set the standards up for and allow for further innovation [for decades] to come.”

A National System

While sources say that RTP is rapidly gaining momentum, the exact trajectory for mass adoption blurred in August when the Fed ended months of speculation and announced that it will introduce and operate FedNow, a “round-theclock real-time payment and settlement service” that will be available in 2023 or 2024. The service will function “alongside” private-sector services, namely TCH’s RTP network.

According to the announcement, the Fed decided to intervene in the market after receiving more than 350 public comments, of which 90 percent were in favor of the Fed developing a new service for RTP. The regulator is now requesting comment on how to design FedNow “to most effectively support the full set of payment system stakeholders and the functioning of the broader U.S. payment system.”

It also is considering the expansion of its Fedwire Funds Service and National Settlement Service hours to “facilitate liquidity management in private-sector real-time gross settlement services for faster payments” and beyond.

Proponents of the Fed’s foray into RTP cite a number of advantages, including increased market competition and improved access for users, and more. During the TRANSACT session, which took place prior to the Fed announcement but after the comment period, Faxel also hinted at eventual global integration. “One of the recommendations from the task force was to look at cross-border, but that was not something that is an urgent need,” he explained. “They identified we [would need] to go ahead and set things up domestically first and then turn our attention” overseas.

Using a public system also may help ease bank rivalries.

“There [are] over 10,000 financial institutions in the United States, and I’m hearing continuously of people [who] aren’t sure if they want to use a competing bank’s platform,” says Tedder. “Even though it’s completely separate, there’s still the appearance that they don’t want to give their money to their competitors.”

For its part, TCH, which is owned by 24 financial institutions, will continue to focus on growing its RTP network to reach all depository institutions and offering the same “eq18 Fall 2019 | TRANSACTION trends

uitable flat pricing model” to all participants, according to a statement released in response to the Fed announcement. In late August, it announced a partnership with Bankers’ Bank and CGI to develop a Funding Agent platform and liquidity service that will bring TCH’s RTP network to smaller community banks. The network currently reaches more than 50 percent of U.S. accounts for real-time payment receipt.

Moving the Needle

Banks and corporate clients are crucial drivers for RTP ubiquity, according to Baumann. “Many [banks] have gone live on receipts only—they can receive transactions,” she says. “But clients can’t initiate a transaction. There is a little bit of lopsidedness in the market. … We need corporates demanding and more banks adopting with send and receive.”

To accomplish that, ongoing education of all stakeholders is needed. In Australia, for example, Whisler explains that an early RTP discussion among stakeholders and experts began in 2012 and continued over the course of five years, ultimately leading to the nation’s entire system being modernized in 2017.

“Having education about real-time payments with different constituencies and stakeholders allows for broader thought and innovation,” she says. “People get frustrated about talking about the same thing, but we need to remember where we are and what we need to accomplish in the U.S. We have tens of thousands of small businesses, and unlike large corporations or financial institutions, they can’t know every detail.”

Getting to mass adoption also means taking a careful approach. Among the Javelin report’s many recommendations for stakeholders to ramp up RTP, is for the market to evolve from what it describes as a task collaboration. “[Today] we see a problem, and we go to fix it. We’re not looking at the total ecosystem to say what … the perfect state [would] be, [and] how … we [would] get to ubiquity,” says Tedder. “Right now, we’re trying to solve, ‘How do I get money from me to you?’” Business model integration—where solutions are operational across different applications, real time or not—would be the next step. For example, a consumer could send money using Zelle to a friend using Venmo without changing applications or opening a new account.

Eventually, this will lead to complete ecosystem integration and finally a place where RTP solutions have replaced checks, domestic ACH, and even card network clearing and settlement. Of course, all of these changes are predicated on payments players being willing and able to collaborate.

“What I think could stall [RTP progress] is that we have a tendency to get complacent in the U.S. … There’s this level of wanting to go it alone, to say, ‘I’m different,’ or there’s the lack of trust between organizations,” Tedder explains. “It’s really going to take a spirit of partnership to do this.” TT Josephine Rossi is editor of Transaction Trends. Reach her at jrossi@contentcommunicators.com. Andrea Billups contributed to this article.

TA K I N G C A R E O F

BUSINESS B2B payments are evolving as software and new technologies enable more frictionless transactions

By Michael Coleman

O

ver the past several years, cashless payment apps such as PayPal, Venmo, and Zelle have begun to change the way U.S. consumers purchase goods and services from businesses—and even divvy up the check among friends eating out at restaurants.

Now, software developers that made this innovation possible are turning their attention to the massive, largely untapped business-to-business (B2B) payments market. Most

svetikd/Getty Images

businesses—large and small—continue to rely on paper checks to make B2B payments. According to Bill.com, 80 percent of the more than $58 trillion in B2B payments made each year are conducted via paper checks. But that trend is changing.

“We see the marketplace at a tipping point when it comes to B2B payments,” René Lacerte, CEO and founder of Bill. com, told Forbes magazine in June. “A lot of attention is focused on how to make checks go away.”

TRANSACTION trends | Fall 2019 19

Exploring Paperless Transactions

The evolving payments landscape in B2B was the focus of a marquee panel at the 2019 TRANSACT conference in Las Vegas this spring. Payments industry veterans Greg Cohen, Rob Nathan, and Sid Subramanium spoke about the challenges and opportunities for the industry in the evolving B2B space.

Cohen, former ETA president and former president of Paya Connect, a Reston, Virginia-based integrated commerce and payments technology company, has spent a significant portion of his 30-year career working to improve payment processes for manufacturers, wholesalers, and distributors.

It’s a massive part of the global business payments chain that, until the past few years, has been underserved by new technology. The fact that paper checks are still a mainstay of many small businesses presents an opportunity for payment processors accessing new software and technology.

“Over the last few years, there has been tremendous innovation in the B2B space,” Cohen says. “You see banking and financial services players in that space, but also a lot of fintech and startups taking a very specific problem and solving it through the web.”

Transitioning from paper checks to digital forms of payment will be helpful to businesses that currently rely on an enterprise resource planning (ERP) solution for most B2B payments—accounts receivable and payable—rather than a standalone piece of software like Clover or Square used in retail, according to Cohen. Software as a Service (SaaS) companies, such as Bill.com, AvidXChange, Ariba, and BillGo, are helping to drive much of the transformation, and businesses that leverage new solutions, says Cohen, are seeing advantages such as improved cash flow, simplified bookkeeping and tax management, and increased security.

“As you start to look where the opportunity is, it’s where checks are moving to electronic payment,” Cohen explains.

“That is true nowhere more than in the B2B space and the service areas around that. This area has taken a long time to evolve with B2B. We’ve seen massive amounts of investment in retail and restaurants, and you hear about Clover and Square [among point-of-sale systems]. This whole B2B market is late adopters—and a huge trillion-dollar global opportunity we can all take advantage of.”

But it won’t be easy. The biggest hurdle—often the case when it comes to introducing new technology to businesses —is convincing decision makers to move away from their tried-and-true way of handling payments and collections.

The evolution is coming, “but what slows it down is the legacy infrastructure of the old ecosystems,” Cohen says. “A lot of these people don’t want to change their legacy systems; they just want to upgrade them. You’ve got buyers who don’t want to change their habits.” Nevertheless, change is on the

horizon, and the good news for the market is that the penetration is low, according to Cohen.

He believes there will be opportunities, even with companies that may be resistant to change. “Think about what it takes to run a lumberyard or a big wholesaler,” he explains.

“They’re legacy businesses, and there is new software that is coming in that’s cloud-based. That requires a refresh. The biggest pain point is collections. You send an invoice and you wait and wait and hope somebody pays. It just takes forever.”

When these companies are open to new ways of doing business—embracing the efficiencies while enduring the inevitable pains of change—they can transform the most important part of their business: managing the bottom line. “The opportunities are around speeding up cash flow and accounts receivable management,” says Cohen.

Nathan, executive vice president of integrated solutions at CardConnect, now owned by First Data, also believes the opportunities are immense, but says enticing bigger companies to change is more difficult than convincing small retailers or restaurants to do so. “Larger companies’ B2B environments will naturally move slower, so I think the opportunity is much larger because of that, and that’s what we’ve seen over the years.

There is a huge market there, and there are a lot of people going after it,” Nathan says, explaining that making payments easier and building in incentives for on-time or early payments can benefit both sides of the transaction.

“How do you streamline that? That is the cool part of this topic,” Nathan adds. “How do you [look at a] Paypal or Zelletype payment in the peer-to-peer world, or B2C world, and transition that to a seamless business-to-business experience?

Those are things that I see as exciting as the future arrives.”

Disruption and Opportunity

To make inroads in the B2B digital transition, Discover is building single, unified platforms that introduce business clients to accounts payable automation software, according to Subramaniam, who is senior manager at Discover Financial Services. “When you look at the end-to-end B2B transaction, there are so many payments and transactions involved in that data flow, which leads to several points of friction in the cycle,” he says.

The cost of making and receiving B2B payments remains high, but new technologies can help, according to Subramaniam. “Five years ago, there wasn’t much innovation,” he says.

“Now, while there is innovation, the adoption has been slow.

When you look at all these things together, there is tremendous opportunity for new players, or existing players, to be a part of the solution.”

B2B payments only became profitable in the past two years, according to Subramaniam. “Consumers don’t want to pay for transactions,” he explains. “They are used to getting value-

Bonus Content: Learn about more opportunities for software solutions to serve the needs of the B2B space from the 2019 TRANSACT session, “The Time Has Come To Disrupt B2B.” Log in and listen to the session via the ETA member portal.

20 Fall 2019 | TRANSACTION trends

added solutions for free, and corporations are used to paying for sending and receiving payments. All of this presents great opportunities to disrupt B2B.” But while technological change in the B2B space has been slow to arrive, Subramaniam points to financial incentives to adapt. “I think buyer organizations are now more knowledgeable about the resources they have available to automate,” he says. “We haven’t quite seen as much investment to automate and digitize payments and innovate in this. You can streamline to take advantage of early pay discounts or rebates. The mindset is starting to change, and people are going to take advantage of that.”

The shift from paper-based to digital processes is inevitable, according to a recent white paper by Mastercard about moving B2B payments into the digital age. “The universal desire to improve efficiency, respond to innovation, and reduce operational risk is necessitating worldwide reform of payments,” according to the white paper.

The major credit card brands are moving quickly and aggressively into the B2B space, says Cohen. “When you look at what Visa and Mastercard have done around real-time payments and [solutions] that make things much more efficient, these card brands have taken a position that they want to get transactions, but they are not totally stuck on the idea that they have to be on a card anymore,” he explains. “You see both Visa and Mastercard investing on network infrastructure … they just need volume over their rails. They’ve made some big investments in this area. Those buyer-seller connection networks are becoming very valuable.”

Optimal Solutions

The most widely deployed digital B2B payment systems to date are in the retail and restaurant sectors, according to Cohen. “Think about where technology investment has traditionally been, and think about the headlines about Square and Public” that aggregate merchant services and mobile payments into a single, easy-to-use service, Cohen says. “All of these technologies are made for retailers and restaurants.”

Meanwhile, many conventional companies have made massive investments in non-cloud-based legacy systems that are really business management solutions, or the brains of the entire operation, not just payments software. “They have been slower to adopt,” Cohen says. “It’s much easier for a small merchant business to throw out their point-of-sale system and put in Square than put in an ERP system,” he says. “Between AP [accounts payable] automation and AR [accounts receivable] efficiency, you wind up with this huge opportunity to do things as simple as having a card on file, as simple as being able to split invoices or take a text payment.

“When you think about all of the automation—a combination of new technology providers plugged into the cloud-based solutions that are now coming into play in the B2B market—it helps solves a lot of the problems of the past,” including increasing efficiency in the AP area and speeding up cash flow on the AR side, says Cohen.

Although inertia and legacy systems can be impediments to

change in the B2B payments world, “there are various reasons why companies want to use a purchase card or other kinds of electromagnetic payment in the B2B space outside of a wire transfer,” says Nathan. He notes that some of the larger entities “are looking for simple and secure ways to handle” their transactions.

Fast-Paced Future

The coming months and years will bring more velocity toward innovation in the heretofore slow-to-adapt business payments realm, predicts Subramaniam. “In the future, I see the B2B ecosystem becoming very similar in a lot of respects

“THIS WHOLE B2B MARKET IS LATE ADOPTERS—AND A HUGE TRILLION-DOLLAR GLOBAL OPPORTUNITY WE CAN ALL TAKE ADVANTAGE OF.” —GREG COHEN

to the consumer world in terms of the customer experience,” he says. “As a consumer you can sit on your couch, turn on Netflix, order food, and pay bills. People are going to want to see the same thing in the B2B space—to be able to do a lot of their processing work on one device.”

Cohen advises payments processors hoping to tap into the potentially lucrative B2B space to do their homework and to team up, when appropriate. “Find a couple of good partners. None of these folks do this alone.” Adapting to a more modern and forward-looking B2B payments profile requires an understanding of how B2B payments work, and the relationship between the ERP, the technology providers, and the payments ecosystem. “Find those good partners both internally and externally, and hire people who have worked in these areas,” says Cohen. “Look for a partner approach to growth.”

He also recommends focusing on a particular niche within the industry, and doing it well, instead of spreading your resources out and trying to do several things. “If you focus on accounts payable versus accounts receivable, that looks a little bit different,” Cohen says. “Even from there, you can subdivide this. There are niches in B2B. I would say verticalize and partner. Understand the ecosystem, and find partners who can help you get into it and navigate it and stay vertically focused.” TT Michael Coleman is a contributing writer to Transaction Trends.

TRANSACTION trends | Fall 2019 21

PAYMENTS INSIDER

QR Codes for Mobile Payments and Beyond How next-level barcodes are paving the way for changes in the payments industry

By Alicia Roisman-Ismach, Eric Brown, and Lori Breitzke Members of the ETA Technology Committee

Q

uick Response (QR) codes are everywhere. Because they are essentially two-dimensional barcodes, they are easy to print or display on stickers, mobile screens, signs, and other surfaces. Most of us are familiar with QR codes from mobile payment apps, but there are many more use cases surrounding these tools—with great potential to impact commerce.

Convenient Payments

QR codes were first designed to track vehicles during manufacturing, as they could store more information than simple, traditional barcodes.

Denso Wave, a manufacturing company based in Japan, created the first QR code in 1994 in an effort to develop a scannable code that would include location information, would be easy to read from multiple angles, and would stand up to industrial use. Over the next few years, QR codes were used for advertisements.

More recently, the technology behind QR codes has become seamless enough to use for payments. Increasingly, QR codes are an effective tool that can be leveraged for many different types of transactions and that integrate well with smartphones.

When it comes to mobile payments, the options are numerous—from a company mobile wallet to an all-encompassing app.

Companies like Starbucks and Dunkin’ allow customers to use their app as a payment method in their virtual wallet. As the customer, all you need to do is present the seller with an auto-generated QR code on the app for the merchant to scan, and the payment has been made. The speed of the transaction, coupled with the app’s features (such as pre-ordering capabilities and value points), makes routine coffee transactions easier than juggling a wallet and multiple cards.

In China, apps like WeChat are used as a national “virtual wallet,” enabling consumers to use QR codes to pay at any shop, 22 Fall 2019 | TRANSACTION trends

entertainment center, or booth, or even for transportation. WeChat also is used as a social media platform and enables other transactions, such as peer-to-peer payments.

Customers can use QR codes to identify the entire supply chain of produce and products at local supermarkets and receive services through city-wide applications. QR codes have helped create a unified system of transactions—monetary and social—where customers can carry out all of their payments activities, whether banking, buying groceries, or shopping at the mall.

In Western countries, the use of QR codes

has not yet caught up to the standard set in China. In fact, payments in most Western countries are more traditional, with citizens paying bills and using debit and credit cards.

However, we are beginning to see an increase in mobile-based payments in certain stores and establishments. For example, Best Buy and other big box retailers use QR codes and barcodes as an inventory management solution for the store and a virtual cart for the customers. This allows customers to roam the aisles, get more information about the item from the store app, sort and prioritize purchases, and, finally, check out seamlessly.

PlargueDoctor/Getty Images

Next-Level QR Codes

One of the most promising use cases for QR codes is in unattended retail. The best known example of unmanned retail in the United States is Amazon Go stores, where QR codes serve as ID verification when entering the store using the phone’s app. This experience was first presented by Näraffär, a Swedish pioneer of unmanned stores in 2016, and followed by Chinese startup BingoBox. At WeChat stores in China, the QR code is scanned by the phone to allow access, serving as a store identifier in the user’s app. Sainsbury UK’s first self-service supermarket uses QR codes for final validation before leaving the store.

QR codes are a valuable tool for customer loyalty. Rather than allowing consumers to redeem points through a traditional punch card or keeping track of customers’ rewards points on a system that is not top of mind or as visible to the consumer, businesses are now using barcodes and QR codes stored on mobile apps or keytags. Tying this code to a phone or keys, the customer carries the rewards everywhere they go. Data suggests that these QR codes have also been used for redeeming offers digitally.

According to research from Juniper, 1.3 billion mobile QR code coupons were redeemed last year—and that number is expected to grow to 5.3 billion by 2022.

For the merchant, QR codes provide flexibility and valuable big data. The codes can be easily programmed into a retailer’s point of sale for loyalty or rewards. Retailers also can leverage the technology to gather information on the buying habits of their customers to strengthen and laser-target their marketing messages, predicting what the repeat customer will want before they hit the store.

The travel and entertainment industries are rapidly joining the unattended retail revolution, with car, bike, and scooter sharing services using QR codes to identify the selected vehicle.

Self-service check-in at hotels is limited to kiosks placed in the lobby using QR codes to ID the guest’s phone app. Early data indicates that the next generation of self-check-in experiences will make the kiosks obsolete, leveraging the consumer’s phone directly as the check-in device and QR codes to connect the phone with the right room door.

One of the less intuitive—but widely ad-

opted—use cases for QR codes is in the cryptocurrency realm. When money in the form of cryptocurrency exchanges hands, it’s often sent using a long, unique wallet address that’s around 30 to 40 characters long. QR codes replace these long addresses with an encrypted

QR codes can be easily printed and affixed to any surface, making them a viable option for small and micro merchants.

QR codes streamline the transfer of large quantities of information—whether reward programs, payment information, crypto wallet

1.3 billion mobile QR code coupons were redeemed last year—and that number is expected to grow to 5.3 billion by 2022. shortcut, resulting in more seamless transactions with fewer errors. By simply tying a QR code to a crypto address, it is possible to scan the code to see exactly where the funds are being sent. As long as there is a screen shown to the customer—in the form of a kiosk, at point of sale, or on an e-commerce website—merchants are able to utilize a QR code.

Expanding Consumer Choices

QR codes are a simple concept with wideranging applications. While they do need some kind of scanning technology to work,

addresses, or customer identity. Expect to see innovative merchants and their service providers come up with many more groundbreaking use cases for QR codes. TT Alicia Roisman-Ismach is vice president of product and marketing at Amaryllis and chair of the ETA Technology Committee. Eric Brown is chief executive officer at Alliant Payment Systems and a member of the ETA Technology Committee. Lori Breitzke is vice president of product management at FIS and a member of the ETA Technology Committee.

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PEOPLE

Richie Serna Richie Serna was looking to “redefine the economics of payments” when he and Sean Donovan co-founded Finix four years ago. Serna, the company’s chief executive officer, started the company after working as a software engineer and recognizing that a gap existed for companies that wanted to monetize their payments but lacked the time and resources to do so.

Here, Serna talks to Transaction Trends about the startup culture and evolving payments models.

What makes your payments model unique?

Finix is a payments infrastructure platform that makes it easy for growing software companies and ISVs to own, manage, and monetize their payments stack by becoming payment facilitators. There’s a common misconception that bringing payments in-house is nearly impossible without committing millions of dollars and multiple years to building your own, so many companies remain in a referral relationship with the acquirers—but that’s not the case.

We’re doing for payments what AWS has done for cloud infrastructure: giving companies a ready-made platform on which they build and customize their own solution that caters to their specific needs.

What types of companies are leveraging your services, and what makes those companies a good fit for this model?

We’re trusted not only by financial institutions like Cross River Bank and Visa, but by a growing number of software firms that serve specific industries and are increasingly interested in “verticalizing” their offerings by offering specialized services to markets they are uniquely positioned to understand and serve. Payments is at the top of that list, as more companies are proving that processing payments can be a revenue driver, versus a cost center.

Finix can be a solution for growing companies that are thinking about payments strategically. We’ve seen especially strong traction from companies who serve vertical markets, like Clubessential, which serves country clubs.

There are more than 10,000 of these vertically focused business software providers. It might

24 Fall 2019 | TRANSACTION trends

not be as exciting a narrative as “solving Silicon Valley’s next big problem,” but it’s a massive— and massively ignored—market.

How did you find your investors, and how will your company be using that money?

We have raised over $20 million to date from leading fintech investors, including Bain Capital Ventures, Homebrew, Insight Partners, Aspect Ventures, Visa, Precursor Ventures, Class 5 Global, and Village Capital. Finix is headquartered in San Francisco, with an additional office in Cincinnati.

We plan to use the additional funding to expand our team to meet growing customer demand as well as expand our product capabilities. We plan to triple our headcount in 2019, with a particular focus on our engineering and sales teams.

What advice would you offer to other payments-related startups looking for investors?

Look for opportunities in places others don’t.

When we started the company in 2016, we were told that “payments was solved” by companies like Stripe and Square. Every new startup was using them. But our team has spent decades working in payments collectively, and we knew there was a gap in the market. We also started out working with customers that many thought would take too long to close or wouldn’t have the money to pay for our services. As a result, our typical customer is a Midwest-based, revenue-focused, vertical SaaS company (for our payment facilitator platform) or a midsized regional bank (for our push-tocard product).

What can the payments space expect to see in terms of more software companies getting involved in payments?

Just as nearly every company has become a software company in recent years, every software company is now becoming a payments company. And they need a lot of help. Far too many companies today find themselves stuck between a rock and a hard place when it comes to payments. While some thirdparty payment facilitators can make it easy to start accepting and managing payments, the transaction fees can add up quickly—for every $100 million earned, $3 million or more goes to a third-party payment facilitator. On the other hand, building a payment system from scratch can be expensive and time consuming.

Recent advances in technology are changing the game. Today, a new category of software providers is emerging to help companies integrate payments directly into their business in a fraction of the time, and with far less expense. You no longer need to hire an army of payments experts—a handful of software engineers will do. With the barriers to becoming a payment facilitator rapidly disappearing, it’s time for companies to rethink their payments strategy. Payments are the lifeblood of every business, and you have to get the underlying technology right. The better the payments experience, the more revenue you stand to generate as a business.

And the more control you have over the user experience, the more of it you actually get to keep. The ability to fully own and customize payments will define the success of a new generation of companies. TT

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