Transaction Trends June 2011 by Content Communicators, LLC

Transaction trends The Official Publication of the Electronic Transactions Association

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| June 2011

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Transaction trends The Official Publication of the Electronic Transactions Association

Vol. 16 | No. 6

cov e r s tory

10 Blueprint for the Future

By Julie Ritzer Ross As payment mechanisms like Google and PayPal eliminate the middleman, ISOs must innovate to succeed. Discover how several were able to maintain a competitive edge.

FEATURES

14 Remote Deposit

Capture: Not So Far Away By Julie Ritzer Ross Although not revolutionary, remote deposit capture has plenty to offer ISOs, including new revenue streams, decreased merchant attrition, and more.

SPECIAL SERIES

Startup Stories: From the Ground Up

By Julie Ritzer Ross With a focus on merchant advocacy, Equity Payment Co. has prospered by providing solutions tailored to merchants’ needs, tapping vertical markets, and developing a strategic merchant boarding policy.

24 Leaving Las Vegas

By Josephine Rossi With a new venue and revamped educational sessions, the 2011 ETA Annual Meeting & Expo offered 3,000 payment professionals dynamic presentations on the latest technologies, legislation and regulation, emerging trends, and more.

d e partm e n tS

President’s Message

Industry News

ISO Corner

Insights from ETA’s elected leader Trends, strategies, and news in the payments business

Data Security Is electronic pickpocketing fact or fiction?

31 Ad Index 32 Industry Insider

AppNinjas finds success in the mobile payments market

Deciphering industry terminology

Transaction trends | June 2011 3

Electronic Transactions Association 1101 16th Street NW, Suite 402 Washington, DC 20036 202/828.2635 www.electran.org ETA Chief Executive Officer Carla Balakgie ETA Director, Communications & PR Thomas Goldsmith Transaction Trends Publishing office: Stratton Publishing & Marketing Inc. 5285 Shawnee Road, Suite 510 Alexandria, VA 22312 703/914.9200 Publisher Debra Stratton Editor Josephine Rossi Contributing Editor Angela Hickman Brady Editorial/Production Assistant Teresa Tobat Art Director Janelle Welch Contributing Writers Bryan Ochalla, Julie Ritzer Ross Advertising Sales Steve Schwanz or Fox Associates (800/440.0232; adinfo.eta@foxrep.com) Fox Associates Offices Chicago 312/644.3888 Atlanta 800/699.5475 Los Angeles 213/228.1250

New York 212/725.2106 Detroit 248/626.0511 Phoenix 480/538.5021

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 monthly, of the Electronic Transactions Association, 1101 16th St. N.W., Suite 402, Washington, DC 20036; 800/695-5509 or 202/8282635; 202/828-2639 fax. Postage paid at New Richmond, Wisconsin and additional mailing offices. POSTMASTER: Send address changes to the address noted above. Copyright © 2011 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. Nonmembers, government agencies, $150 per year; single copy, $20. Subscriptions are available for 12-month periods only, at the quoted rates.

4 June 2011 | Transaction trends

President’s Message

Mobile Domination

ast month was a very busy one for mobile payments. Whether you’re looking at these developments from the perspective of helping new classes of merchants accept card transactions on the go, or helping to equip merchants to accept transactions from consumers who want to pay with their smartphones, there were plenty of announcements and plenty of developments. As those of you who attended ETA’s Annual Meeting & Expo know, a lot of that activity took place in San Diego, with dozens of new products and important updates announced and no shortage of excellent speakers addressing various aspects of mobile payments in pre-conference events like Prepaid Day, in the session rooms, and at the mobile pavilion on the exhibition floor. In the weeks since the ETA Annual Meeting, the activity around mobile didn’t relent, as Visa Inc. announced plans for a smartphone wallet, Square (which got a “strategic” investment from Visa) unveiled a major upgrade with new features, and Google finally unveiled its plans for mobile commerce. It still isn’t clear, despite all the announcements, what shape mobile payments will take in the end. But one thing you can count on is that ETA will be watching developments closely and doing all it can to keep members informed about this potentially disruptive technology and creating opportunities for our members to play an important and profitable role in whatever landscape emerges. You’ll see some of that activity over the summer in the form of web-based seminars and coverage in Transaction Trends and other ETA publications and information services.You can bet the strategic aspects of mobile payments will feature prominently in this year’s 2011 Strategic Leadership Forum in Chicago, and likely in the form of a dedicated conference this year, as well. The reason for all this is simple. Standing still as the environment changes around us is not an option.The cover story for this month’s issue makes the point vividly.To survive and prosper in the payments business of the future will require resilience, adaptability, agility, and a willingness to embrace new approaches and new strategies. And whether it is mobile payments or some other development, the role of ETA and Transaction Trends is to help members stay informed and to open doors to opportunities as they arise. This year’s Annual Meeting, by the way, was a roaring success—and for more than the mobile payments activity there. Sen. Christopher Dodd was an excellent keynote, Steve Wozniak was both entertaining and informative, and we had a chance to honor ETA’s volunteers as well as those who have made extraordinary contributions to the industry. If you couldn’t be with us this year, be sure to take a look at the coverage of the Annual Meeting on page 24.And plan now to be a part of the meeting next year. You’ll be glad you did. Sincerely, Rick Pylant Rick Pylant is President of ETA and President & Chairman of COCARD Marketing Group, LLC

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INDuSTRYnews ACH Piques Small Merchants’ Interest More small businesses are willing to adopt new electronic payment solutions to simplify accounting processes, according to CashEdge Inc.’s 2011 Small Business Payables and Receivables Survey. The study examined 405 small businesses—those generating $1 million or less in annual sales revenue— as they related to the overall payables and receivables processes. Although most still rely on manual spreadsheets and paper-based systems, 60 percent of small businesses surveyed say they would use an ACH receivables service for getting paid electronically if it did not require sharing account information. Other key findings include: • Respondents report an average of 19 days to collect payments from customers. • Sixty percent of respondents want to reduce the total days to payment. • Nineteen percent already leverage ACH transfers for vendor payments. • Thirty-eight percent would use ACH transfers if available.

Small Issuers Brace for Steep Interchange Revenue Decline Small debit card issuers anticipate a 73 percent decrease in debit interchange revenue following implementation of the Durbin Amendment provisions, according to 2011 Debit Issuer Study by PULSE. Although small issuers—including community banks and credit unions with less than $10 billion in assets—are exempt from the regulations proposed by the Federal Reserve Board, they are critical of the interchange cap and doubt the exemption will be effective. Results of the survey support industry consensus that the interchange cap will likely affect even exempt issuers, and the impact small issuers say they are expecting is greater than many anticipated, says Steve Sievert, senior vice president of PULSE. To mitigate the expected losses, 54 percent of regulated institutions and 27 percent of exempt issuers are evaluating additional fees or reducing benefits to customers. Exempt issuers are considering reducing rates on high-yield checking accounts, getting rid of ATM fee rebates, and charging account holders for having checking accounts. Many issuers also are assessing debit rewards, and both regulat-

ed and exempt issuers expect to eliminate or reduce rewards programs as a result. Many issuers also indicate they will encourage increased use of PIN debit instead of signature debit. Following implementation of the Durbin Amendment, interchange rates for PIN and signature debit transactions will likely be the same for regulated issuers, but PIN transactions will have a better rate for issuers.

Noncash Payments Breakdown

Fast Fact Mobile payments provider Square has processed more than $2 million in card payments in a single day and processed more than $66 million in the first quarter. Source: Square

6 June 2011 | Transaction trends

2006

2009

CAGR

Total (billions)

95.2

109.0

4.6%

Checks (paid)

30.5

24.5

-7.1%

ACH

14.6 19.1 9.4%

Credit card

21.7

21.6

-0.2%

Debit card

25.0

37.9

14.8%

Prepaid card

3.3

6.0

21.5%

*Numbers include business, consumer, and government payments. Source: The 2010 Federal Reserve Payments Study

ISO Corner

Lost in Translation

Industry acronyms and terminology lend a lot to the conversation—including confusion By Bryan Ochalla

SO. MLS. POS. It’s hard to imagine having a discussion with a payments industry professional without using one of these acronyms. They allow merchant acquirers, processors, and other industry professionals to converse with one another quickly and easily. But use those terms when talking to a merchant or consumer, and they’re likely to be more of a conversation inhibitor than an abettor. “We use a lot of terms that aren’t everyday words, and that may be to our disadvantage when we’re trying to explain to the public the valuable and essential services we provide,” says Mary Bennett, director of government and industry relations for the Electronic Transactions Association. The same is true when discussing the industry’s products and services with legislators and other decision makers, adds Rod Boyer, president of TSYS Loyalty and Prepaid in Columbus, Georgia.“A common language is crucial to informing lawmakers, retailers, employers, and others as well,” he says. “The industry needs to embrace a common vocabulary and market definitions.”

Confusion and Connotation The problem of confusing terminology is compounded by the fact that some industry members have trouble understanding some of the jargon used today, says Allen Weinberg, a co-founder and managing partner of Menlo Park, California-based Glenbrook Partners. To expect merchants, legislators, and consumers to understand

them “is just ridiculous,” he adds. Even common payments terms such as POS can be downright confusing to those outside the industry.“I have documents in front of me right now that include words like gateway and POS,” Bennett shares.“But if I used either of those terms in a conversation with my neighbors, they wouldn’t have any idea what I’m talking about.” In some cases, that lack of understanding can turn into misinterpretation. One example is the word interchange. While

TOO MANY BUZZ WORDS? Check out ETA’s Encyclopedia of Terminology for the Acquiring Industry wiki glossary. You’ll find more than 3,000 terms with well-researched, cross-referenced definitions and information resources. And, if you sign in, you can contribute, www.electran.org/glossary.

8 June 2011 | Transaction trends

professionals in the merchant-acquiring industry understand what interchange is, consumers who do not likely have a negative relationship with the term thanks to financial reform efforts over the past 18 months. “People who wish to see interchange fees reduced have succeeded in portraying the concept of interchange and the reality of an interchange fee as bad things,” Bennett explains. As a result, the word is now misunderstood and politically charged. “It is no longer a neutral term that explains a technical item. Instead, it is used, by some, as shorthand to describe things that far exceed interchange.” Another commonly misunderstood term is prepaid—and all of the words associated with that segment of the industry. Boyer points to a 2009 survey conducted by Network Branded Prepaid Card Association that found one third of consumers were unfamiliar with, or un-

pp-eta-transaction-trends-postETA-3.5x9.5-FINAL.ai 1 4/26/2011 11:26:20 AM

sure of, prepaid cards and how they work. “Yet that’s the term most commonly used in the industry,” he says.“It’s an uphill battle to market a product that one third of consumers are unaware of, so education must be on the forefront of our efforts.”

Simple Is Better How can the industry resolve its terminology issues? “We could simply use other words to describe those things to consumers and even legislators,” suggests Bennett.“We could say ‘routing system for payments’ instead of gateway or ‘a terminal at the cash register that you put your card through’ for POS. Who wouldn’t understand that?” A similar straightforward approach could be helpful while trying to combat the politicization of interchange. “The word interchange just isn’t meaningful” from a consumer standpoint, says Bennett. “So we need to change how we speak about fees and how we speak about the payments system because we can’t rely on the technical terms anymore.” It’s one thing to use these terms in a professional setting, “but when we’re speaking to the public or when we’re writing a document that will have public exposure, we do ourselves a disservice to rely on terms like interchange because they’re so misunderstood.” Both Boyer and Bennett believe simply explaining processes and services to lawmakers and consumers would go a long way in remedying the situation. Boyer suggests focusing on basic terms in marketing materials and describing how services are performed to gain broader understanding and acceptance. That tactic would be used when talking directly with consumers, although Weinberg isn’t sure such an approach would be embraced en masse. “I think a lot of merchants—especially smaller, momand-pop merchants—would feel better if they had a better understanding of what they’re paying for, but the harsh reality is that they’re kind of a captive audience,” he says. Could an ISO differentiate itself by plainly explaining concepts to merchants? “I think so, especially on their websites,” Weinberg points out. “Merchants are increasingly going onto the Web not only to find an acquiring relationship but to try to understand it.” ISOs that decide to demystify the industry for their customers “are much more likely to get a callback saying, ‘Come talk with me.’” TT Bryan Ochalla is a contributing writer to Transaction Trends. Reach him at bochalla@yahoo. com.

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[ COVER STORY]

for the Future

Pursuing multiple directions—from narrowed niches to auxiliary services—sustains successful ISOs/MSPs By Julie Ritzer Ross

ommoditization. Competition. A shrinking pool of merchants. A dearth of all-in-one point-of-sale hardware innovations that for some merchants are favorable to standalone credit card terminals. With all of these factors and others in play, ISOs/MSPs are being challenged to strive exceedingly harder to remain relevant and position themselves for growth. “Tomorrow’s ISOs/MSPs—or, more realistically, today’s—need to move in a number of directions to hit the target,” says industry consultant Kurt Strawhecker, co-founder and president of The Strawhecker Group, based in Omaha, Nebraska. “It’s a different world now.”

Narrowing the Niche One of the keys to sustained relevance will be an increasingly narrow vertical focus.The “broad-market” model is quickly fading into oblivion; competition and the demands of increasingly educated merchants are such that ISOs can’t “expect to walk down Main Street—or have their agents walk down Main Street—picking up accounts by dropping cards everywhere,” Strawhecker says. For the most part, merchants want to ally themselves with ISOs that understand the machinations and requirements of their particular business and are willing to configure their products and services accordingly. Strawhecker points to an ISO that has, over the past three years, leveraged specialization to build a portfolio of 7,000 merchants.The operation caters exclusively to small law practices, tailoring its payment solutions to how each office collects and processes client and other payments.“This solution accommodates, for instance, the way attorneys work in terms of billable hours,” Strawhecker explains.“Prospects can tell that this particular 10 June 2011 | Transaction trends

KEY NOTES 8

ISOs and MSPs need to find an increasingly narrow vertical focus. Merchants want to partner with organizations that understand their particular business and can provide tailored products and services.

Embracing next-generation payment services is key. By offering mobile payments and other solutions at a reasonable price, ISOs can appeal to underserved merchants.

ISOs and MSPs of the future should consider altering their business models in terms of not only what they sell, but how how and where they sell it.

[ COVER STORY] ISO comprehends the ins and outs of law firm payment collection—and they see the appeal of the ‘specialized’ ISO.” Group Concepts in The Woodlands,Texas, is another example. The ISO continues to make its mark by pursuing clients in the real estate vertical, says President Dan H. Breshears. Group Concepts’ merchant portfolio includes 3,600 real estate entities—80 percent of which are residential building owners and property management firms, with homeowners associations, condominiums, and commercial property owners accounting for the remaining 20 percent. In addition to credit and debit card payment solutions, which are just beginning to garner acceptance by real estate customers, Group Concepts has designed a solution for accepting monthly rent and maintenance payments in electronic check form. A separate ACH solution satisfies clients’ need to collect and process water, electricity, and/or sewer charges separately from rent and maintenance.

Tapping B2B and Auxiliary Tools Breaking out of the generalist mode will, for many ISOs, also necessitate moving beyond the comfort zone of the typical merchant audience and into relatively uncharted waters, says Todd Ablowitz, president of Double Diamond Group in Woodland Park, Colorado.A sizable B2B audience is out there, and contrary to what smaller organizations may assume, prospective B2B customers are not necessarily large companies seeking to board large ISOs. “A lot of these companies are not so big themselves, and they are more comfortable being serviced by a smaller ISO/MSP, ” Ablowitz says. “As an example, there are small tool manufacturing operations that sell tools and supplies to independent auto repair shops—and they want a way” to incorporate electronic payment acceptance into their structure. Offering auxiliary integrated tools and solutions that are also targeted toward individual merchant sectors will prove equally critical.“As disruptive payment mechanisms like PayPal and Google continue to invade the territory and eliminate the middleman, ISOs must strive ever harder to be innovative and forward-thinking,” says Robert J. McCullen, Chicago-based Trustwave’s chairman, CEO, and president. Several ISOs/MSPs of different sizes have 12 June 2011 | Transaction trends

jumped aboard the integration train; among major players, Heartland Payment Systems ranks high on the list with its initiative in the restaurant arena. Heartland has allied itself with the National Restaurant Association and more than 40 state restaurant associations to develop Full Course Business Solutions, a unified payment processing platform geared to the restaurant industry that bundles card acceptance with gift cards, payroll services, and tip and check management solutions. Last March, Heartland released its Freshtxt restaurant management solution, a system that eliminates traditional pagers from waitlist management applications, alerting patrons that their tables are ready via secure text messages or automated calls to their cell phones. An online portal lets restaurateurs access real-time analytics to manage table turn times and use an interactive seating chart to change floor plans. Operators can also send targeted offers to specific groups of customers through text-messaging, and a complimentary online reservation module lets customers make reservations directly on restaurants’ websites without being redirected to a third party. “With Freshtxt, we are enhancing a critical aspect of the restaurant business,” says Steve Elefant, Heartland’s chief information officer. Another ISO,TSYS Merchant Solutions in Omaha, Nebraska, is cultivating the healthcare market with its First Paid Healthcare Solutions bundle, which includes a payment gateway, accessible via the Internet, as well as a module for determining patients’ health plan eligibility and the remaining balances on deductibles and outof-pocket maximums. A separate “Responsibility Calculator” generates estimates of patients’ out-of-pocket expenses at the time of service, and a reports generator creates detailed payment and collection reports. Certain small players, too, clearly see the value of highly specialized integrated systems. Group Concepts has interfaced its rent payment processing solution with proprietary modules for accounting and rent and maintenance roll/occupant information tracking. An integrated website built for each real estate client serves as a portal not only for collecting fees, but for exchanging mass and individual messages with tenants, and displaying apartment floor plans.

In a somewhat different vein, Advanced Merchant Group, an ISO/MSP headquartered in Langhorne, Pennsylvania, has integrated a proprietary payment gateway, configured by a team of outside specialists, with its processing solutions. In addition to sharpening the organization’s competitive edge, the move has yielded a number of side benefits, according to President/CEO Michael Wiener, such as cultivating large banks’ Internet business, casting its service net wider, and offering what is being touted as the only guaranteed check program available on the Internet. Wiener credits the integration in large part with keeping Advanced Merchant Group’s attrition rate below one percent. Several banks, among them a processing bank, utilize the gateway.

Pushing PCI Compliance Along with specialization and integration, solutions and services that foster PCI compliance will continue to be essential to ISO/MSP survival.“The ‘trusted advisor’ position must now include this particular ingredient; otherwise, we lose relevance,” says Henry Helgeson, co-CEO of Bostonbased Merchant Warehouse. Merchant Warehouse’s Merchantware TransPort Platform is a hosted payment solution intended to eliminate the need for PA-DSS audits of point-of-sale systems, shopping carts, websites, and mobile payments. It removes the card processing function from POS software, retaining full functionality through a “transaction portal” and providing enhanced security through tokenization and end-to-end encryption. And the company’s SECR-encrypted card reader is USB-powered and features data encryption, card authentication, Triple DES encryption, and secure PIN debit.The reader secures cardholder data at the point of swipe, transmits encrypted card data over any network (private or public), and securely stores encrypted transaction data at Merchant Warehouse’s data vault. The ISO/MSP also maintains a partnership with ControlScan, an Alpharetta, Georgia-based PCI and security solutions provider, under which merchants in Merchant Warehouse’s portfolio have access to the PCI Self-Assessment Questionnaire and on-demand security scanning, as well as technical support. McCullen sees “strong standout opportunities around PCI” for ISOs with portfolios

“Smart ISOs are not going to turn their backs on the inevitable—that mobile phones as a payment device are here to stay.”

—Todd Ablowitz, Double Diamond Group

of smaller merchants whose understanding of and capability to achieve PCI compliance may not match that of their larger counterparts. “Part of it is the technology piece,” he says, noting that Trustwave’s technologies range from SSL certificates, email filtering, and unified threat management firewalls to an intrusion prevention system, to detection and security information and event management solutions. “However, service and support is another truly differentiating factor.” Trustwave has an on-demand web-based portal called TrustKeeper that enables ISOs to provide merchants with PCI DSS compliance management services, including PCI DSS Self-Assessment Questionnaire Version 1.2, vulnerability scanning, and remediation.As acquiring institutions, ISOs have “sponsor” access privileges to the solution, thereby allowing them to view and track the compliance status of all merchants in their compliance program and address potential problems. A separate web Content Monitoring solution scans and monitors the content of merchants’ websites to validate their marketing practices and ensure compliance with ISOs’ operating regulations.

Embracing New Platforms Still, diversification and specialization may not be entirely enough to safeguard ISOs from obsolescence. Embracing next-generation payment platforms is, in many cases, just as important. “Smart ISOs are not going to turn their backs on the inevitable—that mobile phones as a payment device are here to stay and that merchants will be looking to them to get themselves with the program,” Ablowitz says. Forward-thinking ISOs will need to identify a cadre of underserved merchants and pursue them, using eco-

nomics as a draw. “Tiny merchants don’t want to spend a lot of money on the technology to get going in mobile, but they can download software—think iTunes or Android Market—for under $1 and outfit themselves with a simple, low-priced or even no-cost, card reader,” he explains. Total Merchant Services in Basalt, Colorado, plunged into mobile earlier this year after COO Matt Freedman saw an opportunity to satisfy the needs of an ever-widening mobile-merchant audience. It has since added ROAMpay, a mobile phone-based POS solution service from ROAM Data of Boston that operates on such devices as the BlackBerry Bold 9000 and Droid X. Merchants that obtain only a ROAMpay account from Total Merchant Services pay 1.69 percent of the sale, plus 25 cents for a swiped transaction with Visa, MasterCard, or Discover cards. A monthly fee of $10 buys access to the ISO’s payment gateway, which routes transactions to the appropriate processors for authorization. Merchants that have traditional Total Merchant Services accounts can tack on ROAMpay at the rates stipulated in their existing contracts, plus a $5 monthly gateway fee. DFW Card Merchant Services, an ISO headquartered in Dallas, has also stepped up to mobile. Approximately 12 percent to 15 percent of merchants in its portfolio have adopted mobile POS within the past 12 to 15 months, reports a company spokesperson. Some merchants, such as those that offer delivery or installation services as an adjunct to in-store sales, utilize the application along with regular pointof-sale terminals. Others employ mobile phones to handle 100 percent of their payment processing tasks. Interestingly, some players contend that ISOs/MSPs will gain the most ground in

the mobile space if they lean heavily on vendors and processors to provide them with the training necessary to truly do an effective job of selling mobile POS technology.“The temptation to rush in is there, but as with all new technology, we think it is better to step back and build a base of knowledge first,” says Jeff Rosenblatt, president of Melville, New York-based MSP EVO Merchant Services.

Considering New Models Finally, while the traditional operating model has served ISOs in good stead since the industry’s inception, tomorrow’s ISOs and MSPs would do well to at least consider branching out not only in terms of what they sell, but how and where they sell it. Partnering with and selling through value-added resellers (VARs), rather than competing with them, is likely the wave of the future for some players. For Merchant Warehouse, it already is: In recent years, the company has grown its VAR partner program to include approximately 500 VAR organizations. Resellers working with Merchant Warehouse also receive 50 percent of residuals for merchants referred by partners, and Merchant Warehouse guarantees that back to the partner or reseller. For others, the key could be a different flavor of equipment sales program. Advanced Merchant Group considers itself an innovator in this regard, selling hardware to its agents at cost and allowing them to keep all revenues earned from sales to merchants. The ISO has also built a sales channel on the Internet. Other ISOs and unaffiliated agents can buy terminals and paper goods from Advanced Merchant Group’s website. Both Advanced Merchant Group and EVO are charting international market waters—the former, in Canada, and the latter, in the United Kingdom. “There is a lot of demand for POS equipment and services in these markets, which are not as saturated as those in the U.S.,” says Ablowitz. “But the bottom line is, no matter what ISOs/MSPs do, they cannot afford to avoid making any changes whatsoever to the way they work and expect to” prosper going forward. TT Julie Ritzer Ross is a contributing writer to Transaction Trends. Reach her at jritzerross@gmail.com. Transaction trends | June 2011 13

[ FEATURE]

Remote Deposit Capture: Not So Far Away Opportunities abound for tapping new markets and generating revenue by facilitating check acceptance and deposit KEY NOTES 8

The RDC value proposition is better for ISOs than banks because ISOs are already familiar with the technology needed to execute it in a small business environment.

RDC opens a wide range of alternative markets, such as physicians, dentists, and attorneys; day cares and assisted living residences; home repair companies and contractors; and state governments.

RDC’s local and primary benefits to merchants include immediate access to deposited funds, reduced work flow, strategic re-deposit of returned checks, and electronic propagation of accounting files.

14 June 2011 | Transaction trends

By Julie Ritzer Ross

ike many payment acceptance technologies, remote deposit capture (RDC) was heralded as a revolutionary concept when it first reached the market several years ago. The enactment of the Check Clearing for the 21st Century Act (Check 21) in 2003 created a pathway for RDC adoption, and it remains on the ISO radar screen despite some real, and some perceived, obstacles. RDC comes in two flavors—traditional and mobile. In the traditional RDC scenario, merchants use a check scanner to scan checks into RDC software. The software creates a file of digital checks and transmits that file to the appropriate financial institution, which processes the checks as it would

paper instruments. Physical checks remain in merchants’ possession for the duration of time mandated by the bank. In the mobile deposit scenario, merchants and consumers use mobile devices (cell phones, smartphones, iPads, etc.) to capture images of the front and back of the checks they wish to deposit. Software within the devices converts the photographs into digital images that meet Check 21 standards and transmits them to the appropriate bank or financial institution for deposit. While the RDC concept attracted considerable attention once Check 21 brought it to the forefront, the Federal Financial Institutions Examination Council (FFIEC) “Risk Management of Remote Deposit Capture,” published in 2009, brought adoption to a screeching halt.“There was a stampede of compliance activity that virtually trampled new” RDC introduction for a full year, explains Bob Meara, a senior analyst in the banking group of Celent, a Boston-based research and consulting firm. In 2010, the tides turned, with approximately 950 late-adopter financial institutions entering the RDC fray, according to “State of Remote Deposit Capture 2010: Unintended Consequences,” a Celent report authored by Meara. Celent estimated that nearly 7,500 U.S. financial institutions, or 75 percent of all U.S. banks, would have adopted RDC by year-end 2010. The firm also forecasted that by then, 697,500 commercial RDC users/scanners would be in use, representing a 49 percent year-overyear growth rate. “These are the latest figures we have available, and from what we can see, they are pretty much on target,” Meara says. “With such rapid adoption of RDC, it is probably good that the FFIEC ‘timeout’ occurred. The unintended consequences of the FFIEC guidance—namely, a virtual lockdown of market-facing RDC activity— appear to be largely behind us now, and significant market opportunity lies ahead.”

ISOs Welcome So far, the bulk of RDC initiatives have been undertaken by financial institutions, with average deployments growing from 72 to 94 scanners apiece, says Meara. However, activity on the ISO side is trending upward. “ISOs definitely recognize the appeal of moving into RDC as a means of generating

new revenue streams,” says Randy Fowlie, president and CEO of RDM Corp. in Waterloo, Ontario, Canada. “Similar to credit card processing, RDC provides ISOs with residuals-based income from software and transaction fees, plus equipment revenue from direct sales or leasing programs. Also, ISOs decrease merchant attrition by adding services like RDC, and it differentiates the sales effort.” Approximately 60 to 70 ISOs

pens on the legislative front.” Some ISOs have shied away from RDC based on fear of competition from banks and other financial institutions. But, to a large degree, banks and financial institutions just aren’t looking at consuming the same RDC helping as their ISO counterparts. “There’s a logistical piece that dissuades many banks from promoting RDC to small

“The electronification of checks, through RDC, offers similar opportunities to the ISO community as when credit card transactions converted from paper-based processing to electronic draft capture.” —Stacia Smith, EPSON America

have signed on with the company to offer its RDC solutions to merchants, Fowlie says. “We are seeing a lot of ISO activity around RDC through our processor partners,” agrees James B. DeBello, CEO of Mitek, a San Diego-based financial solutions provider that also plays in the bank arena. DeBello notes that the potential of current legislation to complicate credit and debit card acceptance may spark a resurgence of merchant interest in taking checks as a form of payment. “By federal statistics, checks account for 30 trillion of the 70 trillion non-cash payments remitted in the U.S. each year,” DeBello says. “So really, RDC is worth ISOs’ attention no matter what hap-

business customer segments in which ISOs dominate,” DeBello says. Banks are required to install and maintain scanning equipment on site, and must decide whether they should charge for technology and services or offer them free of charge. Many banks have opted to provide RDC to a limited number of key customers to keep them in the fold, rather than deploy the service as a way to expand their commercial accountholder base or geographic footprint. Fowlie adds that even among those financial institutions that have begun to leverage RDC to capture new business, a vast majority don’t want to involve themselves in underwriting lower-volume customers.

RDC ADOPTION ON THE UPSWING 7,500 U.S. financial institutions, or 75 percent of all U.S. banks, would have adopted RDC by year-end 2010. The firm also forecasted that by then, 697,500 commercial RDC users/scanners would be in use, representing a 49 percent year-over-year growth rate.

Celent estimated that nearly

Transaction trends | June 2011 15

[ FEATURE] “They really don’t see a value proposition in it, which leaves money on the table for ISOs that have long handled the process very deftly.” Whether ISOs are competing with banks and financial institutions for an identical slice of the RDC pie, or a different one, other factors give them an edge on the playing field. For example, ISOs are either already familiar with the technology needed to execute RDC in a small business environment, or can quickly get up to speed through partnerships with hardware and software providers. Just as significantly, hardware and software providers continue to develop RDC solutions intended for sale to small businesses through the channel, as well as programs to support ISOs. For example, RDM offers Simply Deposit, an integrated desktop component of its Image & Transactions Management System (ITMS), as well as a mobile deposit capture solution dubbed Simply Deposit Mobile. Both are intended specifically for small businesses and low-volume check processing. The company also offers a comprehensive suite of sales, marketing, and product sales training for ISOs and their sales and operations teams. Similarly, hardware manufacturer EPSON America, a provider of printers, terminals, and kiosk products headquartered in Long Beach, California, launched its RDC strategy some three years ago with a line of check scanners ISOs can sell bundled with proprietary SureCapture RDC software. “The electronification of checks, through RDC, offers similar opportunities to the

RDC’s VALUE PROPOSITION: 1. Immediate access to deposited funds.

2. Reduced work flow. 3. Strategic re-deposit of returned checks.

4. Reduced bank fees. 5. Electronic propagation of accounting files.

16 June 2011 | Transaction trends

“Mom-and-pop merchants really aren’t the primary RDC target audience because the number of checks they accept is generally extremely low. There will be some merchants that do take more checks, but it is not a good idea to concentrate solely on them.” —Randy Fowlie, RDM Corp. ISO community as when credit card transactions converted from paper-based processing to electronic draft capture,” noted Stacia Smith, EPSON America business development manager, in a recent webinar sponsored by the company. “This service offering has the potential to provide additional revenue through existing merchant relationships and through new and untapped markets for ISOs who embrace this technology.”

Viable Markets While a clear market exists for ISOs hoping to become active in the RDC arena, certain players have still found themselves negotiating choppy waters.Their problem is more often than not a tendency to fall back on promoting the technology to their existing base of traditional Tier 3 and Tier 4 merchants. “Mom-and-pop merchants really aren’t the primary RDC target audience because the number of checks they accept is generally extremely low,” Fowlie says. “There will be some merchants that do take more checks, but it is not a good idea to concentrate solely on them.” Much more viable alternative markets for RDC, sources agree, include the professional services segment (physicians, dentists, attorneys, etc.), day cares and assisted living residences, rental companies (storage facilities for everything from household goods,

to automobiles and airplanes), property management firms, utilities, contractors, and even local and state governments (e.g., municipal offices that accept payments for taxes and licenses). Equally worth tapping is a potential RDC customer niche of small banks that outsource their merchant services and want to offer RDC to commercial account-holders without handling it on their own, says Fowlie. RDM has three or four such bank customers brought to it by ISO partners. ISOs concentrating on markets with mobile workforces—plumbers, electricians, handymen, delivery personnel, and the like—also must move into the mobile RDC space. “As is the case with ‘traditional’ RDC, most banks, with a few exceptions, are leaving the small business side of mobile alone and focusing on consumers, but from what we can see out there, there really is no guarantee that this will continue for the long term,” says Linden (Lin) Fellerman, president and CEO of Secure Payment Systems (SPS), a San Diego-based provider of value-added payment and transaction processing services. Last December, SPS introduced MobileXpress21, a mobile RDC and check-guarantee solution aimed not only at financial institutions, but at ISOs and other channel partners serving wholesale and retail merchants throughout the U.S. To ensure

value-add, SPS has formed a relationship with Mitek wherein it has become a direct processor of the latter’s Mobile Deposit, a mobile RDC application that enables check deposits via camera-equipped smartphones.The integration of the two vendors’ technologies enables guaranteed funding of mobile remote check deposits.Already certified on the Apple Store for the iPhone, MobileXpress21 can be downloaded by participating merchants for an easy-to-implement processing solution. “Mobile is here to stay,” Fellerman says.“The capability for our sales agents to be able to sell real-time mobile Check 21 in conjunction with a guaranteed payment solution is a significant value-add that should translate into a more compelling and persuasive sales justification for the retail decision maker in the numerous market segments that cater to remote check acceptance, such as driver deliveries and the home contractor trades.”

Value Proposition Finally, no matter the vertical market to which they opt to bring RDC, and whether or not they immediately dive into the mobile end of the business, ISOs should follow a well-honed strategy for selling the technology. Start with the value proposition. RDC provides five primary value benefits to merchants that lay a strong groundwork for a sale. Immediate access to deposited funds tops the roster. Reduced work flow is next; studies cited by RDM demonstrate a reduction of up to $200 per month in expenses from the elimination of copying checks, filling out deposit slips, and making physical trips to the bank to execute deposits. Strategic re-deposit of returned checks, with the merchant now controlling the returns process, constitutes another benefit, as do reduced bank fees. Electronic propagation of accounting files—which reduces errors and results in additional savings—rounds out the list. Equally critical, say Fowlie and Fellerman, is presenting RDC to prospects as part of an integrated package. If RDC can integrate with merchants’ existing accounts receivable and accounts payable systems, they can eliminate the need for reconciliation and the value proposition becomes even greater. On the flip side, sources caution against promoting customizable remittance applications to small RDC merchants because they will likely become so frustrated with it that they cancel altogether. Over-selling fixed imagers in the traditional RDC space is unwise, too. Most single-feed imagers process one check every five or six seconds, which is around the same amount of time needed to manage software when personal checks are processed.“Unless you have a traditional RDC merchant whose volume of checks is seemingly overwhelming, don’t push multi-feed scanners,” one source emphasizes. Clearly, RDC holds great promise for ISOs. Handled properly, it can be a viable source of revenues and a strong launch pad into a multitude of markets. TT Julie Ritzer Ross is a contributing writer to Transaction Trends. Reach her at jritzerross@gmail.com.

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Breaking the Mold Instead of price incentives, Equity Payment Co. lures customers with “merchant advocacy” focus By Julie Ritzer Ross

everal years ago, Harry Morales took a hard look at his work environment and didn’t like what he saw. He was working for an ISO whose continued price increases, without concurrent improvements in service, were driving away merchant clients in droves. Determined to extricate himself from what he now deems a “bad match,” Morales pondered whether to ally himself with another organization or start one himself. Launching his own ISO was the most appealing option, but only if he could find a way “to build a better mousetrap rather than a ‘me-too’ operation.” So in 2006, he launched Equity Payment Co. in Hilton Head, South Carolina, with a focus on “merchant advocacy.” In seeking that better mousetrap, merchant advocacy was the one element Morales found lacking in the market.“It occurred to me that every other player in the industry has its protection—for example, there are rules to protect cardholders. But nobody appeared to be advocating for merchants, so why not me?” he says. The company’s annual transaction processing volume has grown from approximately $10 million the first year to $350 million annually today. A cadre of 20 agents, or “partners,” serves a fast-growing portfolio of just under 2,000 merchant accounts. “By many standards, we’re small,” Morales says.“However, that’s by design. Our goal is not to be the fastest-growing ISO/MSP, but to attract and retain merchants based on a foundation other than pricing.”

Partner Autonomy With its focus on merchant advocacy, Equity Payment doesn’t use price to cultivate its merchant clientele. Rather, agents are charged 18 June 2011 | Transaction trends

Equity Payment Co. Hilton Head, SC Founded: 2006 Portfolio size: nearly 2,000 merchant accounts Transaction volume: $350 million annually

with letting prospects know that for a few more basis points than competitors may be charging—and one price that applies to all merchants across the board—they will receive the services of a “trusted advisor” who will assist them with all matters pertaining to their business. “In order to work with us, our partners must commit to conducting themselves as if running their own operation, meaning that if a customer wants help with something other than payment processing, they either provide it or line up a third party who can,” Morales says.“We have assisted merchants in forming new banking relationships, determining which point-of-sale solution to acquire or Web developer to use, and what certified public accountant to retain. It is one level of service, regardless of merchants’ processing volume.” To support agents in providing this caliber of service, Equity Payment hosts an “all-partner” conference call every Monday morning. Participants discuss everything from tips and techniques that may aid them in their trusted advisor roles, to problem-solving, to industry developments that may impact dealings with merchants.

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Creative Verticals While Equity Payment’s approach to pricing and client advocacy has largely spurred the company’s growth, vertical markets are another area of focus.The ISO serves a fair share of retail and hospitality accounts, as well as several others. “I look at the entire merchant space as a square box,” Morales says.“On one side the merchants that are difficult to board and difficult to lose; on another, those that are difficult to get, but easy to lose; on the third, those that are easy to sign and easy to lose; and on the fourth, those that are easy to sign and tough to lose. I don’t think any ISO can cover all of them, so we concentrate on two— those that are hard to board because they have a lot of different requirements, but hard to lose because they tend to stick with the one that can serve their needs, and those that are easy to board and difficult to lose for the same reason.” Two years ago, Morales pegged medical offices a viable target market for Equity Payment. Informal research and “nosing around” convinced him that despite reluctance among medical practitioners and other health-care providers to explore new payment acceptance options, they would sign on if the ISO could help them improve their bottom line by facilitating co-pay collections from patients and settling claims with third-party payers. Morales had also noticed that merchant clients in this category are less likely than retail and hospitality merchants to switch processors based on what he calls “yo-yo” pricing, wherein ISOs lure merchants with low rates, only to raise them shortly thereafter. Equity Payment’s solution for the health-care vertical, known as A-Claim, is initiated when patients swipe their insurance cards. It performs real-time insurance eligibility verification with all major insurance companies and indicates to office staff the total amount for which each patient is liable, including in-network or out-of-network information, co-pay amounts, and annual deductibles.The solution then facilitates the processing of credit and debit card transactions to cover patients’ full financial responsibility or, if practitioners so designate, the acceptance of installment payments.

WORDSFROMTHEWISE Support agents with ongoing education and communication. “They cannot exist in a vacuum if they are to focus on elements other than price when attempting to cultivate merchant customers.” Remember, slow and steady wins the race. “Writing any and all kinds of business simply to move ahead is not a prescription for long-term growth,” says Morales. Don’t shy away from tapping vertical markets in which merchants may be difficult to board. “Often, the hardest merchants to sign are the most loyal.”

20 June 2011 | Transaction trends

“When an ISO—or any other kind of startup, for that matter—is entirely selffinanced, deciding whether or not to throw money into development is not always a clear-cut proposition.” —Harry Morales

“The aim here is to streamline billing procedures, lower collection costs, and improve cash flow,” Morales explains. Since the company launched A-Claim, medical practitioners and other health-care providers have grown to 25 percent of Equity Payment’s merchant portfolio.“It’s a very nice little vertical, with good margins and little fear of attrition, which says a lot.” The ISO has also become heavily involved in the government market under terms of a reseller partnership with eProcessing Network, a Houston-based transaction processing software provider that maintains its own payment gateway. Most of the service it provides here entails the online and “over-the-counter” collection and processing of one-time and recurring tax payments to local and state governments. However, utility payments and fines remitted to local law enforcement entities (e.g., municipal courts and police) are handled within the program as well. “Getting this initiative off the ground involved working with eProcessing Network to modify its online processing solution so it could take electronic payments over-the-counter in addition to those submitted via a website,” Morales explains. Nonetheless, the effort proved worthwhile: Clients in this vertical currently account for about 20 percent of Equity Payment’s merchant portfolio and 30 percent of its annual revenues; the ISO’s largest government client alone has an annual processing volume of $60 million.

Growth by Design Nurturing the business by taking deep dives into “alternative” verticals has not been without hiccups. Executing specialized software development to accommodate individual markets or merchants— occasionally at the last minute—is the biggest challenge. For example, halfway through boarding one government account and integrating its database with Equity Payment’s solution, Morales and his colleagues discovered a major problem.There was no way to move critical data from one of the client’s legacy systems to a newer

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system that was part of the project.To move the initiative forward and minimize the risk of future attrition, Equity Payment commissioned an independent-software expert to create a program to convert the data to the necessary format. To mitigate further technology-related challenges, Morales now keeps a technical development staff on retainer.“Still, when an ISO—or any other kind of startup, for that matter—is entirely self-financed, deciding whether or not to throw money into development is not always a clear-cut proposition,” he says. “The same is true of new markets. I’ve learned that you have to really look at an option being weighed and ask whether moving ahead will really get you to your goal—or if it’s just something to jump into for a little bit of added revenue.” Morales has also learned that there are times when turning away business is the best course of action. Not long ago, he was approached by a casino operator that wanted to sign on. In addition to payment processing capabilities, the merchant required a certain type of point-of-sale system the ISO would not be able to procure without negotiating red tape, if at all. While the idea of referring the prospect to a competitor that does sell the requisite technology wasn’t appealing, Morales did so anyway. “It killed me, but the alternative—trying to shoehorn that merchant into another type of system or signing them with a promise to deliver and then not coming through—would not have reflected well on us,” he says. Equity Payment also continues to steer clear of the high-risk mer-

chant segment.“We’re a low-risk processing ISO,” he says.The underwriting and risk analysis assessments inherent in handling such merchants would compromise service to other clients, he adds. However, future plans include tapping other vertical niches that carry a low risk and have yet to be penetrated by large numbers of ISO/MSP players.The ISO recently made its first foray into the B2B sector by forming strategic partnerships with three software providers. Two of these companies play in the charitable giving space; the third touts billing systems for local telephone companies. Equity Payment now facilitates payment processing for all three partners. “Business-to-business is our smallest niche now, but it could mushroom very quickly,” Morales says. “The nonprofit sector alone processes well over $1 billion in transactions each year, and there is a big piece of the pie for ISOs. One of the two charitable giving platforms brought us 400 merchant accounts at the outset.” While the recession limited Equity Payment’s growth in 2010 to 21 percent, the ISO is back on track and has surpassed goals that had been set for the first six months of the year. “We are looking to get to the $1 billion-per-year processing mark within seven years,” Morales says.“If we continue to do what we do well, I believe we will get there.” TT

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Julie Ritzer Ross is a contributing writer to Transaction Trends. Reach her at jritzerross@gmail.com.

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Special: ETA Annual Meeting & Expo Recap

Leaving Las Vegas Conference Photos By H.W. Edwards Company

Get Connected! Missed out on San Diego? Stay plugged into the conversation even when you can’t be there. Join ETA’s LinkedIn site and look for us on Facebook and Twitter.

24 June 2011 | Transaction trends

At the 2011 ETA Annual Meeting & Expo in San Diego, the industry turns its attention to mobile acceptance, government regulations

ith a new location and a host of revamped informational sessions and speakers, the 2011 ETA Annual Meeting & Expo left attendees excited and energized about the electronic payments industry. Many described San Diego as a “refreshing” change of pace that gave them more time for quality conversations with colleagues, vendors, and partners.“ETA was a fantastic opportunity to personally connect with current and potential customers while introducing our new products,” says Aman-

da Running, public relations manager for Security Metrics and first-time conference attendee. “At ETA, I felt very connected to the entire payment card industry universe.” With the economy picking up steam and technology developing at breakneck speed, collaboration and optimism among payments professionals is paramount. An informal Q&A session with Apple Inc. co-founder Steve Wozniak illustrated that point. His passion for technology and innovation inspired the standing-room only crowd to seize opportunities that others may not think of as important.

ETA Honors Its ‘Stars’ Each year, ETA takes an evening to recognize the people and companies whose dedication and exceptional contributions to the industry add value to ETA and the entire electronic payments community. The President’s Dinner, held during the Annual Meeting & Expo, provides an opportunity to showcase examples of what the industry can accomplish, said ETA President Rick Plyant. The 2011 ETA Star and Industry Award winners are: Business Partner of the Year: First Data Corp., for its support of ETA and its participation in multiple ETA committees and programs “Over and over in technology, the things that get invented and that we recognize as being an important part of our lives weren’t the original intent,” he points out.“We didn’t design the Internet to be a brain… all we wanted to do was connect computers and see what would come of it. But people started sharing information, and we designed search engines to find information, and it turned out to be a large part of what the brain does.” His advice for achieving great success? “Know what your passion is, and put some fun into it.A lot of people work only to get results…but happiness is key.”

Mobile, Mobile, Mobile Mobile certainly captured a large share of the attention around the conference.A visit to the new Technology Pavilion or a quick walk down any of the exhibition floor aisles, and it was easy to see how far the technology has advanced in only a year, particularly among smartphone-acceptance devices and marketing applications. Many suppliers in this area showcased solutions that will pave the way for merchant adoption by enticing consumers with loyalty and couponing programs delivered directly to their phones or mobile devices. One company, Sparkbase Inc., took home the ETA Technology Innovation Award for its Paycloud Mobile Wallet.This smartphone

enabled application allows consumers to find participating merchants, instantly join their loyalty programs, receive coupons and promotions, and earn rewards.The wallet integrates with merchants’ existing credit card terminals. ProPay’s Zumogo payment solution received an overwhelming majority of votes from the attendees at the ETA Technology Committee’s Technology Showcase Challenge, in which tech companies demonstrate their products and services to a live audience. “This event used to be called ‘Technologies of the Future,’” says Scott Goldwaite, Technology Showcase chairman and senior vice president of product management and marketing for Planet Payment.“But this year, we deliberately focused the event on technologies that are here now and that attendees and members could take home and deploy. Given those parameters, I was really impressed with the level of innovations demonstrated by the participants.” The Showcase included six merchant settings within a hotel where participants demonstrated their payment solutions at a front desk, spa, gift shop, patio restaurant, poolside location, and a golf course. Each company demonstrated a plausible merchantconsumer interaction. “As an industry, we tend to be singular, vertical,” says Timothy Dunn, vice president of

Member of the Year: Greg Cohen, president of Moneris Solutions, for his work on developing and overseeing ETA’s Investment Community Forum, among other activities. Committee of the Year: Government Relations Committee, for its work to raise awareness of government affairs and build a grassroots lobbying effort, as well as its work on legislative and regulatory issues Committee Volunteer of the Year: Deana Rich, Rich Consulting, for her work on the Risk and Fraud Committee ISO of the Year: Payment Alliance International, for its professionalism, integrity, and commitment to its customers, employees, and the payments industry Distinguished Payments Professional: Debra Rossi, executive vice president of Wells Fargo Merchant Solutions, for her leadership, innovation, integrity, and commitment to the industry

Transaction trends | June 2011 25

Special: ETA Annual Meeting & Expo Recap

agent bank business development for Fifth Third Processing Solutions. “But this was a payments application experience with synergies of story. Attendees experienced a continuity of all the things in a transaction process that the consumer sees.”

The Dreaded ‘D’ Word Legislation and regulation comprised another large focus of this year’s events. With so much uncertainty at the federal level, several key Capitol Hill experts shared their views of the impact of government regulatory activities on the payments industry. Headlining that discussion was a keynote

speech by former U.S. Senator Christopher Dodd, co-author of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which includes the Durbin Amendment. When Dodd recounted the law’s creation, he explained how dire the economic situation was in 2008.“People are forgetting how close we came to deep financial disaster in this country,” he explains.“Confidence that the system is fair and just—a hallmark of any successful financial structure—has been shattered.” Regarding interchange specifically, Dodd predicted that the proposed 12-cent cap on

debit transactions would be raised, but the so-called Tester bill, which would push back the effective date of the regulation by two years, would not pass. He also expected that Durbin’s exemption of financial institutions with fewer than $10 billion in assets will be changed because it further complicates already complex matters. In his plenary session, George Mason University Professor Todd Zywicki tackled the unintended consequences of interchange regulation. He cited precedence in Australia where merchants did not pass savings on to consumers, and financial institutions assessed new fees and eliminated rewards programs to recoup lost revenues. “In the United States, we’re already seeing this in anticipation of the Durbin Amendment. …Different numbers are being tried, but maybe $9 to $12 per month will be the new fees that will be imposed. Because a lot of consumers will be unable or unwilling to pay those fees, it’s estimated that it will drive about one million people out of the mainstream banking system.” One speaker, however, did provide a slightly positive spin on the situation.Todd Ablowitz, president of Double Diamond Group, told the audience at his talk in the Mobile Pavilion that lower interchange might help the proliferation of mobile payments.“If merchants don’t have to pay a lot, why not try it?” TT

CPP Program Strikes Chord with Payments Professionals Arguably the biggest news to come out of the 2011 Annual Meeting was the industry’s response to ETA’s new Certified Payments Professional program. Six leading payments companies publically supported and agreed to participate in the initiative, which officially launched in February. “The response to announcement of the CPP program was overwhelmingly positive,” says Rori Ferensic, ETA’s director

of education and professional development. “The consensus is that this much-needed, longanticipated program will raise the bar for payments professionals and bring greater credibility and integrity to whole the industry.” Representatives of MasterCard Worldwide, Visa Inc., First Data Corp., National Processing Company/Fifth Third Processing, COCARD Marketing Group, and Merchant Warehouse appeared on stage with ETA CEO

26 June 2011 | Transaction trends

Carla Balakgie during the meet to announce their commitment to the program, which is the industry’s first professional certification program. It focuses on the knowledge and skills required for those involved in the sales and distribution of electronic payments-related products and services to merchants and businesses. “This is a very credible program, and I think this is going to be a great way for merchants

to distinguish who the good payment companies are and who the good ISOs are. And for us, it’s going to be another way that we can differentiate ourselves from the competition,” says Henry Helgeson, CEO, Merchant Warehouse. “On the other side, in the hiring process, I think this is going to allow us to spot good payments professionals. And, I think our failure rate on new hires is going to go down, too.”

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ISO Corner DATA SECURITY

Forget the Tinfoil

Are contactless credit cards safe from electronic pickpockets, or should consumers shield them from rogue readers? By Bryan Ochalla

ate last year, mainstream media outlets across the country alerted their audiences to what they considered to be an imminent threat on consumers’ purses and wallets. According to the reports, millions of consumers are and will continue to be at risk of falling victim to so-called electronic pickpockets as long as they carry— and fail to adequately shield or protect— “contactless” credit cards like the ones offered by American Express (expresspay), Discover (Zip), MasterCard (PayPass), and Visa (payWave). How, exactly, are consumers at risk? According to the single source that was included in most, if not all, of the media stories, thieves carrying off-the-shelf RFID scanners can easily steal credit card information.That media source was the owner of a company selling foil sleeves that are supposed to protect consumers from such attacks. Had reporters interviewed, or at least requested information from, say, any of the major card brands, their stories would have been quite a bit less alarming. The same would have been true if they had included any experts from the payments industry. “I really think this is about a company that wants to promote its protection technology by creating an air of fear among consumers,” says Randy Vanderhoof, executive director of the Princeton Junction, New Jersey-based Smart Card Alliance. “People who understand the payments industry know there’s nothing to this story. The average guy on the street, though, who sees this kind of story is going to think he’s at risk, and that’s unfortunate.”

But It Could Happen It is possible that thieves wielding RFID scanners could steal some data from unsuspecting consumers’ contactless credit cards, but they wouldn’t be able to do much, if anything, with it, says Vanderhoof. 28 June 2011 | Transaction trends

“I really think this is about a company that wants to promote its protection technology by creating an air of fear among consumers.” —Randy Vanderhoof, Smart Card Alliance “Technically, there’s nothing to prevent the account number and expiration date that’s stored on a contactless chip to be read by one of these rogue reader devices.” That said, you need more than an account number and an expiration date to steal someone’s credit card information and use it. “The threat of electronic pickpocketing is small today because much of the relevant data—such as PIN and CVV—is not communicated via the RFID,” agrees Julie McNelley, a senior analyst at the Aite Group in Boston. So if electronic pickpockets really are roaming crowded airports and malls and using modified RFID scanners to steal information from consumers’ contactless credit cards,“they’re probably not getting enough information to be useful.” Still, others aren’t so sure. The act of stealing data from a contactless credit card is “quite easy,” says Rob Havelt, director of penetration testing at Chicago-based Trustwave, a provider of on-demand data

security and payment card industry compliance management solutions. “We’ve actually built devices about the size of an iPhone that you can use from about a foot away to read data off the chip.” You don’t need much experience to create such a device, he adds.“All you have to do is obtain the parts.After that, you can plug it into an iPhone or iPad, open up the [iPhone’s or iPad’s] notepad, and get to work. I would find it hard to believe this isn’t happening on a normal basis because it’s just so easy.” Such an approach doesn’t allow an electronic pickpocket to acquire all of the information needed to complete all transactions, but it does let them get enough data to complete some transactions, he says.“How many places really require you to give them the CVV in order to use your card?”

No Losses Identified It’s hard to say whether or not the kind of

ISO Corner DATA SECURITY electronic pickpocketing highlighted in the news reports late last year is actually happening. “There are no losses that can be directly tied to this technology,” according to McNelley. “We checked with the brands, we checked with the issuers, we checked with the Identity Theft Resource Center, we even contacted the U.S. Secret Service, which is responsible for consumer fraud,” says Vanderhoof. “ All of them said that they have heard no complaints or they have had no reports of this type of fraud happening to anyone. So, if it has happened, or if it is happening out there, no one is aware of it.” Of course, catching an electronic pickpocket in the act likely is the only way to track this kind of fraud. “Today, points of compromise via typical skimming devices or data breaches can be traced back to a common point of purchase at a merchant, or a common point of compromise such as a payment processor,” says McNelley. “There would be no such trail in the case of electronic pickpocketing, as there is no purchase event that triggers the compromise.” Vanderhoof feels fairly certain that “the

thieves who would actually profit from stealing credit card information aren’t using this approach.” Those who are “really intent on getting this information are probably doing other things like swiping information off the mag stripe or stealing physical cards—where there are no protections to prevent that type of fraud.The protections that are on the [contactless card] chip, and are related to how the chip is used, are sufficient to prevent this type of fraud from happening.”

Leapfrogging EMV to NFC Exploring alternate payment methods sounds like a good idea to McNelley, especially since, she says,“from a contactless card perspective, consumer and merchant adoption has been so slow that I don’t think that it is worth spending a lot of cycles.” In McNelley’s opinion, the lack of consumer and especially merchant interest in current contactless credit card technology likely stems from the fact that: 1) it requires capital expenditures on the part of merchants, and 2) there’s no real incentive for consumers to change their behavior—the current swipe methodology is something we

are very comfortable with, and contactless provides no material benefits from a consumer perspective. “There is a lot of speculation over whether payment card security will evolve in the U.S. market since we are one of the last major markets to be on mag stripe,” she adds.“It is possible that we will leapfrog EMV entirely and go to NFC. Similar to contactless, adoption of NFC will depend on the incentive for merchants to upgrade POS technology and the creation of appropriate incentives for consumers to change their behavior at POS.” What advice does Havelt have for contactless card issuers? “That’s a very tough question because the answer to it involves looking at this whole, giant system that we’ve built for credit card transactions in this country and basically telling [the card brands and issuers], ‘You’re doing it wrong. Rebuild it from the ground up.’ Maybe, though, it’s time to explore alternate methods, like chip and PIN, which will more adequately protect someone’s card information.” TT Bryan Ochalla is a contributing writer to Transaction Trends. Reach him at bochalla@yahoo.com.

SAVE THE DATES

ETA’s Strategic Leadership Forum October 25-27, 2011 Chicago Palmer House

THE FUTURE OF PAYMENTS, TODAY! 30 June 2011 | Transaction trends

ETA 2010-2011 BOARD OF DIRECTORS OFFICERS PRESIDENT Rick Pylant Chairman & President COCARD Marketing Group LLC PRESIDENT-ELECT Eddie Myers President & COO Payment Processing Inc. TREASURER Roy Banks CEO ACCELERATED Payment Technologies Inc.

Gary Goodrich CEO ProPay Inc.

Mike Passilla President & CEO Elavon

Robert McCullen CEO Trustwave

Jeffrey Sloan President Global Payments Inc.

Diana Mehochko President TSYS Merchant Solutions

EX-OFFICIO Carla Balakgie CEO Electronic Transactions Association

Jeff Rosenblatt President EVO Merchant Services

SECRETARY Tom A. Wimsett Chairman & CEO J&T Ventures

Debra Rossi Executive Vice President Merchant Payment Solutions Wells Fargo Bank

IMMEDIATE PAST-PRESIDENT Holli Targan Partner Jaffe, Raitt, Heuer & Weiss P.C.

Kurt Strawhecker Managing Director The Strawhecker Group ADVISORY COUNCIL Tom Bell CEO Bank of America Merchant Services

DIRECTORS Todd Ablowitz President Double Diamond Group

Jan Estep President & CEO NACHA Sameer Govil Head of Acceptance Solutions Global Aceptance Visa Inc. Steve Carnevale Senior Vice President/Group Head Commerce Development MasterCard Worldwide Ron Shultz Vice President American Express Gerry Wagner Vice President Discover Financial Services

Donald Boeding President—Merchant Services Fifth Third Processing Solutions

Robert Baldwin President & CFO Heartland Payment Systems Inc.

Chuck Harris President NetSpend

Gregory Cohen President Moneris Solutions Kim Fitzsimmons Senior Vice President—First Data Services First Data Corporation

LEGAL COUNSEL Dave Goch Attorney at Law Webster, Chamberlain & Bean

Chris Hylen General Manager & Vice President Intuit

Advertisers index Company Authorize.Net

Page Phone C2 866-437-0491

Web www.authorize.net

CSS LivePOS

866-343-7185 Ext. 7019

www.LivePOS.com

Discover Network

224-405-0900

www.discovernetwork.com

Elavon

7 678-731-5236

www.elavon.com

Electronic Merchant Systems

800-726-2117

www.emscorporate.com

Electronic Payments, Inc.

800-996-5520

www.electronicpayments.com

EVO Merchant Services

800-227-3794

www.goevo.com

Hypercom Corporation

480-642-5044

www.hypercom.com

NPC

23 877-453-5933

Planet Payment

www.npc.net

516-670-3200

www.planetpayment.com

888-84-TOTAL x9411

www.upfrontandresiduals.com

Total Merchant Services, Inc

TSYS

C3 706-644-4422

www.tsys.com

USA ePay

www.usaepay.com

866-872-3729

Transaction trends | June 2011 31

Industry Insider

No Martial Arts Needed For AppNinjas, customer service helps defeat the mobile merchant competition By Bryan Ochalla

ith a curious name and a top seat among “credit card terminal” sellers in the iPhone App Store, Dublin, Ohio-based AppNinjas’ Swipe product is resonating with iPhone-wielding merchants. The 99-cent app allows merchants to transform their smartphones into credit card terminals and accept credit card payments anytime, anywhere. Included with every new merchant account is a credit card swiper, which can be attached to the bottom of any iPhone, making accepting those onthe-go payments even easier.

Targeting Finance Beyond focusing on mobile merchants, AppNinjas’ executives also are interested in financial institutions and ISOs—especially those that would like to see their own credit card terminals in the iPhone App Store. The company regularly assists app-starved financial institutions and ISOs by allowing them to brand onto a white-label version of the company’s Swipe product. —John Waldron “We do it every day,” says John Waldron, who currently serves as CEO of AppNinjas as well as of Merchant Focus Processing (which teamed up with Seattlebased Inner Fence to acquire AppNinjas last summer).“We white-label the product, and then we launch it in the App Store under the financial institution’s or the ISO’s brand. After that, we manage the PCI compliance, updates, and the hardware certification and distribution.” The Swipe terminal is an attractive option for financial institutions, ISOs, and mobile merchants because it supports all major credit cards and gateways and offers full SSL encryption and keychain password protection. In addition, Swipe also offers full Address Verification System support (with ZIP, street, and CVV fraud detection), touch-screenenabled signature authentication, and email receipts. Waldron points to a few behind-the-scenes reasons for AppNinjas’ success, too.

“If you look at [some of the competition], there’s no toll-free number on their website, there’s no ability to talk to a real person.”

32 June 2011 | Transaction trends

“Before we acquired AppNinjas, the gentlemen who ran the company basically outsourced and sold leads to whichever merchant account processor would be willing to pay them the most money,” he says. Shortly after Waldron and his colleagues at Merchant Focus (and Inner Fence) acquired the company, they brought all of those merchant account leads in house.“So, instead of being in the business of selling off leads, which doesn’t provide the best level of service to the merchant,” he adds, “we now provide a beginning-to-end experience to the merchants that sign up with us directly.”

App Support It all starts when a prospective client creates a new account on AppNinjas’ website.“As soon as you start to fill in information, we assign you an application support rep—and that support rep helps you and stays with you from the beginning to the end of the process,” Waldron explains. Specifically, the company’s support reps can help merchants fill out their applications, get them through the underwriting process, ensure their terminals are up and running, and walk them through their first successful transaction. Waldron also considers AppNinjas’ focus on customer service to be a key differentiator between his company and its main competitors. “If you look at [some of the competition], there’s no toll-free number on their website, there’s no ability to talk to a real person,” Waldron says. There are times, however, when clients need that access, such as when they need to discuss liabilities or disputes. He says that he believes AppNinjas’“front-to-back customer-service assignment” will help separate the company and its product from the mobile payments pack in the future. “At the end of the day, we believe that the things we’re doing and the approach we’re taking will help us stand out from the crowd.” TT Bryan Ochalla is a contributing writer to Transaction Trends. Reach him at bochalla@yahoo.com.

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