How the recession is making the problem of merchant attrition more

Transcription

VOLUME SIX, NUMBER FOUR • DIGITAL TRANSACTIONS.NET • APRIL 2009
When
Merchants
Vanish
How the recession is making the problem
of merchant attrition more acute,
and what acquirers are doing about it.
ALSO IN THIS ISSUE:
The Networks’ New Fee Fest
Managing Interchange
Reloads Reloaded
Get Ready for Consumer Capture
2005 | 2006 |2007
Complete and affordable POS solutions
custom designed for retail and
hospitality merchants.
In the current economic climate, merchants are looking for ways to save money. By offering Harbortouch, you
can offer your merchants the opportunity to cut costs and operate more efficiently. Earn unparalleled
commissions and revitalize your leasing revenue while providing your merchants with a complete and
affordable POS solution.
ONSITE INSTALLATION AND ONSITE MERCHANT TRAINING
24 hour customer service and technical support
Retail and hospitality software customization
Remote support and offsite database backup
LOWEST PRICING IN THE INDUSTRY FOR THE HIGHEST QUALITY POS SYSTEM
Sell below the competition's cost and still earn impressive commissions
GUARANTEED LEASING PROGRAM
Revitalize your revenues from equipment leases which represent approximately 70% of all deals
DESIGNED FOR DURABILITY
Unlike standard PCs, which last 2-3 years, the average lifespan of a Harbortouch POS System is 7-9 years
THE ULTIMATE MERCHANT RETENTION OPPORTUNITY
Reduce account attrition by integrating a business management solution at your merchant locations
Contact Harbortouch POS today and take advantage of the most advanced and lucrative sales opportunity in the
payments industry!
To learn more about Harbortouch POS, contact:
Brian Jones, EVP Sales and Marketing: 800-201-0461 x 136
Jonathan Brandon, National Sales Manager East: 800-201-0461 x 145
Maxwell Sinovoi, National Sales Manager West: 800-201-0461 x 219
www.isoprogram.com
UBC1251_03122009
D
I
G
I
T
A
L
T
R
A
N
S
A
C
T
I
O
N
S
.
N
E
T
C O N T E N TS
April 2009 ■ Volume 6, Number 4
40 When Merchants Vanish
In the wake of the worst economic
recession since the early 1980s
business failures are giving merchant
acquirers headaches. How bad is
attrition and how can processors
minimize the damage?
6 The Gimlet Eye
“The numberone cause
[of attrition]
seems to be
merchant death,
merchants
going out of
business.”
page 40
Don’t Wait for Chargebacks To Hit
8 Trends & Tactics
How New Fees Could Pump
up Visa And MasterCard; Tests
for Online PIN Debit; Is Google
Checkout on Its Way out?
Plus, Security Notes advises how to
protect data from internal threats,
including disgruntled employees, and
the Web Transaction Performance
Indexes spotlight winners and losers
among the leading credit card and
online-banking sites.
18 Acquiring
The Changing Face
of Card Pricing
Competition and merchant frustrations
with how to pay for payment services
are forcing processors to look at new
pricing schemes.
23 Acquiring
Becoming a Master of the
Interchange Universe
The deepening recession has
merchants scrambling to find ways
to reduce card-acceptance costs, but
doing so requires an activist approach.
30 Strategies
Prepaid Plastic:
The Latest Consumer Spiff
Companies are increasingly using
prepaid cards for consumer
incentives, replacing checks and
promotional merchandise. Advantages
include lower costs and stronger
customer satisfaction, but watch out:
the cards don’t always make sense.
34 Networks
54 Components
A Meat-And-Potatoes Focus
for Terminals
Enhanced data security and POS
solutions that can be integrated with
back-office applications may not be
glitzy technology, but that’s what
merchants want in these hard times.
58 Networks
A Captivating Deposit Solution?
Financial institutions looking to
reduce costs while expanding their
reach are weighing whether now is
the right time to aggressively push
into remote deposit capture for
consumers.
63 Security
Can Image-Survivable Security
Technology Survive?
Without the right controls, imaging
can exacerbate check fraud. Some say
special security features that survive
the imaging process are the answer,
but questions abound about cost and
implementation hassles.
66 Strategies
How To Look for the
Next Big Thing
Despite economic turmoil, lots of
innovation is happening in electronic
payments. The real issue is picking
the winners. For that, keep your
eye on data, cloud computing, and
mobile technology—and a mashup of
all three.
71 Endpoint
Should the Federal Reserve
Stay in the Check Processing
Business?
The answer is unequivocally yes, says
David Peterson, who points to the
leadership the Fed has provided to
shape and develop Check 21 and
other electronic initiatives.
Cover photo/design:
istockphoto/Jason Smith
Prepaid’s Blue-Sky Promise
The recession may actually be helping
prepaid card reload networks as
consumers’ credit availability shrinks.
A failed acquisition deal, however,
could show that the market doesn’t
yet know how to value reload
companies.
Digital Transactions (USPS 024-247) is published monthly by Boland Hill Media LLC, 3 Golf Center, Suite 314,
Hoffman Estates, IL, 60169. Periodicals Postage Paid at Schaumburg, IL, and at additional mailing offices.
POSTMASTER: Send address changes to Digital Transactions, P.O. Box 3553, Northbrook, IL 60065-3553.
VISIT US
AT ETA
BOOTH #647
Presenting CERTEGY STRATEGIC PARTNER SALES
SERVICES THAT FITANY
BUSINESS+BUDGET
CERTEGY DELIVERS THE TOOLS THAT HELP YOUR BUSINESS CONNECT WITH CUSTOMERS
For over 45 years, Certegy has been a trusted leader in advanced payment services and loss prevention tools
supporting more than 360,000 merchant locations worldwide. And now, we are pleased to present
comprehensive partnership programs tailored specifically for your Agents and ISO’s to enhance and grow your
merchant portfolio. Certegy offers leading edge products while presenting premium revenue share programs,
centralized training and support with easy online boarding tools—all backed by proven technology and
financial expertise. Most importantly, we bring security and reliability to payment processing, fraud prevention
and risk management—valuable commodities for an ever-changing market.
ELECTRONIC CHECK CONVERSION + COLLECTION/RECOVERY SERVICES + eCOMMERCE + PAYROLL CHECK CASHING + STRATEGIC PARTNER SALES
TOLL-FREE
EMAIL
ONLINE
ADDRESS
1-800-215-6280 ext. 71501
[email protected]
fidelityinfoservices.com
> click check services
11601 Roosevelt Blvd. (TA-06)
St. Petersburg, FL 33716
THE GIMLET EYE
APRIL 2009 • VOL. 6, NO. 4
PUBLISHER
Robert A. Jenisch
Don’t Wait for
Chargebacks To Hit
A
s 2009 settles into its second quarter, the U.S. economy remains mired in
the worst recession since the early 1980s and offers few reasons to be optimistic about a full-throated recovery any time soon. That, most experts
will say, means more fraud is likely as consumers lose jobs and income, pushing
some to rely on illegal means.
What to do? Merchants pay a premium for online card transactions because
these payments are considered riskier than face-to-face commerce, and indeed the
allure of (apparent) anonymity is likely to draw much fraud to the online channel. It may be doing so already. Web merchants lost $4 billion to payment fraud in
2008, up from $3.7 billion the year before, according to research by CyberSource
Corp., a Mountain View, Calif.-based vendor of risk-management and paymentgateway services. Because of steadily climbing sales volume, fraud as a fraction
of volume remained constant at 1.4%.
But that doesn’t mean e-commerce merchants must helplessly sit by while
criminals wreak havoc on their P&L statements. One strategy is to anticipate fraud
before it comes home to roost in the form of chargebacks. That’s what Apple Inc.,
whose online store sells high-end merchandise ranging from personal computers
to iPod music players, does, apparently with a good deal of success. “Fifty-one
percent of chargebacks that come in we already know about,” Dave Moriarty,
director of data mining for Cupertino, Calif.-based Apple, told his audience at
the Merchant Risk Council meeting in Las Vegas last month. “Twenty percent we
know about in the first week after the order.”
How does Apple know about fraud so soon? Chiefly, by paying close attention to a couple of key indicators: canceled fraud and what Moriarty calls shipped
fraud. Moriarty advises merchants to track the rate at which risk managers are
canceling orders because of known fraud. “Canceled fraud is very correlated to
chargebacks,” he said at the conference. “If you canceled a lot of fraud orders
you’re probably going to have a lot of chargebacks. When it’s high, be worried.”
An even better indicator, he told his audience, is the rate of what he calls “shipped
fraud,” or the number of orders shipped that risk managers soon determine were
fraudulent. Fraud agents can establish shipped fraud when they spot a suspicious
pattern that fits known fraud activity or when cardholders call Apple to ask about a
charge on their accounts before filing a chargeback request with their issuers.
Apple’s advice in a nutshell: Don’t wait for chargebacks. They are, as Moriarty
said, a “poor metric” by which to find and plug the holes through which fraudsters
are crawling into your systems.
John Stewart, Editor-in-Chief
[email protected]
6
• digitaltransactions • April 2009
EDITOR-IN-CHIEF
John Stewart
Senior Editor
Jim Daly
Correspondents
Jane Adler
Lauri Giesen
Karen Epper Hoffman
Peter Lucas
Linda Punch
Art Director/Production Editor
Jason Smith
Editorial Advisory Board
Eula L. Adams
John Elliott
Alex W. “Pete” Hart
Former Chief Executive Officer,
MasterCard International
William F. Keenan
President, De Novo Corp.
Dr. Gideon Samid
Chief Technology Officer,
AGS Encryptions Ltd.
Director of Advertising
Robert A. Jenisch, 877-658-0418
[email protected]
Advertising Sales Representatives
Robert Mitchell, 877-658-0418
[email protected]
Cathy Woods, 602-863-2212
[email protected]
Digital Transactions, Digital Transactions News,
and digitaltransactions.net are publications of
Boland Hill Media LLC, 3 Golf Center, Ste. 314,
Hoffman Estates, IL 60169
John Stewart, Managing Director
Robert A. Jenisch, Managing Director
For advertising information, call 877-658-0418.
To subscribe, go to www.digitaltransactions.net
and click on “Subscribe” or call 847-559-7599.
To give us a change of address, call 847-559-7599.
The views expressed in this publication are not
necessarily those of the editors or of the members
of the Editorial Advisory Board. The publisher
makes reasonable efforts to ensure the timeliness
and accuracy of its content, but is not engaged in
any way in offering professional services related
to financial, legal, accounting, tax, or other matters. Readers should seek professional counsel regarding such matters. All content herein is copyright © 2009 Boland Hill Media LLC. No part
may be reproduced without the express written
permission of the publisher. Subscription prices: $59/year for subscribers in the United States;
$69/year for Canadian subscribers. All other subscribers, $119/year, payable in U.S. currency.
TRENDS & TACTICS
The Pricing Spotlight Shifts to Fees
On the surface, the spring pricing
news from Visa and MasterCard
looks pretty good for merchants: no
increases in consumer card interchange from MasterCard Inc. and
decreases of about 2.5% in some
credit card transaction categories
from Visa Inc.
But it’s a different story with new
authorization and related fees, which
in a couple of cases will be more than
triple the fees they replace and could
generate more than $600 million in
new revenues for the card networks.
Seven of the 11 Visa consumer
credit card interchange rates that will
change are going down by about
2.5%, according to a pricing schedule obtained by Digital Transactions
(chart). There will be increases of
varying sizes in four categories that
apply to some Visa rewards cards.
But for merchants, Visa’s decreases
in non-rewards credit cards are less
than meets the eye because there are
fewer such cards in consumers’ wallets. Bank card issuers are pumping
out more rewards cards because they
garner higher interchange than plainvanilla credit cards.
A Mercator Advisory Group Inc.
researcher estimated last year that
8
more than 400 million, or 40% to
45% of the U.S. credit cards in circulation, are now airline cobranded
cards or other rewards cards that give
cardholders miles, points, cash, or
other perks for purchases.
Interchange is a fee set by Visa
and MasterCard that is charged to
the merchant acquirer and paid to the
issuer of the card used in a transaction. Acquirers typically pass on the
entire cost to the merchant clients, and
it can easily account for two-thirds or
more of a merchant’s discount rate.
An acquiring executive who insisted
Visa 2009 Interchange Changes
Category
Old Rate
Old Rate
New Rate
Cost*
New
Rate
Cost* Change
CPS/Hotel &
Car Rental
1.58% + 10¢
1.54% + 10¢
$1.443
$1.409
-2.4%
CPS/E-commerce
Preferred Hotel &
Car Rental
1.58% + 10¢
1.54% + 10¢
$1.443
$1.409
-2.4%
CPS/Passenger
Transport
1.75% + 10¢
1.70% + 10¢
$1.588
$1.545
-2.7%
CPS/E-commerce
Preferred Passenger
Transport
1.75% + 10¢
1.70% + 10¢
$1.588
$1.545
-2.7%
CPS/Card Not Present 1.85% + 10¢
1.80% + 10¢
$1.673
$1.630
-2.5%
CPS/E-Commerce
Basic
1.85% + 10¢
1.80% + 10¢
$1.673
$1.630
-2.5%
CPS/Retail Key Entry
1.85% + 10¢
1.80% + 10¢
$1.673
$1.630
-2.5%
CPS Rewards 2
1.90% + 10¢
1.95% + 10¢
$1.715
$1.758
2.5%
Visa Signature
Preferred Card
Not Present
2.30% + 10¢
2.40% + 10¢
$2.055
$2.140
4.1%
Visa Signature
Preferred Electronic
2.30% + 10¢
2.40% + 10¢
$2.055
$2.140
4.1%
Visa Signature
Preferred Standard
2.70% + 10¢
2.95% + 10¢
$2.395
$2.608
8.9%
Interlink Retail
0.75% + 15¢
0.75% + 17¢
45¢
47¢
4.4%
*Based on $85 credit card sale or $40 Interlink PIN-debit sale.
Source: Digital Transactions
on anonymity said Visa’s decreases
“look charitable, but the number of
rewards cards keeps going up.”
But the big news comes from
some of the obscure, non-interchange
fees the networks charge—fees that,
like interchange, processors usually
pass on to their merchants. On April
17, MasterCard will impose its new
“Network Access and Brand Usage
Fee,” or NABU. The 1.85-cent fee
technically is a settlement fee that
will replace a current half-cent fee
charged to acquirers, according to
the merchant-acquirer source. The
new fee thus is 3.7 times higher than
the fee it replaces.
When contacted by Digital Transactions, a MasterCard spokesperson
was unable to provide more information about the fee. MasterCard this
month also is adjusting about 40 commercial card interchange rates, some
up and some down.
Visa on July 1 will impose a 1.95cent authorization fee that it calls
the Acquirer Processing Fee. It also
replaces an existing half-cent fee.
There’s more from Visa. Acquirers that get an authorization but
don’t follow through with a settlement within a specified time frame
could be hit with a new, 4.5-cent
fee. According to the acquiring
source, Visa has two names for it: an
“unmatched authorization fee” or a
“misuse of the authorization fee.”
Authorizations without settlement
can indicate risk or other problems.
Criminals often test stolen or fraudulently created cards at unattended
locations such as gas pumps just to
see if the cards work, for instance.
But there are legitimate uses for
authorization without settlement, such
as a magazine publisher charging a
subscriber’s card just once a year but
doing small monthly authorizations
to make sure the subscriber’s card
account is good. Many merchants
don’t have the operational capability
to do a reversal within the permitted
time frames and thus are likely to get
hit with the fee, the source says.
Visa would not comment in detail
about its new rates and fees. “Visa Inc.
regularly reviews its pricing, as any
business would, and makes adjustments where appropriate depending
on such factors as the value delivered
to clients and the need to be competitive,” a Visa statement says.
Acquirers contacted by Digital
Transactions say neither card network
gave them reasons for the higher fees.
Left to guess, some executives believe
Visa and MasterCard are trying to
keep revenues up to please Wall Street
now that they are publicly held. “This
is the first time we’ve seen a move by
the new, public Visa and MasterCard
companies to be more profitable,”
says Henry Helgeson, president and
co-chief executive of Merchant Warehouse, a Boston-based independent
sales organization.
MasterCard’s existing half-cent
fee would have raised $68.6 million
in gross revenue in 2008 assuming it applied to all of MasterCard’s
13.7 billion U.S. credit and debit card
purchase transactions, Digital Transactions estimates. Applied to the same
volume, the coming NABU fee would
have raised $253.9 million, for a net
increase of $185.3 million.
Visa’s half-cent fee would have
raised $149.2 million had it been applied
to all of Visa’s 29.8 billion U.S. credit
and debit card purchase transactions in
Visa’s fiscal 2008 ended last Sept. 30.
The new Acquirer Authorization Fee
would have grossed $581.7 million
on the same transactions—on the
assumption that those authorized but
not settled are excluded—for a net
increase of $432.5 million.
Together, Visa and MasterCard
would have netted $617.8 million in
new revenues had the planned fees
been in place last year.
Tests for Online
PIN Debit
Consumers love using debit cards
with PINs at the point of sale. Last
year, they used this flavor of debit
for fully one-fifth of their in-store
transactions, according to research
by Hitachi Consulting and the Bank
Administration Institute. Signature
debit’s share? 17% (chart, page 10).
So would consumers be just as
happy to use PIN debit to buy things
on the Web? Would it be safe for
them to do so? Would Internet merchants be interested in accepting PIN
debit? It’s hard to answer these questions, since this payment method,
so popular in the physical world, is
AWOL in e-commerce.
But now the electronic-payments
business may start to get some
answers. There are at least four small
companies vying to enable PIN debit
transactions on the Web. One of them
started processing transactions last
year, while another in March started
an ambitious pilot involving the Accel/
Exchange electronic funds transfer
network and is seeking to draw more
networks into the test.
With Internet merchants grousing about acceptance costs for credit
cards and alternative payment methods gaining ground, some payments
executives argue the moment may
have arrived to at least try PIN debit
April 2009 • digitaltransactions •
9
TRENDS & TACTICS
online. “I think it’s going to be big,”
says Mike Strada, manager for debit
card product at Chase Paymentech
Solutions LLC.
Strada, who ran an EFT network
back in the ‘80s when PIN debit was
first moving to the point of sale, has
something of a stake in that opinion
proving out. For some time now, he’s
been trying to get EFT networks and
merchants to agree to try out PINbased debit for e-commerce. Now
he’s getting his chance.
issuers and processed its first transaction last month. NYCE has not yet
committed to a start date. Meanwhile,
two other processors, Elavon and
Merchant e-Solutions, have already
agreed to recruit merchants, the first
of which is ShoppersChoice.com, a
seller of grills, patio furniture, and
other products for the backyard.
Montreal-based HomeATM, which
markets a competing technology,
went live with its service in January
2008. Its biggest user is a reseller,
How PIN Debit Ranks
(Share of consumer transactions in stores, 2008)
4%
8%
29%
17%
20%
Cash
Credit Cards
PIN Debit
Signature
Debit
Checks
Gift/Prepaid
Cards
22%
Source: Hitachi Consulting/BAI
The nation’s largest processor
of e-commerce transactions, Dallasbased Chase Paymentech processes
for merchants that control more than
half of all U.S. transactions on the
Web. Strada says he expects to sign
between three and five sizable merchant clients for an online PIN debit
pilot that relies on technology from
Acculynk Inc., an Atlanta-based software company.
The pilot so far has won commitments from two EFT networks, AccelExchange and NYCE. A third network
was committed but unnamed as of midMarch. Accel/Exchange is signing
10
DebitWay Ltd., which processes for
Canadian online pharmacies. Ken
Mages, chairman and chief executive at HomeATM, plans to expand
the company’s service to both
e-commerce merchants and to users
of money-transfer services. “If we
get 500,000 customers on it, eBay
will take payment on it,” he says.
HomeATM is handling approximately $1 million a month in online
PIN debit transactions on an installed
base of 40,000 readers, says Mages,
up from 5,500 a little over a year ago.
The readers, PIN pad devices consumers hook up to their computers
via a USB link, let buyers do an actual
card swipe when they’re ready to
check out.
PIN debit may appeal to merchants because it’s typically priced
at lower rates than credit and signature-debit cards. “There is significant
interest [in online PIN debit] from
merchants we have talked to,” says
Chase Paymentech’s Strada.
Even so, there’s still considerable caution when it comes to putting PINs on the Internet. Strada says
Chase Paymentech is far from ready
to introduce a commercial service
for its client merchants. “All we’ll
commit to today is a pilot,” Strada
says. “This will be a controlled pilot.
Our number-one goal is to do a
proof of concept.”
Chase Paymentech is looking to
the pilot to demonstrate that consumers are willing to enter a PIN on a
Web-site checkout page. “I’ve not
seen a study that says, will you enter a
PIN on the Internet for a debit card, so
we just don’t know” if consumers will
adopt the payment type, Strada says.
Nor is the processor committed
exclusively to Acculynk’s technology,
which relies on a so-called floating
PIN pad rendered on the consumer’s
PC screen. With this system, consumers enter their PINs using mouse
clicks. Acculynk’s software forms an
encrypted PIN block for transmission
to acquirers. Strada says the company
is also considering online PIN debit
technology from three other companies, including HomeATM as well as
Verient Inc., San Jose, Calif., and a
startup called Claerity.
Verient relies on consumers’ onlinebanking programs to authenticate buyers, generating one-time transaction
codes consumers enter online. It has
contracted with the NYCE network for
a separate pilot. With Claerity, consumers enter their mobile-phone numbers
TRENDS & TACTICS
at checkout and receive an authenticating transaction code on their phones
via a text message.
Another issue involves security. The Acculynk solution lacks the
magnetic-stripe data normally captured in a PIN debit transaction at
the physical point of sale, including
discretionary-field data many issuers
consider crucial for security. “The networks aren’t bringing their entire card
bases in on day one,” notes Strada.
That would seem to favor
HomeATM’s solution, whose hardware does capture card swipes and
offers end-to-end encryption. But
some are skeptical that consumers
will hook up a peripheral to do transactions on a Web site. “The hardware
[solutions], those are DOA,” pronounces Dave Moriarty, director of
data mining at Apple Inc.
Is Google Checkout
on Its Way out?
As PayPal Inc. preps for more growth,
is Google Inc.’s Google Checkout
getting ready to check out? That’s
one assessment in the wake of recent
news about the prominent online
payment systems.
Executives from PayPal and its
parent company, San Jose, Calif.based eBay Inc., last month outlined
for analysts ambitious growth plans
calling for PayPal to double, or nearly
double, its 2008 payment volume and
revenues by 2011.
Meanwhile, search-engine giant
Google will change Google Checkout’s long-time standard pricing to
a volume-based tiered system for
private-sector merchants beginning
Simply grow your
sales to a new level
with:
May 5 (chart, page 13). The new rates
match the per-transaction rates for
some of PayPal’s major products but
effectively amount to a price increase
for all but the highest-volume Checkout merchants.
Google also will discontinue the
$10 worth of free processing Checkoutaccepting merchants get for every $1
they spent on Google’s keyword-based
advertising service called AdWords.
Mountain View, Calif.-based
Google wouldn’t make an executive available for an interview about
the changes. A spokesperson says by
e-mail that, “this decision reflects what
we believe is the natural next step for
Google Checkout, as we move from
our standard pricing to a more mature
pricing model. Our new, tiered-pricing
structure aligns incentives so that merchants get more benefit as more buyers
Simply Deposit™ your remote deposit solution
— specifically designed for small business. At
RDM we recognize the importance of partnering
with independent sales organizations, so we’re
offering the most competitive program with the
best value in the industry. RDM offers not only
industry leading products but a complete range of
services and support that will simply enhance your
bottom line.
Benefits of Simply Deposit
•
•
•
•
Simple customer sign up
Easy to use with little or no customer training
Online access to deposits and check images
No ACH requirements due to Image-only
processing
Why Choose RDM?
•
•
•
Technological expertise in Remote Deposit
Capture
Trusted brand name and partner
Full service provider
To Learn More Simply visit our website at
www.simplydeposit.com or call: (800) 562-6227 ext. 345
12
use Checkout on their sites. Merchants
will also continue to benefit from the
increased sales that Checkout delivers
by driving more traffic and generating
higher conversions.”
Google refuses to disclose the number of merchants accepting Checkout
or its volume. The spokesperson refers
to “millions of buyers” worldwide and
“hundreds of thousands of sellers” in
the U.S. and United Kingdom.
Bruce Cundiff, senior analyst at
Pleasanton, Calif.-based Javelin Strategy and Research, sees the changes as
the possible “first step in a phase out” of
Google Checkout. “It seems the product hasn’t lived up to expectations,” he
says. “They’re basically making it like
any other payment mechanism.”
In a statement on Google Checkout’s blog, however, product marketing
manager Anita Barci said Google “is
more leads and higher conversions.” Her posting ended
Old Rate
with an appeal to “stay tuned
2.2% + 20 cents
for more announcements
New Rates
about product enhancements
Monthly GC Sales
coming soon.”
< $3,000
2.9% + 30¢
PayPal, meanwhile, al$3,000 - $9,999.99
2.5% + 30¢
ready is the leader among
$10,000 - $99.999.99
2.2% + 30¢
the online payment alternatives. But eBay has even
$100,000 +
1.9% + 30¢
Source: Google Inc.
bigger things in store for
PayPal while it also at… and PayPal’s Volumes
tempts to reinvigorate its
(total payment volume in billions)
slow-growing auction busi2006
$36
ness. EBay expects PayPal
2007
$48
will become a second “core”
2008
$60
that’s bigger than eBay Mar2011*
$100-$120
ketplace, the company name
*Estimates.
Source: eBay Inc.
for its huge online-auctions
committed to the continued growth and
and fixed-price trading businesses.
development of Checkout and to helpPayPal payment volume was $60
ing merchants increase sales by driving
billion in 2008; company projections
Google Checkout’s Pricing …
Offer Remote Deposit
Capture and improve
revenue with your
card merchants
Introducing Synergy Deposit — the only allin-one payment terminal for both Remote
Deposit Capture (RDC) and debit/credit card
processing. Designed for merchants with limited
space, the small footprint Synergy Deposit terminal
is easy to deploy with no PC required offering cost
savings and improved efficiencies associated with
check, debit and credit card processing.
Benefits of Synergy Deposit
•
•
•
•
Supports RDC without all the hassle of ACH (Check
21) in addition to debit/credit card processing
Certified with many major credit and debit processors
Offers dual-sided imaging with built in IQA, duplicate
detection and MICR correction
Integrates seamlessly into RDM’s trusted and secure
ITMS suite of RDC applications
Why Choose RDM?
•
•
Technological expertise in Remote Deposit Capture
Trusted brand name and partner
To Learn More Simply visit our website at
www.rdmcorp.com/synergydeposit or call: (800) 562-6227 ext. 345
13
TRENDS & TACTICS
call for $100 billion to $120 billion
in 2011. In line with that, PayPal revenues should grow from $2.4 billion
last year to $4 billion to $5 billion
in 2011.
PayPal president Scott Thompson
expects the growth to come from eBay
transactions as well as from off-eBay
merchants, and also new areas such as
mobile and non-retail payments from
social networks, government, nonprofits, banks, and businesses with
specialized payment needs.
Revenue projections call for
compound annual growth rates for
2009-2011 in the low single digits
for PayPal’s on-eBay business, in
the 30% range for merchant services,
and in the 40% range for Bill Me
Later and so-called “adjacent payments.” EBay bought online transactional credit provider Bill Me Later
Inc. last year and placed it under
PayPal’s umbrella.
“Today, PayPal has more than
70 million active accounts and represents 9% of e-commerce globally,”
Thompson said in a blog posting about
the new plans. “And the best thing is
that we are just at the beginning.”
PayPal, however, is going to have
to get more business out of its current
customers rather than rely so heavily
on new accounts for growth as it has
in the past, Cundiff says.
“The growth is certainly going to
be dependent on expanding the breadth
and deepening the relationships with
existing PayPal account holders,” he
says. He adds that while e-commerce
is holding up better in the recession
than in-store retailing, asking consumers to spend more could be a tough job
for PayPal and anyone else looking to
grow retail transaction volumes. DT
Credit Card And E-Banking Web Transaction Indexes
Following are the Keynote Credit Card Web Transaction Performance
Index and the Keynote E-Banking Web Transaction Performance Index.
The Keynote Credit Card Web Transaction Performance Index measures the performance and availability of going to a selected credit
card site and logging in to conduct the appropriate intended actions
and checking in or signing out. All measurements are taken from the
10 largest U.S. metropolitan areas (Boston, Chicago, Dallas, Detroit,
Houston, Los Angeles, New York, Philadelphia, San Francisco, and
Washington, D.C.) on high-speed links attached to key points on the
largest U.S. Internet Service Protocol (ISP) backbones.
The Keynote E-Banking Web Transaction Performance Index shows
the total execution time and success rate for logging into an account
and checking the account balance on selected Internet banking sites.
The sites included in the index were selected based on publicly
available market-share information published in The Wall Street
Journal and other reliable industry sources.
Data for these indexes, supplied each week by Keynote Systems
Inc., San Mateo, Calif., reflect performance for the most recent
week available before the production deadline for this issue, as
well as rankings for the three previous weeks. Sites from these lists
may be removed from weekly published results due to insufficient
data points for a particular week. For other weeks the site was
removed, its ranking will be indicated as “DNR”—did not rank.
For more information on the methodology behind the indexes,
visit www.keynote.com. For more complete statistics for the
weeks indicated, go to www.digitaltransactions.net, click on “Web
Transaction Performance Indexes,” and click on the hyperlink for the
week you’re interested in at the bottom of the page.
Credit Card Web Transaction Performance Index
Week starting March 2, 2009
Rank by Speed (seconds)
Rank
1
2
3
4
5
6
7
8
9
10
Target
US Bank
Diners Club
Chase
Wells Fargo
Citibank
Credit Card Index
HSBC
American Express
National City
Discover Card
Bank of America
Response
Time (sec.)
6.73
6.79
7.41
8.43
11.32
11.79
12.26
14.57
16.67
17.27
17.31
Rank by Success Rate (percentage)
Rank week
of 2/23
2
1
3
4
6
Rank week
of 2/16
2
1
3
4
6
Rank week
of 2/9
2
1
3
4
6
DNR
7
9
10
8
DNR
7
10
11
9
DNR
9
11
12
10
Rank
1
2
2
4
4
6
7
8
9
10
Target
HSBC
National City
US Bank
Chase
Wells Fargo
Bank of America
American Express
Credit Card Index
Discover Card
Diners Club
Citibank
Success
Rate (%)
100
99.87
99.87
99.48
99.48
99.36
98.82
98.45
98.34
97.83
91.11
Outage
Hours
0
0
0
1
0
0
1
0
0
2
6
Rank week
of 2/23
DNR
5
1
7
4
9
8
Rank week
of 2/16
DNR
1
8
4
2
5
2
Rank week
of 2/9
DNR
4
3
7
1
1
10
6
2
10
6
11
7
8
6
9
Rank week
of 2/23
3
8
2
9
DNR
6
1
3
Rank week
of 2/16
5
8
1
4
DNR
5
2
3
Rank week
of 2/9
1
1
5
1
DNR
8
1
8
5
10
7
9
10
7
7
10
6
E-Banking Web Transaction Performance Index
Week starting March 2, 2009
Rank by Speed (seconds)
Rank
1
2
3
4
5
6
7
8
9
10
11
14
Target
Etrade
WAMU
Wachovia
US Bank
Chase
eBanking Index
PNC
Wells Fargo
Citizens Bank
CitiBank
Bank of America
National City
Response
Time (sec.)
3.97
5.65
6.39
6.6
7.33
7.65
7.65
8.44
10.33
11.45
11.77
15.88
Rank by Success Rate (percentage)
Rank week
of 2/23
1
2
3
4
5
Rank week
of 2/16
1
2
4
3
5
Rank week
of 2/9
1
2
3
4
5
6
7
8
DNR
9
10
6
7
8
DNR
9
10
6
7
8
DNR
9
10
Rank
1
1
1
4
4
4
7
8
9
10
11
Target
National City
PNC
WAMU
Bank of America
CitiBank
US Bank
Etrade
Wachovia
eBanking Index
Wells Fargo
Citizens Bank
Chase
Success
Rate (%)
100
100
100
99.87
99.87
99.87
99.75
99.74
99.68
99.35
99.11
98.85
Outage
Hours
0
0
0
0
0
0
0
0
0
0
1
0
TRENDS & TACTICS
Security Notes
Security Strategy for Recession-Racked Businesses
Gideon Samid • [email protected]
B
usinesses, only yesterday on the rise, are
downsizing to a fraction
of what they were. Others simply
are closing their doors for good.
So, in these days of chaos and
closings, who has his mind on
computer security? Yet now is
the time, more than ever, to be thinking about security.
Tomorrow will come, the economic seesaw will swing
back, and chances are the very same clients you served yesterday you will want to serve tomorrow. If you neglect to
safeguard the privacy of their records, you will never gain
their trust again. On the contrary, you will likely face a barrage of lawsuits, which will only make cost management
even more complicated than it already is. Even if your business goes under, most jurisdictions have strong personalresponsibility laws, making you liable in cases of gross
negligence that allowed an unprincipled worker to steal and
abuse corporate data.
Your customers’ data, records, and behavior are a solid
asset that is worth money, and it ages slowly. If you do close up
shop, make sure you keep a copy and at least one backup.
The critical case is when you downsize stepwise,
expecting to bounce back in the not-too-distant future.
Employees are stressed out wondering whether they will
have a job tomorrow. Some may help themselves to copies of your clients’ records and anything else they can lay
a hand on. It’s very tempting because just to keep data at
home is not a crime. Many people rationalize it this way:
“I can always discard the data and no one will ever know.
But if I don’t grab it now, it will be too late tomorrow.”
Others, angry at the prospect of losing a steady paycheck,
have revenge on their minds. Meanwhile, you may be too
busy keeping the business afloat to worry about building a
fence around your data treasures.
In this case, an outside security consultant might make
sense. You can task him with preventing abuse related to
downsizing. With no employment history at your firm,
the new consultant will have no qualms rewriting access
restrictions for the remaining employees, creating backup
16
media and putting them out of reach of saboteurs, and
talking to your people about the need to be stricter than
before about security. Another critical advantage: The outsider will also be able to set up new ciphersystems and
new cryptographic keys. The old ones are likely to be too
much of a temptation to people who may want to strike
back at you.
You may have an indication that confidential information is leaking, but the range of possible culprits is too large
to pinpoint the one who is stealing the data. In that case, we
recommend a procedure of letting the team finger the suspects without fouling the atmosphere. Ask everyone to point
out whom they trust the most. You can work out the choices
mathematically to flush out the one who is least trusted, and
therefore most suspected. You’ll find detailed procedures for
this in my book, The Unending Cyberwar.
Downsizing by slashing paychecks to all, while keeping everyone on board, is a strategy that is also helpful
in preventing data abuse by disgruntled employees. If
you must lay people off, consider having the surviving
employees sign off on a pledge of data integrity. Some
shops in our experience have done this, and it has been
known to have a chilling effect on half-hearted, would-be
data thieves. Of course, a reasonable prospect of the business bouncing back is the best antidote against revenge or
anger-motivated data abuse.
When it’s a security company that’s on the ropes, its
workers are at a particular advantage to abuse their employer
and its clients. After all, they have the expertise to commit
the crime and to cover it up. Be mindful of this risk, whether
you are the employer or the client.
Watch out for some common outsider scams, too. Some
overseas outfits will buy data-rich American companies for
pennies on the dollar just to own their massive client databases. If you get an unsolicited overseas offer from a surprise buyer, report it to the authorities. Likewise, when a
stranger offers to sell you a database you are interested in,
but the source is suspicious, go to the authorities. Help curb
cybercrime. As with everything else, leadership is what is
needed—a clear loud voice to uphold principles of decency
and honor, especially in trying times like now.
11:18
a.m.
9:47
a.m.
2:44
p.m.
9:09
a.m.
10:43
a.m.
7:48
a.m.
4:07
p.m.
3:12
p.m.
5:58
p.m.
10:21
a.m.
Accepted at over 5,000 more places every day.
The Electronic Transactions Association’s Annual Meeting & Expo, April 21–23, provides the
perfect opportunity to learn more about how Discover Network is becoming a global network.
Find out how our loyalty enhancements and other marketing programs are designed to help
drive merchant activation and usage. Continue to grow your business with Discover Network.
Stop by booth #515/517 or visit DiscoverNetwork.com.
Based on Discover Network data for the period January 2008–January 2009.
ACQUIRING
April 2009 digitaltransactions
The Changing Face
Of Card Pricing
Linda Punch
Competition and merchant frustrations with how to pay for payment
services are forcing processors to look at new pricing schemes.
P
ricing for card processing
always has played a crucial role
in whether a merchant signs, or
stays, with a merchant acquirer. That
means an acquirer has to balance a merchant’s demand for low-cost processing
with its own need to make a profit, a
balance difficult to maintain in an industry where price often is the only differentiating factor between competitors.
In their search for the ideal pricing
strategy, acquirers have introduced a
number of models ranging from tiered
rates, in which fees are bundled into
a single price, to interchange-plus, in
which fees are listed separately.
Of course, merchants’ biggest
acceptance cost is one that acquirers don’t control—interchange. That’s
the per-transaction fee set by Visa or
MasterCard, charged to the acquirer
and paid to the issuer of the card used
in a transaction. Acquirers pass that
cost on to their merchants.
“Most acquirers offer the same,
arguably commoditized, services—
access to the major payment networks,” says Red Gillen, senior analyst with Boston-based Celent LLC, in
an e-mail. “As such, competition tends
to boil down to a matter of price.”
Merchants also want to know
exactly what services they are paying
for, information not readily accessible
in many pricing models.
18
As a result, merchants increasingly are moving from bundled pricing, in which merchants pay an
interchange fee, authorization fee,
assessment fee, and acquirer’s markup on their transactions as one bundled fee, to an interchange-plus pricing method, in which merchants
pay the exact applicable interchange charge plus a markup that
includes all network fees and the
processor’s profit.
Older tiered-rate pricing is the
most prevalent pricing model because
it is easiest for merchants, especially
small to mid-size merchants, to deal
with, says Adil Moussa, analyst with
Boston-based payments and financial
consultancy Aite Group LLC.
“What most people don’t know is
that acquirers are being charged a lot
of money from Visa and MasterCard
that are just fixed costs,” he says,
adding that acquirers are charged
for about 60 other billing elements
beyond interchange, assessment fees,
and authorization fees.
Frustration
To cover those charges, acquirers add
up all those billing elements, divide
them by the number of merchants and
transactions in their portfolio, and
split them equally among merchants,
Moussa says.
But while most merchants still
use tiered pricing, they’re getting increasingly frustrated with
how the prices are calculated, says
Sean Harper, co-founder of Transparent Financial Services LLC
(www.TransFS.com), an online
financial-services-provider comparison site for merchants. Chicagobased TransFS.com offers a free
tool that helps businesses audit their
credit card processing fees.
“They realize the tiers aren’t necessarily consistent,” Harper says. “What
is a downgrade for them isn’t necessarily a downgrade for their friend who
owns a similar kind of business.”
These discrepancies are leading more merchants to ask for interchange-plus pricing, which previously
has been used with only the largest
merchants. With interchange-plus, the
acquirer tacks on a single fee to the
interchange charge.
“For the really large merchants [the
additional fee] is a fraction of a penny
per transaction,” Moussa says. “If you
have a large, large merchant like a
Macy’s or Dillard’s, for example, that’s
all the acquirer makes on them because
it’s really based on volume. They just
hope that by that volume they’re going
to make about $50,000 to $100,000 a
year off that merchant.”
But the larger merchants that
demand interchange-plus pricing also
expect more service from the acquirer
than smaller merchants, Moussa says.
®
Charge
Powered by NGT
®
E
- statements
EASY, FAST, AND ENVIRONMENTALLY FRIENDLY
trac
SINCE 2008
The best way to predict the future, is to create it.
At EVO we have built a strong foundation of proprietary products and services that are second to none in
the payment processing industry. Over the years we recognized the value of these tools to our partners and
centered our goals on developing an end-to-end infrastructure with the ability to effectively help you run your
business. Rather than concentrating on free terminals or fancy sales programs, EVO focuses on long-term
prosperity and giving you the foundation you need. EVO provides mid-to-large sized ISOs with the magnitude,
resources and support needed while giving you the freedom to manage your business as you see fit.
EVO — trust, integrity, and a true leader.
Partner with EVO…
COMPETITIVE ADVANTAGES:
STRATEGIC ADVANTAGES:
ONBOARD—The Ultimate Boarding and Tracking System
E-STATEMENTS—Online Merchant Statements
EVO CHARGE—Specialized Computer POS Software
MERCHANT FUNDING—Merchant Advance Program
EVO TRAC—Transaction Detail and Reporting Platform
GROWTH CAPITAL
BIN RELATIONSHIPS
OWNERSHIP/PORTABILITY RIGHTS
PROPRIETARY FRONT-END PLATFORM
EXCEPTIONAL DIRECT PRICING
Providing core resources for all your business needs.
www.goevo.com
CALL TODAY TO DISCUSS A GROWTH PLAN AND TO SCHEDULE A VISIT TO OUR CORPORATE HEADQUARTERS.
CALL JIM FINK @ 1.800.CARDSWIPE (1.800.227.3794) ext.7800, and reference code AD0109A.
“These merchants, as big as they are,
require a lot of hand-holding, require
their own team at the acquirer, require an
account manager—people who are specialized just working on that one merchant because they have huge needs,”
Moussa says. “It becomes really costly
to have big merchants like those.”
While the acquirers don’t make big
profits on the largest merchants, they
20
gain credibility among mid-size merchants because they have a “marquee”
merchant as a customer, he says, adding that acquirers make most of their
money on mid-size merchants.
Junk Fees
Industry data-security standard (PCI)
or for merchant clubs to offset the loss
of income, Helgeson says.
“Generally, we’re seeing subsidized equipment and subsidized
upfront bonuses that are turning into
PCI and other annual fees,” he says.
One strategy many ISOs and
acquirers use is automatic enrollment in
value-added services, Helgeson says.
“For example, if you sign up with
ISO XYZ, you’ll get 30 days free of
their merchant-support club and after
that it’s $9.95 a month,” he says.
Merchants asking for interchange-plus
are really seeking “some assurance
they’re getting a reasonable deal,”
Harper says. “To get that assurance,
they need to understand what their
pricing is and how it compares to other
folks. With interchange-plus, the markup at least is very
easy to compare.”
The downside is
that interchange-plus
means merchants
have to “understand
interchange a little
bit, which is very
complicated,” Harper
says (“Becoming a
Master of the Interchange Universe,”
page 23).
Adds Moussa:
“The issue with interchange-plus is you
get a statement that
is so difficult to read
and hard to reconcile
that you get lost. You TransFS’s Web site aims to walk merchants through
have no idea where the pricing process so they can make accurate estimates of their card-acceptance costs.
to start and where to
finish. It’s pages and pages long.”
Merchant club programs may offer free
While many acquirers are trying to
terminal replacement, next-day termimake it easier for merchants to undernal replacement, paper supplies, and
stand processing charges, others try to
discounts with shipping companies.
muddy the waters with so-called junk
“The trick with merchant-club profees, says Robert Carr, chief executive
grams is that merchant usage is very
of Heartland Payment Systems Inc., a
low,” Helgeson says. “If you were to
Princeton, N.J.-based acquirer.
sign up a group of merchants, most
That’s particularly true of indepenwould forget they even have the prodent sales organizations that recruit
gram and forget to call in to use the
merchants using cut-throat pricing
free paper or free terminal-replacement
strategies, says Henry Helgeson, presiservice when they need it.”
dent and co-chief executive of MerUsing Technology
chant Warehouse, a Boston-based ISO.
Many ISOs that charge lower rates are
Other junk fees include underwriting
tacking on fees to get merchants into
fees, peak-season fees, returns fees,
compliance with the Payment Card
data-breach service fees, and non-
verification of PCI compliance fees,
Carr says.
“We’ve seen merchants whose
dial terminals are being charged a PCI
compliance fee; warranty fees for terminals that are 10 years old; retrieval
fees, even though we get paid to do a
retrieval; batch header fees; compliance fees; all those kinds of things,”
Carr says, adding that junk fees “are
absolutely rampant.”
Carr even considers some forms
of tiered pricing as junk fees.
“The classic is breaking the fees into
three rates: qualified, mid-qualified,
and non-qualified,” he says. “That has
nothing to do with interchange. That’s
the acquirer’s version of it, and what
they decide to put into those three
buckets is totally arbitrary. It’s done
in a way to basically mislead the merchant. The merchant thinks, ‘oh, this
is the way Visa and MasterCard do it,’
and that’s not the way they do it.”
Both Merchant Warehouse and
Heartland used an interchange costplus pricing model.
Some in the industry have introduced technology to help merchants
find low-cost processing, including
Merchant Warehouse’s BINSmart
Cost Manager System and TransFS’s
credit card processing calculator.
Merchant Warehouse in February
introduced the BINSmart, a software
program that works with point-of-sale
terminals to allow small merchants
to process card transactions at the
lowest available interchange rates.
With BINSmart, the terminal queries
a database of interchange tables built
by Merchant Warehouse on its servers. If a transaction would qualify for
a lower rate with an additional piece
of information, the server returns to
the terminal a prompt for that data.
The TransFS online credit card
processing calculator helps merchants
find a low-cost processor. When using
the calculator, merchants submit information such as estimated monthly
sales, average transaction size, percentage of online, in-person, phone,
or mail-order transactions, percentage of credit card sales to other businesses, and previous credit card processing statements.
TransFS’s proprietary program
then uses the information in its database, including interchange rates and
the industry average mark-up above
interchange across merchant class and
size, to calculate the merchant’s possible processing costs.
“Since we have decent data sets for
both of those, we can tell the merchant,
‘if you fill out this questionnaire, we
can make an educated guess as to what
your interchange rates are and then
add on the industry’s standard mark
up, we can give you some idea of what
sort of monthly fee you should expect
21
on a monthly volume,’” Harper says.
TransFS launched in September 2008.
But even the calculator can pose
problems for merchants because it’s difficult for them “to guess what the factors are that determine their interchange
rates,” Harper says. “For example, how
many of your cards are government
purchasing cards? No merchant has
any idea. How many rewards cards?
Well, we can guess based on where
the population is. We know across the
whole U.S. what the percentage of
rewards cards are, but it can vary by
merchant, it can vary by geography.”
Whatever pricing model is used,
the best approach is to be transparent,
according to Carr.
“We think it’s best to say what
Visa and MasterCard charge because
it changes,” he says. “We think it’s
best when there’s a rate increase or
decrease to pass it through without
lying about it.”
That approach has helped Heartland grow its portfolio from 2,500
merchants in 1997 to the current
250,000, he says. (Heartland, however, faces network fines from what
appears to be a massive data breach of
one of its processing systems last year.
The number of card accounts compromised wasn’t known in mid-March.)
The Searchers
And while low pricing can help an
acquirer sign a merchant, it often isn’t
enough to hold on to that merchant,
Helgeson says.
“The only way pricing keeps a
merchant with you is if you have the
merchant priced so low you’re not
making very much money on it,” Helgeson says. “The logic there is if I’m
making a substantial margin on that
merchant, it’s easy for someone else
to come in and say ‘okay, I’m going to
take this account for less margin, and
still make money.’”
The only way to keep merchants
from leaving “is to price them very
tight, which is not always the best strategy for an ISO,” Helgeson says. “You
have to price the merchant so tight that
in order to keep them from leaving,
you’re almost not making money.”
Technology may hold the key to
retaining merchants, Helgeson adds.
“We believe that things that are
proprietary to the ISO, possibly using
proprietary terminals, will make merchants a little more sticky,” he says.
While the debate over pricing continues, one thing is clear. Merchants
are becoming increasingly knowledgeable about processing costs.
“Every month, if you look at the
search data which Google publishes,
there are at least 100,000 credit card
processing searches,” Harper says.
“There are a heck of a lot of folks who
are researching this kind of stuff on
the Internet.” DT
22
ACQUIRING
Becoming a Master of
The Interchange Universe
Peter Lucas
The deepening recession has merchants scrambling to find ways
to reduce card-acceptance costs, but doing so requires an activist
approach.
W
ith recession-weary consumers curtailing their discretionary spending at an
alarming rate, merchants are scrambling
to reduce operating costs and protect
profits. One area they likely are scrutinizing heavily is payment card acceptance costs, which for some can be their
second-largest expense behind labor.
Interchange fees paid by merchant
acquirers to card-issuing banks represent the bulk of the discount rate—
often two-thirds or more—that acquirers charge businesses for accepting
Visa- and MasterCard-branded credit
and debit cards. This creates an incentive for merchants to add or at least
consider payment options that cost
less to accept, such as PIN-based debit
cards or the automated clearing house,
and gently prod consumers at the point
of sale to pay with those alternatives.
One popular merchant tactic is PIN
prompting, in which the POS terminal’s
screen automatically displays a message asking the customer to enter her
PIN when a Visa or MasterCard debit
card with PIN capability is swiped.
PIN-prompting, however, only
scratches the surface of what merchants
can do to lower their interchange costs.
And in some cases, POS strategies
formed without a thorough knowledge
of the complex world of payment cards
can result in higher costs. For example,
a recent interchange assessment conducted by Omaha, Neb.-based consulting firm The Strawhecker Group for a
merchant client revealed the merchant
was actually paying more on transactions of $40 or less when consumers
who used their Visa or MasterCard
debit cards entered a PIN to authenticate themselves as opposed signing
their name on the receipt.
“There is a big misunderstanding
around the cost of PIN-debit transactions on Visa and MasterCard debit
cards, especially now that [interchange]
caps have been put in place,” says
Chuck Fillinger, associate for merchant processing and product at The
Strawhecker Group. (Such caps apply
only to certain purchases, notably gasoline.) “Prior to the caps, PIN transactions were more cost-effective, but that
is not always the case any more. Merchants need to be aware of their acceptance costs and how to qualify each
transaction for the lowest rates.”
Deadline Extensions
Increasingly, merchants are feeling
overwhelmed by the ever-growing
complexity of the bank card networks’
interchange schedules and are looking
to their independent sales organizations or other merchant processors
to help them understand the system.
Their goal: to qualify transactions for
the lowest possible interchange rate
and also start best practices to get the
best overall best discount rate.
“The number of interchange categories has grown substantially and a
lot of smaller merchants don’t understand the extent to which qualifying
a transaction for the lowest interchange rate can impact their acceptance fees,” says Tonya Compton,
manager of operations for Dallasbased processor TransFirst Holdings
Inc. “That’s why we have a team dedicated to helping merchants understand how to qualify transactions for
the lowest interchange rates.”
Two common mistakes merchants
make is unnecessarily keying in card
data at the point of sale and using terminals that don’t meet requirements
set by the Payment Card Industry
data-security standard, or PCI, the
card networks’ uniform set of rules
for protecting cardholder information.
“These types of mistakes can cost
merchants as much as 100 basis points
[one percentage point] more to process a transaction,” says Compton.
One way for merchants to identify business practices that trigger
higher interchange is to audit their
transaction trail. Fillinger uses the
example of a hotel that keyed in a
large number of credit card account
23
Harness The Power
Of Thunder
Break-Through Technology by Ingenico
ICT220
Make Some Noise. Be Different. Stand Out From The Rest.
Ingenico’s unique dual Thunder/Booster Chip technology and its innovative engineering takes
transaction security, speed and dependability to a new stratosphere. With awesome processing
power, dedicated security chip and optimized, robust design, Ingenico’s new Telium 2 product line
blows away the competition. See what all the noise is about. Call Ingenico today to learn more
about how you can harness the power of thunder in your business today.
More Secure
More Powerful
Ingenico puts security first in its Telium 2 design, which
utilizes deeply embedded security within the chip design,
virtually impossible to uncover.
With thunderous power, the Telium 2 line of Ingenico
transaction terminals operate at lightening speeds of up
to 500 million instructions per second. This translates into
the fastest application processing speeds in our industry.
Dedicated “Booster” chip manages security sensitive areas of
terminal including software authentication, tamper detection
circuits display, keyboard, MSR, Contactless and Smart Card
readers.
Booster chip features a PCI PED2 Approved, EMV compliant,
32-bit RISC crypto-processor for turbo boosted speed
(50 million instructions per second) and superior fire walled
security protection.
With faster EMV transactions, faster check-outs, and faster
service, your biggest bottle neck will be filling the orders.
With this much power, multi-application issues dissolve,
and opportunities arise. Put the power of Thunder to work
for you and deafen the competition.
More Opportunities
More Reliable
Having the fastest, most versatile and secure terminal
available today is only relevant if you can make use of all
these features. That’s why Ingenico has created its
Transaction and Business Solutions product offerings.
Telium 2 products have been performance engineered to
reduce components by 50 percent, resulting in awesome
reliability and improved ruggedness.
We can provide you with the power to drive your business
through our terminals. With estate management, transaction
management, connectivity management and rapid
development tools such as Incendo Online, Ingenico can
improve the way you transact business in today’s stormy
business environment.
One touch and you’ll feel the inherent quality, the internal
strength that dwells within every Telium 2 product we make.
Built-in:
•18 lps thermal printer
•Smart card reader
•Outstanding connectivity
•Optional Contactless reader
www.ingenico-us.com
Ingenico
6195 Shiloh Road, Suite D
Alpharetta, GA 30005
1-800-252-1140
numbers because desk clerks found it
easier to type in such data along with
guests’ personal information at checkin. Management initially overlooked
that trend because the hotel received
reports only on a monthly basis.
“Issuing reports and auditing them
with more frequency can help spot
mistakes that lead to higher acceptance costs sooner,” says Fillinger.
looms in July 2010 when PIN-entry
devices must be PCI-compliant.
“Not all merchants know if their
terminals are PCI-compliant,” says
Mike Berman, chief operating officer of Tribul Merchant Services, a
New York City-based ISO. “That
comes back to whether they have a
payments strategy in place as part of
their business plan.”
How To Cut Acceptance Costs
Some of these cost-cutting tactics and guidelines seem obvious, but
more than a few merchants don’t follow them:
Any rate over 10 cents per transaction above interchange for processing is
usually too high.
Swipe credit cards at the point of sale whenever possible.
Use the card networks’ Address Verification Service when hand-keying
credit card information.
Visit Visa and MasterCard’s Web sites to see interchange schedules,
guidelines, and news for merchants.
Ask processors for cost-plus pricing and to see all fees charged per
transaction.
Settle transactions in batch the same day they are performed.
Enter the sales tax when accepting a business card.
Never over-authorize transactions to include tips.
Tax-exempt merchants must provide Level 3 data such as duty and freight
charges, state and local taxes, etc.
Know the causes of chargebacks and fines, and correct the problems.
Lodging establishments should include folio number and check-in date
with each transaction.
E-commerce merchants should transmit their phone number, e-mail
address, or Web-site address with the transaction.
Don’t call for an authorization code.
Source: TransFirst, Food Marketing Institute
“Merchants need to closely monitor what is happening at the point
of sale.”
Continuing to operate non-PCIcompliant terminals is another mistake that triggers a so-called nonqualified interchange rate, which
is the highest rate a merchant can
pay. While it’s no guarantee, PCI is
intended to prevent data breaches and
other other security threats that lead
to card fraud, and applies to all organizations that store, process, or transmit cardholder data. A big deadline
26
Keeping abreast of various PCI
compliance deadlines can help merchants not only avoid qualifying transactions at a higher interchange rate,
but also obtain incentives for hitting
deadlines, or, if needed, request deadline extensions to avoid penalties.
San Jose, Calif.-based Robinson Oil
Corp., which operates 34 independent
gas stations in the San Francisco area,
received an extension past a Dec.
31, 2008, deadline that applied to its
transaction-volume category because
it needed more time to thoroughly test
PCI-compliant terminals. The card
networks enforce PCI, but they delegate most enforcement responsibilities to acquirers.
“We were able to get an extension so we could properly test the
equipment before rollout and avoid
penalties, but it’s going to be tight to
get everything deployed in the next
few weeks to meet the new deadline,” Steve White, chief financial
officer and vice president at Robinson Oil, told Digital Transactions in
late January.
Built-in Interchange
They may not know of them, but
other steps merchants can take to
qualify transactions for the best interchange rate include: entering the sales
tax when accepting a business card;
never over-authorizing transactions
to include tips; and, if they are taxexempt, providing so-called Level 3
data that include duty and freight
charges, state and local sales taxes,
and related information.
“There are several methods to
qualify transactions for lower interchange rates with which merchants
aren’t necessarily all that familiar,”
says TransFirst’s Compton. “Merchants do need to be coached to
understand all they can do in this
area.” At least one independent sales
organization has introduced software
that prompts a terminal to ask for data
that could qualify transactions for
lower rates (box, page 28).
Merchant acquirers are not the only
source of information for merchants
on how to get interchange to its lowest
possible level. Visa Inc. and MasterCard Inc. now publish their U.S. interchange schedules, rules, and chargeback guidelines on their Web sites. The
Web sites of many other groups, including the Electronic Payments Coalition,
to which Visa and MasterCard belong,
also have tips and best practices for
lowering card-acceptance costs.
“We’ve made the availability of
these materials known through the
media, our advisory groups, and even in
several hearings in Washington where
we testified alongside representatives
of merchant organizations,” says a
MasterCard spokesperson.
Best practices aside, merchants
also need to be aware of the true cost
of accepting card alternatives. While
eBay Inc.’s PayPal payment service is
popular with online merchants, in part
because many merchants perceive it
to be a lower-cost alternative to cards,
most consumers fund their PayPal
charges with a credit or signaturebased debit card. Thus, interchange is
built into PayPal’s pricing structure.
The same is true for Google Inc.’s
Google Checkout and Amazon.com
Inc.’s payment offerings.
“These products include interchange in their cost of acceptance to
start, and then the provider adds its
margin,” says Red Gillen, a senior
analyst for Boston-based Celent LLC.
“Only check- and cash-funded payments actually reduce interchange
costs.” Gillen predicts these checkand cash-based alternatives will cost
card issuers $345 million in foregone interchange revenue in 2010 and
$1.7 billion annually by 2015.
But new payment forms require
promotion by merchants to generate
transactions. “ACH products provide
us with a lower-cost structure, but I
have to get them into the customer’s
hands and that means promoting it
to our customer base, which costs
money,” says White of Robinson Oil.
“We have looked at several alternative-payment options, but they are
not widely accepted enough for us to
decide to take them.”
through the ACH. Houston-based
Shell created the card, which has a
5-cents-per-gallon promotional discount until June and 2 cents thereafter, as a low-cost payment option for
it station owners.
Shell expects the card’s users to
be customers who do not have Shell’s
Citigroup Inc.-issued private-label or
cobranded MasterCard credit cards or
who simply prefer to pay for gas out
of their checking accounts. Station
owners will pay an average acceptance fee of 40 cents per transaction,
a savings of up to 50% over transactions made with third-party cards.
“Customers told us they wanted
a non-credit card that offered PIN
Activist Approach
While building consumer acceptance
for a lower-cost payment product is a
hurdle that merchants are struggling
to clear, some are making headway.
Shell Oil Co.’s Shell Saver Card,
which began rolling out in January,
is a Shell-branded card that debits
the cardholder’s checking account
27
authentication and a rebate,” says
Elizabeth Hudson, Shell manager of
U.S. consumer cards. “About 60%
of our customers don’t want or don’t
qualify for one of our credit cards. We
are being very careful not to cannibalize our existing cardholder base.”
More than 12 million Shellbranded consumer and fleet cards
are in issue, and their holders come
to Shell stations more often each
month and buy more than non-Shell
cardholders, according to Hudson.
While Hudson declines to reveal
how many consumers have applied
for the Saver card, she does say initial customer response has exceeded
expectations. “We are always looking at new payment options and
technology that can lower our stations’ payments costs,” she adds.
Other ways small merchants can
chop their acceptance costs is to
negotiate directly with their ISOs or
acquirers about the discount fee rather
than take the first price quoted. “Processors have direct control over what
they charge above interchange,” says
a spokesperson for the Food Marketing Institute, a Washington D.C.based supermarket trade association.
The FMI recommends its members perform thorough due diligence
on any contract proposed so they
understand the basis for each fee and
whether there is room for negotiation. “If a merchant does not understand a fee or if it seems too high,
they need to ask about it,” says the
spokesperson.
Robinson Oil’s White says he has
worked closely with the company’s
processor, First Data Corp., to reduce
payment-acceptance costs. “It’s about
as low as we can get it,” he says.
Some processors take an activist approach on behalf of merchant
clients. TransFirst, for example, will
automatically check transactions for
missing or invalid card data, such
as a voided expiration date. Transactions flagged before batching are
resubmitted for authorization by
TransFirst with the correct information. The service spares the merchant from having the transaction
bounced back and then resubmitted
An ISO’s Terminal-Based Rate Cutter
M
erchant Warehouse, an 11-year-old, Boston-based
independent sales organization that serves more
than 55,000 merchants, in February introduced a software program that works with point-of-sale terminals
and allows small merchants to process card transactions at the lowest available interchange rates. Henry
Helgeson, president and co-chief executive of Merchant
Warehouse, says the new service arms small businesses
with cost-saving technology that up to now was available only to large retailers.
“Tier Three and Tier Four merchants are the one
market that’s really primed for this,” he says, referring to the card-volume tiers used by the card networks.
“That [market] didn’t have access to this technology
because of the cost and complexity of putting it on a
POS terminal.”
Helgeson hopes the BINSmart Cost Manager system
will help its sales agents sign merchants that had been
resisting because of price. With BINSmart available,
“We have a couple [agents] looking at leads that were
closed to them because of the pricing,” says Helgeson.
He says the technology has also found some appeal with
franchisees and small chains. “That’s a nice unexpected
surprise,” he says. “It’s surpassed my expectations, and I
have high expectations.”
Merchants that have a Hypercom T4220 terminal,
the device BINSmart currently works with, can have the
device reprogrammed with BINSmart at no charge. The
terminal and PIN pad is priced at $299. BINSmart will
28
ultimately become available on a wider array of POS
devices, Helgeson says.
With BINSmart, the terminal interrogates a database
of interchange tables built by Merchant Warehouse on
its servers. If a transaction would qualify for a lower
rate with an additional piece of information—for example, a PIN for a debit card or a ZIP code for a keyed
transaction—the server returns to the terminal a prompt
for that data. The process takes less than a second and
occurs before authorization. On commercial cards, the
system will prompt for so-called Level 2 data, such as
tax codes, which are necessary to qualify for the lowest available rate. “We took everything we know about
interchange and the networks and crammed it into this
terminal,” Helgeson says.
The key to the system, says Helgeson, is that it allows
the merchant to enter crucial data before authorization,
maximizing the chance to save money on the transaction.
Adil Moussa, an analyst with Boston-based research firm
Aite Group LLC, says this makes BINSmart unique. It’s
not uncommon for acquirers to check transactions in batch
to look for missing information that might qualify them
for lower rates, but by then it’s often too late to get the
data from the customer, who is long gone.
The service, for which Merchant Warehouse has
applied for a patent, also arms small merchants with
a cost-saving technique large merchants have bought
or built at significant cost, and then typically only to
prompt for PINs on debit cards, Helgeson adds.
for authorization, which can reclassify it for an interchange rate of an
additional 100 basis points, according to Compton. The service has
been in place for about two years.
‘Strategic Decision’
Many merchants, however, say the operational tools available to them aren’t
strong enough to significantly cut interchange. They expect The Credit Card
Fair Fee Act, which was introduced in
Congress but not passed in 2008, to be
reintroduced this year. The bill would
have given limited anti-trust protection
to interchange rates negotiated by merchants and the card networks and established a government-supervised arbitration process if the parties couldn’t
come to terms. The National Retail
Federation and several other merchant
trade groups supported the bill.
But banks and the card networks
fought the proposal. “Lobbying Con-
Shell’s ACH
“Saver” card
is aimed
at cutting
jobbers’ payment costs.
gress to negotiate interchange is not
the answer to reducing acceptance
costs when several options to do so
already exist,” says an Electronic Payments Coalition spokesperson.
Indeed, processors and payments
experts insist there are plenty of steps
merchants can take in lieu of legislation to lower their acceptance costs
and qualify transactions for the lowest
interchange rate.
“Payment acceptance is a strategic
business decision and merchants need to
understand that shopping strictly for the
lowest rate is not always best for their
business in the long run,” says Tribul’s
Berman. “Merchants that take the time
to educate themselves about the true cost
of acceptance and how their processor
can support their payment strategy will
achieve the best overall acceptance cost.
The devil is in the details.” DT
29
STRATEGIES
Prepaid Plastic:
The Latest Consumer Spiff
Ben Jackson
Companies are increasingly using prepaid cards for consumer incentives, replacing checks and promotional merchandise. Advantages
include lower costs and stronger customer satisfaction, but watch
out: the cards don’t always make sense.
A
s companies fish for new
customers, they are trying to
make the old lure of rebates
more attractive by offering it through
prepaid cards instead of checks.
Although they typically cost more
than paper checks, plastic cards offer
advantages both to consumers and
their companies, industry members
say. Consumers can make immediate
use of cards, as opposed to checks that
they must first deposit or cash. For
merchants, cards can lead to increased
sales, especially if the rebate is loaded
onto a closed-loop card that is good
only at their stores. In addition, merchants can customize cards with marketing messages.
Also, rebate checks that go
uncashed fall under unclaimedproperty laws in many states that
require unclaimed funds to become
property of the state after a certain
time, which is called escheatment. In
many states, company-issued openloop cards do not fall under these
laws, which means a company can
reclaim unused rebates after a certain period of time. Unlike so-called
closed-loop cards, which can be
used only at the issuing company’s
locations, open-loop cards carry a
30
general-purpose network brand and
can be used at any store that accepts
that brand.
Influencing Behavior
These reasons have led a variety
of companies beyond retailers to
look into providing prepaid cards as
incentives. For example, Maverick
Network Solutions Inc., a prepaid
card program manager based in
Wilmington, Del., announced in February that it has signed an agreement
to provide Visa-branded prepaid
cards issued by Palm Desert National
Bank, of Palm Desert, Calif., to Bluegreen Corp. to offer as incentives for
potential customers for Bluegreen’s
timeshare properties. Bluegreen is
based in Boca Raton, Fla.
Peter J. Quadagno, president and
chief operating officer of Maverick,
says any company wanting to offer
a reward to lure in potential customers could use prepaid cards. Program managers can customize the
cards cosmetically and operationally. “We’re only limited by the
creativity of the marketing people,”
Quadagno says.
The funds loaded onto reward cards
come from a company’s marketing
budget. Potential customers like the
cards, especially when the cards carry
a major network brand, Quadagno
says. “When you hand out a card with
a Visa or a MasterCard logo, the consumer sees a real value,” he says.
Michael Chittaro, senior business leader at Visa Inc., says in an
e-mail that prepaid cards help companies save money by reducing replacements for lost or stolen checks, bank
processing and handling fees, check
fraud, escheatment, check-printing
costs, and check-reconciliation costs.
Quadagno says that currently
corporate-funded open-loop cards
typically are not subject to escheatment laws. While he expects state
governments will look into the possibly of bringing the cards under
unclaimed-property laws, for the next
three to five years he expects prepaid
cards will offer companies a chance to
reclaim unused rebates.
Companies get a better value from
incentives offered through prepaid
cards rather than through checks or
through things like merchandise, says
Ron Randolph-Wall, chairman and
founder of Quantum Loyalty Systems,
a loyalty-marketing company based in
Incline Village, Nev. Premium products require sourcing and warehousing, and checks can be expensive
to manage. In addition, once a customer receives a check or item as an
incentive, the relationship with the
customer ends, he says in an e-mail.
But companies can use cards as part
of a larger program to influence consumer behavior.
“Loyalty and reward programs
can be designed to evoke myriad
behaviors—purchases, referrals, participation, and behavior modification,” Randolph-Wall says.
Low-Dollar Letdown
Estimates on the size of the rebate
market and the volume of rebates
distributed via cards versus other
means vary, but there is agreement
that rebates are becoming increasingly card-based.
Mercator Advisory Group Inc., a
payments-consulting company based in
Maynard, Mass., said in a report issued
in January that in 2007 $17.6 billion was
loaded onto prepaid incentive cards, up
26.6% from $13.9 billion in 2006. These
numbers include incentives loaded onto
open- and closed-loop cards for both
consumer incentives and employee and
business-partner incentives.
Companies still issue about 400
million rebate checks to consumers
every year, according to Hal Stinchfield, chief executive and founder
Pros and Cons of Incentive Cards
Prepaid incentive cards carry many advantages. Among these are:
f Increased sales (more likely on closed-loop cards)
f Customized marketing messages
f Increased customer satisfaction, since the card can be used
immediately
f Exemption from many state escheatment laws (open-loop cards)
f Reduced costs from, for example, not replacing lost or stolen checks
and eliminating check printing and fraud costs
But prepaid cards don’t always make sense. For example, when:
f The dollar value of the incentive is under $10
f The only value lies in lower costs, with no upside for supporting
corporate goals
rewards programs for corporations,
has a more optimistic view of the
market. She estimates that about 50%
of company-to-consumer transactions
happen through cards and predicts
that number will increase to 75% in
2009. This is up sharply over the past
two years, from about 15% in 2007,
according to Parago estimates.
The reason for the increase is simple, she says: customer and merchant
satisfaction. “Our internal data show
that consumers enjoy the experience
of using their prepaid cards and are
‘In this economic downturn,
corporations need to be prudent
about closed-loop cards.’
of Promotional Marketing Insights, a
consulting company based in Orono,
Minn., that specializes in rebates and
marketing promotions. The number
of rebates used by companies for
employee and partner incentives is
not known, Stinchfield says in an
e-mail. He estimates that about 15%
of all rebate and incentive transactions are done through cards, so room
remains for growth, and he expects
the number to be up in 2009.
Juli Spottiswood, president and
chief executive of Parago Inc., a
Lewisville, Texas-based company
that manages consumer rebate and
likely to return back to the original
merchant to spend it,” Spottiswood
says in an e-mail.
Virtually any payment made via
check is a good candidate for prepaid
cards, Spottiswood says. Cards offer
the convenience of being immediately
usable and also hold out the possibility of putting an ad in the customer’s
pocket through customized designs,
she says. Cards can be less expensive
than checks when multiple rebates
are offered to the same customer. The
rebates can be loaded electronically,
which is less expensive than printing
and mailing multiple checks, she says.
“The only programs not wellsuited for prepaid cards are lowdollar—typically under $10—singleincentive payments,” Spottiswood
says. “Prepaid cards can be costprohibitive in these cases.”
Closed-Loop Risk
Consumers generally prefer openloop cards because they can be used
anywhere, and rebate providers like
them because they can reload the
cards electronically and the cards do
not carry the unclaimed-property risks
of checks, Stinchfield of Promotional
Marketing Insights says.
Even so, companies looking to use
rebate cards need to do a careful analysis of their marketing plans to make
sure that the program will truly be efficient and accomplish the marketing
goals the company is trying to achieve.
It’s not enough for the cards to just
save the company money on processing or loading, for example, he says.
In a down economy, open-loop
cards also offer security in that they
do not depend on any one company
for their value, Randolph-Wall of
Quantum Loyalty Systems says.
“In this economic downturn, corporations need to be prudent about
closed-loop cards,” he says. “Many
retailers are on the brink of bankruptcy [and] their closed-loop cards
would be worthless” if the retailer
went bankrupt. DT
33
NETWORKS
Prepaid’s
Blue-Sky Promise
Lauri Giesen
The recession may actually be helping prepaid card reload networks
as consumers’ credit availability shrinks. A failed acquisition deal,
however, could show that the market doesn’t yet know how to value
reload companies.
I
t’s not too often that an economic
downturn can help a business. But
that just might be the case with
networks formed to reload value onto
prepaid cards.
The weak economy is helping to
spur growth on prepaid card reload
networks in two ways. First, financialservices experts say consumers show
more interest in prepaid cards as credit
tightens and fewer people qualify for
credit cards. Prepaid cards provide
the same level of payment convenience as credit cards, but they can
be purchased by anyone, even the
unbanked—one of the prepaid card
industry’s prime markets.
Second, for retailers, which are
already facing declining sales, reloading value on cards represents a new
service to offer, fee income to generate, and additional foot traffic in
their stores. Furthermore, those new
customers coming into their stores to
add value to their cards suddenly have
disposable income to spend in those
same stores.
And it’s not just the weak economy that is helping the steady growth
in prepaid card reload networks.
Consolidation in the industry has
resulted in more consistent pricing
34
and practices, making it easier and
more attractive for consumers to add
value to their cards. And as consumers become more comfortable with
using all sorts of other prepaid card
products, the general-purpose cards,
which typically have the logo of a
major credit card network on them
and can be used to make purchases
any place that accepts those cards,
are bound to benefit. And it’s these
general-purpose cards that are most
commonly used for reloading value.
Wireless Cards
Whatever the reason, more retailers are offering the ability for consumers to load value onto their prepaid cards, and more consumers are
taking advantage of that service. “It’s
still a young industry, but the volume we’re seeing from these networks is growing rapidly on a percentage basis,” says Chris Truelson,
senior vice president at Columbus,
Ga.-based payment processor Total
System Services Inc. (TSYS).
Indeed, one prepaid card and
reload network, Monrovia, Calif.based Green Dot Corp., reports that
recent volumes on existing programs
are up anywhere from 40% to 100%
year-over-year, according to Mark
Troughton, president of Green Dot
cards and network. Green Dot has
added several prime retail outlets to
its 50,000-location network, including
Kmart, grocer H-E-B, and pharmacy
chain Duane Reade.
“We expect to see continued
growth both in terms of locations and
transaction volume. The reload networks are well-positioned to be the
driving force for the success of the
prepaid industry,” Troughton says.
With the market still highly competitive, Green Dot, TSYS, and others contacted for this story either
refused to release their reload transaction numbers or didn’t have current
related data. A 2007 Celent LLC study
estimated the U.S. had more than
136,700 reload locations if 78,000
outlets of wire-transfer companies
Western Union and MoneyGram are
included (“Prepaid Reloads for the
Next Phase,” April 2008).
The reload networks of Visa Inc.
and MasterCard Inc., ReadyLink
and RePower, respectively, tap into
many of the reload systems built by
the specialty processors and retailers. Visa in March added MoneyGram’s 40,000 U.S. locations to
ReadyLink.
Besides the general-purpose or
so-called network prepaid cards,
another type of card that is spurring the need for reloading value is
the prepaid wireless card. Consumers
use such cards to store value to pay
for cell-phone use. Consumers can
buy the cards and then reload value
at participating retail locations. Teri
Llach, group vice president of Blackhawk Network Inc., a subsidiary of
the Pleasanton, Calif.-based Safeway
Inc. supermarket chain, says a growing number of national retail chains
are starting to allow consumers to
reload value onto their wireless phone
cards at their stores.
“The growth in the telecom cards
right now is much greater than what
we’re seeing in the network cards,”
Llach says. But she predicts there will
be a “spillover effect” as consumers get used to using prepaid cards in
general. And as more retailers make
adjustments to their point-of-sale systems to accommodate phone-card
reloads, they will make adjustments
for general-purpose cards at the same
time, she says.
provides valuable benefits to the consumers without any credit risk.”
What’s more, Tomasofsky notes
that bad publicity associated with
proprietary gift cards could benefit general-purpose cards. In recent
months, a number of consumer-finance
experts have warned Americans to be
careful which retail chains they buy
gift cards from in the event the chain
closes and consumers are left with
worthless cards. With general-purpose
cards, consumers’ funds are protected.
“There have been p.r. problems
with store-branded cards, but that
has not been the case with the network cards,” Tomasofsky says.
And at Green Dot, “Consumers
tell us that prepaid cards with network-association brands give them
high confidence that their funds will
be secure,” Troughton says.
The increased perceived value of
the cards affects the desire for reloads.
“This is an underserved market
and I think the telecom cards can lead
the way,” says Llach.
Driving Traffic
Still, the economy has to be taken into
consideration and most card experts
think its weakened state will actually
help prepaid cards and the accompanying reload networks.
“My gut feeling is that the weak
economy is good for this type of
product,” says Paul Tomasofsky,
president of Montvale, N.J.-based
Two Sparrows Consulting. “The
pricing on card reloads is still lower
than the cost of money orders or
other payment alternatives offered
to the unbanked. In this economy,
a general-purpose prepaid card will
have a lot of appeal.”
Green Dot’s Troughton adds, “As
the credit markets tighten, prepaid
cards become an attractive option that
THE PREPAID PRESS EXPO
THE SHOW FOR THE PREPAID SERVICES INDUSTRY
AUGUST 18-20,, 2009 · CAESARS PALACE,, LAS VEGAS
THE PREPAID PRESS EXPO
WHERE PREPAID CONVERGES
WWW.PREPAIDPRESSEXPO.COM
[email protected] · 866.203.2334 ext. 505
EXHIBIT
LEARN
NETWORK
SPONSOR
The Prepaid Press Expo
is the ONLY event that
brings together the
distributors and retailers
you need to meet to get
your prepaid products
and services to market.
With the help of industry
leading conference
organizer, The Pelorus
Group, The Prepaid Press
Expo is proud to offer
the most informative
and most affordable
conference program
for prepaid services.
Meet, greet, and be part
of the excitement! Learn
about the latest and
greatest ideas, products,
and opportunities within
the prepaid services
industry.
Let us tailor a sponsorship
to increase your exposure
– before, during, and after
the Expo.
BOOTHS FROM $3,900
PRICES FROM $200
SPONSORSHIPS START
AS LOW AS $8,960,
which includes your booth!
FREE EXHIBIT
HALL PASS FOR
A LIMITED TIME
35
Do Business Your Way
Villa Happy Hour
12 Noon - 6p
6pm
A
Wednesday, April
22
Thursday, April
Ap 23
Stop By Our Villa To Find Out More
At MSI, We Deliver Customized Programs That Fit Your Needs.
Enjoy The Villa Rotui Cabana at
Mandalay Bay Pool with MSI!
www.1800bankcard.com
0HPEHU%DQN)LUVW1DWLRQDO%DQN2I2PDKD0HPEHU)',&\HDUVRIVHFXUHWUDQVDFWLRQV
A Program
That Fits!
Customized
Interchange
Programs Up To
80% / 20% Splits
Exclusive BINs
& ICAs
Signing / Conversion
Bonus
Bad Credit Retail
Business
Accepted
Direct Lease / Split
Funding
App In - Live MID 3 Hrs.
MSI Same Day
Deployment
Call 1-800-226-5227 and ask for:
George Mayo at ext. 5923
Rich Lopez at ext. 5912
Joyce Seuhbetian Ext. 5925
Ricardo Romero ext. 5978
“The economy will help reloadable cards, which in effect will push reload
networks,” says Llach. “As more consumers use prepaid cards, they will
start to demand that retailers offer reload capabilities.”
TSYS’s Truelson agrees. “Consumers are starting to look for this service
and retailers need this as a defensive measure. If their competitors offer the
service, they have to offer it as well,” he says.
And while the reload service itself can generate fee revenue for retailers that in general are facing slumping sales and smaller margins, there’s a
related incentive for retailers.
“A bigger issue than additional fee revenue is the added feet in their
store,” says Tomasofsky. “Retailers are hoping to get incremental sales from
the customers who come into their store to reload their cards and then pick
up additional items while they are there.”
Others also note the benefits of offering value reloads have in increasing business. “The fee revenue is not really what
the retailers are looking for. They need anything they can get right now to drive traffic to their stores,” says Red Gillen, senior
analyst for the banking group at Bostonbased Celent.
Two Roads to Reloads
Still, providing card-reload capabilities does
require changes in retailer operations, and
sometimes additional investments in softGillen: “This technology
ware can be required at a time when retailers
is here to stay because
are loath to make investments in operations. it serves real value to
Many certainly have higher priorities for consumers.”
their technology dollars. But Tomasofsky
says the cost is not that great and not difficult to justify.
“For most retailers, it is a painless process. The cost and difficulty is
more for the payments processors that have to certify the operations and
handle the risk mitigation,” he says.
Llach confirms that the initial cost to a retailer to offer reloads can
be minimal. She explains there are two ways retailers can jump into the
business. The simplest and cheapest way is a PIN reload. Here, retailers
simply sell a PIN to a consumer, who hands over cash equal to the value
they want added to the card, plus a fee. Later, the consumer has to call a
number listed on the card or go online and enter the PIN before the value is
added to the card account. This requires minimal changes to the retailer’s
POS system, but it does eliminate the ability for the customer to spend the
value immediately in the store.
With the second type, automatic reload, consumers pay cash and swipe
their cards in the retailer’s POS terminal. The value of the cash, minus any
fees, is automatically loaded onto the card.
Llach says many retailers are opting to get started in the prepaid card
business by selling PIN reloads because they are less costly and require fewer
retrofits. Once they see they are getting enough reload requests to justify the
investment and time, retailers will upgrade their equipment to accommodate
the automatic reload, she adds.
And retail locations are where most consumers are going to want to
reload their cards. Although Visa has announced plans to push reloads
37
at ATMs, Celent’s Gillen says
ATMs aren’t where most users want
to do reloads.
“The biggest users of these cards
are the unbanked, and they are not
going to want to go to an ATM,” he
says. “This is all about serving cardholders where they live or work.
They’re more likely to reload cards
at retail locations because that is
where they go.”
What Value?
Another factor in the proliferation
of reload capabilities with retailers
is greater consistency in operations
and pricing.
“Reload networks are getting better,” says Truelson of TSYS. “The
training programs are better for both
store personnel and consumers. There
is a lot more educational material in
the market now to explain to consumers how these networks work.”
Meanwhile, pricing is converging toward seemingly more rational
points. Experts say the cost of a
reload used to be all over the place,
which confused customers. Some
retailers were charging as much as
$10 to reload a card two years ago.
Today, most retailers charge consumers in the range of $3.99 to $6.99,
Truelson says. Meanwhile, Wal-Mart
Stores Inc. in February dramatically slashed prices on its reloadable
MoneyCard (box). The lower and
more consistent costs will help drive
usage, he adds.
Llach says the cost of reloading
a prepaid card is coming down as
the industry becomes more efficient.
“As more people use these cards, the
efficiencies of supporting the system become greater and that pushes
the cost down,” she says. Blackhawk Network members charge a
$4.95 reload fee.
Still, some industry observers
question how valuable prepaid networks really are. They point to how
leading payments processor First Data
Corp. last fall pulled out of a deal to
38
Wal-Mart’s Pricing Gambit
What: The Wal-Mart MoneyCard
Issued Nationally by: GE Money
Since: June 2007
With Reloads at: Wal-Mart stores and stores linked by the Green Dot Network
Number in Circulation: 2 million
Value Loaded So Far: $2 billion
New Pricing Effective February 2009:
Activation: $3, down nearly two-thirds from $8.94
Reloads: $3, down 35% from $4.64
Monthly Maintenance: $3, down 39% from $4.94
Note: Cardholders can avoid reload fees by using direct deposit or by cashing their
paychecks at Wal-Mart stores. Also, Wal-Mart waives the monthly fee if cardholders load
at least $1,000 each month.
Source: Digital Transactions News, company reports
acquire Atlanta-based InComm Corp.,
a prepaid card and reload network
company. The deal was first announced
in April with a $980 million acquisition price, with a further payout of
$250 million over three years if performance goals were met.
But then, with little explanation, the two companies announced
in November that they had called
off the sale. Instead, they entered
into a distribution agreement that,
among other things, would allow First
Data merchant clients to sell products
through prepaid card malls managed
by InComm.
Many industry experts say First
Data’s decision not to buy InComm
was not an indication that the service
InComm represented was in decline,
but rather was indicative of a weak
economy in general and uncertainty
over the value of prepaid services.
“The prepaid market has grown
so rapidly, it is difficult to understand the value of the companies
involved,” says Truelson. “It is very
difficult to determine the value of a
prepaid company.”
And once again, there’s the effect
of the deflating economy. “Values
of a lot of companies are dropping,”
Celent’s Gillen says.
Additionally, Tomasofsky notes
that merger-and-acquisition activity
in general is down. “There is a lot of
uncertainty right now about the values of companies and most companies do not want to go into debt today
to fund acquisitions,” he says.
Also, Gillen suggests that First
Data’s decision to terminate the
acquisition might show that the processor figured it could benefit as
much in the prepaid market by continuing to work with an independent
InComm as it could by acquiring
the company.
“FDC already had the technology
it needed. It might have realized it did
not have as much to gain by acquiring
InComm. It could continue to grow in
this market without investing capital
in an acquisition,” Gillen says.
Indeed, he believes First Data
and the other players continue to see
benefit in the prepaid card and reload
business. “There will still be a lot of
growth in this industry over time,”
he says. “This technology is here to
stay because it serves real value to
consumers.” DT
I;:
gclj
@]pfliZljkfd\ij_Xk\[\Xcè^n`k_Z_\Zbj#
k_\pËcccfm\[\Xcè^n`k_pfl%
I;:GcljKD#Xi\dfk\[\gfj`kZXgkli\jfclk`fe]ifdN8LJ8L=èXeZ`XcJpjk\dj#
^`m\jpfliZljkfd\ijk_\XY`c`kpkfjZXegXpd\ekjXe[Z_\ZbjXe[dXb\\c\Zkife`Z
[\gfj`kjn`k_flk\m\ij\kkè^]ffkèXYXeb%K_`jd\Xejdfi\fggfikle`kp]fipfl
kfèZi\Xj\i\m\el\Xe[\ogXe[pfligif[lZkjl`k\Y\pfe[ZXi[%
Gclj`kËjk_\fecpkil\#\e[$kf$\e[`dX^\ZXgkli\I;:jfclk`fek_Xk`jZfdgc\k\cp
klieb\p#èZcl[\jXZfdgi\_\ej`m\dXib\kè^gifîXdXe[)+&.N\Y$YXj\[kiXèè^%
8jk_\c\X[\ièI;:#n\le[\ijkXe[n_XkËji\hlì\[kfdXb\pfljlZZ\jj]lcXe[
gifm`[\k_\e\Z\jjXipjlggfikkf^\kpfljkXik\[hl`Zbcp%GXike\in`k_N8LJ8L
=èXeZ`XcJpjk\djXe[pflËccjffeÔe[flk_fnI;:Gcljj`dgcpc\kjpfl[fdfi\%
Kfc\Xiedfi\#gc\Xj\m`j`knnn%i[Zgclj%Zfd
)''0N8LJ8L=èXeZ`XcJpjk\dj#@eZ%
In the wake of the worst economic recession since
merchant acquirers headaches. How bad is attrition
When
a tts
Merchants
Vanish
By Jim Daly
40
the early 1980s business failures are giving
and how can processors minimize the damage?
T
he Grim Reaper of Commerce is stalking merchants as the nation slogs
through the worst economic downturn
since the early 1980s. His lethal efforts are a
big reason why merchant acquirers and independent sales organizations say the dynamics
of merchant attrition are different in 2009.
“The economy certainly has impacted
what has happened with the smaller
merchant—they’re not leaving because of
price, they’re going out of business,” says
Richard W. “Rick” Noble, chief executive
of BankCard Central Inc., a big ISO based
in Kansas City, Mo. “I would say a good
60% to 75% of the folks who leave us leave
us because they go out of business.”
Other acquiring executives report the same
thing: business failures in their merchant portfolios are up, while the normally intense competition for merchants is somewhat muted.
“The merchants are hunkered down,” says
Matt Johanson, vice president of acquirer
relations at Discover Financial Services.
Attrition, of course, is a normal part of
every acquirer’s business. Measuring it is
not a precise science, however. Many processors refuse to disclose their attrition
rates, claiming there are no widely accepted
industry standards. But one researcher
recently estimated so-called voluntary attrition, in which the merchant leaves one processor for another seeking better pricing or
services, at about 12%.
41
UBC1235_07092008
2005 | 2006 |2007
YOU have the POWER with the
most lucrative ISO Program available.
United Bank Card has redesigned its ISO Program to give you even more opportunities to increase earnings. Now benefit from
improved bonus programs and a vast array of products and services specially tailored to create a more profitable partnership.
United Bank Card has earned a reputation for consistently setting the standard in innovation and this is no exception. With
these initiatives, the sky is truly the limit when it comes to increased earnings!
UP TO 70% REVENUE SPLITS!
3 DIAL /2 IP TRANSACTION FEES!
UP TO 40X BUY OUTS!
UP TO $2,200 CONVERSION BONUSES!
PER MERCHANT - PAID WEEKLY
Free Equipment Program
Registered ISO/MSP Program
In-house Gift & Loyalty Program
In-house 24.7 Customer Service
Harbortouch POS Systems
and Tech Support
Nationwide Petroleum Program
Dedicated Relationship Managers
Merchant Cash Advance Program
Outstanding Bonus Programs
FE N
AT OW
UR
IN
G
PLUS
The Orion Terminal
United Bank Card, Inc. is a top 40 merchant acquirer with an impeccable reputation of excellence in the payment processing industry. UBC
provides payment services to over 100,000 businesses throughout the country and processes in excess of 9 billion dollars annually. Consistently
recognized for being at the forefront of innovation, our programs will continue to provide our agents with a competitive edge.
Contact United Bank Card now to find out how our dynamic programs can improve your sales performance and increase your earnings!
To learn more about United Bank Card, contact:
Brian Jones, EVP Sales and Marketing: 800-201-0461 x 136
Jonathan Brandon, National Sales Manager East: 800-201-0461 x 145
Max Sinovoi, National Sales Manager West: 800-201-0461 x 219
or log on to www.isoprogam.com for more details
United Bank Card, Inc. is a registered ISO/MSP of First National Bank of Omaha, 1620 Dodge St., Omaha, NE - Member FDIC
In addition to competition-induced
voluntary attrition, there is involuntary
attrition. Acquirers sometimes kick out
merchants that have moved up the risk
scale or defrauded them. But business
failures account for about 75% of merchant attrition in a normal economy,
says Nicole Schrader, senior consultant
at Linthicum, Md.-based First Annapolis Consulting Inc. That percentage
undoubtedly has gone up in light of
recent increases in business bankruptcies, she says.
Business bankruptcies rose 53%
last year, according to data from
the federal government (chart, page
52). Chapter 7 filings, in which an
organization liquidates, accounted for
69% of 2008’s business bankruptcies.
And for every struggling business
that declares bankruptcy and liquidates,
many more simply shut their doors. The
U.S. Department of Commerce estimates 560,300 firms closed in 2007, the
latest year for which data are available.
‘Merchant Death’
That’s bad news for acquirers. While
they can control their pricing, product
line-ups, and customer service, there’s
not much they can do to help a merchant that has bigger issues than payment-card acceptance. Henry Helgeson, president and co-chief executive
at Merchant Warehouse, says his
Boston-based ISO’s attrition rates are
up by about 10% to 15%.
“The number-one cause seems to
be merchant death, merchants going
out of business,” says Helgeson.
“Merchant death is really where all
the increase is coming from. All the
other reasons are staying the same.”
He adds that his increased use of the
word “death” in reference merchants
going out of business has become an
office joke among staff members who
at first thought he was talking about
people who literally died.
Adds Mike Passilla, executive
vice president of global business
Growth Hormones for the AmEx and Discover Networks
O
n the card-issuing side, Discover Financial Services
and American Express Co. have widely differing
cardholder demographics, but on the merchant-acquiring
side they are in agreement on an important issue. That is,
the best way to grow their merchant networks is to enlist
the aid of bank card merchant acquirers. The acquirers
would deal with merchants directly, giving them a single
point of contact for service and a consolidated statement
for multiple card brands.
Discover, which had signed virtually all major
national merchants as acceptors since launching in the
mid-1980s but lagged among small ones, broke the ice
in July 2006 when it struck a deal with First Data Corp.
to sign small merchants for Discover card acceptance.
Other deals with high-profile acquirers such as Global
Payments Inc. and Chase Paymentech followed.
As of early March, Discover had 96 acquirers in its
fold, according to a spokesperson. And at their current
pace, they’re bringing in about 6,000 locations a day, says
Matt Johanson, vice president of acquirer relations.
“We are making very good progress there,” Johanson says. “We are seeing tremendous growth in acceptance points.”
In a typical deal, Riverwoods, Ill.-based Discover
sells a portfolio of small-merchant accounts to the partner
acquirer. The acquirer handles underwriting in accordance
with Discover guidelines, and customer service. Discover
gets an ongoing revenue stream through the relationship.
The goal was to get Discover’s merchant network up
to parity or near parity with the Visa/MasterCard merchant base, which now has an estimated 7.3 million U.S.
44
merchant locations. Discover won’t reveal the exact size
of its network, but says it was about 85% of the Visa/
MasterCard base in 2007.
AmEx announced a similar but not identical initiative in late 2007 called OnePoint. While AmEx would
use third-party acquirers, the travel-and-entertainment
giant would own the merchant relationships they generate and set pricing. The acquirers would earn residual
income from the merchants they signed and they would
handle customer service and statements.
AmEx’s first partner was First Data, followed by
Elavon and Heartland Payment Systems Inc. in early
2008. Since then, Innovative Merchant Services, an
independent sales organization owned by accountingsoftware maker Intuit Inc., PNC Merchant Services,
and iPayment Inc. have joined the program, an AmEx
spokesperson says. “We do expect a few more announcements,” she adds.
New York City-based AmEx long ago stopped disclosing the size of its merchant base, but the spokesperson indicates OnePoint is helping it to grow. “We’re
delighted with the results so far,” she says.
Atlanta-based Elavon, the merchant-acquiring subsidiary of U.S. Bancorp, is making the program available through its 170 ISOs and 1,500 community agent
banks. The program gives Elavon’s direct sales force as
well as the ISOs and agent banks another brand to sell,
with the hook being one statement and a single service
point for small and mid-size merchants, says Elavon
executive vice president Mike Passilla. “We quickly
saw the value in it,” he says.
GET THE
SECURITY
AND
PROTECTION YOU NEED.
A cheaper price isn’t always a better deal.
There are three main parts to a credit card transaction:
Part 1 - Authorization
Part 2 - Capture
Part 3 - Settlement
(Front End)
(Back End)
At NPC, we use the leading front end Authorization and Capture networks in the credit card industry–the
same networks that process most of the world’s credit card transactions–NOT a low budget, home-grown,
vulnerable system that could leave you exposed.
For back end Settlement, NPC utilizes First National Merchant Solutions, the settlement company of First
National Bank of Omaha (FNBO). FNBO has been in the credit card industry since its beginning and sets the
industry standard as a strong, stable, dependable, back end service provider.
NPC has developed the Platinum Security Program, which is a customized program created specifically to
meet the individual security needs of our merchants. Our Platinum Security Program is a comprehensive
security package designed to help you protect your business and was developed by our dedicated department
of experienced industry experts solely focused on merchant data security.
With NPC, merchants get everything they need to process transactions securely.
Great Price | Dependable Service | Secure Processing Platform
Don’t let your processor put you out of business.
Call NPC today!
1.877.300.7757
development at U.S. Bancorp’s Elavon
merchant-acquiring subsidiary: “We
are definitely seeing an increase in
(Universe: firms with employees)
involuntary attrition, largely attrib637,100
utable to merchants going out of
644,122
640,800
business.” Atlanta-based Elavon has
628,917
850,000 merchant locations in the
U.S. and about 1 million worldwide.
612,296
Acquirers report that many of the
587,800
merchants they’re losing are the ones
z New Firms z Closures
the card networks identified a few
months ago as suffering the worst
565,745
fall-offs in credit card charge vol560,300
umes: specialty retailers, restaurants,
and other merchants whose fortunes
541,047
540,658
are tied to consumers’ discretionary spending. Passilla also mentions
2003
2004
2005
2006
2007
home-furnishings retailers and auto
Notes: Figures exclude single-person firms, estimated at 21.1 million in 2007. Data for
2006 and 2007 are estimates.
Source: Small Business Administration
dealerships, where cards are widely
accepted for service and parts purchases (and sometimes even vehicles).
BankCard Central’s Noble, recounting
U.S. acceptance base, which includes
Apart from merchants’ demise,
how a struggling merchant in suburmerchants and ATMs, was 7.9 million
some of Elavon’s recent attrition also
ban Kansas City who was about to lose
locations at the end of 2008 comis coming from merchants who volhis house submitted about $100,000
pared with 7.1 million a year earlier.
untarily left after they “hit a trigin bogus transactions that resulted in
MasterCard’s and Visa Inc.’s merger,” in Passilla’s words, that would
a police investigation. But Noble and
chant bases are virtually identical in
call for them to post higher reserves,
others say that while fraud does drive
the United States.
cut chargeback rates,
some involuntary attriOn the assumption the U.S. has
or otherwise shore up
tion, especially in a
about 600,000 ATMs owned by banks,
their financial perforweak economy, it’s not
ISOs, or retailers, with growth being
mance as a card accepa huge problem.
nominal in recent years, MasterCard’s
tor. Elavon hasn’t
And if you’re an
figures imply bank card acquirers
changed those triggers,
entrepreneur whose
added 800,000 merchant locations last
Passilla says; it’s just
new business needs a
year despite the fizzling economy.
that more merchants are
merchant account? You
How to explain that? Part of the
hitting them, “which
might have to do a bit
increase is likely attributable to continthey are finding less
more processor shopuance of the decades-old shift of cash
than desirable.”
ping than new merand check payments to credit and debit
Indeed, the downchants did not so long
cards, a trend little affected by passing
turn is triggering a
ago. Johanson of Diseconomic downturns. MasterCard did
migration of merchants
cover says an executive
not make an executive available for
“We’re a flight to quality
who leave one proces- now,” says Elavon’s
with one of Discover’s
an interview, but in an e-mailed statesor on their own seek- Passilla.
96 merchant-acquirer
ment, a spokesperson says the increase
ing a new processor
partners told him
“demonstrates the strong growth of the
that has less stringent requirements
approval rates had “flat-out stopped,
marketplace last year.”
than their old one, or whose procesno new business in the door.”
The spokesperson notes Mastersors now deem them to have become
Card’s efforts to persuade cash-ori‘Back to Your Knitting’
too risky to keep. Processors show
ented merchants to take MasterCard
some merchants the door when they
Yet while the attrition turbulence
through initiatives with taxi compatry to raise cash through card fraud.
acquirers report is very real, the
nies, vending-machine owners, and
“You could just see the economy
payment card merchant base is still
others, partly through the PayPass
kind of getting soft and desperate
contactless card. MasterCard last year
increasing. MasterCard Inc. reported
people doing desperate things,” says
also introduced special interchange
in its fourth-quarter financials that its
Business Starts and Closures
46
Some processors leave you
feeling like this...
At Graphite Payments,
there are NO illusions...
At Graphite Payments, you will receive all of the showmanship but with an unprecedented level of service
that will help you generate more revenue! We get you the answers you need when you need them –
don’t wait days only to get three different answers to one question! Call Graphite Payments today to
learn how you can improve your business with the whole ISO/MSP package!
PLUS...enjoy all of these other revenue generating benefits:
FREE STATEMENT ANALYSIS - Your Time Should be Spent Closing Deals!!!
TRUE REVENUE SHARE! Up to 70%! Interchange + .05 Dial/IP .035 !
APPROVAL BONUS! $150 per Merchant! Paid Weekly!
CONVERSION BONUS! Up to $1,000! Paid Weekly on Approval!
$500 MONTHLY CAR/GAS ALLOWANCE!
PETROLEUM SOLUTION - Pay at the Pump!!!
1151GS-02282008
1151GS-02282008
AMERICAN EXPRESS BONUS! Paid Weekly! On Approval! PLUS Residuals!
FREE EQUIPMENT! Hypercom T4200, Nurit 8320, WAY Systems MTT and Nurit 2085
(PLUS Nurit 2085 Free to Sell or Lease!)
FREE Pin Pad Encryption! Free Ground Shipping!
For further details, contact:
Tina Gregory, CEO - 888.228.1011 ext. 220 or direct 586.216.4255
Sherry Lia, President - 888.228.1011 ext. 221 or direct 519.819.2962
www.graphiteiso.com
rates to attract billers and other recurring-payments merchants.
Visa, which wouldn’t comment
for this story, has its own merchantdevelopment programs. And some
merchant categories, especially electronic commerce, have proven more
resilient than others.
With merchant and consumer preferences for cards still running in their
favor, many merchant acquirers probably are doing what BankCard Central’s
Noble says he’s doing to deal with
increases in voluntary attrition. “You
turn on your sales machine, you go
back to your knitting,” he says.
BankCard Central’s particular
knitting is card-not-present merchants, which account for about 65%
of its charge volume. Noble says his
firm isn’t afraid to book merchants
that conservative banks shun as highrisk, such as sellers of herbal supplements or advisors who help consumers through restructurings of their tax
liabilities—as long as they are honest.
“We will process for legitimate people,” he says.
Some specialty acquirers say the
recent merchant churn is creating
opportunities. “We’re finding people
are flocking to us,” says Bob Botelle,
vice president of the merchant-services
group at Litle & Co. Lowell, Mass.based Litle serves about 250 catalog retailers and other direct marketers. The firm, which adds only 30
to 40 new merchants annually, offers
services beyond basic transaction
Attrition’s Flip Side
T
he other side of the attrition coin is retention. A recent
study indicates there are many things independent
sales organizations and merchant acquirers can do to keep
their merchants other than competing on price.
In fact, the findings from Aite Group LLC’s survey
of 160 small and mid-size card acceptors show merchant
inertia “and a certain amount of laziness,” in the words
of the report, work in processors’ favor. Most merchants
don’t want to go to the trouble of changing acquirers,
says report author Adil Moussa. That means more paperwork, a new depository account, new phone numbers,
and other hassles.
“They just don’t want to deal with it,” Moussa says.
Based on his findings from the interviews, Moussa
released a report in January concentrating on voluntary
attrition and one in March on retention. He’s planning at
least one more.
His analysis led him to make some surprising assessments of common assumptions in the acquiring industry
regarding retention and attrition:
f Merchants using value-added products stick with
their processors: false. There was no major difference
in attrition among merchants that used value-added
products from their ISO or acquirer and those that did
not, according to Aite’s findings. The notable exception
was among merchants that used a PIN pad; these had a
10-percentage-point lower attrition rate than those that
didn’t (chart).
f Overall satisfaction brings higher retention: true.
Among the merchants that had never switched processors, 80% said they were satisfied or extremely satisfied
with their provider.
f Cross-selling other financial services increases
retention: false. While offering checking, savings, commercial cards, and other financial products certainly
48
Acquirer Products and
Merchant Retention
(merchants with value-added products)
31%
PIN Pad
21%
22%
28%
Gift Cards
11%
15%
Recurring
Payments
Check
Verification
9%
13%
Loyalty 3%
Program 3%
1
N = 77.
2
N = 83
Have Never Switched Processors1
Have Switched at Least Once2
Source: Aite Group
can help an acquirer’s banking affiliate boost deposits
or card business, the usage of such products wasn’t significantly different among merchants that had or hadn’t
changed processors.
f Acquisition channels influence retention: true.
Merchants that found their processor through a sales call
or referral were less likely than those that found theirs
through any other way to stay with that processor. Contacts through trade shows and vendors are associated
with more retention.
f Merchants’ satisfaction with specific processor
factors enhances retention: false. It’s the overall relationship that matters. Merchants that have never changed
processors show about the same satisfaction level with
specific areas of their processors as those that have
switched merchant processors, Moussa concluded.
processing, including assistance with
scripting, fulfillment, and marketing.
“We’re a niche player,” Botelle
says. “We’re not in the business of
adding hundreds of merchants a
month or a year.”
Still, while merchant failure has
not been a big problem for Litle,
Botelle says “we do have several
merchants in our portfolio that we’re
watching very closely because of the
economic downturn.”
‘Flight to Quality’
Elavon, meanwhile, is riding on the
reputation of its parent company,
Minneapolis-based U.S. Bancorp, one
of the few top-10 banks whose balance
sheet and reputation haven’t been sullied by the mortgage-market meltdown
and other credit-related problems.
“We’re a flight to quality now,”
says Passilla. “We are finding that
more times than not, [merchants] are
looking at Elavon and U.S. Bank
ownership as a safe haven.”
As noted, Elavon has seen an
increase in involuntary attrition, but
Passilla says the company is still
growing its merchant base. Tactics
include selling merchants on payments-related Elavon products in
addition to card processing, such as
electronic-check services, as well as
helping them find what Passilla calls
an “optimal mix” of business services
from U.S. Bank. “We have the ability to cross-fertilize loans, treasury,
health-care services,” he says.
As both a card issuer and merchant
acquirer, Riverwoods, Ill.-based Discover is taking several steps to control attrition. For its larger merchants,
Discover is focusing on reducing
their costs of acceptance, says Kevin
O’Donnell, vice president of strategic relations. Tactics include examining merchants’ chargeback patterns to
find ways of reducing disputed transactions, and making sure merchants
use every resource available, such as
address verifications, to get the most
favorable authorization rates.
“All of those are common industry
practices that some companies may
not have implemented because they’re
in growth mode,” says O’Donnell.
Discover has sold most of its small
and mid-sized merchant accounts to
bank card acquirers, but works closely
with those acquirers to encourage
charge volume and control attrition,
according to Johanson, who oversees
Discover’s acquirer program (box,
page 44). Part of the strategy involves
co-marketing programs in which Discover funds advertising for merchant
groups such as restaurants in order
to boost charge volume by Discover
cardholders, who sometimes can get
cash credits for spending at those
merchants.
49
People, ideas and technology all working together. It’s happening here. That’s how Fiserv is transforming
the way financial services are delivered and meeting the financial services technology needs of more than
16,000 clients worldwide. Fiserv and CheckFree are now one insights-driven organization, helping our clients
deliver more personalized and profitable experiences through solutions like Corillian Online. With Fiserv, you
have the power to give your customers what’s next, right now. The power within. www.newfiserv.com
Payments
N
Processing Services
N
Risk & Compliance
N
© 2009 Fiserv, Inc. Fiserv and its associated logo are registered in the U.S. Patent and Trademark Office.
Customer & Channel Management
N
Business Intelligence & Optimization
“Consumers need more value,
merchants need more customers,”
says Johanson.
Business Bankruptcies
52
2004
2005
2006
2007
43,546
28,322
19,695
39,201
In the land of the living, a service
approach is acquirers’ best preventative medicine for attrition—and even
more potent than low pricing, according a recent study of voluntary attrition
by Boston-based Aite Group LLC.
“Pricing is only the proverbial
straw that breaks the camel’s back,”
says Aite researcher Adil Moussa.
Moussa notes that merchant dissatisfaction over customer service, confusing statements, and other factors spur
businesses to seek a new ISO or merchant acquirer. And processors often
raise their discount rates in the spring
and fall when Visa and MasterCard reset interchange rates, the single biggest
component of payment card pricing.
“Suddenly, all that dissatisfaction
with what they felt before is exacerbated by this increase and they start
shopping around,” Moussa says.
Aite surveyed the processor tenures of 160 small and mid-sized merchants with up to $3 million in annualized credit card volume—40 apiece in
e-commerce, brick-and-mortar retailing, health care, and restaurants—
from last May to August. Some 51%
of the merchants reported they had
left their original processor since they
began accepting card payments. Aite
estimates that 12% of merchants had
changed processors in the past year.
Brick-and-mortar merchants, the
focus of intense competition among
ISOs and acquirers, had the highest attrition rate, 26%, compared
with 15% for restaurants, 5% for
health-care providers, and 3% for
e-commerce merchants.
Merchants have a notorious reputation for being sensitive to payment
card pricing, and in some respects
Aite’s data affirm that view. Some 78%
of merchants that had changed processors cited pricing as important or very
important in their decisions to switch.
34,317
‘Shopping Around’
2008
Source: Administrative Office of the U.S. Courts
The next most common “important”
to “very important” exit reasons were,
both at 48%, “slow reaction to my
needs” and poor customer service.
‘Throwing Darts’
But processors that concentrate too
much on pricing as a retention tool
could be missing signals from their
merchants about problems, according to Aite. Out of the total number of
merchants reporting they were likely
to leave their processor in the next 12
months, 58% were dissatisfied with
the processor’s products or features,
50% were dissatisfied with the processor’s customer service, and 50%
were dissatisfied with the processor’s
accessibility. Only 32% cited pricing.
Other factors also influence merchants’ happiness with their processors. Among those that had left a processor, 33% pointed to their inability
to understand their processor’s statements as an important to extremely
important reason for leaving. Similarly, some 28% cited their inability to
reconcile their statements and transaction data with accounting software.
Conversely, merchant inertia
plays a role in keeping a lid on attrition (box, page 48). “Even when merchants experience dissatisfaction with
their processor, only 53% express the
desire to switch to a new processor,”
Aite’s report says. “In fact, only 30%
of dissatisfied merchants actively seek
a new processor.”
One reason why the e-commerce
merchants Aite surveyed have such
a low attrition rate is that most were
very young businesses, Moussa says.
Health-care merchants, meanwhile,
have a low attrition rate in part because
they value multiple relationships with
their banks and also put a lower priority on their payment processor’s customer service and the clarity of merchant statements, according to Aite.
Voluntary and involuntary attrition will always be problems acquirers
face, though the involuntary aspect is
more volatile and directly connected
to economic ups and downs. Acquirers have varying opinions about when
the current spike will end. Elavon’s
Passilla says U.S. Bank “is being very
cautious for this entire year” in its
economic outlook.
Speaking in late February, Merchant Warehouse’s Helgeson said he
hoped his involuntary attrition rates
would peak in the first quarter, a time
when many weak retailers make a
final effort to liquidate inventory and
then close for good. But he admits
neither he nor anyone else really
knows when things will improve.
“We’re all throwing darts,” he
says. DT
COMPONENTS
A Meat-And-Potatoes
Focus for Terminals
Peter Lucas
Enhanced data security and POS solutions that can be integrated
with back-office applications may not be glitzy technology, but that’s
what merchants want in these hard times.
W
ith the economy in a severe
nosedive and merchants
shuttering their doors at an
alarming rate, point-of-sale terminal
makers are scrambling to readjust their
mix of technology to entice merchants
to purchase a higher-end solution.
The primary hooks in their new
sales strategy will be terminals with
stronger encryption and integrated
systems. From these systems, POS
terminals and related peripherals can
be hung, and the systems themselves
can run business applications such as
inventory and order management and
support an on-demand software model,
also known as software as a service.
“Increasingly, merchants are looking for POS solutions that deliver data
security and run applications that help
them better manage their business,”
says Darrel Anderson, senior vice
president of sales for Tempe, Ariz.based TSYS Acquiring Solutions.
Opening Holes
Security remains the focal point since
merchants are required by the card
networks to demonstrate compliance
with the Payment Card Industry datasecurity standard regardless of how
basic or sophisticated a terminal they
operate. At the same time, consumer
54
concerns are growing with the
announcement of every high-profile
merchant data breach.
“Security is not going to fade
into the background because of growing consumer concerns about data
breaches at the merchant level, and
even though steps have been taken to
address terminal security, perception
counts for a lot,” says Anderson.
While merchants are cognizant
of the need for increased terminal
security to reassure wary consumers,
they don’t always understand all the
nuances associated with it.
“PCI compliance can be complex, and there are merchants that
want to know it has been taken care
of for them so they can focus on their
core business,” says Scott Holt, senior
vice president of sales and marketing
for Santa Ana, Calif.-based terminal
maker ExaDigm Inc.
For terminal makers, the immediate challenge is not only to keep
pace with toughening data-security
standards for POS terminals handed
down by the card networks, but
also to create encryption capabilities that go beyond what the networks require so that merchants get
a higher level of security than what
is mandated by PCI.
“PCI provides guidelines to protect
card data, but it does not mean all the
security holes have been closed,” says
Scott Henry, director of product marketing for San Jose, Calif.-based terminal developer VeriFone Holdings Inc..
Indeed, a merchant that is deemed
PCI-compliant by an independent
auditor can fall out of compliance
the next day if they make changes to
their operating platform that inadvertently open a hole downstream in the
platform’s firewall. Since many merchants run transaction data from their
POS terminals to the back office over
a local area network (LAN), the hole
creates an opening for hackers to
get at that data.
“Security is a constant re-evaluation process to not only meet industry mandates, but stay ahead of criminals looking for new ways to breach
the terminal,” says Grant Drummond, director of marketing communications for Atlanta-based terminal
maker, Ingenico USA.
‘Sitting Duck’
To thwart hackers, Ingencio has
developed a chip that resides within
the POS terminal and automatically
shuts the device down when it detects
an attempted breach. Using a chip
in place of circuit boards makes it
harder for criminals to hack into the
terminal and tamper with data, since
data are stored deep within the chip
under multiple layers of silicon used
in the chip’s construction. To get at
the data, hackers must breach each
layer, which is a time- and laborintensive process.
“Most chips have up to 30 layers in their construction and we bury
the data that needs to be secured
deep within the structure, making it
extremely hard to get at it,” explains
Drummond.
The technology also secures the
terminal if a merchant chooses to
resell it or swap it out for a newer
model. This is important because
unless the merchant can guarantee a
secure chain of custody once the terminal leaves its possession, there is a
security risk in the transfer.
“Once a terminal is initialized
to communicate with a host system,
data can reside within it, so any time
it gets moved, there is a potential
risk it may be tampered with,” says
Drummond. “That’s a concern for
terminals that get resold.”
The other advantage of using a
chip as opposed to circuit boards
is increased reliability of operation.
With a circuit board, components are
soldered to the board, which creates
connections that can break.
“Chip circuitry also reduces the
components in the terminal by 50%
and we expect it will increase reliability by the same amount,” says
Drummond. “Plus, it is easier and less
costly to manufacture.”
Another effort to neutralize the
threat of data breaches at the merchant level is Hypercom Corp.’s
HyperSafe Secure, which encrypts
cardholder data during transaction processing and ensures they
remain encrypted until they reach
a secure endpoint, where they are
unencrypted.
Encryption relies on the Triple
DES algorithm applied from a MagTek
Inc. card reader. HyperSafe Secure
also leverages a digital-authentication
solution that detects counterfeit credit,
debit, gift, and ATM cards, and stops
hackers in real time.
Ariz.-based Hypercom. “It’s better to
The solution grew out of a weakhave end-to-end encryption.”
ness in the architecture used by large
VeriFone has adopted a similar
multilane retailers to transmit data
end-to-end encryption
across their LAN. As
method with the impletransaction data enter
mentation of AES
the LAN, they are put
(advanced encryption
in a format recognized
standard). The primary
by the network, which
advantage of AES is
in some cases unenthat it preserves data
crypts them. The data
in a standard format
are then re-encrypted
so they can be moved
as they exit the netacross a merchant’s
work upon reachLAN to the back office
ing their endpoint.
and read upon arrival,
While the data may
but they remain in an
only be unencrypted
encrypted state and
for a moment, that’s
Hypercom’s Boardman:
therefore unreadable to
a wide-open window “It’s better to have endcriminals as they travel
for criminals that to-end encryption.”
over the LAN.
successfully hack a
“Merchants need to put card data
retailer’s network.
in a format that is readable to the back
“When this happens the data [are] a
office but also protect it as it travels
sitting duck,” says Gregory Boardman,
over their network,” says VeriFone’s
senior vice president, North American
Henry. “Criminals that breach the
business development for Scottsdale,
Place Your Merchant Payment Processing
World in Trusted Hands
www.eProcessingNetwork.com ♦ [email protected] ♦ (800) 971-0997
Credit / Debit / PIN-Debit / ACH / Gift Card / Loyalty
♦ Mobile / Wireless
♦ Online Terminal
♦ Internet
♦ POS
♦ Recurring Solutions
♦ Financial Software
Integration
55
merchant’s network when data [are]
encrypted using AES don’t know what
is card data and what is not.”
‘A Generational Issue’
As important as security to merchants
is expandability of the terminal.
Advances in retail software platforms
that provide a consolidated view of the
merchant’s business through an executive dashboard accessed via a PC
or notebook have whetted merchant
appetites to consolidate access to their
POS data in the same manner.
In recent years terminal makers
have struggled with how to go about
meeting this need. In some cases
the answer has been to load more
business-management applications
into the POS terminal itself and
increase the screen size.
The drawback to that strategy is
that many terminal makers load proprietary applications onto their terminals,
which usually requires a bridge code
to integrate them into the Microsoft
Windows environment found in most
business-management and POS sys“The on-demand model greatly
tem are more likely to pay a few hunreduces upfront capital costs and ensures
dred dollars more for an integrated
that users get the latest enhancements as
system, rather than buy a POS terthey become available,” says Ed Rothminal and a separate PC to run their
enberg, vice president for product innobusiness-management
vation and strategy for
applications.
Micros-Retail, a ColumThe growing popbia, Md.-based provider
ularity of integrated
of POS and retail softsystems is opening the
ware. “This levels the
door to delivering softplaying field for small
ware on an on-demand
and mid-size merchants
basis. Many retailers
when it comes to the
have already adopted
functionality of their
the on-demand model
POS system because
in their core operating
they can have the same
platform.
tools as the big guys.”
By
definition,
Not all terminal
on-demand software,
makers are fully sold
TSYS Acquiring’s
sometimes referred to Anderson: “Perception
on the idea of these
as software-as-a-service counts for a lot.”
so-called multitenant
(SaaS) or thin-client
applications. “It makes
applications, is software that resides
it harder to differentiate your applicaat a single location and that multiple
tions and merchants are more inclined
customers access and use as needed.
to go with the cheapest hardware,”
Users pay a monthly subscription fee,
says Hypercom’s Boardman.
as opposed to upfront capital costs,
Advances in on-demand software,
however, are making it possible for
merchants to tailor on-demand applications to their business needs while
retaining the core multitenant functionality. “We think that merchants
will want some level of customization
licensing fees, and ongoing back-end
with this model,” adds Boardman.
maintenance costs. Capacity is scalTerminal makers expect that delivable and subscription fees adjust based
ering terminals and POS systems that
on the capacity used.
enhance data security, integrate busi‘Hot Buttons’
ness management and POS applications, and pave the way to deliver
Vendors will upgrade their platform
software through the on-demand
several times a year, compared to
model to prop up sales until the econevery 12 months or longer for licensed
omy rebounds and merchants become
applications. Changes to homegrown
willing to pay for glitzier technology.
platforms are slower too, as IT per“These are some of the hot butsonnel must be shifted away from
tons with merchants right now,” says
their core duties. Because upgrades in
ExaDigm’s Holt. “With the merchant
the on-demand model are universal to
base shrinking, the focus is going to
the user base when one user discovers
be on providing merchants with POS
the need for a new feature, the vendor
solutions that help run their busirolls it out across the platform.
ness more effectively and provide a
That’s a huge advantage for multisecure shopping environment. That’s
lane merchants, since all terminals are
the value merchants are looking for in
upgraded simultaneously rather than
the POS system.” DT
individually.
‘The on-demand model greatly
reduces upfront capital costs.’
merchant back offices. In addition,
merchants don’t usually turn to a countertop POS terminal to access business-management software. Rather,
they prefer to use a PC or notebook off
of which they can hang a terminal or
PIN pad. The integrated architecture is
more attractive than cobbling together
disparate systems.
“It’s becoming a generational
issue, since younger employees are
used to working on a PC in an integrated Windows environment that provides a single access point to multiple
applications,” says Tony Abruzzio,
senior vice president of third party
acquiring for Atlanta-based Global
Payments Inc.
Concurrently, the cost of integrated systems is coming down. As a
result, merchants desiring an integrated
56
©2009 Digital Check Corporation. All rights reserved.
NETWORKS
A Captivating
Deposit Solution?
Jane Adler
Financial institutions looking to reduce costs while expanding their
reach are weighing whether now is the right time to aggressively
push into remote deposit capture for consumers.
W
ith remote deposit capture quickly emerging
as a standard offering to
small-business and corporate clients,
financial institutions are now turning
their sights on consumers. The market
potential seems huge since 90% of U.S.
families have a checking account.
But industry observers question
whether remote deposit will remain
a niche product for only a small,
select group of consumers, or whether
the service eventually will reach
nearly every home as scanners and
high-resolution cell phones become
the easy and preferred vehicle for
depositing checks in the bank.
“There’s a lot of skepticism
about the consumer market,” says
John Leekley, chief executive at
RemoteDepositCapture.com, an industry portal. “Will this be a product for
the masses? Or are we seeing irrational
exuberance? Time will tell.”
As financial institutions compete for much-needed deposits in
an uncertain economy, some argue
now is the right time to aggressively
roll out consumer remote deposit.
They note that remote deposit is
a new channel easily added to
online-banking systems. And just as
financial institutions want to boost
58
deposits, consumers want quick
access to their funds without having
to go to a branch or even an ATM.
Early Adopters
Consumer capture may be the answer,
but the big banks have yet to be convinced. JPMorgan Chase & Co., for
example, offers remote deposit for
businesses, but a bank spokesperson
says the consumer market is not a top
priority—not yet, at least.
Big banks have extensive branch
networks and probably feel less of a
need to offer the service, observers say.
Remote deposits also could compete
with those networks by reducing foot
traffic, effectively raising banks’ costs.
Risk is a factor too, as financial institutions already worried about losses in
a toxic environment seek to avoid new
problems from a new technology that,
on the surface at least, seems ripe for
fraud. And though a large bank may
have a big consumer customer base,
most consumers deposit only a few
checks a month any way.
Mid-size to large banks seem
more likely to make an initial push
into deposit capture for the small
office/home office customers, the socalled SOHO market, rather than for
pure household deposits. “It’s a very
powerful value proposition for those
customers as banks seek to improve
service in today’s deposit wars,” says
researcher Robert Meara, senior analyst at consulting firm Celent LLC.
Others admit there’s a fine line
between consumer capture and a
home-based business that uses the
service, especially as more workers
become self-employed with the shrinkage of the traditional labor market.
For now, though, consumer capture
is still in its infancy. There are currently an estimated 75,000 consumers using remote deposit, according to
RemoteDepositCapture.com. But bank
processor Fiserv Inc. expects the number of users to grow rapidly, approaching 1 million by the end of 2009.
For consumers, the deposit process is simple. The customer scans
both sides of a check at home and
then submits the image via an onlinebanking account. The scanner must
be what’s called “Twain” compatible
in order to meet image-quality standards. Common flatbed scanners and
combination fax, copier, and scanner
machines typically meet this requirement, and can cost less than $200.
The scanned image flows through
the consumer’s online-banking portal
to the financial institution for validation, processing, and clearing. Providers’ systems are configured so that
check images meet standards set by
the Check Clearing Act for the 21st
Century (Check 21), which took effect
How Will You Pick
Your RDC Partner?
Our complete RDC solution
puts success within your
If you’re an ISO looking for a Remote Deposit Capture partner,
ProfitStars® is the best of the bunch! A division of Jack Henry
& Associates Inc.®, we’ve been a leader in the electronic
payments industry since 1988.
reach by opening the door
to new relationships and
greater revenue opportunities
from existing customers.
ProfitStars’ ISO Program offers:
•
•
•
•
•
An integrated, easy-to-use platform for processing including Check 21, ACH, credit and debit cards
Advanced technology, featuring robust reporting tools and QuickBooks® import capabilities
Competitive buy-rate program generating upfront revenue and generous residual payments
Convenient purchase and leasing options for all major check scanners
Next day funds availability for qualified customers
Find out why more than 20,000 businesses rely on ProfitStars’ RDC.
Visit our Web site at www.discover.profitstars.com/teamiso
866.554.2224 | [email protected] | www.profitstars.com
in 2004 with the emergence of imageexchange networks.
Most early adopters of remote
deposit for consumers have been small
banks and credit unions—financial institutions with few branches or a widely
scattered member base. The most notable user, however, is a large institution—
USAA FSB, which serves its customers
The cost of consumer capture is
relatively low. CO-OP FS charges
its members a set-up fee of between
$5,000 and $10,000. Users also pay
a monthly software-licensing fee, and
a transaction fee. Credit unions set
retail pricing.
Meanwhile, about 30 credit unions
receive consumer-capture services
Deposit Costs Compared
$3.00
$2.25
$1.75
Shared
Branching
Foreign
ATM
Mail-in
mostly by phone, the Internet, or mail.
According to a report by Boston-based
Celent, the bank has nearly doubled its
rate of deposit growth since 2005 when
it introduced its consumer deposit product, Deposit@Home.
San Antonio, Texas-based USAA,
which has about $27 billion in deposits, won’t say how many customers
use the service and declined to be
interviewed for this story.
Cheaper Deposits
The big credit-union service organization CO-OP Financial Services, which
has 2,600 members, rolled out its “My
Deposit” system in 2008’s second
quarter. “It’s a hot item,” says Eric
Porter, executive vice president of
business development at CO-OP FS.
The Rancho Cucamonga, Calif.,
company signed an agreement in February with Intuit Inc.’s Digital Insight
unit to market My Deposit to its clients, which could greatly expand the
product’s reach. Digital Insight provides online-banking services to midmarket financial institutions.
60
$0.75
$0.60
Branch
Remote
Source: Celent
from Eastern Corporate Federal Credit
Union, or EasCorp, a credit-union service provider in Burlington, Mass. The
system has 24,000 registered users.
Since its introduction 14 months ago,
the “DeposZip” system has collected
about $80 million in deposits.
Consumers pay no fee to use the
service—the favored pricing model
of most financial institutions. Credit
unions pay a monthly maintenance fee,
and, in some cases, a transaction fee.
High-volume customers pay
less than 25 cents per deposit, says
George Dow, vice president of development at EasCorp. He adds that
the cost for remote deposit is less
than for other deposit channels. “The
payoff [for remote deposit] is very
quick,” Dow says.
Industry consultant Meara says
the average remote deposit transaction
costs about 60 cents. That compares to
about $2 per transaction for an ATM
deposit, and between $1 and $2 per
transaction for mail-in deposits (chart).
Costs for deposits made at branches
ostensibly are low but actually are
more expensive when staff and fixed
costs are considered, he says.
Implementation costs of remote
deposit have been low at First Command Bank, Fort Worth, Texas. First
Command agreed to test the remote
deposit system offered by processor Fidelity National Information Services Inc. and, in return, received the
product at a reduced cost, according
to Sherry Sitton, executive vice president at First Command.
The single-location bank has
85,000 customers, and 65,000 of them
have online accounts. So far, 1,600
online customers have signed up for
the remote-deposit service since First
Command rolled it out last November.
The system averages about 1,200
deposits a month. The bank, which
originally served the military, processes
only about 25,000 checks a month. But
the remote deposits are cheaper to
process than traditional checks, says
Sitton. “The more we can do without
paper, the better,” she says.
‘Sweet Spot’
To qualify for remote deposit, customers must be in good standing with
the bank without non-sufficient funds
(NSF) incidents or credit and debit
card chargebacks in the previous year.
A customer using remote deposit
also must have another relationship
with the bank, such as a loan or
an insurance product from one of
the bank’s affiliated advisors. (Other
financial institutions require multiple
relationships too.) The daily deposit
limit at First Command is $5,000.
At EasCorp’s credit unions, the
average remote deposit totals just under
$1,200, with an average check value of
about $900. “The deposit values are
higher than we anticipated,” says Dow.
He thinks the high deposit value illustrates the type of consumer who values
the service: customers with money,
or those with a lot of money moving
through their checking accounts.
Celent research indicates that highnet-worth (i.e., rich) households could
be a “sweet spot” for consumer capture.
In households with assets of more than
$2 million, 58% use online banking
and 81% have a brokerage account.
At First Command Bank, large
deposits also have been the norm,
says Sitton. She doesn’t attribute big
deposits to wealthy individuals, but to
customers who are cashing in equity
investments and depositing checks in
their accounts as a safe haven.
Operational results have been
encouraging so far, thanks in large part
to business-oriented capture solutions
that have greatly improved recently
and have served as the model for consumer solutions. The systems easily
catch duplicate checks, and institutions report few cases of fraud.
Alliant Credit Union, in Chicago,
opened remote deposit to its members
last December. Alliant offers the service to all members with trouble-free
accounts. Since the rollout, there has
been only one case of fraud. An internal committee reviews scanned checks
each morning and caught the fraudulent check, according to Penny Wang,
Web development manager at Alliant.
In January, the Federal Financial Institutions Examination Council
(FFIEC) issued guidance on remote
deposit capture. The guidelines apply
to consumer systems too, and cover
risk management and operations,
legal issues, and technology.
Mobile Deposits
For now, software and hardware providers are forging ahead, figuring
the market can only grow. Vendors
are announcing new solutions almost
weekly. Long Beach, Calif.-based
Epson America Inc. plans to introduce new software this month that
speeds processing of the check image
from flatbed scanners. ATM and kiosk
maker NCR Corp. in late February
introduced software that enables
remote deposits from home.
Fiserv also unveiled a consumercapture product in February. The
Brookfield, Wis.-based processor has
a suite of deposit-capture products,
including those targeted at merchants
and bank branches.
Gary Brand, Fiserv’s director of business strategies, estimates
that about nine companies currently
make consumer-deposit software. He
expects that number to grow to 12 to
15 companies before too long.
Of course, a real boost could come
when cell phones and other mobile
devices are enabled to take photos of
checks for deposit. Then consumers
won’t even need a home scanner to
put checks in the bank.
Mobile deposit is already taking
shape for businesses. In a February
survey of financial institutions, Fiserv
found that one-third of respondents see
61
a need to offer mobile deposit capture
services to business customers.
Mitek Systems Inc., San Diego,
has created technology that converts
a camera-equipped cell phone into
a mobile scanner that can read and
extract check data from a digital photo.
The image is Check 21-compliant.
Mitek’s technology currently
works on cell-phone cameras with
2-megapixel resolution or higher.
These include smart phones such as
Apple Inc.’s iPhone and the Blackberry
from Research in Motion Ltd. Mitek
says the growth in mobile banking,
especially among young customers,
eventually will lead to mobile deposits among that group. Also, cell-phone
camera quality is improving quickly,
while the prices for smart phones and
other mobile devices are declining.
J&B Software Inc. has several pilots
under way using the Mitek system.
“You have to get used to how to take
the picture,” says Jim Wynn, director of
marketing at J&B in Blue Bell, Pa.
The camera phone must be held
steady, and it’s recommended that
the check be placed on a dark background. A user logs in to his onlinebanking site and selects the account
in which to deposit the check. The
software enables the camera automatically to prompt the user to take
a photo of the front of the check. The
check is validated for clearing.
Then the user is prompted to take
a photo of the back of the check. The
transaction is then submitted and confirmed, and an e-mail notification is
sent to the user. The system performs
an image-quality analysis to make
sure it meets Check 21 guidelines.
Yet another contender, EFT Network Inc., recently introduced a product called FaxTellerPlus that lets businesses or consumers deposit checks
by faxing them to EFT Network’s
data center. As of early this year,
four banks were using the product to
handle between 10,000 and 15,000
checks per month. Those banks are
among the nearly 200 clients of the
Hawthorne, N.Y., company’s conventional remote capture service.
Will everyone use cell phones to
send checks to the bank some day?
Industry analyst Meara thinks consumers might only use the service
occasionally. And many banks won’t
offer the service because they don’t
believe consumers would use it.
The banks might also see mobile
remote deposit for consumers as just
one more product to market that just
isn’t important enough to justify the
costs. “I think the banks will be resistant to this,” Meara says.
But others have a different view,
and they’ll keep stirring the consumercapture pot in hopes that it will come
to a boil. DT
can we give her simple, quick, innovative ways to pay you?
As a leader in payment services, we offer a full line of payment solutions. So you’ll be ready to accept payments
online, through IVR or call centers, or at our agent locations. It’s simple for your customers, good for your business.
Visit payments.westernunion.com[VÄUKV\[TVYL
payment services
62
SECURITY
Can Image-Survivable
Security Technology
Survive?
Linda Punch
Without the right controls, imaging can exacerbate check fraud. Some
say special security features that survive the imaging process are the
answer, but questions abound about cost and implementation hassles.
T
he Check Clearing Act for the
21st Century, or Check 21, in
2004 set the stage for a new era
of check processing—check imaging.
But it also introduced new opportunities for check fraud. Time-tested,
paper-based security features such as
watermarks, security inks, and void
pantographs that previously held
check fraud at bay don’t work in the
check-imaging environment.
With check fraud on the rise—and
with check imaging accounting for
a growing percentage of total check
volume—financial institutions, vendors, and other industry participants
in 2006 joined together to develop
so-called image-survivable security
features. Part of that effort included
developing an industrywide standard
for check verification and maintaining a registry of security features that
meet those standards.
The need for image-survivable
security features is growing. With the
advances in computer technology over
the last 15 years, “the image is particularly susceptible to being doctored or
manufactured completely,” says Scott
West, fraud suite product manager at
Metavante Image Solutions, a subsidiary of Milwaukee-based bank processor Metavante Corp.
Indeed, attempted check fraud more
than doubled to $12.2 billion in 2006,
up from $5.5 billion in 2003, according to the American Bankers Association. Actual dollars lost totaled $969
million, up 43% from $677 million in
2003. Counterfeit checks were the fastest-growing cause of actual dollars lost,
and accounted for 28% of fraud losses,
up from 15% in 2003, the ABA says.
Although it’s not clear what role
check imaging has played in the
increase in check fraud, it’s clear that
“image-survivable security features
are very, very important,” says Nancy
Atkinson, senior analyst with Bostonbased research firm Aite Group LLC.
Limited Usage
Nearly three years later, however, the
use of image-survivable Check Security
Features (ICSFs) is limited to a small
number of large issuers of checks that
can control the printing of check stock
and have enough volume to justify
the cost of implementation, says Ron
Thompson, executive vice president of
the integrated risk management division
of Fiserv Inc. “To this point, it’s largely
been a boutique application,” he says.
Nevertheless, the industry has
overcome one obstacle: interoperability. Studies by the Financial Services
Technology Consortium several years
ago showed that while financial institutions and others had developed
image-survivable check security solutions, the lack of interoperability limited their deployment. As a result, the
FSTC initiated a project to develop a
standard with input from check printers, vendors, and financial institutions.
Under that standard—DSTU
X9.100-172—the security mark
printed on the check must encode
information that can enable some type
of verification. The encoded information must be present on or associated
with the document—such as payee
name or dollar amount—and also can
include other identifying attributes of
the parties to the check.
Registered marks thus far fall into
two main categories: proprietary symbols that encode data into graphic elements and standard barcodes. Under
the standard, the image must be 200 or
greater dots per inch black-and-white.
In addition, the marks must be located in
standard locations on the fronts of both
consumer and commercial checks.
Financial institutions using ICSFs
on their checks must select a feature
provider and then contract with a
third-party verification authority or
set up its own verification authority.
The authority uses software associated with the mark to determine
whether the check is fraudulent.
“Having something that’s more
industry-standard is a positive thing,”
63
Atkinson says. “It allows banks to
implement one solution that goes
across any of these methods.”
Only four companies thus far have
met the standard, a requirement to
be listed in the registry, although
other companies are developing
image-survivable marks. The registry
is maintained by Viewpointe LLC, a
provider of check image exchange and
archive services, under a memorandum of understanding with Accredited Standards Committee X9.
PaymentsNation, a payments-solution provider, developed a draft version
of the registry in 2006, in conjunction
with MorSecure, a security consultancy. Viewpointe acquired PaymentsNation in December. Companies that
have registered are Advanced Software
Design Corp.; Cheque-Guard LLC;
Fiserv Fraud & Compliance, a Fiserv
Solutions Co.; and Viewpointe.
Not Sold on ICSF
Despite advances in interoperability,
ICSFs are still a hard sell. Convincing
financial institutions struggling with the
credit crisis and deteriorating economy
to invest in the new technology isn’t
easy. It’s especially hard, Metavante’s
West says, because ICSFs are a digital version of a security feature already
widely used by banks—positive pay.
Under the positive-pay solution, a
corporation sends to its bank an issue
file containing the number of checks
issued, the dollar amount of each
check, and the payee on the check.
When the bank receives the checks for
payment, it compares them to the file
to see if there are any suspect items, for
example, a check in the wrong amount.
The bank notifies the corporation of
the discrepancy, and the corporation
decides whether or not to pay.
“You’re looking at revamping the
technological aspects of the positivepay relationship,” West says. “This
would require them to implement an
additional piece of software to place
physical information on the surface of
those checks. That’s tough.”
64
West notes that banks are looking
out for their own interests as well as
the welfare of their customers. “Placing
additional requirements on their customers is not always the easiest thing for
financial institutions to do,” he says.
Metavante isn’t convinced that
ICSFs are the way to go, West says.
For the past year and a half, Metavante has been investigating the difference between security marks being
present in a positive-pay atmosphere
and using positive pay without the
security marks.
“From the Metavante perspective,
we look at the efficacy of positive
pay as it stands today—which is the
best fraud-prevention tool for corporate banking because it deals with
items on a one-to-one basis as they’re
issued,” West says. “If (ICSFs are)
not tremendously more cost-effective
than positive pay as it stands today,
then [providers are] going to have
difficulty getting their customers to
adopt the additional requirements.”
While there is additional cost to
adopting ICFS solutions, financial
institutions largely have the technology
needed to implement image-survivable
security features, Thompson argues.
“Most of them, whether they’re outsourced or in-house, are electronifying
the checks through their own imaging
platforms,” he says. “They have their
own archives, viewing capabilities, and
so forth. What’s really left for them is to
acquire the software, which can be done
with a one-time license fee and professional services or, in some cases, can be
spread out based on usage.”
‘Different Ball Game’
Costs aside, ICSFs address only part
of the check-fraud problem. Imagesurvivable security features aren’t
practical for retailers, West says.
While corporations generate large
volumes of checks using software,
“it’s an entirely different ball game”
for retailers, West says.
“In the retail space, you’re still
looking at the prevalence of remote
deposit capture, especially at the merchant level, and you’re looking at
handwritten checks,” he says. “There’s
really not a feasible way to encode that
information on those checks as they’re
being created by the consumer and
released into the retail market.”
For image-survivable check security features to work in the retail environment, the consumer would have to
place a security mark relevant enough
to verify the content of the information, West says.
“They would have to either generate the check at the site or have a previously generated check,” West says.
“And in the retail world we live in, it’s
just not feasible.”
At the retail level, Metavante is
taking a different approach to check
security in an image-exchange environment. It is working on a solution that combines Metavante’s inhouse MICR-based fraud system with
image-analysis products that look at
check-stock validation, automated
signature verification, and other features of the check.
Metavante’s system would check
to see if the dimensions of the check
are the same as the stock used for the
account or whether select design elements are consistent with designs on
authentic stock.
For example, the solution tracks
how a consumer’s signature changes
over time or whether check fields are
in the same place consistently. “That
is proving from our vantage point to
be a better retail tool,” West says.
Using the Metavante system,
“the consumers just continue to write
checks as they do today,” he adds.
“The heavy lifting occurs in the financial processing of the items. It’s all in
the back office of the processor.”
Despite Metavante’s misgivings,
many see an eventual role for imagesurvivable security marks on both corporate and consumer checks. But financial institutions will have to determine
whether the benefits of implementing
the system outweigh the costs. DT
When it comes to RDC applications such as BOC, you
double check detector, built-in franker and two-pocket
can count on the most reliable desktop scanner available,
support for separating documents. Best of all, CaptureOne
CaptureOne™ from Epson. CaptureOne features the highest
comes with the quality and reliability that Epson is known
MICR accuracy in its class, a high-quality image scanner
for, backed by an industry-leading two-year warranty. Find
that ensures crisp, clear images, electronic endorsements,
out more today at pos.epson.com/financial.
©2009 Epson America, Inc. Epson is a registered trademark and Epson Exceed Your Vision is a registered logomark of Seiko Epson
Corporation. CaptureOne is a trademark of Epson America, Inc. All other trademarks are the property of their respective owners.
STRATEGIES
How To Look for
the Next Big Thing
David S. Evans
Despite economic turmoil, lots of innovation is happening in electronic payments. The real issue is picking the winners. For that, keep
your eye on data, cloud computing, and mobile technology—and a
mashup of all three.
T
he payments industry is going
through some tough times.
Transactions drive profits for
everyone in the industry, and in the
past months these transactions have
been plummeting.
Indeed, it looks terrifying at the
bottom of the market. But history
teaches us one thing in these grim
times: it always gets better. And companies that weather these storms often
come back even stronger.
Look at Bill Me Later. This online
payment alternative started on the eve
of the dot.com crash. Since then it
has on-boarded a thousand merchants
and over 4 million consumers. Not
even three weeks after the collapse of
Lehman, as markets were imploding
around the world, eBay Inc. acquired
Bill Me Later for almost $1 billion.
Those who innovate for the long run
can make lots of money.
Half of consumer expenditures
are made with cash and checks, leaving trillions of dollars up for grabs
and plenty of room for innovation in
this industry. So in spite of the macro
issues that encircle it, the future for
payments looks bright.
And in fact, profound changes are
happening—the kind of change that
66
will transform how consumers shop
and how businesses sell. Now isn’t
the time to hide under the covers. The
payments industry is going through
a gale of creative destruction, to use
the words of Joseph Schumpeter,
the famous Viennese economist who
pointed to the new products, the new
technologies, and the new organizations that sweep away the old ones.
The future of the payments industry is in the data, in the cloud, and in
your hands.
Focus on the Dog
For those of us who have been in the
industry for a while and who have
heard the chorus of change before,
the payments industry’s track record
of delivering real change has proved
disappointing. Most people who talk
about change and innovation tend to
focus on the physical method used at
the point of sale. They talk about contactless and biometrics, about paying
with mobile phones, our eyeballs, or
our finger tips. But that’s focusing on
the tail rather than the dog.
The plastic card is just an access
device to the vast payment network that
moves digital money between consumers and businesses. The innovations
I believe we’ll see will be less about
changing the mechanics of how we
pay, less about waving instead of swiping, and more about transforming the
entire process of transacting between
consumers and businesses. To carry
the metaphor further, these profound
changes are the dog and the physical
method is merely the tail.
People looking for change within
the payments industry are simply
looking in the wrong place. Changes
in how we transact will be driven
by three distinct technological revolutions and from mashups of these
technologies with payment methods
that enable a transaction to occur.
You have to know where to look for
the revolution: it’s in the data, in the
cloud, and in your hand.
It’s in the data. Google and others
have shown how crunching massive
amounts of data can release enormous
value. Online advertising businesses
have made fortunes analyzing what
you search for and where you browse.
Yet despite all its sophistication, it’s
still based on a lot of guesswork.
That’s why women are annoyed at
constantly seeing advertisements for
losing weight on Facebook. But people
actually like advertisements that are
relevant to their lives. If I’m looking
for a new pair of sneakers, I’m happy
to get ads on who has the best ones or
where I can get the lowest price.
The payments industry is sitting
on a much richer trove of data—hard
MORE OPTIONS. MORE CUSTOMERS. MORE PROFIT.
Partnership for your success.
Wirecard’s Partner Program allows you to benefit from the strong market position and great
expertise of a leading payment processing and risk management company. Together with
Wirecard Bank we offer cross-border acquiring and multi-currency solutions. Our innovative
payment solutions and unrivalled terms create highly attractive sales opportunities for you.
Expand your portfolio and grow thanks to strong provisioning models. Talk to our Partner
Management team and become part of our success story.
www.wirecard.com/partner
venture companies, is an example of
data on where people shop and what
this. It has a Web-based application
they buy. Using those data can help
that allows small businesses to quickly
companies provide better information
accept multiple methods of electronic
and offers to consumers.
payment and to integrate all of their
Suppose I buy a new pair of runtransaction activities directly into their
ning shoes at Niketown. I might get
accounting software. It sits on top of
ads delivered to my mobile phone
the IP Commerce platform and makes
for energy bars at the nearest GNC,
maybe some coupons to buy running
clothes at City Sports,
and maybe 50 cents
off on a frappucino at
the Starbucks next to
Niketown.
It’s in the cloud.
This is where Webbased applications
run on lots of interconnected computers.
Today’s payments
industry is built on
jerry-rigged linkages
connecting diverse
hardware and software. Dealing with
this old plumbing is
painful and costly.
Innovation, though, is
moving to the cloud.
IP
Commerce
Winning innovators will figure out
Inc., a Denver-based
how to combine payments with
company that is part
payments data to deliver just the
of Market Platform
right pitch at just the right time.
Dynamics’ portfolio
of venture companies, is a leader in this space. It has
it possible for small businesses to be
developed a software platform that
up and running in a matter of days.
essentially sits on top of the payments
It’s in your hand. Just about everysystem. You can think of it as Winone in the world is carrying a mobile
dows for payment systems. It works
phone. Some of us are carrying a smart
with point-of-sale devices like those
phone like a Blackberry or an iPhone.
of VeriFone Holdings Inc. and proThese are handheld computers with
cessing platforms like those operated
browsers, Internet connections, clever
by First Data Corp. in the same way
applications, and global positioning.
Windows works with printers and
Most people will be carrying a similar
other peripherals.
device in the next decade.
Other companies then build appliMobile phones are already revocations on top of the IP Commerce
lutionizing payments in many parts
platform, moving innovation out to the
of the world. What’s amazing is how
edge of the system. PaySimple, also
developing economies from Africa to
Denver-based and also part of MarIndia are using mobile phones to move
ket Platform Dynamics’ portfolio of
money between people and businesses.
68
It’s a lot easier than putting in pointof-sale devices and wiring up card networks, and it’s finally challenging the
pervasive use of cash in these economies. Outside of Asia, though, among
the developed economies, mobile payment hasn’t caught on.
The real power of the mobile
phone hasn’t been realized yet. Mobile
phones may eventually replace cards at
the point of sale, but not because we’ll
be able wave them at contactless terminals like in Korea or because we’ll be
able to use them to pay via text messages like in Africa. They’re going to
replace cards because it’s possible to
integrate payments, data, and the cloud
into the mobile device. It is the mashup
of the phone with these other technologies that will deliver real value to consumers and merchants.
Mashups
Entrepreneurs are working on a lot of
mashups these days. Let me tell you
about a few to watch.
Cellfire Inc. is combining locationbased services, retail merchandising,
and basic couponing. Essentially a
virtual-coupon wallet, the application
allows consumers to easily find, store,
and use discounts and coupons across
various merchants and locations right
on their mobile phones. What’s more
interesting, the application has the
potential to push ads to your phone
based on where you are and what
you’re interested in buying.
Amazon.com Inc.’s TextBuyIt
service is another good example. It
is turning the online/offline shopping
paradigm upside down. Consumers
can shop at stores where they can
look at merchandise in person. While
there, they can text Amazon the UPC
code of the product they want to buy.
If Amazon has it, and offers a lower
price, the consumer can send a text to
confirm a purchase, have it charged
to his Amazon account, and shipped
to his doorstep.
One company that is still under
the radar screen is developing an
advertising network for financial
institutions. It enables these institutions to display targeted messages to
their online-banking customers who
view their statements online, allowing advertisers to reach these eyeballs
with relevant ads and promotions.
Importantly, its technology
adheres to the strict rules that regulate
the protection of consumer financial
information. This is a mashup of
online advertising, data analytics,
and payments. It’s a clever way to
monetize actual transaction data by
offering highly relevant offers in a
subtle way.
Another company that’s operating
under the radar screen can track people’s movements within retail stores
and shopping malls using signals emitted from their mobile phones. If married with data analytics and merchant
point-of-sale technologies, these sorts
of location-based services can deliver
highly targeted offers to consumers
in real time, influencing purchasing
behavior in a nonintrusive way.
secure. People have to believe that it’s
secure. Bill Me Later built a highly
successful online business on the back
of security concerns over entering card
information on Web sites.
Likewise, people are skittish about
paying with contactless because they
envision some gangster hacking into
their bank accounts. And, as we all
know, the biggest consumer reservation about using mobile phones for
payment is security.
Picking Winners
Given all of this, who has the greatest
chance to succeed? I’m not going to
name names, but here is a framework
for evaluating wannabes.
Risky Change
Change, in whatever context, though, is
not without risk. Lots could go wrong.
There’s business risk. In spite of all
of the cool technology, the payments
business is still all about cracking the
chicken-and-egg problem of getting
consumers and merchants on board a
payments platform. The $300 million
investment into the Pay By Touch
pay-with-your-finger concept went
poof in just a few years.
There’s technology risk. Everything really needs to work smoothly
and simply for merchants and consumers. The clerk at the checkout counter probably doesn’t have
a degree in computer science, has
probably only worked there for a
few months, and the consumer just
wants to get out of there. Merchants
and consumers won’t tolerate system
failure at the point of sale.
There’s security and fraud risk. Not
only does the technology have to be
69
There are two important tradeoffs
that determine success. These can be
plotted on a simple 2x2 matrix that
shows the degree of consumer change
required against the level of merchant investment needed to support
something new. When you look at it
this way, it’s not hard to understand
why contactless, for example, has
fallen short (“Can Contactless Stay
in Touch?” December 2008) and why
the good old-fashioned mag-stripe
card remains king of the hill.
But there is a different version
of the matrix that measures another
tradeoff which is at the heart of the
transformation we see coming. It takes
into account the value of a “wow”
shopping experience to a consumer,
and how that “wow” may actually
motivate the merchant to make the
investment necessary to create a better
value proposition for the consumer and
drive incremental sales to their stores.
This is our litmus test for separating the hype from the reality in the payments world: Focus on what change in
payments should be delivering, which
is the ability to improve the transaction
by enhancing the shopping experience.
The convergence of payments, data
for behavioral targeting, smart mobile
devices, and cloud-based computing technologies could fundamentally
transform the shopping experience as
we know it today: how consumers
find what they want; how producers
and merchants sell what consumers
want; how these players make and
receive payment; and how the parties
exchange information to facilitate this.
So, if you want to find where
innovation in payments is going to
come from for consumers and businesses, look at the data, look to the
cloud, and look in your hands. DT
David S. Evans is founder of Market Platform Dynamics, Cambridge,
Mass. Reach him at david.evans@
marketplatforms.com.
ADVERTISER INDEX
4Access Communications
Apriva
Certegy
Digital Check
Digital Transactions
Direct Response Forum
Discover Network
Elavon
eProcessing Network
Epson
EVO Merchant Services
First American Payment Systems
Fiserv
Graphite Payments
Harbortouch
Humboldt Merchant Services
Infonox a TSYS Company
Ingenico
Merchant Services Inc. (MSI)
Merchant Warehouse
Metavante
National Processing Company (NPC)
North American Bancard
Pivotal Payments
ProfitStars A Jack Henry Company
Pulse Network
RDM Simply Deposit
RDM Synergy Deposit
The Prepaid Press Expo
Trustwave
United Bank Card
USAePay
Wausau Financial Systems
Western Union
WireCard
70
888-306-4222 Ext 226
480-421-1200
866-496-2637
847-446-2285
877-658-0418
www.4access.com
Page 49
www.apriva.com/aprivanet
Page 27
www.fidelityinfoservices.com
Page 5
www.digitalcheck.com
Page 57
www.digitaltransactions.net
Pages 21& 69
www.directresponseforum.org
Page 61
224-405-0900
www.discovernetwork.com
Page 17
678-731-5000
www.elavon.com
Inside Back Cover
800-971-0997
www.eprocessingnetwork.com
Page 55
562-290-5306
www.pos.epson.com/financial
Page 65
800-CARDSWIPE Ext 7800 www.goevo.com
Page 19
866-Go4-FAPS
www.first-american.net
Page 22
800-872-7882
www.newfiserv.com
Pages 50-51
586-216-4255
www.graphiteiso.com
Page 47
800-201-0461
wwwisoprogram.com
Pages 1-3
877-635-3570
www.hbms.com
Page 20
480-333-7799
www.tsys.com
Pages 31-32
800-252-1140
www.ingenico-us.com
Pages 24-25
800-226-5227
www.1800bankcard.com
Pages 36-37
800-743-8047
www.merchantwarehouse.com/iso
Page 15
800-236-3282
www.metavante.com
Inside Front Cover
877-300-7757
www.npc.net
Page 45
888-229-5229
www.gonab.com
Back Cover
866-467-2688
www.isoagentprogram.com
Page 11
866-554-2224
www.profitstars.com
Page 59
800-420-2122
www.pulsenetwork.com
Page 7
800-567-6227 Ext 345
www.simplydeposit.com
Page 12
800-567-6227 Ext 345
www.rdmcorp.com/synergydeposit
Page 13
866-203-2334 Ext 505
www.prepaidpressexpo.com
Page 35
888-878-7817
www.trustwave.com
Page 53
800-201-0461
www.unitedbankcard.com
Pages 42-43
866-490-0042
www.usaepay.com
Page 29
608-825-8213
www.rdcplus.com
Page 39
720-332-1000
www.payments.westernunion.com
Page 62
www.wirecard.com/partner
Page 67
ENDPOINT
The payments
system, much
like other critical
national services
such as power and
telecommunications, needs to be
readily available
and affordable to all
who wish to use it.
Should the
Federal Reserve
Stay in the Check
Processing Business?
The answer is unequivocally yes, says David Peterson, who points to the leadership the
Fed has provided to shape and develop Check 21 and other electronic initiatives.
I
n payments circles these days, debating
whether the Federal Reserve should have
an ongoing role in check processing is a
popular pastime. If the Fed were not already
clearing checks, a case could be made against
its entry into a payment system in decline.
But such armchair hypotheticals bypass the
reality of the Fed’s central role in building
and sustaining payment systems that serve
and benefit all financial institutions—and by
extension their customers—equitably, efficiently, and consistently.
The Federal Reserve is a quasi-government
entity that functions much like a private company in the area of payments processing. From
its inception in 1914, the Fed has fulfilled a
mandate to clear and process all checks deposited with it, resulting in any bank being able to
clear checks at face value consistently with all
other financial institutions in the U.S.
Throughout the Fed’s history, the number
of financial institutions chartered in the U.S.
has grown substantially, totaling nearly 20,000
today. The ability for any financial institution,
regardless of size, to have access to the checkclearing system has been critical to its viability.
Much like the U.S. Postal Service and its ability to deliver any piece of mail anywhere in the
country, the Fed made it possible for one entity
to write a check to any other individual or company and be assured the check would be presented and cleared, regardless of geography.
In 1980 came passage of the Monetary
Control Act, which guaranteed every financial
institution access to the Fed’s services, and, in
addition, required the Fed to recover the costs of
the services they deliver. This had the effect of
making sure that the Fed did not use its unique
position to undercut private-sector operations.
Hostage Banks
Keeping this history in mind, perhaps the better
question is, “Does the Fed’s presence in payments today help or hurt the banking industry?”
When one examines the role of the Fed in shaping past and present initiatives in payments, it is
clear that its positive influence provides a tremendous benefit to payments processing.
Well before the Check Clearing Act for the
21st Century, the Fed initiated a pilot project
out of its Montana branch to automate and electronify check processing. Its experience in this
project led directly to the Fed taking leadership
positions on ANSI X9 workgroups to form the
standards under which Check 21 operates today.
While everyone else was suggesting that
check images must be archived in grayscale,
the Fed’s research and experience with scale
showed that the resulting data stores would
be too large to be commercially viable, and it
therefore championed the smaller-sized blackand-white tagged image file format (TIFF)
in use today—sometimes, simpler is better.
The Fed is constantly moving towards greater
David Peterson
is executive vice
president at
Goldleaf Financial
Solutions.
71
efficiency and accuracy in payments,
and its innovations are clearly a benefit for all payments stakeholders.
Critics might counter, “OK, the
Fed clearly played a role to get us to
this point, but there is no ongoing need
for them any more; the private sector can handle it now.” Perhaps this is
true, but examine two recent events,
the tragedies of 9/11 and Hurricane
Katrina. In both cases, it was the
Federal Reserve that stepped up and
announced that institutions depositing
items would be credited regardless of
when the Fed would be able to present
and collect the items. Would another
participant in the payments system be
willing and able to handle the float
cost? While some private companies
might take this stance in an emergency, would every company do so?
In a free-market system, private
companies would not make all necessary check services available to every
financial institution at an affordable
cost without strong regulation requiring
them to do so. In fact, that is the situation the Fed faces today: large checkclearing operations bypass the Fed,
exchanging items between large participants or through private exchanges.
This leaves the Fed to handle payments
processing “of last resort.” Yet, instead
of providing only the most rudimentary
of services, the Fed provides a robust à
la carte menu of every conceivable service that a financial institution needs.
And the Fed is not sitting idly by,
letting the system poke along. It has
aggressively worked with banks to
speed up the transition from paper to
electronic processing. To this end, the
Fed now receives more than 90% of
all check deposits electronically, and
65% of the presentments are electronic. These are pretty strong numbers, considering that Check 21 is only
4 years old. As we continue through
an economic downturn, banks are
turning to the Fed in greater numbers
as their correspondent banks decide to
exit the business or are taken over by
other large financial institutions.
72
Recent Trends in Check Volume
(Average daily volume in thousands)
50,000
45,000
40,000
35,000
30,000
Total Volume
Legacy Paper
FedForward
25,000
20,000
15,000
10,000
5,000
0
2005
2006
2007
2008
2009
Source: Federal Reserve
To those voices that say the private sector can handle all required
payments services, I offer this example. Two years ago, the Fed championed a new standard for Check 21 that
would allow all participants to use
a common file format. This format,
called X9.100-180, would replace the
various forms of X9.37 that had been
altered from the Fed version being
used by the private sector. However,
the processors rallied against its adoption, figuring that keeping their proprietary standards would give them an
advantage in keeping banks hostage
to their processing systems.
Difficult Issues
The private sector does not have a
mandate to improve payments processing for all participants; its mandate is
maximizing profit for its shareholders.
The payments system, much like other
critical national services such as power
and telecommunications, needs to be
readily available and affordable to all
who wish to use it.
There is no government agency or
oversight specific to payments. Could
the private sector provide systemic,
reliable, equitable, and affordable
payments processing? Maybe if there
was strong regulation from Washington. Maybe if there were only a handful of financial institutions instead
of 20,000. And maybe if they would
agree to uniform standards across all
systems. Maybe.
The Fed is dealing with difficult issues. To address decreasing
check volume, it is closing processing centers and reducing the number
of support personnel. In fact, the Fed
recently announced that its Cleveland branch will eventually become
the single processing site for paper
checks and the closing of other sites
will be accelerated. Electronic processing will be coordinated out of
the Atlanta Fed, where the focus
will continue to be the transition to
Check 21 processing.
The particular focus for 2009 will
be presentment of electronic return
items, but, in the end, the only question that matters is, “In what state
would our payments system be without the Fed?” The clear answer to
that question is: in trouble. The Fed’s
future leadership role in payments
should remain strong, and everyone
will be better off in the bargain. DT
4HE-OST0ROlTABLE
0ROGRAM0ERIOD
You want to make money. That’s why you
are in this business, right? Now with NAB
you can see your profits soar with Email
Merchant Alerts right at your fingertips.
Here you’ll find more programs, more
products and more ways to profit than
anywhere else. Period.
Electronic Alert Systems
It’s Time You Got Paid!
Staying up-to-date with your clients means better service for
them and more profits for you. Receive alerts on merchant
activity and account progress right to your email or phone.
s3IGNING"ONUS
s5PTO#ONVERSION"ONUS
s!CTIVATION"ONUS
s$ONT.EED&REE%QUIPMENT
'ETAN!DDITIONAL"ONUS
s-ONTHLY3ALES0ROMOTIONSFOR
-AXIMUM0RODUCTIVITYAND0ROlTABILITY
Higher Residual Income
With NAB, you will receive a true interchange revenue split up
to 65%. And only with NAB can you share income on every
available revenue stream.
Better Pricing
Get the power to close any deal with 2-cent IP pricing and
2.5-cent dial-up pricing!
Free Equipment
The Most Flexible & Most Profitable! Now, more free
terminal choices than ever. No Annual fee or Batch Header
fee required! If you charge one, you share in it.
Get Paid Daily or Weekly
Why wait weeks to get your cash? NAB gives you
the opportunity to choose when you get paid!
Complete Medical Benefits
NAB will reimburse 50% of your current health insurance
premium up to a maximum amount of $300 per month.
More Products = More Opportunities
More to sell means more opportunity to make money – you’ve
built your list of merchants, now build more income with our
ever-growing list of product offerings.
Fleet Cards, Cash Advances, Check Services, ATMs and
Gift/Loyalty Card Programs.
$ISCOVERTHEDIFFERENCE.!"CANMAKEFORYOUssWWW'/.!"COM
North American Bancard is a registered ISO/MSP of HSBC Bank USA, National Association, Buffalo, NY and Wells Fargo Bank, N.A., Walnut Creek, CA.

How the recession is making the problem of merchant attrition more

Transcription

Similar documents

Accept American Express Cards

Register NOW to save and/or Earn CA$H BACK on purchases from

where merchant and mobile services merge

international payment solutions

To Whom It May Concern: Peppino`s Italian Family Restaurants were

Project for the Reconstruction of Regional MARKETS Project

PCI Compliance Instructions

PCI Compliance Instructions

California based merchants with consistent 4.9 shipping DSRs