Updated: Monday, January 21, 2013

UBPS acquisitions further ambitious vision

n December 2010, payments industry entrepreneur Bipin Shah created Universal Business Payment Solutions Acquisition Corp. "to seek opportunities to acquire one or more 'platform' companies in the payment processing industry," according to the preliminary prospectus for the $72 million initial public offering filed with the U.S. Securities and Exchange Commission. Shah currently serves as UBPS Chairman and Chief Executive Officer.

In December 2012, UBPS completed acquisition of the Texas-based online card processor JetPay Corp. and the Pennsylvania payroll services company A D Computer Corp. In July 2012, UBPS also purchased the Ohio-based ISO Electronic Merchant Systems. In a 2012 investor presentation, UBPS reported it had paid $179 million for the three companies.

UBPS plans to use these investments as a platform from which it will continue to acquire related businesses and further consolidate the small-business payments industry, according to information provided to investors. The company stated it plans to acquire and consolidate in both the payroll industry, where there are 1,800 businesses servicing 56 million small business employees, and in the acquiring business, where approximately 1,000 merchant payment service providers are doing business with 8 million small businesses.

Shah's leadership is key to UBPS

Shah has significant experience in providing not only vision to enterprises, but also the guidance needed to turn vision into reality. Previously, he was:

• Founder of payment processor Gensar Inc., which was sold to Paymentech (now Chase Paymentech Solutions LLC) in 1996
• Founder of payment processing company Genpass Inc., which was sold to U.S. Bank in 2005
• Developer of the Money Access Center network
• Developer of a debit POS system
• Developer of a pay-at-the-pump POS system
• Developer of a restaurant tip management system
• Director at Visa Inc.

Shah said he is building UBPS to create a "one-stop shop for the payment needs of businesses" by using and leveraging the existing infrastructure of banks and retailers in innovative ways to create value for consumers, retailers and stockholders. According to Shah, JetPay and A D Computer provide UBPS with technology platforms that are secure, scalable and flexible.

"They not only provide UBPS with a competitive advantage, but their current and future capability in mobile banking and cloud technology will enable UBPS to develop products and services that will only accelerate that advantage," Shah said. "With a combined $32 million in revenues in 2012, approximately 7,000 customers, and solid profitability, we have created a platform we believe will drive growth and profitability significantly faster than the industry."

A D Computer serves unbanked

Shah said the A D Computer platform will lower costs and be more convenient for client companies. Employees will be able to get cash; pay bills; and access financial services through payroll cards, mobile technology, cloud payment systems, ATMs and POS systems.

Many employees receiving paychecks are underbanked, Shah noted. These workers pay millions for check cashing and money transfer services every year. "Using our system, people can send money across borders using an ATM rather than pay $20 to Western Union," Shah said in a January 2013 interview with The Green Sheet.

In an investor presentation in July 2012, UBPS said there are nearly 10 million small businesses in the United States employing 70 million people. Those employees make up about half the entire U.S. workforce. The company estimated that they represent a $2.1 trillion payroll.

Shah said A D Computer delivers 100,000 paychecks, and half of the people receiving those checks do not have access to banking services. "That's 80,000 employees paying a ridiculous amount to cash their checks," Shah said. "UBPS gives access to financial services to people who don't have banking, checking or a credit rating."

JetPay provides in-house transactions

JetPay processes all its front-end authorizations and back-end clearing and settlement in-house for both card-present and card-not-present transactions. In 2012, the company reportedly processed more than 150 million transactions totaling an estimated $30 billion in sales volume.

Shah said JetPay will provide "newer technology and specialized processing like internet, cloud services, and mobile technology." JetPay can also deliver these products and services around the world "far faster than traditional providers," he added.

Prepaid cards are also integral to the UBPS business plan. Shah stated the company will have gift card, loyalty, prepaid, student cards, and payroll cards among its offerings. Shah said he believes more payroll will be moving to plastic soon.

UBPS also intends to market to small businesses with annual receipts of $500,000 to $1 million per year by delivering new products and savings. For instance, Shah said he has developed a system for restaurants to charge customers when they order takeout over the phone. He said an average 20 percent of to-go orders are never picked up. The new system protects the merchant from loss after the order is placed.

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ATMs dispensing multiple bill denominations not new

Thursday, January 17, 2013

Jan. 17, 2013, CNNMoney report said JPMorgan Chase & Co. and PNC Bank were launching ATMs that dispense cash in any dollar amount. But a PNC spokeswoman said the news is not new, as a substantial portion of its ATMs already had that capability.

"We previously had approximately 2,000 ATMs that dispensed $1 bills going back several years," said Marcey Zwiebel, Vice President and Senior Manager, External Communications at PNC Financial Services Group, to The Green Sheet. "Other machines could dispense $10 bills and others dispensed $20 bills.

"What is new is that more than half of our 7,200 ATMs now have been upgraded with this feature, and the upgrades on the rest are expected to be complete by the end of this summer. We are always looking for ways to upgrade our ATM network with new functions that will make banking easier for our customers."

The CNNMoney report said JPMorgan rolled out 350 to 400 ATMs in the last 18 months that could dispense any dollar amount. At these ATMs, customers can reportedly select how many bills they want in denominations ranging from $1 to $100. The news outlet also reported that JPMorgan will soon pilot a program that allows ATMs to dispense coins.

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Zaxby's breach under investigation

Tuesday, January 15, 2013

axby's Franchising Inc. disclosed it has experienced a data breach involving more than 100 of its locations. The Athens, Ga.-based chain of restaurants believes malware was used in the attack.

In a press release posted on its website, the company stated that "certain licensed locations have identified suspicious files on their systems that may have resulted in unauthorized access to credit and debit card information or have been identified by credit card processing companies as common points of purchase for some fraudulent activity."

Zaxby's also stated it had identified "suspicious files, including malware, on the licensees' computer systems at certain Zaxby's locations. Because those files could have been used to export guest names, and credit and debit card numbers, Zaxby's Franchising, Inc. informed appropriate law enforcement authorities of the potential criminal activity."

Zaxby's said it will continue to cooperate with law enforcement in investigating the situation. The company is also working with "all of its store locations to implement additional security measures to prevent further intrusions."

Breach could have been prevented

In response to the breach, Mark Bower, Vice President, Product Management at Voltage Security, said, "These days, there's absolutely no need for merchants or franchises to store credit, debit and member information without protecting the data itself, using what's called data-centric security."

He noted that threats of malware are well-known and have compromised numerous retailers. "That's why leading payment processors offer solutions to eliminate this risk with point to point encryption (P2PE) and tokenization solutions – turning the high-value payment and identity data the attackers are after (the gold), into straw."

Bower advised merchants to "talk to their acquirers about the availability of point to point encryption and tokenization capabilities as part of their offerings to help prevent inevitable payment card data breaches if they are still storing credit card details today."

Bower added that merchants who also handle sensitive data, including Social Security numbers, names and addresses, should consider applying data-centric security for that data, too, in order to "reduce the risk of fines, public notifications and losing customer loyalty if their data is compromised. Today, it's a lot easier than you think to avoid being the next breach victim."

A list of Zaxby's locations affected by the breach can be found at https://dataprivacyinformation.com/index_2.html .

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It's revenue versus risk for Level 4 PCI compliance

Monday, January 14, 2013

ne year after releasing a benchmark study on Level 4 merchant Payment Card Industry (PCI) Data Security Standard (DSS) compliance from the acquirers' perspective, ControlScan and the Merchant Acquirers' Committee issued an update: Risk and Revenue: Second Annual Survey of the Acquirer's Perspective on Level 4 Merchant PCI Compliance. The report explores major shifts in the process as PCI programs gain traction. In all, 123 banks, processors and ISOs with Level 4 merchant portfolios were surveyed for this year's report.

One obvious shift identified was the move toward revenue generation as opposed to risk mitigation as a primary goal of acquirer PCI compliance programs. The report also revealed that acquirers with organizationally supported PCI programs continue to achieve higher compliance rates and experience fewer breaches. Lack of perceived value combined with low merchant PCI compliance rates were perceived as the most significant barriers to an effective PCI program.

"Competitive pressures in the payments space impact how acquirers balance their merchants' needs with their own business need for a healthy bottom line," stated Joan Herbig, Chief Executive Officer of ControlScan. "Traditional merchant services are no longer as profitable as they once were, so we're seeing a conflict between risk and revenue play out in the way acquirers manage their PCI programs."

Susan Matt, Chief Financial Officer at MAC, added, "It's making sure that there's that fine balance between profit generation and risk mitigation, such that the risk does not exceed what they're making in the profit, and you're creating more problems than you are solutions."

Education paving the way

The survey showed that education continues to play a critical role in merchant PCI compliance. "I think most acquirers are communicating once merchants are boarded into their system," said Heather Foster, Vice President of Marketing at ControlScan. "But there is still a lot of work that has to be done before you board a merchant, so the merchant understands this is just a necessary part of business, and there are no surprises when they sign up."

As such, acquirers must continue to remind merchants that PCI compliance is an ongoing process. "They think it's a one-time thing and they don't have to do it again," Foster noted. "As you're approaching your communication plan for the year, you have to get them thinking about it in advance of the revalidation date." One suggestion offered was to create a PCI compliance click-through that allows merchants to view the PCI process when logging into the acquirer's portal.

Another suggestion for reducing risk without sacrificing profitability is to segment merchant portfolios. "What I'd like to see is a shift from dumping PCI out to your entire portfolio to a risk stratification concept, so that at a minimum you're focusing on getting those higher risk merchants [compliant]," Matt said.

The report also contains specific recommendations to help acquirers successfully engage their Level 4 merchants in the PCI compliance process. To view a copy of the free report, visit www.controlscan.com/whitepapers/acquirer_study_2013.php .

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AmEx restructuring, reimbursements force job cuts

Friday, January 11, 2013

merican Express Co. reported its 2012 fourth quarter net income was negatively impacted by restructuring charges, reward redemption enhancements and the cost of consumer reimbursement following the company's October 2012 consent agreement with several U.S. regulatory agencies. The company additionally said it is eliminating 5,400 jobs, mostly in its Global Business Travel division, and it is reducing overall 2013 staffing levels 4 to 6 percent below the current 63,500 positions.

Fourth quarter results

AmEx reported a fourth quarter adjusted net income of $1.2 billion which matched the adjusted fourth quarter net income of the same period the previous year. Total revenues were up 5 percent from the previous year to $8.1 billion and card member spending was up 8 percent over the previous year. Final full year and fourth quarter results will be released Jan. 17, 2013.

"In addition to strengthening our ties to merchants and cardmembers, we have launched products for new customer segments, expanded into new geographies internationally, and extended our presence well beyond the traditional American Express footprint," Kenneth Chenault, AmEx Chairman and Chief Executive Officer, said.

Reimbursement costs

The company recently discovered that, over several years' time, late fees of approximately $28 million were collected from cardmembers who did not receive proper notice of the transgression; members were charged interest of approximately $24 million on disputed balances; and it failed to credit $68 million in reward bonuses to card holders.

The consent agreements the company signed with the Federal Deposit Insurance Corp., the Consumer Financial Protection Bureau, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Utah Department of Financial Institutions require reimbursements to said customers of approximately $153 million, the company reported.

"We never want to make mistakes, but we are fully committed to correcting them and providing compensation when appropriate," Chenault explained. "The material costs for reimbursement that we are able to identify have been recognized, but we are going to continue to work closely with regulators and strengthen our controls."

The company also identified more cardmembers who are eligible for a part of the restitution it was ordered to pay under the consent orders. The restitution will reimburse AmEx customers for regulatory violations in the company's debt collection practices, credit card solicitations, late fee charges, reporting of disputes to credit bureaus and new account approval processes.

Under terms of the consent agreements AmEx agreed to pay $27.5 million in fines and establish an $85 million account to pay for customer refunds. The company said the majority of the refunds are related to debt collection and late fee charges.

Job reductions and rewards increase

The job cuts will take place across seniority levels, businesses and staff groups in positions that generally do not directly generate income. The bulk of the layoffs will be in the company's travel business which it believes "is being fundamentally reinvented as a result of the digital revolution."

"Against the backdrop of an uneven economic recovery, these restructuring initiatives are designed to make American Express more nimble, more efficient and more effective in using our resources to drive growth," Chenault noted.

The company is also adding $342 million to its membership rewards reserve to account for an anticipated increase in reward redemptions. "Loyalty and reward programs are one of our major competitive advantages," Chenault said. He noted the success of the rewards program encouraged AmEx to expand it during the last few years to give customers more opportunities to earn and redeem rewards points.