MBN Payment Systems: February 13, 2012 • Issue 12:02:01Big changes a...

MBN Payment Systems: February 13, 2012 • Issue 12:02:01Big changes a...: February 13, 2012 • Issue 12:02:01 Big changes ahead By Brandes Elitch CrossCheck Inc. n the early 1980s, I worked in the cash ...

February 13, 2012   •  Issue 12:02:01

Big changes ahead

By Brandes Elitch
CrossCheck Inc.

n the early 1980s, I worked in the cash management group for a major insurance company that was owned by one of the largest financial services companies in the world. The day I started work, they hired the management consulting firm McKinsey & Co. to evaluate the whole operation, top to bottom, and implement something they called "activity value analysis."

The idea was that all employees would keep journals documenting what they did during the day, and it would be a relatively simple matter to calculate inefficiencies and redundancies and take appropriate action to reduce expenses.

Of course, while this was happening, everyone was busy justifying their existence and lost focus on their real purpose, which was to generate revenue, pay claims, and keep the independent agents and regulators happy.

During this time, we employees would exchange meaningful glances and say, "Big changes are coming!" And they were. Within a couple of years, every senior manager of the firm was terminated, from the chief executive officer and president on down. The firm was sold to a German company, and the parent company CEO was also terminated. Big changes, indeed.

Today, as I look at the payments landscape, I see big changes in store for the ISO industry. The underlying causal factors have been in plain view for some time, but now they are apparent even to casual observers.

Industry in evolution

Let's start with a look at how it all started. In the credit card industry, the focus has always been on the issuing side: how many cards can we issue? This is an industry of tremendous scale: you need to issue tens of millions of cards to garner any kind of meaningful market share, and only a dozen or so banks can do this.

Also, most banks were more comfortable underwriting consumer credit, say, a $5,000 unsecured credit card line, than processing the merchant side of transactions.

Over time, only larger banks could become "principal banks" of what were then card associations, meaning the banks were association members. The largest merchants typically used the largest acquiring banks. Some industries, such as grocery stores and convenience stores, negotiated directly with the associations for special interchange rates.

Smaller merchants typically had banking relationships with community banks that were not principal members, and those banks used upstream correspondent banks or had relationships with third-party ISOs that brought their own processors.

It was like a railway: POS to gateway to processor to network to issuer and back down. It was continuously available and secure, but it was inflexible.

The 1979 advent of electronic ticket capture created the ISO industry as we know it. Suddenly, somebody needed to inventory terminals, program and install them, train merchants, and handle ongoing customer service.

Banks weren't capable of doing this then, and most banks aren't capable of doing it today (just look at the banking industry's anemic efforts to deploy remote deposit capture to date, something that should have been a slam dunk).

While the largest banks focused on the issuing side, the ISOs made it all work, selling merchants on card acceptance and thereby enabling consumers to use their cards at merchants essentially everywhere.

This is the extraordinary contribution ISOs made to the industry. You could say it was the electronification of payments that created the ISO industry, and it is the further electronification of payments that is changing it now.

Upheaval in store

Some people believe this year is the beginning of the end for the traditional POS platform. Up to now, merchants have paid more for in-store POS devices than it would cost to purchase PCs. But with an Android OS tablet, priced at $100, the numbers have changed. For a small merchant, an Android tablet with a Square Inc. reader can handle all POS functions at a quarter of the price.

Look at what happened in the cash register industry. At first, every merchant had a cash register and a separate POS terminal. The cash register manufacturers figured out they could do both functions, with a big net savings to merchants.

The Apple Inc. iPad was another game changer: for $500, merchants could get touch screen technology, which used to be really expensive. Initially, these were mobile applications, driven by consumers shopping at the POS, and are now online too.

Historically, POS providers seem to have devoted the brunt of their efforts to maintaining their price points rather than dropping prices to be competitive with new devices.

To become competitive, POS manufacturers must move to the cloud, taking the processing out of the store and into data centers. They will have to be compatible with all devices, not build an application for each platform. This changes the POS game in a big way.

Recently, I attended a presentation by Aite Group LLC on this subject. The presenter, Aite Senior Analyst Rick Oglesby, pointed out that for the last 30 years, merchant acquiring has been run like a railway, where the processor specializes in a single type of transaction.

We will need to support multiple transaction types and services, for example, loyalty programs, transaction modifications by third parties like Google, electronic receipts for consumers and reconciliation for merchants, as well as credit apps, rewards, commissions, discounts, offers and coupons.

In the new environment, card swipes will be replaced by taps at the POS. Data will flow back from new payment players that need to be on the back-end of transactions, and this will increase complexity so the back-end software will need a complete facelift. The only way to manage this is to remove the complexity from POS devices.

The result: a gateway will manage the connections to the marketing providers, alternative payment vehicles, devices and the development community. As Oglesby said, "The gateway will be the cable company, and the device will be the cable box."

But the real implication for ISOs is that payment acquiring now becomes the low man on the totem pole. Some merchants will be able to connect directly to the card brands and skip the processors altogether. For ISOs, the goal should be to focus on services, not devices.

Now there are three components to the buying experience: the POS hosting providers, the payment providers and the marketing providers. Large merchants could be processors themselves and do POS hosting, but small merchants will need turnkey solutions, which ISOs can and should provide.

This is complicated by the fact that Visa Inc. will incentivize migration to Europay/MasterCard/Visa and near field communication (NFC) technology to attack counterfeit card fraud.

All three major equipment manufacturers have embraced NFC. For ISOs, this means 11 million terminals in use will need to be replaced. Even at a rate of 2.5 million annual replacements, it would take over four years to complete the conversion to new card readers.

Litigation at issue

I also want to touch on looming antitrust litigation against Visa, MasterCard and 13 of their largest banks. This is a sequel to the 1996 class-action lawsuit, popularly known as the Wal-Mart case, which cost said card brands and banks $3 billion in monetary damages and over $25 billion in income lost due to changes in business practices (according to Bryan Keane, an analyst for Deutsche Bank).

That case was narrowly defined, and the government did not bring a price-fixing case against the card brands at that time. The plaintiffs in the current case (the National Restaurant Association and the National Association of Convenience Stores, among others), which are not yet certified as a class, claim the card brands overcharged merchants, and that the 2 percent interchange rate typically charged should be in the range of 0.50 percent.

Imagine the impact on the defendants if credit card interchange rates were reduced by 75 percent, to say nothing of the effects on the ISO community.

And if the court finds for the plaintiffs, the damages would come primarily from the 13 large banks that are the Visa Class B shareholders. In 2009, industrywide interchange fees were in the range of $40 billion, and this case could cover eight years.

A finding for the plaintiffs would have a material effect on the capital base of these banks, and it would have a material effect on the income statements for any ISOs focused on interchange. It should be an exciting year.www.businesswordwidenetwork.com

MBN Payment Systems: February 13, 2012 • Issue 12:02:01Will PayPal h...

MBN Payment Systems: February 13, 2012 • Issue 12:02:01Will PayPal h...: February 13, 2012 • Issue 12:02:01 Will PayPal hit critical mass with recent deals? ayPal Inc., the payment arm of eBay Inc., isn...

February 13, 2012   •  Issue 12:02:01

Will PayPal hit critical mass with recent deals?

ayPal Inc., the payment arm of eBay Inc., isn't waiting for the development of near field communication (NFC) orEuropay/MasterCard/Visa (EMV) infrastructures to revolutionize payment paradigms for U.S. retailers and consumers.

For instance, AJB Software Design Inc. said in January 2012 it will introduce PayPal payment options to its more than 140 customers (many of whom are tier-one retailers) and their more than 250,000 POS terminals.

PayPal's cloud-based, Internet protocol-enabled solution involves a POS application programming interface that allows AJB retailers to offer customers the ability to pay with a PayPal payment card or by using PayPal's Empty Hands solution, through which users enter mobile phone numbers and PINs at the POS, with no new infrastructure costs or technology upgrades required by merchants.

AJB is also building a PayPal interface into its payment solutions platform, Retail Transaction Switch. AJB hasn't disclosed which retailers will be offering the service, but it boasts a customer base that includes "25 of North America's top 100 companies by 2006 sales volume" and "nine of the world's fastest growing merchants."

The AJB-PayPal rollout will be operational by the end of the current fiscal quarter, an AJB spokeswoman confirmed.

Critical mass

Consumers having the opportunity to use the PayPal solution at some of the largest U.S. retailers that operate in a variety of retail environments, including clothing, department stores, electronics stores, oil and gas, restaurants, sporting goods and toy stores, means PayPal will have the opportunity to reach what payments consultant Paul Martaus calls critical mass.

"Critical mass in this context means when there is enough buzz, knowledge and awareness on the part of consumers that the technology has the opportunity to go from curiosity to adoption," said Martaus, President of Martaus & Associates.

"The test I've applied over 30 years of watching transaction technology in this business is the 'better, faster, cheaper test.' If you have two out of the three, if something provides the consumer with a better, faster and/or cheaper service, it is likely to be adopted."

The question is whether PayPal meets this test, according to Martaus. But the partnership looks promising to him. He said, "250,000 terminals may not be a lot of terminals when you consider there are 6 million terminals out there, but these are tier-one merchants and tier-one merchants provide 90-plus percent of all transactions submitted for closure."

Martaus pointed out that less than 4 percent of retailers have installed NFC readers at the POS. He believes the push to introduce NFC and EMV in the United States will not curb PayPal's inroads into the retail payments market because PayPal doesn't require that technology to offer retailers proximity payments. Additionally, PayPal's popularity continues to grow. In its recent quarterly report, eBay said PayPal is adding 1 million accounts per month.

In September 2011, before Scott Thompson resigned as president at PayPal to join Yahoo! Inc. as Chief Executive Officer, he said in a PayPal blog, "Let's be clear about something - we're not just shoving a credit card on a phone. PayPal is re-imagining money and making it work better for merchants and consumers - whatever device you're on, wherever you are in the world, and however you prefer to pay (whether that's cash, credit or installments)."

Thompson said PayPal's goal is to allow customers not to have to stand in line to make purchases. He added that PayPal technology also offers consumers the ability to decide how they want to pay, arrange for payment installments instantly if needed and use any smart device to make payments - and it gives customers the ability to change how they pay even after they've checked out.

POS penetration

Recently, PayPal entered a pilot with Home Depot U.S.A. Inc. to test PayPal's new POS service. Don Kingsborough, PayPal's Vice President of Retail and Prepaid Products, stated in a Jan. 26, 2012, company blog post that the trial is expanding to 51 stores - 44 in Northern California, six in Omaha, Neb., and one in Atlanta - and that PayPal has invited nearly 500,000 customers to participate in the pilot. PayPal reportedly intends to expand the service to 2,000 Home Depot locations by March 2012.

Russ Jones, a partner with consulting and research firm Glenbrook Partners LLC, tried the solution at a Home Depot store. He summed up his experience in a Glenbrook blog published Jan. 20. "I felt that paying without having to take anything out of my wallet was nice, and I liked it in a subtle but pleasing way," he wrote. "Now that I think about [it], I don't know why anybody would want a PayPal card if they can use PayPal Empty Hands. ... I'm pretty sure that I'll be using PayPal for every one of my purchases going forward at Home Depot."

Karen Webster, CEO of technology consulting firm Market Platform Dynamics, wrote in the January 2012 issue of The Lydian Payments Journal that the biggest hurdle PayPal faces is merchant penetration. However, she said PayPal drove $56 billion in retail payments in 2010.

Webster noted that PayPal's solution is a "versatile approach to solving POS acceptance for consumers and merchants, leveraging what consumers and merchants have available to use today, including 100 million (and growing) populated wallets.

"Their solutions are also handset and carrier agnostic, which is a big plus. There are already too many moving parts in the mobile payments space to orchestrate. Eliminating this one is pretty huge."

Regarding PayPal's retail integration, Ingenico S.A. and PayPal established a relationship to enable merchants with Ingenico POS devices to accept PayPal payment options. And Ingenico has already begun integrating PayPal's payment card solution into its legacy Unicapt32 platform POS devices and new generation of Ingenico Telium 2 series POS devices.

In a Jan. 17, 2012, statement about the partnership, Ingenico said, "Given the vast installed base of Ingenico's devices in the United States, the company will integrate and support PayPal on both of its platforms. The integration will allow merchants with Ingenico's i6xx series and iSc250/iSC350 devices to accept both PayPal's payment card and its alternative mobile phone number and PIN payment solutions."

www.businessworldwidenetwork.com

February 13, 2012   •  Issue 12:02:01

Zappos.com hit with breach, lawsuit

nline fashion retailer and Amazon.com subsidiary Zappos.com revealed in on Jan. 15, 2012, that over 24 million of its customer accounts were breached. Zappos.com said a fraudster was able to obtain names, email addresses, billing and shipping addresses, phone numbers, the last four digits of credit card numbers listed with accounts, and encryptedpasswords.

A class-action lawsuit on behalf of Zappos.com customers was subsequently filed Jan. 16, 2012, in the Western District of Kentucky in Louisville.

Tony Hsieh, Zappos.com Chief Executive Officer, emphasized that the database where credit card and other payment data is stored was not breached. "We were recently the victim of a cyber attack by a criminal who gained access to parts of our internal network and systems through one of our servers in Kentucky," he wrote to employees and customers following the breach. "We are cooperating with law enforcement to undergo exhaustive investigation." Zappos.com disconnected its customer service phone lines following the breach, electing to answer customer inquiries into the breach only by email. Hsieh explained, "We have made the hard decision to temporarily turn off our phones and direct customers to contact us by email because our phone systems simply aren't capable of handling so much volume. (If 5 percent of our customers call, that would be over 1 million phone calls, most of which would not even make it into our phone system in the first place.)"

Zappos.com urged customers to change passwords on its site and on any other sites where they use the same passwords. "We've spent over 12 years building our reputation, brand and trust with our customers," Hsieh said. "It's painful to see us take so many steps back due to a single incident. I suppose the one saving grace is that the database that stores our customers' critical credit card and other payment data was not affected or accessed."

Repercussions

The class-action lawsuit filed in Kentucky said the breach not only forced customers to take the time to reset passwords on Zappos.com and on other sites, but it also represented an invasion into customer privacy that may have future repercussions. "[P]laintiff and class members now face a greater risk of identity theft - including, but not limited to, identity theft from 'phishing' and 'pharming,'" according to the suit.

The complaint charges Zappos.com with willful and negligent violation of the Fair Credit Reporting Act, along with negligence and invasion of privacy by public disclosure of private facts. The class action seeks compensation for customers who, among other things, lost the use of passwords and must deal with credit monitoring and identity theft insurance issues, as well as damages for anxiety and emotional distress caused by the breach.

The complaint also asks for other damages to punish Zappos.com's alleged wrongful conduct and a requirement that Zappos.com submit to periodic compliance audits to ensure cardholder data security is maintained.

When reached for comment, Zappos.com Senior Public Relations Director Diane Coffey said, "We are aware of the lawsuit. Our company policy is not to comment on pending litigation. Every single department in our company is currently focused on assisting customers." At press time, plaintiff attorneys had not responded to requests for comment.

MBN Payment Systems: MBN Payment Systems: Updated: Monday,January 30, 2...

MBN Payment Systems: MBN Payment Systems: Updated: Monday,January 30, 2...: MBN Payment Systems: Updated: Monday,January 30, 2012A European perspec... : Updated: Monday, January 30, 2012 A European perspective on E...