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Ask us to describe the state of EMV migration at this moment, and we would have to call it a mixed bag of good and not-so-good.
On the positive side, certification of point-of-sale (POS) hardware and software to comply with the EMV payment technology standard, while slow to occur, is proceeding at a steady rate. Earlier this month, Visa released a statement stipulating that the ranks of “chip-enabled” merchants tripled in size in the second half of 2015 and now number 766,000, representing an increase of 872 percent in the last year. The volume of chip-based transactions in the U.S. rose by more than 30 percent in December of last year, to $15.8 billion from $12.1 billion the previous month, and seven out of 10 Americans now have at least one chip in their wallet.
Equally encouraging, at least one often-discussed obstacle to EMV acceptance is being scaled. That obstacle is the speed of EMV transactions—or, shall we say, concern about the slower pace of EMV transactions, which simply can’t be processed as quickly as their magnetic stripe-based counterparts. Admittedly, some merchants, especially the larger ones, have been reluctant to educate consumers about how to use their chip-enabled cards at the POS; their modus operandi, spurred by a perception that EMV simply slows down lines, was to wait until customers learned at other retailers’ checkout counters to get the job done fast. However, a larger cadre of retailers has been actively engaging in employee and consumer training to minimize EMV transaction speed-related concerns and keep lines moving—in turn kicking adoption up a notch.
On a less positive note, however, there are still repercussions from the EMV certification process followed by independent software vendors (ISVs). This process is extremely complex and has many “layers,” keeping ISVs well behind schedule in releasing new versions of their offerings.
Many integrated POS systems were also not ready to “go” in time for the October 1, 2015 EMV liability shift date—even if the availability of appropriate software wasn’t even an issue. And in the restaurant industry, the work needed to grapple with tips and tip adjustments in otherwise EMV-compliant restaurant POS software just hasn’t been, and to a degree, still isn’t proceeding as it should be.
Then, we can’t forget about the chargeback problem. Among tidbits from a recent webinar hosted by Heartland Payment Systems and the National Restaurant Association is this one: Many small business owners are being hit with more chargebacks since the EMV liability shift than they had initially expected. We can’t say we’re very surprised about such a trend; after all, fraudsters are shifting their attention away from merchants whose POS equipment can accommodate chip-enabled cards (and hence, thwarts their efforts) and toward those whose equipment is mired in easy-to-duplicate magnetic stripes.
As Heartland and the NRA see it, the “tidal wave of chargebacks” is hitting all types of markets and in all states, but players in a few specific merchant categories and regions are bearing the brunt of the trend. Petroleum/inside sales, restaurants and bars, and quick-service/vending establishments top the list of hardest-hit merchant categories. Breaking things down by region, chargebacks are especially common in Texas, New York, California, Florida, Illinois, and New Jersey, as well as in large cities/populated areas, and college towns; border areas; and markets in which use of “foreign cards” is heavy.
Will chargebacks occur less frequently as merchants board the EMV train? We think so. Will ISVs finally catch up, and will retailers take a more proactive stance in getting customers accustomed to chip card use? Yes again. But still—and despite all the positives—it will take time for all of the pieces to fall into place. We’ll wait.
We’re not going to start off this blog with any more references to Visa’s famous, “Everywhere you want to be” slogan, as we did last week. But it seems that Visa is indeed everywhere, given the announcement it made on February 11. No, not another tool for developers like the one we’ve already talked about. This time, Visa disclosed in an SEC filing that it now owns a nearly 10 percent (9.99 percent, to be exact) stake in Square’s Class A shares. Shares of Square rose by almost 10 percent after this news broke, but the surge was temporary.
This is not big news in and of itself: Visa said in a statement that it had not purchased any additional shares of Square since the latter’s IPO in November, 2015. About four-and-a-half years prior to that, it had purchased a stake in Square for an undisclosed amount. The significant piece of information here is that given its stake in Square, Visa is now the second-largest owner of Square’s Class A shares—behind only mutual fund powerhouse Capital Research & Management.
Square clearly needs a shot in the arm, which it appears Visa is able to give: After strong revenue growth (about 54 percent) that followed the IPO, saw an adjusted EBITDA for 2015 of negative $67.74 million. In addition to the fact that the IPO did not provide the breadth of financial infusion it had hoped, Square was also sucker-punched by Starbucks, which had been one of its investors but has opted not to renew the processing agreement it signed with the mobile company three years ago. That agreement expires in the third quarter of 2016.
Then, there are Square’s competitive woes. Visa itself, along with MasterCard, provides significant competition for Square, as do the likes of First Data and PayPal. Also vying for a share of the increasingly crowded market in which Square plays are Alphabet, Facebook, Amazon, and Apple, all of which are looking to carve out a larger piece of the pie. Apple reportedly is considering leveraging ApplePay to launch a peer-to-peer money transfer service that could give Square’s Cash and PayPal’s Venmo a run for their money.
At the same time, Visa obviously wants to increase its own presence on the mobile side of the payments business. Getting closer to Square could conceivably be a way for it to do just that, especially because it would give the card network a leg up on MasterCard. Visa reportedly will unveil new payment technologies at the Mobile World Congress show in Barcelona later this month.
This could all be the start of something big—a new “shape,” if you’ll pardon the pun, for Square and Visa alike.
Several years ago, Visa made its mark with its “It’s everywhere you want to be” consumer advertising campaign. Now the network is everywhere developers want to be, having on February 4 announced the debut of its Visa Developer platform. The introduction of the platform marks the first time in Visa’s 60-year history that software developers have been given open access to Visa’s payment technology, products, and services.
Visa Developer is intended to help financial institutions, merchants, and technology companies meet the demands of consumers and merchants, both of which are increasingly relying upon connected devices to shop, pay, and collect payments. The platform will initially offer access to a number of Visa’s most popular payment technologies and services, including account-holder identification, person-to-person payment capabilities, secure in-store and online payment services (e.g., Visa Checkout), currency conversion, and consumer transaction alerts.
The creation of the platform involved a multi-year initiative led by Visa’s global product and technology teams. Under this umbrella, Visa’s payment products and services are being transformed into application programming interfaces (APIs) –the standard technology used by developers for building software and applications. Key attributes that reportedly differentiate Visa’s global developer program from others include a globally accessible developer portal, said to provide an easy way to search Visa’s extensive suite of payment products and services and an open platform that yields access to hundreds of Visa APIs and software development kits for some of the most popular Visa payment products and capabilities. Also on the list of purported differentiators is a testing sandbox that offers application developers a “plug-and-play” experience along with access to Visa test data, and Visa Developer engagement centers designed to foster collaboration and co-creation with application developers in such key markets as San Francisco, Dubai, Singapore, Miami, and Sao Paolo (Brazil).
“We are unbundling Visa’s full suite of products and services and giving developers open access to the underlying payment capabilities,” Rajai Taneja, executive vice president, technology, Visa Inc. said in a statement issued when the announcement was made. “We believe this will lead to the creation of entirely new commerce experiences with Visa technology integrated to enable greater security, scale, and convenience when it comes time to pay.”
Visa clearly is serious about the new platform and all that it represents: Its vision for the global developer engagement program, according to the announcement, includes the formation of a marketplace where thousands of financial institutions, millions of merchants, and technology companies to collaborate, share, and search for innovative digital commerce applications. It also intends to provide additional access to more of its payment capabilities over the next year.
Efforts to test the concept also underscore that Visa truly intends to go somewhere with it. Over the past few months, it has allowed leading financial institutions, technology companies, and start-ups to participate in beta-trials of Visa Developer; many have gone on to configure innovative prototype applications using Visa technology. Trial partners included Capital One, CIBC, Emirates NBD, National Australia Bank (NAB), RBC, TD Bank, Scotiabank, TSYS, U.S. Bank and VenueNext. If these players believe in the technology, well…so do we.
The Consumer Financial Protection Bureau (CFPB) is upset about consumer access to checking accounts, or more accurately, impeded consumer access to checking accounts—and has taken action to turn things around.
Earlier this week, the bureau announced in a bulletin that it has taken action to increase the odds that consumers receive fair treatment when it comes to opening checking accounts. The CFPB made the move in light of concern that incorrect information used by credit unions and banks to vet potential account-holders is in some instances preventing consumers from being granted checking privileges.
In its announcement, the bureau said it is informing financial institutions and credit unions of their risk of consequences should they fail to accurately report consumer account histories. Entities that send details pertaining to checking account problems to consumer reporting agencies could face “bureau action” if the information they share is inaccurate, the agency warned. Financial institutions and credit unions were informed that they need to have in place “reasonable written policies and procedures” to prevent errors that “could cause adverse consequences for consumers when included in a credit report,” as well as effective procedures for handling investigations when consumers dispute negative reports.
The inability to open a checking account was cited as an example of these “adverse consequences” if errors—which might encompass anything from duplicate records to mistaking one customer for another because both individuals have the same name—were to be found in a credit report. Those financial institutions and credit unions that do not implement the above-mentioned effective procedures, the CFPB said, would be subject to “enforcement actions to address violations,” with “all appropriate remedial measures, including redress to consumers,” sought by the agency.
“Consumers should not be sidelined out of the basic banking services they need because of the flaws and limitations in a murky system,” CFPB Director Richard Cordray said in a press release issued when the bulletin was published.
Are the CFPB’s threats empty ones? We would hesitate to say “yes.”The agency has reportedly taken action against banks and credit unions for denying checking account access to some prospective account holders based on erroneous information.
Also part of the CFPB’s move was the sending of a letter to the 25 largest banks, encouraging them to offer and promote “low-risk” accounts that do not come with overdraft protection. “People deserve to have more options for access to lower-risk deposit accounts that can better fit their needs,” Cordray noted in the press release.
Of course, it is somewhat difficult to imagine that banks and credit unions will readily market low-risk accounts, given that overdraft fees contribute so heavily to their bottom line. The idea of carrying a glut of low-balance checking accounts likely will not sit well with them. It will be interesting to see if they take the bait.
Apple Pay has been making inroads in the traditional payments landscape, but now it could grab a “bite” elsewhere. During a call last week to discuss his company’s quarterly earnings for the last quarter of 2015, Facebook CEO Mark Zuckerberg said the social media giant is open to working with any entity in the payments business.
Addressing analysts and others on the call, Zuckerberg admittedly reaffirmed earlier assertions that Facebook does not want to “field a bespoke payment product.” He also noted that he does not view the company as a “payments business.” However, he did express an interest in partnering “with everyone who does payment,” citing Apple Pay as a specific example. Zuckerberg told call participants that Facebook management perceives “the stuff that Apple is doing with Apple Pay… as a really neat innovation in the space that takes a lot of friction out of transactions.”
Not surprisingly, Zuckerberg deemed low-friction transactions, such as those processed via Apple Pay, translatable into higher traffic. That traffic, he said, is a key quantifiable metric in the business of selling online space—an endeavor in which Facebook is heavily vested. The reason the latter is so? The social network wants a system that makes it easy for users to interact with businesses, which in turn would allow it to charge more for ad space.
Facebook has already made a move into e-commerce, so teaming up with Apple Pay doesn’t seem to us as if it would be a “reach” for the social media network. Users currently have access to a variety of currently of current offers, which Facebook has designated as “tests.” For example, Facebook now features integrated “buy” buttons on business pages. It also touts a shopping section, designed to keep users engaged online and within the mobile Facebook app. Peer-to-peer money transfer, another app-based feature, was introduced in Messenger in 2015.
“On payments, the basic strategy that we have is…to take all the friction out of making the transactions that you need,” Zuckerberg stated on the call. He said this is “especially” true of Facebook products like Messenger, “where the business interaction may be a bit more transactional.”
While Zuckerberg neither revealed any further information about an alliance between Facebook and Apple, nor discussed teaming up with any other specific payments player during the call, this much is clear to us: Allying with the social network can be seen as a potential victory for Apple, despite the fact that it is unlikely to result in the generation of significant revenue. That victory, we believe, will come in the form of online exposure for Apple Pay’s in-app payment feature, which is rarely seen in ads.
Stranger partnerships have been formed. So while we still don’t see Apple Pay as a be-all and end-all, a partnership with Facebook wouldn’t be a bad thing at all.
So you thought credit card and payments processor TSYS took its most significant acquisitions step when it snapped up prepaid card provider NetSpend for $1.4 billion in 2013? Guess again. The firm announced Tuesday that it is making another large acquisition—the biggest in its history—with the purchase of merchant services provider TransFirst from Vista Equity Partners. The $2.35 billion, all-cash deal is expected to close in the second quarter of this year, pending regulatory approval.
This latest acquisition will make TSYS the sixth-largest U.S. merchant acquirer in terms of net revenue, with more than 645,000 merchant outlets nationwide on its roster of clients. The combined TSY/TransFirstmerchant operation will reportedly generate approximately $117 billion in annual sales volume from handling some 1.2 billion transactions per year.
More importantly, with TransFirst’s customer base under its umbrella, TSYS will become a more formidable competitor on a larger playing field. In addition to retail operations, that base includes software vendors, health care providers, not-for-profit entities, banks, and online commerce players.
“With the added strength of TransFirst, TSYS will be uniquely positioned with significant scale and strength across issuer processing, merchant services, and prepaid program management,” TSYS Chairman, President, and CEO Troy Woods said in a statement issued when the acquisition was announced. “I believe our ability to offer market-leading services through this distribution network and across the payments spectrum will be unmatched.”
Woods will be joined at the helm of the combined operation by John Shlonsky, current president and CEO of TransFirst. Mark Pyke, TSYS’ senior executive vice president and president of the TSYS merchant business line, is leaving the company to pursue other interests within the payments industry, the firm said.
Meanwhile, a few factors indicate that the acquisition will prove to be a positive step for both entities involved. For one thing, it should allow TSYS to sharpen its own competitive edge by playing off TransFirst’s strength to enhance its merchant business.
As Woods told industry analysts during a conference call that followed the announcement and the firm’s earnings report release, “The U.S. (merchant) acquiring market is a very large market;” the sector is currently valued at $13 billion. “At the end of the day, TSYS needed to enhance its merchant business in order to remain competitive in the rapidly changing acquiring landscape.”
Then, there is the seemingly firm alignment of the two companies’ cultures and the foundation of their existing relationship: During the conference call, Shlonskynoted that TransFirst and TSYS have been “partners for quite some time,” with the former having utilized, and continuing to utilize, TSYS’ front-end, back-end, and gateway services. He added that his interaction with TSYS, particularly its executive team, renders him confident that “our values and how we treat each other and our clients are firmly aligned.”
Precautions being taken on the revenues front also seem to bode well for the future. TSYS CFO Paul Todd told analysts participating in the conference call that the company will cut back on stock repurchases until it “digests” a portion of the cost of the acquisition, and until TransFirst “ramps up” into the TSYS revenue stream.
Sounds like a good plan all around.
One of Green Dot’s largest shareholders wants to kick Steve Streit, the prepaid trailblazer’s founder and long-time CEO, to the curb. But Green Dot doesn’t seem to be having any of it.
Yesterday, the shareholder—Harvest Capital Strategies LLC—called for Streit to be ousted based on allegations that he had made strategic missteps, delivered weak financial results, and repeatedly destroyed Green Dot shareholder value since its IPO five years ago in 2010. Missed revenue targets and the discontinuation of Money Pak were among many examples cited by Harvest—which has a 6.2 percent stake in Green Dot—as rationale for putting Streit out on the street. While management at the investment firm admittedly lauded Streit’s accomplishments at Green Dot between its founding in 1999 and the IPO, they stated in a letter demanding the ouster that “the Green Dot of today requires a proven leader who can deliver consistent performance for shareholders,” and that “Mr. Streit has proven over many years, he is not that person.”
Streit is not the only one whom Harvest wants removed from his place at Green Dot. The investment firm wants two more of eight Green Dot directors, Kenneth Aldrich and Timothy Greenleaf, to be terminated as well. In addition, Harvest created and posted on a new website called www.fixgdot.com a 93-page presentation that details major changes it wants to see implemented within Green Dot and presents an argument that if the prepaid entity does not implement the suggested management changes, it should explore other strategic alternatives. “Numerous financial and strategic acquirers,” the presentation states, “would be interested in Green Dot.”
The presentation also contains a full-on attack on decisions made under Streit’s leadership. For instance, it stipulates that Green Dot’s board of directors changed the list of peer firms on its annual proxy “in a blatant attempt to justify increased compensation to Mr. Streit,” as the board utilizes the prepaid company’s relative performance as a reference point for determining management compensation.
It’s clear from Green Dot’s response to Harvest’s demands that it understands the latter’s position; the prepaid player said it has held numerous telephone calls and meetings with Harvest officials and will carefully review suggestions proffered in the presentation. However, it also doesn’t appear to take great stock in what Harvest has said about Streit and related matters so far. “Green Dot maintains a very active dialogue with our shareholders and welcomes their input as a part of our commitment to continually evaluate options to enhance long-term value and to act in the best interests of all our shareholders,” the company said in a statement issued in response to Harvest’s demands. However, “we are confident in our road map for growth.”
Defending Streit’s record as Green Dot’s CEO, the company said in the statement that it had been able to renew its contract with Walmart, where a high volume of Green Dot cards are sold, and deemed itself better prepared than some of its competitors for soon-to-be-finalized new rules governing prepaid cards. “Under Steve Streit’s leadership, Green Dot has established a strong competitive position against existing and numerous new competitors, renewed a long-term contract with its largest customer, made several highly accretive acquisitions and positioned its business in full alignment with key current and pending regulatory changes, which could potentially have severe effects on Green Dot’s competitors,” the statement says.
“Additionally, the company authorized a significant share-repurchase program and committed to ongoing share repurchases through 2018. These achievements have positioned Green Dot well for long-term growth.”
As of now, it’s possible Green Dot doesn’t need to take any of the actions Harvest would like for it to pursue. Okay, so shares in Green Dot sold for $36 apiece during the IPO. That’s nothing like today: Following the close of the markets yesterday, shares were at $17.36 apiece. However, shares were up by 1.6 percent from trading close the previous trading day. That’s progress.
Lots of our customers have come to us after reading our most recent report, To Be or Not To Be an ISV?, and are saying, “we agree that we need to focus on one or more verticals, but which ones?” It sounds like a simple question, but is it? Do you go for ones you are good at? Ones that are easy? Ones that are really big? Traditional or not? How do you decide?
The most successful of our customers take a very focused approach to answer this question. It’s an important decision that requires some work, but it’s very possible to do a compact and clear analysis to come up with one or more verticals on which to focus, and be all but certain they are right for you.
Whether you decide to embark on this yourself, or to seek help from an outside party, here are the key questions we think should be answered:
- What are the top verticals in my portfolio by merchant count and by business volume?
- What verticals am I selling the most of (this may be different from my overall portfolio due to changes over time)?
- Which verticals make me the most money?
- In which verticals do I have core competencies and/or competitive advantage?
- What’s a really good opportunity for me based on my competencies and advantage, the size of the segment, competition, and potential margin?
- What products do I need to maximize that opportunity? What compelling value propositions can I offer?
- What channels do I need to penetrate that opportunity? How can I activate those channels?
- What partners can I enlist? What’s in it for them?
- What competitors will I have? How can I differentiate my offerings from theirs?
I hope this is helpful as you work to refine your market focus. If you have questions, please feel free to email me, or we can set up a call. We can discuss ideas, I can answer questions, or if you are interested, we could frame up a project where the Double Diamond Group experts can help you answer these questions and get your strategy jump-started.
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President of Double Diamond Group
About Double Diamond Group
Denver-based Double Diamond Group LLC provides expert consulting services to the global electronic payments industry. Founded by industry veteran Todd Ablowitz, a former ViVOtech and First Data senior executive, Double Diamond Group helps payments industry clients solve their most critical business challenges with a unique blend of experience, connections and know-how. From venerable leaders to promising start-ups, Double Diamond Group works with companies of all sizes from around the world, including processors, acquirers, ISOs, agents, vendors, suppliers, service providers and merchants.
Are you tired of hearing that MPOS is the future of payments while your business is incapable of scaling its MPOS offering? Or are you seeing that your MPOS portfolio is made up of nothing but inactive or low volume merchants? Here’s 4 reasons why, and some things you can do about them.
|Reason for Failure||Explanation||What you can do|
|Because you have an MPOS strategy.||Good product strategies end with solutions, they don’t start with them. If you are merely adding products to your portfolio as a reaction to Square and others, you have short circuited the entire product management process. It’s a prescription for product failure.||Get to know your customers, prospects and competitors. Stop focusing on reactive strategies and get back to the 4 Ps.|
|Because you don’t really know your customers or prospects.||If you are listening to your customers, understanding their problems and offering solutions, you might have a chance. Keep in mind that not all customers have the same problems, and not all problems have viable solutions.||Segment your customers and prospects by vertical, by size, by profitability, and by your organizational expertise. Identify the segments where financial opportunity and core competencies overlap, and focus there.|
|Because you don’t really know your competitors.||Few financially valuable ideas are new, so don’t think of yourself as a genius for having an idea. The magic will be in execution and in differentiation. You must know your competitors and offer a more valuable solution, and continue to stay ahead over time.||Reinvent your competitive outlook. POS is not a payment product, it’s much more than that. If your list of competitors includes a bunch of payment companies you need a new list. Once you have that list, get to know the companies on it, and their products, extremely well.|
|Because your products and channels don’t fit.||Products and channels need to go together like peanut butter and jelly. If you’re mixing peanut butter and tuna, you won’t get far.||Create an MPOS channel strategy. Assuming that payment channels will suffice is a pipe dream. They need to be either transformed or replaced.|
Payments is a universal merchant need and a commodity, MPOS is neither of those things, so it shouldn’t be a surprise that payment companies are struggling with it. POS is a highly differentiated, value-added service, so a whole new set of rules apply. It will be product teams, not distribution teams, that will make or break the payments companies of the future. Is your business ready?
This blog post was inspired by a recent report by Double Diamond Payments Research. For more information about the report please visit To Be or Not To Be an ISV? Integrated Payments Strategies for Merchant Solutions Providers, or email firstname.lastname@example.org.
ETA Transaction Trends, July 14, 2015
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Investopedia defines “commodity” as:
A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers.
Payment processing has been a commodity since its inception, but it hasn’t always been used as raw materials in the production of other products. Now, however, the fastest growing processors are the ones that facilitate the use of payments as an input, completing the commoditization cycle and creating the next great payments opportunities.
A variety of banks created Visa and MasterCard in order to enable financial institutions to offer payment instruments that could be accepted at any merchant, anywhere in the world. To do so, they created standardized authorization, clearing, and settlement frameworks that merchant acquirers could use to offer payment acceptance to merchants in a way that provided global coverage and interoperability to bankcard issuers. It’s important to also understand that this standardization was the most important thing that ever happened in the payment industry, it offered thousands of companies to enable electronic payment acceptance around the world, and to benefit by earning a percentage of the many trillions of dollars in transaction volume that would follow.
There’s another important implication. By creating standards, the payment networks not only made payment cards globally interoperable, they also commoditized the industry. By definition payment acceptance offerings had to meet network rules, and these rules forced a convergence of diverse offerings into a single standardized product, so payment acceptance has been a commodity since day 1. Payment processors and terminal manufacturers followed the networks’ lead, deploying multi-network processing solutions and for-purpose payment acceptance hardware that enabled any card to be accepted by any merchant in an out-of-the-box, yet highly commoditized product.
Integrated software vendors (ISVs) have been using payments as an input into the production of their POS systems for decades, but primarily for just the largest of merchants. However cloud computing has reduced the cost of software delivery, making integrated payment solutions more accessible to smaller merchants, thereby making payments as an input far more popular. This trend has gathered momentum to the point that companies that specialize in helping ISVs include payments in their applications, such as Accelerated Payment Technologies, Element Payment Services, PayPros, and Mercury Payment Systems were growing a rate that outpaced the rest of the acquiring industry by a 3X multiple until they were swallowed up by Vantiv and Global Payments. Other integrated payment firms such as Stripe and Braintree continue to be some of the fastest growing firms in payments.
It’s important to note that facilitating the use of payments as an input to the products of other firms is a pure commodity play. Integrated payments firms like those mentioned above continue to make it easier and easier to use payments as an input, speeding the process of payments devaluation into raw-material status. Integrated payment is the next big commodity play that will be dominated by scale-driven firms, strategies, and pricing. In short, the integrated payments player is the payments processor of the future: large, untargeted, undifferentiated, and facing ongoing pricing compression. So as Vantiv and Global duke it out to be the largest commodity distributors, what is the rest of the world’s merchant services providers to do?
We believe that there are 6 options, each one requiring a specific set of competencies. Payments firms should be deeply involved in self assessments to determine the option that best fits their business, and they should be aggressively investing to close any gaps and to maximize their growth potential. To learn about the six options, contact us about our most recent report: To Be or Not To Be an ISV?
For more information about the report, To Be or Not To Be an ISV? Integrated Payments Strategies for Merchant Solutions Providers, email email@example.com.
Most merchant services providers will fail in their integrated payments and mobile POS strategies, concludes To Be or Not to Be an ISV? Double Diamond Payments Research’s latest report.
To Be or Not to Be an ISV? analyzes the major sea change that is underway in the merchant acquiring sector. Stand-alone payment services are being replaced by integrated services that bundle payments within a growing set of software services, and the trend is accelerating thanks to mobile technology. The implications of this movement are profound, requiring the transformation of business models, product and marketing strategies, distribution strategies, pricing strategies, and targeting strategies for ISOs, acquirers, processors, technology vendors, and integrated software vendors (ISVs). ISOs and acquirers, specifically, are faced with the question “should I, or should I not become an ISV?” This report answers that question, as well as many others.
The findings are based on DDPR’s analysis of interviews with senior to c-level product experts from 26 payment processing providers across all size tiers. The interviews focused on industry efforts to transform in response to industry changes, and the challenges that come with being in a state of transition.
“This report addresses the challenges faced by the technology vendors, ISOs, and acquirers as a result of this sea change and concludes that many organizations have the wrong strategy,” said Rick Oglesby, senior research analyst, DDPR, and report author. “It provides a specific approach through which merchant services and solutions providers can identify and pursue the right strategies for future success”.
For more information about the report, To Be or Not To Be an ISV? Integrated Payments Strategies for Merchant Solutions Providers, email firstname.lastname@example.org.
Merchant acquiring has made the payments system more efficient for many, many years. As the payments arena continues to evolve and new technologies challenge and shape the industry, our research suggests acquiring will gain strength.
For our new report, Acquiring Acquirers: Why Industry Insiders are Bullish on the Acquiring Sector, we interviewed CFOs from around the industry and found that despite rumblings to the contrary, merchant acquiring is a healthy sector that can only benefit from new technology.
Several key factors will drive volume and margin expansion as well as increased free cash flow. Due to these factors industry EBITDA will grow an average of 6.5% each year with EBITDA expanding from US$4.9 billion to US$7.2 billion between now and 2020.
The report also outlines five strategies acquiring organizations must have to maximize growth and maximize their valuation.
To download the report’s executive summary:
Acquiring Acquirers: Why Insiders are Bullish on the Acquiring Sector
To purchase the report or speak with us call (623) 252-5419 or email email@example.com.
Today, I am thrilled that we are launching a new research report that provides an unprecedented, deep analysis of the acquiring market, its overall health and future, and provides a roadmap for the maximization of acquiring organizational valuations.
We conducted confidential interviews with active merchant acquirers to get their unfiltered take on what’s really happening in merchant acquiring, and their take was eye-opening. These organizations show little trepidation about the future, in fact they’re charging full steam ahead
In the report findings, we outline the six key reasons why CFOs are bullish and investing heavily in their sector. We further analyze the information that the CFOs provided along with a variety of other data on valuation, transaction growth rates, margins, earnings and others, and used it to create specific criteria that can be used to identify the most attractive acquisition targets and/or investments in merchant acquiring. This same criteria can also be used by operating companies to improve their own valuations.
To learn more about the report and its eye-opening findings: Acquiring Acquirers: Why Insiders are Bullish on the Acquiring Sector, or contact us at (623) 252-5419 or at firstname.lastname@example.org.
I’ve really been pondering the past few weeks’ events; Apple Pay was announced and launched and the new iPads were shown to the world. The payments lover in me had finally made my first Apple Pay transaction, and I was impressed and excited. However, that alone just got me thinking more, and then it hit me. What if the new iPads also had NFC chips. What would that mean for merchants and payment acceptance, and what would it mean for EMV compliance.
Initial reports indicated there was no NFC chip included. Then, I saw the guts of the new iPads, and BEHOLD, there was an NFC chip hiding inside. Whoa! So, Apple did include it after all and is waiting for the right time to enable it.
Then, just as I thought I had figured it all out, people started saying there was no antenna! After many conversations with technology and payments experts to see if I could glean any answers, I found myself at the end of today with nothing that explains why the NFC chip was included without an antenna. I hear the point that the secure element is important for “remote” Apple Pay security, and I buy that, but if they spent the money to include the chip, why not an antenna too? (Author’s note: the so-called “antenna” used for NFC is actually an induction coil, but so many people call it an antenna, we will continue to use that mildly flawed term)
We all know that the iPhone 6 and 6 Plus have an NFC antenna, and Apple said it was innovative and built into the top part of the phone, but no one out there seems to be able to find it. All they can verify is that the booster was included for small devices that don’t have enough antenna real estate.
What a NFC Chip with an Antenna Would Mean
If the chip was included in the new iPads to work as a NFC reader, it would mean HUGE things for merchant payment acceptance, and when and if that all happens, as you can imagine, some very powerful things are possible.
In one year, the deadline for Chip and PIN acceptance will be here, so when there are readers on every iOS device, you don’t need an EMV plug-in or to upgrade your POS system, you meet EMV requirements with contactless acceptance. With the deadline also comes pressure on issuers to issue Chip and PIN cards, but in my opinion, financial institutions will miss an opportunity not to also include contactless in the new cards.
Now these are the facts I have, and I’m not ever 100 percent sure they are the facts. So if anyone out there has other ideas or knowledge that explains this, please, reach out and help me figure it out.
Monday morning on my early flight to NYC, I have to admit I was anxious. My plan was to download iOS 8.1 with Apple Pay on landing, and I was pumped to see it in action. I had waited patiently since September 19 when Apple Pay was announced, and finally launch day had arrived.
The topic of mobile payments is not new. Business models, technologies and standards have consumed conversations related to the future of commerce since the early 2000’s. However, after these many, many years, I was finally able to give it a spin and see if my thoughts and predictions had any real world merit.
Did Apple Pay meet my expectations, and live up to my predictions from years ago? It really was very cool. My first transaction was easy, convenient, and with my consumer hat on, it definitely was secure.
After I landed, I installed iOS 8.1 and loaded Apple Pay with two credit cards and one debit card, I jumped in a taxi to Manhattan. I did not have to type in a PIN to access my mobile wallet or close any apps that were open, all I had to do was wave my phone near the reader, and it automatically opened my wallet. I provided my Touch ID to verify it was me, and just like that, it was done. It took about one second to complete, and my default card was automatically charged – the transaction appearing in Passbook. So cool!
For years, I have felt that the only way to consumer adoption is simplicity, ease and speed. To achieve those things, it’s imperative that you don’t have to think about it, press buttons, enter codes or any other silliness. Consumers want to pay – simple. With their card, they just swipe – super easy – but definitely not easy for mobile payments to compete with. So, what does that mean? As I’ve said for years, it’s crucial that the simple act of tapping “pulls” your card out, regardless of what screen you are on – even if it’s locked, with the screen off. Apple accomplished exactly this, and it’s the “killer app” that crushes the alternatives. ONLY Apple and Google, who control the operating system, can control the phone to this degree. It will definitely put pressure on Paypal, MCX and the other contenders – and i just don’t know how they could overcome it. Is this Checkmate?
This all reminded me of a video interview I did on NFC versus Cloud-based payments about a year ago. In the video I talk about this very thing; how tapping for in-person mobile wins, and why the very act of using a mobile device has to behave just as I mentioned above – it has to make it easy by not requiring the consumer to do anything other than tap and verify themselves.
I am not sure when my excitement will start to fade, but I will definitely be using it again soon, and I can’t wait to see what this does for the industry.
The fact that U.S. infrastructure is underdeveloped from an NFC standpoint may be exactly what makes the market appealing to Apple. It allows Apple to become a dominant player in in-app payments first:
- Apple already benefits greatly from an app-centric mobile commerce environment, it seeks to preserve and build upon this ecosystem.
- Apple Pay is extremely well positioned to quickly expand Apple’s already large share of the in-app payments market, NFC infrastructure is not needed for that.
- By deploying it’s own marketing power, together with that of 500 banks plus that of the major payment networks, it will deploy massive resources to create consumer awareness and demand to use Apple Pay. At the same time, the lack of NFC infrastructure ensures that consumers will only be able to use Apple Pay in the places where Apple benefits the most – for in-app payments.
- Apple can freely add alternative payment mechanisms to its in-app payment capabilities, where acceptance infrastructure is not a problem. It could add PayPal, ACH, online debit, PayNet/MCX, cyber currencies or others that could quickly make in-app payments more competitive and less expensive for merchants than network driven, card present transactions.
Once Apple is a dominant player in in-app payments, it can extend it’s dominance to offline payments:
- Passbook serves as a hub for all mobile apps, a place where consumers, merchants and app developers can centralize, organize, and automate information recall and exchange for close proximity commerce. Apple Pay is fully integrated with and a component of Passbook.
- Because Apple Pay is a part of Passbook, the above-mentioned Apple Pay consumer awareness and demand creation efforts will create a flurry of activity around Passbook as application developers seek to take advantage of the newly created consumer and merchant attention.
- Passbook has long supported Bluetooth Low Energy (BLE) and barcodes. These technologies are currently available for use by all developers, while NFC can only be used by Apple. That, coupled with the lack of installed NFC infrastructure will ensure that the flurry of activity created by Apple Pay publicity will actually focus on BLE and barcode technologies. The resultant apps will use Apple Pay in the background as an in-app, non-NFC payment mechanism while using Passbook, BLE and barcodes as the merchant interfacing solutions of choice.
- As a result, Apple can leverage the marketing power of the financial institutions and payment networks to establish itself as a dominant player in in-app payments, a capability which Apple could then extend via Passbook to make in-app payments the default mobile payment mechanism at the point of sale. If the goal is to become dominant in in-app payments first, the lack of NFC infrastructure actually provides a benefit. Once established as the in-app payments leader, Apple will be indifferent to transmission technology (BLE, barcode or NFC) as it will be able to leverage any of these technologies to accomplish its goal of extending its in-app dominance to the point of sale.
So as the payments industry celebrates Apple’s acceptance of NFC technology, payments executives should take note. It is the payments industry that needs NFC, not Apple. However, we still must assume that Apple’s adoption of NFC is self serving. So we should think hard about why the world’s greatest product company is adopting and launching a solution in a market where it is unusable in the vast majority of merchant locations, why it’s preventing that technology from being used in situations other than in which it is currently unusable, why it has not embraced the technology for additional devices such as its new iPads, and why it is claiming that it will reinvent payments while at the same time following a blueprint that is essentially provided by the payment networks and has already been tried unsuccessfully by others. Does Apple really care if NFC succeeds? Or is Apple adopting NFC because the lack of NFC infrastructure coupled with the payment industry’s desperation to make NFC succeed combine to make NFC adoption a terrific business play to establish in-app payments dominance and a foundation for future offline payments dominance?
Some are arguing that Apple Pay should have launched in Canada first. While I don’t think that would have gotten Apple the kind of splash they were looking for, the idea has a lot of merit in both a practical and consumer sense. In fact, they could also do very well in Poland and the U.K., not to mention many other places around the world. I recently chatted with some of our Double Diamond Group colleagues around the world to get their perspective, and to look deeper into why Canada, Poland, Australia, the U.K. and markets in Asia would have made sense and why they don’t.
Canada, Australia, Poland and the U.K. are four countries with huge and already established contactless infrastructure. Why? In the case of Canada and Poland, contactless payments, card payments that use the same technology as near field communications (NFC), rolled out at the same time as Chip and PIN. The upgrade at retail happened rapidly and smoothly, with huge support from the card networks-namely MasterCard and Visa. If you have ever used Chip and PIN, it takes a bit of time to read the card, enter your PIN, and confirm the transaction. Contactless, which happens in less than a second is much faster, and it’s an easy sell to the consumer versus Chip and PIN (unlike mag-stripe).
In the U.S., Apple has huge market share – according to recent data from comScore, 173 million people in the U.S. owned smartphones (71.8 percent mobile market penetration) during the three months ending in July 2014, and Apple ranked as the top OEM with 42.4 percent of U.S. smartphone subscribers. Add to that recent data from Investment banking company Piper Jaffray that surveyed 200 teenagers across 41 states, which found that 73 percent surveyed said their next phone would be an iPhone.
What about Australia?
Australia has extensive contactless infrastructure and is known for early payments technology adoption, so is New Zealand. In fact, some companies are increasingly looking to Australia as a testing ground before rolling out to other countries. The country has also had cards and payment terminals full EMV compliant for several years. In 2008 Commonwealth Bank (CBA), the largest issuer and acquirer, a predominantly MasterCard bank, started issuing PayPass cards and the POS terminal base followed in the coming years. This push by CBA plus a high contactless limit (A$100 or about US$88) for both Visa Paywave and MasterCard PayPass were the catalysts for take-up in 2010 and 2011. Then, the real traction came in 2012 when the two largest grocery and fuel retailers both upgraded their POS systems to accept contactless.
Perhaps it would have made sense for Apple to try Australia to launch Apple Pay due to its established and successful contactless infrastructure, but it might not have had the “sizzle” that the U.S. launch had.
Contactless in the U.K.
In the case of the U.K., Chip and PIN (EMV style) is over a decade old and was the first country to reach critical mass (yes, ahead of France even though they invented chip). The famous “Liability Shift” occurred on January 1, 2005, which means the terminals that rolled out a decade ago, are old, and cardholders have long been conditioned to the Chip and PIN process. Since contactless EMV arrived more than five years ago with major support from Visa and MasterCard, deployment of readers has caught-up with the POS replacement cycle, meaning that integrated contact and contactless POS devices have become the norm. Whilst consumers were slow to adopt contactless at the start (to some degree because of the mixed security messages they received from the banks) consumers have finally started to adopt contactless but not to the degree expected. This may be due to the minimal speed advantage – the U.K. networks are now optimized for extremely fast Chip and PIN transactions – and the contactless limit is low, so when exceeded, it causes confusion for both customer and merchant. A limit-less mobile and contactless solution would undoubtedly improve usage and critical mass. It could be achieved quickly with Apple’s high smartphone market share and with the dense population of compatible readers at merchants.
In the U.K., the carriers have gone cool on payments as they became embroiled in a long drawn-out argument with the banks over pricing where the banks refused to pay them any transactional fee. They may see the app as giving some lift or stickiness in the market, but the prospect of any long-term monetary benefit seems unlikely. Currently the high demand for the new Apple phone is enough to draw the carrier’s attention regardless of Apple Pay.
In the U.S., issuing banks have signed-up for Apple Pay, and are actually paying Apple. I find it unlikely that the U.K. issuers will accept paying ongoing fees to Apple. Clearly there are some marketing advantages to being first to launch the high visibility Apple Pay wallet with an exclusive card brand; but after all the flag waving subsides and the wallet is open to all brands we are back to the old arguments about transaction cost versus issuance cost. Whilst Apple Pay may have a slight advantage due to reduced transaction risk, I don’t see this will feature very highly on Issuers negotiating agendas.
So maybe the U.K. is a great place to launch Apple Pay but it is simply not a good commercial prospect for Apple.
London Underground Could Propel Contactless Consumer Adoption
Although Apple Pay chose to launch in the U.S., the use case and value of mobile and contactless are being realised very soon on the London Underground. Transport for London (TfL) announced last month that it would begin rolling out contactless payments, including mobile, for transit payments, which could potentially increase consumer adoption of contactless payments. TfL already accepts contactless on buses and estimates it receives around 700 contactless transactions a day. With annual ridership around 1.23 billion, transport could be the “killer app” for contactless payments in the U.K.
Why the U.S. Market?
Apple already benefits greatly from an app-centric mobile commerce environment, and it seeks to preserve and build upon this ecosystem. Apple Pay is extremely well positioned to quickly expand Apple’s already large share of the in-app payments market, NFC infrastructure is not needed for that, yet the adoption of NFC technology is the ticket to getting support from financial institutions and payment networks, which will accelerate Apple’s rise to in-app payment dominance.
Once Apple dominates in-app payments, it can freely add alternative payment mechanisms to its in-app payment capabilities, where acceptance infrastructure is not a problem. It could add PayPal, ACH, online debit, PayNet/MCX, cyber currencies or others that could quickly make in-app payments more competitive and less expensive for merchants than network driven, card present transactions. From that foundation, Apple would be extremely well positioned to make a strong play for in-person payments under a framework where Apple is in control of the front-to-back consumer and merchant experience.
It’s therefore quite possible that Apple views NFC as merely a means to gain support from issuers and networks. Penetration of point of sale payments is a long-term, not a short-term, objective.
Asian Markets are at Different Stages
In Asia Pacific, Australia has clearly taken the lead in contactless payments and growth has been rapid over the past several years. While contactless is not as common here in Singapore, volumes have also grown so that it has perhaps the second highest percentage of contactless POS transactions in the region, and contactless accounts for more than 20 percent of POS transactions for some brands. Whether the mobile phone at the POS would reach the same levels as well is up for debate, though, as an NFC pilot has recently been largely superseded by app-based mobile payment solutions such as Dash and Paylah. Even if NFC were more common, Singapore has a small population and launching Apple Pay here would have less impact.
In other markets in Asia the growth of contactless for POS has been far slower, outside of transit solutions in Hong Kong, Japan, Korea and Thailand that have done well. Even though a few markets have the contactless infrastructure in place, cardholders have shown relatively less interest in using contactless cards or in using NFC for mobile payments. While simply the appeal of Apple phones in some markets could provide a boost over time, using those markets to launch Apple Pay could well not have provided the headlines Apple would prefer.
Why Apple Likely Chose to Launch in the U.S.
Although Canada and other markets make sense due to established infrastructure and overall higher acceptance of contactless payment technologies, there are some substantial hurdles for Apple in those markets.
A big one is market share; in Canada Android has more penetration, and in Australia Android is a very strong brand alongside iOS, so Apple’s reach and brand power compared to the U.S. is not nearly as high.
Second, banks and carriers have a dog in the hunt, and it remains to be seen if Apple has the same market power in those countries as they have in the U.S. In fact, during its October event last week, Apple announced it has signed up 500 new banks throughout the U.S. that will rollout Apple Pay later this year and into 2015.
The bigger element at play with Apple Pay and contactless payment technologies overall is that they are truly global with nuances region by region. I am more optimistic than ever about mobile payments and realize that it is far beyond a single market rollout, and that each market will embrace Apple Pay and other mobile payment technologies at its own pace.
Last week we launched an online community focused on discussion and idea sharing on topics and concepts touching the payment facilitator community. I am excited to learn from this group and share my own experiences and ideas.
We will start new discussions regularly that analyze and explore a variety of topics including best practices, business models, how the payments landscape is evolving and what that means for the PF community. We encourage others to post ideas and discussion topics as well. We want to make this a rich and engaging forum.
This week we are looking into using social media as a risk and fraud mitigation tool.
In addition to businesses using social channels to connect with their customers and clients, some Payment Facilitators have found it’s also an effective tool for fraud and risk management.
This is very beneficial in making the underwriting process more seamless. It works by using social data to quickly populate information into the system, which means fewer questions to the applicant and a much faster overall experience. Using social can also help to identify businesses and people to determine if they are real and who they say they are.
One very interesting trend happening that makes this data more useful and valuable is companies offering aggregation of social data. I am curious what other trends you are seeing out there? Please join me in looking deeper into this topic, as well as those we discuss in the future: Payment Facilitator Discussion Group on LinkedIn
You can view a video on the topic as well: