By Patti Murphy
Europay, MasterCard and Visa (EMV), mobile payments, cybersecurity, interchange litigation, IPOs and the pursuit of real-time payments. These are key issues that helped to shape the competitive landscape this year for feet on the street and their acquiring and technology partners.
After years of fits and starts, mobile payments began moving into the mainstream in 2015, driven by nonbank initiatives such as those launched by Apple Inc., Google Inc. and, more recently, Samsung Corp. Softcard, a mobile wallet scheme from the major phone carriers with bank support (previously known as Isis), shut down in May, selling its technology to Google. Meanwhile, a merchant-backed mobile wallet scheme known as CurrentC remains in pilot mode, its fate uncertain.
Wal-Mart Stores Inc., one of several big-box merchants behind CurrentC, recently introduced its own mobile payment app. Walmart Pay builds on Wal-Mart's mobile shopping app (which it claims has 21 million active users) to support acceptance of all major payment and Wal-Mart gift cards. It is being tested now and is expected to be made widely available in 2016 to an estimated 140 million consumers who shop regularly at Wal-Mart, the company stated in December 2015.
Unlike Apple, Google and Samsung mobile wallets, which use near field communication (NFC) technology to effect a tap-and-pay experience, Walmart Pay (and CurrentC, too) relies on quick response (QR) codes to effect transactions. Walmart Pay also can be used on both iOS and Android devices. This is an important distinction, according to Wal-Mart executives, as Apple Pay only works with Apple devices and Google's Android Pay and Samsung Pay work only with Android phones.
The Electronic Transactions Association addressed issues raised by mobile payments during a Strategic Leadership Forum in mid-October. In an interview with The Green Sheet following that event, Jared Drieling, Business Intelligence Manager at The Strawhecker Group, suggested the lack of common approaches to mobile wallets (for example, NFC versus QR codes, iOS versus Android) could hinder consumer adoption going forward. Yet he also said that broad adoption of EMV will help by creating an infrastructure that can support NFC as well as QR codes. "We need that infrastructure in place, then the banks and merchants can jump in," he said.
Hardware manufacturers and software developers have been responding with a new generation of mobile POS devices, which also addresses the public's growing dependence on smartphones and tablets. New and emerging mobile devices come with more functionality (digital couponing and loyalty and reward programs, for example) than fobs and dongles, experts noted. They are easy to deploy and upgrade on the fly.
The latest of these, the Verifone e265, was introduced in December and joins a line of Verifone mobile POS (mPOS) devices, including the e355, which is used by large retailers. The e265, designed primarily for small and micro-merchants, is EMV compliant, accepts NFC payments and it reads mag stripes, too. "Merchants will have the ability to connect their online and offline sales channels by integrating Verifone e265 with any type of smart [phone or] tablet," the company said in a press release.
"What we're seeing is a complete change to the old legacy systems, appropriately driven by technology," said Norm Merritt, President and Chief Executive Officer at ShopKeep.com, which sells tablet-based POS solutions. Merritt and other experts expect users of mPOS solutions to grow exponentially, given the power and simplicity of tablet applications as well as low cost of ownership.
Grand View Research Inc., a San Francisco-based market research firm, agrees. It predicts the global market for mPOS terminals will reach $42.99 billion by 2022. "Sophisticated data analytics, growing credit card payments and ever-changing consumer expectations are expected to spur the mobile POS terminals industry," the firm said.
It was an active year in the capital markets for acquirers and other payments companies. Worldpay Group plc, started trading on the London Stock Exchange in October, becoming the first financial technology company in the United Kingdom to launch an IPO. Although it is headquartered in the U.K., Worldpay has a large book of business in the United States and ranks among the top 10 U.S. merchant acquirers.
Soon after Worldpay's IPO, top U.S. acquirer First Data Corp. raised $2.6 billion its first day listed on the New York Stock Exchange, making it the largest financial technology IPO in the United States this year.
Meanwhile, another top 10 acquirer, TransFirst Holdings Corp. let it be known in October that it planned an IPO. TransFirst had planned an IPO last year. That plan was scuttled, however, when Welsh Carson Anderson & Stowe, the New York-based private equity firm that owned TransFirst, sold the company to San Francisco-based Vista Equity Partners.
In July, eBay Inc. spun off its popular payments unit, PayPal Inc., which now trades on NASDAQ. eBay had invested heavily in PayPal since it purchased the then public company in 2002. Most recently it made several acquisitions to bolster PayPal's mobile payment capabilities. That appears to have helped PayPal make inroads with PayPal Here, which now features a chip-card reading dongle in direct competition with Square Inc.
Square has been active in the capital markets, too. It became a public company in November, raising $243 million in its initial stock offering on the NYSE.
The assault on merchant pricing continued this year. In February, the U.S. Supreme Court declined a request by retailers to review a 2014 lower court ruling that let stand debit card interchange caps established by the Federal Reserve Board. The Fed, which was directed to regulate debit interchange under the 2010 Dodd-Frank Act, has taken significant flak from banks and merchants since it capped debit card interchange at about $0.21 per transaction.
Merchants complained the cap is too high and took the Fed to court in 2013 to force changes, but the challenge was shot down in 2014 by the U.S. Court of Appeals for the District of Columbia Circuit. Since the High Court declined to review that lower court ruling, the rate cap remains.
Retailers have been challenging card interchange for years, and in 2012 MasterCard Worldwide and Visa Inc. agreed to a payout of over $7 billion to retailers to end long-standing litigation over alleged overcharges. But thousands of retailers opted out of the settlement, claiming the payout and other terms were insufficient.
Several big-box retailers that opted out of the agreement (such as Wal-Mart and Target Corp.) since have filed individual lawsuits against MasterCard and Visa alleging that interchange setting is equivalent to price fixing in violation of federal anti-trust laws. Google added its name to that list early this year when it filed suit against the card companies in the federal District Court for the Eastern District of Texas.
More recently, a group of merchants in Tennessee sued two acquirers in a Georgia state court for allegedly inflating interchange with hidden charges. One of the defendants in that case, Mercury Payment Systems LLC of Durango, Colo., faces similar charges in a lawsuit filed in a federal district court earlier this year by Heartland Payment Systems Inc. Heartland alleged that Mercury has been poaching Heartland customers with claims of cut-rate processing fees, which it then inflates with hidden charges.
Cybersecurity and fraud concerns remained front and center for payment companies this year. "Companies in the payments industry face a huge challenge keeping up with securing new technologies to protect consumer data and with cybercriminals who are trying to penetrate card systems 24/7," said Michael Bruemmer, Vice President for Experian Data Breach Resolution.
According to the LexisNexis True Cost of Fraud Study, retailers saw 1.32 percent of revenues siphoned off by fraud this year, a whopping 94 percent increase over 2014 losses. Escalating adoption of debit card and mobile payments are major contributors to this trend. "Consistent with merchant trends, financial institutions agree that debit card fraud is a growing challenge facing their industry," LexisNexis reported.
A survey in May of executives at financial and nonfinancial enterprises, undertaken by the Ponemon Institute and Experian Information Solutions Inc., revealed that over 50 percent believe the use of mobile payment systems increases the risk of data breaches. Apparently that is not a deal breaker for many, however, as 53 percent said they accept that risk and asserted that customer convenience trumps security.
Several initiatives came to the fore this year that demonstrate the industry's resolve to fight back against fraudsters and cyber-crooks. The most notable of these has been the migration to EMV. EMV is a security protocol intended to supersede the need for storing credit and debit card data on magnetic stripes, which can be compromised easily and leave merchants and their acquiring partners vulnerable to card frauds. The technology has been available for years, and has been implemented in most major economies, but adoption by U.S. merchants and card issuers has been slow.
The card brands set a deadline of Oct. 1, 2015, for most U.S. merchants to be EMV compliant. (Merchants operating automated fuel dispensers have additional time to comply.) Merchants who haven't met the deadline are now subject to liability for losses that ensue from fraud associated with their noncompliance. Still, many merchants – notably large swaths of smaller merchants – remain noncompliant. Part of the problem is a lack of awareness, especially among smaller merchants. The terminal certification process has been problematic as well.
"We're seeing saturation at every point in the [certification] process," said Lynn Holland, Vice President and General Manager, Retail Payment Solutions at payment company ACI Worldwide Inc. Holland is optimistic that 90 percent of national and regional retailers that work with ACI will be EMV compliant by the first half of 2016. Other experts are similarly optimistic that the bulk of U.S. POS devices will be EMV compliant within the next few years.
Payment companies continued to come under scrutiny from Washington this year. Cybersecurity was a hot topic in Congress (state legislatures, too) where numerous hearings were held and legislation was introduced addressing card data breaches. So was consumer protection.
The Consumer Financial Protection Bureau named four payment processing companies as co-defendants in a civil suit against a telemarketing firm running a bogus debt-collection operation. The Bureau said the four – Global Payments Inc., Pathfinder Payment Solutions Inc., Frontline Processing Corp. and Electronic Merchant Systems – ignored red flags that their client was engaged in illegal activities, including consumer complaints and massive chargebacks.
The CFPB assumed primary regulatory authority over the acquiring sector from the Federal Trade Commission under the Dodd-Frank Act. And as industry attorney Adam Atlas noted at the time, the CFPB seems to be taking a harder line on standards of conduct for ISOs and acquirers than did the FTC. "Until now, absent complicity in wrongdoing, processors were not held responsible for the acts of their merchants," Atlas said.
Dodd-Frank notwithstanding, the FTC continues to wield influence over the payments space.
Recently the agency amended its Telemarketing Sales Rule to ban acceptance of certain types of payments by telemarketers. Specifically remotely created checks, remotely created payment orders and prepaid card cash reloads – payment "methods that scammers like, but honest telemarketers don't use," the FTC said.
Meanwhile, the CFPB continues work on amendments to federal credit and debit card regulations to specifically cover prepaid cards. Opponents argue the rule changes will hamper growth in prepaid cards, which are often positioned as less costly alternatives to bank accounts. NetSpend, a leading prepaid company owned by top 10 acquirer Total System Services Inc., has been a vocal opponent, especially of provisions in the proposal that would treat prepaid card overdrafts (a prepaid card feature pioneered by NetSpend) as lines of credit subject to federal Regulation Z, which addresses truth in lending.
We live in a fast-paced world, punctuated by near universal desire for instant gratification. One way this has been playing out in the marketplace is through faster payments initiatives. The Federal Reserve got the ball rolling in 2014 when it set forth a 10-year plan to get financial institutions and their technology partners to create networks that support near-real-time payments. The Fed's vision is that there will be one or more such networks for business and consumer payments that operate in tandem with existing payment systems, such as the automated clearing house (ACH), image check clearing and card networks.
NACHA – the Electronic Payments Association took a step in that direction when it approved plans for a three-step approach to same-day ACH payments beginning next year. (Today ACH payments settle in one or two days.)
Meanwhile, The Clearing House, a payment company owned by the largest banks in the country, revealed an ambitious plan to establish a real-time system for both business- and consumer-initiated payments. And it has partnered with some heavy hitters to see the plan through. The New York-based company has hired VocaLink Ltd. the technology company behind real-time payment networks in several countries including the United Kingdom and Singapore, and FIS, which provides payment and other back-end services to about 3,000 financial institutions here in the United States
The United States is one of 14 countries where infrastructure improvements are underway in support of real-time or near-real time payments. Combined, those economies account for 45 percent of global credit transfers, according to the international consultancy McKinsey & Co.
The CFPB has weighed in on faster payments, too. In a paper issued in July – Consumer Protection Principles: CFPB's Vision of Consumer Protection in New Faster Payment Systems – the agency voiced support for the concept, but stated consumers must "remain top of mind" throughout the development and implementation of any new payment systems.
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