Volume Seventeen, Number Eleven • DigitalTransactions.net • November 2020

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NOVEMBER 2020 • VOLUME 17, NUMBER 11

The 10 Most Pressing Issues in E-Payments 20 Each year, Digital Transactions uses this space to lay out the problems impacting the payments industry. This time, the Covid-19 pandemic has in ected our coverage across a wide range of issues. The solutions will have to be far from business as usual.

THE GIMLET EYE The Fed Inches Toward Real Time 4

TRENDS & TACTICS 6 Is FedNow Moving As a Deadline Nears, Afterpay Comes PayPal, Venmo, Fast Enough? Relief for EMV to the Cash Register And QR Codes Even banks are far from at the Pump It’s yet another big step PayPal’s new Visa card united on this question. for the fast-growing for Venmo features an Meanwhile, FedNow TNS o ers gas stations a point-of-sale installment NFC chip for point-of-sale is planning a pilot. break on telecom-installation lending trend. transactions and a QR code Details to come. costs to support EMV. to make P2P payments. Plus, Security Notes describes a remedy for attacks via quantum computing; and Payments 3.0 sketches what a Biden administration would look like for payments.

ACQUIRING 13 STRATEGIES 27 Poised for Huge Growth— Subscriptions, Online Services, And Potential Trouble PayPal, And Covid-19 The rapidly rising payo for acquirers The pandemic is changing payments, from the state-by-state legalization but it’s also reworking payments of online sport betting comes with strategies. Here’s how the industry will  ashing caution signs. have to react in the next few years. STRATEGIES 16 ENDPOINT 30 Contactless Payments: The Real Deal for We Can Do Better Real-Time Payments Yes, consumer usage has grown Multiple real-time services may since Covid-19 set in, but a lack  ourish, but don’t discount the Fed’s of coordination among industry ability to corner volume. players has led to confusion at the point of sale. Cover Illustration: Jason Smith, 123RF.com

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2 DIGITAL TRANSACTIONS | NOVEMBER 2020 CONTENTS

NOVEMBER 2020 • VOL. 17, NO. 11

THE FED INCHES PUBLISHER Robert A. Jenisch EDITORINCHIEF John Stewart SENIOR EDITOR, DIGITAL TOWARD REAL TIME Kevin Woodward CORRESPONDENTS IN AUGUST LAST YEAR, when the Federal Reserve announced it would jump into Jim Daly, Peter Lucas the real-time payments arena, proponents of the idea were elated. A public sec- ART DIRECTOR/PRODUCTION EDITOR tor competitor would be needed, they argued, to o set the rapidly advancing Jason Smith network at The Clearing House Payments Co. LLC, an entity owned by 25 EDITORIAL ADVISORY BOARD major banks. And this doesn’t even take account of other private-sector ini- Eula L. Adams tiatives, including Early Warning Services LLC’s Zelle network and the major John Elliott card networks’ push-payment services. Alex W. “Pete” Hart But what many may not have counted on is that the Fed would take its Former Chief Executive O cer, Mastercard International time. It no sooner announced its entry in the real-time arena than it said its William F. Keenan FedNow service wouldn’t go live nationally until 2023, or 2024 at the latest. In President, De Novo Corp. the world of digital payments ‹ ows, that’s an eternity. Dr. Gideon Samid Not only that, the Fed’s competitors are already up and running. TCH Chief Technology O cer, announced in September its Real Time Payments service is already able to AGS Encryptions Ltd. connect, directly or through core processors, to 56% of U.S. deposit accounts, DIRECTOR OF ADVERTISING Robert A. Jenisch, 877-658-0418 and has the potential to link to 70%. [email protected] So proponents of the Fed initiative were already disappointed when o icials ADVERTISING SALES REPRESENTATIVES of the central bank said this summer they were sticking to the timetable. And last Robert Mitchell, 877-658-0418, x7 month they reiterated that point. They did announce they were seeking “expres- [email protected] sions of interest” from financial institutions, processors, and other parties to Rob Akert, 877-658-0418, x6 participate in an upcoming pilot. But, 14 months after the Fed publicly announced [email protected] the FedNow project, those o icials were silent about the pilot’s details. Digital Transactions, Digital Transactions News, and DigitalTransactions.net are publications of Experts are split on the question whether the Fed’s deliberate approach Boland Hill Media LLC, 800 Roosevelt Road, will allow competing private-sector services to lock up volume (see our lead Suite B212, Glen Ellyn, IL 60137 story in Trends & Tactics on page 6). “Financial institutions are moving for- John Stewart, Managing Director Robert A. Jenisch, Managing Director ward with other real-time payment plans due to the extended timeline of For advertising information, call FedNow,” Erika Baumann, an analyst at Aite Group, told us last month. In a 877-658-0418. To subscribe or give us a change of address, go to survey Aite conducted with more than 100 financial institutions, just 10% www.digitaltransactions.net and click on said they’d wait for FedNow, even though they had originally intended to “Subscriber Care” or call 847-559-7599. move ahead with another service. The views expressed in this publication are not necessarily those of the editors or of the But the Fed can’t be underestimated. It is the nation’s central bank, and members of the Editorial Advisory Board. The publisher makes reasonable eš orts to as such wields immense power. Eric Grover argues in our Endpoint column ensure the timeliness and accuracy of its on page 30 that, while TCH itself may not want to interoperate with FedNow content, but is not engaged in any way in oš ering professional services related to (“why would it help a competitor become viable?” he asks), its owner banks › nancial, legal, accounting, tax, or other matters. Readers should seek professional “will have to bend the knee for the Fed” and pressure TCH to play ball. counsel regarding such matters. All content We’ll see how that plays out. Our own take hasn’t changed since the Fed’s herein is copyright © 2020 Boland Hill Media LLC. No part may be reproduced without the announcement that it was jumping into real-time payments: It would have express written permission of the publisher. been better served to leave this business to the fast-moving private sector. Subscription prices: $59/year for subscribers in the United States; $69/year for Canadian John Stewart, Editor | [email protected] subscribers. All other subscribers, $119/year, payable in U.S. currency.

4 DIGITAL TRANSACTIONS | NOVEMBER 2020 DigitalTransactions.net brings you the most important payments market news, in one place, updated the moment it happens

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IS FEDNOW MOVING FAST ENOUGH? The announcement from the Federal Stanescu, senior vice president and “Many pilot program details have Reserve last month of a pilot for the FedNow business executive with yet to be announced,” says a spokes- FedNow real-time payments service responsibility for product manage- person for the FedNow project. may represent an important stage ment, in a statement released with A range of competing real-time in the development of a service not the announcement. services is already available, includ- expected to go live until 2023 at the The pilot will consist of three ing The Clearing House Payments earliest. But observers caution rival phases: advisory, testing, and Co. LLC’s Real Time Payments facil- services have already made headway closed-loop production. Further ity, push-payment services from with key market participants. details, such as a start and end Visa Inc. and Mastercard Inc., and “Financial institutions are moving date, were not immediately avail- the Zelle peer-to-peer payment forward with other real-time pay- able. “The announcement of the network, which is backed by some ment plans due to the extended pilot, and recruitment of participa- of the largest banks in the country. timeline of FedNow,” Erika Baumann, tion, is a strong signal back to the “The pace of payments innovation senior wholesale banking analyst at market that work is progressing. is moving so quickly that the tar- Aite Group, says in an email message. However, there is noticeable ambi- geted 2023-2024 timeline [for Fed- The Fed first announced its intention guity of timing and details about Now] is lagging behind expecta- to develop FedNow in August last the pilot,” notes Baumann. tions,” Baumann says. year, and this summer rea“ irmed its timeline for the project. In its latest move, the Fed has WHO’S ASKING FOR IT? invited financial institutions and (Percentage of institutions that say customers/members are asking for the product) service providers among the 700 members of its FedNow Commu- RTP nity of entities supporting the real- time service to participate in a Same-day ACH 9% pilot. It is looking for “expressions Zelle of interest” by Nov. 16. 45% Push to Card “We have a strong foundation 67% with our initial service design and 7% are now in the next phase of devel- FedNow opment designing enhanced fea- Source: Aite Group survey of 104 community 3% tures and functionality,” said Nick banks and credit unions Q2 2020

6 DIGITAL TRANSACTIONS | NOVEMBER 2020 TRENDS & TACTICS In a survey of more than 100 Twenty-four percent indicated they “In recent market research I have community banks and credit unions would add FedNow to rival services, done, financial institutions are mov- undertaken by Aite Group during while 35% said they did not intend ing forward with other real-time the second quarter, 10% said they to use FedNow. The remainder payment plans due to the extended would wait for FedNow even though either didn’t know what their plans timeline of FedNow,” says Baumann, they had originally intended to were or gave another response. The who co-authored the Aite report. move ahead with another service. Aite report was released last month. —John Stewart AS A DEADLINE NEARS, RELIEF FOR EMV AT THE PUMP With gas stations and convenience months before deadline, and 33% at stores feeling the economic pinch 33% the deadline, on average. Merchants from a slowdown caused by the Price increase that complete installation post- Covid-19 pandemic and uncertainty above baseline deadline will see a 31% increase. over the economy, Transaction Net- for EMV “If there is a run on network instal- work Services Inc. has announced a fuel pump lation leading up to the deadline, new pricing structure to help cut sta- installations at that will create a run on labor that tion owners’ telecom-network instal- the deadline will raise installation costs,” Lyman, lation costs for EMV at the pump. who adds the same economic princi- Transaction Networks Services ples apply to EMV installation over- (TNS) will defer monthly payments the cost of network installation for all. “We have one customer that has at the start of a multiyear contract those willing to enter into longer- already deferred installation until for the installation of telecom sys- term contracts at a time when bud- profits are up again.” tems that enable the point-of-sale gets are tight and profits are down,” As part of its push to entice fuel system to communicate with in- says Dan Lyman, head of payments retailers to convert to EMV at the pump EMV card readers. markets, North America, for TNS. pump sooner rather than later, TNS For example, a fuel retailer enter- Station owners upgrading to EMV is educating merchants not just ing into a three-year contract with at the pump typically need to have about the risks if they are not EMV- TNS may have payments deferred for telecom-network solutions certified complaint at the deadline, but also the first three months of the contract. by their POS-system provider. the potential to leverage new fuel- Merchants entering into a four-year Station owners that wait to dispenser technology to engage contract may have payments deferred install EMV will see higher installa- consumers at the pump in a way for the first four months. tion costs not just for the telecom that can lead to more sales. Under card-network rules, gas- network, but for all aspects of the Television monitors at the pump, station owners have until April to EMV upgrade, because of a short- for example, can display ads that become EMV-compliant. Non-com- age of technicians to facilitate the prompt consumers to purchase pliant owners will have to assume installation, Lyman warns. additional items in the stations’ liability for fraudulent transactions. Citing research from Conexxus convenience store and that generate “The telecom network is just Inc., which develops technology advertising revenue, Lyman adds. one piece of the puzzle to EMV standards for convenience stores “Converting to EMV is a signifi- upgrades and we are trying to and gas stations, TNS says over- cant expense,” Lyman says. “But the incent fuel retailers to transition to all network installation costs rise liability that will come from avoid- EMV sooner, rather than closer to 14% six months prior to deadline ing that conversion is even greater.” next April’s deadline, by deferring compared to a baseline, 23% three —Peter Lucas

TRENDS & TACTICS DIGITAL TRANSACTIONS | NOVEMBER 2020 7 AFTERPAY COMES TO THE CASH REGISTER

Just in time for the annual holiday consumers who shop online and in- spending binge, Afterpay Ltd. is store spend 15% to 20% more per making its previously online-only transaction than ones who shop buy now, pay later service available online only. to U.S. consumers in stores. Consumers initiate a transac- Australia-based Afterpay, fresh tion by tapping the card icon in the Katz: o a deal with mall developer Simon Afterpay app, which activates the “We’re Property Group to support its ser- Afterpay card in the Apple Pay or taking on vice at physical retailers, announced Google Pay wallet. They then hold the risk.” the in-store service in October. the phone near the contactless- As with online purchases, After- enabled point-of-sale terminal to Merchants like Afterpay because pay users make four equal payments complete the transaction. Each they avoid the risk of taking on using the payment card stored in purchase, whether online or in- installment payments and are their Afterpay account. Merchants, store, is split into four equal pay- immediately funded for purchases. however, are immediately funded ments to be paid every two weeks. Additionally, the service brings the full transaction amount minus The average purchase price is $150. them new customers who typically Afterpay’s fee, which typically ranges Afterpay takes on all the risk, make repeat purchases. from 4% to 6%, says David Katz, Katz says. It uses a proprietary set of “There’s something about this Afterpay’s chief product o icer. analytics to evaluate consumers, he model that strikes people as a lit- The in-store Afterpay uses a vir- says, and has a loss rate average of tle bit magical,” Katz says. “We’re tual card stored in the consumer’s less than 1%. “Our ability to keep our taking on the risk and bringing them smart-phone wallet. It’s available losses very low is the secret sauce of a higher average over value and a at Forever 21, Finish Lines, Levi’s, Afterpay,” Katz says. Afterpay per- higher conversion rate.” Conversion Solstice Sunglasses, and select DSW forms no credit checks and does not rates may jump as much as 22% when stores, among others. Afterpay says report to the credit bureaus. a merchant deploys Afterpay, he says. Afterpay, which started in 2014 in Australia, launched in the United States in 2018 just as the point-of- MONTHLY MERCHANT METRIC sale installment-lending business was heating up with entries from Growth in Same-Store Sales Year Over Year startups like A irm Inc. and from Annual volume change/growth the major card networks Visa Inc. of retained 1 and Mastercard Inc. (non-attrited) 5.15% 4.75% 5.58% 0.25% Q2 2020 July 2020 accounts for Despite the increasingly crowded Q2 2019 Q3 2019 Q4 2019 Q1 2020 -10.43% -3.12% given period market, Afterpay to date has divided by total 1. Trailing three months portfolio volume 5 million active U.S. customers. Its from same period of the prior year. in-store service launched in 2016 in Australia and New Zealand. Afterpay Note: This is sourced from The Strawhecker Group’s merchant data in-store requires no integration warehouse of over 3 million merchants in the U.S. market. The ability to understand this data is important as small and medium-size with the merchant’s POS system businesses (SMBs) and the payments providers that serve them are key drivers of the economy. since it uses existing mobile wallet All data are for SMB merchants de­ ned as merchants with less than $5 million in annual card volume. rails to house the virtual card. Source: The Strawhecker Group © Copyright 2020. The Strawhecker Group. All Rights Reserved. All information as available. —Kevin Woodward

8 DIGITAL TRANSACTIONS | NOVEMBER 2020 TRENDS & TACTICS PAYPAL, VENMO, AND QR CODES PayPal Holdings Inc. has launched a Visa-branded credit card for its VENMO’S RAPID GROWTH Venmo peer-to-peer payment ser- (Total payment volume vice that features a QR code for for each quarter, in billions) P2P transfers in addition to a near- field communication chip for mer- chant acceptance. The new prod- uct arrives as PayPal searches for ways to boost revenue for its wildly popular P2P network, which allows users to make transfers for free. The no-annual-fee card, issued by Stamford, Conn.-based Synchrony Financial, is not only the first issued on behalf of Venmo but may well be unique in featuring QR code capa- $8 $14 $24 $37 bility in addition to NFC, accord- Q2 2017 Q2 2018 Q2 2019 Q2 2020 ing to experts reached by Digital Source: Statista Transactions. The card arrives at a time when a “personalized” rewards program. enable transactions or as a way to consumers are turning to contact- Users can manage the card through deliver a bill or other document that less technology in stores to avoid the Venmo app. could trigger a payment (“The Sud- possible Covid-19 infection. At the The card’s rewards allow users den Ascent of QR Codes,” October). same time, mobile-wallet compa- to earn up to 3% cash back each Incremental POS usage for nies like PayPal are actively inves- month on purchases made in their Venmo via the new card would also tigating QR codes as a way to allow top spend category. The categories help the service boost its revenue users to make fast contactless pay- can change month-to-month as potential, if, as expected, Synchrony ments with or without cards. usage changes. Users can also split and PayPal will share interchange With its dual contactless tech- purchases within the Venmo app. income on the Venmo card transac- nologies, the Venmo credit card is The new card comes as PayPal has tions. Neither company responded “clearly a ‘future forward’ idea and embarked on an ambitious program to queries regarding the matter, but it positions PayPal well as an accep- to enable point-of-sale transactions PayPal executives have indicated tance oŠ ering that can be used in via QR codes. In July, the company over the years they were looking for any situation, physical or digital,” announced it would enable QR code ways to monetize the service’s rap- says Thad Peterson, a senior ana- payments at 8,200 CVS pharmacy idly rising popularity. lyst at Aite Group, a Boston-based stores in the United States in a ven- In a July earnings call, the com- consultancy. ture with processor InComm. In all, pany indicated Venmo had racked PayPal says the card is available to PayPal has initiated QR code pay- up $37 billion in volume in the sec- all “eligible” Venmo users in the United ment capability in some 28 countries. ond quarter (chart), up 52% year- States. The Venmo user base numbers Other payments companies, over-year as users sought ways to some 60 million total, according to including Shift4 Payments Inc. and move money to each other in the PayPal. The card will oŠ er automatic NMI, have also pushed QR tech- face of the pandemic. cash back on “eligible” purchases and nology in recent months either to —John Stewart

TRENDS & TACTICS DIGITAL TRANSACTIONS | NOVEMBER 2020 9 LAST MONTH, The Wall Street to prepare for this calamity? Recent Journal reported that Visa and bold announcements by China, JPMorgan Chase are gearing up to Google, IBM, and Microsoft suggest face the threat of quantum. Indeed, [email protected] an imminent emergence of quan- the drumbeat is getting louder. A tum machines. Moreover, power- new class of computing machines ful computers are national strate- is coming down the pike, and much In addition, we have another gic assets, so most governments as present-day computers upended mystery called entanglement. If are feverishly—and silently—devel- the payment industry, so will the two spinning coins are entangled, oping their own capabilities. They new ones. then their collapse into heads or calm everyone with assurances that Richard Feynman, a primary phys- tails appears coordinated, even quantum is years ahead. icist, a Noble Laureate, once asserted though they may be very far apart. We at BitMint join a determined that “no one understands quantum.” Again, no explanation, only obser- movement to use present-day com- This includes payment professionals. vation. This combination of prob- puters to fend o the quantum Indeed, while all modern electronics ability outcome and entanglement assault. Our particular choice is to is based on quantum physics, it is not allows us to construct comput- apply a “quantum vaccine” against clear how reality behaves in micro- ing circuitry that far exceeds what the quantum attack. This “vaccine” cosm. We observe this behavior and non-quantum machines can do. is the new technology for quantum- express it with math, but we don’t Very well, so we compute faster. grade randomness (see U.S. patent understand what we observe. Why worry? It turns out that pay- 10,467,522), which, if applied lavishly I have had some success laying ment today is based on a silent (patents 10,728,028 and 10,541,808), the quantum story out to colleagues, assumption that computers are suf- will defend digital payment against so let me try it here. Present-day ficiently slow to prevent them from the most robust quantum attack. computers are based on electronic breaking the security of money Preliminary deployment of our circuitry that generates the same transfer. Once this assumption col- technology is very promising. output for a given input, time and lapses—as will happen with the The ” ipside of the quantum threat again. That premise holds true in the emergence of quantum computers— is the quantum promise. Those prob- visible world, but, as was discovered then everything from small online abilities of outcome I mentioned early in the last century, the smaller purchases to large interbank wire earlier are very delicate, which elements of reality react to the same transfers will no longer be secure. makes any “data touching” detect- stimulus the way dice reacts to toss- Unfortunately, cryptocurrencies will able. This is big. Digital data today ing then. When you roll the dice on not save the day. They too hinge on can be stealthily compromised. But the table, you don’t know what they this under-emphasized assump- quantum-set data cannot be looked will show. You only have probabili- tion that computers will remain not at without leaving fingerprints. ties. If the dice are “fair,” then every much faster than they are today. Quantum computers used for outcome is associated with a prob- The threat is real. Imagine that artificial intelligence will result in ability of 1/6. Elements of the micro- payment goes back to coins and artificial personal CFOs—software in cosm are characterized by the prob- banknotes only! So now the ques- charge of our personal money man- ability of an outcome when engaged. tion is, how much time do we have agement. Exciting times ahead!

10 DIGITAL TRANSACTIONS | NOVEMBER 2020 TRENDS & TACTICS ONLY ONE OF THESE BIRDS CAN GIVE YOU THE LATEST NEWS IMPACTING THE PAYMENTS MARKET

Today and every day follow DIGITAL TRANSACTIONS @DTPAYMENTNEWS on Twitter AS OF MID-OCTOBER, Joe Biden for bills that would break them up. is heavily favored to win the presi- Could this lead to a future where dential election and the Democrats people could load Apple Pay onto [email protected] are likely to take control of both Android devices? It’s too soon to houses of Congress. tell, but that would no longer be out If the current trajectory plays Of course, a new director would of the realm of possibility if Con- out (let’s pause for a moment and bring in new staƒ , which could gress forced such a break up. recognize that anything could hap- change the tone of the bureau and The judicial system may be one pen), the payments world will find its interactions with the industry. countervailing force in all of this, itself in a very diƒ erent operating Elizabeth Warren has been sug- given that the Trump adminis- environment in 2021. gested as a possible treasury secre- tration has appointed more than With Biden as president, the tary in a Biden Administration. But 200 federal judges and multiple first major move to aƒ ect the pay- if the Democrats take control of the Supreme Court justices. The first ments industry will be a change in Senate by a narrow margin, they case that could lead to big changes personnel at the regulators. The won’t want to leave an empty Warren is one I have written about before, Supreme Court’s decision in Seila seat for Charlie Baker, the Republi- PayPal versus the CFPB. Law LLC v. Consumer Financial can governor of Massachusetts, to While the case has attracted Protection Bureau makes it pos- fill even on a temporary basis. little notice, it is worth reiterat- sible for the president to remove If the Democrats take both ing it could change the way pay- the CFPB director at will. So the houses of Congress, we can expect ments are regulated. Courts are current director probably will be big tech firms to face more scru- more likely to decide that a rule replaced quickly by someone who is tiny over their size and operations. should be thrown out than they are more in line with what Sen. Eliza- The House Judiciary Committee’s to grant a narrow exception for one beth Warren had in mind when she Antitrust Subcommittee released company. This means that if PayPal created the agency—a regulator a report in early October taking big wins, the CFPB’s prepaid rule may who will aggressively go after the tech companies to task and calling be thrown out entirely. industry for any and all infractions. for increased antitrust enforce- That could cause a great deal of People rumored to be possible ment. Consider this in context of regulatory uncertainty, both now candidates for the position include the introduction of the “Keep Big and for future rules. In addition, Congresswoman Katie Porter of Tech Out Of Finance Act” intro- if PayPal’s arguments on the con- California, who was taught by duced in the House last year. stitutionality of disclosures are Sen. Warren in law school; Rohit A suƒ iciently aggressive Con- accepted, that could lead to ripple Chopra, a commissioner at the gress could force changes in the eƒ ects throughout the industry. Federal Trade Commission; and structure of big tech companies. Companies should begin plan- Chris Brummer, Agnes N. Williams Given that many conservatives feel ning now for a stricter environment research professor and faculty that these companies have been and prepare to make the case to reg- director of Georgetown’s Institute unfair to those on the right, there ulators that more is not always bet- of International Economic Law. may even be bipartisan support ter when it comes to regulations.

12 DIGITAL TRANSACTIONS | NOVEMBER 2020 TRENDS & TACTICS The rapidly ONLINE SPORTS BETTING has gamblers wagered $13 billion in become a big business since the the channel, double the amount in rising payo for Supreme Court in 2018 opened the 2018, according to the American acquirers from door for states to legalize it (“The Gaming Association. Some 59% Sporting Chance,” July 2018). But of the bets were placed outside of the state-by-state now it’s poised to undergo stagger- Nevada, with 70% made through ing growth. online or mobile channels. legalization of Between June 2018 and mid- Currently, online sports betting October of 2020, $26.9 billion in is taking place in 18 states, with online sport legal sports bets have been wagered. four more set to go live soon. About 90% of all sports bets placed Nevertheless, processors aren’t betting comes in the United States are through racing to cash in on this gold mine with ashing digital channels, according to Eilers of new volume. One factor keeping & Krejcik Gaming, a research and some processors, especially small caution signs. consulting firm that tracks sports and mid-size ones, on the side- betting regulation and revenue. lines is a widespread concern that That’s significant volume that didn’t online sports betting is a high- exist a just few years ago. risk market for fraud and money- In 2019, the first full year of legal laundering schemes. BY PETER LUCAS sports betting in the United States, Legal barriers to entry are also formidable. Acquirers must jump through a hodge-podge of hoops to get certified. “Acquirers have to pro- vide a lot of information about their business and ownership to receive approval to process online sports bets in each state,” says Gerald Rau, managing director of electronic money movement for Eilers & Kre- jcik. “That precludes a lot of acquir- ers from entering the market.” Rau adds that it took more than a year for one top 10 acquirer his firm worked with to fully digest the steps needed to receive certifica- tion to process online sports bets.

ACQUIRING DIGITAL TRANSACTIONS | NOVEMBER 2020 13 likely looking closely at it,” says which are very useful for uncover- STOPPING ABUSES Pucci, who adds e-commerce gate- ing fraud rings, White adds. Another speed bump is the Covid-19 ways are also interested. “Any Acquirers also need to be on the pandemic, which has upended acquirer or processor looking to lookout for what White calls bonus the economy and dampened some get in this market, however, most abuse. In this scam, fraud rings acquirers’ desire to enter the market. likely doesn’t want to talk about it look to exploit cash bonuses online- “Pre-Covid, we were seeing more too much because of the risks asso- betting operators o er for setting competition entering the market, ciated with the market.” up an account. Fraud rings set up but much of that competition has Worries that criminals will use hundreds of accounts and cashing diminished due to the stress the online sports-betting accounts out the bonuses, resulting in losses pandemic has put on the acquir- for money laundering are rising for the operator. ing industry, particularly on smaller fast. Account vending, or account “Bonus abuse is one of the fastest- processors,” says George Connors, brokering, is a money-laundering growing fraud types we see, grow- senior vice president, gaming and scheme that occurs when a bad ing 72% in 2019 and 493% over the sports solutions, at Fiserv Inc. “Right actor sets up an account, uses it past three years,” says White. “Bonus now, sponsor banks and merchants heavily to get VIP status or show a abuse is likely to be particularly prob- are looking for an established pro- good transaction history, then sells lematic for sports-betting operators vider that brings size, scale, and the account to criminals so they just launching in the U.S.” resiliency to the table.” can mask money movement, says A MOBILE MARKET Money laundering and fraud are ‘Bonus abuse is one of the not the only risks for acquirers. They also need to evaluate online- fastest-growing fraud types’ gambling operators to ensure they ANGIE WHITE, SENIOR MANAGER, TRANS UNION are viable businesses. While large players such as London-based Wil- Fiserv carved out its stake in Angie White, a senior manager at liam Hill Sports, which was acquired online sports betting in 2019 with Trans Union, the big credit bureau. in October by Caesars Entertain- its $22-billion acquisition of First “This is a growing trend that ment for $3.7 billion, have estab- Data Corp., which had been process- we’ve been hearing about from lished track records as financially ing gaming transactions for years. [online-gambling] operators,” White sound companies, a lot of smaller “A lot of large acquirers such as says. “There are a number of con- players entering the market don’t. Fiserv and FIS have entered this trols operators can put into place Although it is a common prac- market through acquisitions that to stop these abuses, such as adding tice in states that have sanctioned bulked up their economies of scale,” device-based authentication at login online sports to require the betting says Raymond Pucci., director for to allow operators to see whether operator to have an a iliation with the merchant services practice at an unauthorized device is attempt- a casino before they can be licensed, Mercator Advisory Group. “I expect ing to access the account even if the the a iliation does not guaran- legacy players in this market to log-in credentials are correct.” tee the operator has the financial keep riding this wave.” Another preventive measure reserves an acquirer wants to see. Several months after the Firserv- is adding device risk intelligence “Acquirers we work with require First Data deal, FIS Inc. acquired when funds are deposited to open the gambling operator to show a Worldpay Inc., a legacy player in the the gambling account. This allows minimum of three consecutive gaming business, for about $35 billion. the gambling operator to see if months of six-figure volume before “Online sports betting is a there are any suspicious veloci- taking their business,” says Jennifer growth market, so acquirers are ties or account-to-device linkages, Carrigan, who handles processing

14 DIGITAL TRANSACTIONS | NOVEMBER 2020 ACQUIRING and sales at PayKings, a St. Peters- Worldpay Gaming Solutions at FIS. by a third party. Geo-location con- burg, Fla.-based processor for high- “When consumers want to shop, trols further enhance security by risk merchants. “Acquirers want to socialize, or pay, they are now confirming the device is physically be sure that the online gambling reaching for the smart phone.” in the state where the bet is being operator is vested in the business placed, says Tristram. The latter is for the long haul.” A SECURE MEDIUM a capability states require of online Acquirers able to look past the sports-betting operators, Rau adds. risk associated with online sports Indeed, some racetracks o’ er onsite As more states legalize online betting will find that bets through betting through mobile devices, so sports betting, and those that have mobile applications are skyrocket- gamblers don’t have to place their legalized it finally go live (such as ing. In New Jersey, for example, 89% bet at the parimutuel window before North Carolina, Tennessee, Virginia, of online bets were placed through each race, according to David Mat- and Washington), the opportuni- mobile devices prior to the Covid-19 tei, a senior analyst for Aite Group. ties for acquirers to mine this new pandemic, says Rau. Bettors can download the app at bonanza of volume are likely to Such a high percentage of bets the track and fund the account with become too attractive to resist. placed by mobile devices is not a sur- cash at the parimutuel window or “Gamblers in search of a touch- prise to acquirers, considering how with a credit card. less experience are shifting their popular e-commerce has become. In general, placing sports bets dollars from casinos to digital- “Across the e-commerce land- through mobile devices is a secure gaming platforms,” says Fiserv’s scape in the U.S., mobile is the medium, because measures such Connors. “As more states allow fastest-growing channel,” says as biometric controls help ensure online gaming, an uptick in digital Warren Tristram, president of that the device is not being used players can be expected.”

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Yes, consumer usage CONTACTLESS chip-enabled cards purchases in-store has plateaued. has grown since that allow consumers to simply wave The global card networks have been their plastic in front of a similarly championing contactless card use Covid-19 set in, but a enabled merchant terminal to com- for years, and issuers and merchants lack of coordination plete a purchase without needing to have been slowly, methodically touch a point-of-sale terminal were adopting the technology on their among industry tailor-made for the onset of the dev- own timetable. Apart from some players has led to astating coronavirus pandemic. standout examples in transit fare Their use has seen a marked collection use had been rather tepid. confusion at the increase as announced by the global Then along came Covid-19. point of sale. card networks and processors, and The most creative marketers they certainly have attracted much in the world could not have devel- media attention. oped a more convincing campaign BY SARAH GROTTA The interest in contactless cards to raise awareness of contactless Sarah Grotta is director, debit and has been a focus as the number of technology. The virus has single- alternative payments practice, Mercator new users of mobile wallets that also handedly prompted consumers to Advisory Group, Marlborough, Mass. allow consumers to tap and pay for begin waving their cards at mer- chants’ checkout rather than risk touching a POS terminal by dipping a card into a contact chip reader or even swiping their cards through the magnetic stripe reader. But it has been di icult to pin- point the actual growth of contact- less card transactions or dollar vol- umes in the United States. Some of that I believe is purposeful. Networks, processors, and other players are happy to share incred- ible year-over-year growth per- centages for contactless card use, but less likely to share the actual numbers. This would reveal that use in 2019 was very low, likely in

16 DIGITAL TRANSACTIONS | NOVEMBER 2020 STRATEGIES the range of 1% to 2% of total card that 35% of consumers were using choreographed act before the trick volumes. So even slight growth in a contactless chip card more or is revealed. And sometimes the transactions in 2020 would deliver much more and 35% of mobile wal- transaction simply fails, likely due some impressive percentages. let users were using that payment to compatibility issues between the Also, some of the data about con- form factor more or much more. chip in the card and the generation tactless use currently being broad- This survey also found that 12% of the technology in the terminal. cast is survey-based, and that can of cardholders who had never used We also seem to have fumbled run into definitional issues that a contactless card were using it the opportunity for a contact-free skew the adoption rate. Where pay- for the first time in reaction to the checkout with the use of contact- ment experts may think of con- pandemic. less cards and wallets, slowing tactless as a chip on a card or a But before the payments industry down the purchase process and mobile device capable of transacting collectively pats itself on the back requiring interaction with the through near-field communication, for the recent growth in contactless grimy terminal. consumers are thinking in terms of transactions, I’d like to suggest that While the objective from a card- their own needs and simply recall there is room for improvement. The holder’s point of view is to avoid contact-free checkout experiences. rollout of contactless-capable cards catching a life-threatening disease This may include placing an that began long before the onset of through a payment terminal, many order with a grocer on their com- Covid-19 has produced an uneven merchants are insisting that con- puter for delivery or using mobile- user experience for many consum- sumers touch the display panel or order-and-pay with a local restau- ers as conveyed by issuers and as pick up the attached stylus to select rant for carry out. When the con- experienced first-hand. a payment type, confirm their pur- sumer perspective is not consid- Sometimes it works as expected, chase amount, select receipt type, ered, the adoption of contactless providing a better user experi- and maybe agree to round up the cards and universal wallets may be ence and faster checkout. Some- dollar amount to contribute to exaggerated. times the cardholder cannot find a charity. the NFC reader on the terminal With all of this activity demanding ROOM FOR IMPROVEMENT and begins circling the POS termi- cardholder attention and response, nal with the card like a magician’s the value of contactless to the Certainly, the increased use of con- tactless cards is real. PSCU, the Florida-based credit union service organization, has released some of the most revealing data regarding transaction trends. For the week ending Sept. 8, REIMAGINE 2020, they found that 13.1% of THE OF debit card transactions and 9.8% of ART credit card transactions conducted TRANSACTION on contactless-enabled cards were completed as a contactless tap- and-go transaction. That is up from 8% for debit cards and 6.5% for credit cards when measured in mid-January 2020. Survey data released by Merca- tor Advisory Group conducted after RETAIL E-COMMERCE MOBILE the outbreak of Covid-19 found USAEPAY.COM 866-740-2496

STRATEGIES 17 USE OF NEW Much Much / m / m ss % More or ss % More or le 19 e/ le 21 e/ PAYMENT h h c s c s u s 3 u s 3 M e 5 M e 5 TECHNOLOGY L % L % Contactless Smart phone AS A RESULT OF chip card universal

THE COVID 19 transaction wallet

OUTBREAK

% %

6 5 (Base = Those who used each No change 4 No change 4 technology before Covid-19)

Source: Mercator Advisory Group North American PaymentsInsights, 2020 U.S. Payments Survey consumer—a quick and touch-free In both the EMV and contactless experienced in other countries such interaction—is lost. rollouts, it appears that shoppers’ as Australia and the United King- This is reminiscent of the U.S. interests have not been the first dom will be duplicated in the U.S. approach to the migration of EMV consideration. chip cards. Like contactless card Prior to the pandemic, we also GETTING IT RIGHT technology, EMV technology had had a widespread lack of aware- been around for years, and, out- ness on the part of both merchants There is certainly a lot of oppor- side of a few implementations, and consumers about contact- tunity. Though the use of cash to largely ignored. Then there was less. Issuers went to the expense pay for things in stores is declin- a major event. For contactless it of issuing cards with contactless ing, cash is still the next most has been the pandemic, but for capability, yet very little was done popular form of payment for in- EMV it was the major retailer data to market it. person transactions after debit and breaches. At the same time, while net- credit cards. The industry, in full-on reaction- works were reporting ever greater If we are ever going to get this ary mode, committed to the tech- issuance numbers, consumer and right, there needs to be much bet- nology and rushed the implemen- merchant surveys showed very lit- ter coordination. In a free market, tation—and, as one of several unin- tle knowledge of the technology’s there is choice, and choice can be tended consequences, left the befud- existence—and, even worse, almost messy and induce indecisiveness. dled cardholder at the point of sale no understanding of its benefits. The payments industry can still trying to figure out how to pay. The curiosity to try new technol- get this right and retain options by ogy for the sake of new technology recognizing the needs, monetary MINIMAL ADOPTION is only going to achieve a minimal and otherwise, of each participant level of adoption. in the payments value chain and Its seems that we are now stepping The less altruistic reason for align with all participants. into that phase where issuers are the investment in contactless card This doesn’t mean mandates, but rushing to move up their contactless technology is the opportunity for rather coordination between major card issuance, and merchants, at issuers to convert cash transactions players, and some ground rules on least those that are not fighting for to interchange-generating activity. results. This includes benefits for mere survival, are scrambling to That rests on the assumption that the consumer, who recently seems get terminals contactless-certified. the cash-to-contactless conversion to have been forgotten.

18 DIGITAL TRANSACTIONS | NOVEMBER 2020 STRATEGIES Digital Transactions News We deliver the payments industry news to your email inbox daily!

Digital Transactions News is packed with news and information from the $123.4 billion transaction industry: „ Two original stories every issue „ Trending stories, so you know what our subscribers are reading „ Links to Digital Transactions magazine „ Calendar of events „ PLUS! “In Other News” The most complete listing of announcements from the payments community

Subscribe today at Bolandhill.omeda.com/dtr/ or email publisher Bob Jenisch at [email protected] Each year, Digital Transactions uses this space to lay out the problems impacting the payments industry. This time, the Covid-19 pandemic has in ected our coverage across a wide range of issues. The solutions will have to be far from business as usual. BY PETER LUCAS, JOHN STEWART AND KEVIN WOODWARD 2020 HAS BEEN ONE OF THOSE YEARS you can some day tell your grandchildren about. A robust start, featuring a strong economy and plenty of optimism for a big year in payments, and then—WHAM! Lockdowns forced people to stay at home and derailed what had been an economic express train. Even when the economy ultimately reopened, fear of infection conditioned everything consumers and mer- chants did regarding their interactions with each other. Payments providers struggled to accommodate both 1. GAS STATIONS AREN’T GOING TO parties by stepping up e orts to support contactless MAKE THE EMV DEADLINE payments and e-commerce. The resulting boom in online sales and in technology IN WHAT’S STARTING TO SOUND LIKE a broken for NFC and QR codes has reshaped much of the pay- record for the petroleum industry, 100% EMV compli- ments landscape, but it has also raised a host of uncer- ance among station owners is unlikely at the April 2021 tainties. In this year’s annual catalog of the 10 most prob- deadline, which has been extended twice since the origi- lematic payments topics—the 14th we’ve put together— nal October 2017 cuto date. we’ve found that questions and complications arising The high cost of installing EMV at the pump and from Covid-19 have generated at least four of this year’s shrinking profits due to consumers driving less during issues, and perhaps indirectly in™ uenced several others. the Covid-19 pandemic has delivered a one-two punch that One other thing: Will consumers retain newly acquired is prompting many station owners to delay installations. habits when the pandemic finally lifts—or a vaccine is That trend has kept high the percentage of stations not widely distributed—or will they fall back into old hab- fully compliant. As of August, 47% of major petroleum mer- its, leaving thousands of contactless devices untouched? chants surveyed remained unprepared to meet the dead- What about all the added capacity to accommodate hordes line, and 20% were still in the planning stages for rolling of consumers who suddenly started shopping online for out EMV, according to ACI Worldwide. Of the stations not the first time? Will they go back to physical stores? in compliance, one-third are unlikely to meet the deadline. Nobody has the answers yet, least of all us. But at least Compliance among convenience stores is no better. we can provoke some thought on this and all the other Overall, 39% of c-store owners will not be 100% compli- sticky wickets on this year’s list. One thing we can be ant by April, says Conexxus Inc., which develops technol- sure of: Some very clever folks somewhere are figuring ogy standards for convenience stores and gas stations, out how to tackle these matters. When they do, we’ll be Among c-store chains with 500 or more locations, 33.3% there to to tell you about it. say they currently have no working EMV readers at the pump, while the remainder have installed EMV at less than CONSUMER ELECTRONIC TRANSACTIONS IN THE U.S. 25% of their pumps, Conexxus says. Among chains with (In billions) 150.2 144.6 51-to-200 locations, 46% have installed EMV readers at less 137.2 140.5 than 25% of their pumps, and 23% have yet to install any. 131.2 Another factor slowing compliance is that demand 121.4 123.4 for technicians to install EMV at the pump is outstrip- 119.0 ping supply. 110.6 What about after April? While petroleum-industry 100.7 experts acknowledge that progress toward full com- pliance is being made, it remains painfully slow within some segments of the industry, making it unlikely it can 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 be achieved in calendar year 2021. Note: Figures include all consumer-based card and ACH volume. Source: Digital Transactions estimates THE 10 MOST PRESSING ISSUES IN EPAYMENTS DIGITAL TRANSACTIONS | NOVEMBER 2020 21 3. SCREEN SCRAPING AND OPEN BANKING FOR YEARS, FINTECHS HAVE ACCESSED consumers’ bank accounts through a practice rather inelegantly known as screen scraping. With the consumer’s permis- sion, an app provider used the consumer’s credentials to log into his account to make withdrawals, for example, to support a transfer to someone the consumer wanted to pay. Or the access might allow providers to verify the account or do risk decisioning. It’s called open banking, and it’s gotten to be a big business, so much so that both Visa and Mastercard have agreed to acquire two of the cadre of companies that facilitate this access on behalf of any number of financial apps. Screen scraping has been around for quite a while. But the data aggregators that control this access, along with 2. ONLINE IDENTITY REMAINS any number of fintech apps and the financial institutions A MAJOR CHALLENGE themselves, are less and less comfortable with it. They want to replace the practice with something far more secure and The Cold War adage of “trust, but verify,” could well controllable—an application programming interface. be applied to authenticating consumers as they make But if screen scraping is a “blunt instrument,” as some transactions, especially online ones. With billions of call it, what will an API do—and how quickly can it be pieces of stolen personally identifiable information safely and broadly used? Those are questions the Finan- available to criminals, it’s easy enough for them to try to cial Data Exchange, a Reston, Va.-based association fool a merchant into thinking a legitimate customer is whose members are working on the API, will have to about to buy a new coee pot or television. answer. The group, made up of fintechs, aggregators, Throw in more consumers—many of them new to and financial institutions, is aiming at what it calls data e-commerce as first-time users stuck at home and shop- minimization, precisely to reduce risk. ping online—and the issue for merchants compounds. It’s a race of sorts to develop and deploy the API fast How do they verify online identities without falsely iden- enough and widely enough to head o the chance that, one tifying a legitimate customer as potentially fraudulent? of these days, one of those screen-scraping gambits could Certainly, online-fraud issues have intensified in harvest a bonanza of consumer data that might be used in 2020, aected like so much else by the Covid-19 pan- ways the owners of that data never really authorized. demic. As many states shuttered nonessential busi- nesses and consumers shifted much of their spending to online stores, so, too, did criminals increase their mis- deeds. Matters such as account takeovers and a better understanding of chargebacks surged to the forefront of merchant concerns, if they already weren’t there. Long a major issue for merchants and payments pro- viders, account takeovers further cemented their posi- tion as the pandemic settled in place. “It’s the number- one fraud trend we see,” says Je Wixted, vice president of marketing and client solutions at Accertify Inc., an online-fraud specialist owned by American Express Co. “It’s due to data breaches.”

22 DIGITAL TRANSACTIONS | NOVEMBER 2020 THE 10 MOST PRESSING ISSUES IN EPAYMENTS 5. ANOTHER ROUTING KERFUFFLE YET ANOTHER ROUTING DISPUTE erupted this sum- mer, this time over so-called PIN-less debit transactions. With e-commerce volume exploding as stay-at-home consumers shop online, some consumers are using a so- called PIN-less debit option, which allows them to use a debit card without having to enter a PIN. That makes for a faster transaction for users and an easier one for pay- 4. WILL CONTACTLESS FADE OR STICK? ments processors. But a number of major debit card issuers, fearful of 2020 WILL BE KNOWN AS THE YEAR that finally losing out on interchange revenue, are blocking these sparked consumer and merchant adoption of contact- transactions by requiring users to enter a bank iden- less payments. The worry, though, is whether this trend tification number, according to a letter this summer will fade when the pandemic does. from Sen. Richard Durbin, who is famous—or infamous, Born out of a concern to avoid touching point-of-sale depending on your point of view—for keeping an eye on terminals, this change in behavior has been long sought. routing and interchange matters. In fact, issuers, card brands, and merchants have spent In 2010, Durbin attached his eponymous amendment the past 15 years trying to get the three legs—consumers, to the Dodd-Frank Act to cap debit-interchange revenue merchants, and issuers—to line up to broadly adopt for big banks and require the availability of at least two contactless payments. Now, it seems they have. una†iliated networks for each transaction. Card-based and smart phone-based contactless tech- Durbin’s July letter, addressed to Federal Reserve nology use is growing. This tech relies on a near-field Chairman Jerome Powell, urges the Fed to consider communication chip to establish a two-way radio wave actions that could correct the matter. It estimates mer- link between the card or phone and the POS terminal. chants could save $2 billion or more annually if PIN-less A recent American Express Co. survey found that 81% of debit were widely available by allowing transactions to consumers intend to make contactless payments a per- ‹ow over the PIN-debit networks rather than through manent option at the point of sale. Visa and Mastercard. The estimate comes from research Meanwhile, some 70% of merchants say their cus- and consulting firm CMSPi. tomers have asked for contactless payments, says J.J. Payments executives have learned not to underes- Kieley, vice president of the AmEx Payments Consult- timate Durbin. Many of them thought his amendment, ing Group. And in a Visa Inc. survey, 54% of consumers at the time he proposed it, was radical and unlikely to would switch to a store that o†ers contactless payments. become law. But it did, despite united opposition from But it’s not just NFC that is advancing. Quick Response Visa, Mastercard, and the big banks. (QR) codes, long popular in many international markets, Now, they are dealing with another salvo from the are being adopted by the likes of Square Inc. and Shift4 Senator. They can only hope the result this time is more Payments Inc. for online ordering and payments. Even to their liking. online stalwart PayPal Holdings Inc. is bringing QR code payments to more than 8,000 CVS stores. No question di†erent contactless technologies, driven in part by the pandemic, are gaining popularity. But a massive shift to new technology at the point of sale entails massive cost in hardware, software, and training. The question is, will consumers go back to old habits at the point of sale once infection fears subside? After all, swiping a card isn’t all that complicated. All eyes will be on how consumers react once the pandemic subsides.

THE 10 MOST PRESSING ISSUES IN EPAYMENTS DIGITAL TRANSACTIONS | NOVEMBER 2020 23 7. MERCHANTS’ CROSSBORDER CHALLENGE CROSS-BORDER TRANSACTIONS represent an enor- mous opportunity for processors. International e-com- merce alone is forecast to represent 20% of online sales in 2022. In addition, opportunities for processors to facilitate cross-border payments exist in peer-to-peer payments and money transfers. Processors looking to cash in on this high-growth market need to oer a platform that can convert cur- rency and support payments popular with shoppers, including local payment options. Merchants unable to oer either of these facilities can lose sales. Payment options favored by consumers for cross- border purchases include mobile wallets, credit and debit cards, bank transfers, and buy now, pay later oers. Also, experts say popular local payment options, such as AliPay or WeChat, should be oered as consum- 6. THE CHARGEBACK WAVE ROLLS ON ers expect them. Failing to oer the right mix of pay- ment options can also cost merchants sales. CHARGEBACKS ARE ALWAYS A MAJOR ISSUE for It’s a challenge for most merchants. They’re already retailers, and that intensified this year as online shop- struggling to suss out the advantages and drawbacks of ping became a necessity for many consumers. Those new a dizzying array of new payment methods and services. to online shopping may have generated chargebacks Help could be on the way. PayPal and Visa took a because of their unfamiliarity with e-commerce and step earlier this year to provide more tools to facilitate shipping practices. This has been especially challenging cross-border payments. Merchants can now accept these for the travel industry, which had to contend with can- transactions through PayPal’s Instant Transfer Service celed plane trips and hotel stays as in-person confer- and Visa’s Visa Direct push-payment platform. ences were scrubbed and vacations were postponed. The agreement will allow consumers and small busi- The annual chargeback cost to U.S. issuers was nesses to send or receive money to a recipient’s Visa card $585 million in 2019, and could grow to $1.05 billion by account in real time via PayPal, Venmo, or Xoom interna- 2023, said an Aite Group LLC report this summer. Aite tionally. It will also enable PayPal to extend global white- pegs the cost of resolving a single chargeback at $25. label Visa Direct payout services through PayPal and its Chargebacks will continue to demand attention Braintree, Hyperwallet, and iZettle product solutions. because criminals will continue to use legitimate con- The deal will give both companies a leg up against sumer data to make purchases. Some consumers, too, will fintechs such as TransferWise and Revolut, and allow commit so-called friendly fraud. Now, with Covid-19 lin- them to compete with low-cost providers of cross bor- gering, chargeback filings will continue to grow. That’s der payments, such as The Clearinghouse RTP. because more fraudsters view the card-not-present envi- For processors to cash in on the connected global ronment as the channel of least resistance and there are economy, they need to provide merchants and consum- inconsistencies in technology and regulations in dier- ers with the tools and services they want and need to ent markets, among others, notes Monica Eaton-Cardone, eectively manage and move their money. cofounder and chief operating oicer of Chargebacks911. One idea that might help: Putting more information on the cardholder’s statement, such as detailed digital receipts, could help de›ect some potential chargebacks, Aite says.

24 DIGITAL TRANSACTIONS | NOVEMBER 2020 THE 10 MOST PRESSING ISSUES IN EPAYMENTS USPS STATEMENT OF OWNERSHIP, MANAGEMENT AND CIRCULATION 1. Publication Title: Digital Transactions 2. Publication Number: 024-247 3. Filing Date: October 13, 2020 4. Issue Frequency: Monthly 5. No. of Issues Published Annually: 12 6. Annual Subscription Price: $59.00 7. Complete Mailing Address of Known Office of Publication (Not printer): Boland Hill Media LLC 800 Roosevelt Road Building B Suite 212 Glen Ellyn, IL 60137 Contact Person: John Stewart Telephone: (877) 658-0418 8. Complete Mailing Address of Headquarters of General Business Office of Publisher (Not printer): Boland Hill Media LLC 800 Roosevelt Road Building B Suite 212 Glen Ellyn, IL 60137 9. Full Names and Complete Mailing Addresses of Publisher, Editor, and Managing Editor: Robert A. Jenisch Boland Hill Media LLC 800 Roosevelt Road Building B Suite 212 Glen Ellyn, IL 60137 John Stewart Boland Hill Media LLC 800 Roosevelt Road Building B Suite 212 Glen Ellyn, IL 60137 John Stewart Boland Hill Media LLC 800 Roosevelt Road Building B Suite 212 Glen Ellyn, IL 60137 10. Owner (If the publication is owned by a corporation, give the name and address of the corporation immediately followed by the names and addresses of all stockholders owning or holding 1 percent or more of the total amount of stock. If not owned by a corporation, give the names and addresses of the individual owners. If owned by a partnership or other unincorporated firm, give its name and address as well as those of each individual owner. If the publication is published by a nonprofit organization, give its name and address.): Boland Hill Media, LLC Same as block 7 Robert Jenisch Same as block 7 John Stewart Same as block 7 11. Known Bondholders, Mortgagees, and Other Security Holders Owning or Holding 1 Percent or More of Total Amount of Bonds, Mortgages, or Other Securities (if there are none, so state): None 12. Tax Status (For completion by nonprofit organizations authorized to mail at special rates): Not applicable 13. Publication Title: Digital Transactions 14. Issue Date for Circulation Data Below: September 2020 15. Extent and Nature of Circulation:

Average Number of number of copies of copies of each single issue issue during published preceding nearest to 12 months filing date a. Total Number of Copies (Net press run) 22,341 22,029 b. Legitimate Paid and/or Requested Distribution (By Mail and Outside the Mail) 8. CONFUSION AT THE POINT OF SALE 1. Outside County Paid/Requested Mail Subscriptions Stated on Form PS Form 3541. (Include direct written request from recipient, telemarketing and Internet requests from recipient, 13,422 13,988 TAP, SWIPE, OR WAVE? Tap, wave, or QR code? Card, paid subscriptions including nominal rate subscriptions, employer requests, advertiser’s proof copies, and exchange copies) watch, or phone? Never have consumers been confronted 2. In County Paid/Requested Mail Subscriptions stated on PS Form 3541. (Include direct written request from recipient, with so many ways to pay. Out of infection fears, only cash telemarketing and Internet requests from recipient, paid 0 0 subscriptions including nominal rate subscriptions, employer requests, advertiser’s proof copies, and exchange copies) in some places may not be among the myriad options. 3. Sales Through Dealers and Carriers, Street Vendors, Counter 0 0 Sales, and Other Paid or Requested Distribution outside USPS But how much confusion has this panoply of pay- 4. Requested Copies Distributed by Other Mail Classes Through 0 0 the USPS (e.g. First-Class Mail) c. Total Paid and/or Requested Circulation [Sum of 15b (1), (2), (3), ment options sewn? It’s likely few walk away from the 13,422 13,988 and (4)] transaction in utter befuddlement, but even momentary d. Nonrequested Distribution (By Mail and Outside the Mail) 1. Outside County Nonrequested Copies Stated On PS Form 3541 (include Sample Copies, Requests Over 3 years old, Requests confusion can add precious seconds to a process many induced by a Premium, Bulk Sales and Requests including 7,168 6,313 Association Requests, Names obtained from Business Directories, high-throughput checkouts have worked to make as Lists, and other sources) 2. In County Nonrequested Copies Stated on PS Form sleek as possible. 3541(include Sample Copies, Requests Over 3 years old, Requests induced by a Premium, Bulk Sales and Requests including 0 0 It could be a temporary problem that will rectify itself Association Requests, Names obtained from Business Directories, Lists, and other sources) as consumers get savvy to new ways to pay. No doubt 3. Nonrequested Copies Distributed Through the USPS by Other Classes of Mail (e.g. First-Class Mail, Nonrequestor Copies 0 0 credit cards were a mystery at one time to those accus- Mailed in excess of 10% Limit mailed At Standard Mail or Package Services Rates) 4. Nonrequested Copies distributed Outside The Mail (Include 1,283 1,092 tomed to forking over—or accepting—folding money. Pickup Stands, Trade Shows, Showrooms and Other Sources) e. Total Nonrequested Distribution (Sum of 15d (1), (2), and (3)) 8,451 7,405 But how long that will take is impossible to predict. f. Total Distribution (Sum of 15c and e) 21,873 21,393 g. Copies not distributed 468 636 In the meantime, it might behoove merchants to beef h. Total (Sum of 15f and g.) 22,341 22,029 i. Percent Paid and/or Requested Circulation (15c divided by f times 100) 61.4% 65.4% up cashier training or keep someone on hand who can trouble-shoot at the front of the store on a moment’s 16. Electronic Copy Circulation a. Requested and Paid Electronic Copies 0 0 b. Total Requested and Paid Print Copies (15c) + 13,422 13,988 notice. That, of course, drives up costs at a time when Requested/Paid Electronic copies (16a) c. Total Requested Copy distribution (15f) + 21,873 21,393 merchants are already grumbling about the cost of Requested/Paid Electronic copies (16a) d. Percent Paid and/or Requested Circulation 61.4% 65.4% card acceptance. (Both print & electronic copies) (16b divided By 16c x100) X I certify that 50% of all my distributed copies (electronic and print) are legitimate requests or paid copies. 17. Publication of Statement Ownership for a Requester Publication is required and will be printed in the November 2020 issue of this publication. 18. Signature and Title of Editor, Publisher, Business Manager or Owner: THE 10 MOST PRESSING ISSUES IN EPAYMENTS 25 John Stewart, Editor Date: Oct. 13, 2020 I certify that all information furnished on this form is true and complete. I understand that anyone who furnishes false or misleading information on this form or who omits material or information requested on the form may be subject to criminal sanctions (including fines and imprisonment) and/or civil sanctions (including civil penalties). 10. THE IMPACT OF DRIVING OUT CASH IS CASH THE NEW ENEMY? You would think so by reading some of the reports about the pandemic that refer to fears concerning how long the novel coronavi- rus can live on bank notes. Entrepreneurs have been quick to act on this new squeamishness. This fall, a firm in Toronto called XTM Inc. introduced a so-called reverse ATM that takes 9. MANAGING THE IMPACT OF AN in cash rather than dispensing it. In return, the user ECONOMIC DOWNTURN gets a prepaid Mastercard loaded with the value of the inserted cash. WHEN THE COVID-19 PANDEMIC began shutting Sensing trouble, the ATM industry has been moni- down the economy, it was clear this recession would be toring the issue closely. Last month, its leading trade like no other. There were no metrics indicating an eco- group, ATMIA, issued a statement deploring what it nomic correction in the months leading up to the pan- called “fearmongering” in the press about a scien- demic. Instead, Covid-19 instantly slammed the brakes tific study regarding how long the virus can survive on the economy, and hard, leaving businesses little if on a variety of surfaces, including paper and polymer any time to prepare for the shock. banknotes. The association pointed out that the samples Once shelter-in-place orders were imposed, sup- in the study were not exposed to light, while the virus is ply chains slowed to a crawl as manufacturers and busi- said to wither quickly when so exposed. nesses throttled back activity or temporarily shut down. ATMIA has a point. For all the advances in making dig- With millions of workers furloughed, consumer spending ital payments easier and faster (though sometimes more fell o a cli. Meanwhile, consumers’ growing concerns confusing at the point of sale—see issue number 8), cash about infection from interactions with cashiers and POS remains a widely used and favored payment medium. terminals and ATMs began changing how they transacted. Merchants, banks, and payments providers may well live Payments providers responded by pushing technolo- to regret moves to discourage cash. Better to let the best gies that make consumers feel safer at the point of sale. payment method win on the merits. Restaurant POS and management-systems provider Toast Inc., for example, fast-tracked development of an app that allows consumers to pay at the table by scan- ning a QR code on the receipt with their phone, spar- ing them from handing over their card to wait sta or touching a portable POS terminal at the table. Merchants are more receptive to installing or acti- vating contactless card acceptance at the point-of-sale and consumers are relying more on peer-to-peer pay- ments for such transactions as paying rent. Cardless ATMs, which allow consumers to stage a withdrawal on a smart phone, then complete it at the ATM by linking their phone to the machine via near-field communica- tion or a QR code, have also gained traction. The question is, with the country bracing for a resur- gence of the coronavirus during the fall and winter, will such innovations give merchants the tools to adapt to consumers’ changing payment preferences and help them weather the economic storm?

26 DIGITAL TRANSACTIONS | NOVEMBER 2020 THE 10 MOST PRESSING ISSUES IN EPAYMENTS The pandemic is COVID-19 HAS DRAMATICALLY this summer. (The shortage was wors- TRANSFORMED daily life in many ened by supply-chain disruptions). changing payments, ways all too familiar by this point. Major retail chains actively but it’s also reworking While we know that the pandemic encouraged customers to use cards. will end, the timing is uncertain, and Even cards, however, posed a risk payments strategies. some changes will be permanent. when inserted in point-of-sale sys- Here’s how the industry I will focus here on two of these tems. Guidelines from the Centers changes: the shift to contactless for Disease Control (as of Sept. 11, will have to react in payments and the growth of digital 2020) urged consumers to “[i]f pos- wallets. sible, use touchless payment (pay the next few years. without touching money, a card, CONTACTLESS WILL STICK or a keypad). If you must handle money, a card, or use a keypad, use Public health authorities have advised hand sanitizer right after paying.” BY AARON McPHERSON everyone to minimize physical con- This accelerated what had been Aaron McPherson is founder of tact, and early on people began reduc- a sluggish move to contactless pay- AFM Consulting LLC. Reach him at ing their use of cash to the extent that ments (QR code as well as NFC). [email protected]. there was a nationwide coin shortage American Express Co. found in a recent survey that 81% of merchants intend to make contactless a per- manent payment method. Square Inc. is pushing QR codes for eateries. Also, PayPal Holdings Inc. has issued a Visa-branded Venmo card with built-in QR code as well as near-field communication capability. NFC is a technology that allows communication between two micro- chips, at least one of which must be powered, over very short ranges. These chips can be embedded in plastic cards or posters, and the powered ones are found in mobile phones and payment terminals.

STRATEGIES DIGITAL TRANSACTIONS | NOVEMBER 2020 27 Contrast the current status ENERGIZED WALLETS Internet is improving. From primi- of contactless with the situation tive Zoom calls to the sophisticated almost a year ago, when Jordan Universal wallets like Apple Pay, multi-framed, edited performances McKee wrote for Forbes that “it’s Samsung Pay, and Google Pay that that were done for the political still early for contactless cards in function via NFC have gotten a major conventions and for the Global Cit- the US,” citing lots of commitments shot in the arm by the increase in izen fundraiser in May, the tech- and support from major players but support for contactless payments nology has evolved to the point little in the way of action. from merchants responding to safety that I expect in-person events will Personally, as someone who concerns. However, the use of digital become less common. uses Apple Pay, I can testify that, wallets is also increasing as people Right now, most of these events before the pandemic, it was com- shift from in-person to online events. are being released for free, but this mon to encounter merchants that Trade shows and conventions in is obviously not sustainable. That technically could accept NFC but physical locations are temporarily creates a new opportunity for paid had not activated it. All too often, impossible in the U.S., with events streaming and purchased video, an attempt to tap would be met through next year being moved which will be done through pay- with confusion from the clerk, who online or canceled altogether. The ment cards and digital wallets. would mumble something like “oh, same is true of concerts, tours, and There is a general shift from that’s not working right now.” Now, festivals. Many restaurants are the point of sale to e-commerce NFC is common anywhere, and likely to fail. that will also endure as consum- local businesses that were cash- By contrast, subscription stream- ers become more comfortable with only have changed their tune. ing, delivery, and gaming services shopping online. In terms of pay- Habits, once formed, are hard are seeing an increase in usage as ments, this will increase the impor- to break, and we are forming a people seek entertainment and food tance of digital-wallet placement tap-and-go habit right now. Most in the safety of their homes. and deals with wallet providers important, merchant support is Some of this will endure, not to improve positioning. Apple has much better, so consumers are only because habits have formed, already started to do this by giving more comfortable using contact- but because the technology of extra rewards for certain mer- less technology. presenting performances over the chants, and this is likely to grow. PAYPAL IS UNIVERSALLY ACCEPTED FOR COMMON STREAMING AND SUBSCRIPTION SERVICES BANK GIFT SUBSCRIPTION SERVICE CARD PAYPAL ACCT. CARD OTHER INCENTIVES Netix None DC Universe None Marvel Unlimited Marvel Mastercard gives 3% cash back on Marvel.com Hulu None YouTube Premium, TV Google Pay None Apple TV+, Music, News, Arcade Apple Card 3% on Apple Card Xbox Game Pass Mobile phone None Playstation Now None Source: AFM Consulting

28 DIGITAL TRANSACTIONS | NOVEMBER 2020 STRATEGIES Subscriptions also have appeal While we know that the pandemic will in a time of economic crisis, when end, the timing is uncertain, and some consumers place value on predict- changes will be permanent. —McPherson able costs and lack the funds for large individual purchases, prefer- ring to spread out payments. had more success with their real- need to provide some incentives, like time disbursement platforms, those in the direct merchant realm. A MISSED OPPORTUNITY Mastercard Send and Visa Direct. American Express, Chase, Citi, Direct storage of card numbers (in and Discover do integrate with When we look at some of the major tokenized form) is still the most PayPal to allow cardholders to streaming services (chart, page 28), popular method, but PayPal is use their proprietary cash-back one thing becomes apparent: Pay- becoming a universal default. rewards in the PayPal wallet, but Pal is universally accepted, in addi- However, I found few store cards more issuers will need to do this. tion to payment cards. or incentives to use one form of If I am right, and there is a per- This is a striking result, because payment over another. While Apple manent shift away from in-person PayPal is itself a universal wal- Card does have some merchant events to online entertainment and let, capable of storing cards and deals (for example, Panera), most of services, this will become the next bank accounts and able to support those are for one-time purchases, fight for market share. instant funding (for a fee). not subscriptions. This seems to be Therefore, even after it has been Although Visa and Mastercard a missed opportunity. eradicated, Covid-19 will still have have combined forces under their As card issuers fight for pride of a long-lasting e ect on payment- Click to Pay branding, they have place in the PayPal wallet, they will industry competition.

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Multiple OVER THE LAST several decades, payments network, Zelle, went live there has been a crescendo of inter- in 2017. And, leveraging their “card” real-time est from regulators and the indus- rails, Visa, Mastercard, Discover, try worldwide in real-time inter- Fiserv, and FIS provide instant services may bank payments. Instant interbank interbank credit-push payments. payments displace batch auto- Visa’s and Mastercard’s products,  ourish, mated clearing house transfers and Visa Direct and Mastercard Send, enable new use cases, improving reach billions of demand-deposit but don’t economic e iciency and enriching accounts planetwide. society writ large. The field will broaden further discount the While the United States wasn’t with nontraditional competitors. an early adopter, its real-time For example, Chase’s and Signa- Fed’s ability interbank-payments market is ture Bank’s dollar-backed stable- developing apace. The Clearing coins, JPMCoin and Signet, enable House Payments Co. LLC (TCH), faster payments between their to corner owned by many of the nation’s big- institutional clients. Their systems gest banks, launched its real-time could be opened up to other banks. volume. payments system, RTP, in 2017. Facebook’s Libra will support the In reaction, the Federal Reserve real-time exchange of tokens repre- contends that, since there’s only one senting dollars. And, when the Fed BY ERIC GROVER private-sector instant-payments introduces a digital dollar—ideally Eric Grover is principal at Intrepid Ventures, operator, it’s imperative the Fed distributed through rather than a Minden, Nev.-based consultancy. itself provide competition and sys- competing with banks—it will be tem resiliency, as it does with ACH. another instant-payment system. The Fed has disingenuously argued In the meantime, TCH’s RTP is that, because other instant-payment building network critical mass. It has systems don’t provide interbank relationships reaching 70% of U.S. real-time gross settlement, they DDAs, though not all are yet switched weren’t TCH competitors. If mar- on. While many community banks kets are defined narrowly enough distrust TCH, they can ill a ord to you can always conjure a monopoly. wait on FedNow. That would deny The Fed’s plan is to have its Fed- their customers services and cost Now real-time payments network them deposits and customers. live by 2023 or 2024. TCH priced RTP to win over small Meanwhile, bank coopera- banks. Banks pay 4.5 cents per real- tive Early Warning Systems’ time credit, a penny per request-for- instant account-to-account- payment, a penny per remittance

30 DIGITAL TRANSACTIONS | NOVEMBER 2020 ENDPOINT SPONSORED CONTENT DIGITAL TRUST & SAFETY INDEX: ACCOUNT TAKEOVER FRAUD AND THE GROWING BURDEN ON BUSINESS Account takeover fraud has been a challenge for e-commerce merchants since business online. But Top Targets: The Year-Over-Year recent years have proven exactly how pervasive ATO Impact of ATO is across every industry, and revealed that it’s the 282.35% % change ATO rate average fraudster’s weapon of choice. Between the 300 second quarter of 2019 and Q2 2020, overall ATO 250 195.45% rates (the percentage of total logins that were stopped 200 because they were fraudulent) surged by 282% across 150 the entire Sift global network of merchants. 100 84.62%

50 Digital and physical e-commerce were hit especially hard compared to other verticals. Combined with 2020’s 0 Sift Physical Digital heavily disrupted economy, this massive spike has put network e-commerce e-commerce risk teams in a di„ cult position. Predictions are no longer reliable; patterns are unpredictable. And this year, Losing 28% of one-time customers is a huge problem trust and safety experts are without the fraud-‡ ghting on its own. But if businesses consider the average tools and data they usually depend on. customer’s lifetime value (LTV), or how customer acquisition costs (CAC) are impacted by brand abandonment, the consequences of account takeover THE CREEPING COST OF ACCOUNT TAKEOVER get exponentially bigger—and even the most accurate A more urgent issue for merchants is the growing data doesn’t account for the consequences of negative evidence that account takeover fraud can capsize reviews and a company reputation blighted by fraud. businesses from the outside in, causing lasting damage that goes well beyond a fraudster’s immediate control. The latest industry report from Sift, Digital Trust Consumers reported that, if an account they owned were & Safety Index: Account Takeover Fraud and the hacked, almost one-third of respondents said they’d Growing Burden on Business, explores the story stop using the impacted site or service and turn to a behind these ‡ ndings. With insights derived from Sift’s direct competitor. global merchant network of over 34,000 sites and apps across e-commerce, in addition to a survey of 1,000+ consumers, this newly-released report gives online merchants an The Hidden Cost of ATO:Churn and Chargebacks understanding of why, how, and when ATO can cause signi‡ cant • Keep using the site/service, but disruption to a business. From user 28 change credentials/personal info: 40% expectations around data security to 20 account takeover’s impact on buying • Stop using the site or service behavior, this report digs into how and select another provider: 28% fraudsters exploit security loopholes, • Keep using the site/service, which verticals are under attack 12 from opportunistic fraudsters, and and contact support: 20% 40 how trust and safety experts can • No change in behavior: 12% e— ectively stop account takeover fraud in pandemic-era e-commerce.

Download the Digital Trust & Safety Index here: https://resources.sift.com/ebook/digital-trust-safety- index-account-takeover-fraud-burden-business/ advice, and a dime in bill-payer directly and through third-party would be 38 billion in 2023. For interchange per credit, regardless of processors, it will likely reach 99% instant and batch payments, the volume. TCH had hoped to weaken of U.S. DDAs. Use of the card net- marginal processing cost is zero. the Fed’s case that only the benefi- works’ and Zelle’s instant payments The Fed could decide the mar- cent Fed could provide equitable will be greater. Digital dollars may ket won’t be mature until real-time access to community banks. be in the mix. substantially supplants batch inter- Thereby, TCH hoped to dissuade By contrast, FedNow at launch bank payments and FedNow pro- the Fed from entering the market. will reach relatively few DDAs. cesses 20 billion payments annually. It was a good try that was never For a would-be private-sector going to work. competitor, the market would be BENDING THE KNEE sewn up, unless it had a compel- COMPETITOR NONPAREIL lingly better mousetrap. The Fed, Even aggressively priced, however, however, is a competitor nonpa- FedNow won’t interest banks if it The Fed’s actions should be reil. It’s the central bank, the para- doesn’t reach a critical mass of DDAs. viewed through the lens of Nobel- mount financial-system regulator, The Fed pressed TCH to pledge to Prize-winning economist James and enjoys unlimited resources. interoperability. Thus far, the bank Buchanan’s Public Choice Theory, The central bank will muscle its cooperative has demurred. Why which holds that public actors act to way into the market. would it help a competitor become maximize their own utility. Since its How? Pricing. Mastercard and viable? However, the central bank 1913 founding, the Fed has relent- Visa price higher than TCH and tar- won’t take no for an answer. It will lessly amassed more power and get di™erent use cases, for now. The assert interoperability is neces- increased the scope of its activities. Fed has a di™erent approach in mind. sary to ensure critical U.S. payments FedNow will be the first new Fed To win volume, FedNow will be infrastructure is resilient. TCH banks payment system in four decades. priced below cost for more than a could refuse such a demand from a One hundred Fed employees are decade. No private-sector enterprise private-sector competitor. But they beavering away. could do this. Moreover, when for- will have to bend the knee for the Fed. Initially, FedNow will support eign companies price exports to the FedNow’s liquidity-management credit-push payments, request-for- U.S. below cost, it’s called dumping. tool will facilitate banks using RTP payment, and liquidity management The Fed says FedNow “fees will be and/or FedNow, providing credit for banks’ instant-payment pro- based on transaction costs associ- among themselves to maintain grams. Additional features such as ated with mature volume estimates.” funds to cover real-time payments an alias directory will be added later. In 2018, the United States had outside Fedwire’s hours. But by 2023, TCH’s RTP will be a 28.5 billion ACH payments, which, The market’s global. TCH’s RTP mature, feature-rich system, and, on the current growth trajectory, and FedNow at some point will interoperate with other national real-time payment platforms. ADVERTISER INDEX Mastercard, with its worldwide net- Digital Transactions Pages 5, 11, 19, 29 MagTek Page 3 work and Vocalink and Nets faster- 877-658-0418 www.digitaltransactions.net 562-546-6467 www.magtek.com payments assets, is in the pole position to interconnect national Electronic Merchant Systems Inside Back Cover paxRhino Inside Front Cover real-time-payments platforms. 866-525-7403 www.emsagent.com 877-859-0099 www.pax.us A patchwork of diverse, interop- eProcessing Network Page 15 Sift Page 31 erating, and competing traditional 800-296-4810 www.eprocessingnetwork.com 855-981-7438 www.sift.com and nontraditional domestic and cross-border systems augurs well for Harbortouch, a Shift4 Company Page 1 USAePay Page 17 instant-payments value for banks, 800-201-0461 www.isoprogram.com 866-740-2496 www.usaepay.com businesses, and consumers. Humboldt Merchant Services Back Cover 855-767-0685 www.hbms.com 32 ENDPOINT

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