It’s been a long-lasting a air, and it’s getting more intense.

Volume Seventeen, Number Nine • DigitalTransactions.net • September 2020

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SEPTEMBER 2020 • VOLUME 17, NUMBER 9

Why Wall Street Loves Payments 24 Shift4 Payments dazzled the payments industry and Wall Street with its June initial public o ering. What do recent processor IPOs say about the prospects for payments companies?

THE GIMLET EYE Wall Street And the Payments Biz 4

TRENDS & TACTICS 6 PayPal Plots a New Senator Durbin Rides Again Not Just Volume, But the FedNow Sticks to Its Plan POS Course Merchants are complaining Right Kind of Volume Last year, the Fed said it QR codes were once seen about PIN-debit routing. Newly public Shift4 wants would debut its real-time as exotica. Now PayPal is The author of the Durbin to move more volume network in 2023 or 2024. bringing them to major U.S. Amendment wants answers from its gateway business One coronavirus later, it still chains, starting with CVS. from Visa and Mastercard. to its more lucrative says 2023 or 2024. end-to-end platform. Plus, Security Notes argues that digital cash could be the key to a renewal of capitalism; and Payments 3.0 considers how long the payments industry will have to live with the e ects of Covid-19.

ACQUIRING 15 NETWORKS 32 Is This the New Online Normal? Fast Thinking for Faster Payments As merchants, consumers, and For  nancial institutions of all payments providers wrestle with sizes, real-time transfers are likely the Covid-19 pandemic, one thing to be a competitive necessity. But is certain: Online fraudsters are as small banks must work out how to relentless—and opportunistic—as ever. balance operational headaches with potential advantages.

STRATEGIES 20 ENDPOINT 38 Open Banking And Its Friends Why Signatures Won’t Go Away Big moves by Visa and Mastercard The networks stopped requiring have thrust data aggregators into signatures on receipts two years ago. the spotlight just as the focus of Something else is keeping them alive. payments is expanding and the aggregation model is modernizing. Cover Illustration: Jason Smith, 123RF.com

Digital Transactions (USPS 024-247) is published monthly by Boland Hill Media LLC, 800 Roosevelt Road, Building B, Suite 212, Glen Ellyn, IL, 60137. Periodicals Postage Paid at Glen Ellyn, IL, and at additional mailing o ces. POSTMASTER: Send address changes to Digital Transactions, P.O. Box 493, Northbrook, IL 60065-3553.

2 DIGITAL TRANSACTIONS | SEPTEMBER 2020 CONTENTS

SEPTEMBER 2020 • VOL. 17, NO. 9

WALL STREET AND PUBLISHER Robert A. Jenisch EDITORINCHIEF John Stewart THE PAYMENTS BIZ SENIOR EDITOR, DIGITAL Kevin Woodward CORRESPONDENTS AS WE LOOK AT THE NUMBERS at precisely 3:15 p.m. Eastern Time on Jim Daly, Peter Lucas Aug. 17, most of the payments and payments-related stocks we track are up ART DIRECTOR/PRODUCTION EDITOR for the day. Indeed, out of a basket of some 17 stocks, only four are down— Jason Smith and there’s still part of the afternoon left. Some, like Adyen, Apple, eBay, EDITORIAL ADVISORY BOARD Green Dot, Mastercard, PayPal, Shift4, and Square, are at, over, or very near, Eula L. Adams John Elliott their highs for a year in which a pandemic has ravaged most businesses. Alex W. “Pete” Hart Jim Daly’s cover story, starting on page 24, explains this shouldn’t come Former Chief Executive O cer, as a surprise. “The publicly traded payments companies have done better Mastercard International than the broader market for years,” he says. Indeed, as he points out, one William F. Keenan President, De Novo Corp. hundred dollars invested early in 2011 in a basket of more than 25 payments Dr. Gideon Samid stocks tracked by The Strawhecker Group would have been worth $670 by the Chief Technology O cer, first quarter this year, a 22% compounded average annual return. The same AGS Encryptions Ltd. investment in the S&P 500, by contrast, would have yielded $234. DIRECTOR OF ADVERTISING Robert A. Jenisch, 877-658-0418 The love a” air on Wall Street shows no signs of abating. In fact, the infat- [email protected] uation only grows more intense. Jim points to the example of one of the ADVERTISING SALES REPRESENTATIVES most recent IPOs, that of Shift4 Payments Inc. Priced by its underwriters Robert Mitchell, 877-658-0418, x7 in the low $20s, the processor’s stock debuted in early June as if shot out of [email protected] a cannon and closed the first day at $33.54. By mid-August, the shares were Rob Akert, 877-658-0418, x6 [email protected] brushing against $50. Two factors explain its success so far: investors appre- ciate its growing share of the vital restaurant business, and the big processor Digital Transactions, Digital Transactions News, and DigitalTransactions.net are publications of mergers last year made Shift4 and other players more visible to prospective Boland Hill Media LLC, 800 Roosevelt Road, clients by reducing the ranks of competitors. Suite B212, Glen Ellyn, IL 60137 John Stewart, Managing Director Clearly, Covid-19 isn’t damping demand for payments stocks. Another Robert A. Jenisch, Managing Director example is Green Dot, which got its start in prepaid products and now ™ exes For advertising information, call 877-658-0418. To subscribe or a highly successful strategy centered on a bank it acquired in 2010. Dan give us a change of address, go to Henry, who took over as CEO early this year, made it plain from day one that www.digitaltransactions.net and click on “Subscriber Care” or call 847-559-7599. the bank is key to Green Dot’s future. The market agrees. The stock opened The views expressed in this publication are the year at $23.30 and by mid-August had climbed to the mid-$50s. not necessarily those of the editors or of the members of the Editorial Advisory Board. We are not in the business of recommending stocks, nor do we intend The publisher makes reasonable e™ orts to ensure the timeliness and accuracy of its to get into that game. The shares of any of the companies mentioned in content, but is not engaged in any way in this column could plunge tomorrow and stay in the basement for months. o™ ering professional services related to š nancial, legal, accounting, tax, or other Our point is only to say that, to the extent the collective wisdom of stock matters. Readers should seek professional counsel regarding such matters. All content markets matters, the payments business appears to be on a solid footing herein is copyright © 2020 Boland Hill Media despite the bu” eting of pandemics, economic shocks, and the inevitable LLC. No part may be reproduced without the express written permission of the publisher. regulatory interventions. 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 | SEPTEMBER 2020 ONLY ONE OF THESE BIRDS CAN GIVE YOU THE LATEST NEWS IMPACTING THE PAYMENTS MARKET

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PAYPAL PLOTS A NEW POS COURSE PayPal Holdings Inc. has made big The move comes as the months- of QR codes for payment, Schul- plays for the physical point of sale old coronavirus pandemic has man said. The e ort includes talks before, but late in July the San Jose, left hordes of consumers wary of with payment networks and termi- Calif.-based company unveiled touching payment cards or key- nal providers “to distribute our QR what could be its biggest strategy pads. Such widespread caution has codes,” he added. “It’s not just about yet to capture transactions at the opened an opportunity for rapid touchless payment, it’s rewards, cash register. development of a QR strategy as o ers, messaging. We think the Top executives said an arrange- part of the PayPal wallet, Schulman economics over the medium term ment under way with CVS Pharmacy said. “QR codes are a key strategic are quite positive for us.” to run PayPal and Venmo transac- priority for us,” he told the ana- The thrust for QR code capa- tions on Quick Response (QR) codes lysts. “It’s critical for driving daily bility follows an initiative PayPal will roll out to all 8,000 CVS stores use. We will make the investments launched in May to bring the tech- by the end of the year. Already, Pay- we have to.” nology to small-scale sellers as part Pal has deployed QR codes for pay- Besides CVS, PayPal is working of its mobile app. The company at ments in some 28 countries, chief with more than 100 “enterprise” the time attributed the move to con- executive Dan Schulman told equity merchants in the U.S. and European sumer and business fears of infec- analysts on a conference call. markets to introduce acceptance tion in the midst of the pandemic.

SELLERS STOCK UP ON PAYPAL (Merchant volume in billions) 2016 $300 2017 $393 2018 $512 2019 $649 Source: PayPal

6 DIGITAL TRANSACTIONS | SEPTEMBER 2020 TRENDS & TACTICS QR codes have proven quite pop- pandemic that is wrecking many ular in markets like China, where world economies. Indeed, by the SENATOR DURBIN the big mobile-payments services end of June it had enjoyed what it Alipay and WeChat Pay depend on called the “strongest” quarter in its RIDES AGAIN them. In these deployments, as well 22-year history. as in the PayPal program for small Active accounts reached 346 U.S. Sen. Richard Durbin and a Ver- merchants, sellers display the code million, up 21% year-over-year, mont Congressman said this sum- for buyers to scan with their smart including 26 million merchant mer they want the Federal Reserve phone. The scan triggers the trans- accounts. This total also includes to look into what they say are e€orts action and movement of funds to 21.3 million net new active by debit card issuers “aided by the the seller’s account. accounts, up fully 137%. Pay- dominant card networks” to pre- But the codes haven’t gained a ment volume totaled $222 billion, vent PIN-debit networks from get- foothold in the U.S. beyond e€orts exceeding the year-ago number by ting a bigger share of booming card- to equip popular American chains 30% on a foreign-exchange-neutral not-present payment volumes. to serve Chinese tourists. Other basis, and topping $200 billion for “The Federal Reserve should major companies, though, may be the first time in the company’s his- consider appropriate enforcement seeing potential. Apple Inc. report- tory. Revenue reached $5.26 billion, action and policy responses to cor- edly was testing QR codes for Apple a 25% year-over-year increase on rect any such anticompetitive incen- Pay earlier this month, for example. an FX-neutral basis. tives and regulatory violations,” says PayPal has not discussed how it Venmo, PayPal’s popular peer- a July 24 letter to Federal Reserve will price QR code transactions for to-peer payments service, ended Board Chairman Jerome Powell big chains like CVS. It hasn’t been the quarter with more than signed by Durbin, D-Ill., and U.S. Rep. so reticent when it comes to small 60 million active accounts. Its vol- Peter Welch, a Democrat who has sellers. In its May announcement, ume totaled $37 billion, up 52% monitored payment card acceptance the company said these merchants as users turned to the product to issues for at least a dozen years. would pay 1.9% plus a dime per trans- move money to each other in the Although he has been quiet in action after the expiration at the end face of the pandemic. recent years, Durbin is well-remem- of July of an introductory free period. –John Stewart bered in the payments business as For the first 14 years of its exis- tence, PayPal stuck with its online- only payments service. But in 2012 the company began to enlist phys- ical merchants as it hoped to tap USAEPAY.COM REIMAGINE THE ART OF 866-740-2496 into the much larger market for point-of-sale transactions. At the time, PayPal was still part TRANSACTION RETAIL E-COMMERCE MOBILE of eBay Inc. But eBay spun o€ Pay- Pal to public ownership in 2015. That same year, PayPal said it planned a renewed POS thrust with near-field communication technology in its digital wallet. Unlike QR codes, NFC links to point-of-sale readers with very short-range radio waves. Now, as it embarks on its latest POS gambit, PayPal is register- ing impressive results despite a

TRENDS & TACTICS 7 the sponsor of the so-called Durbin extra chore for consumers and a tech- reviewing the letter; a Visa spokes- Amendment to 2010’s sweeping nical hurdle for payments providers. person could not be reached. Dodd-Frank Act. The amendment But issuers have an economic The letter raises some of the same famously regulated the interchange incentive to route transactions to issues the Federal Trade Commission big debit card issuers could receive. networks with higher interchange began investigating earlier this year. But it did more than that. To rates, and Durbin’s letter says if An FTC spokesperson declined to preserve network competition in a they don’t provide bank identifica- comment on the status of that probe, market dominated by Visa Inc. and tion numbers for PINless debit, the in which the agency has asked for doc- Mastercard Inc., the measure also merchant may not have more than uments from Visa and Mastercard. required issuers to make at least one routing option. “I believe there is merit to the two una€ iliated debit networks Citing estimates from research letter,” Anand Goel, chief executive available to merchants for transac- and consulting firm CMSPi, the let- of Optimized Payments, an Atlanta- tion routing. The Fed’s Regulation ter says U.S. merchants could save based company that helps clients II, which took e€ ect in 2011, imple- at least $2 billion a year in fees if reduce their payment-processing ments the amendment’s provisions. PINless debit functionality “were costs, says in email. Now comes Durbin’s letter, which made fully available” by having But he adds: “I also believe the argues “intervention may become more transactions routed over the smaller PIN-debit networks have necessary again” because of “what PIN-debit networks instead of the been slow to implement PINless appears to be the anticompeti- Visa and Mastercard networks. capabilities. Visa and Mastercard tive practice of major debit issu- “Because the volume of online are happy with the status quo, and ers refusing to enable PINless debit ‘card-not-present’ transactions has neither has added [e-commerce] or functionality on their cards.” increased dramatically during the PINless capabilities to their Inter- PIN-debit networks, which typi- Covid-19 pandemic, the need to link and Maestro [debit] networks, cally have lower interchange rates address obstacles to PINless debit respectively, because they know than Visa and Mastercard, have in competition has grown more urgent,” those debit transactions will be some cases developed PINless options the letter says. routed through their ‘credit’ rails. So in recent years to attract transaction A Fed spokesperson declined to the inaction by Visa and Mastercard volume, particularly in e-commerce comment on the letter. A Mastercard of not implementing PINless has payments when entering a PIN is an spokesperson said the company is allowed them to reap larger profits.” Goel says a good solution “would be for the Fed to force all issuers to support PINless capabilities. This MONTHLY MERCHANT METRIC would foster a competitive market- Total Gross Processing Revenue, in Percent place in all channels as the Durbin Sum of total discount, total transaction fee revenue, and total other fee revenue divided by total volume Amendment had intended.” In a statement, NACS, the Alex- Q  .% andria, Va.-based trade association Q  .% of convenience stores, said “the law Q  . % says that there should be a competi- Q  . % tive market choice of payment net- Q  . % work on every debit transaction. Unfortunately, Visa, Mastercard, and Note: This is sourced from The Strawhecker Group’s merchant data their largest banks have consistently warehouse of over 3 million merchants in the U.S. market. The ability to understand this data is important as small and medium-size tried to undercut competition. We businesses (SMBs) and the payments providers that serve them are key drivers of the economy. appreciate Senator Durbin and Con- All data are for SMB merchants de„ ned as merchants with less than $5 million in annual card volume. gressman Welch’s tireless work.” Source: The Strawhecker Group © Copyright 2020. The Strawhecker Group. All Rights Reserved. All information as available. —Jim Daly

8 DIGITAL TRANSACTIONS | SEPTEMBER 2020 TRENDS & TACTICS NOT JUST VOLUME, BUT THE RIGHT KIND OF VOLUME Shift4 Payments Inc. chose an inter- esting time to go public. Its initial ENDTOEND TAKES A HIT AT SHIFT4 public oering hit Wall Street in (Payments volume in billions) June in the teeth of a raging coro- $6.1 $6.2 navirus pandemic. Last month, $5.9 that move required the Allentown, $5.5 Pa.-based processor to lay bare the plague’s impact on its business as it conducted its first earnings call. $4.2 Stay-at-home orders and busi- ness shutdowns, with tentative Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Source: Shift4 reopenings, clipped the company’s full-service, lucrative end-to-end that simply use Shift4 as a gateway moved clients to online order- payment volume in the June quarter to other processors. ing. That ratio has since declined 23% year-over-year to $4.2 billion. Typical gateway merchants fall to 80%/20%, Lauber said, though Things started looking up in into sectors Shift4 has historically the company’s introduction of QR June and July, however, with total served, including restaurant brands, codes for contactless payments payment volumes in July coming hotels and resorts, casinos, and golf is helping to buoy the card-not- in as the second-highest number courses. These are merchants with present business. in the company’s 21-year history, complex payment needs. “We love “When it comes to payments, chief strategy oicer Taylor Lauber food trucks, but serving food trucks implementing a QR code solution told equity analysts on the call. And is not what makes Shift4 special,” said is challenging,” Lauber said. Mer- the pipeline is filling up. chief executive Jared Isaacman, who chants appreciated the fact “we “Our boarding of new merchants as a teenager founded the company were able to push it out,” he added. never really slowed during the in his parents’ basement. He noted Another burgeoning market, quarter,” Lauber said. Wall Street that conversions of gateway clients executives added, is sports stadi- got the message. Shift4 began trad- can be done in 24 hours or less. “All ums. The company got a big start in ing publicly June 5 and finished its the connections are already there,” that category last month when the first day at more than $33 per share. he said. “It can be very, very simple.” Las Vegas Raiders National Football By mid-August, that price was Širt- With the emphasis on converting League franchise named Shift4 its ing with $50. gateway to end-to-end business, oicial credit card processing com- The end-to-end processing por- the company projects its volume pany. “Sports and entertainment is tion of Shift4’s business accounts in that sector will not only recover becoming an important market for for a relatively small part of total but grow to between $6.2 billion us,” Isaacman noted. payments volume, with the gate- and $6.5 billion in the third quar- For the quarter, Shift4 logged way operation providing about ter, and to between $6.5 billion and gross revenue, less network fees, 89%, executives said. But they made $6.9 billion in the fourth. of $67.4 million, down 10% year- it clear they’re set on a strategy to In the face of the exigencies over-year. Gross profit came to expand that number quickly. That’s forced on payments markets by $32.3 million, down 26%. The adjusted because the company can make as the pandemic, Shift4 found its net loss totaled $14.4 million, com- much as eight times more gross card-not-present volume shifting pared to $4.4 million in the same profit from the full-service end-to- from 15% of total volume in Febru- quarter in 2019. end business than from merchants ary to 40% in April as the company —John Stewart

TRENDS & TACTICS DIGITAL TRANSACTIONS | SEPTEMBER 2020 9 FEDNOW STICKS TO ITS PLAN While the Covid-19 pandemic has ‘We are raised the issue of speeding stim- ulus payments and other relief to committed to consumers and businesses, the Fed- interoperability eral Reserve system is staying with to ensure nation- its planned 2023 or 2024 launch date wide reach. for its FedNow real-time payment service, oicials said last month in We can’t do it an update that came almost exactly on our own.’ one year after the central bank LAEL BRAINARD, GOVERNOR, announced the service. FEDERAL RESERVE “We look to be on track for 2023 or 2024 but I expect over the functionality. As for international interoperability, allowing links to coming year we will be able to get a payments, “we need to laser-focus other faster-payments services little more precise about when we’ll on getting the service to function using the ISO 20022 electronic data be able to deliver the service,” said domestically,” she added. interchange standard. “We are com- Kansas City Fed president Esther At the same time, tokenization mitted to interoperability to ensure George, who spoke during a Web “likely won’t be available in the early nationwide reach,” Brainard said. presentation that included Fed implementation but we are looking at “We can’t do it on our own.” governor Lael Brainard and Ken- it for later,” Montgomery said. Tokeni- While the launch may be three neth Montgomery, the Boston Fed zation replaces live account data with or four years o, financial institu- executive who has been heading up random strings of characters that can tions should be drawing up plans the FedNow eort for the past year. be decoded by participating institu- now for how they can “serve their FedNow, which represents the tions in an eort to thwart data theft. customers,” George said. central bank’s entry into a busi- Still, while the service may not “Given how fundamentally dif- ness that has been served so far come online soon enough to help ferent this product is going to be, by private-sector players such as distribute federal relief funds, it’s not too early to start thinking The Clearing House Payments Co., Brainard stressed the importance about it now,” she added. “What will is “designing a pilot program as we of real-time delivery in such emer- it mean for accounting, operations, speak,” Montgomery said. The goal gencies as an alternative to checks staing? It will involve hard work is to recruit participants later this and debit cards through the mail. to ensure this platform serves the year for pilots that could launch “The pandemic is taking a tre- country for many years to come.” early in 2021, he added. mendous toll on households across One factor in that planning pro- But when what the Fed is now the country,” she said. “Instant pay- cess that may be hard to pin down calling FedNow Instant Payments ments would allow households to for some time is cost. “We don’t launches, it will not include cross- get instant access to funds rather have a number right now,” George border payments or a so-called alias than waiting for a check to clear.” said. “We’re still settling on the capability that would enable, for From the start, she said, the new tech strategy, which will determine example, peer-to-peer payments service will support fraud tools with the cost.” Still, she added, pricing to phone or bank-account num- parameters set by banks; a liquidity will be based on a “mature volume bers, George said. Aliases will come management tool to enable banks estimate” and the Fed’s mandate to “at a later phase,” she noted, as the to ensure they have suicient funds recover its costs. Fed concentrates on launching core to support instant settlement; and —John Stewart

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GCF_digitaltransactions_2019_v1.indd 1 5/10/19 2:46 PM MOST OF US WILL OPT TO PAY prying eyes, not because they are a higher price at Amazon, which illegal, but because they expose the already holds our financial and pri- payer to ill-wishers. vate data, rather than pay less and [email protected] Digital cash in its basic form is expose our data to a merchant with an extremely cost-e ective solution unknown security practices. The for this, as BitMint has proven in its net result is that the megastores with frequent replacement of field-test cases. This is because when keep getting bigger, and newcom- personal financial data. Concep- someone pays with digital cash, only ers are sti” ed, however innovative, tually, it amounts to “painting the cash itself needs to be inspected, superior, and better-serviced their data with short-lived colors.” A not the payer and not the payee. The products may be. computer technique attaches to authentication apparatus shrinks I hear from various craftsmen account numbers, PINs, and pass- dramatically, and so does the service that the coronavirus kept them at words some extra data not visible fee. Digital cash can be spent with- home. They opened an online store, to the user. This data is stealthily out an Internet connection, using but have no way to impress on their mounted, and stealthily refreshed, hard wallets (U.S. Patent 10/754,326). prospective customers that it would as often as desired. It is short-lived. The parties pay a fraction of a per- be safe to surrender their personal Hence, a thief will be able to abuse centage point in operational fees. financial information to such a his spoils only for a short time Now, once you tether money (see my hack-easy home-bound merchant. before the “colors” are refreshed book, “Tethered Money”), the cost This is a fundamental socio- (see U.S. Patent 10/395,053). rises, but so does the service. economic dilemma. Capitalism is Think of it. Today a Social Secu- Imagine the whole world as an powerful if it invigorates the bot- rity Number represents a lasting accessible market. You could buy an tom tier, not when it broadens the value for a fraudster. But with this independent movie directly from the gap between rich and poor. coloring technology, the same data overseas producer. You could buy a Technology can help in two con- will be unusable a week later. The drawing or a statue you like directly ceptual modes: making hacking Social Security Number will not from a poor artist far away. The unprofitable and using digital cash. change. The invisible add-on data buyer is not dependent on the secu- A fence surrounding confiden- will simply expire. rity practices used by the unknown tial data is only as good and as This new “data-coloring” tech- seller. In turn, you could get sensi- smart as its designers. Naturally, nology can also prevent phishing tive advice from an expert who gets some hackers are smarter than the because your email client will be paid without knowing who paid him. fence builders, and hacking contin- able to silently and cryptographi- No doubt, solid, non-speculative, ues. Now, suppose that the hacked cally examine the identity of the quantum-safe, nationally recog- data is short-lived. Its utility will sender, and alert you against phish- nized digital money is promising to diminish quickly to a degree that it ing attempts (U.S. Patent 10/733,374). catapult much-maligned capital- won’t be worth the e ort to steal it. Beyond security, privacy con- ism to new heights. History tells us A new technology does just siderations motivate consumers that bottom-up capitalism works. that, and without burdening to use cash, especially for transac- It is when monopolies emerge that the customer and the merchant tions they would rather shield from the social benefit ebbs.

12 DIGITAL TRANSACTIONS | SEPTEMBER 2020 TRENDS & TACTICS RELIABLE MOUNTING SOLUTIONS FOR YOUR RETAIL ENVIRONMENT

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Combine your iPad 10.2 and Magtek iDynamo 6 card reader with our mPOS stand for the best customer experience. The design contains a 1.25” open hole for cable management and can be used with other accessories such as cash drawers and barcode scanners for user convenience. Learn more: 1.800.456.6868 | [email protected] COVID-19 HAS CHANGED shop- balances fell by $76 billion in the ping and payments behavior, and a second quarter, according to the big question facing the industry is: Federal Reserve Bank of New York. How long will those changes last? [email protected] As we all emerge from our Most conversations about the pan- Covid-19 shells and return to work- demic start with, “When things get places, that will be another in€ ec- back to normal.” But all signs point to pre-Covid levels, and using options tion point for behaviors as environ- a new normal rather than a return to a like curbside pickup long after the ments change again, Berman says. pre-pandemic state. While that might pandemic ends, said Leon Buck, Of course, pandemic behaviors be a disturbing thought, it could lead the NRF’s vice president of gov- may have their own aftershocks. In to improved relationships with cus- ernment relations, banking, and May of 2020, the Federal Reserve tomers and new payments products. financial services. surveyed 2,767 people who had Big shifts in daily lives can provide “Retailers understand their cus- completed its 2019 Diary of Con- an opportunity to make big changes. tomers—everybody wants faster, sumer Payment Choice to ask how Kristen Berman, the cofounder of safer, and easier [shopping expe- things had changed. Although 63% Irrational Labs, a behavioral eco- riences], and they are going to of consumers said they had not nomics nonprofit, explains that peo- accommodate it,” Buck said. made an in-person payment since ple change their habits when their Berman, who is also a cofounder March, the average amount of cash environment changes. The pandemic of the Common Cents Lab, a Duke that respondents were storing had has forced changes—working from University initiative focused on nearly doubled from $275 to $534. It home, for example—so the stage has financial well-being for low-to- may be that we will see a spike in been set for changed habits because middle-income Americans, said cash use when people begin making peoples’ routines have been broken. now is a good time for payments in-person payments again, as they “When people are able to break companies to consider new ideas. will have a lot of cash to use. out of their normal environments, People’s lives are disrupted, so they Payments providers, retailers, then they can change their habits,” are in a mindset open to change. and financial institutions have Berman says. One area in particular that may be opportunities to help shape their Evidence of such changes can be ripe for change is financial health. customers’ behavior. As I have seen in research from the National “While it seems like the worst pointed out in earlier Payments Retail Federation that found that time to be pitching people financial- 3.0 columns, many of the problems 58% of retailers said they can accept health interventions—whether it that have arisen from the pan- a contactless card payment in 2020, be paying down your credit card or demic are chronic issues that have up from 40% last year. It also found changing banks to avoid fees—this been made acute. that 69% of retailers said that con- actually may be a very nice time to do The uncertainty has given us an tactless payments had increased it, because now more than ever peo- opportunity to make course correc- since January. ple realize that their financial strug- tions that can lead to a profitable Retailers expect that customers gles could hit them,” Berman said. future for everyone. But we’ll need will continue using contactless This trend may already be to rise to the challenge and begin payments, shopping online above showing up in the data. Credit card thinking long term.

14 DIGITAL TRANSACTIONS | SEPTEMBER 2020 TRENDS & TACTICS As merchants, IF LITTLE ELSE, this year has more will consumers shop online proven that forecasts are grounded and how much more fraud will consumers, and only in the moment they are made. this shopping spree generate. It’s payments providers No one could have foreseen in 2019 already known that as e-commerce the impact of the Covid-19 virus on volume increases so does fraud. At wrestle with the the U.S. economy and how it would least one fraud-prevention vendor Covid-19 pandemic, alter e-commerce and online fraud. noted major spikes in attacks in Here’s the impact so far. The the first half of 2020. one thing is certain: most recent quarterly data from Certainly, online-fraud issues the U.S. Census Bureau for the sec- have intensified in 2020, aected Online fraudsters ond quarter finds that e-commerce like so much else by the Covid-19 are as relentless— sales accounted for 16.1% of pandemic. As many states shut- all retail sales, or more than tered nonessential businesses and and opportunistic— $211.5 billion. That is much higher consumers shifted much of their than the 10.8% share in 2019’s sec- spending to online stores, so, too, as ever. ond quarter, when online sales did criminals increase their mis- totale $146.4 billion. deeds. Matters such as account The big questions about takeovers and a better understand- BY KEVIN WOODWARD e-commerce in 2020 are how much ing of chargebacks surged to the forefront of merchant concerns, if they already weren’t there. Long a major issue for merchants and payments providers, account takeovers further cemented their position 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.” The problem worsened as habit- ual online shoppers increased their spending and consumers who for- merly didn’t shop online much increased their e-commerce activity. Wixted says some Accertify clients

ACQUIRING DIGITAL TRANSACTIONS | SEPTEMBER 2020 15 ECOMMERCE FRAUD ATTEMPTS (Average monthly fraud attempts per U.S. e-commerce retailer, late February through late April)  Prevented  Successful Total attempts: 277  ŒŽ‘ Œ“Œ Total growth: Growth: -24.4% Growth: 86.8% 24.2%  ŒŒ’ ““‘ Total attempts: 344 Source: LexisNexis Risk Solutions 2020 True Cost of Fraud Study/E-Commerce/Retail Report are experiencing Black Friday or Program,” Conroy adds. The PPP rings to do well with account- Cyber Monday sales volumes, refer- program is a small-business funding takeover attempts.” Phishing scams ring to two peak holiday shopping program from the U.S. government. gull online users into giving up key days online. A huge new segment of digital credentials like user names and newbies who may be more suscep- passwords. DIGITAL NEWBIES tible to social-engineering scams For some frontline personnel, could succumb to account-takeover rising fraud is already a problem. Some suggest that account-takeover attacks, Conroy says. At the same “Financial institutions definitely attacks will grow more numerous, time, a lot of financial institutions are contending with more account especially as the fourth-quarter have relaxed some of their veloc- takeovers,” says Charlotte Ritonya, holiday season arrives. “We will see ity rules and dollar limitations on vice president of security and an intensification,” says Julie Con- services like person-to-person pay- fraud, card services, at Brookfield, roy, research director for Boston- ments and remote deposit capture Wis.-based Fiserv Inc. based Aite Group’s fraud and anti- because they want to ensure as few “As we shore up the point of sale money-laundering practice. customers as possible are inconve- with contactless [payments] and “We haven’t seen a big spike yet nienced, she says. EMV, we start to shore up authen- because the fraudsters have been Already, she says, “We have seen tication,” Ritonya adds. “Account focused on defrauding unemploy- an uptick in phishing. All of the takeover is not a new event; we’re ment and the Payroll Protection ingredients are there for the crime just seeing more and more of it.” As other observers note, the cheap price of consumer data—information for the average stolen account sells ‘As we shore up the point of sale with for $15.43, according to antifraud spe- contactless [payments] and EMV, cialist Digital Shadows Ltd.—makes account takeover more widely avail- we start to shore up authentication.’ able, says Christopher Mascaro, CHARLOTTE RITONYA, VICE PRESIDENT OF SECURITY Fiserv vice president of fraud data AND FRAUD, CARD SERVICES, FISERV INC. and financial crime insights.

16 DIGITAL TRANSACTIONS | SEPTEMBER 2020 ACQUIRING Relationships are paramount at First American. Our holistic and personable approach gives your ISO the attention it deserves and the security you need to succeed today, and tomorrow. Read our story, “Straight Talk for ISOs Continues” at digitaltransactions.net.

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Copyright © 2020 First American Payment Systems, L.P. All rights reserved. First American Payment Systems, L.P. is a registered ISO of Fifth Third Bank, National Association, Cincinnati, OH and of Wells Fargo Bank, N.A., Concord, CA. BIDING THEIR TIME Immediately after the Covid-19 Account takeovers lockdowns went into e ect this are ‘the number-one spring, fraudsters sprang into action. According to data collected fraud trend we see.’ for its third-quarter Fraud & Abuse JEFF WIXTED, VICE PRESIDENT OF MARKETING Report, San Francisco-based Arkose AND CLIENT SOLUTION, ACCERTIFY INC. Labs said attack rates on logins increased 28% in the second quar- first time, those individuals can be ‘RIDICULOUS VOLUMES’ ter. Along with that was a 30% lower at higher risk for account-takeover attack rate on account registrations fraud, says Kimberly Sutherland, Chargebacks also have proven and a whopping 47% decrease in the vice president for fraud and iden- problematic during the pandemic. attack rate on payments. tity-management strategy at Lexis- As online shopping volume has Cloud configurations and the Nexis Risk Solutions, an Atlanta- increased, so too have chargebacks. notion of software-as-a-service, based risk and data-services pro- “Most of the banks I interviewed which has contributed positively to vider. “Less-experienced online have seen between a two- and three- ever-increasing decentralization of users are always going to be at fold increase in non-fraud disputes computing capabilities, also have higher risk,” Sutherland cautions. in the early months of the pan- been put to use by criminals. Some criminals, however, are demic,” Aite’s Conroy says. This was “A couple of years ago, to do biding their time by creating sleeper compounded by the fact that many account takeovers, fraudsters would accounts. In this scheme, Wixted banks had o shore call centers that need teams of people to help,” says, the criminal creates an account lacked the infrastructure to adapt Wixted says. But today, through and doesn’t necessarily do anything to a work-from-home environment. cloud computing, someone could malicious with it initially. “They cre- While some issuers have regained do it all themselves, he says. They ate them now and let them marinate control of that, dispute volumes can e iciently rent the software for for six to nine months,” he says. increased as summer travel plans a period of time and then shut it These accounts can be spotted were altered to re ect localized down, Wixted adds. because, as is the case with accounts Covid-19 resurgence. “The other leg The account-takeover problem for loyalty or rewards programs, of the stool is that fraudsters rec- is compounded by constant data consumers generally don’t create an ognize that call centers are seeing breaches leaching usernames and account and then let it sit unused, ridiculous volumes,” she says. passwords, poor password practices, he says. There’s usually some driver In the past 12 months, 17% of and technology advances, Wixted to use the account, such as snagging consumers initiated a payment dis- says, adding: “These make it even points when booking a trip. Many pute, says John Buzzard, lead ana- more impactful when it does happen.” technology providers can determine lyst for fraud and security at Pleas- Because there are now more con- an approximate identity on online anton, Calif.-based Javelin Strategy sumers going online to shop for the accounts, such as email addresses. & Research. “It’s likely this number is going to increase as a result of Covid fallout,” Buzzard says. “Anecdotally,” he adds, “we are Cheap prices for illicit hearing from some major proces- sors that they are seeing an increase data make fraud all in friendly fraud chargebacks in the more prevalent. the past two months as consumers CHRISTOPHER MASCARO, VICE PRESIDENT OF have increasingly had buyer’s FRAUD DATA AND FINANCIAL CRIME INSIGHTS, FISERV remorse and continuing financial

18 DIGITAL TRANSACTIONS | SEPTEMBER 2020 ACQUIRING uncertainty. This has been di er- One concern centers on whether from a fraud perspective, but from ent than initial disputes centered online shopping will continue to an economic standpoint, there may around undelivered goods—think outpace prior quarterly sales. In be more opportunistic fraud,” says travel—that occurred when lock- 2019, fourth quarter e-commerce Fiserv’s Ritonya. “There may be downs first went into e ect.” sales accounted for 11.3% of all U.S. ways we start to see increases in The travel-and-hospitality indus- retail sales, according to the Census disputes that are not valid.” try saw a lot more disputes that Bureau, up slightly from 11.2% in In addition to holiday shopping, Wixted says were not necessar- the third quarter. the fourth quarter also signals a ily related to fraud, but could have “I don’t know if we’ll see high lot of personal-care purchases. “If emanated from a customer-service e-commerce volumes month-over- the current trajectory for [card- issue. A consumer calling to cancel a month,” says Sutherland. “Will it not-present] payments contin- ‰ ight might have been frustrated by stay at a rate that is higher than ues, we will see a stronger usage hold times, gave up, and chose to file 2019? One thing that definitely develop around the holidays as a dispute, he says. came out of the pandemic is a level health needs shift into consumer of uncertainty as it related to the staples and personal-care items,” MENACING ASPECT economy and as to whether a state Buzzard says. remains open or closed. Because of He adds: “Scarcity will drive The other menacing aspect of the the uncertainty, many consumers demand and the demand, we antic- pandemic is that online shopping are hesitant to make big purchase ipate, will mostly likely send more already is at elevated levels as the decisions.” than a few consumers to fraudu- fourth-quarter holiday shopping Criminals, too, may be antici- lent Web sites where they will be season looms. pating the fourth quarter. “Not just victimized in some way.”

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Through our ePN Partnership, ISOs/MSPs will experience: ePN has payment options to t all • No fee, lead distribution of your merchant’s needs • FREE brandable marketing materials through our Reseller Support Center • Registered VISA and Mastercard Third-Party Service (TPS) Provider (800) 296-4810 • FREE online documentation, development test account, and sample code for experienced developers eProcessingNetwork.com © eProcessing Network, LLC. All Rights Reserved. All trademarks • Compliant with PCI and PA-DSS Data Security Standards are the property of their respective holders. Big moves by Visa LIKE MOST BUSINESSES, the pay- just because businesses are— ments world has been upended by tentatively—reopening and con- and Mastercard the coronavirus pandemic and its sumers are shopping again. have thrust data impact on buyers and sellers alike. The number of fintech startups But just before the virus struck in the that need these links to make their aggregators into the United States, Visa Inc. announced apps work smoothly is growing at a it had clinched a deal to shell out much faster rate. There were 8,775 of spotlight just as the $5.3 billion for Plaid Inc., an 8-year- them in North America in February, focus of payments is old financial-data aggregator with up 52% from the same time in 2019, links to 11,000 financial institutions. according to data-collection service expanding and the Those connections are the vital Statista. By contrast, that number links that let apps like Venmo grew only 2% from 2018 to 2019. aggregation model (peer-to-peer payments), Chime “The number of financial apps (online banking), and Betterment consumers are using is growing is modernizing. (digital investing) reach financial pretty significantly. The number institutions and serve users. of payment apps is growing pretty It’s called open banking, and quickly. And that’s going to con- it’s an increasingly essential busi- tinue,” says Ben Isaacson, a former BY JOHN STEWART ness, not just for Plaid and not Mastercard Inc. executive who is now senior vice president for prod- uct strategy at The Clearing House Payments Co. in New York City. The same faster expansion is happening overseas. The Statista numbers show a one-year doubling of fintech startups in the Europe, Middle East and Africa region and a 91% jump in the Asia-Pacific area. Not only are there more apps, but the apps themselves are adding users hand over fist. PayPal Hold- ings Inc.’s Venmo service recently reported 52 million users, up fully 30% in one year (chart, page 21). Square Inc.’s Cash App, meanwhile, has hit 30 million users, which means it added 6 million just since the start of the year.

20 DIGITAL TRANSACTIONS | SEPTEMBER 2020 STRATEGIES In concert with this app growth, aggregators like Plaid are book- TOP 10 FINTECHS ing more and more business. The (Ranked by user count in millions) ANNUAL company serviced more than USERS GROWTH RATE 200 million linked accounts last Credit Karma  % year, up more than 55% from 2018 and 20 times greater than the num- Venmo  % ber in 2015 (chart, page 22). No wonder, then, that the card networks are paying attention—and Coinbase  % opening their wallets. Mastercard agreed in June to lay out $825 million Cash App1  N.A. in a deal for Finicity Corp., a 21-year- old company whose clients include Mint  % Brex Inc., a fast-growing startup o“ering services such as business NuBank  % credit cards and cash management. “They have very strong connec- tivity into the banking infrastruc- Toss  N/A ture, so we felt they were the right partner for us,” says Craig Vosburg, Clearscore  N/A president for North America at Mastercard. Etoro  N/A

‘A BIG DEAL’ Revolut   % Payments providers and other N/A=not available 1. Formerly Square Cash Source: Visa presentation January 2020, financial services have long relied citing the companies; Digital Transactions updates where available on data aggregators, but the busi- ness—and its technology—are banks that hold their mutual cus- But the nature of that “connec- undergoing fundamental changes. tomers’ accounts, he adds, “We are tive tissue” is changing. Aggrega- Using prearranged links, aggre- the underlying connective tissue.” tors historically relied on a tech- gators access app users’ financial These links to financial insti- nique called screen scraping, in accounts on their behalf to perform tutions can support a variety of which the aggregator deploys the services ranging from identity purposes. “Account verification, app user’s valid credentials to and balance verification to funds for example, is one of a variety of access his accounts at financial movement. The process makes for opportunities, and something Pay- institutions. These days, the busi- a faster, smoother transaction for Pal and Venmo have been apply- ness is moving toward applica- consumer and fintech alike. ing for quite some time,” says Katja tion programming interfaces to “Fintechs are an important sec- Lehr, director of global payment achieve the same ends with safer tor in our economy,” says Stu- products at PayPal Holdings Inc. connections. art Rubinstein, chief executive of “Another example where PayPal APIs are “the new normal,” says Akoya LLC, an aggregator spun o“ and Venmo are leveraging open- Brian Costello, vice president of in February by Fidelity Investments banking data is in our risk deci- data strategy at one of the early and now owned equally by Fidel- sioning, making sure our custom- players in aggregation, Envestnet ity, The Clearing House, and 11 TCH ers can use the payment method of Yodlee, Redwood City, Calif. “It’s banks. Between the fintechs and their choice.” a big deal.”

STRATEGIES DIGITAL TRANSACTIONS | SEPTEMBER 2020 21 ‘A BLUNT INSTRUMENT’ PLAID’S HOT GROWTH The change includes an API stan- (Linked accounts in millions) dard for data sharing under devel- opment by the Financial Data Exchange, a Reston, Va.-based trade group embracing fintechs, aggregators, and financial institu- 30 tions. The standard aims at what 10 72 129 200+ the group calls “data minimization.” 2015 2016 2017 2018 2019 “Screen scraping is going to grab Source: Plaid, as cited in January 2020 Visa presentation all the data and then sort through it. It’s a blunt instrument,” says That standardization undergirds acquisitions, the card networks Tom Carpenter, director of pub- what Mastercard sees as a way for- have “access to some of the best lic a­ airs and marketing for the ward in payments not necessarily data on what people do. That’s very group, which operates under the based on plastic. “Not every open- powerful,” says Eric Grover, princi- auspices of the 21-year old Finan- banking use case will involve a pay- pal at Intrepid Ventures, a Minden, cial Services Information Sharing ment or movement of money, but Nev.-based consultancy. and Analysis Center (FS-ISAC). there’s a reasonable subset that do,” Perhaps the biggest factor, though, By contrast, Carpenter says, the says Vosburg. “Our strategy is very lies in e­ orts to move the United standard restricts data gathering much founded on payments beyond States to a nationwide real-time pay- to only the information required to credit and debit cards.” ments network connecting nearly all satisfy a specific request. He cites services like Mastercard the country’s financial institutions. But more changes are in the o­ - Send, the network’s real-time transfer The Federal Reserve plans to have its ing, some experts say, now that Visa product, and the company’s e­ orts to real-time gross settlement system, and Mastercard are laying out big develop a blockchain for payments, as FedNow, up and running by 2024 at sums to jump into open banking. examples of that strategy. “All these the latest, for example. The move toward developing a stan- things can come to bear in an open- That could put pressure on tradi- dard for data exchange played a role banking environment where there tional card-payment networks, some in stoking Mastercard’s interest. “We are needs to move funds,” he adds. observers say, if FedNow ultimately don’t see [screen scraping] as a great bumps up against such fast-pay- way for this business to be built,” says ‘VERY POWERFUL’ ment services as Mastercard Send Vosburg. Visa did not respond to a and Visa Direct. But a trend toward request for comment for this story. Some observers also see the card real-time payments could also put networks’ open-banking acquisi- a premium on managing access by tions as a way to build pipelines fintech apps to account data as those for additional transaction volume apps ramp up to compete for trans- in businesses such as bill payment actions that are irrevocable. and peer-to-peer transfers. As unemployment lingers in “This is why Visa paid $5.3 billion the wake of Covid-19, a key to that for Plaid,” says Patricia Hewitt, prin- action will lie in controlling risk, cipal at PG Research & Advisory Ser- and that’s where the networks’ vices in Savannah, Ga. “It gives Visa stake in open banking could hand ownership of all those connections.” them an advantage. “The real-time Vosburg: “Our strategy is very much Others see value just in the data risk is that the money must be founded on payments beyond credit the aggregators can spin o­ , even there and the user must be who he and debit cards.” if it’s anonymized. With these says he is,” says Hewitt.

22 DIGITAL TRANSACTIONS | SEPTEMBER 2020 STRATEGIES

Shift4 Payments dazzled the payments industry and Wall Street with its June initial public o ering. What do recent processor IPOs say about the prospects for payments companies? BY JIM DALY No investment in the stock market is a sure winner, but payments investments often prove to be better than others. On June 4, underwriters for merchant acquirer “Wall Street loves payments,” says consultant Shift4 Payments Inc. priced the company’s ini- Eric Grover, principal of Minden, Nev.-based tial public o ering at $23 per share, above their Intrepid Ventures. “Payments remain, nation- $19-to-$21 target just days before. The next ally and globally, healthy [for] secular growth day, Shift4’s shares opened on the New York long term.” Stock Exchange at $33.10—an instant 44% gain. Recently, Allentown, Pa.-based Shift4’s shares have been trading in the $50 range. Not bad, considering that Shift4, which claims about 200,000 merchants generating more than $200 billion in annualized payment ‘INVESTOR APPETITE’ volume, gets more than half its volume from the hospitality industry. After all, its IPO came during the midst of the Covid-19 pandemic, Shift4 and Bill.com have joined a club of about which forced the closure of many restaurants 40 publicly traded payments companies that, in and sent hotel reservations plummeting. addition to the four U.S.-based global card net- Palo Alto, Calif.-based business-to-business works, includes merchant acquirers, online and payments provider Bill.com Holdings Inc. last specialty processors, PayPal, and all manner of year had expected to get $16 to $18 per share tech suppliers. from its planned IPO, then upped the target IPOs let a company’s funders cash out on to $19 to $21. But with underwriters sensing their investments and potentially enable the strong investor demand, the company priced firm to pay down debt, make acquisitions, and its Dec. 13 IPO of 9.82 million shares at $22 per fund product development. But not every IPO is share. The next morning, trading in Bill.com’s a home run. Striking out is a clear possibility, new stock opened at $37.25 on the New York and sometimes the o ering is simply the finan- Stock Exchange, 69% above the IPO price. It’s cial equivalent of a single or double. been mostly upward since then. In mid-August, The small acquirer Net Element Inc. had the stock was trading in the $93 range. an IPO in 2012 but in May announced that it

WHY WALL STREET LOVES PAYMENTS DIGITAL TRANSACTIONS | SEPTEMBER 2020 25 ‘A lot of the payments stocks, even some of the legacy companies … their stocks have been holding up fairly well.’ JARED DRIELING, SENIOR DIRECTOR OF CONSULTING AND MARKET INTELLIGENCE, TSG

would explore “strategic alternatives” because American Express Co. joined the New York “the public markets do not appropriately rec- Stock Exchange in 1977, some 127 years after ognize the value of our business.” The company its founding and about 20 years after it got into recently struck a deal to merge with an electric- the credit card business. A $1,000 investment auto firm interested in its public listing, not in AmEx’s IPO would have been worth more its processing business, which Net Element is than $446,000 near the end of 2019, according required to divest (box, page 30). to the financial news and analysis service The Merchant acquirer EVO Payments Inc. got o Motley Fool. That return doesn’t even include to a strong start with its May 2018 IPO, pricing the e ects of reinvested dividends. it at $16 per share and opening the next day at Spawned by banks, Mastercard Inc. joined $20.05. The stock, which lately has been trading in AmEx as a global, publicly traded payment the $27 range, largely outpaced the major market firm in 2006 with its seminal IPO—the first for indexes in 2019. But it mostly trailed them in the a bank card network. The next year, Discover recovery since the market tanked in February and Financial Services, whose namesake card was March as governmental stay-at-home orders and founded in 1985 by Sears, Roebuck & Co., finally related measures to control Covid-19 slammed was spun o as an independent, public com- the brakes on the economy. In late summer, how- pany by investment firm Morgan Stanley. ever, EVO made strong gains, outpacing the S&P Visa Inc. followed Mastercard in 2008 with 500 and the Dow Jones Industrial Average. a record-breaking, $17.9 billion IPO. As of late As a group, the publicly traded payments July, Visa’s market capitalization was about companies have done better than the broader $434 billion—by far the biggest in the payments market for years, according to merchant- industry, according to Yahoo! Finance. Master- acquiring consultancy The Strawhecker Group. card was No. 2 at $311 billion. Starting in the first quarter of 2011, a $100 With the Federal Reserve and Congress try- investment in a basket of more than 25 payments ing to jump-start the economy, some observers stocks TSG tracks would have been worth $670 believe now could be a good time for proces- by 2020’s second quarter, representing a 22% sors to tap the public markets, especially if they compounded annual growth rate. That compares o er contactless and online payment options. with $234 for the equivalent of a $100 investment “The Fed is ¦ooding the market with liquid- in the S&P 500 over the same period, which had a ity,” says Grover. “It’s been, maybe counter-intui- compounded growth rate of 10% (chart, page 28). tively, a healthy environment for payment IPOs.” “You look at a lot of the payments stocks, Adds San Francisco-based analyst Joseph Vafi, even some of the legacy companies … their managing director for equity research at Canac- stocks have been holding up fairly well,” says cord Genuity: “The investor appetite is pretty Jared Drieling, senior director of consulting and darn good right now. I think the Covid pandemic market intelligence at Omaha, Neb.-based TSG. has shifted the focus to electronic payments.”

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  TSG Payments Index S&P 500  S&P 500 Value of $100 invested  in TSG Payments Index compared with the S&P, 2011-20  Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1 2011 2012 2013 2014 2015

road show when the Covid-19 thing came along,” says Isaacman, noting the tour was compressed into just a few days in the first week of June. ‘A LOT OF CASH’ A Shift4 prospectus estimated the IPO, with 15 million shares to be sold and poten- tially another 2.25 million if demand war- Analysts agree, however, that investors are ranted, would raise $315 million to $364 million looking more at the potential long-term returns in net proceeds. But the o– ering was oversub- from payments companies rather than whether scribed and ultimately generated $497 million they’re capitalizing on short-term opportuni- in net proceeds. ties the pandemic creates. “There was just a lot of demand,” says Isaacman. Shift4 had been seriously prepping for an Under Shift4’s new holding-company struc- IPO since 2018, and actually had its eyes on ture, Isaacman retains the majority economic eventually going public since it was founded interest as well as the majority of the voting in 1999 as the independent sales organization power. The private-equity firm Searchlight Capi- United Bank Card, according to founder and tal holds a substantial interest, while the public chief executive Jared Isaacman. shareholders have about a 22% economic interest “The IPO is a journey, it takes a lot of time,” but only a single-digit share of the voting stock. he says. The IPO enabled Shift4 to pay down more than Shift4 had hoped to ring the bell at the New $285 million in debt “and put north of $200 million York Stock Exchange on April 8, but the Covid- on the balance sheet,” says Isaacman. 19 breakout delayed the “road show”—visits by “We achieved exactly what our objectives underwriters and company executives to sell were, which were to substantially de-lever, and the prospective IPO to potential investors—by we put a lot of cash on the balance sheet for two months. “We were a week away from the good times or bad,” he says.

28 DIGITAL TRANSACTIONS | SEPTEMBER 2020 WHY WALL STREET LOVES PAYMENTS  The TSG index had a compounded annual growth rate (CAGR) of 22%  over the period compared with a 10% CAGR for the S&P 500. 







 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2014 2015 2016 2017 2018 2019 2020 Source: The Strawhecker Group

Another factor: Recent mergers have removed some of leading payment processors from the public markets (“Let’s Make a Deal,” FLASHY ADVERTISING May 2019). First Data Corp. is now part of Fiserv Inc.; Worldpay Inc., formerly Vantiv, is now part of FIS (Fidelity National Information Services Isaacman won’t say what Shift4 will do with Inc.); and TSYS (Total System Services Inc.) is the IPO funds, such as buy another company. now owned by Global Payments Inc. Regarding potential acquisitions, however, “We “Right now, there is definitely a scarcity of try and keep a decent pipeline,” he says. payments assets,” Isaacman says. Isaacman attributes the strong IPO in Analysts say investors gave points to part to investors noticing Shift4 was gaining Shift4’s suite of software o’ erings and mar- share in the restaurant industry, even though keting. “Their technology platform allows dis- many establishments were getting hammered parate systems to connect in,” says Gary Pre- because so few people could eat inside in the stopino, managing director at Chicago-based spring and early summer (“Cooking Up a Come- Barrington Research Associates Inc. “That gets back,” May). investors excited.” “We’ve always taken share from the competi- TSG’s Drieling says Shift4’s integrated o’ er- tion,” he says. “Our business can’t just be mea- ings enable the company to capitalize quickly on sured in a static basis. We’re growing because new market trends. He points to the huge spike we’re taking so much share.” He adds that, in restaurants’ demands for online-ordering “roughly a third of the restaurants and hotels and related capabilities in response to the clo- in the country” use at least one Shift4 product, sure of inside dining. though not all take “our full stack” of software “Integrated payments really give you that and payment services. ability to pivot and focus on channels that are

WHY WALL STREET LOVES PAYMENTS DIGITAL TRANSACTIONS | SEPTEMBER 2020 29 WHEN A PUBLIC LISTING IS YOUR MOST VALUABLE ASSET Sometimes a company’s core business As of mid-August, no sale of the pro- proves to be less desirable than its listing cessing business had been announced. on a stock exchange. A Net Element spokesperson did not Merchant processor Net Element Inc. respond to Digital Transactions’ inquiries. found that out in June when it signed a let- Besides its North American merchant- ter of intent to merge with Mullen Tech- processing business, North Miami Beach, nologies Inc., a privately held startup that Fla.-based Net Element has an interna- plans to sell Chinese electric sports cars tional operation based in Russia. Russia in the U.S. The pending deal requires Net generated $3.2 million of the company’s Element to divest its payment-processing $65 million in total revenues for 2019, says business. Lisa R. Thompson, a senior equity ana- In early May, Net Element announced lyst who follows Net Element at Chicago- plans to “explore strategic alternatives … based Zacks Small-Cap Research. to unlock shareholder value.” The com- The North American segment pro- pany claimed “it appears that the public cessed $3.2 billion in volume last year, markets do not appropriately recognize up 10.3% from 2018. The international the value of our business.” segment posted $425 million in volume, Net Element did not state a value for down 2.1%. the pending deal, but its stock rocketed The post-merger company will be June 15, the day of the announcement, to known as Mullen Technologies Inc., and it close at $6.90 per share, up 50% from the won’t have anything to do with payments. previous $4.60 close. For much of the pre- Mullen, which owns eight car dealer- vious year, the stock had been trading in ships in California and one in Arizona, the $3 range or even less. in addition to the CarHub online auto Share prices rose and then fell during marketplace and other businesses, plans the summer, closing in the $9.50 range to import the Chinese-made, electric- in mid-August. Yahoo! Finance pegged powered Dragonfly K50 luxury sports car Net Element’s market capitalization at to the U.S. next year. Mullen also is devel- $35.7 million at that time compared with oping electric car batteries, and even $13.2 million as of Dec. 31. plans to assemble electric vehicles. The so-called “reverse triangular While IPOs get more headlines, reverse merger” is an all-stock deal that will mergers are another way a company can enable Brea, Calif.-based Mullen to go tap the public equity markets. For Mullen, public without having an initial pub- “it gets them out the door quicker, costs lic offering. Mullen will own 85% of less, pays bankers less,” says Thompson. the surviving company, install a man- The letter of intent also requires Net Ele- agement team led by founder and CEO ment to raise $10 million in a private place- David Michery, and get control of Net ment. Mullen shareholders could acquire Element’s listing on the Nasdaq Global another 5% of the post-merger company if Select Market. Net Element’s sharehold- it generates more than $100 million in rev- ers will own 15%. enue over 24 months after closing.

30 DIGITAL TRANSACTIONS | SEPTEMBER 2020 WHY WALL STREET LOVES PAYMENTS ‘Right now, there is denitely a scarcity of payments assets.’ JARED ISAACMAN, FOUNDER AND CHIEF EXECUTIVE, SHIFT4

[growing],” he says. “A lot of those merchants With Shift4 and Paya having partly filled the are looking to pivot, and quickly.” void of publicly traded payments companies cre- The acquiring industry isn’t noted for ›ashy ated by last year’s mergers, who might be next? advertising, but Drieling says Square Inc. and Ant Group, the payments arm of China’s Alibaba Shift4 have stood out. Shift4 has advertised on e-commerce behemoth, reportedly is looking the reality TV show Bar Rescue, and in July it was at a public oering with listings on exchanges designated the “Oicial Credit Card Processing in both Shanghai and Hong Kong. The compa- Company of the Las Vegas Raiders” and the Raid- ny’s estimated valuation could be upwards of ers’ Allegiant Stadium, where all payment trans- $200 billion, Yahoo! Finance reported. actions will be processed on Shift4 technology. The Wall Street Journal reported in late July “They’ve done a tremendous job around that point-of-sale credit provider Airm Inc. marketing,” says Drieling. was exploring an IPO, and Reuters said card- Shift4 pioneered the tactic of giving away issuing platform Marqeta Inc. was looking to point-of-sale terminals as a way of booking hire investment bankers ahead of a possible IPO. new accounts, a controversial move copied by Although it hasn’t made noises about an IPO, some of its competitors. Lately, it’s updated talk never ceases about Stripe Inc., whose value that move by oering free QR-code payment analysts estimated at $35 billion a year ago. technology or free online-ordering, takeout, Founded by brothers Patrick and John Colli- and delivery systems for restaurants. Isaacman son, San Francisco-based Stripe started out in insists any short-term revenue hit through the e-commerce services for merchants but also giveaways is more than compensated for by the has moved into the physical payments world. revenue the new merchants generate over time. Consultant Grover says Stripe could go public “We don’t need to make money o of the “tomorrow morning.” individual service as long as we’re winning the “At some point, the venture-capital firms long-term relationship,” he says. that fund them, and the Collisons, will want to IPO and related activity continued through- get liquid and will want to go public,” he says. out the summer. In early August, Atlanta-based But today’s strong IPO market has no guar- payments provider Paya Inc., which is owned antee of longevity. by private-equity firm GTCR LLC, announced “The private-finance markets are still pretty a planned merger with a so-called blank-check robust,” leaving alternatives to IPOs on the company with a public listing. The combined table, analyst Vafi says. And if Covid-19 keeps entity will trade on the Nasdaq. re-surging, as it was doing in mid-summer, he And while it’s not a payments pure play, says the result could be “headwinds in the econ- e-commerce services provider BigCommerce omy. The public markets may not be as strong Holdings Inc. had an IPO in early August and in a year.” saw its share price pop 201% on its first day of Thus, today’s lesson may be to get in while trading. the gettin’s good.

WHY WALL STREET LOVES PAYMENTS DIGITAL TRANSACTIONS | SEPTEMBER 2020 31 FAST THINKING FOR FASTER PAYMENTS

For nancial institu- IT HAS BEEN GENERALLY with real-time payments adoption. tions of all sizes, ACKNOWLEDGED that real-time Additionally, they need to know payments can provide some signif- what is available now for real-time real-time transfers icant benefits to financial institu- payments, and what could be com- are likely to be a tions. But for smaller FIs, they come ing down the road. with some very real challenges. competitive necessity. Unlike the case with the current THE LANDSCAPE But small banks must standard for automated clearing house daily payment fulfillment, sup- Today, real-time payment networks work out how to porting real-time or near real-time are being deployed around the globe. balance operational payments requires a true 24x7x365 These networks allow financial environment. In addition, compa- transfers to occur in near real time, headaches with nies need to have the appropriate permitting a recipient to have access potential advantages. reserves on hand and the necessary to funds transferred by a remitter sta­ to support real-time payments within seconds of transfer initiation. monitoring and administration. An important aspect of this BY JACK BALDWIN It is important for smaller FIs to process is that the recipient will Jack Baldwin is chairman understand the true requirements, have unrestricted access to trans- of BHMI, Omaha, Neb. costs, and solutions associated ferred funds. What this means is that after a remitter has initiated a funds transfer, possession of those funds is controlled completely by the recipient. In other words, the remitter cannot recall them. What’s more, settlement of the whole transfer operation is immediate. This capability contrasts sharply with traditional settlement methods, which delay settlement completion for hours or even days after a transfer. This is a model typically followed by most funds-transfer operations. For instance, payments via checks or most wallet based payment

32 DIGITAL TRANSACTIONS | SEPTEMBER 2020 NETWORKS networks are settled via the ACH this solution provides customers of instead settle among themselves network. Historically, ACH settle- member institutions access to RTP using a common general ledger. This ment files are swapped among FIs on services. These include support for ledger is, in turn, supported by a a nightly basis. Until this occurs and real-time transfers and payments common reserve account maintained the involved banks or credit unions with immediate settlement of all by the Federal Reserve, to which all have adjusted their internal balances transfer operations. member banks contribute. Its mem- to account for ACH transactions, Rather than directly using ACH bers are required to maintain mini- transferred funds cannot be used by settlement, RTP member banks mum reserve levels. If these reserve recipients without restriction. The main reason recipients can’t fully take possession of the funds is that, until those nightly settle- ments have occurred, remitters can implicitly cancel the trans- fers. A remitter could, for exam- ple, write a check to a recipient and then simply withdraw all funds from the source account. Thus, the nightly settlement for the associ- ated transfer will fail because there are no funds available to support it. This basic remitter cancella- tion feature is part of many funds- transfer approaches that cause delays in settlement for a period of time. There have been some attempts to shorten the delays. For example, NACHA is o€ering same day settle- ment, permitting ACH settlement to Our Focus is You! occur on the same day as the trans- fer initiation. NACHA has also pro- posed an additional daily settlement window to allow multiple ACH settle- We know your business is unique. ment operations to occur each day. Our team will work with you to However, despite these e€orts, customize your Unique BIN Solution. there is still a delay that could possibly result in interrupted funds transfers. Profitability • Personalization • Portability THE RTP NETWORK Partner with Us Today! Until recently, the only “true” real- ® time funds-transfer network in the United States was the Real Time Merchant Acquiring Payments (RTP) network. Created and operated by The Clearing House www.MerrickBankAcquiring.com/Contact Payments Co., which is owned by most of the country’s largest banks, Although we are not hosting in-person meetings during the current pandemic, we value your business and are ready to meet with you virtually. Please contact us today to schedule a meeting! NETWORKS 33 levels fall below a certain amount, additional funds must be deposited. Although FedNow seems promising Since most RTP member banks for smaller FIs,those with fewer tend to have large numbers of deposit holders, a sizable number Baldwin resources will be challenged to of U.S. customer banking accounts can participate in the real-time take advantage of the services. payment capabilities it o ers. However, there is a significant number of accounts associated with This helped alleviate the con- platform will automatically fail the smaller FIs across the nation that cern that smaller FIs would be dis- attempted transaction. are not a iliated with RTP. For these advantaged if they allied with RTP. For those FIs not currently customers, access to real-time pay- However, though the news was pos- required to maintain reserve ments may not come as easily. While itively received, some smaller FIs accounts with the Federal Reserve RTP does o er real-time payment were disappointed with the four- due to their size, there is also an services to smaller FIs that partner to-five-year projected lead time additional consideration. For these with one of its larger member banks before FedNow would be avail- smaller FIs, maintaining a reserve or authorized portal organizations, able. As a related correlation, RTP account to support RTGS would be its outreach e orts have been mar- announced an upsurge in interest a new operational obligation with ginally successful at best. from smaller FIs following the Fed’s additional costs to acquire and com- Unsurprisingly, many smaller announcement. mit the necessary funds to cover FIs have reservations about joining Although FedNow seems to pro- the new reserve requirements. a network operated by their larger vide a promising path forward Sta ing may also be a major banking competitors. Though RTP for smaller FIs, banks and credit issue. Maintaining the sta to cover has o ered assurances to smaller FIs unions with fewer resources will be both normal banking hours as well to further entice them to join, many challenged to take advantage of the as the additional 24x7x365 opera- continue to be reluctant to do so. services provided by the solution. tions will present an increase in One of the key problems is the workforce and attendant training. FEDNOW issue of reserves. All FedNow set- To fully accommodate the Fed- tlement will be real-time gross set- Now processing demands, these Recognizing the need to extend real- tlement (RTGS), not net settlement. institutions must not only maintain time payment services to all of the This means that every single trans- 24x7x365 monitoring sta , they must nation’s FIs regardless of size, the action will be immediately and also have the authority to refresh Federal Reserve last year announced irrevocably settled by FedNow. FedNow reserves if or when those the creation of its FedNow network. This is a stricter process than amounts drop below certain levels. Initial estimates by the Federal net settlement, which permits a Additionally, there are service Reserve suggest the network will financial institution to be deficient expectations to consider with the be available by 2023 or 2024, though in required reserves for individ- extended hours. For example, does some industry experts have been ual transactions as long as proper 24x7x365 operations mean that cus- skeptical of this timeframe. reserves are available at the end of tomer support will also be extended The FedNow announcement was a specified settlement window. for related issues? FIs will need to greeted enthusiastically by most Thus, each FedNow participant decide how they will handle this from smaller FIs, as the Federal Reserve is must monitor its reserve level on both a sta ing and training angle. generally considered to be more of an a constant, round-the-clock basis Anticipating that this would likely “honest broker” or impartial opera- to ensure reserves are adequately be a burden for smaller banks and tor of the payments network as com- maintained at all times. If an FI does credit unions, the Federal Reserve pared to a private company or group. not have the reserves, the FedNow is planning to allow participating

34 DIGITAL TRANSACTIONS | SEPTEMBER 2020 NETWORKS 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] FedNow institutions to designate ser- The Federal Reserve has indicated is monitoring issues that could vice providers that can act on their that FedNow participants will each diminish its capabilities—or attrac- behalf. These third parties will be be assessed a portion of the network’s tiveness—for those FIs that may allowed to submit or receive payment overall operating costs so it can run wish to access FedNow services. instructions as well as settle accounts as a financially self-sustaining plat- For example, the after-hours of correspondent institutions. form. Therefore, regardless of the liquidity to support RTGS has been FedNow regulators have not other FedNow issues that smaller suggested as a possible stumbling issued any rules or requirements FIs must address, there will be addi- block for smaller FIs. This could governing the types of organizations tional costs to o‹er FedNow. be addressed in a number of ways. that would qualify to be service pro- For some FIs, these additional One idea would be to use exist- viders and the type of oversight that costs could potentially price them ing reserve accounts as sources to they would be subject to by the Fed- out of the network, especially if they replenish FedNow reserve accounts. eral Reserve. However, these guide- have current services that may help lines will presumably be updated provide a semblance of real-time as the availability date for FedNow payment capabilities. For example, approaches. Regardless of the regu- some FIs currently o‹er same-day lations ultimately issued, smaller FIs ACH services as their “real-time that choose to outsource their Fed- payments solution,” with the expec- Now operations will also incur the tation that account holders will be additional fees associated with it. satisfied with unrestricted access to Another key concern with Fed- funds if they can be available on the Now is its proposed interoperability same day as payment initiation. with other systems, like the RTP net- What’s more, this service could work. While the Federal Reserve has become an even more compelling confirmed this is a high priority for option after NACHA adds the addi- the network, it has also admitted to tional settlement window to its its complexity and that it may be dif- daily processing. Some smaller FIs ficult to have this functionality avail- may determine that “reasonably able during FedNow’s initial release. fast payments,” while not truly real In addition, though the Fed has time, are good enough. suggested it is open to exploring It is easy to see how smaller FIs solutions for true interoperability that position themselves as ser- between FedNow and other pay- vice leaders or innovators may view The Federal Reserve has indi- ment networks, The Clearing House FedNow services as a marketing cated that it may allow existing has expressed its intention to con- advantage, one that distinguishes reserve accounts that currently tinue expanding RTP to minimize them in their local markets. How- must be maintained by FIs to be used the need for FIs to sign up for Fed- ever, it is also just as likely that the as sources of funds to automatically Now. Smaller FIs will need to keep more conservative FIs may only maintain the FedNow minimum this interoperability con‰ict in embrace FedNow if their customers reserves. If approved, this arrange- mind as they consider their long- or members demand the service. ment could help smaller institu- term real-time payments strategies. tions cover the funds needed for THE FUTURE after hours FedNow processing. DO THEY NEED FEDNOW? Additionally, relaxing the cur- Many of the challenges associ- rent RTGS requirements for those Ultimately, each community bank or ated with FedNow are still conjec- institutions deemed “well operated” credit union will need to decide if Fed- tural. However, it does seem safe could also provide relief for smaller Now makes sense for its institution. to assume that the Federal Reserve FIs. As previously mentioned, the

36 DIGITAL TRANSACTIONS | SEPTEMBER 2020 NETWORKS Federal Reserve has confirmed that Due to the costs and complexity, for real-time payments from their all FedNow settlement operations many smaller banks and credit unions account holders. However, a truly will be based on individual transac- will be unable—or uninterested—in national banking system should tion settlement, which requires FIs providing their own additional after provide the same service opportuni- to always have the reserves to sup- hours sta‚ for maintaining 24x7x365 ties to FIs of all sizes competing in port each individual transaction. operations. If the Federal Reserve still comparable market segments. But the Federal Reserve already wants to attract these institutions, a While the RTP network can pro- allows those FIs with good oper- key question becomes who will pro- vide similar services to those pro- ating track records to incur “day- vide the needed support? posed for FedNow, RTP is not gener- light overdrafts.” These overdrafts If the Federal Reserve ends up ally perceived as a neutral network occur when a bank or credit union only allowing FedNow processing operator. Many smaller FIs have is allowed to withdraw more money to be outsourced to correspondent serious concerns about whether it FIs, then the situation becomes will treat all its clients impartially. very similar to RTP a‚iliation. That Real-time payments networks is, smaller FIs will be forced to out- are becoming increasingly available The United States source at least partial operational throughout the world. The United is virtually alone in responsibility to their larger com- States is virtually alone in not having petitors—something that FedNow a national fast-payments network not having a national has otherwise alleviated. operated or directly supervised by fast-payments FIs of all sizes outsource various its national banking authority. Fed- types of processing to outside com- Now addresses this imbalance. network operated or panies that are non-banks. Fiserv, This is perhaps the greatest value Vantiv, Jack Henry, and FIS, to name of FedNow to smaller FIs; namely, it directly supervised a few, perform several di‚erent types will be a neutral, trusted provider by its national of payment processing services for of real-time funds transfer services FIs of all sizes. These organizations to all financial institutions, regard- banking authority. are not FIs and, consequently, are less of size. Because of this, many FedNow addresses also not direct competitors. smaller FIs will see the network as In turn, it is not hard to surmise an opportunity to better compete this imbalance. these, and similar organizations, with their larger rivals in the world will most likely o‚er after-hours of faster-payment service o‚erings. FedNow processing services if the However, for smaller FIs, making than it has in its Federal Reserve Federal Reserve allows it. This will the jump to implement these ser- account to make a payment with certainly be a Federal Reserve con- vices may not be an easy process. the requirement that the over- sideration when drafting final Fed- Rather than adopting real-time pay- draft be corrected by the end of a Now rules and regulations. ments processing for its own sake, processing day. community banks and credit unions With RTGS adopted as the stan- A QUESTION OF VALUE must look to their own specific sit- dard for FedNow, o‚ering a “night- uations—their strategic business time overdraft” would ease the As mentioned, there is some debate plans, pain points and accountholder reserve burden on smaller FIs by on whether smaller FIs actually need needs before making a decision. allowing their FedNow reserves to the real-time payments capability Only by understanding the true temporarily drop below the mini- that will be o‚ered by the FedNow costs and impacts of issues like mum required levels. For this to network. The short answer is some 24x7x365 operations and increased occur, however, minimum reserve will and some will not. Frankly, administrative complexity can they levels would have to be reset within many community banks and credit best choose the right path for their a specified period of time. unions are not seeing much demand institutions.

NETWORKS DIGITAL TRANSACTIONS | SEPTEMBER 2020 37 Will the stupidity ever end?

The networks “JUST SIGN THIS RECEIPT and when we pay with our credit card?” you’ll be all set.” Not being a vio- I had 17 responses (not statistically stopped requiring lent person by nature, it did cross significant, but read on): my mind to take the pen and jam it signatures into the checkout counter, glaring 41.2% - Unaware of Changes defiantly at the clerk, and loudly 41.2% - Needs updated POS two years ago. stating, “NO!” 17.6% - Better Safe than Sorry This is how angry I get at the Something stupidity of our market. So that’s my Twitter-sphere of The payments experience in the payments enthusiasts willing to else is keeping United States is like wearing stripes take the poll. Skeptical that almost on top and polka dots on the bot- half the merchant population in the them alive. tom. Both are a cover up, but they United States is unaware of these co-exist in opposition. That’s what changes, I turned to my merchant I think about the continuation of a expert colleagues for their opinion. BY PATRICIA HEWITT meaningless authentication prac- Here’s what they told me: Patricia Hewitt is principal at PG Research tice that has been superseded by far “I think it’s less about software & Advisory Services LLC, Savannah, Ga. better technology. and more about consumers and So, I decided to do a little dig- merchants thinking they need it. ging into why this extremely irri- Especially the older generations.” tating practice is so persistent “Merchants don’t know and or two years after the card networks don’t trust that they don’t need announced that signatures were signatures.” dead and fintech is the Sun King. “…some terminals that capture Here’s what I found. electronic signatures need to have First, the results from my poll their software updated, but neither on Twitter. I asked: “In acquirers or manufacturers seem to 2018, the card networks be interested in spending the money.” eliminated signature requirements. In A POSITION OF POWER your opinion, why do merchants still Essentially then, one cohort believes keep asking us that the acquiring industry doesn’t to sign a receipt care what the networks say about

38 DIGITAL TRANSACTIONS | SEPTEMBER 2020 ENDPOINT SPONSORED CONTENT STRAIGHT TALK FOR ISOs CONTINUES A Q&A from First American’s Angela Carranza and Ross Paup

Many businesses adopted digital payment technology practically overnight in response to COVID; how have ISOs and merchants adapted to this change? Angela: When faced with the change to business that COVID caused, successful ISOs and merchants asked, “where do we go from here and how do we get there?” This mindset opened the door to new technology such as Angela Carranza is Manager, Ross Paup is Senior Manager, contactless payments and expanded service o erings that Strategic Partnerships Strategic Partnerships complemented mobile/on-the-go sales opportunities, both of which opened the door to a new and improved customer provide data breach protection, o setting ‹ nes incurred in experience that will continue well beyond the pandemic. the event of a supposed or actual security breach. Ross: Because First American o ers a full suite of products Ross: There is a lot of pressure on business owners right and has been deploying NFC-enabled equipment and now to keep their doors open and pay their employees. First web-based solutions for quite some time, the majority of American has the technology our partners need to serve their our merchants were in a position to adjust quickly. customers in alternative ways; it is our job to educate them about this technology, and to dispel any misconceptions about We continue to work closely with our ISOs to ensure high cost or complexity of integration that might keep them merchants are set up to capture payments in every possible from adopting it. Change is never easy, but we have the tools manner—in-store, mobile/contactless and online—to our partners need to survive and prepare to once again thrive. mitigate any short-term impact from COVID and accelerate long-term growth. The lines between ISOs and ISVs are blurring; how are If there is a silver lining to this pandemic, it’s that both ISOs capitalizing on payment integration opportunities? merchants and consumers are embracing new technologies Angela: More and more merchants are looking for payment and payment methods. solutions that can also simplify business operations, and that’s where software solutions come into play. The What strategies can ISOs implement to help slow convergence of ISOs and ISVs are helping businesses of adopters get on the contactless band wagon? all types o er card present and card not present solutions Angela: Speak to the safety aspects—both for employees to enhance payments with inventory, billing and reporting and consumers—of touchless technology as well as the capabilities. Partners, like First American, who provide speed; contactless payments can save as much as ‹ ve integrated solutions are helping ISOs build, monetize and seconds per transaction. ISOs need payment solutions that protect their merchant portfolio. enable their merchants to serve customers in both physical First American has extensive experience working with and digital environments, and contactless payments are the Ross: both models and we are able to provide a variety of integration answer. First American, as part of its mission to provide options to help any business enhance their payment capabili- maximum Œ exibility for businesses of every size and type, ties. Many of our tools are geared toward integration opportu- currently o ers nine contactless device options. nities, including 1stPay Blaze, a customizable online application Ross: Education is key. We are working with our ISOs tool that allows partners to board multiple merchants in one fell to help merchants recognize the bene‹ ts of contactless swoop, while controlling pricing strategy and terms for each. payments and to explain how easily they can add/activate the capability on new or existing equipment. Consumer demand What do you see in your crystal ball for payment drives merchant behavior, and consumers want contactless technology in 2021? solutions for both the health aspect and the convenience. Angela: I have no doubt that the rapid evolution of payment technology will continue, with contactless and digital payment First American manages its equipment in-house—we options at the forefront, and that forward-thinking companies don’t utilize third-party ful‹ llment—and we are responding who can adapt quickly will leave others to catch up or fail. quickly and e’ ciently to ensure our merchants are set up to capture payments in every possible manner. Ross: The “new normal” will be fueled by contactless payments or mobile point of sale technology as merchants Any pitfalls from this digital world that you are helping and consumers continue to embrace alternative channels ISOs/merchants navigate/resolve? like curbside and delivery. Angela: With new payment methods come new opportuni- ties for fraud. First American is committed to protecting our partners and our merchants. Our solutions and gateways are fully compliant with PCI-DSS requirements, we monitor transactions to address or reject any that are risky, and we signatures. If there’s no perceived become laser-focused on ei- could mandate the change, but financial upside to the change and ciency? We still process millions of that’s not going to happen. So, let’s it’s not mandated, then rule changes checks each year. consider why merchants still ask for can be ignored. Let’s just keep doing This is not exactly a hip market. signatures: it because it’s a sunk cost and chang- We do things the way we do things. Ignorance of Changes It’s likely ing it would require investments. Except when we don’t, and then they received some kind of update But wait. What about acquirers’ we change things, except when we regarding this (I’m being kind), ability to update software on the POS don’t because we don’t want to. It’s and simply didn’t read it. However, device? Isn’t that a core fintech com- the idiotic logic of our free-market acquirers could keep it on the list petency that allows acquirers to get system in all its insane glory. of update notices and periodically new services quickly into market? OK. Then why don’t merchants remind them. Shouldn’t this change be part of nor- just stop the practice? Because, Software Update POS software mal software-compliance updates? Virginia, the truth is that receipts has to be updated periodically, and No Virginia, that’s not how com- contain all sorts of information this update could be included as part pliance updates work. How it works related to the transaction, like of an overall modernization eort is that someone or some group refund policies or delivery charges by the processor. One can wish. reviews all the compliance changes or the all-important survey. Signatures Serve Multiple Pur- scheduled by the networks. Then, Asking for a signature puts the poses Merchants dealing in big- they check o all the ones that are merchant in a position of power. ticket items need to ensure their required and cherry-pick the rest. They can remind consumers who customers understand refund or If it’s too much eort for too little are asking for a refund that the pol- delivery policies. But using the card benefit, and merchants aren’t ask- icy is clearly stated on the receipt receipt as a communication mech- ing for it, the change gets shelved. they signed. Because I always care- anism lacks technical creativity. I Result: software updates relevant fully read my entire receipt before I challenge the market to do better! to signature capture gather dust. sign it, don’t you? You may read this piece as a Then why aren’t merchants tongue-in-cheek treatment of one of taking it upon themselves to elim- THE PAYMENTS MUSEUM our quaint payment practices here in inate the signature step in their the United States. I respect that, but checkout process? Wouldn’t that Let me be clear. Signature authen- don’t turn away from the real issues. improve eiciencies in throughput? tication belongs in the payments First, the card networks have Yes, Virginia, it would. But since museum along with knuckle-busters not been shy about mandating when has the U.S. payments market and checkbooks. The card networks other big changes, so why not this? My guess is that the big processors wanted them to back o as they are ADVERTISER INDEX still grappling with EMV-related Datacap Systems Page 23 Humboldt Merchant Services Back Cover terminal and software upgrades. 215-997-8989 www.datacapsystems.com 855-767-0685 www.hbms.com Announcing this change produced Digital Transactions Inside Back Cover, 5, 35 MagTek Page 3 a nice brand bump, though. 877-658-0418 www.digitaltransactions.net 562-546-6467 www.magtek.com Second, merchants have hijacked eProcessing Network Page 19 Merrick Bank Merchant Acquiring Page 33 receipts for purposes unrelated to 800-296-4810 www.eprocessingnetwork.com 650-600-8849 www.merrickbankacquiring.com/contact card authentication. There’s little First American Pages 17, 39 PAX Inside Front Cover will to find a better way. 866-464-3277 www.rst-american.net 877-859-0099 www.pax.us/unattended Forget all the pronouncements about the importance of the con- Gamber Johnson Page 13 Signature Payments Page 27 800-456-6868 www.gamberjohnson.com 800-631-3072 www.signaturepayments.com sumer experience. The truth is, it’s the merchant experience that General Credit Forms Page 11 USAePay Page 7 888-GCF-News www.GCFINC.com 866-740-2496 www.usaepay.com really matters. Harbortouch, a Shift4 Company Page 1 800-201-0461 www.isoprogram.com 40 ENDPOINT DigitalTransactions.net The payments market, Breaking news from the all in one place. payments market, posted daily

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