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VOLUME FIFTEEN, NUMBER NINE • DIGITAL TRANSACTIONS.NET • SEPTEMBER 2018 CHINACHINA CALLINGCALLING The mobile-payments giants Alipay and WeChat Pay are working hard to expand acceptance outside China, and the United States is a prime market.

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CONTENTS September 2018 ■ Volume 15, Number 9 30 China Calling The mobile-payments giants Alipay and WeChat Pay are working hard to expand acceptance outside China, and the United States is a prime market. Here’s what that could mean for U.S. merchants—and for the comparatively less successful U.S. wallets. 4 The Gimlet Eye ILC, FDIC, OCC: When Alphabet Soup Is a Good Thing 6 Trends & Tactics Another Big Retailer Challenges Which Fintech Is Ready Visa Over Acceptance Costs To Become a Bank? The dustup between Visa and a grocery The door is open now that the Office chain belonging to Kroger keeps credit of the Comptroller of the Currency has card interchange in the spotlight. invited nonbanks to apply for national With a Government Push, banking charters. Canada’s Credit Card Inter- Payments Players change Is Going Down Again Line Up Against Tariffs North of the border, merchants will Washington’s protectionist trade policy get another reduction that will save is starting to squeeze ATM and point- them more than $190 million of-sale terminal companies. (U.S.) starting in 2020. Why Banks Will Soon The ACH Basks in a Claim Less Than 50% of Long-Lived Growth Spurt Payments Revenue Same-day credits and debits are Surging nonbanks are growing faster, only part of the resurgence for this and will overtake banks by 2020, 44-year-old network. according to a recent report.

Plus, Security Notes explains the importance of the trust index in blockchain transactions. ‘[Alipay] is a full 18 Acquiring A New Age for Underwriting lifestyle app. It is Vetting a new merchant takes a lot of work, but the plethora of nontraditional data may make it a little easier. important to take 25 Networks all that information Still Unsettled A divided Supreme Court says American Express Co.’s anti-steering rules for and services and merchants don’t violate antitrust law. What does that mean for card payments? put them under 38 Security A Good Policy one identity, and Once a novelty, data-breach insurance has quickly become a must-have. It won’t we haven’t seen offset all the expenses associated with a cyber attack, but it can ease a lot of pain. 46 Endpoint anybody else The Blockchain Is Moving Toward Being More Than Hype Distributed ledgers are working their way into mainstream financial applications. do that yet.’ The time has come to understand how blockchain works, says Esther Pigg. PAGE 30 Cover illustration: Jason Smith, Fotolia.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 offices. POSTMASTER: Send address changes to Digital Transactions, P.O. Box 493, Northbrook, IL 60065-3553.

THE GIMLET EYE SEPTEMBER 2018 • VOL. 15, NO. 9

PUBLISHER Robert A. Jenisch ILC, FDIC, OCC: EDITOR-IN-CHIEF John Stewart Senior Editor When Alphabet Soup Jim Daly Senior Editor, Digital Is a Good Thing Kevin Woodward Correspondents t the end of July came an opening for nonbank payments players that, as Jane Adler the old expression goes, you could drive a Mack truck through. And it’s Lauri Giesen Karen Epper Hoffman A our guess that we’ll be hearing much more about this opening—and about Peter Lucas how financial-technology firms and other nonbanks are exploiting it—for quite Linda Punch Elizabeth Whalen some time to come. Art Director/Production Editor The new opportunity came courtesy of the Office of the Comptroller of the Jason Smith Currency, which on July 31 said it would start accepting applications for national- Editorial Advisory Board bank charters from fintechs. The big advantage in this for nonbanks is that now Eula L. Adams John Elliott they can get licensed nationwide at a single stroke rather than fight their way Alex W. “Pete” Hart through 50 state applications. Former Chief Executive Officer, It wasn’t long before observers’ attention focused on Square Inc. The 10-year- MasterCard International old San Francisco firm is an obvious candidate given its strong interest in lending William F. Keenan President, De Novo Corp. to the same small businesses that use its payments technology. Currently, its Dr. Gideon Samid Square Capital operation makes hundreds of millions of dollars’ worth of loans Chief Technology Officer, AGS Encryptions Ltd. through Celtic Bank, an unaffiliated Utah industrial bank. Director of Advertising A directly owned banking operation with its deposit-taking function would Robert A. Jenisch, 877-658-0418 make those loans a lot more efficient. That’s why Square has already tried to set [email protected] up what is called an industrial loan corporation, a type of bank, in Utah. Advertising Sales Representatives Robert Mitchell, 877-658-0418, x7 But the ILC effort hit a snag just three weeks before the OCC’s big announce- [email protected] ment. Banking groups like the Independent Community Bankers of America aren’t Rob Akert, 877-658-0418, x6 too keen on ILCs, and they lobbied vigorously against Square. Early in July, the [email protected] company suddenly withdrew an application it had filed in September with the Digital Transactions, Digital Transactions News, and digitaltransactions.net are publications of Federal Deposit Insurance Corp., saying it wanted to re-file at a later date. A sepa- Boland Hill Media LLC, 800 Roosevelt Road, rate application with the Utah Department of Financial Institutions remains active. Suite B212, Glen Ellyn, IL 60137 John Stewart, Managing Director Given its banking interest, Square could be a candidate for one of the new national Robert A. Jenisch, Managing Director charters the OCC now offers. But top officials are playing it coy for now. In answer For advertising information, call 877-658-0418. to an analyst’s question about the prospect during an earnings call last month, CEO To subscribe or give us a change of address, go to www.digitaltransactions.net and click on Jack Dorsey gave a carefully modulated non-answer answer: “We’re really well- “Subscriber Care” or call 847-559-7599. positioned to broaden access to the financial system, which is our core purpose.” The views expressed in this publication are not necessarily those of the editors or of the members Our take is that it’s nice to have the choice to go for a national OCC charter, of the Editorial Advisory Board. The publisher especially given the headwinds the ILC application has stirred up. But if Square makes reasonable efforts to ensure the timeliness and accuracy of its content, but is not engaged in decides against the OCC option, we hope it follows through on its intention to any way in offering professional services related to financial, legal, accounting, tax, or other matters. re-file with the FDIC for the proposed Utah bank. These options aren’t just good Readers should seek professional counsel regard- for Square, they’re good competitively, and that should make for a better market ing such matters. All content herein is copyright © 2018 Boland Hill Media LLC. No part may be all around—better for consumers, fintechs, innovation, and, yes, even banks. reproduced without the express written permis- sion of the publisher. Subscription prices: $59/year John Stewart, Editor | [email protected] for subscribers in the United States; $69/year for Canadian subscribers. All other subscribers, September 2018 $119/year, payable in 4 • digitaltransactions • U.S. currency. Your Payment Partner of Choice

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pax-eta-smartretail(digitrans).indd 1 2/12/18 12:42 PM Trends & Tactics

Another Big Merchant Challenges Visa Over Acceptance Costs

There’s nothing payments execu- Visa issued a statement as the included cardholder usage incentives tive love more than watching a fight boycott commenced that it is “com- at grocery stores and ads reminding the pitting a leading retailer against a big mitted to working with Kroger to local populace of the many places they payment card network over credit or reach a reasonable solution so that could still use their Visa cards. debit card acceptance costs and terms. Visa cardholders can resume using Walmart expanded the boycott to That’s what they’re getting with the their credit cards at Foods Co in Cali- 16 stores in Manitoba before the two current spat between supermarket fornia. When consumer choice is lim- sides reached an accord six months giant The Kroger Co. and Visa Inc. ited, nobody wins.” after it began. Neither Walmart nor Citing what it calls high accep- Kroger could be following the play- Visa disclosed terms. tance costs, Kroger’s Foods Co chain book of Walmart Inc.’s Canadian unit, Foods Co said in announcing the on Aug. 14 began boycotting Visa which, in a similar dispute over accep- boycott that it was “discontinuing credit cards as a means of customer tance costs, first boycotted Visa credit the acceptance of Visa credit cards to payment at 21 supermarkets and five cards in 2016 at three stores in Thunder save on the high costs associated with gas stations in San Francisco, Sacra- Bay, Ontario. Visa’s public response the credit card company’s interchange mento, and other central and northern California locations. The stores, however, continue to accept Visa debit cards as well as Mastercard, American Express, and Discover credit cards. Foods Co signaled in late July when it announced the planned boycott that it could expand to other Kroger stores, but gave no details. Cincinnati-based Kroger, the nation’s largest standalone grocer, operates Will Kroger, nearly 2,800 stores under such banners whose Cincinnati as Kroger, Ralphs, Fry’s, Fred Meyer, headquarters is Roundy’s, and more than 20 others. pictured here, Asked in mid-August about a pos- expand its Visa credit card boycott sible expansion, a Kroger spokesper- beyond 26 stores son said only that the issue is still “to in California? be decided.”

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© 2018 Worldpay, LLC and/or its affiliates. All rights reserved. Worldpay, the logo and any associated brand names are trademarks or registered trademarks of Worldpay, LLC and/or its affiliates in the US, UK or other countries. Trends & Tactics rates and network fees. Visa’s rates depending on volume and card type, Merchants should have the flexibility and fees are among the highest of any from 1.15% of the sale plus 5 cents to accept different types of payments credit card brand. The savings will be to 2.10% plus 10 cents for high-end based on what makes good business passed along to Foods Co customers rewards cards. sense for their companies and their in the form of low everyday prices on The Minneapolis-based Merchant customers.” the items shoppers purchase most.” Advisory Group, an association of Also in 2016, Kroger sued Visa Foods Co did not reveal its Visa mostly large merchants concerned with in U.S. District Court in Cincin- acceptance costs. But with $122.7 bil- payments issues, declined to comment nati, accusing the payment network lion in sales last year, parent company on the Kroger-Visa spat specifically. of thwarting its plans favoring low- Kroger likely qualifies for Visa’s low- But in an e-mailed statement, MAG cost PIN-debit transactions as it con- est interchange rates—and it’s possi- chief executive Mark Horwedel said, verted its stores for EMV chip card ble Kroger already had its own inter- “The payments ecosystem should be acceptance. Visa denied the allega- change deal with Visa. grounded in transparency, choice, and tions. The case was on hold until For credit card transactions at competition with balanced responsi- August, according to a recent Visa supermarkets, Visa’s latest public bility for payment security and deliv- regulatory filing. interchange schedule says rates vary, ering the best customer experience. —Jim Daly

With a Push From the Government, Canada’s Credit Card Interchange Is Going Down Again

Canada’s finance ministry last month issued its latest merchant-friendly ‘These commitments from announcement regarding payment Visa, Mastercard, and cards, this one disclosing agreements American Express will make with Visa Inc. and Mastercard Inc. for an average 10-basis-point reduction credit card acceptance fairer in credit card interchange for small for small and medium- and mid-size businesses to take effect sized enterprises.’ in 2020. —Bill Morneau, Finance Minister, Canada The Department of Finance Canada also said American Express Co., which has a different business model than The Canadian government for of 1.40% for five years from the bank card issuers, made a separate years has lent an attentive ear to com- current 1.50%, narrow the range of agreement “that will support the gov- plaints from smaller merchants about interchange rates charged, and obtain ernment’s objectives of greater fair- card-acceptance costs and provisions annual verification of rates from an ness and transparency in the Canadian in merchant acquirers’ contracts. independent party. credit card market.” The finance ministry came out The finance ministry estimates “The voluntary commitments with a “voluntary” code of conduct the cuts will save small and mid- announced today are good news for for the payments industry in 2010, size merchants about C$250 million Canadian businesses that accept credit a code developed with input from ($191.1 million) a year based on roughly cards, and good news for Canadian banks and retailers, and later obtained C$250 billion in annual card purchases. consumers,” Finance Minister Bill five-year commitments from Master- Not surprisingly, merchants hailed Morneau said in a statement. “With card and Visa, effective in 2015, to the news. “These new measures lower interchange fees, businesses will get average interchange rates down build on the positive momentum in be able to save money that they can use to 1.50%. improving the power balance between to invest, grow, and create more jobs— The new commitments call major card brands and smaller mer- an important part of strengthening and for Visa and Mastercard to reduce chants that began with the adoption growing the middle class.” domestic interchange to an average of the Code of Conduct for the Credit

8 • digitaltransactions • September 2018 and Debit Card Industry in Canada,” “The news becomes fuel for mar- across the country and about $1 billion Dan Kelly, president of the Canadian keting by ISOs,” Atlas says. “It’s very back to the business community.” Federation of Independent Business hard to get the attention of merchants; The Canadian Bankers Associ- trade group, said in a statement. this is a way of putting a bug in the ear ation, whose members receive the The new agreements probably of every merchant in the country to interchange merchants pay, issued a will have little long-term effect on begin discussions on the topic.” statement saying that “in 2016, banks Canadian payments, but they could Visa, Mastercard, and AmEx all took part in Finance Canada’s review spur a burst of account-acquisition issued polite statements about the com- that culminated today in a further vol- activity by independent sales orga- ing changes. Mastercard said in a blog untary reduction in interchange rates nizations, according to Adam Atlas, post that since 2015 its commitment by these payment card networks, the a Montreal attorney who works with to lower interchange “has delivered second such agreement since 2015.” ISOs in Canada and the U.S. lower rates to over 700,000 businesses —Jim Daly

The ACH Basks in a Long-Lived Growth Spurt

The massive automated clearing house network is on a growth spurt Same-Day that shows no signs of slowing down. The ACH handled 5.68 billion Payments’ transactions in the quarter ended June Rapid Ascent 30, a 6.2% increase year-over-year, (Quarterly trans actions according to Herndon, Va.-based in millions) NACHA, the network’s governing Note: Same-day credits were launched in September 2016. 13.3 42.6 11.9 40.9 body. The network has now notched Same-day debits weren’t growth exceeding 5% in 12 out of the initiated until a year later. Q1 2017 Q1 2018 Q2 2017 Q2 2018

14 quarters since the start of 2015. Source: NACHA Faster payments on the network, which links virtually every U.S. bank, totaled 40.9 million in the quarter, up from 11.9 million in 2017’s second quarter (chart). These are ACH credits and debits processed the same day they are initiated. Under NACHA rules, banks ushered in same-day credits in September 2016, with same- day debits following a year later. Tra- ditional transactions typically clear and settle the next day. For the first half of 2018, same- day transactions totaled 83.5 million, up from 25.2 million same-day credits in the first half of last year, NACHA reported. The organization has under consideration a proposal to lift the per- transaction limit on same-day transactions to $100,000 from $25,000.

September 2018 • digitaltransactions • 9 Trends & Tactics

Comments on this proposal closed credits is the fastest-growing ACH Conversely, codes that cover on Feb. 23. Transactions at or under transaction code so far this year. check conversion are slowing with the $25,000 account for approximately WEB debits, which include long-term decline in check volume. 98% of the total, NACHA says. e-commerce payments, grew 14% to The ARC application, which converts In peer-to-peer payments, the net- 1.44 billion in the quarter. These rep- checks sent by consumers to bill- work processed 29.4 million trans- resent the second-largest ACH code in ers’ lockboxes, totaled 280.6 million actions in the second quarter, a 24% terms of transaction volume. items in the June quarter, down 8.2% increase year-over-year. P2P is a The largest code embraces so-called year-over-year. closely watched payment category pre-arranged payments and deposits, or But the POP and BOC applications these days with explosive growth at PPD. PPD credits, the ACH’s original are sliding even faster, down 16.5% to companies such as PayPal Holdings application, grew 4.2% year-over-year 50.3 million transactions and 15.6% to Inc., with its popular Venmo service, to 1.68 billion items. These refer to 22.5 million, respectively. Both codes and Zelle, a bank-owned alternative. payroll direct deposits. Another vari- refer to checks presented at retail P2P volume, which falls under the ety, called PPD debits, routes consumer checkouts; with POP, these are con- WEB credits NACHA code, totaled payments for recurring obligations like verted at the register and handed back 58.1 million transfers for the first six health-club dues, homeowner-associa- to the customer, while with BOC they months of the year, up 24% from the tion levies, and the like. These increased are converted later in a back office. same period last year. Indeed, WEB 4% to crack the 1-billion level. —John Stewart

Which Fintech Is Ready To Become a Bank?

Financial-technology firms, many of which command significant positions ‘Providing a path for in the payments business, can now apply to become national banks. But fintech companies to will Square Inc., the highest-profile become national banks candidate, take the leap? Moving on a proposal it’s had can make the federal under consideration for months, the banking system stronger.’ Office of the Comptroller of the —Joseph M. Otting, Comptroller of Currency announced July 31 it will the Currency, U.S. Treasury Dept. begin accepting bank-charter applications from fintech firms. The OCC’s (Photo: U.S. Treasury Dept.) announcement triggered a wave Square is a natural candidate to to the application from banking groups, of speculation about who would apply for a bank. It recently with- notably the Independent Community go first, speculation that quickly drew an application with the Federal Bankers of America. focused on the plans of merchant Deposit Insurance Corp. in connec- Comptroller of the Currency processor Square. tion with a proposed Utah-based Joseph M. Otting said the decision to But Square is being coy. industrial loan corporation, a type of let fintechs into the federal banking “We’re really well-positioned bank favored by nonbank companies. club has much to do with encouraging to broaden access to the financial But Square is having “an ongoing dia- innovation in financial services and system, which is our core purpose,” log” with the FDIC, Dorsey said dur- expanding opportunity for businesses Square chief executive Jack Dorsey ing Square’s second-quarter earnings and consumers. said the next day in response to a call. “We have decided to withdraw “Providing a path for fintech stock analyst’s question about the and refile,” he said. companies to become national banks company’s intentions. Dorsey ven- Square’s decision to withdraw can make the federal banking sys- tured no further than that on the topic. came in the midst of strong opposition tem stronger by promoting economic

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Visit us at Booth 10 at WSAA! Trends & Tactics growth and opportunity, moderniza- of financial services challenging the “This type of clarity benefits tion and innovation, and competition,” OCC’s authority to grant bank char- everyone by ensuring that industry, Otting said in a statement. “It also ters to fintech firms. customers, and regulators are oper- provides consumers greater choice, Whether the OCC’s announcement ating from the same rules and can promote financial inclusion, and will open the floodgates for federal fin- expectations,” ETA chief execu- creates a more level playing field for tech banks remains to be seen. But some tive Jason Oxman said in a state- financial-services competition.” advocacy groups, including the Wash- ment. “We look forward to work- Under the new charter, fintechs will ington, D.C.-based Electronic Transac- ing with the OCC on the charter to be subject to the same laws, regulations, tions Association, are celebrating the help expand financial inclusion by reporting requirements, and supervi- decision as a steppingstone to wider making services less expensive and sion as traditional national banks. In and richer opportunity for technology- broadly available.” return, the new banks will be subject centered financial-services firms. —John Stewart to one set of rules, those at the federal level. Before the OCC decision, fintechs could only obtain state charters, a Payments Players Line Up Against Tariffs lengthy and arduous process that could subject a company seeking national coverage to 50 sets of regulation. The payments industry would like to Industry Association announced its At the same time, banking func- see a de-escalation of the worsening opposition to planned U.S. tariffs on tions like taking deposits and making trade skirmish between the U.S. Chinese goods, calling them a “threat loans can be appealing to financial- and China. Most recently, the ATM to business.” services companies looking for fresh capital and for ways to exploit the pre- Tente: “We support free trade.” dictive and processing power of their technology. For this reason, some firms, including Square, have sought to establish special-purpose banks such as industrial loan corporations. In addition to many bankers, some states also oppose the exten- sion of national-bank charters to fintechs. In December, the U.S. District Court in Manhattan dismissed a lawsuit from New York’s superintendent

MONTHLY MERCHANT METRIC Growth in Same-Store Sales Year Over Year Annual volume change/growth of retained (non-attrited) accounts for given period divided by total portfolio volume from same period of the prior year. 6.50% 4.90% 6.16% Note: This is sourced from The Strawhecker Group’s merchant datawarehouse of over 3 million merchants in the U.S. market. The ability to understand this data is 4.35% important as SMB merchants and the payments providers 3.84% that serve them are key drivers of the economy.

All data is for SMB merchants defined as merchants Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 with less than $5 million in annual card volume.

12 • digitaltransactions • September 2018 ATMIA members were among States, according to Tente. GRG’s dis- “We’re not selectively opposing those testifying at an August tariff tributor is Mount Prospect, Ill.-based this tariff, we’re opposing all tariffs,” hearing in Washington, D.C. A Cummins Allison Corp., a hardware he says. “We support free trade.” pending U.S. government proposal provider to the banking industry. The Office of United States Trade would impose duties of 25% on Deployers of lower-cost ATMs for Representative (USTR), an arm of the Chinese-made ATM parts and com- convenience stores and malls likely White House that convened the August ponents, and 10% on fully-assembled would be hit the hardest by tariffs, 20-23 hearing, had received nearly machines, according to David N. Tente predicts. 1,100 comments on its proposals a Tente, executive director for the U.S. and Americas at the Sioux Falls, S.D.-based association of ATM independent sales organizations and other deployers. Payments-industry groups and those from other industries have been Portfolio Purchases monitoring the tariff situation ever since President Donald Trump began challenging China, Canada, Mexico, and the European Union earlier this year about trade policies he sees as unfair to the U.S. The Electronic Transactions Asso- ciation joined more than 100 other trade groups that sent a letter to Con- gress in April expressing their “deep concern” about planned tariffs. The ETA said duties could make life more expensive for merchant acquirers and others that buy point-of-sale terminals and related payment hardware from Chinese manufacturers. Now the ATM industry is growing increasingly concerned about the Trump Administration’s most recent tariff proposals. But no one has pre- The Cutter Advantage: cise data on how much hardware the industry buys from China, according • Robust fi nancing assures you of fast to Tente. transaction closing. “It’s a little hard to know exactly • Endorsed by countless ISO’s - thanks to years how expensive it would be,” says of successful transactions. Tente. But he adds: “It just appears • Superior portfolio evaluation regardless the further we got into it, the greater of size impact there is.” • Flexible terms ensure seller gets the best deal possible. It’s fair to say that U.S. ATM manufacturers and related suppliers Denise Shomo | 610-451-4096 buy quite a few components from denises@cutterfi nancial.com China. Only one Chinese ATM man- David Daily | 615-604-3886 WWW . CUTTERFINANCIAL . COM ufacturer, GRGBanking, however, davidd@cutterfi nancial.com sells complete machines in the United

September 2018 • digitaltransactions • 13 Trends & Tactics week ahead of the meeting. Many U.S. companies, including not be practicable or effective to curb The Washington-based ETA said payments firms, have complained for or eliminate the acts, policies, and in a filing with the USTR that a range years that China requires technology practices of China related to technol- of telecommunications components transfers and imposes other condi- ogy transfer, intellectual property, and and other electronic equipment used tions that make it difficult for them to innovation” cited by the USTR, the in the payments industry would be do business in the world’s most popu- ETA said in its filing. subject to new duties. lous country. But new tariffs “would —Jim Daly

Why Banks Will Soon Claim Less Than 50% of Payments Revenue

Financial institutions have been bat- tling fast-growing fintechs and other The Nonbanks Take Over nonbanks for payments share and rev- (Net payments revenue, in billions) $177 enue for years, but now new research l Banks l Nonbanks indicates banks, which have histori- $167 cally controlled this crucial business, $163 are on the cusp of slipping from that dominant perch. In 2017, U.S. banks’ total payments revenue netted out to $163 billion, $136 with nonbanks claiming revenue of $136 billion, according to the research 2017 2020 released recently by Accenture Pay- ments (chart). That already meant Source: Accenture nonbanks ranging from the likes of accrue primarily to nonbanks over post. “For those who are unprepared, Apple Pay, PayPal, and Square to less the next few years,” says Frank Mar- gradual pricing pressure and value well-known players claimed a 45% tien, managing director for payments leakage may begin to erode many share of revenue last year. at Accenture and author of the study, existing business models.” But by 2020, the research projects in a blog post about the research. Accenture recognizes that at least the nonbank share will rise to $177 “The beneficiaries include players some major financial institutions have billion versus $167 billion for banks, already in the value chain (those less moved to thwart the nonbank chal- tipping the balance in favor of non- exposed to customer demands, such lenge, but wonders whether they are banks for the first time as they claim as rewards, and with more direct doing enough and acting with enough a 51% share. The change in nonbanks’ access to key platform levers, like urgency, especially when it comes to favor will come about over the next processing) and new forms of fintech, new technology. three years as banks gain $15 billion bigtech, and other third parties phas- “Incumbents have already begun in revenue but lose nearly $12 billion ing into the market.” moving to protect their revenue base to pricing pressure and business lost to The change, though projected by introducing innovative solutions, what Accenture calls “new players.” over a mere three years, can still seem such as [the peer-to-peer payments Nonbanks will sustain pricing pres- gradual enough to lull bankers into a network] Zelle,” says Martien’s post. sure as well, which will exact a $27 sense of complacency, Martien warns, “Going forward, technology deploy- billion toll. But they will reap enough particularly as many nonbank play- ment needs to happen faster with new business—$69 billion worth—to ers are only now emerging as major more agile adoption and monetization more than offset the leakage to lower factors in the market long after their of technologies, such as data analyt- pricing, Accenture forecasts. launch. “As evidenced by ApplePay, ics, blockchain, and [artificial intelli- “Our analysis indicates that incre- it can take years for new, disruptive gence]/machine learning.” DT mental revenues are projected to platforms to scale,” he says in the —John Stewart

14 • digitaltransactions • September 2018 # Trends & Tactics

Security Notes Making Uninterrupted Payments a Reality

Gideon Samid • [email protected] ayment technology has There are two emerging solution categories for this chal- kept pace with living lenge. One is captured in U.S. Patent #9,471,906, based on P technology, and thereby a chemical-structural hybrid coin, and the other is based on has kept payment as the widely a slow-growing trust index. accepted means for moving peo- Long before a crisis strikes, money traders invite witnesses ple to do things they otherwise to observe their trade practices. Crypto tools validate this would not do. In other words, trading track record, and over a long period of time such good humanity runs on payment. Our behavior earns a trader a much-coveted trust index. In nor- civil order is maintained through the ability of people to get mal times, a trust index is like a gold or platinum frequent- others to serve them by paying them. flier card: it has its benefits. Alas, one misstep, one attempt to The flipside of this is the risk of disruption. If, for any cheat, and the index crashes to the ground, even to negative reason, this bloodflow of society becomes a no-flow, society territory. And it will take a very long time to rebuild the index. will collapse as the biological body does when the heart The longer the pre-crisis period, the higher the trust indi- stops. Heart attacks happen to people who, a moment earlier, ces of the trading public. When the catastrophe happens and felt perfectly fine. Similarly, we should not disregard the the network is down, these indices remain valid and may serve specter of a sudden payment disruption, regardless of how as a basis for unwitnessed peer-to-peer money exchange. smoothly payment seems to chug along. The particular BitMint product allows two unwitnessed One of the compelling arguments for the new form of traders to use their battery-operated devices to carry out a money—the crypto abstraction—is that payment is carried transaction in which the payer vouches for his money by flash- out without vulnerability at a central control point. Bitcoin ing his or her trust index. If the payer cheats, his trust index and its crypto cousins run on a non-hierarchical network that will be wiped out when, at some point, the network is back on. would keep operating even if large swaths of the network A trader who is careful to be honest for a period of, say, three became incapacitated. years, and thus achieves a commensurate trust index, is not This so-called peer-to-peer payment idea is no doubt likely to discard it by making a small false payment. a big step forward in planning for payment continuity. It As the lights go off, people will keep trade going through emerged from the Cold War, where it was a solution to a their battery-operated electronic wallets (their phones), and similar vulnerability of a hierarchical network. Peer-to-peer weather the down period. payment will operate even when much of the network is out The beneficial side effect of this crisis preparation is that of order. this trust index will also serve us during periods of normal Alas, the prevailing P2P solutions require a sufficient network congestion. We are building an automatic decision number of witnesses. Crypto currencies defer on how software program that evaluates a situation where the network exactly the peers intervene to make the payment stick, but seems slow, a payment is small, and the payer projects a high intervene they must. Unwitnessed payment is beyond the trust index. In this case, the software will not wait for the net- reach of modern crypto currencies. work, but will accept the payment as claimed by the payer. For witnesses to play their role, they need a communi- As more and more traders run such automatic payment- cation platform. So, while crypto payment is quite forgiving decision software programs, the load on the network will of interruption in communication, it does require a mini- ease up and overall throughput will increase. All the while, mum baseline of communication, and will wither without it. traders are more and more prepared to weather even pro- Crypto currencies also face the risk of having “two network longed periods of network blackouts. islands” that operate independently, and cannot reconcile Keeping payments flowing is like keeping clean, when power is back on. unclogged arteries. It’s a life-or-death issue.

16 • digitaltransactions • September 2018

ACQUIRING September 2018 digitaltransactions

A New Age for Underwriting

Kevin Woodward

Vetting a new merchant takes a lot of work, but the plethora of non- Sign Up online application to provide traditional data may make it a little easier. the information PaySimple needs. This information forms the nucleus of the underwriting assess- ow do you tell the difference are still essential, and indeed required ment, David Sharp, PaySimple’s pres- between a bot applying for by acquiring banks. ident, tells Digital Transactions. “We Ha merchant account and an Other traditional types of infor- can get a full picture of what they pro- actual human doing it? The answer mation and methods include a mer- vide to us and what they didn’t pro- might lie in social-media profiles and chant’s history, verifying the business vide to us,” Sharp says. “We evaluate a little understanding of human nature. structure, examining prior processing and score everything.” Underwriting is a venerable and statements, verifying that inventory PaySimple performs the basic vital part of signing up merchants to reflects the sales volume, and opera- review of a merchant’s application, accept payment cards. And it, too, tional data like average transaction such as checking out the merchant’s like so many other aspects of acquir- amount and chargeback history. Web site to see if it aligns with ing, is changing at a record pace. The But now this core information, what the merchant purports to be process of ensuring a merchant appli- coupled with the nontraditional data, selling. But PaySimple’s underwrit- cant is who she says she is is impor- informs underwriting decisions for ers, too, will examine what wasn’t tant because, without verification, bad more and more payments providers. asked about. actors can access the payment network. Some online methods, as out- “What we’re not asking is what That can destroy revenue channels and lined in the second edition of the time of day did [the application] take harm the industry’s reputation. Electronic Transactions Association’s place and if it was in the merchant’s Fortunately, new underwriting “Guidelines on Merchant and ISO local time zone,” Sharp says. “Is that methods have emerged to make the Underwriting and Risk Monitoring,” out of the ordinary for the industry?” job a little more effective. In today’s include conducting an eBay Inc. mem- Other considerations might be culture, for example, the prevalence ber search, reviewing message boards how soon the application is made after of social-media profiles—68% of like Scam.com or RipoffReport.com inquiring about a PaySimple account U.S. adults use Facebook and 45% to view consumer comments, and or the geolocation of the applica- use Twitter, the Pew Research Cen- making a reverse phone search using tion. Does that location align with ter says—is a bonus for underwrit- Superpages.com. The ETA advises where the merchant is based? Sharp ing. It can be an asset to independent that any negative information found says a merchant who applies while, sales organizations, payment facilita- does not represent an attempt to dis- for example, on vacation in Europe tors, integrated payments providers, credit the merchant. for her U.S. business might not war- and others. rant an automatic rejection. Instead, The basics—such as legal name of Asked And Not Asked PaySimple will ask for an explanation business, a credit-background check, At PaySimple, a Denver-based pay- in most instances, he says. site visits, and checking that the mer- ments provider, the nontraditional data All this is vital because PaySimple, chant applicant isn’t prohibited from can help fill in what merchants don’t with 10 years of experience using its connecting to a payment network— say. Merchants use PaySimple’s Simple Simple Sign Up online service, has

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© eProcessing Network, LLC. All Rights Reserved. All trademarks are the property of their respective holders. “The process can’t be [fully] automated yet ... it takes a human eye to check for fraud statements from fake or lying businesses looking for ‘free’ money.” —Alex Shvarts, chief technology officer and founder, FundKite

(Photo: FundKite) reviewed thousands of applications. is just as important as it is for a mer- about other advances the merchant “We’ve mapped out the buyer’s jour- chant-account provider, and it also might have taken. ney and what the characteristics look relies on determining the validity “The merchant interview is cru- like,” Sharp says. of both traditional and nontradi- cial and really highlights how impor- One tactic that PaySimple tional data. tant underwriting is,” Shvarts says. employs is defining its ideal client “Everything besides business his- “Seeing how much a person knows profile. Each merchant application tory and credit score is ‘nontradi- about the business and the way it is measured against this profile. If a tional’ in the sense that it wasn’t pri- makes money is one of the most merchant application is below that marily used 10 years ago, but most important things in determining if the threshold and presents peculiarities, funders in the industry use the same business is profitable and will be able PaySimple dismisses it. extra credentials,” says Alex Shvarts, to pay us back.” chief technology officer and founder It’s the combination of traditional ‘Extra Credentials’ of New York City-based FundKite. merchant data with the nontraditional This tactic of collecting data and In his company’s case, nontradi- that’s necessary today and has the vetting it against what the merchant tional methods might entail calling potential to produce the best decision says and what it doesn’t knowingly the merchant’s landlord to verify the on the merchant’s application, say reveal is vital even for value-add ser- business location, asking what the both lenders and payments providers. vices sold by independent sales orga- merchant wants to use the money “While FundKite heavily factors nizations and acquirers. for, considering the seasonality of the in numbers, financial statements, bank At FundKite, a merchant cash- business, asking for projected reve- verification, payback months, and advance company, vetting merchants nues, making a site check, and asking credit score, there is so much else that needs to be looked into about the individual and the business,” Shvarts says. Catching Bots Indeed, some merchant types aren’t as easily evaluated electronically and require some atypical vetting. The cannabis industry, for example, is domi- nated by cash transactions because of the uncertainty surrounding the legal- ity of accepting card payments. ‘We’ve mapped out the buyer’s journey and what the These merchants would need more than bank statements and credit sales, characteristics look like. What we’ve found recently is, if Shvarts says. “While FundKite consid- [an application] looks too good to be true, it probably is.’ ers cannabis businesses to be too high- risk to fund, other alternative lenders

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GCF_digitaltransactions_fullpg_v7.indd 1 7/11/18 1:40 PM rely on nontraditional sources to pro- marketing campaign it came from, vide that industry funding,” he says. he says. “If we detect fraud coming At PaySimple, nontraditional data from a campaign, we’ll adjust our is growing in importance, Sharp says, campaign.” Typically, PaySimple not just as possibly useful fringe data reviews its campaigns monthly, not but as a larger part of the decision- only for potential losses but for what making process. One reason for is working well. this is that the proliferation of data, even the stolen kind that ends up on ‘The Final Say’ criminals’ computers, presents chal- It’s vitally important that the vet- lenges. That wasn’t always the case a ting process be complete and accu- few years ago. rate, especially for companies like “One of the things we learned is FundKite, which can send money that if it was a pristine application a ‘We can get a immediately into an approved mer- few years ago it might be let go for chant’s bank account. auto approval,” Sharp says. “What full picture of “Part of why the [cash-advance] we’ve found recently is, if it looks too industry is booming is because of how good to be true, it probably is.” what [merchants quickly funds can be transferred,” But that doesn’t necessarily mean Shvarts says. “With immediate money an automatic denial. It’s at this point being assessed wiring and [automated clearing that nontraditional sources prove their for underwriting] house] deposits, businesses can get worth. PaySimple will visit the appli- money ASAP. The use of Docusign cant’s Facebook page and check that provide to us also allows us to fund over the Inter- the marketing done on the social net- net by having legal documents signed work matches with what the appli- and what they within minutes, no matter what state cation says. The demographic data didn’t provide to the business is in.” Docusign is an will also be checked and any dif- electronic document-signing service. ferences noted. us. We evaluate Sometimes the nontraditional Another nontraditional tactic information isn’t electronic. “Red flags might be to use a CAPTCHA—an and score also can come up over the phone,” acronym for Completely Automated everything.’ Shvarts says. Public Turing test to tell Computers Interestingly, questions that may and Humans Apart—to determine if —David Sharp, seem alarming at first blush really the application is being completed by president, PaySimple aren’t. “Someone who asks questions a human or a bot. about being unable to pay back or is The sure sign of a CAPTCHA is (Photo: PaySimple) concerned about being over-leveraged the sometimes pesky dialog box that This is a special hazard to Pay- isn’t a sign that their business isn’t requires a person to select all the cars Simple because most of its customer- doing well, but rather that they are in the image or type in a code. “There acquisition effort consists of digital logically thinking about numbers and are ways to trip up a bot,” Sharp says. marketing. “When you put out that whether their business can take one.” A simple way might be to include amount of digital marketing, you Instead, what provokes concern a hidden check box on the form. If encounter fraud,” Sharp says. is the quiet applicant. “Someone too checked, that signals further review of Interestingly enough, any detected eager for anything, asking no ques- the application, he says. fraud is examined to see what digital tions and blindly accepting funding is a sign that this deal is a risk,” Shvarts says. Interpreting that kind of informa- ‘Someone too eager for anything, asking tion, as with PaySimple’s efforts to determine if a bot or a human com- no questions and blindly accepting pleted an application, requires human intervention. That’s where the one funding is a sign that this deal is a risk.’ inviolable element of the entire underwriting process reigns supreme.

22 • digitaltransactions • September 2018 Plug into Paysafe and grow your ISO business

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Twitter @PlugIntoPaysafe | [email protected] | www.paysafe.com “The underwriter holds a lot of power in that they have the final say,” Shvarts says. “It is absolutely the most important part of funding a business.” Even with conventional underwriting data, an underwriter must review key aspects of a prospec- tive merchant. For example, Visa Inc. wants the acquirer to verify that a merchant has credit and return policies that say how they handle this part of their business. Payments providers and If it’s an e-commerce business, cash-advance companies are relying on a wide array of newly even if the merchant already accepts available data from the Web to cards in its brick-and-mortar store, evaluate merchant applicants. underwriters have to ask for and review specific information. This may include verifying Web-site ownership, Companies like PaySimple and you have to factor in many other aspects ensuring customer-service informa- FundKite automate as much of the pro- to calculate the overall health of the tion is clearly visible, and checking to cess as feasible. But the human aspect business, and it takes a human eye to see that the merchant has all the nec- is not going away any time soon. check for fraud statements from fake essary terms and conditions, and simi- “The process can’t be automated yet or lying businesses looking for ‘free’ lar policies, on its Web site. because you can’t just look at numbers, money,” Shvarts says. DT

24 • digitaltransactions • September 2018 NETWORKS September 2018 digitaltransactions

Still Unsettled

Jim Daly

A divided Supreme Court says American Express Co.’s anti-steering from it,” says attorney Jeffrey I. Shin- rules for merchants don’t violate antitrust law. What does that mean der, managing partner at Constantine Cannon LLP in New York who is for card payments, especially with another big card-related court representing a group of 65 large opt- case heading for a settlement? out merchants. “I think the future of this indus- he U.S. Supreme Court’s But many large merchants had try will be determined by two broad recent 5-4 decision upholding opted out of the now-moot 2012 forces,” Shinder continues. “One, the T American Express Co.’s anti- class settlement—merchants rep- outcome of these [large-merchant] steering rules for merchants has lots resenting slightly more than 25% cases, and the manner in which the of implications, but the big takeaway of Visa and Mastercard purchase digitization of the industry as technol- is that despite the high profile of the volume—and some of them then ogy changes the way people pay— case, not much will change for rela- sued the card networks on their own. how that’s going to affect the prevail- tions between merchants and the pay- These merchants are now clustered ing paradigm.” ment card networks—yet. into several different groups with dif- The AmEx case, however, marks A likely more important issue ferent lawyers, and their claims also a milestone in how courts view pay- for most merchants is just what lies are being adjudicated under the MDL ment card networks. The Supreme ahead for their relations with the 1720 umbrella. Court endorsed a view held by many Visa Inc. and Mastercard Inc. net- Mastercard disclosed in a July economists that card markets are two- works. The state of those relations regulatory filing that negotiations sided affairs with merchants and con- could be determined by the outcome with merchants were moving along sumers each playing essential roles, of a massive case known as MDL and that a new settlement could be and, more importantly, that network 1720, which involves merchant chal- reached by Sept. 30. Some reports in price increases to merchants do not lenges to Visa and Mastercard credit the financial press pegged the settle- necessarily harm consumers. As such, card interchange and card-acceptance ment value at possibly $6.5 billion. the court said AmEx’s rules that ban rules. This case could be getting close But as of mid-August, it was unclear merchants from steering customers to its second settlement. to what extent each of the major cheaper forms of payment do not vio- The litigation, which dates back to groups, particularly the opt-out late antitrust law. 2005 and has had countless twists and merchants, would be covered by Retailer trade groups quickly turns, including an appellate court’s any settlement. signaled their disappointment when 2016 rejection of a $5.7 billion class- the high court’s ruling came down action settlement struck four years A Wild Card June 25. earlier, is pending in U.S. District So, while the AmEx case settled some “It’s certainly a setback,” says Court in Brooklyn, N.Y. The class issues, MDL 1720 remains a wild card. Mark Horwedel, chief executive of merchant plaintiffs are now divided “I don’t see the Supreme Court the Merchant Advisory Group, a into two groups. One seeks mon- decision as something that gives the Minneapolis-based association of etary damages, while another seeks [bank card] networks a pass on the mostly large merchants concerned changes in acceptance rules. conduct that’s been challenged, far with payments issues. “The merchant

September 2018 • digitaltransactions • 25 alternatives to hold down the cost of services to our customers, both con- side of the platform is essential for payment cards have gotten fewer as a sumers and merchants,” Chenault’s two-sided platforms to maximize the result of this decision.” successor, AmEx chairman and CEO value of their services and to compete Stephen J. Squeri, said in a statement. with their rivals.” A Big Winner Thomas noted that AmEx’s busi- American Express clearly is a big ‘The Optimal Balance’ ness model depends on relatively high winner in the seemingly endless legal In his 20-page opinion, Thomas wrote merchant fees to fund its rich rewards battles between merchants, card net- that “unlike traditional markets, two- programs for cardholders. In contrast, works, and government over payment sided platforms exhibit ‘indirect net- he wrote that Visa and Mastercard card acceptance costs and rules. work effects,’ which exist where the “have significant structural advan- At the direction of now-retired tages over AmEx.” chief executive Kenneth I. Chenault, Most of the nation’s banks belong the travel-and-entertainment card net- to their networks, translating into a work took a major risk in 2010 when card base about eight times bigger it chose to fight the U.S. Department than AmEx’s. And, relying on 2013 of Justice and 17 states that chal- numbers, he said that about 6.4 mil- lenged the anti-steering rules of not lion merchants accepted Visa and only AmEx, but also those of Visa and Mastercard cards compared with only Mastercard. The DoJ and the states 3.4 million for AmEx. said such rules were anti-competitive. The DoJ and the states failed to Rather than fight what looked to prove that AmEx’s behavior was anti- be yet another lengthy court battle, competitive, according to Thomas. He Visa and Mastercard immediately set- wrote that AmEx actually spurred net- tled and changed their rules to allow work competition, pointing out that steering. But AmEx insisted its so- AmEx inspired Visa and Mastercard called non-discrimination provisions Visa and issuers to come out with premium cards were essential to its business model. of their own, and that when AmEx In February 2015, AmEx lost a Mastercard raised merchant fees between 2005 seven-week bench trial before U.S. and 2010, “some merchants chose to District Judge Nicholas G. Garaufis ‘have leave its network.” Merchants’ fees to in the Brooklyn court, but appealed accept cards have declined by about to the Second U.S. Circuit Court of significant 50% since the 1950s, Thomas said. Appeals in New York and won. Eight Thomas’s opinion essentially says states led by Ohio then took the fight structural the card market is one entity, not two to the Supreme Court, with the DoJ advantages separate ones comprised of merchants no longer playing the lead but a sup- and consumers, respectively, and con- porting role. over AmEx.’ cluded that AmEx didn’t have the Associate Justice Clarence Thomas, market power to raise merchant pric- joined by the court’s three other con- —CLARENCE THOMAS, ing above what would be expected in servatives and swing vote Associ- ASSOCIATE JUSTICE, a normal market. U.S. SUPREME COURT ate Justice Anthony Kennedy (who A law professor and former DoJ recently retired), upheld the Second (Photo: U.S. Supreme Court) attorney who worked on a high-profile Circuit’s decision that AmEx’s rules earlier card case believes the Supreme did not violate the Sherman Act, one value of the platform to one group Court majority made the right call. of Congress’s main antitrust laws. The depends on how many members of “There’s big difference between court’s four liberals dissented in an another group participate.” American Express and Visa and Mas- opinion written by Associate Justice “Two-sided platforms must take tercard,” says Steven Semeraro, direc- Stephen G. Breyer. these effects into account before mak- tor of the Intellectual Property Fellow- “This was a long battle, but well ing a change in price on either side, or ship Program at the Thomas Jefferson worth the fight because important they risk creating a feedback loop of School of Law in San Diego. Mer- issues were at stake: consumer choice, declining demand,” Thomas’s opin- chants believe “they have no alterna- fair market competition, and the abil- ion said. “Thus, striking the optimal tive” but to accept Visa and Master- ity to deliver innovative products and balance of the prices charged on each card cards, but not AmEx, he says.

26 • digitaltransactions • September 2018 ONLY ONE OF THESE BIRDS CAN GIVE YOU THE LATEST NEWS IMPACTING THE PAYMENTS MARKET

Today and every day follow DIGITAL TRANSACTIONS @DTPAYMENTNEWS on Twitter did not lose the business of any large merchant,” Breyer wrote. “Nor did ‘If merchants American Express increase benefits (or cut credit card prices) to American don’t like Express cardholders in tandem with the merchant price increases.” AmEx, they Breyer also highlighted the trial court’s findings about Discover Finan- can stop cial Services, the youngest and small- taking it.’ est of the four U.S. general-purpose card networks, when it tried to attract —STEVEN SEMERARO, merchants by charging them less than DIRECTOR OF THE INTELLECTUAL Visa, Mastercard, and AmEx. PROPERTY FELLOWSHIP PROGRAM, THOMAS JEFFERSON “The court determined that these SCHOOL OF LAW efforts failed because of American Express’ (and the other card com- (Photo: Thomas Jefferson School of Law) panies’) ‘nondiscrimination provi- “From my perspective, merchants says “any argument that AmEx had sions,’” Breyer wrote, quoting from like credit cards, they just want to pay market power was nonsensical.” He Garaufis’s decision. “Because the pro- less,” says Semeraro. “They’re looking also applauded Thomas’s close atten- visions eliminated any advantage that for a legal avenue that might enable tion to the interplay between the con- lower prices might produce, Discover them to do that, but I don’t see how sumer and merchant sides of payment ‘abandoned its low-price business this [case] hurts them. If they don’t like networks. model’ and raised its merchant fees to AmEx, they can stop taking it.” In contrast, regulators in the Euro- match those of its competitors. This pean Union and Australia, as well as series of events, the court concluded, ‘Nonsensical’ Argument the U.S. merchant lobby, have mostly was ‘emblematic of the harm done to Back in 1998, the DoJ sued Visa and focused on the cost of card accep- the competitive process’ by the ‘non- Mastercard over their rules prohibit- tance for merchants, Grover says. “In discrimination provisions.’” ing their bank and credit-union mem- almost every case where it’s framed For AmEx, the Supreme Court’s bers—both were financial-institution- that way, it [results in] some sort of decision means the company can con- owned associations at the time—from regulation, price cap, or restriction on tinue a policy forged when it was issuing cards on other networks what networks can mandate around much more of a T&E brand whose such as AmEx or Discover. The DoJ acceptance of their products,” he says. primary cardholders were business also wanted to untie the governance travelers and upscale consumers. structures of the two associations, ‘Premium Business Model’ “It preserves AmEx’s ability which the feds claimed were not true In his dissent, however, Breyer to preserve its premium business competitors. said the court majority “devotes lit- model,” says Thomas McCrohan, Semeraro was the DoJ’s lead tle attention to the district court’s managing director and senior ana- attorney during the investigative detailed factual findings.” It came out lyst for financial technology and pay- phase of that case, but he left before at trial that beginning in 2005 AmEx ments at Mizuho Securities USA LLC it was adjudicated. The bans on issuer raised its merchant rates 20 separate in New York City. participation in other networks were times over five years, but, thanks to AmEx still markets heavily to overturned, and a few banks then the non-discrimination provisions, “it that core base of upscale consumers began issuing AmEx-branded cards. The DoJ, however, failed in its bid to unscramble network governance. But Semeraro says the DoJ Despite all the litigation, ‘the bigger ultimately “won as a practical matter” merchants have learned how to a few years later because both networks held initial public offerings and navigate the interchange world, become investor-owned companies. Payments consultant Eric Grover of because they’ve all cut side deals.’ Minden, Nev.-based Intrepid Ventures

28 • digitaltransactions • September 2018 and merchants, but it also has been accept, and even though they may not the largest merchants are probably working for years to get “everyday” be operating within the rules of the paying only 70 to 100 basis points merchants such as discount retail- networks.” (0.70% to 1%) of the transaction to ers, grocery stores, and small, local Analyst McCrohan notes that accept cards. “They get a lot of value merchants to accept its cards, and to despite all the litigation, “the big- for that,” he says. broaden its cardholder base. ger merchants have learned how And maybe when the networks “This [decision] allows them to to navigate the interchange world, and merchants can all agree on what’s go forward with their strategy,” says because they’ve all cut side deals” fair value for everybody, the court Semeraro. “I don’t really understand with the networks. He estimates that fighting will end. DT it, but I guess they’ve been doing okay with it.” One element of AmEx’s recent strategy has been a gradual reduction in its average discount rate to attract merchants, especially small ones. ® ‘Loath To Surcharge’ While possible settlements in the Merchant Acquiring MDL 1720 case could generate damage awards and potentially loosen rules for merchants over surcharging Portability • Profitability • Personalization and other acceptance rules, the Supreme Court opinion in the AmEx case still could raise hurdles for merchants in future legal challenges over such rules. “They [merchants] need to prove that consumers are being harmed by the fees merchants are paying,” and that prices are higher because of those fees, says McCrohan. “How the heck do you prove that? They just can’t look at it through one lens.” While the AmEx case and a final end to the lengthy MDL 1720 litigation could give merchants more clarity about what’s permitted and not permitted regarding card acceptance, merchants are restrained by Partner with Us their overarching desire to please customers. Pleasing customers usu- ally includes accepting whatever MerrickBankAcquiring.com payment form they present. As such very few big merchants surcharge card transactions, according to the Meet us at MAG’s Horwedel. Meet us at WesternWestern States Acquirers Acquirers “Not much of it is going on among SeptemberSeptember 12 12 - -13, 13, 2018 2018 | | Scottsdale, Scottsdale, AZAZ large merchants who are very much Join us at the Hot Summer Nights on Route 66 loath to surcharge because of potential Join us at the “After Party” following WSAA’s closing reception“After Party” - co-sponsored following WSAA’s by Merrick closing andreception Visa® . consumer backlash,” he says. But he — sponsored by Merrick and Visa®. adds: “I run into it all the time at small merchants, often restaurants that have minimums to accept, or surcharges to

September 2018 • digitaltransactions • 29 CHINA CALLING The mobile-payments giants Alipay and WeChat Pay are working hard to expand acceptance outside China, and the United States is a prime market. Here’s what that could mean for U.S. merchants— and for the comparatively less successful U.S. wallets.

BY JOHN STEWART

30 • digitaltransactions • September 2018 CHINA CALLING In the four years since cross-border payment executive gave to CNBC in July. WeChat Pay did its launch, Apple Inc.’s not make an executive available to Digital Transactions. But why are these payment services so fixated on serving Chinese citi- Apple Pay mobile- zens as they travel, and—as some experts wonder—will it be long before payment service they begin signing not just popular businesses but consumers as well? That latter prospect has the attention of U.S. payments executives. has been adopted “We get a lot of calls about the Chinese payment apps,” says Sarah by 252 million users Grotta, director of the debit and alternative products advisory service at globally, or nearly Mercator Advisory Group, Maynard, Mass. “The first question I always get asked is, Should financial-services providers in the United States be one-third of the active concerned. I get a lot of that.” base of iPhone users, according to estimates ‘THE BALL IS YET TO DROP’ released last month by Ant Financial’s abortive effort last year to acquire the well-known money-transfer company MoneyGram International Inc. may have Loup Ventures. sparked some of that concern. But the progress its mobile-payments Those look like impressive service is making to serve Chinese visitors has also earned the close numbers—until you dig a little deeper. attention of payments observers. Just 38 million of those Apple Pay users “They’re clearly selling to merchants now,” says Steve Mott, a are in the United States, where adoption veteran payments consultant based in Stamford, Conn. “The ball is yet has been slower than anyone, including to drop on when they’ll start marketing to [U.S.] consumers.” tightlipped Apple, expected. Working with the big merchant processor First Data Corp., Alipay Now consider a couple of alterna- has already recruited 175,000 U.S. merchant locations. And the business tives. Alipay, from Ant Financial of wiring stores to take Alipay or WeChat Pay is attractive enough that Services Group, is a 14-year-old service it has drawn specialist players like Citcon USA LLC. that has been adopted by at least “I don’t have any specifics, but we can’t rule out the possibility to 600 million users. Its rival, Tencent expand the consumer base beyond Chinese tourists,” says Chuck Huang, Holdings Ltd.’s WeChat Pay, could a former Visa Inc. executive who is chief executive and founder of be Venmo’s big brother. Like PayPal Citcon, a Santa Clara, Calif.-based company that helps merchants with Holdings Inc.’s peer-to-peer payment the technology they need to process the quick-response (QR) codes both platform, WeChat Pay ties into a Alipay and WeChat Pay rely on. popular messaging app. In its seven- UnionPay International, China’s answer to Visa and Mastercard Inc., year history, WeChat Pay has scooped makes no bones about its ambitions to recruit U.S. cardholders, many if not up users by the bushel, reaching a total most of them businesspeople who travel frequently to China. In April 2016, of at least 800 million. Now these two Chinese giants are on Apple Pay’s home turf. Alipay has 600 recruited 175,000 U.S. merchants that THE RISE OF ALIPAY cater to Chinese travelers and has (Users, in millions) 520 signed deals with First Data Corp. and Verifone Systems Inc. to expand their 450 store footprint even more. “With the Chinese middle class, the fastest-growing online consumer market in the world, slated to hit 600 million by 270 2022, now is the time for U.S. businesses 190 to participate in this lucrative market,” an Alipay spokesperson says. 100 For its part, WeChat Pay is gearing up to sign more U.S. merchants yet this year, again focusing on Chinese tourists, 2013 2014 2015 2016 2017 2018 according to an interview a WeChat Pay Source: Techinasia; DMR; company reports 32 • digitaltransactions • September 2018 NAC2018

ATMPartMart.com Your ATM Headquarters a UnionPay member bank began issuing the first credit cards to American citizens. But whether these cards can be used UNIONPAY EX CHINA to fund Alipay and WeChat Pay transac- (Cards issued outside Mainland China, in millions) tions is another story. Neither company will disclose how much of its volume Late 2014 stems from cards versus cash accounts, though the Alipay spokesperson says April 2016 “a large portion” of transactions on its system are funded with bank or money- October 2017 market accounts. Both wallets disallowed foreign Source: News releases and reports cards until early this year, when WeChat Pay made a tentative move in that the latest year for which numbers are available from the Commerce direction by allowing expats living in Department. That represented a 15% increase from 2015. Those visitors China to link non-Chinese credit cards. spent $33 billion, up 9%. This year, Alipay says projections indicate the To make that work, though, the app Chinese tourist count will grow to 4 million. must be downloaded in mainland China, In fact, China now sends more tourists to the United States than any Hong Kong, Macau, or Taiwan. other country except the United Kingdom and France. “My sense is that their ambitions have been quite limited to Chinese customers at San ‘LIMITED’ AMBITIONS Francisco, New York, and other entry points for [overseas] travelers,” says Zilvinas Bareisis, a senior analyst at Boston-based financial- Still, some observers say either Alipay services technology advisory firm Celent. or WeChat Pay could work with local banks to distribute their apps in over- GROWING THE PIE seas markets. “It will probably require some partnerships but it’s certainly It’s not hard to see why the mobile giants have been developing acceptance believable,” notes Richard Char, senior networks in foreign markets. Their dominance in China is such that, com- vice president of business develop- bined, they account for 92% of mobile-payments volume, with $15.5 trillion ment at Verifone, which also has an of total volume in 2017, according to data compiled by New York City-based agreement to support Alipay’s overseas investment-information service CBINsights (chart, page 36). acceptance effort. That’s in a home market that has been, until very recently, closed to Through a connection to its China- foreign competitors. Only in 2015, for example, did China allow Visa and based gateway, the San Jose, Calif.-based Mastercard to seek clearing licenses for domestic payments. maker of point-of-sale devices connects Unless Alipay and WeChat Pay can grow the pie, and fast, they need Alipay directly to special-purpose termi- either to mine more volume from bank transfers and straight-up card nals in stores in Europe and the United payments or follow Chinese citizens as they travel abroad. States to cater to Chinese travelers. Right now, though, it’s these tourists only that use the service. “We’re not seeing use of Alipay or WeChat Pay by locals, not even Chinese locals,” says Char, who adds he tried to sign up for an Alipay wallet himself and immediately ran into obstacles. Among other things, “You have to be vouched for Alipay in by other Alipay members, that was my action: experience,” he says. Cracking For now, the tourist trade may the code for mobile- be quite sizable enough for Alipay payments and WeChat Pay. In the U.S. market, success? some 2.97 million Chinese tourists visited popular destinations in 2016, Photo: Verifone 34 • digitaltransactions • September 2018 The arrival of a Chinese payments service on U.S. shores is nothing Seven years later, Tencent is still new. In 2013, UnionPay had struck deals with Fidelity National Information reporting rapid growth for its mobile- Services Inc. and Bancorp Bank to issue prepaid cards in the United States, payments service, particularly in with Bancorp as the issuer and FIS as the program manager. physical stores. In its earnings report Three years later, as noted earlier, came UnionPay-branded credit for the June quarter, the company said cards, this time with Industrial and Commercial Bank of China, the its average daily transaction volume had country’s biggest bank by assets, as the issuer. At the time, UnionPay risen more than 40% year-over-year. Its had 54 million cards issued outside of China, a number that by last fall offline volume alone was up 280%. The had swelled by 67% (chart, page 34). report did not state the absolute figures. But as big as ICBC is, few could imagine when they emerged the proportions the two nonbank mobile-payments players would assume. ‘A FULL LIFESTYLE APP’ Alipay came first, in 2004, as a solution to a growing problem faced by Taobao, an online marketplace operated by Alibaba Group Holding Ltd., That diversity of services is a key factor the progenitor of Ant Financial: how to make online payments possible in the rapid growth of both payments for consumers who, for the most part, had no means of paying digitally. products. Alipay, for example, handles With virtually no competition from credit cards, Alipay grew fast payment but also lets users manage enough to be spun off in 2010 as a separate unit. Three years later came the mundane functions like hailing a cab idea of having users salt away idle escrow funds in an online money-market and booking a hotel room. “It is a full account that earns interest and charges no fees to move money in and out. lifestyle app,” the spokesperson for the By that time these escrow funds had already run up to billions of dollars. company says by email. “It is impor- In parallel with these developments, WeChat Pay emerged in 2011 as tant to take all that information and a service of WeChat, a huge messaging network created by Tencent as services and put them under one iden- one of a number of Internet services, including cloud computing, social tity, and we haven’t seen anybody else networks, digital content, and online advertising. do that yet.”

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September 2018 • digitaltransactions • 35 But there was another factor contrib- uting to the rapid growth of both services: when they emerged, there was no ALIPAY + WECHAT PAY substantial non-cash payment alternative. (Total payment volume in China, in billions) In the United States, the so-called Pays— Apple Pay, Google Pay, and Samsung 2014 2015 Pay—have to compete with a solidly $900 $1,000 established base of plastic payment cards 2013 that do the job pretty efficiently. In fact, $200 with contactless EMV cards, payment with plastic can be just as swift and effortless 2017 as with a mobile phone. The Chinese technology companies, 2016 by contrast, introduced mobile-payment $15,500 services that even the most rudimen- $9,200 tary roadside stand could accept. All the merchant needed was a QR code that customers could scan with their phone. And that code could be printed on a Source: CBInsights, compiled from various sources sheet of paper and pinned to the front of the stall. The user simply scans the “The U.S. doesn’t have a tradition of contactless payments,” notes code and enters the transaction amount Windsor Holden, who follows mobile payments worldwide at Juniper and a PIN. Research, a United Kingdom-based consulting firm. “Apple Pay is doing The payment method caught on a reasonable job, but, that said, it’s a comparatively small market.” rapidly as the base of smart phones grew. But merchants were pleased, ‘THE LONG GAME’ too. “QR was less investment for the merchant,” says Mohammad Khan, Now the question is whether either Chinese wallet will make a play for president and cofounder of Omnyway U.S. consumers, and if so, how soon. Experts who see this coming say it’s Inc., a San Francisco-based payments- likely to be years away, chiefly because the hard work of building out an technology company that builds acceptance base will take time. Mott calls it “the long game.” QR-based mobile-payments apps for Holden agrees. “I would say it’s going to be a lengthy process,” he merchants like Kohls Corp. says. “The first market will be Chinese tourists, the second market will be Watching the rapid growth of Alipay overseas workers and Chinese immigrants, then U.S. residents of Chinese and WeChat Pay—as well as Paytm in extraction, then from that point you get to a wider demographic.” India, in which Alibaba holds a 40% What could be attractive to merchants if that “wider demographic” stake—is a bittersweet experience kicks in is that UnionPay card transactions reportedly carry an advanta- for Khan, formerly a top executive at geous interchange rate. Omnyway’s Khan pegs it at roughly 70% of Visa ViVOtech, a now-defunct company that or Mastercard rates. tried for years to sell near-field commu- That prospect—coupled with QR code technology in place of NFC— nication to banks and payment networks, could resonate with U.S. merchant executives who view NFC and related with decidedly mixed results. “I worked routing issues as too much under the control of the card networks. “In so hard to make NFC go,” he says. the United States, merchants have strategic concerns about NFC,” says All three of the Pays rely on NFC, Mark Horwedel, chief executive of the Merchant Advisory Group, which which is a sophisticated—and, some advocates on behalf of large retail companies in payments matters. experts argue, superior— technology for He says most merchants would welcome Alipay and WeChat Pay, but payments. not unconditionally. “Large merchants understand they’re paying the But for China’s cash-based highest [transaction] costs in the world, and desire to encourage disrup- merchants, NFC could well have been tors. But it depends on the investment and whether there’s a material overkill. And now, with both Alipay and number of users,” he says. WeChat Pay pushing to build out a U.S. If that’s the rub, the Chinese wallets have passed the test in their merchant network, QR codes might home market. And if they truly are playing “the long game” in the United offer the fastest route to acceptance. States, they may have plenty of time to figure out how to do it here. DT 36 • digitaltransactions • September 2018 DigitalTransactions.net brings you the most important payments market news, in one place, updated the moment it happens

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A Good Policy

Peter Lucas

Once a novelty, data-breach insurance has quickly become a must- also include network security liabil- have. It won’t offset all the expenses associated with a cyber attack, ity, breach response, financial penalties awarded from lawsuits, forensics but it can ease a lot of pain. to determine why the event occurred, data loss, and lost business revenue. here is one inescapable truth for affecting 1.9 billion records, more While cyber-liability insurance typ- any company that handles con- than 1.5 times the number of records ically doesn’t cover the entire cost of a Tsumer data: At some point, they exposed in 2016, according to Amster- data breach, it can significantly reduce will be targeted by hackers looking to dam, Holland-based data-security pro- the financial hit a victimized company steal their data. This persistent threat vider Gemalto. incurs. For companies in the world of makes cyber-liability insurance a “Data-breach insurance is becom- digital payments, that protection can necessity. Without it, a company that ing a necessity because of the high make the difference between surviving has been attacked can be on the hook costs associated with the fallout from an attack and being put out of business. for paying damages out-of-pocket to a breach,” says Robert Siciliano, a Equifax Inc., which suffered a affected consumers, in addition to Boston-based data-security expert. major breach in 2017 that reportedly fines and remediation costs. “The more sensitive the consumer cost the credit bureau $439 million Of those payouts, remediation data a company handles, the more it that calendar year, reportedly had a can arguably be the most costly. has to lose from a cyber event.” policy covering $125 million of those Companies victimized by a data expenses. Global Payments Inc., breach, denial-of-service, or ransom- Spreading Out Risk which reported a breach in 2012, had ware attack must fund an ongoing The financial damage caused by a a policy that covered $30 million of public-relations campaign to regain cyber attack is so great that more the $121 million in associated costs. the public’s trust, mount an internal transaction processors, merchants. and On average, companies taking out investigation to determine the weak- financial institutions of all sizes are cyber insurance will purchase at least ness that was exploited, and install taking out policies than ever before, $1 million in liability coverage. Many new technology and security features according to insurance providers. will opt for tens of millions in cover- to prevent future attacks. Every major insurance carrier offers age, and some policies are written for Globally, the average cost for com- cyber insurance, including Chubb hundreds of millions of dollars, says panies experiencing a data breach was Ltd., The Hartford, and Travelers, as Tim Francis, enterprise cyber lead $3.62 million in 2017, according to a well as dozens of smaller carriers. for Hartford, Conn.-based The Trav- study by Traverse City, Mich.-based “Any carrier offering business insur- elers Companies Inc. When a pol- Ponemon Institute. While that amount ance would be foolish not to be in this icy exceeds $10 million in coverage, was down from $4 million in 2016, market segment,” Siciliano says. it is underwritten by multiple carri- companies experiencing breaches are While reimbursable expenses vary ers. “That’s how insurance companies seeing more records stolen or com- by carrier and policy type, most poli- spread out their risk,” Francis says. promised than ever. cies cover legal fees, fines, and the cost Cyber-liability coverage has evolved During the first six months of of notifying customers of a breach and so far since being introduced more 2017, there were 918 data breaches monitoring their credit. Coverage can than a decade ago that companies can

38 • digitaltransactions • September 2018 THE ONLY MAGAZINE COVERING THE TOTAL PAYMENTS MARKET In 2015, there were 131.2 billion digital transactions in North America. Digital Transactions magazine covered them all. It is the only publication addressing the total market. Financial institutions, independent sales organizations (credit and debit ISOs, ATM deployers and value added resellers), processors, along with the top tier retailers all turn to Digital Transactions for the trends affecting the payments market and, more importantly, their livelihoods.

Covering the electronic payments business for 13 years, Digital Transactions magazine is your independent source for changes affecting the payments market.Digital Transactions is also available in a digital edition on our web site, DigitalTransactions.net

Subscribe today by going to Bolandhill.omeda.com/dtr/ to start tackling the ever-changing payments market. customize their policies from a menu of options that include network-secu- Data Breaches By Source in 2017 rity liability, breach response, losses due to business interruption, data loss, 18.5% and cyber extortion. Accidental This last hazard is becoming more Loss common as hackers launch ransomware attacks, which hold a company’s data hostage by encrypting it and then 9.3% Malicious threatening to withhold the key if the Insider ransom is not paid. In 2016, Uber 71.9% Technologies Inc. reportedly paid Malicious hackers $100,000 after they accessed Outsider 0.2% the names, email addresses, and phone Hacktivist numbers of more than 57 million customers and drivers. 1,765 0.1% Uber paid the ransom based on a Total Incidents State promise by the hackers they would Sponsored/ delete the stolen information if the Unknown ransom was paid. The ridesharing company then tried to keep the inci- Source: Gemalto dent quiet, but Bloomberg News broke the story about a year later. It that the data is not retrievable even if Less Guesswork is not known for certain whether Uber the ransom is paid,” Francis says. While the cost of a cyber-insurance had cyber insurance. Indeed, some hackers will delete policy varies based on the amount of When dealing with a ransomware the data or keep copies of it to be sold the coverage, premiums are becoming attack, Travelers will bring in a team on the dark Web after the ransom is more stable because, after writing of experts to assess whether the hack- paid. “Our ransomware experts deter- policies for more than a decade, insur- ers will free the data being held hos- mine whether the data being held hos- ance carriers can better predict what tage and negotiate a settlement with tage is retrievable before any money the financial fallout will be from a them. “Sometimes it is determined is paid,” says Francis. cyber event. “Loss ratios are understood much better by carriers than they were several years ago, so premiums are Breaches by Type in 2017 not as high,” says Robert Halsey, a director with RGS Ltd. LLC, a Troy, 15.5% Mich.-based insurance broker. “When Access to cyber liability was first introduced, Financial Data there was more guesswork about how to price it because the cost of the risks was not as well known.” 6.9% As part of the underwriting pro- Account cess, carriers typically perform a risk Access 69.2% assessment of a company’s cyber secu- Identity rity to not only determine what weak- Theft 5.4% nesses exist, but also to create a blue- Existential print for correcting those deficiencies 1 1,765 Data before the policy is purchased. Total The Hartford, for example, uses Incidents 2.9% four main criteria when underwriting Nuisance a policy: the data assets a company has, how those assets are being protected, and how a company identifies 1. Data that could threaten the survival of a company or national security. Source: Gemalto 40 • digitaltransactions • September 2018 SPONSORED CONTENT ENSURING ELECTRONIC PAYMENT SECURITY FOR SPECIALTY MERCHANTS ost merchants are in business because of information is managed in a similar manner as credit their passion about a product or service, and card data. All customer information gets handled as an Mbecause they are interested in making money. “entire identity” and is accessible only on a need-to- To succeed, business owners must be prepared for know basis by the payment support team, limiting risk the many obstacles they can face. When it comes to exposure and the possibility of a breach. electronic payment acceptance, security is one of the challenges that is best faced upfront to avoid even SPECIAL MERCHANTS REQUIRE SPECIAL ATTENTION greater obstacles down the road. Knowing that merchants in certain industries are Payment security boils down to the protection of in need of extra data security — and being able to personal data. Credit card numbers, bank account provide it through a good payment gateway — allows information and personal identities are some of for a merchant services company like Humboldt to elements that can become compromised in a data focus on the management of risk and thereby o er breach. That data is highly sensitive and consumers greater risk tolerance. Whereas some merchant are keenly aware of existing threats, thanks in part services providers may decline businesses simply to media coverage of major breaches. Because of based on industry, Humboldt draws on years of this, merchants — especially those in ecommerce and experience and a unique set of risk tools to assess specialty markets — must take measures to ensure the viability of a business. data isn’t vulnerable and customers are put at ease. “More risk tolerance equals more approvals,” says CUSTOMER PROTECTION Cunningham. “With the right tools, a merchant account can be approved and stay active regardless While any business that accepts electronic payments of the level of heightened security they require.” is a possible target, those in industries gathering a large amount of personally identi able information When there is complete understanding of risk, require a hardened security environment. For companies like Humboldt and Inovio can o er the example, an online dating merchant has the respon- special attention needed for specialty merchants. sibility to not only protect customer data but also Handling security and risk factors the right way ensure total discretion by providing comprehensive from the onset allows for sustained and con dent security of all personal information, including names, business operations. addresses, email addresses and billing information. KEY PARTNERSHIP How is this type of security ensured? Companies like Humboldt Merchant Services and gateway provider Missteps made during the assessment or set up Inovio start with a rigid formula around PCI compliance. of merchant accounts in ecommerce and specialty industries can lead to costly errors down the road. “The objective is to make it so these merchants Put simply, data breaches can cause reputation don’t have to touch a credit card,” explains Conal damage that will put a merchant out of business. Cunningham, General Manager at Inovio. “In other words, tokenization happens even before a purchase This in mind, it’s important to partner with trusted gets made.” and proven industry experts like Inovio and Humboldt. Inovio is a revolutionary payments gateway that Tokenization ensures that sensitive data elements are provides seamless integration and global scalability. substituted with non-sensitive equivalents that have Humboldt has been providing customized payment no exploitable value. However, Inovio and Humboldt go acceptance to retail, ecommerce and specialty one step further to ensure ALL personally identi able merchants since 1992.

To learn more about Humboldt Merchant Services or to become a sales partner, visit www.hbms.com or call 877-387-5642. To learn about Inovio, please visit www.inoviopay.com Cyber Liability by the Numbers An analysis of 419 companies in 13 country or regional samples showed that $3.62 $141 27.7% is the average is the likelihood million cost per lost or of a recurring is the average stolen record material data total cost of a breach over the data breach next two years

Source: Ponemon Institute and responds to cyber threats. Appli- which can help lower the premium whose data has been stolen, and cants are then measured against peers and, in some cases, raise the amount provide access to credit-monitoring that have been assessed using the of coverage that can be purchased, services. same criteria, says Tim Marlin, head Francis says. Travelers will also per- Failing to comply with laws in the of cyber and professional liability for form a more streamlined underwriting states where affected consumers live The Hartford. review before renewing a policy. Poli- can bring the wrath of the state attor- “A company handling highly sen- cies are in force for 12 months. ney general and a class-action lawsuit sitive data is going to undergo a When a cyber event occurs, carri- by affected consumers. more extensive underwriting process ers provide policyholders with access Says The Harford’s Marlin: “We than a company handling less sensi- to a variety of advisory services make attorneys available to policy- tive data,” says Marlin. “That is why through third parties that help the holders to guide them through the there is no one-size-fits-all policy or policyholder navigate all the unfore- state laws and deal with a class-action pricing. How each policy applies to seen issues that pop up. One of those suit. Their in-house counsel does not each customer is unique.” issues is abiding by state law when a always have the expertise to navigate In addition to evaluating a com- breach occurs. Each state has its own these types of issues.” pany’s security weaknesses, Travelers laws regulating how a company must Carriers also make forensic will also look at its security strengths, report a breach, notify consumers experts available to assess what went

‘There is no one- size-fits-all policy or pricing. How each [insurance] policy applies to each customer is unique.’

42 • digitaltransactions • September 2018 SPONSORED CONTENT DOES YOUR POS MAKE YOU MONEY? As payment professionals, point of sale is frequently our toughest sell. Many factors play into the merchant’s purchasing decision, and price always seems to be a key in uencer. It’s a ne balance between making money for your business while also discerning the true value of your solution’s purchase price. Does the cost of your point of sale solution position you to do both?

We frequently see POS systems with added costs remaining competitive and saving your merchant for peripherals, software licenses, feature sets, money? Few successfully accomplish both and, service, and the list goes on. When these costs thus, close windows of opportunity. Electronic are itemized, the solution becomes expensive and Payments’ Exatouch bundles are priced to ensure creates confusion. The answer here is bundling. our agent partners establish a lucrative POS When all POS hardware, software and support portfolio, starting with upfront income from sales, services are included in one comprehensive and still come in lower than the competition. package, merchants can easily understand the full value and appreciate the “one solution for all” Regardless of cost, does your POS partner have a model. They are not forced to pick and choose program in place for those merchants who do not essential peripherals like printers and scanners have the capital to make the purchase? If not, you based on cost, and they don’t have to worry about could lose the sale. Payment options that extend which third-party apps that they can (or can’t) over a longer term, even if just a few months, a ord to augment their business. could be all the merchant needs to commit and start experiencing the bene ts of your services. Successful selling begins with resolving a merchant’s Exatouch’s three-month payment options give you challenges, and the “bundling” model enables you to greater exibility as a sales consultant, and a ords address them head-on with a variety of integrated your merchants the opportunity to own their own features at one low cost. Does your POS upcharge point of sale solution in short order. for business-building tools such as specialty tax, the direct transmission of Scan Data reports, CRV While we shouldn’t tout price alone, upfront and integration, support for 3rd party delivery services, monthly POS costs play into our conversations above store reporting, and back o ce management? and overall sales story. If your prices are not Are there costs for menu/inventory builds, training, transparent, or you’re not sure where you stand or other services? If so, these costs add up quickly amongst the competition, you are doing a disser- and will most likely prohibit your merchant. Look for vice to your business and merchants. Reach out to a solution like Exatouch® Point of Sale, which o ers Electronic Payments at 800-966-5520, ext. 223, to all modules and features at one low monthly cost and learn how Exatouch Point of Sale and our pricing encourages upselling and cross selling, boosting your structure can generate new opportunities for your revenue and customer retention. ISO and establish a pro table POS business long term. With the right products, price and partner As many merchants frequently struggle with cash program in place, you’ll walk into your next sales ow, the upfront cost is a major consideration. meeting with more tools, resources and con dence Does your POS make you money upfront while than ever before!

For more information, contact Keith Ashcraft, Director of Corporate Recruiting 800-966-5520, ext. 223 | [email protected] ‘Don’t assume your policy can cover a specific event, such as ransomware, until you need to make a claim.’

wrong and what steps need to be taken file, it showed they still may store D.C.-based National Cyber Security to prevent future attacks. The Hartford information that’s more sensitive than Alliance. “Don’t assume your pol- offers policies that provide funds for they realize. icy can cover a specific event, such improving data security after a breach. For example, a bakery accepting as ransomware, until you need to “Our aim is to make sure a policy- credit cards could be breached by make a claim.” holder is more secure after an attack hackers through its point-of-sale sys- When choosing an insurance car- than they were before,” Marlin says. tem if it is not properly protected, says rier, a best practice is to start with Many carriers will also write poli- Insureon President Jeff Somers. an insurance broker that can assess cies that provide coverage in the event “It’s an unfortunate fact in modern the company’s liability needs, flesh a third party that has access to the business that no one is safe from out all the ways its network can be breached company’s network inadver- cyber threats,” Somers says. “For breached, and determine how much tently opens the door to hackers. many small businesses, cyber-liability insurance the company needs and insurance is available as a standalone what kind of deductible it can afford. Small Targets policy or as an add-on to their business Armed with that information, the Large financial institutions, proces- insurance policies. Depending on an broker can then match the company sors, and merchants aren’t the only organization’s needs, our customers to an insurance carrier. In some cases, entities in need of cyber-liability choose first-party or third-party cyber- a company may need to purchase cov- insurance. Small and mid-size mer- liability insurance or a combination of erage from more than one carrier. chants and independent sales orga- both types of coverage.” Finally, with the threat of breaches nizations are also being targeted steadily rising, businesses need to be by hackers. ‘A Worthless aware that just because they take out A joint poll from Insureon, a Piece of Paper’ a cyber-insurance policy, they can’t Chicago-based provider of cyber- While insurance can buy processors, rest when it comes to upgrading their liability insurance, and Manta, a merchants, and financial institutions network security. Columbus, Ohio-based provider of peace of mind, data-security experts “The number of cyber attacks education and marketing tools and recommend they have intimate is going to keep growing,” says other resources for small businesses, knowledge of the terms of their pol- Schrader of the National Cyber Secu- found that of the 34,000 cybersecu- icy before they have to make a claim. rity Alliance. “Liability coverage can rity incidents that occur daily in the “Companies should know exactly be tricky to understand, and the last United States, small and midsize com- what’s covered in their policy and thing any company victimized by panies are targeted 61% of the time. what’s not so there are no loopholes a hacker wants to be told is that While the same poll found that that prevent coverage from kicking in their policy is a worthless piece of 76% of the small businesses sur- when needed,” says Russell Schrader, paper because they didn’t follow their veyed don’t keep customer data on executive director for the Washington carrier’s compliance guidelines.” DT

44 • digitaltransactions • September 2018 SPONSORED CONTENT UNDERSTANDING OFAC: A BEST PRACTICES COMPLIANCE GUIDE FOR ALL BUSINESSES Over the last decade, the O ce of Foreign Assets Control (OFAC) has imposed $4.3 billion in civil money penalties. But did you know that businesses other than banks received 81% of these nes last year?

Yes, OFAC violations are costing U.S. businesses PROTECT YOUR BUSINESS WITH SANCTIONS SCREENING hard-earned cash. Since the attacks of Sept. 11, 2001, OFAC’s role in national security has The crux of your OFAC compliance program is its increased immensely. The passage of the USA denied party screening process. Sanctions lists are PATRIOT Act brought with it a broader de nition of updated every time OFAC identi es a new individual the term “ nancial institution” in order to highlight or entity to be added or removed from that list, industries that, by their very nature, are at a which can occur daily. OFAC’s various regulations heightened risk for money laundering and OFAC determine your company’s risk pro le and how violations. Those industries are de ned by OFAC often you’ll need to cross-check that list: with every as “All Other Businesses.” transaction, with every new customer, or your entire customer database at periodic intervals. OFAC FINES ARE COSTING “ALL OTHER BUSINESSES” UNDERSTANDING OFAC AND SANCTIONS SCREENING From 2006 to 2017, nearly 30% of all nes levied against OFAC’s “All Other Businesses” category Comprehending OFAC’s role in your industry is the ranged from $100,000 to $499,999. For many key to a successful sanctions screening program. companies, a penalty that hefty could be enough Download CSI’s white paper, Understanding OFAC: A to put them out of business. Even if not, an OFAC Best Practices Compliance Guide for All Businesses, violation could cause irreparable reputational harm to learn how you can enhance your compliance that a ects pro tability for years to come. Here are program and mitigate potential risks. In the paper, just a few of the maximum penalties OFAC can levy CSI’s regulatory experts o er the intel you need to against businesses: improve your sanctions screening program, including:

 Up to $20 million in criminal penalties and  Detailed analyses and data trends of OFAC nes 30 years in prison for willful violations of by type and industry from 2006 to 2017 some programs  OFAC implications for several industries,  Up to $1.4 million in civil penalties for each including insurance, MSBs, nonpro ts and others violation of the Foreign Narcotics Kingpin  Five critical best practices for enhancing your Designation Act company’s sanctions screening program  Up to $85,236 for each violation of the  Steps to handle positive screening matches Trading with the Enemy Act CSI’s white paper provides insight on overcoming With the stakes so high, companies across all types your toughest compliance challenges and of industries must understand the importance of enhancing your sanctions screening program. OFAC compliance and take proactive steps to avoid OFAC compliance is complicated, but the cost of a compliance pitfall. non-compliance is far too steep to risk.

Understand OFAC by downloading the white paper now. https://www.csiweb.com/resources/white-papers/understanding- ofac-a-best-practices-compliance-guide-for-businesses ENDPOINT Yes, there are still many questions to be answered about blockchain uses and governance. However, waiting for blockchain perfection could mean missing a The Blockchain Is Taking big opportunity. Pragmatic Steps Toward Being More Than Hype

Distributed ledgers are slowly but steadily working their way into mainstream financial applications. That means the time has come to understand how blockchain works— and to take the technology more seriously, says Esther Pigg.

espite all the hype surrounding it, block- With the global financial world getting smaller chain—or “distributed-ledger technol- by the moment, this has great potential for gen- Dogy” (DLT)—remains a complicated erating revenue and reducing costs, particularly mystery to many. Here is a simple description in the areas of cross-border payments, securities I find helpful in explaining what blockchain is. trading, and compliance. Esther Pigg is senior Imagine there is a spreadsheet (ledger) that vice president of Blockchain Projects product strategy, is duplicated (distributed) thousands of times banking and across a network of computers (nodes). The And Proofs of Concept payments at spreadsheet is constantly reconciled (by miners) For now, real-life uses of blockchain technol- Fidelity National and immediately updated across its thousands of ogy are still limited, but financial institutions Information instances whenever a new transaction (block) is and fintechs are exploring blockchain use cases Services (FIS), Jacksonville, Fla. added. The spreadsheets are permanent, public, for banking and payments. Proofs of concept, and verifiable (proof of work). innovation-lab experiments, and controlled This is notable and important because: pilots are under way with selective back-office  All transactions are verified and approved and customer-facing solutions. Here are some by consensus among participants in the network, notable projects currently in play: making fraud much more difficult;  The Bank of England plans to rebuild its  The full chronology of transactions that Real Time Gross Settlement system so it can take place is tracked, allowing anyone to trace interface with private business and platforms or audit prior transactions; using DLT;  The technology operates on a distributed  HSBC is testing blockchain suitability for platform, rather than a centralized one like those trade finance. Working with ING, it issued a used by most countries’ banks, providing more letter of credit to U.S. agriculture firm Cargill resilience to hacks or outages. for a shipment of soybeans. A transaction that Secure by design makes blockchain potentially normally requires 10 days to clear was com- suitable for recording events, contracts, medical pleted in 24 hours; records, and other records-management activities  JPMorgan Chase’s blockchain unit like identity verification, transaction processing, or tested a new application to handle financial even voting. More broadly, blockchain technology instruments, having recently phantom-issued can be applied to any multistep transaction where a $150 million, one-year, floating-rate Yankee traceability and visibility are required. certificate of deposit;

46 • digitaltransactions • September 2018 SPONSORED CONTENT FROM SMALL ISO TO INTERNATIONAL POWERHOUSE How You Can Share in the Success NXGEN is a technology company that delivers state of the art payment solutions to merchants globally. Founded in 2002, and based in White sh MT, NXGEN has grown with local o ces across the country and a global footprint in 30 countries.

The company has grown from the dreams of integration with partners enabling EMV on legacy Founder/CEO, Thomas P. Nitopi, to a global leader POS systems, NXGEN has become a key player in in the payments industry with a footprint in more the restaurant/retail vertical. than 30 countries and sales volume reaching over $5 billion in 2017 and is on track to reach NXGEN continued to push the envelope ahead of $7 billion in 2018. the curve by partnering with CardX to bring a true surcharging solution to the market ahead of its NXGEN set itself up for double-digit growth year competitors. Surcharging is a wave of the future, but over year by setting its vision on the international NXGEN is pioneering it now with a fully compliant, market, through the development of software, turn-key solution that enables Agents/ISO’s to adding payment solutions ahead of industry trends, penetrate key vertical markets such as B2B, Auto and expanding the understanding of an ISO in Tow and Repair, Construction and many others. today’s landscape. Most recently NXGEN has turned its focus to In 2015 NXGEN launched the WorldAccess program app-based solutions such as ParkMobile and which allows ISOs, MSPs and Sales agents in any vertical market solutions such as xtraChef. of 30+ countries to sell within these countries and ParkMobile is a parking app that integrates with get paid in their home currency. Agents/ISO’s now our eCommerce solution to facilitate the payment have a smooth, seamless way to place merchants aspect of the application. XtraCHEF brings the outside the U.S. restaurant vertical a 360-degree solution to their operations with a backend invoicing and account However, it is the vision and innovation of the management capability, Integrated POS o erings, NXGEN management team on current and future and payment processing. trends in payments that has catapulted the overall business. Technology, Partnerships and Vertical B2B is a relatively untapped market opportunity Focus have enabled NXGEN to allow many for Agents/ISO’s. NXGEN recognizes the growth Agents/ISO’s to achieve success. opportunity this sector represents. With our surcharging solution, Level 3 solutions, Invoicing Early on NXGEN recognized restaurant/retailers and billing solutions and key payment services needs for business exibility and insights as part of these manufacturers/wholesalers require, the payment process. NXGEN led the way with the NXGEN has again beat the trends and set up our testing and selling of the iPad based POS system, Agents/ISO’s for success with signi cant volume, talech. With the new Poynt Smart terminal and higher margin opportunities.

NXGEN’s ability to look forward and anticipate stakeholder’s needs has helped the company grow over the past 15 years and o ers promise for future expansion. You can be part of this success. Contact us at 866-863-9977 or [email protected] to discuss our partnership programs.  Mitsubishi UFJ Financial Group is reported to be using a blockchain- the best of blockchain and the best of is partnering with Akamai Technolo- based technology for its recently traditional payment rails, we may be gies to develop its own blockchain launched international money-transfer able to not only reduce friction but for payments with the twin goals of service One Pay FX. unlock new areas of revenue growth processing transactions in under two in cross-border payments. Several seconds each and processing 1 million Still A Ways Off DLT projects are working to reduce transactions per second; One common trend of thought is that the time and costs of settlement. Once  Nasdaq introduced its next- the transition to a blockchain-driven those barriers are lowered enough, we generation Financial Framework, financial-services world is imminent. can expect to see much greater pay- which allows for blockchain integra- The reality is that DLT is very prom- ments volume and revenue as a result. tion as part of its core services, to its ising but has some way to go. Visa exchange and interchange clients. SIX Inc., which is often the benchmark Shaping the Future Swiss Exchange is an early adopter; against blockchain, can supposedly Yes, there are still many questions to  SWIFT, the Belgium-based inter- handle up to 24,000 transactions per be answered about blockchain uses national financial-messaging organi- second (TPS), while larger institutions and governance. However, waiting zation. successfully conducted a DLT like stock exchanges can execute up to for blockchain perfection could mean proof of concept for Nostro accounts 80,000 TPS. Currently, Bitcoin can han- missing an opportunity to help shape (a bank’s account in a foreign cur- dle seven TPS and Ripple/XRP roughly the technology. rency in another bank) reconciliation 1,000 TPS. Several blockchain projects To understand how blockchain with 34 banks. It has also conducted have a goal of surpassing 1 million TPS can enable the financial industry several other proof-of-concept experi- but their ability and timetable for such to become more efficient, resilient, ments as part of its global payments- scale remains unclear. and reliable requires both continued innovation service. Most organizations must keep research and real-life applications their existing infrastructures in place and pilots. Together, we are learn- Emerging Realities as they work to identify specific use ing the real advantages of this new The financial industry is primarily cases and problems that DLT can technology—and the future opportu- starting with private collaborative solve. For example, by combining nities are constantly unfolding. DT blockchain networks to ensure customer information remains private and safe from hackers and other ADVERTISER INDEX threats to the ecosystem. With the AMP 905-597-2333 www.amobilepayment.com Page 15 tremendous pressure to demonstrate CSI 800-545-4274 www.csiweb.com Page 45 regulatory compliance, secure solu- Cutter 610-451-4096 www.cutterfinancial.com Page 13 tions like DLT may become a crucial Digital Transactions 877-658-0418 www.digitaltransactions.net Pages 27, 35, 37, 39 component in reducing compliance Electronic Merchant Systems 866-887-8907 www.emsagent.com Inside Back Cover costs in the years ahead. Electronic Payments 800-966-5520 www.electronicpayments.com Page 43 Blockchain’s “distributed” technol- eProcessing Network 800-296-4810 www.eprocessingnetwork.com Page 19 ogy can be useful in back-office tasks ETA Strategic Leadership Forum www.etaslf.com Page 24 such as transaction and contract recon- General Credit Forms 888-GCF-NEWS www.gcfinc.com Page 21 ciliation to enable faster updating and Harbortouch 800-201-0461 www.isoprogram.com Page 1 more accurate recordkeeping. Block- Humboldt Merchant Services 877-457-4479 www.hbms.com Back Cover & Page 41 chain can cut the cost of daily check- Magtek 562-546-6467 www.magtek.com Page 3 ing and re-checking of transactions Merrick Bank 800-267-2256 www.merrickbankacquiring.com Page 29 and chains of ownership, which has the NAC2018 www.natmc.org Page 33 potential to save financial institutions NXGEN 866-863-9977 www.us.nxgen.com Page 47 in terms of head count and man-hours. PAX 877-859-0099 www.pax.us Page 5 Banks are starting to dip their Paya 855-603-1090 www.paya.com Page 17 toes in these waters, and notable pilots PaySafe 800-309-0524 www.paysafe.com Page 23 are focused on reducing the cost and Sound Payments 844-319-5635 www.soundpayments.com Page 11 complexity of cross-border payments. TSYS 866-969-3350 www.tsys.com/solutions/products-services/acquiring/ Inside Front Cover These transactions are traditionally USAePay 866-490-0042 www.usaepay.com Page 9 full of friction and manual processes. Worldpay 866-622-2390 www.vantiv.com/wespeakISO Page 7 Banco Santander SA, for instance,

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