AMAZONAMAZON PAYPAY How Amazon’S Payments Unit Is Stepping out Onto a Bigger Stage

VOLUME FIFTEEN, NUMBER TWO • DIGITAL TRANSACTIONS.NET • FEBRUARY 20182018

PRIMETIMEPRIMETIME FORFOR AMAZONAMAZON PAYPAY How Amazon’s payments unit is stepping out onto a bigger stage.

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DIGITALTRANSACTIONS.NET

CONTENTS February 2018 ■ Volume 15, Number 2

22 Primetime for Amazon Pay Amazon long ago mastered e-commerce, and now its payments unit is making moves in physical stores and in voice commerce. Will it succeed here as it has online? 4 The Gimlet Eye The Allure of Brick And Mortar 6 Trends & Tactics The Hazy Horizon for ... Opening a Door for Tech- Cannabis Payments Oriented Payment Cards The U.S. Attorney General’s decision A plastic card that behaves like a to crack down on pot has further mobile phone stole headlines last complicated a tortured situation month. Will it catch on? for sellers in states where the Debits Already Account for drug is legal. Almost Half of Same-Day How Visa’s About-Face ACH Volume on Signatures May Spur Same-day processing for debits on the EMV Adoption automated clearing house network Holdouts may now feel more didn’t start until Sept. 15, but by the motivated to beef up point-of-sale end of December same-day debits had authentication. nearly caught up with same-day credits. Security Fears Hobble Plus, Security Notes depicts a future Mobile Payments ... full of potential for “smart selves,” and What’s holding back adoption and Payments 3.0 cautions that the next usage? Banks and credit unions blame big thing in payments never seems to consumers’ wariness about fraud. entirely displace the last big thing. ‘Given its wide distribution 18 Acquiring No Shortcuts To Becoming a PayFac and use, we’re looking to As the payment-facilitator model gains favor, understanding the process expand the ability to use to become one has become more important than ever. 29 Networks Amazon Pay in the Amazon PayPal Reimagines the Point of Sale A series of partnerships with the card networks and now individual app beyond restaurants to banks have positioned the online-checkout kingpin to make the leap to other types of retail a mainstream digital-payments platform. 33 Components and goods.’ Puttin’ on Payments PAGE 22 Wearables, a hot sector within the booming Internet of Things, are being outfitted with new payments technology. Will wearables generate a tide or just a trickle of new electronic payment transactions? 38 Endpoint Why We’re Offering Cryptocurrency Solutions to Merchants Solutions are coming for slow speeds and high fees, says Eric Brown, who argues that even now the advantages for merchants are too good to pass up.

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 FEBRUARY 2018 • VOL. 15, NO. 2

PUBLISHER Robert A. Jenisch EDITOR-IN-CHIEF John Stewart Senior Editor The Allure of Jim Daly Senior Editor, Digital Brick And Mortar Kevin Woodward Correspondents obody knows for sure, but some time this year Amazon.com Inc. could Jane Adler unleash a double-barreled assault on the world of physical-store payments. Lauri Giesen As our cover story this month lays out, the Seattle colossus has already Karen Epper Hoffman N Peter Lucas introduced Amazon Pay Places, a mobile order-ahead application for Amazon Pay, Linda Punch and is working to expand it. Elizabeth Whalen Art Director/Production Editor Beyond that, it’s perfecting its Alexa voice-based commerce technology, which can Jason Smith allow users to interact with restaurants and other stores. Last November, that technol- Editorial Advisory Board ogy was opened up to outside developers, who can integrate Amazon Pay capability. Eula L. Adams But Amazon is far from alone in this ambition. As our story starting on page 29 John Elliott makes clear, PayPal Holdings Inc. entertains similar aspirations, even if it’s pursu- Alex W. “Pete” Hart Former Chief Executive Officer, ing them in a different way. MasterCard International Over the past two years, PayPal has patiently built alliances, starting with the William F. Keenan major card networks and now with some of the nation’s biggest financial institu- President, De Novo Corp. Dr. Gideon Samid tions, that give it the keys it needs to unlock physical-world payments. Already, Chief Technology Officer, PayPal has started pushing its Venmo person-to-person payment app to the point of AGS Encryptions Ltd. sale, allowing users to pay at the cash register in the same way they pay other people. Director of Advertising Robert A. Jenisch, 877-658-0418 This is not a new strategy for PayPal. Several years ago, it made a run at POS [email protected] payments through a plastic card and a deal with the Discover Network, which Advertising Sales Representatives agreed to route the transactions. That effort faded, and now version 2.0 is emerging. Robert Mitchell, 877-658-0418 [email protected] Why this ambition to get physical? There are any number of possible expla- nations, including user demand and the never-ending hunt for revenue growth. Cathy Woods, 602-863-2212 [email protected] Venmo, for example, can charge merchant fees for acceptance, giving it a revenue Digital Transactions, Digital Transactions News, base it doesn’t have with its free P2P service. and digitaltransactions.net are publications of But the more basic explanation is that physical stores are still, even after all Boland Hill Media LLC, 800 Roosevelt Road, Suite B212, Glen Ellyn, IL 60137 these years of e-commerce, where the bulk of transactions are. Forrester Research John Stewart, Managing Director estimates online sales command a 12.7% share of overall retail sales volume. The Robert A. Jenisch, Managing Director firm predicts that share will grow to 17% by 2022. Simple math tells you that, For advertising information, call 877-658-0418. To subscribe or give us a change of address, even four years from now, physical-world stores will still control 83% of retailing. go to www.digitaltransactions.net and click on To be sure, online sales are growing much faster—five times faster, according “Subscriber Care” or call 847-559-7599. The views expressed in this publication are not to Forrester. But can payments firms afford to ignore that huge pool of POS trans- necessarily those of the editors or of the members actions, many of which are still consummated on checks and cash, or with little of the Editorial Advisory Board. The publisher makes reasonable efforts to ensure the timeliness if any feedback to merchants in the form of customer data or to customers in the and accuracy of its content, but is not engaged in form of rewards? any way in offering professional services related to financial, legal, accounting, tax, or other matters. Not likely. Which is why two huge e-commerce players are making their play Readers should seek professional counsel regard- for the POS. We won’t pretend to compute their chances of success. The marketing such matters. All content herein is copyright © 2018 Boland Hill Media LLC. No part may be place will do that, no doubt swiftly. reproduced without the express written permission 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, February 2018 $119/year, payable in 4 • digitaltransactions • U.S. currency. Your Payment Partner of Choice

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pax-smart-retail-digitrans.indd 1 9/6/17 8:51 AM Trends & Tactics

The Hazy Horizon for Cannabis Payments

After a short-lived scare, investors upward trajectories after taking a hit money in these industries,” says pay- in the budding cannabis sector last the day Sessions made his announcements consultant Eric Grover, prin- month didn’t seem to be rattled by the ment. Some firms saw their share cipal at Minden, Nev.-based Intrepid hard line being taken by U.S. Attor- prices dip by more than 20% that day, Ventures. But individual investors and ney General Jeff Sessions against but many recovered fast, with several some investment managers willing to their industry. But the legal marijuana up by double-digit percentages. As take a risk “are basically making a industry is certainly no closer to get- of mid-January, the companies’ col- bet that these companies won’t be put ting payment card merchant accounts lective gain since Dec. 1 was 26%, out of business. If that plays out, they and other mainstream financial ser- according to Yahoo! Finance. stand to profit handsomely,” he says. vices, at least for the time being. What gives? Part of the reason Still, consultant and payment- Sessions announced Jan. 4 that the could be that investors in cannabis facilitator executive Todd Ablowitz, go-easy federal approach to the mari- companies believe Sessions’s position chief executive of Centennial, Colo.- juana industry in states where canna- will not survive in the long term in light based Double Diamond Group, says bis is legal, announced in 2014 by the of the increasing number of states, most Sessions’s new policy “didn’t help Obama Administration through its so- recently California, that have legalized any” in bringing mainstream financial called Cole Memo, was over. Instead, recreational and/or medicinal pot. services to the cannabis industry. He Sessions is giving U.S. attorneys in “I don’t think conservative pen- predicts that the development is push- each state discretion over enforcement sion funds or mutual funds are putting ing the federal and state governments of federal laws regarding cannabis. At the federal level, cannabis remains a Schedule 1 substance, in ‘Investors and patients league with harder drugs such as heroin need not panic or worry. and LSD. Because of that, most banks This is a marathon, not a have refused to provide merchant sprint, and indictments accounts or other financial services are not imminent.’ to dispensaries and industry suppliers, —Jeremy Roberts, chief executive, even after the Cole Memo came out. Medical Cannabis Payment Solutions Surprisingly, the stocks of about a dozen publicly traded vendors to the cannabis industry—most based in the U.S. and Canada, with one in the United Kingdom—resumed their

6 • digitaltransactions • February 2018

Trends & Tactics toward a showdown. “I think it has to chief executive of Las Vegas-based “We don’t, therefore, have the come to a head,” Ablowitz says. Medical Cannabis Payment Solutions, issues with banking that others have In January, 18 state attorneys gen- announced his system for medicinal because we can comply with state eral wrote a letter to Congressional marijuana dispensaries, dubbed Green, regulations and aren’t violating laws leaders asking them to advance leg- on the same day that Sessions made his not covered by federal marijuana pro- islation allowing states with legalized announcement. tection,” says Roberts by email. medical or recreational use of mari- Green is a private-label debit sys- Roberts remains hopeful about the juana “to bring that commerce into tem that does not provide general- cannabis industry’s future. “Investors the banking system.” purpose payment card acceptance, but and patients need not panic or worry,” The frostier climate in Washing- does enable state-licensed dispensa- he says. “This is a marathon, not a sprint, ton hasn’t stopped one cannabis pay- ries to store customers’ information and indictments are not imminent.” ments entrepreneur from going forward and accept payments with just a few —Jim Daly, with additional with a new service. Jeremy Roberts, clicks, Roberts says. reporting by Kevin Woodward

How Visa’s About-Face on Signatures May Spur EMV Adoption

Visa Inc.’s announcement last month (“Signing off,” December 2017), “is EMV, according to Visa’s data, that it will make signature authen- an expected move by the card network has been successful at reducing coun- tication optional for EMV contact leader,” says Michael Moeser, direc- terfeit card fraud at the point of sale. and contactless transactions in North tor of the payments practice at Jave- Less than two years after the U.S. America starting in April might pro- lin Strategy & Research, a Pleasanton, liability shift for EMV chip accep- vide another boost for merchants who Calif.-based advisory firm. tance launched, fraud declined 66% have yet to adopt chip-card accep- “Visa has taken a sensible at EMV chip-enabled merchants, the tance, suggests one analyst. approach in specifically calling out card brand says. More than 460 mil- Signatures remain a require- EMV and contactless-eligible transac- lion Visa-branded EMV chip cards ment for Visa magnetic stripe-based tions for elimination of the signature have been issued. transactions not subject to existing requirement,” he says in an email. A retailer trade organization, the no-signature policies for low-value “By maintaining the need for older Merchant Advisory Group, welcomed transactions. tech-based mag-stripe transactions to Visa’s decision. “MAG appreciates Visa’s move, joining that of Master- keep signature, it further incentivizes the final move by Visa to eradicate card Inc., Discover Financial Services, both issuers and merchants to transi- this dated cardholder-verification and American Express Co., which ear- tion to more secure technologies, such method,” a note to MAG’s mem- lier also said they will make signa- as EMV, to battle counterfeit card bers read. In October, at the time tures optional with an April rule change fraud at [the] point of sale.” of Master card’s announcement, Wal- Mart Stores Inc. praised the decision. Other merchants may like the move, too. “It will be well-received by merchants, since it simplifies the payments process and reduces friction, but it will take a while for systems to be adjusted and team members re-trained,” says Thad Peterson, senior analyst at Aite Group LLC, 66% a Boston-based firm. “For custom- Decline in fraud at ers, I don’t think it will dramatically EMV chip-enabled increase spend. Instead they may just merchants be saying ‘It’s about time.’” —Kevin Woodward

8 • digitaltransactions • February 2018 Security Fears Hobble Mobile Payments ...

If you ask consultants what’s holding back mobile payments in the United Who’s Popular? States, you’ll get answers ranging from lack of acceptance ubiquity to mal- Who’s Not? functions at the point of sale to spotty (Percentage of responding rewards to consumers’ perceptions that institutions that either offer or plan to offer each payment cards work just fine. 53% 52% 49% mobile-payments brand) Now the nation’s financial insti- 46% tutions have weighed in on the matter, and their answer is: their own and 22% 21% consumers’ security fears. 12% 13% 13% 5% Fifty-one percent of banks and 2% 2% 4% 1% credit unions cite security concerns Apple Google Samsung Visa Masterpass Microsoft Express as a “high” barrier to consumer adop- Pay Pay1 Pay Checkout Wallet Checkout tion, according to a report released in January by the Federal Reserve 1. Formerly Android Pay Source: Boston Fed Bank of Boston. Another 35% rate Not surprisingly, the survey “Given some of the challenges these concerns as a “medium” barrier, that forms the basis of the Boston related to security and merchant accep- and only 14% call them a “low” bar- Fed’s report, entitled “2016 Mobile tance, customer enrollment is growing rier. No other factor scores as high in Banking and Payment Practices of at a slow rate,” says the report. the survey, which consolidates results U.S. Financial Institutions,” found What’s at the bottom of these chal- gathered in 2016 from 706 finan- consumer adoption and usage rates lenges? Much has to do with a crucial cial institutions across seven Fed dis- lagging. Some 211 institutions said difference between mobile payments tricts. Some 450 of these institutions they offer mobile payments, and of and its close cousin, mobile bank- responded to the question about adop- these 144 track enrollment, while 131 ing. Banks and credit unions “directly tion barriers. track usage. Eighty-one percent of manage and control access to their Another “high” barrier, cited by those that track the matter report an mobile-banking services, but mobile 44% of responding institutions, is enrollment rate of less than 5% of the payments can be offered by third “low merchant acceptance/lack of customer base. Just 1% say the rate parties independent of the [financial merchant interest.” A further 44% rate ranges from 35% to 50%. For usage, institution] (e.g., merchant and wal- this as a “medium” barrier. the percentages are the same. let provider mobile apps) and involve

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. 6.62% 6.41% Note: This is sourced from The Strawhecker Group’s merchant datawarehouse of over 3 million merchants 6.17% in the U.S. market. The ability to understand this data is 5.51% important as SMB merchants and the payments providers 5.73% that serve them are key drivers of the economy. All data is for SMB merchants defined as merchants Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 with less than $5 million in annual card volume.

February 2018 • digitaltransactions • 9 Trends & Tactics multiple parties in the transaction to recede. Among all 706 responding saying they plan to (chart). For rival process,” the report says. “Therefore, institutions, 80% said it will take any- “Pays” Google Pay, from Alphabet there are more points of vulnerability where from three to five years for the Inc.’s Google unit, and Samsung Pay, and less standardization of mobile- service to achieve “industrywide con- from Samsung Electronics Co. Ltd., payment functions and processes.” sumer adoption” at the point of sale. the corresponding percentages are The most prevalent security con- For in-app and mobile Web usage, 22%/52% and 21%/49%, respectively. cern for financial institutions is “inade- 75% cite the same time span. Google Pay was formerly known as quate customer security behavior,” with For now, Apple Pay enjoys a Android Pay. 64% of 450 respondents rating it a wide lead among the 388 banks and Lagging well behind, however, “high” concern. Coming a close second, credit unions that say they already are Visa Checkout, Mastercard Inc.’s at 63%, is “card-not-present fraud.” offer or plan to offer mobile pay- Masterpass, Microsoft Wallet, and As a result, the horizon for mass ments, with 46% currently offering AmEx Express Checkout. adoption of mobile payments continues Apple Inc.’s wallet, and another 53% —John Stewart

... Opening a Door for Tech-Oriented Payment Cards

When major technology companies started launching mobile-payments services a few years ago, many observers figured digitized and tokenized card credentials would soon replace The Wallet Card: old-fashioned plastic. But now, the A “win-win” chronically sluggish adoption and business model for usage rates these mobile wallets have digital payments? registered are lending new life to (Graphic: Dynamics) plastic cards. Dynamics says it’s in talks with Clearly, mobile-payments services The twist is that the next genera- international banks, including Emir- from the so-called Pays, powerhouse tion of payment cards will be stuffed ates NBD, that could start issuing the tech firms Apple Inc., Alphabet Inc., with technology associated with smart Wallet Card within months. As for and Samsung Electronics Co. Ltd., phones, including a display, push but- any U.S. issuers, there is “no specific” have so far failed to wow consumers tons, cellular connections, and mes- launch date right now, a company (see previous story). saging capability. spokesperson says. By contrast, the plastic card is a The first such cards could hit the The card garnered headlines for familiar form factor, Mullen argues, market as early as this year. Dynamics Dynamics, a company that has largely constituting the “biggest device mar- Inc., a Pittsburgh-based developer, labored in the shadows of the pay- ket in the world,” with 20 billion introduced its Wallet Card last month ments industry developing the capa- issued. “The phone is great for com- at the CES (formerly Consumer Elec- bility to embed phone-like features in munication, but until you see people tronics Show) in Las Vegas, with an standard plastic cards. Now, an oppor- put their car keys or house keys on assist from partners like Visa Inc. tunity may have opened with the dis- their phone, they won’t put their card The card is standard size and thick- appointing results of mobile payments. keys on their phone,” he says. ness for a credit or debit card yet fea- “We have always asked ourselves, Still, the Wallet Card could face tures a cellular chip from Sprint, a why is everyone trying to move pay- formidable challenges. Previous efforts self-charging battery, a display, and ments to the phone?” says Jeff Mul- at next-gen smart cards, including buttons the cardholder can use to toggle len, founder and chief executive at products from startups like Coin and between card accounts. The card can be Dynamics. The plastic card, he says, Plastc that allowed consumers to load instantly issued at bank branches and is a “workhorse” for payments, with multiple cards, came to nothing. is expected to have a useful life well untapped potential that the right on- Another hang-up could be the card’s beyond that of conventional cards. card technology can unlock. cost. Mullen won’t give specifics, but

10 • digitaltransactions • February 2018

Trends & Tactics says “it’s not as high as you think.” than will traditional cards, and there plastic is a significant benefit,” says Issuers could charge cardholders for will be upfront setup to manage the Thad Peterson, a senior analyst at Aite both the card and the cellular signal, over-the-air communications with the Group, a Boston-based consultancy. but Mullen doubts they will. That’s cards,” notes Rick Oglesby, principal Dynamics has attracted more than because the card offers them new mes- at AZPayments Group, a Mesa, Ariz.- $110 million in investment capital saging capability they can use to mar- based consultancy. and has been working on related tech- ket lucrative services or combat fraud. “There’s no proven consumer nology for years. As early as 2010, it And its durability will eliminate market for wallet cards so it will be produced a card for Citigroup Inc. that multiple re-issues, he adds. At the highly speculative for issuers to invest featured buttons cardholders could same time, issuers can avoid the cost in them,” he adds. “The business case press to apply loyalty rewards for a of card re-issuance in case an account for issuers will still not be strong.” purchase or use a credit line. is compromised by simply shutting But while it may take a while, the Now, Mullen figures his company down the account on the card and Wallet Card could ultimately exert a has the device banks and credit unions replacing it remotely strong appeal for issuers, say some are looking for. “The Pays don’t have But on this point, at least, observ- experts. “The capability to immedi- a win-win business model,” he says. ers are skeptical. “These cards will ately replace an account that has been “We do.” still be much more expensive to issue compromised without issuing new —John Stewart

Debits Already Account for Almost Half of Same-Day ACH Volume

Same-day processing for both credits for the year’s final quarter alone, same- and debits on the automated clear- Same-Day Soars day debits accounted for nearly 47% of ing house network finished its first 18.8 total same-day traffic. full quarter on Dec. 31, and numbers 16.4 “We are ... pleasantly surprised by released a couple of weeks later show the initial adoption of same-day ACH 12.8 a solid increase in volume and dol- debits,” Michael Herd, senior vice lars. In particular, same-day debits, (Same-day president for ACH network adminis- introduced Sept. 15, are growing fast ACH credits tration at NACHA, says by email. “We and finished the final quarter account- and debits, didn’t expect this amount of same-day ing for nearly half of all same-day 2.0 in millions) ACH debit volume in the first quarter transactions. Q3 2017 Q4 2017 of availability. It is gratifying to see All told, financial institutions han- this level of industry adoption.” dled 75.1 million same-day credits and Source: NACHA For same-day processing as debits in 2017, of which 18.3 million For the fourth quarter, total same- a whole, “the steep increase from were debits, according to the num- day transactions came to 35.2 million, up November to December is reflective bers released by NACHA, the Hern- 138% over the 14.8 million recorded in of financial institutions’ promotion don, Va.-based governing body for the third quarter. In particular, December of same-day ACH, greater aware- the ACH. Same-day dollars processed chalked up a 50% jump over November, ness and adoption by users, and, most totaled $87.1 billion in value, with notching 15.2 million transactions. likely, an increase in the number of $72.5 billion stemming from credits NACHA did not report dollar value financial institutions launching same- and the balance from debits. by quarter, but in terms of transactions, day ACH origination,” Grotta says. While that dollar volume is a debit volume is increasing rapidly. Grotta adds that same-day pro- “small fraction” of the total value pro- Available for only 15 days in the third cessing appears to be smooth sailing cessed on the ACH last year, it repre- quarter, same-day debits totaled 2 mil- so far for the nation’s banks, nearly sents “an impressive start for a new lion, or an average of 133,000 a day. all of which link to the ACH network. ACH product,” says Sarah Grotta, a In the fourth quarter, volume totaled “To date, I haven’t heard of any major research analyst at Mercator Advisory 16.4 million, or 178,000 per day, a glitches or significant fraud concerns Group who follows the ACH. 34% increase in daily volume. Indeed, with same-day ACH,” she says.

12 • digitaltransactions • February 2018

Trends & Tactics

Herd echoes that assessment. “We largest application by transactions, with windows. Ordinary ACH transac- haven’t heard of any significant pro- a 47% share, but same-day business-to- tions do not clear and settle until the cessing problems,” he says. “We think business payments accounted for the next day. that allowing the industry to gain most dollars, with a 49% share. With credits, payers push pay- experience for a year with same-day Under NACHA’s plan to speed ments from their accounts to those ACH credits has paid off.” processing of ACH transactions, of their recipients. With debits, pay- Consumer bill payments accounted same-day credits were introduced a ees pull payments, with authorization, for the bulk of same-day debits in 2017, full year earlier than debits. As the from payers’ accounts. Same-day pro- at 92% of transactions and 84% of name implies, same-day processing cessing is required of receiving finan- dollars. Business-to-business payments requires clearing and settlement of cial institutions, but is optional for made up the balance. On the credit transactions on the same day they are originating institutions. side, payroll direct deposit was the initiated, within certain processing —John Stewart

Glitches, Volatility, And Sky-High Fees Bedevil Bitcoin Acceptance

While most payments executives have to bitinfocharts.com. The Microsoft been fascinated by the spectacular year- Bitcoin’s site, which sells various digital products long rise—and recent crash—in the from the software giant, doesn’t accept value of Bitcoin, merchants that accept Costly Bitcoin directly but allows users to fund the cryptocurrency continue to struggle Ascent their accounts with the digital currency. with a wide range of vexing issues. Price volatility and slow transaction (Median fee $13.14 Overstock.com, one of the first per transaction) times are also a problem because they merchants to accept Bitcoin, last month can require customers to make followup had to fix a programming flaw that had transactions to make up a deficiency the online retailer accepting Bitcoin $3.55 caused by a drop in value. The followup $0.68 $0.71 Cash instead of Bitcoin for purchases, $0.25 transactions are subject to the same fees. and then refunding canceled transac- 2/1/17 5/1/17 8/1/17 11/1/17 1/15/18 Unlike Microsoft, online-game tions in Bitcoin instead of Bitcoin Cash. seller Valve Corp. in December dropped Source: Bitinforcharts.com The glitch was brought to light in a post Bitcoin acceptance permanently, citing on the security blog KrebsOnSecurity. corrected a piece of code that was caus- the same issues (“Bitcoin Accepted This was a serious issue because ing the problem, according to Krebs, Here?” January). Bitcoin Cash, which debuted last sum- who donated his proceeds after being Moves like this have prompted mer as an offshoot of the Bitcoin block- told by Overstock to keep the windfall. exchanges dealing in Bitcoin to lay chain, was worth only approximately Around the same time, Microsoft plans to add alternatives. Some of one-tenth of Bitcoin’s price. Bitcoin Corp. restored Bitcoin acceptance at these alternatives, though, may exhibit was trading just shy of $14,000 at the its online store after shutting down similar volatility. Ether, second only time, according to Coinmarketcap.com. the cryptocurrency for a few days in to Bitcoin in market capitalization, As he related in his blog post, response to issues surrounding the its saw its price jump nearly 12.5% in a the flaw allowed security researcher volatility and transaction costs. 24-hour period at one point in January, Brian Krebs to place an order that Rising transaction volumes have to $1,348, according to Coinmarket- called for a certain fractional amount congested Bitcoin’s blockchain, the cap. Over the same period, the value of Bitcoin and then pay for it with decentralized ledger that tracks and of the third-largest currency, Ripple, the same amount of Bitcoin Cash. He records transactions, forcing users dove 17%, to $1.88. reaped an even bigger windfall, how- to pay higher fees to get their pay- While not as severe as the case ever, when he canceled the order and ments processed. This is a particu- with Bitcoin, some of these promi- received his refund in Bitcoin. larly acute problem for low-value pur- nent currencies are also experiencing Made aware of the issue, Over- chases, since the median transaction rising transaction costs. DT stock and its processor, Coinbase, have fee was $18 at mid-month, according —John Stewart

14 • digitaltransactions • February 2018 Security Notes Brave New Payments World

Gideon Samid • [email protected] rtificial intelligence (AI) tomorrow’s houses will be equipped with a refrigerated is so unsettling that we outer box to hold items that must be kept cold. Bread, fruits, A look the other way as it and vegetables will come directly from distribution centers encroaches on the fundamentals of that we humans will know nothing about. what it is to be human. Under life-excitement, stuff like a new car, an easy chair, Why do I say this? As AI or a new jacket will be viewable and touchable in dedi- is envisioned today, each of us cated display centers. We humans will go to these centers humans will have his or her to kick the tires, hold the nice lamp, and try on the fashion- smart self, or “sself.” This sself is an AI unit that will be con- able pants. Once we have decided on a purchase (estimated stantly loaded with our personal data, including information prices will be displayed), we will be prompted to indicate regarding health, finances, profession, tastes, style, goals, whether we wish to have it delivered to our address right concerns, proclivities, weaknesses, strengths—everything. away, tomorrow, next week, or “whenever.” Now, the various sselves will socialize and use their learn- The less demanding we are with delivery, the more nego- ing capabilities to search for cohorts, or other sselves that bene- tiation and optimization power we provide to our sself and to fit each other by association, which means sharing information the shopping community that this sself belongs to (perhaps an or pooling resources. Sselves will form smart families (“sfami- ad hoc scommunity), and hence the cheaper the price. And of lies”), which may or may not correspond to the traditional course, forget about EMV or other old-school payment devices. bond of family. Families will bond into smart tribes (“stribes”), It’s all digital money, held, stored, managed and paid by your and then into smart communities (“scommunities”). artificial sself to best serve your human goals and desires. All this bonding is self-serving. The sself will execute Give it a few years, and people will wonder how we ever fast computational inference of all the ever-growing infor- managed to comparison-shop and pay using just this slug- mation at its disposal to best serve the goals identified by the gish human brain that randomized Darwinian evolution has human (the “dumb self”’). The self-serving sfamilies will endowed us with. So much better to replace our irrational identify shared objectives so that their members will benefit brain with sselves immunized against emotional response. the most. And the same for the stribes and scommunities. It Everyone using a spreadsheet today pities prior genera- will amount to rational optimization of social power to serve tions that had to use calculators to handle mundane computa- the combined interests of the members of society. tions that a spreadsheet does so much more efficiently. Simi- This smart society (“ssociety”) will revolutionize every- larly, money matters are so conceptually easy: You wish to buy thing from politics to health care to ethics to globalization. for less and to sell for more. It’s the myriad details that need to But here we’re focusing on its impact on payments. be rationalized and optimized, but our brain is ill-suited to this What we buy may be categorized under the headings repetitive arithmetic. For our sselves, however, it is easy as pie. “life-maintenance” and “life-excitement.” Routine main- Historically, shopping centers were location-optimized tenance items like bread, gas, and toilet paper are charac- to make it easy for customers to drive there. Department terized by predictable consumption. The sselves will bond stores were built to allow customers a one-stop shopping into negotiation blocks and contract for a price and delivery place for all their needs. As these two imperatives vanish, schedule for each member. so will the solutions. Credit cards were invented to solve The contract will result in “tethered money” (see my the problem of trust between merchants and customers. But book by that title), which will be transmitted on delivery. public ledgers and other cryptographic trust products offer a When the gas pump fills your car, your sself pays the gas much more elegant solution. station with pre-negotiated digital tokens. You just fill up Similarly, when clients ask me to help with EMV issues, and go. To accommodate groceries shipped to your address, I say, wait it out. Soon the need will be passé.

February 2018 • digitaltransactions • 15 Trends & Tactics

Payments 3.0 Beyond Technological Innovation George Warfel • [email protected] hen payment vol- Debit Card umes and values Payment Ware displayed as a types ranked Credit Card single graphic, some interesting by volume Check patterns emerge about how we and value ACH Debit use current payment methods.  Volume ACH Credit Are there implications for new and future payment methods? Source: The Federal Reserve Value   Debit card has the highest number of transactions but the lowest total value of those transactions. It has become the reports of my death have been greatly exaggerated,” could new pocket change (parking meters, vending machines). well be the motto for checks. Although check volume contin-  Credit card volume is trailing debit card volume. ues to decline slowly, we may begin to see evidence here of One might venture a guess that this is due to the historically what has happened in other countries where small-business high interest rates and cardholder fees being charged. owners continue to use checks because they find them well-  Checks continue a slow decline in volume; and the suited for the stapler method of accounting: attaching the value rank is following suit. image of the paid check to the invoice it is payment for.  ACH debits, which tend to be consumer-related pay- While mobile-capture and image-processing technology has ments, show low volume but high value. reduced the cost to banks of processing checks, it has only  ACH credits, which are often corporate and govern- made them more convenient for people to use. ment transactions, have the lowest volume of any payment type Often, the more that new technology is applied to old pay- while carrying the highest value due to big-ticket payments. ment methods, the more it keeps the old and supposedly inef- An observation perhaps remarkable only to graphics ficient means of making payments in play. The same path we aficionados is the perfect inverse symmetry that shows up have gone down with checks was traversed earlier as “wire” when the data is displayed in a single graphic icon rather payments came to be wirelessly sent on high bandwidth, digi- than the usual bars and curves on a grid. tal, global satellite networks, which added both greater speed Given the cost to both merchant and bank of transporting, and better security to an old way of paying by telegram. securely storing, and handling cash, one could predict that In our own time, we have replaced the magnetic stripe debit card use is pretty much here to stay, buttressed by with a chip without reducing the size of the cards or the ter- the special-purpose debit cards distributed to government- minals, when in reality the card now need not be any larger benefit recipients, contest winners, gift recipients, etc. Debit than the chip and the terminal no bigger than the PIN pad. card use will likely grow even more with new services such The reason that the old ways of making transactions don’t as Visa Direct. The use of debit cards as both the sender’s go away when new ones are invented is simply human nature and the receiver’s storage medium for many of the new at work. In many countries (especially the United States), mobile-payment methods should also assure debit cards’ even when a newer technology is “mandated,” little effort is continued position at the top of the volume chart. made to retire the old method of making the same payment. Credit cards, on the other hand, may be slowly asphyxiating This message inherent in the pattern of the annual pay- themselves, except for large purchases, as the combination of ments data raises a question we will tackle in an upcoming historically high interest rates and high cardholder fees seems issue: Is fintech going to overthrow the historical pattern locked into an ever-increasing spiral. At some point one has to of new ways to pay being innovated without dramatically think people would stop using them at all for small purchases. diminishing use of the old ones? Or is there something fun- What Mark Twain supposedly said about himself, “The damentally, not just technologically, different this time?

16 • digitaltransactions • February 2018 CONNECTIONS | PARTNERSHIPS | DEALS Accelerate Your Payments Business.

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CONNECTING THE PAYMENTS TECHNOLOGY WORLD ACQUIRING February 2018 digitaltransactions

No Shortcuts To Becoming a PayFac

Kevin Woodward

As the payment-facilitator model gains favor, understanding the process acquisitions,” says Todd Ablowitz, to become one has become more important than ever. chief executive and founder of software company Infinicept and consult- few years ago, deciding on a for general payment card acceptance, ing firm Double Diamond Group. payment model was a simple it has quickly become the darling of The operational costs of onboarding A choice for a software vendor software developers. These companies merchants may be less expensive, in or event organizer: Find an indepen- want an expeditious, simple, and secure the end, for payment facilitators, too. dent sales organization to work with way to offer payment acceptance to Relying on a risk-based approach in or become one. Then, along came the their merchants. this regard might prevent boarding a payment-facilitator model, first used It also has become highly favored merchant that will only process $1,000 by the likes of PayPal Holdings Inc. among event-organizing companies. a year, he notes. and Square Inc. to make it easy for Rather than trying to arrange pay- This in particular created a unique smaller merchants to accept payments. ment acceptance for participants in opportunity for payment facilita- The payment-facilitator model thousands of 5K runs and triath- tors to court independent software enables entities to accept payments lons, the organizers turn to compa- developers. without going through the compli- nies like Active Network LLC or “Our research suggests there are cated process of setting up their own SignUpGenius Inc., which already more than 10,000 software companies merchant account. Instead, the mer- have this capability. that are a good fit for the payment chant signs up to accept payments Part of the appeal of the payment- facilitator model,” Ablowitz says. using a master account provided by facilitator model for software devel- Double Diamond Group research the payment facilitator. opers is that it can sidestep a poten- forecasts that independent soft- Both Visa Inc. and Mastercard Inc. tially cumbersome EMV integration. ware vendors (ISVs) and software- enable submerchants to have charge- The multitude of unique software as-a-service providers will reach volume amounts up to $1,000,000 products that traditionally offered a $513 billion in gross payments vol- annually before requiring them to built-in payments function was com- ume by 2021, generating $4.4 billion establish their own, independent mer- plicated by the EMV standard, which in revenue. chant account. required certification of each configu- ration. If the point-of-sale hardware ‘Very Proprietary’ ‘A Good Fit’ changes, a recertification is necessary. The potential growth in the model The benefit for the submerchant is that If the software is updated, a recertifi- is vast. A 2016 presentation from it is a quicker and simpler way to begin cation is necessary. Mastercard on its registration pro- accepting payments. For the payment Another aspect that might be grams said there were 818 payment- facilitator, the benefit is the ability to appealing is that payment facilitators facilitator registrations, with 158 of service vast numbers of other organi- often rely on online customer acqui- them in the United States. Visa counts zations while maintaining control and sition, which doesn’t entail such ele- 624 worldwide, but that tally does not having access to their payment data. ments as direct mail or using sales include Europe. While the payment-facilitator model agents to recruit merchants. “Payment Many organizations are willing continues to serve small merchants well facilitators are much better at online to accept the challenge, especially

18 • digitaltransactions • February 2018 because the revenue potential is greater than with some other payment models, says Holli Targan, an attorney at Jaffe Raitt Heuer & Weiss, a South- field, Mich.-based law firm. Without a middleman they must pay to process their transactions, payment facilitators typically retain a larger revenue share. They also benefit from having more control over the payments element. “There is a little less friction because it is the payment facilitator deciding as opposed to someone else,” Targan says. “They’re very proprietary about their customers. Frankly, they’re tired of the bad service their payment processors have been giving their customers.” Becoming a payment facilitator, however, is not a super-simple task. The prospective payment facilitator will have to determine if its customer base is a good fit for the model. If so, other considerations must be addressed. The first task is to find a sponsor, Active.com uses the payment-facilitator model to accept payments on behalf of Targan says. Candidates can include thousands of organizers of events, such as marathons. such companies as First Data Inc., Total System Services Inc. (TSYS), and monitoring submerchants for knows how to do underwriting, or Worldpay Inc., the company newly fraud. Among federal regulations are they’re hiring personnel,” says Tar- formed from the Vantiv Inc. and the Bank Secrecy Act and anti-money gan. “They’re initiating a whole new Worldpay plc merger. laundering compliance programs. division of their company that is now “The sponsor is required by the They also must determine whether payments.” card brands to do a due diligence on becoming a payment facilitator quali- Once all this is ready, the pro- [prospective payment facilitators],” fies the company as a money trans- spective payment facilitator should Targan says. Requirements that must mitter, an entity subject to various hire a payments attorney, Ablowitz be met include demonstrating the state laws. says, and get its technology ready company has good capitalization and to connect to the sponsor. That pro- showing that management has strong ‘More Than One cess may take between three and six acquiring experience. Model Going’ months, Targan says. Payment facili- “They’ll have to indicate to the The sponsor, too, will want to see a tators also must pay registration and sponsor they have the wherewithal to business plan, says Ablowitz. If the annual renewal fees of $5,000 each to perform the obligations required to be sponsor is going to underwrite a pay- Mastercard and Visa. a payment facilitator,” she says. ment facilitator, it’ll need to know Other considerations include They’ll also have to comply with how the business operates. Policies devising a plan for boarding exist- various regulations, not just state and and procedures outlining the submer- ing merchants. Usually, the payment federal ones, but also those estab- chant underwriting are necessary. facilitator will assign an employee lished by the card brands. “That can be a thing that trips to manage this project, Ablowitz “Once they become registered people up if they don’t understand,” says. Typically, that entails checking with the card brands, there are rules Ablowitz says. His advice is to either the payments experience of existing they have to comply with,” Targan hire staff that know underwriting or merchants in the payment-facilitator says. Examples include ensuring sub- bring in a third party. model as well as their systems. merchants comply with card-brand “From an expertise perspective, Migrating existing merchants to rules, maintaining PCI compliance, if they’re looking for someone who the new model often is not done

February 2018 • digitaltransactions • 19 wholesale, but in segments or by channel, Ablowitz says. “It wouldn’t be unusual to have more than one model going,” he says. “One other thing a payment facilitator needs once they are ready to launch—even the smallest payment facilitator—is someone to manage the operation day-to-day,” Ablowitz says. “You can’t launch with no staff.” ‘A Challenge for New Players’ There are other sources to help companies become payment facilitators. The Electronic Transactions Asso- ciation, a Washington, D.C.-based trade group for the acquiring industry, publishes the “Payment Facili- tator Guidelines,” a document that helps companies in incorporating risk and compliance practices associated Focusing on art events, Arts People offers ticketing, fundraising, and marketing with the model. Released in 2016, the functions among its services. guidelines are to be updated this year, says Amy Zirkle, ETA vice president provide customer service for mer- the model, which originally labeled of industry affairs. chants,” Zirkle says. providers as aggregators, has come. “It’s a challenge for new play- The payment-facilitator model has “The next wave is all these software ers,” Zirkle says. “There are roles and matured to the point the ETA formed companies are going to become their responsibilities that payment facili- a committee last year dedicated to it. own payment facilitator.” tators have to agree to support and “What we’re really trying to do with Other organizations are trying to abide by.” that committee is create an environment determine whether the model might For companies that have limited where we can have proactive discus- be good for them. “We’ve had inqui- exposure to the payments industry, sions on a variety of issues that relate to ries from traditional ISOs who are and specifically the acquiring aspect, payment facilitators,” Zirkle says. looking at it and trying to figure out the prospect of becoming a payment if it’s something they want to take facilitator can be daunting. ‘In the First Inning’ advantage of,” Targan says. “It’s not “That’s tied to the core of what’s Most experts agree that the payment- just ISVs and value-added resellers.” going on in traditional sales channels, facilitator model has a lot of growth An experienced payments pro- in the ability to underwrite merchants, ahead. “We’re ending the first inning,” vider may understand the challenges manage settlement for merchants, and Ablowitz says, in describing how far of becoming a payment facilitator, but not all companies, regardless of their size. “More of our inquiries are ‘More of our inquiries coming from software companies,” are coming from Targan says, “who have a payments aspect to their software or want to software companies have a payments aspect.” who have a payments “They know their software, they aspect to their software know their services they can offer or want to have a their software clients, but they don’t payments aspect.’ necessarily know payments,” she —Holli Targan, attorney, says. “They start peeling back the Jaffe Raitt Heuer & Weiss onion and realize it’s much more complicated than anticipated.” DT

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© eProcessing Network, LLC. All Rights Reserved. All trademarks are the property of their respective holders. n the fall of 2009, a certain big company in Seattle launched a service that let consumers authenticate themselves for online purchases with a favorite phrase and a PIN. By the spring of 2012, the Iservice was no more. In the summer of 2014, that same company sought to join the burgeoning ranks of mobile- wallet providers with a wallet app of its own, just ahead of Apple Inc.’s launch of Apple Pay. As with Apple Pay, the Seattle company’s new wallet worked on its proprietary line of smart phones. Just six months later, the app was discontinued. Also that summer of 2014, the company came out with a mobile point-of-sale product to compete with Square Inc. and a host of other vendors aspiring to equip small merchants with the ability to accept cards with a smart phone. That entry lasted until February 2016. The failed products were, in order, PayPhrase, Amazon Wallet, and Local Register, and the company behind them was, of course, Amazon.com Inc., the colossus of e-commerce.

22 • digitaltransactions • February 2018 Amazon long ago mastered e-commerce, and now its payments unit is making moves in physical stores and in voice commerce. Will it succeed here as it has online? BY JOHN STEWART Alexa’s Louder Voice (Amazon programs used in the past year. Respondents selected all that applied)

Source: 2018 “Amazon User Study” by Feedvisor, which relied on a survey of 1,500 Amazon shoppers equally divided between male and female

87% 12% 11% 11% 8% 5% 4% 3% Amazon Amazon PrimePantry Amazon AmazonFresh Amazon Amazon Hub by Prime Alexa Prime Now Locker Dash Amazon

Observers accustomed to the seem- employees to experiment with a concept called Amazon Go ingly unending story of success that is Ama- that does away entirely with the conventional checkout. zon may be startled to hear that not all the But the question really took on urgency last summer when retailer touches turns to gold. But Amazon has the company shelled out $13.7 billion to buy the 470-store Whole a way of learning from its mistakes, and these Foods grocery chain. About any payment plans here, the company days that virtue may be nowhere more evident is keeping quiet. “That’s not something I would speculate on,” than in its payments business, which it takes says Gauthier. very seriously, indeed. So seriously, in fact, that consumers are ‘GONE TO MARS’ already using Amazon Pay, the company’s pay- With the possible exception of PayPal Holdings Inc., Amazon in ments service for non-Amazon sites, for trans- its 23 years in business has done more than any other company to actions in the real world. meld two crucial steps in payments: checking in (authenticating Starting last summer, they could order yourself) and checking out, so that they are practically one in the ahead at TGI Fridays restaurants and a few same process. other stores using a new service called Ama- The idea is to capture user credentials once, and then store zon Pay Places. And starting last fall, Amazon them for all subsequent transactions. Making this work in split sec- opened Amazon Pay, which claims at least onds across a base of about 330 million active accounts is easier to 33 million users, to developers for purchases describe than to pull off. But Amazon long ago became more of a through its Alexa voice-commerce service. tech shop than an e-commerce merchant. Participating merchants so far range from TGI “Amazon does technology better than anyone else I know. Fridays to Atom Tickets, a digital-ticketing ser- They’ve gone to Mars without stopping at the moon on the way,” vice for movie theaters. says Joe Kleinwaechter, an electrical engineer by training who is “We see great potential here. There are tens vice president of innovation and design for Worldpay Inc., a mas- of millions of Alexa-enabled devices out there, sive payments processor. and the whole experience is built voice-first,” Tech prowess is key, but not everything. Of those 330 million says Patrick Gauthier, a former PayPal and active users, about 100 million are members of Prime, the company’s Visa Inc. executive who is vice president for top-shelf set of services like free two-day shipping. Prime members, Amazon Pay, in an e-mail interview. who pay $99 a year for the privilege, shop more frequently, and Just how far into the physical world might spend more, than non-Prime customers (chart, page 26). Amazon extend its payments capabilities? The Not only that, but Amazon customers now go to the site ahead online merchant already operates a handful of of other places to research products, in this sense out-Googling bookstores and Kindle popup stores. It’s also Google, says Marc Freed-Finnegan, who was product lead for created a testbed convenience store for the original Google Wallet and is now chief executive of San

24 • digitaltransactions • February 2018 Largest Exhibit Hall to Date

Demo Theater Showcasing Solution Providers

65 Expected Exhibitors

Women in Payments and Fraud Luncheon

MRC Technology Awards

MRC Global Payments Survey Findings Francisco-based Index, which markets technology to speed up EMV transactions. Prime Importance “Increasingly, customers begin their shopping (Percentage that shop online) journey on Amazon,” he notes. So Amazon attracts consumers, makes it Source: Feedvisor easy for them to order and pay, and ships merchandise for one- or two-day delivery, in Less than At least Less than At least some cases free. It does this for itself as well once a once a once a once a as third-party sellers on its site. How potent is week week week week that combination? Quite potent, if done right. “An active enrolled user is just as valuable as closing a sale,” says Richard Crone, principal 32% 68% 64% 36% at Crone Consulting, a San Carlos, Calif.-based payments consultancy. UP FROM 50% GREASING THE SKIDS IN 2016 The key, of course, is the stored payment credential for each customer. That method PRIME NON-PRIME enables the fabled single-click purchase that MEMBER MEMBER greases the skids not only for e-commerce but ultimately for mobile payments and voice commerce. Amazon patented its 1-Click payment rou- GETTING PHYSICAL tine in 1999 and happily raked in licensing Now Amazon is ready to move that sort of experience to the physi- revenue from Apple Inc. and other online-store cal world. Last July, it announced Amazon Pay Places, which proprietors over the years. By the time the pat- allows users to deploy Amazon Pay within the Amazon mobile app. ent expired last year, the method had given rise The “Amazon Pay in-store program,” as Gauthier styles it, to logical extensions like PayPal’s 1-Touch. relies on the Clover point-of-sale system from the huge processor The whole idea is to get rid of irritating First Data Corp. Clover is a line of portable devices that process online forms, which are bad enough on payments and work with a library featuring apps that automate a standard-size keyboards. For mobile transac- wide variety of business functions. tions, they can be the kiss of death. Right now, it’s available at “select” TGI Fridays locations and With Vacatia, an online vacation-booking some other eateries that use Clover, Amazon says, without being service that uses Amazon Pay, single-click more specific. Users can order ahead using the Amazon Pay feature is crucial. “Two-thirds of our customers are in the Amazon app and show up later to pick up their meal. mobile, which makes figuring out an easier But you can bet physical-world payments won’t stop there. Ama- checkout process incredibly important,” says zon is clearly relying on the popularity of its app to sell Amazon Mike Janes, chief marketing officer for the Pay to more merchant categories. When checked at mid-January, the 5-year-old San Francisco-based company. Amazon app ranked first in downloads in the shopping category and Having access to that back-end data is also 16th overall, according to ranking service App Annie. important because most of Vacatia’s visitors “Given its wide distribution and use, we’re looking to expand are first-time customers, given the company’s the ability to use Amazon Pay in the Amazon app beyond restau- startup status, Janes says. He won’t specify rants to other types of retail and goods,” says Gauthier. his conversion rate with Amazon Pay, but says Just within the restaurant category, there is plenty of potential the method is the site’s “most successful pay- as well, particularly if Amazon can sell users on the idea of dis- ment option.” Vacatia also accepts credit cards, placing specialized order-ahead apps. “With Amazon Pay in store, Apple Pay, and an online-financing option Amazon customers no longer need to download another app to called Bread. enjoy the convenience of order-ahead experiences from a range A bonus for Vacatia lies in a “huge overlap” of local restaurants from a familiar flow in the Amazon app,” of Prime members and family-vacation deci- Gauthier notes. sionmakers, Janes adds. “Amazon is exactly At the same time, Amazon Pay transactions are increasingly my demographic,” he says. mobile, Gauthier says, noting that almost one-third of payments

26 • digitaltransactions • February 2018 came from a mobile device in 2016. “We expect that number to continue to increase,” he says. That should make it a bit easier to sell users, particularly those loyal Prime users, on tapping the app Amazon ‘can’t get for physical-world shopping. the growth they want ‘THE STEPPING STONE’ The big question mark here is the role Whole Foods will play in by just being an Amazon’s payments plans. Amazon is mum on this matter, but most observers see Amazon Pay moving into those 470 stores online retailer.’ sooner rather than later. —Joe Kleinwaechter, vice president of Crone, for example, figures the fastest route into the stores innovation and design, Worldpay Inc. would be via familiar barcode readers. Unlike near-field communication, barcodes are easy and familiar to most mobile users. “I’m sure Patrick [Gauthier] is thinking this is the path of least resis- tance,” he says. The company won’t say when it will be But a more intriguing technology lies near Amazon’s Seattle introduced to the public, but both Crone and headquarters in an experimental c-store open, for now, only to com- Worldpay’s Kleinwaechter figure it will be this pany employees. Here, sensors at the doors and on all the shelves year some time. follow customers throughout the store, tracking what they put in For his part, Kleinwaechter says Amazon their baskets and what they put back on the shelf. The final total is Go’s complexity, involving multiple sensors charged to their account as they walk out. and cameras tracking multiple customers at the The result is a physical store that does 1-Click one step better— same time, means Amazon will take the time it gets rid of checkout altogether. Amazon calls it Amazon Go. it needs to get it working right—even if it

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February 2018 • digitaltransactions • 27 has to take flack for it. “We will probably see some stores open in late Q1 or early Q2, but this is very tricky to do,” he says. Getting it right, though, could have implications well beyond the experience of no checkout. It could, for example, yield a bonanza of data that Amazon could sell to food marketers and other interested parties, according to Crone. Knowing in real time what a customer is picking up, marketers could deliver offers to her phone for a related item while she is still in the aisle. Once Amazon Go is proven, Amazon could offer it to third parties, following the model of Amazon Pay. “Amazon Pay is the stepping stone to Amazon Go,” says Crone. A CHOICE AND AN ECHO But when it comes to getting rid of checkouts Gauthier on voice and other sources of what the payments busi- commerce via Alexa: ness calls “friction,” few technologies can “We see great potential here.” top voice commands. Amazon’s Echo line of devices, introduced only a few years ago, features a form of artificial intelligence called Alexa, which speaks with a feminine voice, sellers for Amazon Pay, bigger retailers will remain unmoved, recognizes human speech, and performs tasks fearful of sharing even a scintilla of customer data with a resource- according to so-called skills. ful rival. Also, some big chains, such as Walmart, Kohls, and CVS, In November, Amazon opened Alexa to have proprietary mobile wallets of their own. “I do not expect to see outside developers to program commerce func- large merchants partnering with Amazon in physical stores,” says tions into their skills. The offering includes Index’s Freed-Finnegan. Amazon Pay “so that customers can easily pay That means Amazon Pay’s penetration in the grocery segment, for goods and services in your skill,” according aside from smaller stores, could be limited to Whole Foods. “I can’t to a Nov. 29 Amazon blog post. see any of the top 10 grocers putting Amazon Pay in their stores,” With what Gauthier says is an installed says Crone. “If I’m a smaller grocer, I’ll do whatever I need to do base of “tens of millions” of Alexa-enabled to stay in business.” devices, buying via Amazon Pay may get even Another issue lies in the nature of voice commerce. Here, easier. Voice, says Gauthier, is “the most natu- Amazon is pouring tons of development dollars into a capabil- ral and convenient user interface. We see great ity Gauthier calls “natural” and “convenient” for consumers, but potential here.” others have some doubts. For now, the program is in “private beta” “I’m challenged by payment by voice. The voice is the weakest with TGI Fridays, Atom Tickets, and a few oth- form of authentication,” insists Kleinwaechter, who is nonetheless ers, he says. Amazon is accepting applications a big fan of the Echo device, using it to control the lights in his to participate on its Web site. home and to maintain his grocery list. One way or another, though, Amazon is coming to the physical ‘WEAKEST FORM OF AUTHENTICATION’ point of sale. The company won’t address its business motives, but Over the years, Amazon has proved to be as observers see an obvious one. “They can’t get the growth they want canny a technologist as a merchant. But for all by just being an online retailer,” says Kleinwaechter. its technical prowess, there remain problems it That motive has pushed much innovation over time at Ama- may not be able to overcome. One such issue is zon. Now the question will be whether ventures like Amazon Pay the competitive nature of retailing. Places, Amazon Go, and Alexa for Amazon Pay will succeed— Most observers agree that while Amazon or wind up on that list with PayPhrase, Amazon Wallet, and may sign up plenty of mid-size and smaller Local Register. DT

28 • digitaltransactions • February 2018 NETWORKS February 2018 digitaltransactions

PayPal Reimagines the Point of Sale

By Peter Lucas

A series of partnerships with the card networks and now individual It has been pursuing this broader banks have positioned the online-checkout kingpin to make the leap initiative through a further set of agreements with financial institutions to a mainstream digital-payments platform. and merchants that supplement, and build on, the provisions of the original ver since PayPal Holdings Inc. In-store purchases, after all, still network deals. The idea is to deliver was spun off from eBay Inc. in exceed e-commerce sales by a wide unique payment experiences to con- E2015, its chief executive, Dan margin. During the third quarter of sumers through the PayPal wallet, Schulman, has not been shy about 2017, e-commerce sales accounted regardless of whether they pay with a warning financial-technology provid- for $115 billion, or less than 10%, of PayPal account or a bank card. ers to re-imagine how money can be $1.2 trillion in retail sales, according “Our aim is to become a scale- moved and managed. His reasoning to the U.S. Department of Commerce. driven platform that interoperates with rests on the idea that the change that Access to Visa’s and Mastercard’s the card networks in the broader pay- will take place in this business over tokenization engines not only gained ments ecosystem to provide better the next few years will be staggering. PayPal entrée to more than 5 million user experiences, and maximize the PayPal itself—which has long merchants globally that are equipped users that come onto our platform,” expressed its aspiration to move to accept mobile wallets at the point says Jim Magats, vice president of beyond its niche as a popular, alter- of sale. It also ensured PayPal trans- core product for San Jose, Calif.-based native online-payment option and actions at those merchant locations PayPal. “The first steps we have taken transition into a mainstream digital- will be secure, as actual card-account along these lines have been to improve payments company—has been busy data will not be exposed during a our core user experience.” positioning itself in preparation for transaction. What are these new, improved the coming sea change. The belief was that PayPal could experiences, in concrete terms? One PayPal’s new strategy began leverage the security angle to actively of these allows PayPal users to set a taking shape in 2016 when it struck promote to consumers the use of Pay- credit or debit card within the PayPal deals with Visa Inc. and later Master- Pal for in-store purchases and create wallet as their default payment mecha- card Inc. to gain access to their respec- demand for in-store acceptance. nism. Others automatically update credit tive tokenization engines. A similar and debit cards in the wallet that have agreement with Discover followed. Instant Liquidity expired, were lost or stolen, or compro- The deals were widely heralded as The passage of time, however, has mised by criminals. Still another enables victories for the card networks because brought the benefits of the Visa and users to move funds from their PayPal their terms required PayPal to drop Mastercard deals into even sharper account to a debit card in real time. a longstanding practice of promoting focus. While PayPal wants broader “To become a scale-driven plat- the low-cost automated clearing house acceptance at the physical point of form, we must have an environment network over higher-cost cards for sale to help fuel long-term growth, it that supports consumers who prefer to account funding. Less noted at the time sees an even larger growth opportu- fund, and move money out of, PayPal was how the deals would smooth Pay- nity in becoming a platform provider accounts using Visa and Mastercard Pal’s way into physical stores. for all digital channels. cards,” says Magats.

February 2018 • digitaltransactions • 29 points at PayPal merchants online or in-app. The feature is expected to go PayPal at a Glance live this year, PayPal says. (Third-quarter 2017 results, with change from 3Q 2016) Such deals may provide the value- added hook that can accelerate con- TOTAL PAYMENT VOLUME 29% sumer demand for merchant accep- $114 billion  tance of mobile wallets, including PayPal’s wallet, at the physical point VENMO PAYMENT VOLUME of sale. billion 93% “An advantage of an open plat- $9.4  form is that it lets others into the ecosystem that can expand the customer PAYMENT TRANSACTIONS 26% base,” says Raymond Pucci, asso- 1.9 billion  ciate director for research services at Maynard, Mass.-based Mercator ACTIVE CUSTOMER ACCOUNTS Advisory Group. “One of the reasons mobile wallets haven’t gained traction million 14% 218  in-store is because consumers don’t Source: Company reports see value in them. An open platform allows for competitive cooperation.” While PayPal will not provide PayPal declined to break out fig- Could PayPal now strike promo- specifics, Magats says automatic card ures on the sums transferred between tional deals on its own with merchants updates have substantially reduced PayPal accounts and debit cards. to build in-store acceptance for its the number of customer-service inqui- wallet? That remains to be seen. The ries, which in turn has increased oper- Cracking the Point of Sale concept is viable, however. ating efficiencies. PayPal’s next steps have been to Pucci points to an example: Mas- “About one-third of the cards in enhance the way PayPal users man- tercard’s promotion last year with our wallets need to be updated annu- age cards in their wallets and pay for Dunkin’ Donuts to reward Dunkin’ ally,” Magats says. “Updating creates purchases. Donuts customers enrolled in the churn, and we lose a portion of those Through a string of deals with chain’s DD Perks loyalty program customers every year. Automatic such financial institutions as Citibank, with a $5 credit on their Perks card updates help alleviate the churn.” JPMorgan Chase, Bank of America, for reloading value onto it through In addition, there has been a large and Wells Fargo, PayPal has gained a the Masterpass mobile wallet. More number of withdrawals from Pay- marketing foothold with a large swath than 7.5 million consumers have Pal accounts to debit cards. “Instant of customers it normally would not enrolled in the Dunkin’ Donuts Perks liquidity is an important feature to reach. In exchange for being able to program. our customer base, because when we load their cards into PayPal’s wallet, Starbucks ran a similar promotion moved funds out of a PayPal account partner banks agree to market the wal- last year. Visa rewarded customers in the past through the ACH, it took let to their customer base. buying a $10 Starbucks e-Gift card one to three business days,” Magats But PayPal isn’t stopping there. with a $10 bonus when paying with says. “For our users that are small- Its deal with Citibank, which was Visa Checkout. business owners that need immediate struck last year, will enable custom- “Promotional tie-ins with large access to those funds, that was too ers enrolled in the bank’s ThankYou merchants that reward customers for long a wait.” Rewards program to redeem those a PayPal transaction is a way PayPal

‘We see our platform as a way to bring card issuers and merchants together to expose consumers to more contextual offers.’ — JIM MAGATS, VICE PRESIDENT OF CORE PRODUCT, PAYPAL

30 • digitaltransactions • February 2018 PayPal HQ: Plotting a course to the point of sale.

(Photo: PayPal)

can crack the point of sale in-store,” a la Citibank, makes the PayPal wal- PayPal can even use the data col- says Pucci. let even more attractive to a bank’s lected through its wallet to conduct If PayPal opts to go that route, it customers, he says. attribution marketing to remind wal- will be at least a year or two before it “This adds another dimension to let users rewards are available for does. “While we envision ourselves as the PayPal wallet that can make con- redemption at the time of purchase, a platform for offers and rewards, we sumers more inclined to use it,” says Magats adds. don’t see it happening until 2019 or Larry Berlin, a senior vice president beyond,” Magats says. with Chicago-based First Analysis Earning Interchange Securities Corp. who follows PayPal. But what’s the payoff for banks in Contextual Offers Down the road, Magats foresees the having their customers load their In the meantime, PayPal’s plans to day when rewards for PayPal wallets cards into PayPal’s wallet? It’s the focus on partnering with banks to can be customized based on the card opportunity to capture transactions promote its wallet to their customers. used. One potential scenario would be they might not otherwise get from About 10 banks are now actively pro- to peg the reward to the purchase. A PayPal users, especially at PayPal’s moting the PayPal wallet. PayPal wallet user purchasing an air- 17 million merchants, observers say. “We are getting the benefits of our line ticket, for example, could receive Many consumers, PayPal users bank partners’ marketing arms encour- free flight insurance. Other rewards included, will divide their purchases aging their customers to add their could be pegged to consumer purchas- between different payment mecha- cards to a PayPal wallet or to create a ing behavior to encourage repeat pur- nisms based on the dollar amount, new PayPal wallet with just the banks’ chases at a specific merchant. according to Magats. cards,” says Magats. “We see our platform as a way For purchases of $70 or less, the Getting a bank to also agree to to bring card issuers and merchants favored purchasing method is a debit promote rewards redemption through together to expose consumers to more card or an ACH-based payment vehi- PayPal’s wallet to its cardholders, contextual offers,” Magats says. cle, he says, but for purchases of more than $70, consumers prefer to use a credit card. “If our wallet only supports debit ‘This adds another dimension and ACH, then banks lose potential credit card transactions through our to the PayPal wallet that can make wallets,” says Magats. “Supporting consumers more inclined to use it.’ credit cards helps boost conver- —LARRY BERLIN, SENIOR VICE PRESIDENT, FIRST ANALYSIS SECURITIES CORP. sions through our wallet for credit card issuers.”

February 2018 • digitaltransactions • 31 The Venmo app: Wildly popular, but will it play well at physical stores?

(Photo: PayPal)

Another benefit for banks is the to-peer payments service. To Venmo the service by charging merchant- opportunity to earn interchange fees users, the service is more than just acceptance fees, as Venmo does not when consumers use their cards to a way to pay, it’s a social-payments charge for P2P payments. Merchants fund a PayPal account. “PayPal is a experience. Schulman has publicly will pay the same fees to accept merchant to us, even though it has noted how Venmo users, who tend to Venmo as they do for PayPal, starting its own merchant base,” says Jenni- be Millennials, not only attach emo- at 2.9% plus 30 cents and declining fer Roberts, head of digital products, jis to their payments, they open the with volume. including the Chase Pay wallet, for Venmo app to keep apprised of what “Supporting Venmo at the point JPMorgan Chase. “We expect that our their friends are doing. of sale is part of our platform,” says customers will use their Chase cards That certainly gives Venmo pow- Magats. “All the capabilities of our to fund their PayPal account.” erful appeal, but the unanswered ques- platform will be available to any mer- In 2017, Chase struck a part- tion is, can that appeal translate to con- chant on our platform.” nership with PayPal to allow Chase sumer demand for in-store acceptance? customers to load their cards in the PayPal is already making a run at ‘Just Scratching the Surface’ PayPal wallet and make in-store the merchant community with Venmo. By all accounts, the partnerships Pay- transactions through the wallet using Late last year, it announced that more Pal has struck have put the company, tokenized credentials. Chase has not than 2 million retailers are accept- which this year celebrates its 20th revealed the timeline for bringing ing Venmo online and through their anniversary, on a steady march toward those features to market. mobile apps and that Venmo users can establishing a significant presence at make online purchases at nearly all the physical point of sale. Whether Venmo at the Cash Register PayPal merchants. that happens this year or next or the The wild card in all of PayPal’s maneu- Getting Venmo accepted at the year after that, only PayPal’s leader- vering is Venmo, the company’s peer- point of sale is a way to monetize ship knows for sure. What is certain is that PayPal these days is not shy about using partnerships to re-fashion how consumers pay, manage, and ‘Supporting Venmo at the point of sale is move money. “That’s how we progress,” says part of our platform. All the capabilities Magats. “When we deliver the experi- of our platform will be available to any ences customers want, we attract more customers, get more repeat usage, and merchant on our platform.’ have less churn. We are just scratching the surface.” DT

32 • digitaltransactions • February 2018 COMPONENTS February 2018 digitaltransactions

Puttin’ on Payments

Jim Daly

Wearables, a hot sector within the booming Internet of Things, are banks such as the United Kingdom’s being outfitted with new payments technology. Will wearables gen- Barclays Bank PLC, and manufacturers of fitness trackers, smart watches, erate a tide or just a trickle of new electronic payment transactions? and other personal devices, such as Fitbit Inc. and Garmin Ltd., are he idea of enabling smart connected cars, household appliances, vying to establish early leads in the watches, fitness trackers, and toys, all manner of other devices, and payment-enabled wearables niche. Tother Internet-connected wear- even clothing, expands. Visa, a long-time sponsor of able devices to make contactless Boston-based research firm Aite the Olympic Games, has teamed up electronic payments is still young Group LLC forecasted in a May with Lotte Card, the financial arm enough to be a novelty, but it’s rapidly 2017 report that the total number of of Korean retailer Lotte Department becoming a requirement for one of the devices connected by the Internet of Store, to roll out three wearables for hottest sectors within the exploding Things globally will hit 15.7 billion the 2018 Winter Olympic Games in Internet of Things. by 2021, up 127% from an estimated PyeongChang, South Korea, which Business Insider, a New York City- 6.93 billion in 2017. start Feb. 9. based media and research firm, pre- Standing in the way of wide- They include gloves outfitted with dicted last March that payment func- spread adoption of payment-enabled near-field communication technol- tionality would be included in 62% of wearables, however, is a less-than- ogy, commemorative stickers, and an wearable device shipments by 2020. slam-dunk use case, hefty price tags Olympics pin, all of which are capa- “That could be a catalyst for adop- for many devices—Apple Inc.’s high- ble of making contactless payments tion, particularly in markets where end Watch Edition Series 3 goes for through a tap at an NFC-enabled users are already accustomed to $1,349—and lingering security issues point-of-sale terminal. paying contactlessly, because it’s put- that could turn off some consumers. The devices, which became avail- ting features in the users’ hands,” Randy Vanderhoof, executive able in November, will be sold online Business Insider said in a report. director of the Princeton, N.J.-based until March or when supplies run out. Later in the year, Stamford, Smart Technology Alliance trade They are the successors to wearables Conn.-based technology consulting and group, says payments have become Visa unveiled at the 2016 Olympics in research firm Gartner Inc. predicted “table stakes” for wearables. If a Rio de Janeiro, including a payment- that 310.4 million wearable devices device can’t make payments, “it’s enabled ring. would be sold worldwide in 2017, up viewed as not being as good.” The most famous wearable is 16.7% from 265.9 million in 2016, “Consumers identify with pay- probably Apple’s Watch, a smart and that sales would increase 12% to ments, so it becomes an attractive fea- watch that the Cupertino, Calif.-based 347.5 million units this year (chart, ture to have,” he says. smart-phone and computer behe- page 34). Bluetooth headsets accounted moth introduced in 2015. Watch, like for nearly half—150 million units—of 33 Million Watches Apple’s iPhone, uses NFC technol- 2017’s wearables, Gartner estimated. That strong identification is a major ogy so that wearers can make pur- Wearables clearly are staking out reason payments leaders such as Visa chases through the Apple Pay mobile- valuable territory as the IoT universe of Inc. and Mastercard Inc., some big payments service.

February 2018 • digitaltransactions • 33 Apple keeps key statistics, such as Watch’s unit sales and Apple Pay A Wearables Forecast transactions, as closely guarded (worldwide unit sales in millions) secrets, but research firm Asymco has estimated that up to 33 million 2016 2017 2018 2021 Watches have been sold since their Bluetooth headset 128.5 150.0 168.0 206.0 introduction. Smartwatch 34.8 41.5 48.2 81.0 ‘Security Exposure’ Head-mounted display 16.1 22.0 28.3 67.2 One big reason for payment companies’ enthusiasm for wearables is Wristband 35.0 44.1 48.8 63.9 the growth of NFC-enabled contact- Other fitness monitor 30.1 30.3 31.0 58.7 less payment infrastructure. Sweden- based technology research firm Berg Sports watch 21.2 21.4 21.7 22.3 Insight estimated in late 2016 that the Body-worn camera 0.2 1.1 1.6 5.6 installed base of NFC-ready POS terminals in the U.S. and Canada would Total 265.9 310.4 347.5 504.7 hit 9.2 million by the end of that year, Source: Gartner Inc., August 2017 a 92% increase over the previous two years. Other technological developments by replacing primary account num- A big reason for that increase is are working in wearables’ favor, too. bers with digital characters useless to the U.S. conversion to EMV chip card With the IoT rapidly expanding, the hackers. payments since 2015. Most of the new cost of the device’s embedded sensors, “Because of tokenization, which EMV terminals also can handle NFC which collect and transmit data, is goes hand-in-hand with wearables, transactions, although many merchants declining steadily, according to Aite. it’s really taken down the security have yet to turn on that functionality. Citing data from Goldman Sachs exposure [from] what it was before,” Worldwide, Berg Insight pre- and Business Insider’s BI Intelli- says Vanderhoof of the Secure Tech- dicted the installed base of 45 million gence, Aite predicts that the aver- nology Alliance. NFC terminals in 2016 would grow age cost of an IoT sensor will have to 86.9 million in 2020. It’s upon that fallen from about $1.30 in 2004 to ‘A Significant Gap’ foundation that wearables payments approximately 39 cents in 2020—a The road for wearable payments is are rising. drop of 70%. not exactly wide open, however. “This is essentially becoming a Furthermore, many payment- Despite protection during transactions globally relevant capability,” says enabled wearables rely on the tokeni- because of tokenization, wearables Stephane Wyper, Mastercard’s senior zation engines of Visa and Master- still are not immune to payment fraud. vice president of new commerce part- card. These systems protect online The original provisioning of tokens nerships and commercialization. and mobile-payment transactions into the wearable is a potential weak spot, Vanderhoof notes. In addition, the sensors in IoT devices, including wearables, all have ‘It’s the an Internet Protocol address, says Thad Peterson, a senior analyst at convenience Aite. “A lot of them have default factor. Nobody passwords on them,” which translates into an “exponential” increase in risk, wants to carry he says. these bulky The larger risk at the moment, however, is not the theft of payment wallets.’ data, but other types of mischief such —Avin Arumugam, as digital denial of service (DDoS) senior vice president of attacks. A massive DDoS attack in the Internet of Things, Visa October 2016 temporarily slowed down or disabled many popular Web

34 • digitaltransactions • February 2018 sites. Most fraudsters will find that hacking IoT devices in hopes of steal- ing payment card credentials is a waste of time, according to Peterson. “There’s probably a lot easier way to get a card; we all know you can go to the Dark Web and buy active live cards,” he says. “The theoretical exposure [with the IoT] is there, but realistically ... there’s a whole ecosystem already there and working just fine to get you that.” Still, IoT security issues can never be ignored. Beyond that, the case for The Garmin Forerunner 645 Music smart watch at left is provisioned with a Mastercard card. wearable-generated payments has to be made to consumers. Are they better of consumers is, insert their card them are seeing mostly green lights. and faster than old-fashioned pay- and leave.” The payments use case for wearables ments with a plastic card? Adds Peterson: “It has to make is pretty straightforward, according to “Right now we still have a sig- things easier and less complicated.” Avin Arumugam, Visa’s senior vice nificant gap in terms of numbers of president of the Internet of Things. places where contactless and mobile ‘Sweaty Money’ “Right now it’s the convenience are accepted,” says Vanderhoof. “The But wearables manufacturers and factor,” he says. “Nobody wants to muscle memory of the vast majority payments companies eager to help carry these bulky wallets.” And when

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February 2018 • digitaltransactions • 35 you’re working out, “cash is harder email. “This gives American Express to carry,” creating the risk of what he card members a convenient checkout calls “sweaty money.” experience while they are on the go.” So, if you’re in the gym or run- Neither San Francisco-based Fitbit ning on a lakeshore path, what better nor Garmin, which has its U.S. head- way to avoid sweaty money but still quarters in Olathe, Kan., responded be able to buy some Gatorade or other to Digital Transactions’ requests for refreshment than by putting on a Fitbit comment. Ionic, the first smart watch from Fitbit, or a Garmin Forerunner Music 645? No More Than a Blip Those devices not only store music, but By no means do either of those two they also come with the Fitbit Pay and companies have a duopoly on the Garmin Pay apps, respectively. payment-enabled wearables action. Both Visa and Mastercard Other contenders include watch- announced last August that Garmin maker Movado Group Inc., which and Fitbit were using their tokeniza- last March announced it was working tion systems to protect payment trans- with Alphabet Inc.’s Google unit on actions on their newest wearables. the launch of Movado Connect, a line “We saw an opportunity to integrate of NFC-enabled watches powered by payments into those,” says Mastercard’s Google’s Android Wear 2.0 platform, Wyper. He adds that wearables are “sort A Fitbit customer making a contact- according to Business Insider. These of the first generation of IoT commercial less purchase using Fitbit Pay. watches don’t come cheap—prices devices. You’ll find that wearables is range from $595 to $995. complementary to a much broader effort Wells Fargo & Co. Fitbit gained an Over in the United Kingdom, Bar- we’re doing around the IoT space.” entrée into contactless payments in clays, the country’s second-largest Neither Visa nor Mastercard will May 2016 when it acquired Coin’s bank by assets, in 2015 unveiled a say how much purchase volume wearable-payment assets. set of wearables. The lineup currently they’re generating from wearables so Fitbit users add their credit or includes a wristband, watch, sticker, far. The manufacturers, meanwhile, debit cards via the Fitbit Pay app. To and other products that include the have quite a way to go before their use the service, consumers enter a card bank’s NFC-based bPay service. The payment services become ubiquitous. number and billing address, and verify wearables can be used for purchases of Garmin’s Web site shows that their identity through a one-time pass- up to £30 ($41.38). Users don’t need only 10 U.S. general-purpose card word or through a card issuer’s call to have a Barclays payment card for issuers enable their cards for use with center. The issuer verifies enrollment funding; any Visa or Mastercard card Garmin Pay. Some of the participating and, upon approval, the consumer’s registered to a U.K. address will do. financial institutions are big, however, card appears in the Fitbit Pay app. While it can be exciting to watch including Bank of America Corp., Card data is tokenized within the app. the rollouts of intriguing new wear- Capital One Financial Corp., and U.S. “We know health and wellness is ables, the lack of a compelling pay- Bancorp’s U.S. Bank. a top priority for our card members, ments use case for most consumers, As of mid-January, Fitbit Pay’s so we are excited to be part of Fit- the lofty pricing of many products, roster of U.S. issuer partners was bit’s first payment-enabled device,” and a lack of participating issuers in just a shade higher at 11. Besides the Matt Sueoka, AmEx’s vice president manufacturers’ payment systems so three aforementioned banks, they also of digital partnerships, told Digital far have prevented wearables from include American Express Co. and Transactions News last summer by registering more than a blip on the payments-volume screen. “Until the wearable use cases achieve critical mass, it will be a very ‘Until the wearable use cases achieve small percentage of IoT volume,” says Peterson. “The price has to come critical mass, it will be a very small down, and the value has to come up, has to be proven.” DT percentage of IoT volume.’ —With additional reporting by Kevin Woodward

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Solutions are coming for slow speeds and high fees, says Eric Brown, who argues that even now the advantages for merchants are too good to pass up.

nless you spent last year living under a high-risk and e-commerce accounts, so why rock, you know that cryptocurrency is a shouldn’t our merchants accept Bitcoin as an Usizzling-hot topic right now. Bitcoin’s alternative payment? These clients look to us price and daily transaction count reached new for ways to transfer money safely, securely, and heights in 2017, with the number of people with cost effectively, and cryptocurrency allows us to Coinbase accounts going from 5.5 million in move money in all of these ways. Eric Brown is founder and chief January to 13.3 million at the end of November, At that time, there was only one company executive of Aliant according to data from the Altana Digital processing for merchants: Atlanta-based BitPay. Payment Systems Currency Fund. We partnered with BitPay in September and Inc., Fort Lauder- Still, if you’re like most people, you probably became one of the first third-party acquirers to dale, Fla. Reach don’t recognize how cryptocurrency is changing offer merchants the ability to accept payments him at eric@aliant payments. For the first time ever, transactions in Bitcoin. payments.com. and power are being taken away from traditional financial institutions. An increasing dis- Benefits trust of banks has created a climate that is ideal Merchants are turning to cryptocurrency pay- for the rise of alternative payment options like ments to enjoy a multitude of benefits that tradi- Bitcoin and other digital currencies, which are tional payment methods don’t offer, including: secure and put users in control.  The ability to transfer funds quickly and Cryptocurrency is also a highly accessible inexpensively. No more domestic and interna- means of payment. All a person needs to create tional transfer fees and traditional bank-wait an account and acquire cryptocurrency is access times; to a smart phone or the Internet. This levels the  Simplified payments. Merchants can playing field for the approximately 2 billion receive payments from anywhere in the world, people worldwide who lack a bank account but from any computer or mobile device, with no do have Internet access or a smart phone. foreign-exchange fees or currency conversions; I personally realized that cryptocurrency  No more chargeback fraud and identity and blockchain technology were at the fore- theft. With Aliant’s cryptocurrency-processing front of our industry when my company, Aliant platform, once the transaction hits the block- Payment Systems, was working on a large mer- chain, there’s no reversing it or stopping it, and chant account and the subject of cryptocurrency no charging it back. There are no rules in place repeatedly came up. It hit me that we’re in the that allow a transaction to be reversed by a con- alternative-payment space, and we work with sumer—a huge win for merchants;

38 • digitaltransactions • February 2018 SPONSORED CONTENT The Rise of Chargebacks Did you know that the typical business will only hear from around 4 percent of their unsatis ed customers? That leaves the remaining 96 percent with the potential to le a chargeback against a merchant’s business, negatively impacting their bottom line. The ability to maintain positive cash ow is one of the most important traits of successful small and midsized businesses. Unfortunately, chargebacks are one of the biggest obstacles merchants face when trying to grow their businesses. In fact, according to www.chargebacks911.com chargebacks are rising at a clip of 20 percent per annum, with merchants imperative maintaining proper cash ow is to the ultimately missing out on a whopping $118 billion in hardworking small and midsized business owners we revenue due to unwarranted chargebacks each year. partner with,” said Terri Harwood, Chief Operating Of course, there are legitimate reasons why a O cer of North American Bancard. “We also know customer might issue a chargeback claim against the challenges those business owners face in the a merchant (such as an item not being delivered). form of unwarranted chargebacks. That’s why we’ve That said, so-called “friendly fraud” chargebacks have always been so proactive about giving merchants increased 41 percent over the last two years and are the tools they need to more e ectively manage and expected to cost merchants upwards of $25 billion a resolve chargebacks and other disputes.” year by the year 2020 alone. The most exciting new development in NAB’s Historically, customers have issued friendly fraud ongoing mission to ght back against unwarranted chargebacks against merchants for a wide array of chargebacks is the unveiling of Payments Hub, the reasons, including: the item was not as described or transaction leader’s brand new, online merchant was defective, the original transaction was not autho- portal. “The Hub” features a handy disputes tab, and rized, or a recurring transaction was not cancelled as an easy-to-use interface that allows merchants to requested. While 49 percent of friendly fraud charge- quickly and easily view all their current chargeback backs resulted from a simple misunderstanding (like and retrieval requests, whether they are “closed,” the cardholders not even knowing they were ling a “under review,” or have “action required.” Merchants chargeback), 40 percent of consumers who commit can even add comments and supporting documents friendly fraud will do so again within 60 days. to help them dispute unwarranted chargebacks. So, as you can see, by abusing the chargeback “By simplifying and streamlining the dispute process to secure a refund, friendly fraudsters can do management process for our merchants via our signi cant damage to a merchant’s small or midsized safe and secure online merchant portal, we have business. That’s why it’s imperative that merchants signi cantly reduced the time our merchants need have a payments partner they can trust to help them to spend dealing with chargebacks,” Bom Lee, vice ght back against unwarranted chargebacks. president of sales for NAB, said. “This allows them to spend more time dealing with the day-to-day tasks of CHARGEBACK REDUCTION POWERED BY running their businesses.” NORTH AMERICAN BANCARD In addition to dispute management, Payments Hub also enables merchants to access statements At North American Bancard, we’ve been leading the and reports, set up customized alerts, accept online charge to protect merchants against unwarranted payments via a virtual terminal, order supplies, and chargebacks for years. “We understand how so much more.

For more information on how you can help NAB’s 350,000 satis ed merchants continue to grow their businesses, while helping yourself to some of the biggest bonuses and most rewarding residuals in the payments industry, please visit www.gonab.com or call (888) 229-5229.  A competitive edge. Merchants BitPay reported major growth in transactions with smaller-ticket items. can embrace the rising demand for 2017, with a 328% increase in their These coins are basically the debit card alternative payment methods by being payment dollar volume year-over-year version of digital currency, and I expect among the first to accept crypto- from 2016. The company’s merchants to see more coins come out that serve currency payments. Merchants also received a total of over $110 million in specific purposes like this. gain a competitive edge when cater- Bitcoin payments per month, with pre- Transaction fees as high as $28 are ing to a millennial clientele that’s cious metals broker JM Bullion gain- threatening Bitcoin’s value for small accustomed to digital wallets, Apple ing nearly $4 million in Bitcoin sales payments, so I can’t wait for a com- Pay, and person-to-person payments. in the month of June 2017 alone. pany to offer higher volume and dis- According to Blockchain Capital, Their competitive nature will lead counted mining. The high fees are a 30% of millennials would rather own more large retailers to offer alternative growing pain, like the high cost of min- $1,000 worth of Bitcoin than $1,000 payments, bringing us closer to mass utes in the early cell-phone days, but I of government bonds or stocks. adoption. While more merchants are expect that some major players will get  A great option for high risk, signing up for cryptocurrency solutions, involved, and fees will come down. e-commerce, and merchants with big- processing volume remains low overall. Another challenge will be bringing ticket items. In other words, those that But as consumers become more com- cryptocurrency payments to the retail are looking for secure transactions, no fortable making cryptocurrency trans- counter. A colleague of mine had chargebacks, and lower costs, and no actions on Web sites they trust, it’s only an interesting experience in Europe limitations on transaction size. a matter of time before they use digital recently. He saw someone bring a currency in other environments, and printed-out quick-response (QR) code Major Growth processing volume will increase. to a retail counter. The wheels started Some of the larger merchants accept- turning in our heads: as long as a cus- ing Bitcoin payments today are Lord Expected Challenges tomer has a smart phone, a terminal & Taylor, Expedia, TigerDirect, Our biggest challenge with cryptocur- could issue a QR code on the screen, Virgin Galactic, NewEgg, and Dish rency payments today is that they need from which the customer can scan the Network. One notable merchant that to be faster. The closest thing I’ve seen code to open their wallet. They then accepts a variety of cryptocurrency to a solution is the Lightning Network, approve the transaction, and money payments is Overstock. In August a system of smart contracts built on is transferred. My team is currently 2017, the online retail giant partnered top of the base Bitcoin blockchain that in development to provide a solution with blockchain startup ShapeShift to allows for fast, cheap payments directly using the Poynt terminal, which we like accept more than 60 cryptocurrencies between two parties. Lightning intro- because it’s high-speed, has Internet as payment at its online stores. duces coins that are set up for faster access, and is developer-friendly. DT

ADVERTISER INDEX Digital Transactions 877-658-0418 www.digitaltransactions.net Pages 27, 35, 37 Electronic Merchant Systems 866-887-8907 www.emsagent.com Inside Back Cover eProcessing Network 800-296-4810 www.eprocessingnetwork.com Page 21 Harbortouch 800-201-0461 www.isoprogram.com Page 1 Humboldt Merchant Services 877-457-4479 www.hbms.com Back Cover MagTek 562-546-6467 www.magtek.com Page 3 MRC Vegas 2018 events.merchantriskcouncil.org/mrcvegas18/ Page 25 North American Bancard 888-229-5229 www.gonab.com Page 39 PAX 877-859-0099 www.pax.us Page 5 Paya 800-261-0240 www.paya.com Page 7 PaySafe 281-583-4400 processing.paysafe.com Page 11 ProPay, a TSYS Company 888-227-9856 www.propay.com Inside Front Cover Southeast Acquirers Association (SEAA) www.southeastacquirers.com Page 13 Transact, powered by ETA www.electran.org/events/etatransact18 Page 17

40 • digitaltransactions • February 2018 YOU SELL & WE TAKE CARE OF THE REST!

At Electronic Merchant Systems our agent partnering approach stems from the understanding that our success is based upon your success. We are committed to building a lasting relationship with you and strive to provide you with the personal service that you deserve from an Agent partnership with EMS.

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