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VOLUME SIXTEEN, NUMBER TWO • DIGITAL TRANSACTIONS.NET • FEBRUARY 2019

THE NEW REALISM ABOUT BLOCKCHAIN Unbridled enthusiasm for distributed ledgers has given way to a more sober assessment of the technology’s probable role in payments.

ALSO IN THIS ISSUE + Why Fiserv Is Buying First Data + The Smart Money in Smart Terminals + ATMs And the Fate of Cash + What’s Next for Retailer Wallets? pax-2019-smart-retail-solutions(digitrans).indd 1 12/10/18 8:04 PM

DIGITALTRANSACTIONS.NET

CONTENTS February 2019 ■ Volume 16, Number 2 22 The New Realism About Blockchain Unbridled enthusiasm for distributed ledgers has given way to a more sober assessment of the technology’s probable role in payments. 4 The Gimlet Eye On Realism 6 Trends & Tactics The Mega-Merger Postpone the Requiem Nobody Expected for ATMs Some experts may have figured Yes, numbers are down globally, somebody would buy debt-laden but that’s mainly because of Rather than force the First Data some day. But Fiserv? machines unplugged in China. technology into the Remember TSYS’s Vital Brand? Dashboard Commerce: It’s Now a POS Product Suite Phillips 66 Links high-volume, high-speed Total System branches into the With Honda ... fast-moving market for super- A petroleum company that happens world of credit and sophisticated POS devices. to be a pioneer in digital payments sees big potential in in-car payments. debit card transactions, What an Acquisitive Paya Is Looking for—And What It Isn’t ... As Visa Teams Up some advocates see The merchant processor’s new With SiriusXM CEO explains the reasons behind And so does the familiar in-car a more practical use the First Billing deal. entertainment channel. in high-dollar, low- Plus, Security Notes shows how cryptourrency can make taxation both fair volume transactions, and incapable of evasion. such as money transfers 14 Acquiring Get Smart and cross-border and So-called smart devices are invading the point of sale at an increasing pace. business-to-business They bring undoubted advantages, but also a few complications. payments. 18 Components Can ATMs Stay Relevant? PAGE 22 As cash goes, so go ATMs. Cash so far has managed to ward off its many electronic enemies, but it’s playing defense in the payments version of The Hundred Years’ War. What does it all mean for ATM deployers and manufacturers? 28 M-Commerce Retailer Wallets Load Up Benefitting from a built-in customer connection, retailer wallets adroitly tap into shoppers’ purchasing habits in ways unavailable to the big tech wallets. 31 Endpoint The Fundamentals Still Apply Want to start—or bet on—the next big thing in payments? Forget glitz and glamor and focus on startups that address pressing problems with substantial and realistic solutions, argues Eric Grover. Cover illustration: Malin Christersson, Jason Smith, Fotolia.com

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THE GIMLET EYE FEBRUARY 2019 • VOL. 16, NO. 2

PUBLISHER Robert A. Jenisch EDITOR-IN-CHIEF John Stewart Senior Editor Jim Daly Senior Editor, Digital On Realism Kevin Woodward Correspondents t was only a matter of time before the payments industry, some of which had Jane Adler succumbed over the years to a flight of fancy over blockchain technology, Lauri Giesen returned to earth. To be fair, this episode never reached the level of hysteria, Karen Epper Hoffman I Peter Lucas nor were enthusiasts entirely wrong in their expectations. The error was more one Linda Punch Elizabeth Whalen of character than of degree. Art Director/Production Editor Distributed ledgers will one day deliver some significant benefits both inside Jason Smith and outside of the payments business. But, as our story on page 22 shows, this day Editorial Advisory Board will arrive later than most enthusiasts expect and will likely yield fewer advances Eula L. Adams than many of them think it will. John Elliott Nor should this come as a surprise. The same has been true of most innova- Alex W. “Pete” Hart Former Chief Executive Officer, tions believed to be transformative. It is easy, perhaps too easy, to blame inflated MasterCard International expectations on the human tendency to believe, and spread, hype. Hype is typi- William F. Keenan cally associated with ideas that were never built on anything but hot air from the President, De Novo Corp. Dr. Gideon Samid start. Such ideas depend on hype for momentum, as they have little else to rely on Chief Technology Officer, for propulsion. AGS Encryptions Ltd. But blockchain isn’t hot air, and enthusiasm for it isn’t hype. This is a math- Director of Advertising Robert A. Jenisch, 877-658-0418 ematically sophisticated system that can yield significant benefits in areas involv- [email protected] ing, for example, self-executing contracts, chains of ownership, and yes, payments. Advertising Sales Representatives We called our story “The New Realism About Blockchain” because it points out, Robert Mitchell, 877-658-0418, x7 [email protected] not how blockchain is a failure, but how expectations for it have been premature. Rob Akert, 877-658-0418, x6 Critics like to point out, for example, how Visa can process tens of thousands [email protected] of transactions per second while blockchain supporting Bitcoin can manage just Digital Transactions, Digital Transactions News, seven. This is a fair point. But it is not dispositive in arguing that blockchain is a and digitaltransactions.net are publications of failure. It really means blockchain needs more innovation, and probably more time. Boland Hill Media LLC, 800 Roosevelt Road, Suite B212, Glen Ellyn, IL 60137 Techniques like the fledgling Lightning Network, for example, may yet improve John Stewart, Managing Director transaction capacity and speed by diverting volume in ways that relieve congestion. Robert A. Jenisch, Managing Director For advertising information, call 877-658-0418. This is what we mean by “realism.” To adopt a realistic point of view of some- To subscribe or give us a change of address, thing is not to dismiss or denounce it. It is, by contrast, a pose that accepts and go to www.digitaltransactions.net and click on “Subscriber Care” or call 847-559-7599. respects an idea by investing it only with expectations that are reasonable, given The views expressed in this publication are not its capacities and limitations. necessarily those of the editors or of the members We are a publication that follows and reports on digital-payments innovation, of the Editorial Advisory Board. The publisher makes reasonable efforts to ensure the timeliness so it would be perverse were we to ignore something like blockchain, or dismiss and accuracy of its content, but is not engaged in any way in offering professional services related to it out of hand. What we are trying to do with this month’s cover story, by contrast, financial, legal, accounting, tax, or other matters. is to pay respect to the idea by recognizing clearly what it can reasonably do, and Readers should seek professional counsel regarding such matters. All content herein is copyright pointing out where users and experts feel it falls short. © 2019 Boland Hill Media LLC. No part may be We hope our readers will profit by the result. 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 2019 $119/year, payable in 4 • digitaltransactions • U.S. currency. PAYMENTS FROM START TO FINTECH APRIL 30–MAY 2, 2019  LAS VEGAS, NV

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etatransact.com Trends & Tactics

The Mega-Merger Nobody Expected

In a stunning announcement that sur- and chairman Frank Bisignano on the accounting term referring to earnings prised many observers last month, morning the merger was announced. before interest, taxes, depreciation, Fiserv Inc. struck a deal to acquire Yabuki cautioned that the invest- and amortization. First Data Corp. with what the parties ment community has allowed First With the merger, Fiserv will gen- say will be the biggest ever such trans- Data’s debt load to overshadow the erate some $4 billion annually in free action in the payments and financial- importance of its payments assets. cash flow by the third year of the technology businesses. “We’ll still have that $17 billion in merger, Yabuki estimated. The all-stock deal, expected to debt for a little while but it’ll be at a Yabuki will serve as chief execu- close in the third quarter, values First lower cost,” he said. “What we saw tive and chairman of the united entity, Data at $22 billion and will bring [in First Data] was a lot of debt but while Bisignano will fill the role of to Brookfield, Wis.-based Fiserv also major investments in the [pay- president and chief operating officer major assets in merchant acquiring, ments] market. When we saw that, we and will be a member of the board including the fast-growing Clover said, ‘Wow.’ This is a misunderstood of directors. smart-terminal unit. investment. It’s a lot of debt, but it’s For his part, Bisignano cited two It will also bolster both companies’ a lot more EBITDA.” EBITDA is an overarching benefits of the merger. connections with financial institutions and expand Fiserv’s PIN-debit business by adding First Data’s Star network. Fiserv Compared to First Data With the combination, the expanded Fiserv FDC Fiserv will boast annual revenue of Revenue1 some $15 billion but will also inherit $5.5 billion $8.6 billion a significant albatross—approximately $17 billion in debt Atlanta-based First Head Count Data has struggled pay down over a 24,000 22,000 number of years. Fiserv’s plan is to refinance the Operating Income debt load as soon as the deal closes and $1.8 billion $2.4 billion then begin paying it off with free cash flow from the combined operations, Free Cash Flow said Fiserv chief executive and presi- $1.2 billion $1.5 billion dent Jeffery Yabuki in a conference call held jointly with First Data CEO Note: As of the 12 months ended 9/30/18 1. Adjusted Source: The companies 6 • digitaltransactions • February 2019 “For years, we have had aspirations to deliver a compelling core processing “We said, ‘Wow.’ This is a platform,” and the combination with Fiserv fulfills that ambition, he said. misunderstood investment. It’s a lot The second benefit involves what of debt, but it’s a lot more EBITDA.” Bisignano referred to as an immediate —Jeffery Yabuki, chief executive and president, Fiserv process of “deleveraging” First Data’s balance sheet. With Fiserv’s assets in payments It’s a big deal between two companies can see there’s synergy, there’s over- businesses like electronic billing, the I never thought would come together,” lap,” he says. merger will also allow First Data says Lawrence Berlin, senior vice The terms of the deal call for First to market what Bisignano called president at First Analysis Securi- Data shareholders to receive a fixed “the largest and broadest merchant- ties Corp., Chicago, where he covers exchange ratio of 0.303 Fiserv shares services platform in the world,” which Fiserv and monitors First Data. for each share of First Data common will now extend to some 20,000 bank Berlin cautions that managing First stock, representing a share price of branches served by Fiserv. Data’s big debt load will be a more $22.74 based on the Jan. 15 closing To spur new businesses, Yabuki significant encumbrance than the two price. This is a premium of 29% to the said the combined company will companies are saying publicly. “It’s a five-day volume weighted average as commit $500 million over the next lot,” he says, adding that “Fiserv has a of that day, the companies said. This five years “to enable new sources of little over $5 billion [of debt] on their formula will result in Fiserv share- growth,” without being specific. own. Bottom line, it’s going to be a ton holders owning 57.5% of the new The announcement has stunned of work to make this thing work.” company, leaving First Data share- most observers, leaving some optimis- Still, Berlin sees “synergies” for holders with 42.5%. tic while stirring skepticism in others. the combination in person-to-person The transaction is subject to cus- “This combination creates an intrigu- payments and in PIN debit, particu- tomary regulatory approvals and the ing new entity in payments with the larly with the combination of Star approval of shareholders. capacity to change the game for any with Fiserv’s Accel network. “You —John Stewart and all banks and merchants other than the great big guys,” says Steve Mott, principal at Stamford, Conn.- Remember TSYS’s Vital Brand? based consultancy BetterBuyDesign, It’s Now a POS Product Suite by email. “It substantially changes the balance of power in the industry and will Payment processor Total System Ser- system for businesses with one or have huge implications, if the deal is vices Inc. (TSYS) last month unveiled more physical locations. approved, for several of the key prod- a line of point-of-sale terminals and In addition to their payment func- uct futures including PIN debit, faster services for small and mid-size busi- tions, all three products include back- payments, and digital commerce, nesses, and took its Vital brand out of office features such as analytics and among others,” Mott adds. a 13-year retirement as the name for reporting, inventory management, tax “The trick will be making this a the new product suite. accounting, time-clock and employee- strategic-marketing thrust and not just The cloud-based Vital POS has management functions, pricing and a cost-cutting exercise,” he says. “If three major components: Vital Mobile, discount controls, and other features, it’s the former it could really energize an EMV card reader for a merchant’s according to TSYS. Pricing was not the industry in a productive way.” smart phone or tablet; Vital Plus, a immediately available. Others are less sanguine. “Surprise replacement for countertop POS ter- “We currently have nearly 800,000 is the first word that comes out. Skep- minals and electronic cash registers, merchants in our portfolio, and each ticism is probably the second word. and Vital Select, a full-featured POS of these three products is designed for

February 2019 • digitaltransactions • 7 Trends & Tactics

Vital in action: An old processing name returns as the brand for a smart terminal line.

(Photos: TSYS) the specific needs of different sizes of capabilities offered for a very afford- acquiring venture TSYS and Visa businesses,” said a TSYS spokesper- able monthly fee,” the spokesperson formed in 1995, with Visa providing son by email. says. “Another key selling point of the front-end services and TSYS doing Columbus, Ga.-based TSYS, one of Vital POS is that it is based on a uni- the back-end tasks. TSYS bought out the nation’s biggest merchant acquirers, fied platform. This provides business Visa’s share in 2005, including rights now has a system that competes directly owners with a single, unified experi- to the Vital brand, and renamed the with the likes of First Data Corp.’s ence across all of our products.” business TSYS Acquiring Solutions Clover, Square Inc., and Poynt, all of Vital uses technology TSYS in April 2006. which offer small and medium-size obtained last June when it shelled out “Vital is an extremely powerful merchants business-management soft- $13.4 million in cash to acquire Jack- brand that reflects and embodies the ware apps in addition to POS hardware. sonville, Fla.-based iMobile3, a pro- value and importance of the product “Vital POS offers everything one vider of POS products and an app mar- set we are now delivering ... the Vital would expect from a Square or Clover, ketplace for mobile phones and tablets. name also resonates very well in the but surpasses them with extraordinary Vital Processing Services was industry,” the spokesperson says. back-office and business-management the name of a 50-50 joint merchant- —Jim Daly

What an Acquisitive Paya Is Looking for—And What It Isn’t

Paya Inc. last month acquired First municipal and other government cli- says Hack, who took over at the com- Billing Services, a Dayton, Ohio- ents serving more than 2.5 million con- pany in November after a career that based billing processor for municipal- sumers. The potential for expansion in has included long stretches at JPMor- ities, utilities, and multifamily hous- this market is appealing for a payments gan Chase & Co. and First Data Corp. ing units. provider like Paya, Hack says. “We have merchant agreements The deal, which Paya chief execu- “The penetration rate is low but today that don’t have the word ‘mer- tive Jeff Hack says was consummated rising at a high rate,” he says. “Munic- chant’ in them,” he says. “We believe minutes before midnight on New ipalities are a less-penetrated segment. it’s a competitive advantage going to Year’s Eve, represents the Atlanta- There’s not hundreds and hundreds of market with partners and offering a based payments provider’s second in people tripping over each other to deeply integrated software solution.” as many months and continues what serve them, so it’s very attractive.” In this sense, the First Billing deal Hack says is the company’s mission The acquisition also furthers a strat- follows the same logic that under- to fill in “white spaces’ in its portfolio egy at Paya to recruit resources that girded Paya’s acquisition Nov. 1 of of services. Terms were not disclosed. can integrate software and payment another Ohio-based company, Stew- Formed in 2011, First Billing processing in markets not typically ardship Technology Inc. That deal brings to Paya a base of more than 600 served by rival merchant acquirers, brought to Paya a processor with

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It’s really that easy! To get started, contact Publisher Bob Jenisch today: 877-658-0418 [email protected] Trends & Tactics strengths in nonprofits, particularly houses of worship. First Billing, whose services include “We have merchant agreements processing for automated clearing house today that don’t have the word and check transactions as well as credit ‘merchant’ in them.” and debit cards, has benefited from a trend among local governments toward —Jeff Hack, chief executive, Paya electronic billing and payment. In this market, “electronic payment adoption is growing rapidly,” to build out its capability to fill those software firm Sage Group plc. Sage Hack says, but he adds that “staying white spaces with acquisitions that Payment rebranded as Paya a little out of PCI scope” is also critical to can merge software and processing over a year ago. these clients. “This is why it makes capabilities in underserved markets. But potential deals are not all sense to be partnering with someone “A payments-centric space that equal. In fact, very few that Paya like FBS.” PCI refers to the Payment has low penetration of cards cre- evaluates are likely to come to frui- Card Industry data-security rules for ates opportunity for us,” Hack says. tion. “We see lots and lots of inbound card transactions. GTCR paid $260 million in 2017 to interest,” says Hack. “The funnel With backing from Chicago-based acquire the company, formerly known is incredibly wide. What makes it private-equity giant GTCR LLC, as Sage Payment Solutions, from the through the funnel is incredibly rare.” Paya is far from finished in its effort United Kingdom-based accounting- —John Stewart

Postpone the Requiem for ATMs

With the onset of digital wallets, observ- The two schemes together to digital cash is having an impact. ers of the payments scene might expect accounted for $15.5 trillion in spend- “China’s burgeoning middle class has consumer demand for cash to wither, ing in that country last year, more than embraced digital payments enthusias- and with it the population of ATMs. 77 times the $200 billion they racked tically, and as demand for cash falls, It turns out the ATM count worldwide up only in 2013. Alipay alone saw its the number of ATMs in the country is did hit its zenith last year, according to user base increase six-fold to 600 mil- expected to continue dropping,” RBR research released last month, but the lion over the same time span. says in a news release. reason is a bit more complicated. Since China is home to “by far” China isn’t the only region where The total number of machines the world’s largest installed base of this is happening. RBR also sees it in around the world peaked in 2017 at ATMs, according to RBR, that turn some of the countries in Western Europe 3.28 million and then started a slow decline that will see it fall to 3.23 million by the end of 2023, according to ATM Installed Base (in millions) RBR Research, a London-based firm. p China p Remainder of world And while the reason is related to a downdraft in consumer cash usage, that downdraft is most dramatically going on in just one very large country—China. The installed base in China is 2.7 expected to drop from 700,000 to 2.5 600,000 through 2023, RBR says, for the most part because of wildly suc- 0.7 0.6 cessful mobile-payments services like 2017 2023 Alipay and WeChat Pay. Source: RBR

10 • digitaltransactions • February 2019 as the spread of payment cards and the “With the interest we are seeing in Dashboard Commerce: ongoing closure of bank branches take the Consortium for Next-Gen ATMs, Phillips 66 Links their toll on ATM deployments. growth here is expected to continue,” With Honda ... Nevertheless, these declines will says David Tente, executive direc- be more than offset by rising installa- tor for the U.S. and the Americas at tions in other parts of Asia, as well as ATMIA, an industry trade group. The Phillips 66 Co., which has long been a in the Middle East, Africa, and Latin ATMIA-sponsored consortium is pro- leading player among petroleum compa- America, RBR says. moting a blueprint that was reached nies in digital payments, has taken a step The research firm cites moves in last year to advance ATM technology. into in-car commerce in a tie-up with some of these regions toward financial The upshot is: don’t expect a declin- Honda Motor Co. Inc. that will allow inclusion and a general effort to bring ing demand for cash access to lead to customers to find the nearest station, electronic banking to rural areas. Over- the end of the ATM any time soon. claim a pump, and pay for gas from the all, the world total outside of China will “Convenient access to cash remains infotainment system in their cars. grow to 2.7 million machines, up from a priority for a great many customers The new arrangement, under devel- 2.5 million in 2017, the firm projects. around the world, and ATMs will con- opment with Honda Developer Studio, In the United States, an industry tinue to be a key cash delivery chan- is expected to work at stations flagged push to modernize the installed base nel in the years to come,” says Rowan under the Houston-based petroleum of ATMs will spur deployment and Berridge in a statement. company’s three brands, which in the usage, industry sources expect. (For Berridge led the research effort United States include 76 and Conoco more on the impact of declining cash for RBR’s report, “Global ATM Mar- as well as Phillips 66. Some 7,550 usage on ATMs, see “Can ATMs Stay ket and Forecasts to 2023.” independently owned outlets in 48 Relevant?” page 18). —John Stewart states sell the company’s products.

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February 2019 • digitaltransactions • 11 Trends & Tactics

The company also said it will con- payments capability to the most recent way,” said John Barbour, manager of tinue rolling out its My Phillips 66 generation of infotainment systems payments and card services at Phillips mobile app, which launched last year installed in automobiles (“Hitting the 66, in a statement related to the part- and works in-store as well as at the Accelerator,” January). nership with Honda. pump with both Apple Inc. and Google Honda has been an early exponent of Honda Developer Studio is situ- devices. Google is a unit of Alphabet Inc. this trend. Two years ago, the automaker ated within a unit called Honda R&D The app integrates Mastercard worked with Visa Inc., pump maker Gil- Innovations Inc., which is based in Inc.’s Masterpass wallet. In 2016, Phil- barco Veeder Root, and parking-meter Mountain View, Calif., and concen- lips 66 was an early player to announce manufacturer IPS Group Inc. to demon- trates on self-driving technology as it would accept JPMorgan Chase & strate a mobile app that allowed drivers well as in-car payments. Co.’s Chase Pay mobile wallet. to pay for parking and fuel. —John Stewart The company’s latest move is “We understand consumers want part of a larger trend toward bringing to fuel up, pay, and quickly be on their

... As Visa Teams Up With SiriusXM

Visa Inc. and SiriusXM Connected pay tolls, and more, according to Visa. Vehicles Services Inc. said in January “Users will activate and authenticate they plan to offer the SiriusXM e-wallet payment with their Visa account using to auto manufacturers that deploy biometric authentication, like voice and SiriusXM’s connected-vehicle services. touchscreen commands, to eliminate SiriusXM Connected Vehicles driver distractions during the transac- transforming the vehicle into a ‘hub’ Services is a subsidiary of New York tion,” Visa said in a news release. that provides for real-time, convenient City-based satellite-radio services The wallet runs on Visa and transactional services to drivers and provider Sirius XM Holdings Inc. SiriusXM application programming passengers,” John Jasper, senior vice Multiple automotive brands offer Siri- interfaces as well as the Visa Token Ser- president at SiriusXM Connected Vehi- usXM systems in their vehicles. vice for data security. Tokenization sub- cle Services, said in the release. The SiriusXM wallet will allow stitutes card account numbers with digi- Visa and SiriusXM announced drivers and passengers with Visa tal strings of data useless to fraudsters. their pair-up at the Consumer Telemat- accounts to shop and pay for coffee, “Our work with Visa is a significant ics Show, an automotive-industry con- find and pre-pay for gas, locate and pay step in establishing the next generation ference in Las Vegas. DT for parking, purchase movie tickets, of vehicle-to-everything connectivity, —Jim Daly

MONTHLY MERCHANT METRIC Q3 2018 Account Attrition And Growth Account Attrition—Total attrited accounts in given period divided by total portfolio active accounts from same period of the prior year. New Accounts Added—Total new accounts in given period divided by total portfolio accounts from same period of the prior year.

Note: This is sourced from The Strawhecker Group’s merchant data warehouse of over three million merchants in the U.S. market. The ability to understand this data is 100.0% 103.6% important as SMB merchants and the payments providers 26.0% that serve them are key drivers of the economy. All data is for SMB merchants defined as merchants with Beginning Account Attrition New Accounts Added Ending less than $5 million in annual card volume. -22.5%

12 • digitaltransactions • February 2019 Security Notes Crypto And the Tax Man Gideon Samid • [email protected] t’s ten years since Bitcoin To do this, the bank will have to collect 5% of the trading made its big splash. More coins. Seems like a daunting task. The owners of those pub- I than a thousand coins now licly displayed coins are cryptographically masked. follow in its footsteps. Digital Indeed, but the identity of the coins themselves is clearly coins are still a tiny fraction marked. So all that is needed is a fair way to take over 5% of of worldwide money movement, the Bitcoins on the public ledger. To do that, the World Bank but the hype is on. can use the other Bitcoin novelty: randomness. Very serious financial experts Bitcoin poses, every 10 minutes, a puzzle that amounts and economists predict a rosy future for this new technology. to randomized trial and error. This is ingenious. If the puz- Many share a strong conviction that money is on an irrevers- zle were solvable by intellect, the smartest trader would get ible course towards digitization, a trend that is about to change all the new coins. So randomness projects fairness (though payment, commerce, global sharing, and culture itself. But Bitcoin prefers those who wrestle randomness with heavy what path will it take, and how fast will this happen? computing power). By applying a high-quality randomizer, One possible pathway is rooted in irony. The original the World Bank can hit 5% of the outstanding coins, and popularity of Bitcoin was due to the fear of Spanish and announce them as “taxed,” that is, taken over by the bank. Italian account holders toward their own governments. They The bank can take over the randomly marked coins with- saw the European Union confiscating savings accounts in out having any idea who it is taking them from. It does not Cyprus, and regarded Bitcoin as a means to keep money out matter. And, since all the trading Bitcoins are listed, their of government reach. owners cannot hide them in the mattress or in the Cayman Bitcoin is a brilliant (albeit flawed) combination of well- Islands. And, being random, every outstanding coin stands known cryptographic ideas and some bold novelties. The most the same chance to be “hit.” prominent are: (i) the public ledger listing all traded coins, Which means that Bitcoin traders will pay taxes in direct and (ii) random allocation of out-of-the-blue-generated digi- proportion to their holdings. This is a fair, wealth-based tax, and tal coins. These two novelties can be turned around and used cheat-resistant at that. Public-ledger technology will instantly by the very governments that Bitcoin was designed to evade. spread the word: these coins have been taken over as tax. The The public ledger, and randomized allocation, may revolu- World Bank being a global institution, representing all 188 tionize the world of taxation. Taxes are an enigma, mostly based United Nations states and supported by global Internet organi- on income. A multibillion dollar industry is busy with account- zations, it would be impossible to resist the coin confiscation. ing acrobatics to reclassify income as something else. The gov- I have used Bitcoin to explain this concept. Wealth-based ernment is battling its citizens in a never-ending tax war. taxation is much better applied to national currencies in digi- And lo and behold, digital money may replace the tized form, where the coins don’t vary in value, and the trade income-tax paradigm with a wealth-based, cheat-resistant, itself is fully managed by the respective central bank. fair alternative. Given the importance of taxation, this par- We recommend this concept be applied to government- adigm change may induce governments to welcome and issued fiat coins, as we do with BitMint, which combines embrace the new technology of money. this cheat-resistant fair taxation with the emerging concept Remember the public ledger? It is a public list of all the of universal income, circulating taxes from the top to the digital coins in circulation. Bitcoin trade is based on the idea bottom of the financial pyramid. The advantage of instant that this ledger is efficiently distributed and known through- and fair taxation will be very pronounced for local commu- out the trading universe. Suppose now that the World Bank nities issuing and taxing community dollars. declares that Bitcoin holders will be taxed 5% each year to pay The impact on taxation will serve as an irresistible induce- for worldwide refugees, climate change, and natural disasters. ment for governments to embrace digital currencies.

February 2019 • digitaltransactions • 13 ACQUIRING February 2019 digitaltransactions

Get Smart

John Stewart

So-called smart devices are invading the point of sale at an us our first year to scale, and now increasing pace. They bring undoubted advantages, but also a few we’re expanding to multiple countries,” he says. “Things are scaling complications. pretty nicely.” Meanwhile, Clover is seeing udging by the number of times is now more like 20% “for those who $70 billion in annual processing vol- Fiserv Inc. chief executive Jeffery are better at it,” notes Alfred “Chip” ume, a number that’s growing at a JYabuki and First Data Corp. Kahn, who runs Boomtown Inc., a 46% annual rate. That’s up from zero CEO Frank Bisignano mentioned Tiburon, Calif.-based company that five years ago. Clover last month during their joint helps merchants and resellers iron out “We see strong demand from all announcement of Fiserv’s proposed POS issues. sectors,” says Mark Schulze, a co- acquisition of First Data, you would He doesn’t see that trend slow- founder. Now, it’s keeping upwards think there’s little more to First Data ing down any time soon. “I don’t see of 500 developers so busy on apps than the line of sleek, smart point-of- why it wouldn’t be 50% in a couple of that “the line between a Clover devel- sale devices Clover sells. years,” he says. oper and an ISV [integrated software Of course there is much more, vendor] is rapidly blurring,” he says. but if the $22 billion all-stock deal ‘Scaling Pretty Nicely’ closes on schedule in the third quarter, It’s already taking on outsize impor- Democratizing Payment Fiserv will at a stroke join a rapidly tance for Boomtown. The company has Fast growth hasn’t come because the growing smart POS market that didn’t 190,000 merchant locations on soft- devices are cheap. They can sell for exist a few years ago and now bids to ware called Relay that allows the com- prices up to $500 apiece. Some sophis- reshape the way consumers pay and pany to help proprietors with terminal ticated systems, like Square Inc.’s merchants track their business. problems. Of these, Kahn estimates Square Register, list for $1,000, though So-called smart devices—little 25,000 are using smart terminals. the company’s recently launched computers that sit on countertops with Startups that have been created Square Terminal sells for $399. Internet connections and cloud-based specifically to supply smart terminals But the devices appeal to mer- libraries of software—are now the also report rapid growth. Palo Alto, chants of various sizes and in vari- focus not just of traditional terminal Calif.-based Poynt Co., for exam- ous industries because they can solve makers like Ingenico and Verifone ple, only began shipping devices less business problems fast, run loyalty but also of major processors like Total than two years ago but has already programs, and integrate updates, System Services Inc. (TSYS) and the shipped more than 200,000, according all with a very small footprint at aforementioned First Data. to founder Osama Bedier, a former the counter. And their large screens Sales of the devices have acceler- PayPal and Google executive. make it easy to see the solutions the ated at a breakneck pace. Shipment Founded more than four years machines are coming up with. totals are hard to come by. But where ago, the company now works with With typical payment terminals, a provider might have installed them 15 acquirers around the world to dis- “you see these beige-gray boxes in 3% to 4% of its clients’ locations a tribute its double-facing (customer as where you can barely read the screen,” couple of years ago, that proportion well as cashier) terminals. “It took says Thomas Templeton, a member of

14 • digitaltransactions • February 2019 longer a Joe’s Pizza customer, they’re Poynt in action: an Uber Eats customer,” Kobres says. Fast growth in a “It’s ratcheting up every year, and tech short time. integration has not kept up with that.” Extending the restaurant’s brand is important for Revel, which gets 60% of its sales from the segment. “It’s what we’re working on,” he says, though he admits “there are a lot of variables— we don’t have it settled yet.” Revel isn’t the only player that doesn’t yet have all the answers. Despite the industry’s rapid development, observers are wondering how long it can support so many play- ers. The big question, they say, is not (Photo: Poynt) when a shakeout among providers will happen, but how soon. “Terminals are going to be around for decades, but the winnowing of the Square’s Hardware Team who helped It also hasn’t escaped Ingenico’s smart terminals” will happen much design Square Terminal. “We saw an notice that the smart-device segment sooner, says Rod Hometh, a former opportunity to redesign the product of the terminal business is “the fast- Ingenico executive who is now a part- and make it more user-friendly.” est-growing,” says Bunney. Axium is ner with the payments-advisory ser- Even aesthetic considerations set to begin shipping before June. vice RPY Innovations. “I’d put that at matter. “We put a lot emphasis on For its part, Verifone has intro- less than five years.” how do we bring beautiful design,” duced its Carbon line of devices to The complicating factor for pro- says Templeton. meet much the same market demand. viders, Hometh argues, is the require- The rise of the smart terminal The company declined to speak to ment to certify devices with the card hasn’t gone unnoticed at the two Digital Transactions for this story. networks, an expensive and lengthy traditional giants in the countertop- process that could be a crushing bur- terminal business, Ingenico Group The Coming Shakeout den for a new player operating on and Verifone Holdings Inc. Some of the providers point out that thin capital or without alliances with “We’ve been looking at this class the swiftly developing demand for established processors. “If you try to of product for quite some time,” these devices also stems from a need go it alone, you don’t have a chance,” says Mark Bunney, director of go-to- to combat what Erick Kobres, chief Hometh warns. market strategy for Ingenico, which technology officer at Revel Systems, last year announced its Axium smart a San Francisco-based maker, calls a ‘The Hardest Part’ terminal, a device that relies on ISVs “digital channel shift” that especially The relatively quick popularity of for apps and can operate as either a threatens restaurants, a key market. smart terminals has attracted merchant- mobile or stationary terminal. The shift involves delivery ser- processing companies that have either What Ingenico is seeing, says Bun- vices that take over “branding” from started up their own device operations ney, is a trend toward cash-register the eatery, so that the user is “no or signed agreements to work with and processor sophistication combined in a small box with a big screen. And even small merchants, he says, are keen to get this. ‘The smart terminal democratizes “We’ve been seeing that for a number of years,” he says. “They payment. Now, mom and pop can have need something more. The smart terminal democratizes payment. Now, as much power as a Tier One merchant.’ mom and pop can have as much power as a Tier One merchant.”

February 2019 • digitaltransactions • 15 existing ones. But this development also shelters fledgling device opera- Clover: at 6 tions under the aegis of much larger years old, the grand-daddy of organizations with more resources and smart devices. more industry connections. The most recent example of this trend emerged early this year when TSYS dusted off a brand name it hadn’t used in 13 years and applied it to a spanking-new line of smart terminals. The Vital line depends on tech-

nology Total picked up last year (Photo: Clover) when it laid out $13.4 million in cash to buy iMobile3, a Jacksonville, Fla.-based vendor of POS products and an app marketplace for mobile phones and tablets. Total had last affordable as costs pile up, are major links. “It’s a lot of external issues used the Vital name in 2006 for a pro- hurdles that can take years to sur- as opposed to the complexity of the cessing venture it rechristened TSYS mount. “Getting 18 different certifi- product,” he says. Acquiring Solutions. cations was the hardest part,” he says. Some of the smart-device play- “Vital wasn’t created from whole “Three years in, we had [them].” ers have offset complications like cloth,” observes Hometh. “TSYS is this with offerings that have strong assembling the right pieces and parts ‘Folks Need Help’ appeal for merchants and tend to tie with iMobile3 and Cayan.” The lat- Other complications hover on the them closer to the product. Busi- ter “piece” refers to a processing- horizon of this business. Boomtown’s ness finance, for example, is a technology company TSYS acquired Kahn, for example, says the devices popular product. in January 2018. are not quite as easy to use and main- Square has offered its Square But TSYS is hardly alone. Last tain as their makers claim. Capital loans for years, and Revel’s month, the big processor Worldpay “They’re not complicated to set up, recent deal with Worldpay will allow Inc. announced a tie-up with Revel but Silicon Valley oversimplifies how it to offer merchants funding sup- that will include a wider selection of easy it is,” he says. “Folks need help. port through Worldpay’s FastAccess software and a single point of contact It’s not just plug it in and it works.” Funding service. This option allows for support. In November, Elavon, a Recalling those 25,000 merchant clients to settle their batch and get processing subsidiary of U.S. Ban- locations with smart terminals that same-day access to their money. corp, announced it had taken a minor- Boomtown supports on its Relay soft- ity stake in Poynt. ware, Kahn says that while they rep- ‘Tons of Ideas’ Years earlier, First Data snatched resent 13% of the total terminal base Still, the problems of smart devices up Clover. And payments providers on Relay, they account for almost as have to be seen in the light of the like North American Bancard and many service tickets as the total of the advantages the technology offers, Shift4 Payments LLC have intro- other 87%. advocates argue. In this regard, the duced their own lines of smart devices Not all of the problems have to technology has few more ardent evan- rather than rely on startup suppliers. do with the terminals themselves. gelists than Square’s Templeton. Poynt’s Bedier admits certifica- One-third, Kahn says, concern Inter- “Terminals at the point of sale tions, and the struggle to keep pricing net connectivity, particularly WiFi will continue to get smarter and more powerful,” he promises. “We have tons of ideas we want to add for our sellers. It’s just going to get better and ‘Terminals at the point of sale will continue better over time.” Best of all, he promises, Square to get smarter and more powerful.’ sellers won’t have to buy new hardware. Instead, he says, “You’ll just get a software update.” DT

16 • digitaltransactions • February 2019

COMPONENTS February 2019 digitaltransactions

Can ATMs Stay Relevant?

Jim Daly

As cash goes, so go ATMs. Cash so far has managed to ward off its More hopeful findings for the many electronic enemies, but it’s playing defense in the payments ATM industry come from the Fed- eral Reserve Bank of San Francisco, version of The Hundred Years’ War. What does it all mean for ATM which in November released findings deployers and manufacturers? from the Federal Reserve’s Diary of Consumer Payment Choice. The diary he leading payment card net- deployers of the country’s approx- project had a nationally representative works have targeted cash since imately 470,000 ATMs, that figure sample of 2,800 consumers track their T their inception more than a half- coming from British research firm payments in October 2017. century ago, and “Death to Cash” is a RBR. About 191,000 of the machines The study report says “cash con- catchphrase that inspires fintech armies are owned by financial institutions and tinues to be the most frequently used seeking to spread their new electronic- the rest by retailers, ATM independent payment instrument,” representing payment inventions across the land. sales organizations, and non-bank net- 30% of all transactions (down slightly While most payments executives works such as Cardtronics plc. from 31% in 2016 and 33% in 2015) and banking regulators agree cash Recent research presents conflict- and 55% of transactions under $10. likely has a permanent place in paying data about Americans’ usage of And while online shopping continues ments, an increasingly heard opinion cash. In December, the Federal Reserve to grow, 77% of payments were made may be summed up in a recent speech released the latest annual update to in-person, with cash accounting for by Australia’s top central banker, its triennial payments study that last 39% of the volume. Philip Lowe, governor of the Reserve examined the 2012-15 period. The Consumers continue to use cash Bank of Australia. update found ATM withdrawal transac- mainly for smaller transactions, with “For some decades, people have tions at large banks declined by 2.8% cash being used for 55% of payments been speculating that we might one day from 2016 to 2017 (chart, page 19). under $10 and for 32% of payments go cashless—that we would no longer Also in December, the Washing- between $10 and $24.99. be using banknotes for regular payments ton, D.C.-based Pew Research Center The survey also found surprising and that almost all payments would be released results of an online-shopping concurrence in cash usage among electronic,” Lowe said at a November and e-commerce study that found older and younger consumers. payments conference in Sydney. “So far, 24% of U.S. adults make no cash pur- Respondents 18 to 25 years of age and this speculation has been exactly that— chases during a typical week. Further, those 45 and older use cash approxi- speculation. But it looks like a turning 39% of respondents said they didn’t mately 34% of the time to pay for point has been reached. It is now easier worry if they didn’t have cash with transactions. than it has been to conceive of a world them, since there are many other ways “As retailers and payment pro- in which banknotes are used for rela- to pay for things. viders compete to deliver new ways tively few payments, that cash becomes “Physical currency has existed to shop and pay, data from the 2017 a niche payment instrument.” since the dawn of the modern econ- Diary of Consumer Payment Choice But a niche role for cash in U.S. omy, but its role is waning as new shows that consumers continue to payments would be bad news for modes of payment have emerged,” demand and pay with cash about as ATM manufacturers as well as the wrote the Pew researchers. frequently as in previous years and

18 • digitaltransactions • February 2019 that their usage is relatively similar “Seven out of 10 consumers is across age groups,” the San Francisco ATM Cash-Withdrawal a super-healthy and powerful state- Fed researchers concluded. ment on the use of cash,” says Brian (Compound annual growth rates) “In particular, cash remains a pop- Trends Bailey, executive vice president and ular payment method for small-value  Transactions  Value general manager, North America, for transactions. Furthermore, when con- Cardtronics. sidering preferences, cash remains a David N. Tente, executive direc- preferred secondary payment choice 3.6% 3.9% tor for the U.S. and Americas at the regardless of what payment instrument 0.5% Sioux Falls, S.D.-based ATM Indus- consumers prefer to use primarily.” 2012-2015 2015-2016 2016-2017 try Association, notes that despite the -0.3% cash-withdrawal transaction declines ‘Look at the Nuances’ -2.8% -3.4% found in the Fed research, “people are What does all this mean for the ATM taking out more money.” industry, especially since ATM ship- The Fed’s latest payment-study ments peaked in 2015 (chart, page update says the value of ATM with- Source: Federal Reserve Payments Study 2018 Annual Supplement 21) and average replacement cycles drawals increased 3.6% from 2012 to have been extended from 7.5 years to the world’s largest ATM owner, cites 2015, 3.9% from 2015 to 2016, and 10 years, according to D.A. Davidson the annual Health of Cash study that 0.5% from 2016 to 2017. & Co. The investment firm in Janu- it sponsors. The latest survey, done by Both Tente and ATM consultant ary issued research reports on the big an independent research firm, found Sam M. Ditzion, president and chief U.S.-based ATM manufacturers, NCR that 73% of consumers “used cash executive of Boston-based Trem- Corp. and Diebold Nixdorf Inc. regularly despite more payment meth- ont Capital Group, point out that Houston-based Cardtronics, which ods being available,” according to a the Fed’s supplement showing cash- operates in 10 countries and says it is December Cardtronics blog post. withdrawal transaction declines in

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February 2019 • digitaltransactions • 19 2017 includes data only from large Now Cardtronics is focusing on agreements, and 9% from managed ser- financial institutions, not community strengthening its partnerships with vices and other sources. banks and credit unions. retailers and financial institutions, and The company is looking to expand “Statistically I don’t disagree with expanding its fast-growing Allpoint its stable of financial institutions those headlines,” Ditzion says. “If surcharge-free network. Cardtron- that put their brands on Cardtronics- you look at the nuances, however, ics operates 230,000 ATMs in total, owned ATMs, enabling customers of things get interesting.” including 76,000 that it owns. those institutions to make surcharge- He notes that while wealthy Cardtronics reported a 6% year- free cash withdrawals. Americans are very card- or mobile- over-year increase in cash-withdrawal As of Sept. 30, approximately payment oriented, lower-income transactions in 2018’s third quarter 20,000 company-owned ATMs were groups are less so. among U.S. ATMs it operated for a under branding contracts with some

Consumers’ Payment Cash Check Credit Card Debit Card Electronic Other Instrument 30% 6% 21% 27% 10% 6% Usage, 2017 Notes: Electronic includes automated withdrawals and ACH transactions. Other includes prepaid and mobile. Source: Federal Reserve Diary of Consumer Payment Choice

“If you start to segment out demo- least a year. Fourth-quarter figures 500 financial institutions. Some of graphic groups, there are only some were unavailable at press time. the newest include Citibank, Fifth that are not willing to use cash,” says Bailey credits much of that Third, and First Tennessee, accord- Ditzion. “There’s only a small number. growth to the popularity of Allpoint, ing to Bailey. Cardtronics’ pitch is For average Americans, [payment- which enables consumers to use an that ATM branding enables a bank to usage] change is very slow.” ATM their bank doesn’t own with- extend its physical presence without out paying a fee to the owner. All- building an expensive branch. ‘A Huge Growth Platform’ point has about 55,000 ATMs world- “We’re actively partnering with The negative or neutral perceptions wide, including 40,000 in the U.S. In financial institutions ... as branch con- of ATM-industry prospects accounted surcharge-free networks, the network solidation and transformation acceler- for some of the battering Cardtronics’s owner and bank and credit-union par- ates,” says Bailey. stock took in much of 2018, with its ticipants work out alternative revenue Next up for Cardtronics, besides fur- shares dropping in the double-digits arrangements. ther development of its retailer and bank in some months. “The same-store [transaction] relationships, is “mobile cash access” “The stock got walloped throughout increase we’ve seen is on the back for Allpoint, according to Bailey. He the year,” says analyst Gary Prestopino, of surcharge-free,” Bailey says. declines to give details early, but says a managing director at Chicago- “Surcharge-free has been a huge “that’s something that can unlock a based Barrington Research Associates growth platform for our company.” whole new available market for us.” Inc. “It got way undervalued.” Still, In a December investor presen- Cardtronics’s share price managed to tation, Cardtronics said Allpoint’s ‘A Critical Linchpin’ finish the year up 40%. participants include 1,100 banks, Meanwhile, the outlook for ATM Cardtronics is recovering from the credit unions, and prepaid card manufacturers Diebold Nixdorf and loss of its biggest retailer client, 7-Eleven issuers, and seven of the top 10 U.S. NCR seems to be improving. In Janu- Inc., which has switched management of retailers. Partners include Costco, CVS, ary, Great Falls, Mont.-based D.A. its 7,000-plus ATMs to an affiliate of its Walgreens, Target, and Safeway. Davidson upgraded its recommenda- Japanese parent company. Some of its Cardtronics gets 45% of its tion on both companies’ shares from other 2018 woes stemmed from possible ATM operating revenues from cash- “neutral” to “buy.” regulatory actions in the United King- withdrawal surcharges, 32% from inter- D.A. Davidson analyst Matt J. dom, a key market for the company, that change (card issuers pay interchange Summerville noted in research reports threatened its fee income. But the situa- to ATM transaction acquirers), 14% on the two firms that after three tion didn’t play out as badly as feared. from bank-branding and surcharge-free years of declines, the ATM industry

20 • digitaltransactions • February 2019 that cardless cash access, in which a consumer carries out an ATM with- Current And Projected Global ATM Shipments drawal using a smart phone, “is some- (In thousands) thing that has more and more momen- 425 tum” among Diebold’s customers. 407 Some countries that have been especially active in promoting digital financial services, including the Nordics and the Netherlands, have found that they really can’t eliminate 328 332 320 325 “the long tail of cash” says Anderson. 312 “There’s always going to be that need to have currency in the hands.” NCR and another big ATM manu- 2015 2016 2017 2018 2019 2020 2021 facturer, Nautilus Hyosung America, did not respond to requests for comment. Source: RBR, D.A. Davidson estimates is poised for a “modest recovery” in “The physical touchpoint is still A Continuing Role shipments this year. Citing RBR fig- very important,” he says. Cash in the early 21st Century is mov- ures, he said the global industry suf- Diebold’s software initiatives stem ing over to accommodate new payment fered an “unprecedented” shipment in part from financial institutions’ forms, just as it did when checks, credit decline from 407,000 units in 2016 to desire to add more functions to ATMs, cards, debit cards, prepaid cards, online 328,000 in 2017 (chart). including account opening, product payments, and, most recently, mobile About half of that slump stemmed originations, and other services typi- payments came along. But nothing’s from lower orders in China, according cally obtained in a branch, according knocked it off the bench yet, which to D.A. Davidson. In addition, some to Anderson. assures a continuing role for ATMs. U.S. ATM owners delayed replacements “It’s about making the box, the “Cash as a whole is still growing ahead of Microsoft Corp.’s 2020 sunset- ATM, more than a cash point,” he and keeping pace with GDP, even here ting of support for the Windows 7 oper- says. “It’s about the intersection of the in the U.S.,” says ATMIA’s Tente. “We ating system, widely used in ATMs. The physical and digital worlds.” He adds don’t see any threat at all to cash.” DT successor system will be Windows 10. Other factors pushing shipments down were banks’ re-direction of capital spending toward other channels Residual Stream Buyouts such as mobile, and “a heightened ISOs - Agents - SaaS - ISVs level of headline narratives regarding a broader migration towards cashless societies,” Summerville wrote. After evaluating Diebold and NCR, however, “we came away feeling that the ATM remains a critical linchpin for customer engagement as part of a broader omni-channel, retail-banking strategy,” according to Summerville. The Cutter Advantage: Both Diebold Nixdorf and NCR No Minumum, No Maximum Transaction Size are working diligently to grow their Work with all Major Processors Team of Subject Matter Experts Providing Superior Valuations software and services businesses in Highest Ranking Satisfaction based on Seller Feedback the face of slower ATM and point-of- Advantageous Referral Program Denise Shomo | 610.451.4096 sale hardware sales. But ATMs remain denises@cutterfi nancial.com key for financial institutions, accord- Alex Daily | 615.663.5088 alexd@cutterfi nancial.com ing to Scott Anderson, global soft- CUTTERFINANCIAL . COM Katelyn Neiman | 484.638.6802 ware engagement manager at North katelyn@cutterfi nancial.com Canton, Ohio-based Diebold Nixdorf.

February 2019 • digitaltransactions • 21 RE ENEW ALIS TH M

A BO IN UT BLOCKCHA RE Unbridled enthusiasm for distributed NEW ALI ledgers has given way to a more E SM sober assessment of the technology’s TH probable role in payments. BY PETER LUCAS A few years ago, evangelists for blockchain bolster the speed, security, and cost effi- than $86 billion in transactions between air- confidently predicted its widespread adop- ciency of processing payments, commercial lines and travel agencies, learned that les- tion to facilitate faster, more secure, and use of blockchain remains in the distance. son the hard way during a blockchain trial. economical payment transactions. “We wanted to learn what block- The type of transaction didn’t matter. chain’s potential was for use in transac- Whether it was stock trades, the sale and ‘A FUNDAMENTAL PROBLEM’ tion settlement internally,” says Dickie transfer of real estate, purchasing concert The main stumbling block is blockchain’s Oliver, vice president and chief informa- tickets, real-time payments, or the grand inability to scale to volume. Bitcoin, for tion officer for ARC. “After the trial, we prize of them all—credit and debit card which blockchain technology was created feel it can’t scale to manage the millions transactions—some payment executives to serve as the public record of all the of records we handle each day, so we don’t envisioned blockchain as a transforma- cryptocurrency’s transactions, handles see it as a good fit at this time.” tional technology. about seven transactions per second. By While ARC has decided against using What raised hopes is that blockchain contrast, Visa Inc. says its network it can blockchain internally for transaction pro- allows money or assets to move directly process 65,000 transactions per second. cessing, it is exploring its use to share data between two trading partners, thereby The culprit lies in blockchain’s archi- with customers. ARC recently completed a eliminating the need for a central inter- tecture. Distributed ledgers require the proof-of-concept trial with United Airlines mediary to oversee the transaction. In consensus of multiple super nodes or Inc. to determine whether the technology theory, that would drive up efficiency and miners that continuously update trans- can be used to facilitate reporting and set- drive down transaction cost. actions on the blockchain to validate a tlement of United Airlines tickets with its Another caveat is that data within transaction, a time-consuming process settlement system (box, page 26). the blockchain provides an immutable, that limits network throughput. Western Union is another player that up-to-the-minute public record of any “This is a fundamental problem with has yet to see a business case for block- transaction at any point in time, making distributed ledgers that affects their abil- chain in mainstream payments. In mid- it impossible to double spend an asset. ity to scale,” says Nicko van Someren, chief 2018, Western Union chief executive Hikmet That knocks out the potential for fraud. security officer for Nanopay, a Toronto- Ersek said that while the company began Further, with a decentralized ledger, there based payment platform for real-time testing Ripple Labs Inc.’s xRapid network, A is no central point of origin for transac- multicurrency payment solutions. which uses Ripple’s XRP cryptocurrency, for tion data. Multiple super nodes or miners What the payments industry is dis- payments six months earlier, the trial had B N continuously update transactions. This covering is that scalability issues are yet to demonstrate a cost benefit. I absence of a central point of origin makes masked during trials because of the low San Francisco-based Ripple has pro- O it tougher for hackers to attack the data volumes being tested. “But when attempts moted blockchain technology, which under- A within blockchain. are made to scale volume, that’s when lies xRapid and XRP, as a faster, cheaper U But since then, payment industry exec- issues arise,” van Someren says. way to move money. H utives have come to a sobering conclu- Arlington, Va.-based Airlines Reporting Part of the problem with the trial, Eresk T BLOCKC sion: Despite the technology’s potential to Corp. (ARC), which annually settles more said, was that up to that point, Western 23 • DIGITALTRANSACTIONS • FEBRUARY 2019 Union had seen just 10 transactions initi- their customers’ accounts any time, any its business, Visa has also dedicated a ated with xRapid, too small a sample to day of the week. “Private blockchain net- research team to explore how blockchain determine its cost-effectiveness. Ripple has works provide an opportunity to initiate can be applied to its internal operations, maintained that xRapid pilots have reduced money transfers between known enti- clients, consumers, and partners. user costs by 40% to 70%. ties more cost efficiently and provide an “There are many possible use cases for While Western Union was not planning immutable record of the transaction,” says blockchain and distributed-ledger tech- to pull the plug on the trial prematurely, Sunil Hirani, founder of trueDigital, a New nology, and we—along with many of our Ersek’s remarks cast a cloud over the idea York City-based provider of a real-time clients and partners—are looking at ways of blockchain for mainstream payments. digital-payment platform. “Our product is to harness its power,” says Kevin Phalen, designed specifically for commercial users.” global head, business solutions at Visa. TrueDigital recently signed an agree- Other card networks are jumping on ‘THE NEXT STEP FORWARD’ ment with Signature Bank, a New York the blockchain bandwagon, too. Since late Still, blockchain’s struggles to move City-based commercial bank, to transmit 2017, American Express Co.’s FX Interna- beyond the pilot stage have not com- funds between other financial institutions tional Payments division has been work- pletely cooled the payments industry’s over trueDigital’s Signet platform. Hirani ing with Ripple to enable business-to- interest in it. Rather than force the tech- business cross-border payments using nology into the high-volume, high-speed blockchain technology. world of credit and debit card transac- IN’S RELATI AmEx customers are connected tions, some advocates see a more A VE to London-based bank Santander CH (Transactions S practical use for the technol- K per second) P UK, which facilitates the cross- C EE ogy: high-dollar, low-volume LO D border payments. AmEx says transactions, such as money B the use of blockchain speeds transfers and cross-border BITCOIN 7 remittances from its cus- tps and business-to-business tomers in the United States payments. to bank accounts in the Besides having lower United Kingdom. volume requirements, money BITCASH 61 “This collaboration with transfers, cross-border and tps Ripple and Santander repre- business-to-business payments sents the next step forward can be run over private block- on our blockchain journey, chain networks that operate out- VISA 65,000 evolving the way we move money side the traditional rails of the tps around the world,” says Marc Gor- banking system to provide real-time don, executive vice president and chief transactions and instantaneous reporting Source: Cointelegraph, Visa information officer for AmEx. when a transaction is made. Mastercard Inc., too, has launched Those benefits are strong selling says several banks have already joined the a blockchain network for business-to- points. Operating outside the banking sys- network, without being more specific, and business and cross-border payments. tem allows money to be transferred imme- that his company is in talks with more While Mastercard provided no addi- diately all day, every day. By comparison, it banks about joining and expanding the tional details about its use of, or future can take hours or days to move money from money-transfer service beyond U.S. dollars. plans for, blockchain, the company did a payor’s bank account to a payee’s account Third parties aren’t the only ones pur- say it has been investing in blockchain, through traditional banking channels. suing private blockchains for payments and which includes filing patents, developing If a transaction cannot be readied money transfers. Visa is preparing to launch application programming interfaces, and before the bank’s close of business, for during the first quarter of 2019 its B2B Con- making an investment in the Digital Cur- example, it will not be initiated until the nect platform, a private, permission-based, rency Group, a New York-based venture- next business day, which could be a day blockchain-based service built to process capital company focused on the crypto- or more if the next calendar day is a bank business-to-business payments globally, currency market. holiday or the weekend. faster and more securely. “Blockchain has the potential to radi- Financial institutions joining such pri- In addition to piloting blockchain- cally shift the way we exchange value,” says vate networks can move money between related capabilities in several areas of a Mastercard spokesperson. “But to unlock

24 • DIGITALTRANSACTIONS • FEBRUARY 2019 ONLY ONE OF THESE BIRDS CAN GIVE YOU THE LATEST NEWS IMPACTING THE PAYMENTS MARKET

Today and every day follow DIGITAL TRANSACTIONS @DTPAYMENTNEWS on Twitter the benefits and full potential of block- world are not giving up on migrating The decentralized network is open to chain, companies will need to collaborate, public blockchain ledgers to mainstream participants fulfilling various functions, explore, experiment, and consider long- payments. such as acting as super nodes to update term implications.” The Global Real-time Authorizations the blockchain, and creating business and and Funds Transfers Project (GRAFT) is revenue opportunities for users. looking to develop a decentralized pay- Network users are given incentives THE TWOLAYER APPROACH ment platform to facilitate commerce to carry out automated payment network Despite the pivot toward private ledgers, without central banks, payment card net- functions, including real-time authoriza- some third parties in the payments works, or governments. tions, exchanges, fault-tolerant gateways, WILL BLOCKCHAIN TAKE FLIGHT FOR UNITED AIRLINES? Airline Reporting Corp.’s decision not to move forward with can provide safe and reliable smart-contract transactions. blockchain for internal transaction processing has not com- “If it can help us make settlement safer, easier, and more pletely dissuaded the company from exploring whether the seamless for our customers, then it’s a win-win,” says Tye technology can improve ways to share smart contracts with Radcliffe, director of distribution for United. its client airlines. The proof-of-concept trial demonstrated that trans- Last month, ARC announced it had completed a proof- actions could flow between all of United’s and ARC’s vari- of-concept trial with United Airlines Inc. to facilitate the ous systems. The next steps will be to process actual reporting and settlement of United Airlines tick- ticket transactions, gradually add more travelers ets. For the trial, ARC partnered with to the mix to determine scalability, and Blockskye, a Boston area-based pro- refine processes. vider of blockchain solutions to “The immutable and dis- the travel-and-entertainment tributed nature of smart con- industry. tracts, as well as the contin- “One of the things we ued interest, research, and wanted to see is if we could investment going into create an ARC-owned the technology, make blockchain to share data it attractive for use in for smart contracts with our own research and United,” says Dickie Oli- development,” Radcliffe ver, vice president and says. “Proof-of-concept chief information officer is a small step, and one for ARC. “With blockchain, of many in our efforts to all the parties involved in enable our customers to the contract can view the have a truly seamless expe- transaction and determine if rience throughout every step there are any discrepancies before of their travel. the contract is executed.” “Imagine a world where your calen- Smart contracts are computerized transac- dar could potentially become an indicator of tion protocols that automatically execute the terms of a con- intent to travel,” he continues. “[A world] where a traveler’s tract. Since the contract is recorded on the blockchain, its airport and onboard experience is simple and less stressful, terms are visible to all parties named in the contract through and when the traveler returns to her office, her air expenses the blockchain. are automatically accounted for and settled. No itinerary United opted to use blockchain to facilitate the reporting receipts to submit; just a simple, blockchain-enabled settle- and settlement of tickets because it thinks the technology ment, powered by ARC.”

DIGITALTRANSACTIONS FEBRUARY and merchant-service-provider services, Once the transaction is complete, the technology’s applicability is through according to the company. authorization data is layered onto the continued testing. “We see blockchain as a way to unte- blockchain of the network’s second tier “Scalability is an issue, but it’s ther consumers from traditional payment to provide a complete, up-to-the-minute incumbent on the payments industry systems by providing strong privacy and accounting of the transaction. The settle- to understand blockchain’s capabili- control of transactions through a decen- ment layer of the network supports pay- ties for payments, what use cases make tralized ledger,” says Dan Itkis, co-creator outs to merchants in multiple currencies. sense, and its value proposition,” says of the GRAFT Project. “Our goal is to guarantee speed of trans- Esther Pigg, senior vice president, prod- In other words, with no central point action, and our [two-layer] approach sup- uct strategy, banking and payments, of origin for the transaction data entered ports that,” Itkis says. for Jacksonville, Fla.-based financial- into the blockchain, there is no single GRAFT’s approach to improving service technology providers Fidelity point hackers can attack. transaction speeds is similar to that of the National Information Services Inc. (FIS). “Consumers are tired of having their Lightning project, an add-on for Bitcoin “There is a lot unknown about block- information hacked through merchants, transactions that processes high volumes chain and we shouldn’t dismiss its use in processors, and the credit bureaus, which payments yet.” are all key [data] aggregation points,” Itkis One use case FIS is looking at for says. “Decentralization gives control ENCY VARIE blockchain is cross-border payments and back to consumers.” GRAFT Project LAT S BY settlement. is preparing to launch its beta ’S BITC C But for those who are bear- IN OIN R phase by the end of March. A 1 Y ish, blockchain remains a tech- H 5 P C ETHE m TO Initially, GRAFT Project RE in nology in search of a prob- K U u C sees an opportunity to C M t O lem within the payments O e I 6 s N target underbanked and L ecosystem. - o B 7 LITECOIN r high-risk merchants, “A lot of financial m 60-90 seconds m

such as online gaming o institutions and the card

Web sites that can’t get t networks are dabbling e

traditional merchant- s in the technology, but payment services or pay there is nothing mission- exceptionally high accep- critical,” says Eric Grover, tance fees and e-commerce principal for Intrepid Ven- merchants that sell adult tures, a Minden, Nev.-based content and Class A drugs. financial-services consulting These merchants will be able to firm. “I don’t see blockchain accept cryptocurrencies through the Source: Digital Transactions upending the current payments sys- GRAFT Project platform. tems, because it doesn’t bring a compel- To complete a retail transaction, which ling business case compared to what it is consumers expect will take two seconds of small-dollar transactions by taking trying to displace.” or less, GRAFT has developed a two-tier them temporarily outside the blockchain. Some skeptics think the best-case network where the tiers operate sepa- Ultimately, Itkis believes that the data scenario for blockchain in payments is rately, but in parallel. The first tier autho- entered on GRAFT Project’s blockchain that elements of it, such as the immuta- rizes transactions in seconds. The second can be used for merchant-loyalty pro- ble record of transactions, will be adopted tier records settlement, which can take grams, and ultimately allow merchants and the rest left behind. 24 hours or more, depending on the type of to issue rewards to consumers through If that’s what happens, it won’t be currency used to make the purchase. the network. the first time. “It’s often the case with As part of the authorization process new technologies that only parts of it on the network’s first tier, multiple super are useful for certain applications,” says nodes concur on the value, time, and date ‘NOTHING MISSION-CRITICAL’ Nanopay’s van Someren. “The peak of of the transaction, and validate that there If nothing else, supporters of block- inflated expectations for blockchain has is no double spend of the cryptocurrency chain for mainstream payments believe passed. It’s time to demonstrate what, if being used. that the only way to prove or disprove any, productivity it has.” DT

27 • DIGITALTRANSACTIONS • FEBRUARY 2019 M-COMMERCE February 2019 digitaltransactions

Retailer Wallets Load Up

Kevin Woodward

Benefitting from a built-in customer connection, retailer wallets says Richard Crone, founder of Crone adroitly tap into shoppers’ purchasing habits in ways unavailable to Consulting. “The reason is it’s been used to create a competitive advan- the big tech wallets. tage to retailers and retailers aren’t going to share their secret sauce to etailer mobile wallets are pro- That’s because retailer wallets their own peril.” liferating in part because the have a distinct advantage over the That “secret sauce,” he adds, is R consumer can get something tech-based ones: shoppers often are the customer-relationship manage- that she can’t with any of the tech- more willing to share their shopping ment aspect of the merchant wallets. based apps. That is a high degree of behavior in exchange for rewards and It’s the connection between the con- personalization that not only includes offers. While the tech-based wallets sumer’s shopping behavior and the payment preferences, but also the have added loyalty features, the depth retailer’s marketing department. It’s ability to earn loyalty points, receive of these integrations typically is not the ability to create messaging that special offers, and redeem rewards. as detailed as it is with their retailer engages and persuades the consumer. Consider the sheer volume of them counterparts. “Rewards, offers, and loyalty pro- now. The Starbucks Corp. wallet, motions are extremely effective in which debuted in 2010, may get a lot The ‘Secret Sauce’ motivating usage,” Crone says. “A of recognition because of its success, Anywhere from 10% to 15% of great example is the launch this year but other heavy hitters have joined users of tech-based wallets actually of petroleum fueling apps from BP, the fray. Walmart Inc.’s Walmart Pay use them for mobile payments, says Shell, and 76 [ConocoPhillips]. These has been available since 2016, the Krista Tedder, director of payments three and many others in the fuel cate- same year CVS Pay from CVS Health at Javelin Strategy & Research, a gory have launched their own branded Corp. and Kohl’s Pay from Kohl’s Pleasanton, Calif.-based firm. But mobile apps with mobile payments Corp. emerged. “retailer wallets have a higher fully integrated with their existing A slew of others belong to this usage rate, getting closer to 20%,” loyalty programs. To drive adoption club, too. ExxonMobil Corp. launched Tedder says. of the apps, they included supplemen- its Speedpass+ app in 2016, along with In one example, Walmart Pay tal discounts on fuel purchases using many other fuel retailers. Fuel compa- is adding 10,000 new users per their branded apps.” nies Phillips 66, Gulf Oil, Shell Oil, day and has nearly as many active Others have long offered that inte- and BP each have their own apps, many users—31 million—as Apple Pay’s gration. Walgreen Co. enabled the of which have built-in loyalty-earning 32 million, according to projections ability to redeem its Balance Rewards and offer-redemption capabilities. from Crone Consulting LLC, an inde- loyalty points in 2015, which made it While many retailers accommo- pendent research firm. An active user the first retailer to offer that capabil- date the tech-based wallets, such as is a consumer who makes at least two ity, a year after Apple Pay debuted. Apple Pay, Google Pay, and Samsung transactions per month with the wallet. When Javelin researched why Pay, their own marketing and devel- “They are more successful than adoption of tech-based wallets hadn’t opment resources are devoted to fur- the casual observer knows, especially been stronger, it found two primary thering adoption of their own wallets. the casual observer in payments,” causes. “The first is consumers,” Tedder

28 • digitaltransactions • February 2019 says. “When we asked them what they “The gold standard of how to wanted in a mobile application, pay- get customers to use mobile is Star- ments were near the bottom.” bucks,” Tedder says. “It’s very easy.” One reason for that is how well- Starbucks creates games, or chal- trained consumers are already to pull lenges, within its app to drive repeat out a card and swipe it on, or dip it in, behavior. One, labeled Star Streak, a reader, Tedder says. “It’s a friction- encourages users to collect up to 100 less behavior,” she says. And, plenty bonus stars (125 earns a free drink) by of consumers don’t see the value making a purchase on six consecutive in using a mobile wallet, especially days by the game’s conclusion. Such when using a card is easier. challenges require the consumer to The other factor limiting general- pay with their Starbucks app. purpose mobile wallet use is that “Where I would normally not go many consumers aren’t sure where back, they’re sending me reminders they can use one, Tedder says. “I to come in and get discounts and keep can’t say how many times I’ve asked coming back,” Tedder says. “Mer- a clerk if they take Google Pay and chants have a unique advantage that they don’t know,” she says. Apple Pay, Samsung Pay, and Google And, while the card brands agreed Pay don’t have in that they have a on a radio-wave symbol to indicate closed ecosystem. If I take Google Pay contactless acceptance for cards and somewhere I don’t know if I can pay.” smart phones, many consumers are The card brands have been hard unsure where the reader is located on at work trying to alleviate that situa- point-of-sale terminals. tion. As the payments industry con- Throw in general consumer anxi- verted to EMV credit and debit cards, ety about the security of mobile pay- merchants installed new point-of-sale ments—some 38% in a recent PSCU terminals, most of which have con- The BPme app, in addition to payments, survey said security concerns held tactless payments capability built in. selects the pump when a consumer them back from using mobile pay- In September, Visa Inc. said 50% of pulls in to fill up a vehicle. ments—and the situation worsens, its face-to-face transactions happened Tedder says. at contactless-enabled merchant loca- wallets only work with bar codes, tions as of June 30. It also said 95% of which don’t require additional cashier The ‘Gold Standard’ the POS terminals being shipped were training. So how do the retailer wallets get contactless-capable. Retailers know this, and some around these concerns? After all, While efforts to make smart-phone- take advantage of it when developing many of them use technology like based wallet acceptance ubiquitous their apps. bar codes that may not be as new and have had success, they might have “These mobile-payment apps interesting as encrypting card num- greater success if merchants actually eliminated the separate step of first bers and tokenization. The reason lies activated the contactless technology scanning a retailer loyalty card before in the data connection. in the terminals. Many of the retailer dipping a payment card and providing your ZIP code or PIN,” Crone says. “Now, in a single step the consumer opens the fuel retailer’s app ‘I can’t say how many with biometric authentication such as Face ID or Touch ID, and it auto- times I’ve asked a clerk matically activates the pump, applies the loyalty-program discount, and the if they take Google Pay consumer is given loyalty credit for the purchase.” and they don’t know.’ Such deep integration is possi- —Krista Tedder, director of payments, ble because of the close connection Javelin Strategy & Research between the retailer and the consumer, he says. “The way to compete

February 2019 • digitaltransactions • 29 is to move to a CRM-based model where you know who the customer A consumer is,” Crone says. That ensures services, holds a smart such as order-ahead and pick-up-later, phone ready to or scan-and-go technology, are avail- make a Walmart Pay transaction. able to consumers. ‘Fighting Chance’ This is what makes retailer wallets stand out against the big budgets and clever technology of the tech wallets. “Those are features retailers must put in place to have a fighting chance to come against Amazon Go,” Crone says. He forecasts that mobile wallets will need to adapt to Amazon.com Inc.’s nascent brick-and-mortar pres- (Photo: Walmart) ence to remain competitive. Amazon or developing ones, will need to incor- “The real first move is payment Go is the online giant’s attempt to get porate this social dynamic, he says registration,” he says. “This is where in-store sales. Payment is done via the It’s not an issue unique to gro- the tech wallet and retailer wallet ally, consumer’s Amazon account in the cers. Every retailer has to consider if not enhancing each other. If the Amazon app. this consumer desire for convenience name of the game is CRM and to get “Amazon Go will change the face and making transactions easier. “The CRM you need to register a payment of retail in every merchant category,” way to compete without having to credential, the retailer doesn’t care Crone says. “Customers shopping at reconfigure everything is buy-online, where that comes from. However they Amazon Go regularly have become pickup-in-store. In that case, the can register the customer’s payment dependent on the service and the mer- retailer is not even making customers credential, they’ll do it.” chandising is unique there. It is pre- enter aisles, but the cost upsell has to pared foods—those SKUs that com- start and be initiated in the retailer’s ‘It’s About the Experience’ mand the high volume and frequency app,” Crone says. The future will also feature the debut of in the grocery category.” How that gets done is by leverag- more retailer wallets, especially those More Amazon Go locations could ing payments companies. Retailers with payments capability, says Tedder. pose problems for grocers, he says. that enable consumers to register with That’s because retailers want to “Grocery stores have always con- existing payments accounts, like ones direct consumers to favored payment sidered themselves as competing they might have with PayPal Hold- methods as much as possible. Target against quick-serve restaurants. Now, ings Inc., benefit from getting not only Corp.’s wallet, for example, only lets the average American household pur- the customer’s name, but billing and users pay with one of the chain’s pro- chases more food from QSRs and shipping addresses. It can be the trig- prietary cards. in the prepared-food categories than ger to making the retailer’s customer- Retailer wallets also may adopt they spend on food inside their own relationship management system that faster-payments capability, if a speedy homes.” Grocers with their own apps, much more effective, Crone says. settlement service that’s potentially less expensive than cards finds broader adoption, she says. A Kohl’s Pay Ultimately, consumer adoption user scans of mobile wallets comes down to the bar code engagement. “Each company has to at a checkout. look at what their business model currently is and how to modify it,” Ted- der says. “The more you can get the engagement, the better the experience and more likely they are to return. It’s more about the experience than how do I pay for this.” DT (Photo: Kohl’s) 30 • digitaltransactions • February 2019 ENDPOINT Enthusiasm for swing-for-the- fences, exotic payments startups has waned.

The Fundamentals Still Apply

Want to start—or bet on—the next big thing in payments? Forget glitz and glamor and focus on startups that address pressing problems with substantial and realistic solutions, argues Eric Grover.

uccessful payments fintechs such as Closer to terra firma, a handful of interesting Adyen, Ant Financial, Klarna, Stripe, early-stage payments ventures worth watching Sand Square have generated enormous are Modo, Marqeta, Beyond, RS2 North America, excitement. With the arguable exception of Ant and Veem. All address big opportunities or prob- Eric Grover is Financial, they all employ traditional business lems, and rely on proven business models. principal at Intrepid models, and enhance, and in places stress but None, however, proposes to fundamentally Ventures, Minden, don’t disrupt, the existing payments ecosystem. upend the current ecosystem. If one could genu- Nev. Reach him There have also been notable fintech disap- inely disrupt the status quo, that could be huge. at eric.grover@ pointments. Hyped mobile-payments venture But regnant systems work well and enjoy enor- intrepidventures.com. Powa Technologies went belly up. In 2014 mous network effects. Mozido’s seductive mobile-commerce story was valued at $2.4 billion in a round in which Sleepy Oligopoly Mastercard, Wellington Management, and Julian Modo is a payments-and-value hub headed by Robertson participated. Former Mastercard chief payments savant Bruce Parker. The secret sauce executive Bob Selander sat on its board. Now is its transaction and intelligent-gateway ledger it’s on a life-support from Brevet Capital. And and its abiding interoperating philosophy. the SEC is suing Mozido’s founder, Michael Modo is being used by Fidelity National Liberty, for defrauding investors. Ballyhooed Information Services (FIS), Deutsche Bank, Softcard and MCX both folded. Klarna, Verifone, and Etihad Airlines to connect Nonetheless, capital continues to be put to to and transact with a web of interconnecting tra- work in fintech. In the first half of 2018, $58 billion ditional payment networks, alternative-payments was invested globally across 875 deals. systems, and proprietary rewards programs, Enthusiasm for swing-for-the-fences, exotic taking the burden off of banks, merchants, and payments startups, however, has waned. And processors. In November, 2018 Modo closed a the euphoria stemming from the belief that $13 million A round led by Deutsche Bank. cryptocurrencies and distributed digital ledgers Marqeta is a self-described new-age card- would upend the reigning payments ecosystem issuer processor. Taking a page from Stripe, it has ebbed. Ripple XRP at 33 cents, Bitcoin at styles itself as developer-friendly, intimating tradi- $3,659.82, and Ethereum at $127.16 are down tional processing behemoths aren’t as agile or flex- 88%, 79%, and 91%, respectively, from their ible and are, therefore, not best-suited for develop- January 2018 peaks. ing nontraditional payment-card applications.

February 2019 • digitaltransactions • 31 Entry barriers in issuer processing, Carr brings his philosophy of With globalization, cross-border which is dominated by First Data, owning the sales channel, transpar- retail, commercial, and money-transfer FIS, and Total Systems, are signifi- ent pricing, and supplying additional payments are growing at a robust clip. cant. There haven’t been new entrants services around payments, making for Delivery is more challenging, fees in decades. Building delivery systems stickier merchant relationships and richer, competition less, and entry bar- requires time and resources. Even more sustainable economics. Beyond riers higher, than in domestic markets. then, no large bank will outsource acquired software enterprise Peach- Most cross-border commercial credit-card processing to a challenger Works to bolster its integrated-pay- payments are made directly or indi- unless and until it has scale clients. ments offer for restaurants. rectly through correspondent banks and The potential market is immense RS2 is a card-management software the near-monopoly global interbank- and growing. There are 1.3 trillion and processing company headquartered payments network Swift, over which U.S.-issued general-purpose payment in Malta. It’s been around for decades, 3.5 billion payment messages were cards. Marqeta enables new use cases strongest in emerging markets. In 2018, sent in 2018 through November, up and, consequently, more virtual and it launched a North American ven- 10.5% year-over-year. physical cards, like debit cards for ture headed by Daniela Mielke, a Visa, spending Square Cash. It isn’t, how- PayPal, and Worldpay veteran. Traditional Model ever, fit for purpose for traditional Historically, RS2 underperformed Focused on helping SMEs with cross- credit-card programs end-to-end, yet. against its worldwide opportunity, border payments, Veem started out pub- Whether the upstart can move partly because of its tumultuous early licly embracing blockchain. That, com- upmarket to challenge incumbents years. Charismatic entrepreneur and bined with a big market problem, was a remains to be seen. At a minimum, founder Reinhold Schaeffter got tan- good theme off which to raise venture Marqeta promises to give the sleepy gled up selling and buying back RS2, capital. It has sensibly pivoted, how- issuer-processing oligopoly a jolt. and the enterprise was starved of ever, broadening the payments systems capital. Now it seems to have found employed, including Swift. Veem’s busi- Stickier Merchants its footing. ness model is traditional, taking account, Heartland Payment Systems founder RS2 North America is focused transaction and foreign-exchange fees. and CEO and philanthropist Bob Carr on merchant processing for smaller A host of firms including Swift launched merchant acquirer Beyond acquirers for which speed and flex- and correspondent banks, Payoneer, in 2017. The acquiring industry con- ibility matter, but which may have CurrencyCloud, Earthport (Visa), tinues to consolidate. In 2016, Global misgivings buying processing from Western Union, Ripple, Flywire, Payments acquired Heartland. competing fully integrated acquirers. Mastercard, and PayPal address cross- But entry barriers and regulation There should also be opportunities border payments. There won’t be one are relatively modest. Small enhance- to serve smaller credit-card issuers or even several winners. Interoper- ments can be enormously valuable. looking to better compete with giants ability is vital. For Veem, channels to While processing for gargantuan retail- like Citi and Capital One. That’s a originate small merchants and compli- ers like Walmart and Carrefour pro- longer sell, and demonstrating regula- ance, at scale, are critical. vides razor-thin margins, the opportu- tory compliance is a big deal. If RS2 The fundamentals still apply. Pay- nity to provide services on top of and gets traction, it should spur incum- ments ventures need to serve real needs around payments to SMEs is immense. bents to better performance. and earn fees from someone. DT

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