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Updated: Tuesday, July 29, 2014

Aite report dispels card acceptance myths

F or years, retailers and their associations have argued that the costs of offering bankcard payments to their customers has been too high. Their efforts to shape public opinion proved highly influential, resulting in U.S. lawmakers passing the Durbin Amendment to the Dodd-Frank Act of 2010, in which a price cap was placed on debit card interchange. But now comes a report from payments consultancy Aite Group LLC that provides evidence that the costs associated with accepting cash can far surpass that of electronic payments.

In Tender Truths: The Real Cost of POS Transactions in the U.S., Aite Senior Analyst and report author Madeline Aufseeser developed a financial model that compares card acceptance to cash acceptance costs. Aufseeser concluded that blanket statements about the costs of various types of payments are irrelevant because of the disparity in the payment mix among different types of merchants. But specifically in two vertical markets analyzed – quick service restaurants (QSRs) and convenience stores – cash is a far greater cost burden than cards.

In Aite's financial model, the variables of total sales; losses by theft, fraud and chargebacks; expenses; total number of transactions; and average ticket size are all broken down by tender type. For the case of the average QSR, Aufseeser found that the cost per transaction for debit and credit cards was $0.23 and $0.27, respectively, while the cash equivalent stood at $0.37. The percentage cost per transaction was therefore 2.83 percent and 3.02 percent for debit and credit cards, respectively, but 4.82 percent for cash.

The disparity is even greater for convenience stores. Aite found that the cost per transaction at c-stores was $0.43 for debit, $0.67 for credit and $1.06 for cash, which worked out to a percentage cost per transaction of 2.56 percent, 3.61 percent and 7.86 percent, respectively.

"The tender type comparison shows that the true cost of accepting cash is 45 percent higher than the credit card transaction at the equivalent dollar amount," Aufseeser wrote. A large part of that cash expense is tied to what Aufseeser called the c-store's "dirty little secret" – susceptibility to theft.

Meanwhile, in the brick-and-mortar specialty retailer category, the numbers were partially flipped, but to a lesser degree. In this category, where credit card use dominates, credit costs $3.19 per transaction, compared with $0.52 for debit and $0.74 for cash, which leads to a percentage cost per transaction of 2.48 percent for credit, 1.88 percent for cash, and with debit in between.

Cash not king?

Aite's research was based on over 40 interviews with merchant business owners/operators conducted between March and May 2013, as well as data provided by merchants and publicly available information. Aufseeser said merchants should be more detailed in how they arrive at acceptance costs per tender type, and include all cash handling expenses in the equation, before they argue about the high cost of plastic.

"One of the big findings, quite frankly, is that the merchants have been coalescing and coalitioning together for a long time against the quote-unquote high price of cards," Aufseeser told The Green Sheet. "And now they've lasered in on credit [interchange legislation]. But high cost compared to what?"

Aufseeser noted that merchants have not made legitimate apples-to-apples cost comparisons because it isn't a priority for them. "So they don't necessarily get into the weeds on how to look at some of this stuff, which I think is part of the point [of the report]," she said.

Aufseeser singled out the National Association of Convenience Stores as being the "loudest criers" of the high cost of electronic transactions for their constituents, and yet the association apparently hasn't done the necessary research to arrive at its conclusion. According to the report, the NACS website cited electronic transaction costs as being the second highest operating expense for c-stores after the cost of labor.

"However, they have not quantified and aggregated all the different theft and shrinkage expenses," the report stated. "That may be partially because those numbers are difficult to derive and capture. Store owners and operators do not always know how much and what is being stolen."

When NACS leaves out the various cost factors that go into the handling of cash, it is "only looking at half the equation," Aufseeser said. The result is an incomplete picture when the full picture makes the case for c-stores to increase plastic payments and reduce cash transactions, according to Aufseeser. "You can minimize your exposure by having a greater acceptance of cards," she said. "The less cash you handle, less is likely to fly out the door mysteriously."

It's all relative

Aufseeser said the two main takeaways from Aite's research are that debit cards represent the cheapest tender type "across the board," and that different merchant segments will have different cost levels, depending on cash volume and average ticket sizes. The interchange cap imposed by the Durbin Amendment is the reason for the low cost of debit. It follows that merchants who emphasize cash payments over debit will not realize as much cost savings as merchants who push debit.

For ISOs, Aite's research provides ammunition for the value proposition of electronic payments and a way to convince protesting merchants that card acceptance costs are not too high. "I think they can lift the model from the report I put together and run it for particular merchants to help them sell more card services," Aufseeser said.

For the industry, the research can be used to counter the claims of merchant associations like NACS and the National Retail Federation, and even educate lawmakers. Aufseeser said, "The first question I would ask if I were a senator and looking at this is, 'So credit is expensive compared to what? It's not more expensive than cash, so stop the whining already.'"

ISIS mobile wallet moves to rebrand
Thursday, July 24, 2014

W hat's in a name? For many companies, the moniker they choose becomes their public persona. So imagine the shock of executives at banks and communications companies involved with the Isis mobile wallet when news broke of a militant group whose name translates into English as the Islamic State of Iraq and Syria, or ISIS for short. ISIS is a militant group that has been making headlines with a violent sectarian campaign against civilians and governments in Iraq and Syria. In an effort to distance itself from the group, the Isis mobile wallet will be renamed, the company stated.

"However coincidental, we have no interest in sharing a name with a group whose name has become synonymous with violence," said Michael Abbot, Chief Executive Officer of Isis, a mobile wallet joint venture formed in 2010 by AT&T Mobility, T-Mobile US Inc. and Verizon Wireless.

Both American Express Co. and JPMorgan Chase & Co. also back Isis. But despite all the big-name backers, Isis has failed to take off. The rebranding process may further stymie adoption. In a July 7 statement about the change, Abbot suggested it could take several months for the company to settle on a new moniker. "Changing a brand is never easy, but we know this is the right decision – for our company, our partners and our customers," he said.

Use of the word Isis is not uncommon. To the ancient Greeks and Romans, Isis was the goddess of fertility and motherhood. More recently, it has been an acronym used to identify several organizations, including the Institute for Science and International Security and the International Species Information System. It is also the name of a pharmaceuticals company that trades on Nasdaq.

Name change not for everyone

Isis isn't the first payment services provider to reassess its name in an effort to distance itself from unrelated negative publicity. Instabill, a Portsmouth, N.H.-based merchant services provider that specializes in serving high-risk businesses doing e-commerce and MO/TO transactions, found itself in a similar position in 2009 when an Australian company that went by the name Intabill ran afoul of the law. Intabill was also an ISO with a focus on e-commerce, specifically online poker sites.

The Unlawful Internet Gambling Enforcement Act of 2006 made it a criminal offense for U.S. financial institutions and payment processing companies to process transactions related to online gambling. Intabill nonetheless continued to acquire payments for poker sites frequented by Americans until its collapse in 2009, which was followed by arrests of key company executives.

Jason Field, founder and President of Instabill, soon found himself on the defensive. "There was certainly some backlash," he said. But Field wasn't keen on changing his company's name. "We were well established," with 10 years in the market and a growing clientele, he noted. So he opted instead to ride out the storm. "We spent a lot of time schooling our account managers on how to respond to questions from customers and prospects," he added.

The biggest challenge may have been press reports. "A lot of the reporters got the name wrong," reporting that arrested executives were with Instabill instead of Intabill, Field said. Looking back, he is confident he did the right thing. Within about 18 months of news breaking of the arrest of Intabill executives, questions from Instabill customers and prospects about the corporate connection had subsided. And, today, Instabill continues to grow its portfolio. "We were able to stand the test of time, and we pretty much haven't looked back since," Field said.

Acquisition fuels cross-border e-commerce
Tuesday, July 22, 2014

L ondon-based e-commerce payment firm Optimal Payments Plc agreed to acquire Los Angeles-based ISO TK Global Partners LP (doing business as Meritus Payment Solutions) in a $210 million transaction. The proposed acquisition, which is expected to close in the third quarter of 2014, is seen by Optimal and Meritus as a way to expand their e-commerce footprints statewide and overseas, respectively.

Optimal has an extensive portfolio concentrated primarily in the U.K., Canada and Europe, with one emphasis on legal online gambling in those markets. Meritus services small to midsize e-commerce businesses in the United States. Thus, the purchase gives Optimal a stronger foothold in the U.S. market, while Meritus will be able to leverage Optimal's payments suite to allow its U.S.-based merchants to reach new international customers.

In a statement, Optimal Payments President and Chief Executive Officer Joel Leonoff noted that the U.S. market represents the biggest expansion opportunity for Optimal. "After careful evaluation of a number of potential candidates, Meritus stood out as the perfect choice on all fronts," he said. "The company's strong stakeholder relationships, multi-channel sales force, established presence with small and medium businesses in the U.S. and entrepreneurial spirit makes them an ideal acquisition for us."

Meanwhile, Meritus Principal and cofounder Alan Kleinman added that the acquisition will allow the ISO to meet its strategic expansion goals as well. "Optimal Payments offers our employees, merchants and business partners the experience, global infrastructure and product offering to achieve the scale required in today's payments market," he said.

Dani Chafinoff, Chief Operating Officer at Optimal Payments, told The Green Sheet that Optimal intends to maintain the Meritus brand. "We have a lot of confidence and a lot of respect for what Meritus has done," he stated. "And we think that they have an incredibly strong brand recognition from their existing base, both from an agent perspective as well as just from the market in general. So the intent is to work very closely together to maintain our respective brands and find ways of taking advantage of the reach that Optimal has that Meritus doesn't yet have."

Payments without borders

Optimal has also agreed to purchase another Los Angeles-based, e-commerce-focused ISO – Global Merchant Advisors Inc. – for $15 million. Together, the two acquisitions will add over 8,000 U.S. small and midsize businesses to Optimal's portfolio.

Chafinoff noted that Optimal has had more success in Europe and Canada than in the United States. "We needed the right partner to properly penetrate the U.S. marketplace from a sales perspective and dealing with ISOs and agents," he said.

That is essentially the same scenario for Meritus, only in reverse. "We've been really focused in the U.S., and now we have the ability to have our sales partners access not only Canada but Europe," Kleinman said.

Kleinman added that Meritus' merchants had been asking for a way to accept international payments, and Optimal provides Meritus the tools to do just that. "Both Optimal and ourselves really focus in the card-not-present world," he said. "There are no physical boundaries to where our clients operate. And so with that, having a single solution that enables these merchants to process throughout the world is very powerful."

Chafinoff agreed. "What happens typically and traditionally from an e-commerce perspective is that merchants just don't necessarily want to service just an individual geography or niche," he said. "They want to be able to go global and have local acquiring and local payment processing in the various communities in which they operate."

Unlike brick-and-mortar merchants, e-commerce businesses are not hampered by restrictions imposed on them by physical geographies. "In that regard, the more countries, or the more jurisdictions that you can offer local payment processing for and the more products and services you can provide, you can be a one-stop shop for their payment and risk management requirements," Chafinoff said.

Place your bets

Optimal operates the Neteller e-wallet, which is reportedly used by consumers in over 180 countries. The virtual wallet is integrated into online gambling sites, allowing horse race enthusiasts and gamblers in games of chance, for instance, to bet online. Meritus does not operate in the relatively small online gambling market in the United States. But, by acquiring the California-based ISO, Optimal gains a strategic foothold in a state that may eventually legalize online gambling.

The United States is governed by the Unlawful Internet Gambling Enforcement Act, which passed into law in 2006. It seeks to cut off the flow of revenue to illegal Internet gambling businesses by prohibiting U.S. banks and processors from facilitating online gambling transactions.

However, Doug Lewin, Executive Vice President at Optimal, said the UIGEA allows for individual states to offer online gambling to its residents. Nevada, New Jersey and Delaware already allow for it, with more populated states like California and New York hopefully following suit, Lewin added.

Development of online gambling has been a "slower process than if the United States passed one federal bill, but our sense is that over time many states will legalize and regulate online gaming," Lewin said.

Kleinman pointed out that Optimal is more than just an online gambling processor. "And that's what really excites us," he said. "So whether it's gaming transactions or e-commerce transactions, they work with a number of the big brands out there, in some of the regions of Canada and Europe. So our ability to access their infrastructure and product offering really enables us to provide a more well-rounded suite of products to the ISO, MLS community."

"It's very exciting for both teams," Chafinoff said. "Both teams have proven track records and are very dynamic and enthusiastic about what we can do together. Like we said, it's about the geographical reach. It's about the product offering. And it's taking advantage of a situation where one plus one can equal much more than two."

ETA seeks Operation Choke Point petition signatures
Thursday, July 17, 2014

O n Friday, July 18, the Electronic Transactions Association will submit the first round of signatures gathered in a petition advising Congress to curtail the federal law enforcement initiative Operation Choke Point. The initiative holds payments companies responsible for merchant fraud. Members of the payments industry are encouraged to sign the ETA petition by visiting .

In early 2013, the Department of Justice launched what became known as Operation Choke Point, representing an expansive investigation of banks and payment processors, with the objective of combating fraud by choking out fraudulent merchants' access to payment systems.

"Although well intentioned, the federal agencies supporting Operation Choke Point are aiming in the wrong direction," said Jason Oxman, Chief Executive Officer of the ETA. "By targeting payments companies instead of fraudulent merchants, the Financial Fraud Enforcement Task Force is ignoring the payments industry's massive efforts to identity and eliminate fraud."

This week four congressional hearings were held to discuss concerns over Operation Choke Point, the last one July 17. The ETA testified in the July 17 hearing before the House Judiciary Subcommittee on Regulatory Reform. This will be detailed further in an upcoming article in The Green Sheet.

In-app billing at issue, again
Tuesday, July 15, 2014

T he Federal Trade Commission alleged that unlawfully billed parents to the tune of millions of dollars for the in-app purchases of their children. The complaint follows a similar FTC action against Apple Inc. earlier this year in which the tech giant agreed to reimburse parents for charges incurred by their children via the lucrative mobile app ecosystem.

In the July 10, 2014, complaint, the FTC charged that the online mega retailer violated the FTC Act by billing parents and other Amazon accountholders for the usually small-dollar in-app purchases made by their children without the permission of parents or other accountholders. "Amazon’s setup allowed children playing these kids’ games to spend unlimited amounts of money to pay for virtual items within the apps such as 'coins,' 'stars,' and 'acorns' without parental involvement," the FTC said.

The complaint stated that when Amazon introduced in-app payments via the Amazon Appstore in November 2011, no user authentication mechanism, such as passwords, was used by Amazon to ensure the proper accountholders were conducting in-app transactions, including transactions for games and other apps that appeal to children. The FTC said this lack of authentication resulted in parents having to "foot the bill for charges they didn’t authorize."

The FTC noted that children’s games, like "Ice Age Village," blur the line of "what costs virtual currency and what costs real money" for gamers. In the case of "Ice Age Village," gamers can collect "acorns" as part of advancement through the game. However, gamers can also purchase by some electronic payment account additional “coins” and “acorns” via an in-app screen "visually similar to the one that has no real-money charge," the FTC said.

House on fire?

The FTC also furnished internal communications among Amazon employees beginning in December 2011 that suggest Amazon knew the lack of authentication controls was problematic. The FTC quoted from one communication as saying that allowing unlimited in-app charges without password protection would negatively impact a large percentage of Amazon customers.

The complaint reported that Amazon updated its in-app payment system in March 2012 to require accountholders to enter passwords for in-app purchases, but only for charges over $20. The FTC stated that Amazon continued to allow for unlimited in-app purchases under $20, which permitted children to charge their parents' accounts without first getting parental approval.

The FTC disclosed one Amazon employee communication that stated it is '"much easier to get upset about Amazon letting your child purchase a $99 product without any password protection than a $20 product.” (According to the FTC, the largest in-app purchase amount allowed by Amazon is $99.99.)

The FTC cited instances where, via internal emails, Amazon employees characterized the gaps of in-app user authentication as creating a "house on fire” situation. It was only in June 2014, as the FTC was forming its complaint against Amazon, that the e-commerce giant modified its in-app policy so that Amazon had to obtain accountholders’ informed consent for in-app charges on newer Kindle Fire mobile devices.

Bobbing for 'app'-les

In January 2014, Apple settled with the FTC over a similar issue. Apple agreed to refund a minimum of $32.5 million to consumers who had been charged for the unauthorized in-app payment activity of their children.

The FTC alleged Apple violated the FTC Act by undermining parental control. The commission said Apple failed to inform parents that by entering a password they were approving not only a single in-app purchase but also 15 minutes of additional unlimited purchases their children could make without further action taken by parents.

According to the FTC, Apple often presented a screen with a prompt for parents to enter passwords for their children without explaining to accountholders that password entry finalized all in-app purchases. The commission said one consumer reported that her child had spent $2,600 in the app “Tap Pet Hotel,” while other consumers reported unauthorized purchases by children totaling over $500 in the apps “Dragon Story” and “Tiny Zoo Friends.”

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