Peering into the rearview mirror, one can't help but notice many influences sweeping across the payments panorama. Trends spotted in 2010 gained momentum in 2011 and are on course to reconfigure the industry as we know it today.
This year positive signs in the economy were revealed in the U.S. Economic Indicators Q3 2011 Report, by The Strawhecker Group and the Electronic Transactions Association. The report showed strong demand in the retail sector, despite a declining consumer sentiment index. Total retail and food service sales, seasonally adjusted, rose 7.8 percent to more than $395 billion from September 2010 to September 2011, as compared to 7.4 percent over the same period one year previously.
"One interesting thing we noticed was the change in retained account volume followed the overall trend in the economy for those points in time, as far as what was happening in GDP and personal consumption figures or consumer spending," said Bob Loewens, TSG Junior Associate. Loewens noted a decline in net revenue attrition loss from the second quarter of 2010 to the second quarter of 2011; he added that retained merchant volume grew by 3 percent, which is positive news for merchant portfolio valuation.
Another positive indicator was the increase in average ticket size. "At the height of the recession in late 2008, I can remember reading and writing about the shrinking average ticket size, and that people were retrenching and not spending as much on their cards," said Thomas Goldsmith, ETA Director of Communications and Public Relations.
For Visa Inc., debit card average ticket size rose 1.6 percent to $36.9, while MasterCard Worldwide saw the average debit increase 1.3 percent to $39 in the third quarter of 2011 as compared to third quarter 2010. Additionally, over the same period, U.S. credit card average ticket size rose by 2.5 percent and 0.5 percent for MasterCard and Visa, respectively.
"Certainly from ETA's point of view, with all of the changes that are going on in the industry, the arrival of mobile, the various different technology improvements, this is both an opportunity for growth for card-based transactions as well as for non-card-based transactions," Goldsmith said. "The fact that the nonstore retailers are growing faster than just about anything other than food and beverage and motor vehicles tells me there are a lot of new retailers coming into the market, and they're not putting up brick-and-mortar stores. Chances are that bodes well for mobile acceptance."
New applications and card readers for smart phones and mobile tablet devices muscled into traditional and untapped merchant segments this year. While the industry was atwitter on mobile, Twitter founder Jack Dorsey's startup Square Inc. made inroads with its Square dongle card reader squaring off against competing products, many with enhanced security features built in.
On the mobile front, United Bank Card Inc. teamed with Charge Anywhere LLC, VeriFone Inc. rolled out PAYware Mobile, ProPay Inc. introduced the ProPay Jack and North American Bancard unveiled Pay Anywhere. Other contenders joined the mobile race as well. By midyear, near field communication made a leap forward with Google Wallet, and others are lined up behind it.
No year would be complete without the major card brands adding a touch of spice to the mix. This year Visa didn't disappoint, issuing an initiative for U.S. adoption of the Europay/MasterCard/Visa (EMV) chip-enabled smart card technology widely used in Europe. Visa will require 75 percent of transactions to be processed on dual-interface EMV chip-enabled terminals by October 2012 in order for merchants to avoid PCI DSS revalidation - and that's only the beginning.
On Jan. 1, 2011, transaction processor Total Systems Services Inc. completed 100 percent acquisition of First National Merchant Solutions LLC, the merchant acquiring subsidiary of First National Bank of Omaha. FNMS was subsequently renamed TSYS Merchant Solutions. Prior to January, TSYS entered a joint venture with FNBO, initially acquiring 51 percent controlling interest in FNMS.
The disclosure of VeriFone's intent to acquire Hypercom Corp. in November 2010 followed with shareholder approval before the acquisition was finally completed in August 2011. "The international distributors in the Hypercom network are a vital element in our strategy for geographical and product and services diversification," said Jeffrey Dumbrell, VeriFone Executive Vice President, International, at the time of the acquisition.
By September, VeriFone reported it had fully integrated Hypercom's international distributors into the VeriFone International Partner program. "We are working aggressively to share the benefits of our VIP program with these new partners," Dumbrell said.
Fifth Third Processing Solutions LLC, a leading U.S. acquirer, changed its name to Vantiv LLC in July. The name change came two years after Boston-based buyout firm Advent International Corp. purchased 51 percent majority ownership in the company. Jointly owned by Fifth Third Bancorp and Advent International, Vantiv filed with the Securities and Exchange Commission in November for a proposed initial public offering of its common stock.
Reflecting on recent mergers and acquisitions, Mike Strawhecker, Vice President and Director of TSG Metrics for The Strawhecker Group, said, "I do think if the economy continues to improve at the rate that it has, we're going to see a lot more large M&A deals. At the same time, it's great to be a smaller merchant acquirer as well, because there's a lot of opportunity to increase the volume of their portfolios." Strawhecker has also seen an uptick in calls from capital investment firms interested in looking at the payments industry.
In the opening months of 2011, an unprecedented deluge of large-scale data breaches struck behemoths in retail, networking and data security. The breach of Sony Corp.'s PlayStation network in April exposed personal data of more than 100 million customers. Concurrently, Michaels Stores Inc. responded to a rash of fraudulent transactions and discovered 90 POS terminal PIN pads had been swapped to skim customer data in stores across 20 states.
Even guardians of data security lacked immunity. During March, secure socket layer (SSL) certificates were fraudulently obtained through an affiliate of Comodo's SSL Certification Authority. RSA, the security division of EMC Corp., suffered a network attack resulting in information being stolen via its SecurID authentication product. And then there was the email system breach at Epsilon Data Management LLC, which impacted over 50 large global clients.
The assault on personal data prompted swift countermeasures by the PCI Security Standards Council, including issuance of point-to-point encryption requirements for hardware-based solutions, new oversight of PIN security requirements previously managed by the card brands and setting a mandate for all merchants to become Payment Card Industry (PCI) Data Security Standard (DSS) 2.0 compliant by Dec. 31, 2011.
However, in the waning moments of 2011, the march toward PCI compliance continued to plod along. According to A 'Perfect Storm' of Complacency: The Third Annual Survey of Level 4 Merchant PCI Compliance Trends, a report released by ControlScan and Merchant Warehouse in November, 47 percent of Level 4 merchants surveyed remain either unsure of or are not at all familiar with the PCI DSS.
To increase PCI compliance awareness, ControlScan Vice President of Marketing Heather Foster suggested merchant acquirers adopt an ongoing program of merchant education and support, especially among micro-merchants, those with 10 or fewer employees, where she said an estimated 85 to 90 percent of all data breaches occur.
When the final rules for the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 went into effect Oct. 1, 2011, the exhaustive debate over interchange regulation seemed to have run its course. The new rules effectively capped the debit interchange fee at 21 cents per transaction, plus a small allowance for fraud prevention.
But surprisingly, the parties that lobbied Congress for passage of the Durbin Amendment filed a lawsuit in its aftermath. In November, a coalition of merchant groups led by the National Retail Federation headed to Federal Court in Washington, D.C., to challenge the Federal Reserve Board's final ruling, claiming the board adopted an "unreasonable interpretation" of the Durbin Amendment, citing the ruling did not distinguish between allowable incremental costs and other costs, and the ruling should not have allowed for fraud losses.
"This is an ... example of government interference with private enterprise," said Barry Sloane, President and Chief Executive Officer of Newtek Business Services Inc., The Small Business Authority. "And then they have the audacity, and I know I'm probably getting into trouble because this is my customer base, but the audacity of the retail sector to go back and sue the Federal Reserve.
"My scorecard on Durbin as a participant in the industry observer is we created legislation that set an awful precedent, which is that the government will actually determine what private corporations can charge for a service, and the primary purpose of the Durbin Amendment to the Dodd-Frank bill was to protect consumers," Sloane said. "I'm not really aware of that happening."
While Sloane believes the Durbin Amendment may benefit large retailers, additional fees could make it more costly for small retailers to accept electronic payments.
Strawhecker views the Durbin Amendment as an opportunity for ISOs to strengthen the value proposition, especially as payment products become more commoditized. "What merchant acquiring companies are having to do is expand their product offerings," he said. "For example, they may team with a VAR or a business management software provider in order to get referrals from that software provider, and that makes the merchants more sticky."
Strawhecker suggested that when aligning with value added resellers (VARs) in vertical markets, it is important to understand the terminology associated with each niche. "It's kind of like what Heartland started doing in the very beginning [when] focusing on restaurants," he said. "However, we're seeing that more and more all the way down to a super-niche level. For example, even to the point where people are specializing in pool cleaners with a mobile merchant application."
Although it's too early to tell what long-term effects the amendment may have on the payments industry, Strawhecker sees the industry divided into two camps: bundled fees or interchange plus. "If it's bundled fees, then I think a lot of merchant acquiring companies, in the short term at least, will see somewhat of a windfall, especially with smaller merchants who might not be aware of Durbin," Strawhecker said. "It's easy for them to keep that savings provided by Durbin.
"On the other hand, you have companies like Heartland with an interchange-plus model. They communicate to their merchants that they're passing the savings on to them, so they're using that as a sales tool. I think of lot of people are doing that."
Still reeling from the effects of debit interchange regulation, members of the payments community were bracing to meet the deadline set forth under IRS Code Section 6050W as part of the Housing and Economic Recovery Act of 2008. Under the new code, payment processors and merchant acquirers are required to file annually a newly created IRS Form 1099-K beginning Jan. 1, 2012, for the 2011 tax year.
In October, the Internal Revenue Service offered a temporary reprieve when it agreed to delay by one year the assessment of penalties for filing incorrect taxpayer identification number (TIN) matching and related information under the new code, provided "good faith efforts" were made by required filers. The decision to delay penalties (which include a federally mandated 28 percent withholding of card revenue for merchants submitting incomplete TIN validations) will allow the IRS and payments industry more time to refine reporting procedures.
IRS Section 6050W requires reporting of gross credit and debit card receipt amounts for each merchant as indicated by the settlement entities, as well as an accurate TIN and related merchant information. The IRS projects it will generate about $9.5 billion in extra revenue over the next decade as a result of the new electronic payment reporting requirements. Stay tuned. More game changers are in the periphery.
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