The Green Sheet Online Edition
July 08, 2013 • Issue 13:07:01
Embrace innovation in the new payments game
Innovation is good, especially in banking and payments. But let's be sure not to give the new kids an unfair advantage over the old-timers, like banks and their legacy networks. That pretty much sums up the message in a paper just released by the American Bankers Association.
"A common sense of fairness argues that all participants, whether incumbents or new entrants, operate by a similar set of rules and standards," the report stated. The Changing Face of the Payments System: A Policymaker's Guide to Important Issues was produced by the ABA's Emerging Payments Advisory Group. The group, comprised of executives from community, regional and large national banks, met earlier in 2013 to discuss the thorny issues raised by emerging payments; with the report distilling that discussion.
The call for fairness is not new; banks have been complaining for decades about nonbanks encroaching on their payments turf. But Richard Crone of Crone Consulting LLC suggested bankers could lose more than transaction revenues if they don't change with the times.
"The fight will be to register customers," Crone said. These could be accountholders, but that is not a prerequisite. What's important is who owns the user interface, and the data customers provide via that interface. "It's about who is the system of record, who owns the transaction data," he said. "That's what you want to strive for. It's about relevancy." That is also why new players are quick to leverage mobile technologies. "Mobile brings the UI (the user interface) to the POS," Crone said.
And when it comes to mobile, nonbanks seem to have an advantage with consumers. A 2012 survey of consumers conducted by Carlisle and Gallagher Consulting Group Inc. found 50 percent of respondents like the idea of a PayPal Inc. wallet rather than bank mobile wallet offerings; 30 percent said they preferred Google Inc. to bank mobile wallets. "It's not about the payment; it's about fundamentally changing the retail experience," said Arkady Fridman, Senior Analyst at the consultancy Aite Group LLC.
The online marketplace Amazon.com Inc. has been a major agent of change, registering millions of e-commerce buyers and sellers. Now, online shoppers who register with Amazon can use their Amazon credentials to pay for purchases at other online retailers. And because Amazon customers' bank and card accounts are on file, it can engage in "tender steering," Crone noted.
Square Inc., the upstart payment company launched by Twitter Inc. co-founder Jack Dorsey, recently heralded a register-to-pay service called Square Market. MasterCard Worldwide, too, has plans for a similar registration service for consumers using its MasterPass digital wallet service.
Taking a cue from Apple
"The big opportunity is to do for the combination of payments-loyalty-and-banking what Apple did for the combination of hardware-software-and-content," wrote Visa Europe in a paper titled Lessons from the Music Industry: How to profit from next generation payments. Although many companies are vying for dominance in this changing marketplace, none has yet come up with the "killer app" that creates that change. Fridman, however, is optimistic. "There are going to be some major breakthroughs in understanding what that killer app is," he said.
So what does this all mean for ISOs and their acquiring partners? The opportunities will be for those that get in front of this trend. "The ISO's strength comes from its feet on the street and their relationships with retailers," Crone said, adding that they can and should do more than just sell transaction services. "The opportunity is to actually empower retailers," he said.
Alternative payments primarily address consumer-initiated payments, although increasing numbers now cater to small businesses, as well. Some, like Amazon, focus exclusively on consumer-to-business payments, but most also support person-to-person (P2P) transactions.
Leading alternative payment options
Here's what's up at the most prominent alternative payment schemes available today.
Amazon is a name that has become synonymous with online retailing. Now the company is angling to become the consumer online payment option of choice. Amazon Payments Inc., the payments arm of Amazon, has been inking deals with online retailers like Buy.com that enable consumers to use their Amazon account credentials when shopping at those sites.
The company also has a new digital currency for purchasing apps, games and other items using Kindle Fire devices. (Kindle Fire is the latest generation of Amazon's popular Kindle e-reader; it features Internet access.) "Everyone recognizes Amazon's success in the e-commerce world," said Misha Lyalin, CEO at online game developer ZeptoLab. Amazon reports that it has 155 million registered users.
Dwolla was founded by a disgruntled businessman, Ben Milne, who didn't like the fees acquirers were charging for handling credit and debit card payments. So in 2010, Milne began soliciting investors to back Dwolla, a web-based platform that charges a flat fee of 25 cents on payments over $10. Today Dwolla is moving $3 million a day, and has raised $22.5 million from investors, according to Milne. But Dwolla is not just about displacing card payments.
In 2012, the company made a move to displace automated clearing house payments with a real-time, online payment alternative called FiSync. "The new way to move money in this nation isn't only safer, faster and more secure by design, but it's smarter and more compatible with tomorrow," the company said when it launched the new platform.
In January 2013, Dwolla reached an agreement with its home state, Iowa, to offer Dwolla as a payment option for state taxpayers. First up: cigarette tax stamp payments which total more than $100 million a year, according to Iowa Governor Terry E. Branstad.
Google is the latest entrant into what has become a crowded field of consumer payment alternatives. After bowing out of merchant services, Google revealed in May a P2P option that enables consumers to attach payments to Gmail email messages. The company also launched Instant Buy, a Google Wallet feature that consumers can use to grant brick-and-mortar merchants access to the billing and payment information they've registered with Google.
Google Wallet, a mobile wallet supported by near field communication (NFC), hasn't been one of Google's more successful endeavors. Indeed, published reports suggest the NFC wallet has become a money loser for Google, which eats transaction fees rather than charges Wallet users for using the product. Meanwhile, Google Checkout, an online payment platform that works with Google Wallet, in direct competition with PayPal Inc., will be shut down this fall, according to Google.
LevelUp is a mobile network that supports loyalty programs primarily; payments are almost a secondary consideration. In fact, merchants that participate in LevelUp marketing programs get payment processing for free. Company executives have said that's because LevelUp earns more money mining customer data for marketing insights it can sell back to merchants, than it could ever make on transaction fees.
"LevelUp is a marketing firm," Fridman said. "They're interested in drumming up business for their customers." LevelUp offers its own branded payment app for mobile devices, as well as a white-label version that retailers can integrate with existing POS apps. The apps generate quick response (QR) codes linked to customers' registered credit and debit cards which then get scanned into a terminal to complete payment.
In May 2013, LevelUp inked a deal with NCR Corp. that the firm hopes will help it make "further inroads" in the restaurant sector.
In the previous March, LevelUp tapped Heartland Payment Systems Inc. to help facilitate widespread adoption of its mobile payment and loyalty solution. LevelUp said it has signed more than 1 million consumers and 5,000 merchants. At the end of 2012, the company claimed it was handling $5 million per month in transactions.
PayPal, wholly owned by eBay Inc., is betting that traditional wallets will soon become obsolete. Still, it may not be an easy transition. The company recently revealed results of a survey indicating 83 percent of consumers in five countries would be happier if they didn't have to carry wallets. Additionally, 29 percent said they would choose their smartphones over wallets if they could bring only one item when going out.
"While American consumers are keen to move to a digital payment future, the businesses that serve them may be lagging behind," PayPal wrote in the report. More than two-thirds of Americans surveyed said they had been unable to make purchases because they didn't have cash on hand; 30 percent said this was a frequent occurrence.
That's some of the motivation behind recent moves by PayPal into the world of brick-and-mortar sales. Fridman, formerly of PayPal, said it's not clear whether PayPal can repeat its online successes at the physical POS. "The physical channel is a completely different environment from online," he said. And it's one acquirers and their partners have a firm hold on. That's why PayPal has begun inking agreements with ISOs to support merchant acceptance of its mobile wallet.
Additionally, in May 2013, PayPal reported it had a POS presence at 20,000 major retail locations, most notably The Home Depot Inc., through a relationship with Discover Financial Services. PayPal reported it has 128 million users who together made $41 billion in transactions during the first three months of 2013. The company said it added 5 million active users during that period and transactions were up 21 percent.
To put these numbers into perspective, PayPal said it handled $5,277 in payments every second of every day between Jan. 1 and March 31, 2013. But PayPal isn't really a payment company, according to Fridman. "It's a risk mitigation company that does payments," he said. "Its core competency is risk mitigation; that's how it's been able to control losses."
Square has been a major source of consternation for banks and their acquiring partners. First came Square dongles - miniaturized card readers that plug into smartphones.
Next came Business in a Box and Square Register, a full-scale POS system that Square markets to brick-and-mortar merchants as an alternative to traditional acquiring relationships. Then in May 2013, Square introduced Square Stand to further enhance Register, which incorporates analytics and reporting functions.
Square Wallet takes it a step further by making the checkout process easier for consumers. When a consumer using Square Wallet enters a store, the individual selects that store from a preset list on his or her mobile device; once done shopping the consumer gives the cashier his or her name, and a Square POS device does everything else to complete the transaction.
Square also has designs on the e-commerce market, with an application it calls Square Market. Square Market is really an online marketplace - merchants list their products on a Square-run website, and Square handles the payment processing.
Square reported that it is "processing over $15 billion on an annualized basis," not counting transactions at Starbucks Corp. locations. Starbucks has been a Square partner for about a year. In March 2013, the company said its Square Wallet, which uses QR codes instead of NFC, was being accepted by more than 200,000 merchants.
Meanwhile, Square is discovering that regulatory scrutiny isn't just for banks' payments activities. Earlier this year the state of Illinois ruled the company was violating the state's Transmitters of Money Act. That law requires state licensing of any business selling or issuing payment instruments in Illinois.
Only time will tell which, if any, of these companies will achieve dominance in the new payments game. But for ISOs and other traditional players, deeper engagement with merchants now is preferable to a passive game of wait and see.
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