The Green Sheet Online Edition
July 27, 2015 • Issue 15:07:02
opportunities abound, tenacity required
Internationally, opportunities abound for payment companies. For some, going international begins as an e-commerce play. Others seek to establish a physical presence in overseas markets. The winners are those that take the time to understand the dynamics of individual markets.
"There are opportunities everywhere you look," said Harold Montgomery, Chief Executive Officer of Calpian Inc., a registered ISO based in Dallas. Opportunities, can differ significantly from market to market, however. "It takes money, time and expertise to address many of these markets. They're not as straightforward," Montgomery said.
Montgomery speaks from experience. Calpian set out to stake a claim in the India market in 2002, with Money-on-Mobile, a prepaid mobile payment solution that consumers in India use to make POS and person-to-person payments using the SMS text functionality on mobile devices. Mobile phones are hugely popular in India. The nation is home to over 1 billion mobile phones, most of which are basic (not smart) phones, Montgomery noted. Yet very few have bank accounts, hence the demand for prepaid.
Now the largest mobile money network in India, Money-on-Mobile is available through approximately 265,000 retail locations, and it is adding about 5,000 new locations monthly. In May the network processed the equivalent of $38.1 million in payment transactions, an increase of 20.5 percent over its April totals. "Our continued execution of Money-on-Mobile's growth strategy is expanding our footprint across India," Montgomery said.
India, China, Brazil poised for growth
But Calpian won't be placing card terminals with merchants in India. "India is not a credit country," Montgomery said. At least 40 percent of adults in India are unbanked, according to the Reserve Bank of India; in rural areas it's more like 60 percent. "On the other hand, the middle class is growing," Montgomery said, which should ultimately spur growth in credit card usage.
Tristan Hugo-Webb, Associate Director of the global payments advisory service at Mercator Advisory Group provides a similar assessment in a recent research note, referring to the hundreds of millions of unbanked in the country as "the biggest barrier" payment companies face in India. "Unless the industry and government tackle this issue," Hugo-Webb said, "the country will continue to lag behind other leading developing markets like Brazil and China."
Chris Pascoulis, Director of Product Management at ACI Worldwide, affirmed the promise of India and China, stating they "offer huge growth opportunities," In a recent report, Asia Pacific Mobile Money Industry Prospects till 2019, Dublin, Ireland-based Research and Markets projected a combined annual growth rate for card payments in those countries in excess of 174 percent between now and 2019.
The People's Bank of China (PBOC) reported that 4.39 billion bankcards were being used in that country in 2014; most (3.97 billion) were debit cards. China's card market is closed to foreign banks, however, and dominated by China UnionPay, a state-owned entity that issues cards and acquires transactions for 26 million merchants worldwide. Rules imposed by the Chinese government have made it next to impossible for competing networks (such as Visa Inc. and MasterCard Worldwide) to operate there.
The government has signaled a willingness to consider leveling the competitive landscape and allowing foreign entrants, yet it also has continued to erect roadblocks. For example, beginning in 2015, all card issuers in China had to comply with a new security protocol known as PBOC 3.0, which is similar to, but not the same as the Europay, MasterCard and Visa (EMV) security protocol backed by the leading card brands.
Brazil is another promising market. Elavon Inc. established a beachhead there in 2010, when it entered into a merchant acquiring joint venture with a Brazilian unit of Citicorp. In 2014, First Data Corp. introduced Bin, an acquiring solution developed specifically for the Brazilian market, at a cost of $150 million, the company said. First Data partnered with a local merchant acquirer, Bancoob, which is the acquirer of record. Bancoob, is part of Sicoob, the largest credit union cooperative in Brazil.
Under the partnership with First Data, Bancoob is responsible for provisioning the necessary card scheme licenses, and managing merchant settlement payments. In addition to POS card capture and authorization, Bin supports payment options unique to the Brazilian market, such as prepayment schemes.
Brazilian consumers are not big users of credit cards, and only the richest among them use the international card brands. Most middle class Brazilians use domestic cards or domestic prepaid products, neither of which are recognized by international e-commerce sites. "This points to an opportunity for payment enablers who can capture payments locally and later settle up with foreign merchants," Lindsay Lehr, Senior Director, America's Market Intelligence, wrote in a recent paper, Unlocking Brazil's e-commerce potential.
SIDE BAR:Going international
So you want to take your acquiring business global? These are a few considerations.
What licenses or regulatory approvals are required in the target country/region? "A good lawyer is important," said Harold Montgomery.
Can your technology partners provide support in desired markets?
Are there sound, well-run companies in the target markets willing to partner with outsiders to support payments acquiring?
Is there a sufficient pool of potential employees in the target market?
What are the social, political and economic factors that drive individual markets? "You've got to think like a local," Montgomery said.
Value of partnerships
Partnerships are a hallmark of international acquiring. Darren Wilson, President of EVO Payments International LLC, said it has been a key to EVO's success. "The strategy we have adopted is to find a local bank that has a mainstream customer base and partner with them," Wilson stated.
EVO provides merchant acquiring and processing services in the United States, Canada and Europe. Over the past three years, the company has relied on this strategy to make inroads in several European countries, including Germany, Spain, Poland and Ireland. "We provide cross-border support to merchants," Wilson said. In May 2015, EVO purchased the merchant acquiring business of Deutsche Postbank AG and inked a long-term referral agreement with the bank. In June 2013, EVO purchased Deutsche Card Services, a unit of Deutsche Bank.
Variations in market dynamics, such as consumer preferences and government oversight also contribute to the value of partnerships. "There are a lot of differences between markets," Pascoulis said. Partnering with local firms helps a company like ACI navigate those differences.
In Germany, for example, consumers prefer debit cards to credit cards. In the United Kingdom, credit cards remain popular, but several alternatives have been gaining, notably the Faster Payments Service, an automated clearing house-like network with near real-time settlement. (Net settlements are performed three times daily.) In France, Carte Bleue debit cards account for 85 percent of all e-commerce transactions by French consumers.
Meanwhile, in Spain, merchants deal directly with their local banks for payment services. And in numerous overseas markets, legal constraints on who can do business with merchants necessitate finding local partners, experts noted.
Legal and regulatory hurdles
The European Union has undertaken a series of measures it says are intended to make payment acquiring more competitive across its 28 members. The creation of the Single Euro Payments Area (SEPA), for example, came with uniform procedures and euro-denominated formats for retail payments (bank-to-bank and card transactions). And SEPA is now working on an instant credit transfer system for retail payments that operates like the U.K.'s Faster Payments Service.
Early in 2015, the EU capped interchange for most credit and debit card transactions. In a recent spate of rulings, the EU also told the card brands to eliminate rules that prevent merchants from steering customers to preferred payment cards and methods, and to abolish honor-all-cards rules. These latest regulations also impose new billing practices on acquirers and processors. For example, beginning in December 2015, billing statements must break-down merchant charges on a per-transaction basis.
"They are trying to drive acquirers to be more competitive, and bringing down interchange is one way of doing that. It's a way to level the playing field," Pascoulis said.
Opponents believe the new rules will be a financial drain on acquirers in Europe – and lost revenues could top $6 billion a year. Wilson, who works from EVO's London office, is more optimistic. "It actually opens up opportunities for us to compete and grow," he said. "The ubiquity of the international brands and the new, cheaper pricing combine to create an interesting dynamic."
Closer to home, Canada beckons
U.S. acquirers and ISOs don't need to travel far to pick up international clients. Canada is an option. "ISOs from the U.S. should, for the most part, find Canada to be a market they can understand," said Brian Green, General Manager for Canada at First Data. "There aren't the kind of structural differences that exist in other [foreign] markets. A street-level salesperson, by and large, can take the business development skills they honed in the U.S. and apply them in the Canadian market." And many of First Data's ISO partners have done so successfully, he added.
There are some differences to consider, of course. Canada is a much smaller market, French is the primary language for about 20 percent of the population, and PIN debit is the most common POS card-based transaction. Merchants in Canada also expect more on-site support from their ISOs and acquirers, according to Green.
U.S. ISOs and acquirers already doing business in Canada gain the added advantage of being ahead of the EMV curve, according to Green. "Having practical knowledge of EMV is a competitive asset in a market [like the United States] that is just implementing EMV," he said.
SIDE BAR:Payments execs look for better deals
Reducing the number of intermediaries in the payment chain tops the wish lists of a growing number of payments executives worldwide. That's the key takeaway from a new Global Payments Insight Study by ACI Worldwide.
Forty-four percent said reducing the number of fee collectors in the payment value chain is a top priority, ranking higher than both the ability to make targeted offers (41 percent) and mobile commerce (39 percent). Nearly 60 percent said they are evaluating direct connections with banks in order to eliminate or reduce reliance on the card networks. Meanwhile, 85 percent of bankers said they want to work more closely with clients to help reduce costs.
ACI partnered with the market research and advisory firm Ovum for its global payments study, which queried executives in consumer finance, higher education, insurance and other consumer billing organizations.
Additionally, 75 percent of surveyed organizations believe consumers expect more payment options, and in response, half the organizations surveyed said they were evaluating at least eight new payment methods.
It's not that the traditional payment rails are unreliable, noted ACI's Chris Pascoulis. "But there are situations where retailers want to cut costs, and some are looking to create alternatives, like MCX," he said. MCX (for Merchant Customer Exchange) is a mobile commerce payment network developed by leading U.S. merchants as an alternative to the major card brands.
E-commerce and fraud
The spread of e-commerce clearly makes international acquiring a more viable option for U.S. companies. And when an established merchant decides to start selling online one of the first calls they make is to their ISO or acquirer. "They look to them for support," Green said.
Credorax, with offices in Boston and London, has been in hot pursuit of international markets. It has garnered licenses to acquire transactions in 28 countries, including all members of the EU. Most recently, the company was licensed to operate a bank in Japan, making it one of only a handful of outsiders allowed to acquire payments there, according to Benjamin "Benny" Nachman, Credorax founder and CEO.
"This license is not only a win for Credorax, but one for the entire global online payments ecosystem," Nachman said. The company's Smart Acquiring platform offers a single source for acquiring and processing transactions across borders. This eliminates the need for multiple, domestic processing silos, Nachman stated.
The strategy has attracted investor interest. In the fall of 2014, Credorax reported it had received $40 million from outside investors, bringing to $100 million the total of outside investments in the company, which supports mobile and online payments exclusively.
E-commerce is driving interest in merchant acquiring all over the globe. In fact, e-commerce growth now outstrips in-store sales in most countries. Globally, 22 percent of disposable income is spent online, according to a report by Worldpay, Are you giving your customers what they really want?
According to Worldpay's analysis, annual online spending as a percentage of disposable income is highest in India and China, where consumers spend 33 percent and 31 percent, respectively, of disposable income online. Brazil ranks third (27 percent) followed by the U.K. (25 percent) and the United States (23 percent). In Germany, Argentina and Mexico consumers spend 21 percent of disposable income online.
In addition, Worldpay noted that card-not-present (CNP) transactions are growing at an annual rate of 15 percent, worldwide, compared to 4 percent growth in card-present transactions. By 2018, ACI expects worldwide CNP payments will number 27 billion.
There is a downside to consider along with this growth, however: higher fraud rates. In 2014, online merchant losses averaged about 0.68 percent of revenues, according to LexisNexis. Mike Braatz, Senior Vice President at ACI, noted that cross-channel fraud is increasing, too.
Yet, a survey recently commissioned by ACI and conducted by Forrester Research Inc. reveals that 54 percent of retailers in the United States and Europe have yet to consolidate fraud management solutions and strategies across sales channels. Another mismatch uncovered by the research: two-thirds of merchants use real-time rules engines and neural modeling for card-present transactions; fewer than half use those tools for online transactions. "It's clear from our study that many retailers feel unprepared to face the fraud challenges of an omnichannel world," Braatz said.
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