By Brandes Elitch
CrossCheck is located in Sonoma County, Calif., or as we like to call it, Wine Country. It turns out there are some similarities between the disruptions in the wine business and the current activity in the payment space. Sometimes, that is called "disruptive payments," a topic discussed extensively at the ETA's recent Transact 16 show in Las Vegas.
A winemaker has to balance the supply and demand of this year's crop two years before it is sold. On the supply side, you must forecast quality, quantity and yield. You must balance your inventory by segments versus projected consumer demand. Did you know that 93 percent of Northern California's vineyard acreage consists of just eight grape varietals? (The other 7 percent propagates hundreds of lesser-known grapes).
You also have to evaluate what your competition is going to do, particularly given the recent strength of imports driven by the strength of the dollar. You have to forecast the price per ton you are going to get in the forward market versus spot contracts.
We have had three years of great quality and big yields, but ironically this can lead to lower grape prices and collapsing spot prices. Now we are wondering if a 4 million ton harvest will be the norm in the California market. You have to forecast how much to plant, always difficult but particularly so given California's several years of drought, alleviated somewhat in 2016.
Can you pass higher costs on to the consumer? There are issues with the environment, permitting, water and planting on hillsides. You may be involved in vineyard acquisition, or mergers and acquisitions activity. You have to worry about foreign bulk imports, which have recently taken 30 million cases of California wine out of the market, the equivalent of 60,000 acres planted.
A lot of this analysis is driven by demographics. For instance, observers project that wine priced above $20 a bottle will "break out" this year, but wine less than $7 a bottle will slump. The three equally sized workforce groups (baby boomers, gen Xers, and millennials) each want something different. Consumers' greatest spending years occur from ages 35 to 55, and it turns out that to be a "meaningful consumer" of fine wine, you have to be in the top 25 percent of wage earners.
Speaking of disruption, Transact 16 covered all of the disruptive factors in the payments industry: digital payments, multichannel payments, the migration to EMV, the rise of nonbanks, the importance of a loyalty offering, mobile payments, bitcoin and blockchain, geo location and beacons, cybersecurity, the regulatory framework, vertical specific merchant value propositions, and the nonbanking technology attackers.
Did you know that about 5,000 financial technology (fintech) companies are focused on payments? The financial services industry represents about 20 percent of gross domestic product. This year, fintech is expected to raise $15 billion to $20 billion of venture capital (VC) money, which is about a third of the entire VC industry. According to VC firm The Orogen Group, the financial services industry "will evolve from one dominated by large leveraged conglomerate banks and unregulated non-bank financial companies to a broader, more decentralized network of vertical financial services companies."
Just like winemakers, entrepreneurs here are forecasting what the market for their products will look like in two years, maybe longer. Remember, it took ATMs 10 years to catch on. So far, consumer adoption of mobile wallets has been lackluster. No dominant loyalty and rewards player has emerged, except perhaps for Starbucks, which has a unique combination of frequent buyers, a high margin, a lot of stores and a high-end buyer demographic. When it comes to mobile devices, you have to always keep in mind that the consumer's highest priority is convenience, and the retailer's highest priority is providing offers.
The EMV (Europay, MasterCard and Visa) rollout has been a conspicuous failure, with transactions taking anywhere from 20 to 45 seconds, or longer. Part of the explanation is Visa's decision to support chip and signature authentication as opposed to chip and PIN. Both MasterCard and Discover supported the latter, but Visa won the day.
Apparently, Visa management thought that having to use a PIN with a credit card would cause consumers to put that card in the back of the wallet, because, presumably, Americans were too dumb to remember another PIN number.
Aside from recent investigations by Sen. Durbin, and a lawsuit by Wal-Mart over this matter, Lauren Smith wrote the following in the May 18, 2016, Good Housekeeping article titled "This Is Why You Shouldn't Swipe Your Chip Credit Card": "Some retailers aren't in a financial position to cover a major security breach. That means you are stuck with covering the snafu, according to Adam Levin, author of Identity Theft 911. … If you approach a checkout without a working chip insert, just pay with cash instead."
Just think for a minute about the implications of this. Good Housekeeping is advising American consumers to pay with cash at the POS. So much for the comments made by one industry expert, who said that "cash and checks are going away, and pretty quickly, too." What nonsense.
In addition, only a minority of terminals are now EMV ready, or even turned on if they are. Major markets, such as petroleum, have not even begun this conversion, which will be shockingly expensive and time consuming for this industry. Merchants who have bought new terminals have not been able to get Level 3 certified; this process could take months, given the current backlog.
Meanwhile, fraudulent card activity at retailers has increased significantly, and now retailers are liable if their EMV terminals are not working. So it turns out that EMV is turning out to be really disruptive, for consumers and merchants, but not for the terminal manufacturers, for whom this is a deus ex machina (an unexpected event saving a seemingly hopeless situation).
Dr. John Clarke, co-founder and Head of Product Innovation at Worldnet, said, "We believe that it is time for the U.S. card business to respond to these concerns by delivering scaleable EMV implementation packages that cover both physical and virtual world transactions; packages that are both cost-effective and time-efficient to implement. By providing merchants with the capacity to accept Internet and physical transactions, digital wallets and mobile devices, players in the card industry will speed up the adoption of EMV across the U.S. payments business."
Clarke also issued a warning, stating, "More damagingly, today's payment industry leaders could become tomorrow's losers if they fail to provide the enhanced transactions and data security offered by EMV to all points of the emerging 'omnichannel' environment." Unknown effects It's difficult to say which of the estimated 5,000 fintech companies will be around in five years, certainly not more than 10 percent of them. Consumers don't seem to have much of an issue with swiping a card or paying cash at the counter; the system works well for them today. And there is no great cry from consumer groups for more efficient payments (although there is certainly a lot of noise about "faster payments," and "same day ACH payments").
In the case of the latter, this is a three-year implementation project. In the first phase, the receiving bank has to post the incoming payment by 5 p.m. local time, by which time it is too late to do anything with it anyway. The handful of major card issuing banks have built a large, highly lucrative business out of charging "convenience fees" for making a same-day payment to your credit card account, but this is really more extortion than convenience for the cardholder. The ETA offered, by my count, almost 60 individual sessions, broken down by these categories: going global, integrated payments, investments and funding, mobile pay, politics and policy, and security technologies. There was something for everyone, and obviously a great deal of work went into planning these sessions, the topics and the speakers. This work takes almost a whole year, and the ETA committee did a good job of putting this together – kudos to them and to the other committees that work behind the scenes.
The big feature for most attendees is the exhibit hall, which is always a somewhat daunting proposition, as it is almost impossible to see it all. It is easy to take for granted how much work goes into setting up the hall, which is always a first-class presentation. You could spend the whole show in the exhibit hall and consider it time well spent if you are focused and know what you want.
But the ground is moving under payments, and it is not clear what will be important and what will pass by the wayside when it comes to these new fintech offerings. That's the thing about disruption – you never really know how it is going to end until you are overtaken by circumstances.
Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at firstname.lastname@example.org
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