s p r i ng 2015
pay m e n ts i n d u st ry i n s i g h ts j o u r n a l
cover story
Why Millennials’
Behavior Will
Bring an Age of
Disruption in
Banking and Beyond
How the group is a driving
force behind the shelving
of old business models
Strategies to:
07> Become a customer-centric
organization
ecognizing the rising tide
R
of customer power
1 1> Harness the not-so-obvious
benefits of chip cards
esides security, the often-unperceived
B
perks of EMV technology
21> Creating lasting payments
innovations
Experts weigh in on the
recipe for success
plus
13> Three things VCs look
for before funding a
payments company
17> Why tokenization can be
hackers’ kryptonite
25>Using crypto-currency for
cross-border payments
33>Finding opportunity in loyalty
cover story
3
Millennials’ Behavior Brings
on Age of Disruption in
Banking and Beyond
Group is driving force behind
shelving of old business models
7
The Rising Tide Of
Customer Power
Surfing the wave with a
customer-centered organization
21
25
Experts weigh in on the
recipe for success
Crypto-currency technology
could usher in a new era for
foreign exchange
Why Do Some Payment
Innovations Succeed
While Others Fail?
Cross-Border Payments
Due For Disruption
f e atu res
41 Payments Profiles
60 Seconds With George Wallner
A payments legend — and still an industry innovator ­— shares some
thoughts on mobile, user experience and phasing out the magstripe
he made commonplace
43 A View From Washington
Policymakers at Work:
Payments regulations and legislative news from Capitol Hill
45 Perspective in Payments
A Crisis of Culture
Identifying the symptoms of organizational dysfunction
11
The Hidden Benefits of EMV
Besides the obvious fraud prevention,
other often-unperceived perks
for merchants
13
Three Things VCs Look For
Before Funding a Startup
Payments Company
What entrepreneurs can learn from
VC firms’ payments strategies
17
Why Tokenization Can Be
Hackers’ Kryptonite
We have the technology, but
fraud-prevention strategy is key
29
33
37
Small business merchants might be
the meal ticket for POS providers
Reevaluating long-term and short-term
strategies for retaining customers
Use of analytics is quickly giving
new entrants footholds in
underserved markets
Follow the Money: Why Big
Opportunities in Payments
Come in Small Packages
When Switching Cards Has
Never Been Easier, Finding
Opportunity in Loyalty
Why Nonbank Online Lenders
Are Gaining Critical Mass
n>genuity
Spring 2015
Volume 8, Number 1
n>genuity journal features industry
articles on global payments topics and
is published by TSYS.
®
®
editorial
Editor In Chief: Virginia Ann Holman
Managing Editor: Erin M. Sarris
Editorial Coordinator: Stan Merritt
editorial boa r d
Charles Marc Abbey
Anil Aggarwal
Sean Banks
Deborah Baxley
Carol Coye Benson
Virginia Ann Holman
Kenneth Howes
Steve Mott
Joanne Robinson
Patricia Sahm
Matt Simester
Scott Talbott
Karen Webster
contributing e d itor s
Cyle Mims
Rebecca Stephan
production
Design and Creative Direction:
Laura Champion
Paula Sutton
Illustration:
Kelly Kingman
Printing:
Columbus Productions, Inc.SM
subscribers
To request additional copies, make
comments or request electronic
delivery, contact Stan Merritt
at +1.706.641.6586 or
[email protected].
TSYS Marketing
One TSYS Way
Post Office Box 2567
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co n t r i b u to r s
Charles Keenan: Charles Keenan has written about payments since joining the American
Banker as a staff reporter in 1997. His work at the American Banker included writing about credit and
debit cards, merchant processing, and bank stocks. He later freelanced for the Banker and industry
publications such as Banking Strategies, Bank Director, Community Banker, and U.S. Banker. He also
writes about investing, insurance and health care, and is based in Los Angeles.
Stephen Hewett: As the founding partner of C3 Partners, Stephen is one of the UK’s leading
authorities and business advisors in the field of customer-centred business change. Working with
leadership teams in both public and private sector organisations, he has experience in a wide variety
of industry sectors. In previous roles Stephen was Head of Business Consulting at Charteris, and
before that, Development Manager, Research & Expansion at John Lewis.
David Pickering: As the CEO of C3 Partners, David is an experienced leader of consulting
and services businesses, both public and private. Strongly customer focused, David has extensive
experience in building successful consulting brands. His previous business, Charteris, is growing to
become one of the leading management consulting businesses in the UK. Previously, David was a
director with global IT services firm, Logica plc. He is a Chartered Engineer and Fellow of the British
Computer Society.
Stan Merritt: Stan Merritt is the editorial coordinator for n>genuity journal and a member of the
Digital Communication team at TSYS. In addition to writing industry articles, he focuses on studying
payments industry trends, product innovations, regulatory issues and game-changing technology.
Prior to joining TSYS, Merritt was engaged in the private practice of law for more than 15 years.
Sean M. Banks: Sean M. Banks is a partner at TTV Capital and has more than ten years of
venture capital experience. Prior to joining TTV, Sean served as the vice president of finance and
general counsel for an Atlanta startup company. Sean earned his MBA in 2003 from the Goizueta
Business School at Emory University where he was one of five Woodruff Fellows. He is currently a
member of the Georgia Bar Association, having earned his J.D. at the University of San Diego in 2001.
He is a 1996 graduate of the United States Naval Academy, where he earned a B.S. in economics.
Nathalie Reinelt: Nathalie Reinelt is an analyst within Aite Group’s Retail Banking & Payments
practice, focusing on the global payments ecosystem, including alternative payments, cross-border
remittances and emerging technologies complementary to payment processing and commerce.
She brings to Aite Group more than 16 years of experience in Internet, technology, e-commerce
and financial services industries.
Samuel Murrant: Sam is an Analyst in the Consumer Payments team at Datamonitor Financial.
He has worked on Consumer Payments content since moving into the Consumer Payments analyst
team in early 2013. His focus includes online payments and m-commerce, payment card loyalty,
prepaid cards, and the U.S. payments market. His main interests in payments lie in evaluating new
payment products from a consumer perspective.
George Wallner: George Wallner is co-founder and CTO of LoopPay and a payment industry
pioneer and innovator. He has been part of the payment industry for more than three decades,
and was the founder and CEO of Hypercom. Mr. Wallner launched the first modern magnetic stripe
point-of-sale (POS) terminals, as well as the POS network equipment that still support the electronic
payment industry today. With LoopPay, he has taken on his first operating role since Hypercom to
help make the company a leader in mobile commerce.
Scott Talbott: Scott Talbott, J.D., C.P.A., is SVP of Government Affairs at the Electronic
Transactions Association. He is an experienced policy advocate and communicator with two
decades of experience in Washington. Talbott has represented the largest financial services
firms in the country before Congress and federal regulators, most notably during the fiscal
crisis. He is also an expert on communication, appearing regularly on national and international
media. He has been called the voice of the financial services industry and one of the most
recognizable faces in the industry.
Tamara Snyder: Tamara Snyder is a senior vice president with Edelman, the world’s largest
public relations firm. As deputy of Edelman’s Chicago-based Employee Engagement team, Tamara
helps organizations build connections with employees to deliver business results. She works with
clients to design and execute programs addressing a variety of business challenges, including
strategic internal communications planning, leadership effectiveness, employee ambassador
activation, organizational transformation, communications infrastructure design and measurement.
© 2015 Total System Services, Inc. All rights reserved worldwide. Total System Services, Inc. and
®
TSYS are federally registered service marks of Total System Services, Inc., in the United States.
SM
n>genuity in action: n>gen is a service mark of Total System Services, Inc., in the United States
and in other countries. Total System Services, Inc., and its affiliates own a number of service marks
that are registered in the United States and in other countries. All other products and company
names are trademarks of their respective companies.
®
For more information, visit our website
at www.ngenuityjournal.com.
The information in this document is confidential and proprietary. Reproduction, in part or
whole, is strictly prohibited without written permission from TSYS.
1
n>genuity
Spring 2015
“Innovation distinguishes
between a leader and a follower.”
“Elegant simplicity” seems to best describe this statement by the late Steve
Jobs of Apple. And in the payments industry, the relevance of the message is
undeniable. The industry is moving at light speed in every facet, and the pace
shows no signs of slowing. In this issue of n>genuity, we take a look at the
directions in which the industry is heading at this rapid rate.
The millennial generation continues to figure ever-so prominently in the economy, and there is little likelihood of this
changing soon. Our cover story delves into the ways in which millennials are set to bring about disruptive change
and huge shifts in the financial services industry and the economy in general.
At the often-encountered intersection of the international economy and burgeoning technology, our staff writer
Charlie Keenan revisits the hot-button area of cross-border payments and how they may be due for major change
in the very near future due to the versatile uses of crypto-currency technology. As a nice complement, we have a
contributor who offers opinions on why certain innovations in payments gain robust traction while others fall flat.
Tokenization and EMV remain both prominent and crucial in the industry at this time. In this issue we have a piece
exploring strategies for optimizing tokenization technology to thwart hackers, as well as how strategic use of the
technology is as potent and vital as the technology itself. We also feature an author who discusses the hidden
merchant benefits of the EMV shift, but warns that these merchants must purposefully and vigilantly ready
themselves in order to embrace these benefits.
We hope that these and our other articles in this issue help to keep us all thinking, moving forward and, as Steve
Jobs would charge, innovating. If you’ve not already, we hope you will connect to n>genuity by subscribing online
at www.ngenuityjournal.com to take full advantage of our newest special features, podcasts, timely news and
pertinent research.
We welcome feedback on our articles or anything else. Feel free to e-mail us at [email protected] or
tweet us at @ngenuityjournal. As always, we hope you enjoy the read.
Sincerely,
M. Troy Woods
President & Chief Operating Officer
TSYS
www.tsys.com
2
3
n>genuity
Spring 2015
cov e r sto ry
Millennials’ Behavior Brings
on Age of Disruption in
Banking and Beyond
Group is driving force behind
shelving of old business models
by > c h a rl i e k e enan
When it comes to financial services and
millennials, the revolution has only just
begun. More than any other generation,
millennials are leading the way for
disruption of retail banking, personal
finance, payments and lending.
www.tsys.com
4
In essence, millennials have embraced
new business models that make sense
to them. They are a force in part due to
their sheer numbers, but also because
of their propensity to use technology
when compared to older generations.
In fact, millennials are 2.5 times more
likely to be first and early adopters of
new digital, social and mobile platforms,
according to FutureCast, a marketing
and consulting firm based in Kansas
City, Mo. They were the early adopters
of services and platforms such as Uber,
Snapchat, Tumblr, and Spotify — and
they’ll be the ones educating everyone
else on the next hot product.
This trend should give financial services
providers pause, because newcomers
are moving in, riding on the rails of
millennial consumption and tastes.
Mobile-based retail banks such as
Simple and Moven offer easy ways to
track spending, something traditional
banks avoided because they made
revenues on overdraft fees.
Personal finance platforms Betterment
and Acorns simplify investing and free
up time. And services such as Kabbage
offer sophisticated scoring methods
that unearth creditworthy borrowers
that banks have passed up. While it’s
not just millennials using these newer
products, they are the ones driving
change, experts say.
5
n>genuity
Spring 2015
Raised on digital
“For the first time, we have a
generation that has grown up with
the Internet,” says Shamir Karkal,
chief financial officer and co-founder
of Portland, Ore.-based Simple, which
counts millennials as its most numerous
users. “They expect things to work in
ways that seem obvious to them, but for
previous generations are huge switches
from what they are used to.”
Definitions vary, but millennials — also
referred to as Generation Y — were
born as early by some accounts as
1977 and as late as the early 2000s,
encompassing those aged 13 to 38 at
the extremes. For comparison, millennials, those who are 15 to 34 years old,
number 88 million. Baby boomers,
those 50 to 69, number 79 million.
So at minimum, providers need
to consider millennials since they
outnumber the boomers and are on
the rise. “When new competitors
emerge that create less friction,
better content, and a more seamless
journey, then there will be massive
disintermediation,” says Jeff Fromm,
president of FutureCast. “Millennials will
fuel a revolution across categories.”
Banking high on the
disruption list
Banking is a category prime for
upheaval, with the highest chance of
disruption from millennials, according
to a survey by Scratch, a marketing
and branding firm owned by Viacom.
About 71 percent would rather go to
the dentist than listen to what banks
are saying, according to a recent survey
of 10,000 millennials by the agency.
Four of the leading American banks
made the top-10 least-loved brands
of this group.
In creating Simple, Karkal and Chief
Executive Officer Josh Reich wanted to
do something to address their frustrations with American retail banking.
“It just felt fundamentally antiquated,
broken and adverse to what customers
are looking for,” Karkal says.
Simple capitalized on the new mobile
economy, differentiating itself from
So at minimum, providers need to
consider millennials since they outnumber
the boomers and are on the rise.
traditional banks in a few ways, one
being its personal financial management dimension. A “Safe-to-Spend”
feature gives a running balance that
takes into account upcoming bill
payments, pending transactions
and savings goals. Millennials have
flocked to it — the median customer
age falls between 25 and 35, while it
also has customers in their late
90s, Karkal notes.
Personal finance luring Gen Y
In personal finance, millennials
are common adopters of so-called
robo-advisors, which use algorithms
to allocate money into index ExchangeTraded Funds. The allocation is based
on modern portfolio theory, investor
age and investing goals.
New York-based Betterment, for
example, sells itself as a service
that can help people better manage
and grow wealth at a fraction of the
cost of traditional financial services,
freeing up time to do other things.
Jon Stein, chief executive officer,
was working as a banking consultant
in New York when he became disenchanted with the strategy of finding
ways to add fees to products and boost
profitability, as opposed to focusing
on customer needs.
“I just wanted to create a product
that I could recommend; something
personalized that would automate a lot
of annoying work that you otherwise
would have to do to be a smart
investor,” Stein says.
While Betterment appeals to all ages, it
skews toward millennials. The average
age of customers is 36, and 75 percent
are under 50, Stein says. Betterment’s
structure has an appeal to the
technology-savvy.
Though Betterment has a customer
service department, it also has a vast
database of frequently asked questions
and answers for users. Stein, who at 35
defines himself as a millennial, says
Betterment can cater to millennials
who prefer conducting business
electronically rather than in person
or by phone.
Finding ways to adapt
To survive a rapidly changing market,
the established players have to adapt,
first by finding out what millennials
want. They can also form alliances
with newcomers. Many established
companies are already making moves.
BBVA Compass bought Simple last year.
Fidelity has partnered with Betterment.
“Inaction is not a strategy,” warns
Matthew Friend, managing director
for Accenture Payment Services in
Washington, D.C. “Having a clearly
defined plan of what you want to be
and how to go about it is the first,
most important step.”
“Millennials are going to decide who
the winners and losers are for all of the
generations behind them,” Friend says.
“The strategy for millennials is primary
for each and every industry.”
About the Author
Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997. His work
at the American Banker included writing about credit and debit cards, merchant processing, and bank stocks. He later
freelanced for the Banker and industry publications such as Banking Strategies, Bank Director, Community Banker,
and U.S. Banker. He also writes about investing, insurance and health care, and is based in Los Angeles.
www.tsys.com
6
The Rising Tide Of
Customer Power
Surfing the wave with a
customer-centered organization
by > d
avid pickeri n g a n d st e p h e n h ew et t
With the worst days of the
great recession finally behind us,
there’s a new wave of change in
the business world. Whilst the
recession’s legacy for organisations
will likely be financial prudence and
thrift, the big game-changer now
is customer power.
7
n>genuity
Spring 2015
Customers are significantly more
informed and empowered than
ever before. Shifts in attitude and
expectations, and breathtaking
advances in technology — notably
the power of the Internet to socially
connect, inform and mobilise — mean
a new era of unprecedented customer
influence on business success.
Promotion on social media sites
can win global fame for an obscure
organisation overnight. Just as easily, organisations’ reputations can be
ruined in a world where disgruntled
customers can circulate opinions to
millions in microseconds. The rapid,
even instantaneous, impact of
Facebook, Twitter and YouTube
is unparalleled at this time.
Drowning in big data
But of course this isn’t one-sided. For
their part, organisations have access
to enormous amounts of customer
information — “big data.” Technology
enables organisations to capture far
more data about their customers
than they ever could in the past. And
complex analytical tools are deployed
in the quest to reveal patterns, trends
and associations, especially relating
to customer attitudes, behaviour
and experience.
www.tsys.com
8
Our research has shown that many organisations are
spending up to 70 percent of their energies on internal
activities that are not explicitly linked to outcomes for customers.
But big-data insight machines take a
lot of fuelling. Not only can operational
costs be high, but in the new massively
customer-connected world, there is also
a real question over the true value they
provide to the organisation.
There are many dimensions involved.
Yet a recurring and vital theme is that
current customer insight processes and
systems are frequently biased toward
models based on internal hypotheses
on customer attitudes or organisational
performance. This, combined with the
sheer complexity and scale of current
insight techniques, can obscure the
simple but powerful things that matter
most to customers.
Too often the voice of the customer is
drowned out, awash in oceans of big
data. Moreover, it is often not recognised that tremendous value can be
created from a truly customer-centred
approach, and one that is not just
about optimising customer-facing
processes, systems and behaviours.
A new wave is needed
At one level, it’s easy to state what
needs to be done. If the customer
is gaining unprecedented influence
on organisational performance,
organisations should strive to
9
n>genuity
Spring 2015
become, as quickly as possible, fully
customer-centred in their operations.
Our research has shown that many
organisations are spending up to 70
percent of their energies on internal
activities that are not explicitly linked
to outcomes for customers. Even worse,
this, rather than the customers’ needs,
is often the focus of redesigns. The
proportion can and should be the
other way around: with at least 70
percent of organisational activity
linked to identifiable customer
(internal or external) needs.
This means putting customers
at the heart of the change agenda
to accelerate and maximise
performance improvement,
delivering transformed results
for the organisation based on
greater outcomes for customers.
An organisation becomes customercentric not just by making its
customers’ needs a prioritised
strategy, but also by consciously,
decisively and comprehensively
putting its customers at the centre
of its business activities — creating
a bloodline that runs throughout
the entire organisation.
The performance prize from
customer commitment
The beauty of the customer-centric
approach is that it is fundamentally
self-funding. As one might expect,
the return on investment tends to
vary from one organisation to
another, but our experience is that
organisations can achieve ROI of
up to ten times or more.
But how can this transformation
be reliably delivered?
In our experience, a highly practical
approach based on a Customer-Centred
Framework (CCF) has proven effectiveness, unlocking the full potential of
customer-centred change. Looking
straight to customers for the clearest
possible view of performance is
remarkably effective.
The turning tide
With such an unambiguous understanding of the customer voice, organisations
can discover the gap between actual
customer needs and experiences, and
the organisation’s perception of them.
This is the foundation for a change
to deliver a customer-centred future
using the customer as a compass to
reduce complexity and guide strategic
investment choices.
The tide of customer power is rising
at an unprecedented rate. It is fast
becoming the greatest single force
influencing an organisation’s
performance, and this change has
only just begun. Those organisations
that recognise and embrace this new
reality, with customers in their DNA,
will be the winners — surfing the
wave of customer power to deliver
maximum value consistently to all
of their stakeholders.
About the Authors
David Pickering
As the CEO of C3 Partners, David is an experienced leader of consulting
and services businesses, both public and private. Strongly customer
focused, David has extensive experience in building successful consulting
brands. His previous business, Charteris, is growing to become one of the
leading management consulting businesses in the UK. Previously, David
was a director with global IT services firm, Logica plc. He is a Chartered
Engineer and Fellow of the British Computer Society.
Stephen Hewett
As the founding partner of C3 Partners, Stephen is one of the UK’s
leading authorities and business advisors in the field of customercentred business change. Working with leadership teams in both public
and private sector organisations, he has experience in a wide variety
of industry sectors. In previous roles Stephen was Head of Business
Consulting at Charteris, and before that, Development Manager,
Research & Expansion at John Lewis.
www.tsys.com
10
The Hidden Benefits of EMV
Besides the obvious fraud prevention, other
often-unperceived perks for merchants
by > stan m e rr i t t
Sometimes it’s warranted to restate the obvious: EMV is out there
and on the table in a big way.
Merchants are faced with it and its point-of-sale implications, and the
payment brands are attempting to powerfully place it in their faces.
“It was inevitable that the U.S. had to respond to
this call to action,” says David Robertson of the
Nilson Report. The EMV shift in October, according
to Robertson, is a change in the status quo that will
affect more than a billion cards and more than 25
million point-of-sale terminals. After all, he says,
“there’s no business like a mandate.”
Benefits both obvious and subtle
But he also notes many “hidden” benefits in the EMV
shift, and how the metaphorical twist of merchants’
arms could actually do them good in many ways other
than the obvious fraud-prevention impacts.
And the implementation of EMV may also result in a
sort of chain reaction of positive effects that ripple
through the retail payments industry, starting with its
image. “First, the EMV shift should result in a massive
public relations success for retailers and financial
institutions,” Robertson notes. “People will inherently
feel more comfortable with these safeguards in place,
and consumer goodwill will rise.”
And while the retail and payments industries would
be wise to regard EMV as a gateway to improvement
— not a panacea — the up-side potential of the
technology should not be underestimated.
11
n>genuity
Spring 2015
“EMV will undoubtedly result in great strides in
reducing card-present fraud,” says Robertson. The
grim specter of card-not-present fraud will linger
even after EMV implementation, he admits, but the
protocol will be a huge remedial step in terms of
fraud in general.
needs to evolve,
and the shift will push this evolution.”
“The point of sale
But there are also even more organic and fundamental
improvements in the core payments process that will
likely stem from EMV implementation.
“EMV is the first step toward a much safer and smarter
interaction with electronic devices in general,” says
Robertson. “The point of sale needs to evolve, and
the shift will push this evolution.”
And perhaps in ways not often considered.
But are we prepared to embrace all of this progress?
The state of industry readiness — or lack thereof
According to a recent article by fintech news site Finextra,
more than half of U.S. retailers are not ready for EMV with
merely nine months to go. The author of the post further
noted: “Of more than 100 retailers polled by ACI Worldwide
at a conference earlier this month, just 12% are already
compliant, while 14% admit to still having work to do ahead
of the deadline, 19% say they are not prepared, and 22%
are still ‘evaluating their options.’”
EMV and biometrics: the connection
“As the POS evolves through the EMV shift, consumers will
become more comfortable with the concept of biometric
authentication,” says Robertson. Whether it is fingerprint,
voice or face recognition, these methods of identification
will become far less far-fetched and “science-fiction-like”
in the eyes of consumers as they utilize the EMV protocol.
And it is undisputed that biometrics are a huge step
toward safer transactions.
In Robertson’s opinion, the U.S. is at an “apogee of
uncertainty” in terms of merchant compliance with the
EMV shift because it is a very large and diverse country
with far more end-points and a lot more money at stake
than most. And while he predicts that in five or six years
“the good guys will be ahead of the fraudsters,” total
compliance with the EMV deadline this October may
be a pipe dream.
In fact, on January 13th, USAA announced its deployment
of mobile biometric account login capabilities, which
is indicative of a trend toward consumer adaptation of
and comfort with biometrics in general, even in mobile
account use. This consumer comfort will likely result in a
“spill-over” effect in the merchant community, as retailers
adjust to their consumers’ payment method comfort level.
“Our connective tissue needs to be upgraded,” he warns.
“A lot of the big companies have EMV covered, but there
are a lot of ISOs and VARs that are just not up to speed,
which has serious implications for smaller merchants.”
About the Author
Stan Merritt is the editorial coordinator for n>genuity journal and a member of the Digital Communication
team at TSYS. In addition to writing industry articles, he focuses on studying payments industry trends,
product innovations, regulatory issues and game-changing technology. Prior to joining TSYS, Merritt was
engaged in the private practice of law for more than 15 years.
www.tsys.com
12
Three Things VCs Look For
Before Funding a Startup
Payments Company
What entrepreneurs can learn
from VC firms’ payments strategies
by > sean banks
Venture capital investors review hundreds
of business plans each year. While there
are numerous factors that we weigh when
evaluating a business, the three most
important are the management team,
the market opportunity and the solution
for that market. Although generic and
important to any new venture, there
are specific nuances in each factor
when we evaluate a payments
industry opportunity.
13
n>genuity
Spring 2015
Strong management
Processing payment transactions
is not a simple task. The systems
architecture, pricing structure, sales
channels, regulatory/compliance,
and other aspects of the industry
have evolved over decades. These
complexities have us seeking management teams with payments industry
experience. And this experience must
not be limited to the leadership of the
company, but must also permeate the
technology team as well as sales and
marketing functions.
We have seen failed “great ideas”
and inefficient capital deployment
because management did not
understand the current way payments
are processed. Some leaders also failed
to appreciate the industry and government regulations required to conduct
business in a compliant manner, such as
KYC, AML, MTL, PCI, etc. Perhaps one
of the best testaments to the wisdom
of understanding the industry prior to
www.tsys.com
14
More than
$430 billion was projected to be spent worldwide
on technology just by financial services firms in 2014.
entering it is Apple Pay’s launch. With
payment companies looking to charge
As noted above, new products and
all of its resources and distribution
a “per-transaction fee,” the revenue/
services can now be delivered to
points, Apple did not try to reinvent
expense plan of management must
millions of consumers and small
payment processing. Instead they
recognize the slow buildup of transac-
businesses all at once, and new
built the solution using the existing
tions until critical mass is achieved.
businesses can be created in a very
near-field communication (NFC),
A CEO must also be a strong leader.
capital-efficient manner. However,
tokenization and the four-party system.
While this may seem nebulous and
we do see a significant number of
immeasurable, having a management
new payment applications with very
The widespread adoption of modern
team that can foster a culture to
niche markets.
technology, such as the Internet, mobile
succeed and instill a clear vision
connectivity, app-based architecture
for the company is critical.
and cloud computing, means solutions
While many of these can be solid
businesses, we seek investments that
and companies can be created and
The least negotiable characteristics
can generate venture-style returns for
brought to market in a significantly
of the management team are its eth-
our limited partners, which is why we
more capital-efficient manner than
ics and trustworthiness. As managers
are focused on applications with large
a decade ago. However, we still want
of a portfolio, it is imperative that we
addressable markets or on applications
management teams that are resource-
can trust the executives running these
that can apply to multiple verticals
ful. Managing expenses and making
investments. After all, the payments
and markets. For example, we have
payroll not only extends the runway
industry and its regulators are highly
invested in a company that is creating a
for the company, but also reduces
intolerant of bad actors.
payment processing and reconciliation
the capital required to get to market
solution for the payment of film and
— which prevents management and
Large addressable market
shareholders from experiencing
The market for products and services in
dilution of ownership.
the Fin Tech sector is vast in size, scale
The application is being built to
and criticality. More than $430 billion
expand beyond just those residuals to
Further, management must be willing
was projected to be spent worldwide
industries such as music, copyright/
to pivot the model to better position
on technology just by financial services
intellectual property royalties, oil
the business instead of spending
firms in 2014. This is the largest sector
and gas, and clinical trials to name
multiple cycles and significant capital
of technology consumption.
a few. While the initial targeted
on actions that are not yielding results.
television residuals.
market is narrow, the solution
Additionally, management must recon-
Virtually every business and consumer
solves an underlying problem
cile its revenue generation and expense
in the world interacts with financial
across numerous industries.
plan with its go-to-market strategy. For
products and services at some level.
15
n>genuity
Spring 2015
Market fit
The last of the three things we
look for is a well-defined market
fit for the technology and solution.
The company must have a plausible plan that appeals to merchants
to drive consumer adoption (or
vice versa). The solution also must
demonstrate a sustainable purpose
to compel usage by both sides of
the “chicken-and-egg” model.
In the payments space, it is
particularly important for management to understand the value of
its solution to all parts of the
value chain. Many of our most
successful investments have
leveraged channel partnerships
to grow rapidly, and that growth
was predicated on a clearly
delivered and demonstrated
return on investment for their
channel partners.
About the Author
Sean M. Banks is a partner at TTV Capital and has more than ten years of venture capital experience. Prior to
joining TTV, Sean served as the vice president of finance and general counsel for an Atlanta startup company.
Sean earned his MBA in 2003 from the Goizueta Business School at Emory University where he was one of
five Woodruff Fellows. He is currently a member of the Georgia Bar Association, having earned his J.D. at the
University of San Diego in 2001. He is a 1996 graduate of the United States Naval Academy, where he earned a
B.S. in economics.
www.tsys.com
16
17
n>genuity
Spring 2015
Why Tokenization Can Be Hackers’ Kryptonite
We have the technology, but fraud-prevention
strategy is key
by > nathalie rei ne lt
It’s the hard truth: Every organization should assume that they will be
breached at one time or another and to varying degrees.
In the last 24 months, one organization after another
Relentless, entrepreneurial hackers are not simply going
has come forward with news that its perimeters have
to grow a conscience and change careers. As long as
been penetrated by cybercriminals. The headlines are so
there is a financial payoff at the end of that cybertunnel,
frequent that no one seems all that surprised anymore,
these criminals will continue to advance their knowledge
and the reactions from participants in the security
and sophistication to win the cyberwar. About the only
community span from relief that it was not their own
thing that is certain is that the attacks will continue, and
organization to concern that it very well could have been.
eventually another one will be successful.
Keeping up with the criminals
This is why the security industry is so focused on
Even though readers are becoming increasingly desen-
removing the incentive. If hackers are unable to obtain
sitized to the headlines, the reality of these breaches is
any useful data during these breaches, however, the
not falling on deaf ears. Security professionals, vendors
damage to the affected organizations, their consumers
and global standards committees (e.g., EMVCo and the
and the payments industry as a whole is minimized.
Payment Card Industry Security Standard Council) are
actively working to address this very broad issue while
Data security is not a new concept. IT and security
continuing to innovate technologies and standards
professionals have always focused on protecting their
that will protect consumer financial data — namely,
infrastructure and data from cyberattacks.
encryption and tokenization. What is also becoming
absolutely clear is that cybercriminals are growing more
What is rarely reported is the frequency of attacks that
sophisticated in their attacks and will exploit any possible
organizations actually thwart on a daily basis, because
vulnerability within the payment life cycle to get their
those success stories do not make great headlines.
hands on payment card data.
Unfortunately, it does not matter how many wins an
organization can claim in the cyberwar — it only takes
www.tsys.com
18
While tokenization itself is not an emerging technology,
the various methodologies used to deploy
the technology continue to evolve.
one high-profile loss to call an organization’s entire
technology, the various methodologies used to deploy the
security practice into question, which has proven to
technology continue to evolve. Although merchant and
be incredibly damaging to the brands of recently
acquirer tokenization solutions have been in existence
breached merchants.
for nearly a decade, issuers are now also able to tokenize
payment data before a transaction even occurs, thereby
But how? Implementing tokenization and
encryption
protecting themselves and their cardholders in the event
of a merchant breach.
How tokenization and encryption are deployed is
equally important in data protection. Although
merchants may have payment data encrypted and
Unique tokenization challenges for merchants,
acquirers and issuers
tokenized in various applications and databases within
So, what is the difference between merchant and acquirer
their ecosystems, the only way to truly ensure that they
tokenization vs. issuer tokenization?
are fully protected from sensitive data exposure is to
deploy encryption and tokenization at every single
Merchant and acquirer tokenization services obfuscate
point of potential compromise.
the payment card data as it flows through the merchant
point-of-sale system, whereas issuer tokenization
It is clearly no longer enough to tokenize the data
replaces payment card data with a token as soon as
merely for storage and analytics. The recent breaches
it is captured by a specific platform.
have made clear that all data needs to be either
encrypted or tokenized at the point of capture (e.g.,
Take as an example Apple Pay, which is the first
upon card swipe or online entry of the credit card
deployment of issuer tokenization since EMVCo
number) and beyond. Perhaps the only positive
introduced the approach back in March 2014. This new
outcome of these breaches is that other organizations
tokenization framework allows payment networks (e.g.,
are learning about vulnerable points of compromise
Visa, MasterCard, and American Express) to provision
that they may not have even realized were unprotected
tokens on behalf of the participating issuers (e.g.,
in their own ecosystem, PCI audits notwithstanding.
American Express, Bank of America, Capital One, Chase,
Citibank and Wells Fargo) to be securely stored in the
As with any technology, there are multiple approaches to
tokenization. While tokenization itself is not an emerging
19
n>genuity
Spring 2015
iPhone 6’s secure element.
There are two primary reasons why issuer tokenization
A collaborative and cooperative industry approach
is different from the merchant and acquirer tokenization
Although issuer tokenization will address fundamental
approaches:
security vulnerabilities at the earliest possible point in
the payment life cycle, it is still considered complemen-
> The tokens are provisioned at the point of capture
tary to merchant and acquirer tokenization solutions,
when a payment card is added to Apple Pay, as opposed
since it will be a while before issuer tokenization reaches
to merchant and acquirer tokenization solutions that
ubiquity. In the meantime, merchants still need to protect
tokenize the payment card data after the transaction
their data within channels where issuer tokenization is
has already taken place.
not deployed.
> The tokens will be provisioned and managed by the
When it comes to data security, there is no silver bullet.
payment networks on behalf of the issuers, ensuring
There is such a thing as “death by a thousand cuts,”
that merchants never see payment card data in the
however, and both merchants and issuers can do much
clear, which should be very appealing to merchants in
to chip away at cybercriminals’ fraud schemes to
the wake of all the recent point-of-sale data breaches.
eventually send them packing — or at a minimum,
hacking elsewhere.
About the Author
Nathalie Reinelt is an analyst within Aite Group’s Retail Banking & Payments practice, focusing on the global
payments ecosystem, including alternative payments, cross-border remittances and emerging technologies
complementary to payment processing and commerce. She brings to Aite Group more than 16 years of
experience in Internet, technology, e-commerce and financial services industries.
www.tsys.com
20
Why Do Some Payment Innovations
Succeed While Others Fail?
Experts weigh in on the recipe for success
by > charles kee na n
Apple Pay’s debut has generated plenty of buzz, positive and negative.
Regardless of how it performs, the product serves as a reminder of how
difficult it is to succeed in the payments world, as the established players
still offer a pretty reliable payment mechanism: magnetic stripe credit
and debit cards that offer quick authorization at the point of sale.
21
n>genuity
Spring 2015
Despite all of the innovation in
point of sale is a hard thing to surpass
Conversely, some mobile wallets have
payments, the killer app has been
in terms of convenience. “Where you
struggled for adoption because they
hard to come by. Even with all of the
have got a very stable environment,
fail to offer a superior way to pay,
startups and the millions of dollars
and a lot of preexisting behaviors, what
notes Josh Gilbert, a partner at First
invested, most payments innovation
is it going to take to suddenly change
Annapolis Consulting, a firm based in
initiatives lack one or more key
the way you pay?” asks Rick Ogelsby,
Annapolis, Md. “What they are putting
ingredients for success. n>genuity
a senior analyst at Double Diamond
out there appears to be a solution
journal spoke with a few payments
Group, a consulting firm based in
in search of a problem. They are not
experts to come up with a short
Centennial, Colo.
offering a way to pay that is markedly
list of critical factors for successful
innovation in payments.
1
better to consumers than just pulling
With Starbucks, it’s the promise of
out the piece of plastic that is in
loyalty points and ease of presenting
their pocket.”
Value Add
an on-screen QR code at the point of
Though it’s repeated incessantly
sale. With PayPal, it’s in part the ability
at industry conferences, it’s still
to pay friends with an email address.
2
Critical Mass
Entwined with the value
proposition is the need for
the No. 1 requirement for innovation
Square offers merchants easy sign-up
success — to change consumer
and transparent pricing. The long-
behavior, there must be a compelling
delayed move to EMV chips only seems
On both the issuing and merchant
reason to adopt the new service on
possible now that issuers are adopting
sides of the transaction, adoption
both sides of the transaction. The
the technology en masse after major
rates must be broad, and this obstacle
swipe of a magnetic-stripe card at the
security breaches at retailers.
is what brings many attempts at
critical mass for a product to take hold.
www.tsys.com
22
“Where you have got a very stable environment,
and a lot of preexisting behaviors, what is it going
to take to suddenly change the way you pay?”
innovation to a grinding halt. Smart
card pilots always floundered for
this reason.
“In payments, you’ve got the chickenegg problem,” says Scott Loftesness,
a founding partner at Glenbrook
Partners, a consulting firm based in
Menlo Park, Calif. “You need both a
viable consumer value proposition
and an equally viable merchant
value proposition.”
For the successful product PayPal,
those two needs were easily met: eBay
needed it as a way for consumers
and merchants to transact, allowing
for critical mass. “You simply had a
big commercial need: having secure,
reliable payments in the e-auction
presence with issuers. Google Wallet
space,” says Eric Grover, a principal at
has suffered in part due to its lack
Intrepid Ventures, a consulting firm
of a large number of credit cards of
based in Minden, Nev.
issuing banks.
3
Transaction Speed
For all payment products, speed
at the point of sale is another
factor. To compete with cards, products
must at least match the quickness of a
Without that kind of value proposition
Similarly, Apple Pay has started with
for stakeholders, products will have a
the biggest merchants and banks,
hard time getting going. Again, mobile
but will need to do more, says Brian
“It’s table stakes,” Grover says. Mobile
wallets are a prime example.
Riley, a senior research director at
wallets and near-field-communication
swipe at the cashier.
CEB TowerGroup, a consulting firm
(NFC) face stiff competition with the
MCX and Softcard (the latter formerly
based in Boston. “There are 5,000
fast transaction times offered with
branded Isis Wallet) each has a group
other banking institutions. They are
traditional debit and credit cards.
of participating large merchants,
wondering, ‘What about me?’”
Signing a receipt can slow down
but both lack ubiquity and any big
23
n>genuity
Spring 2015
Critics of the status quo love to complain about the
weaknesses of the current payment system, but it still works.
Just pulling out a phone and calling up
leverages the existing infrastructure,”
an app can be less convenient, Riley
Gilbert says. “They didn’t come into
notes. “I can be at the point of sale
this trying to reinvent payments.
and have my debit card swiped and
That makes it a lot easier to get the
authorized in less than 10 seconds,”
payments companies on board, and it
Riley says. “Why should I go through
makes it a lot easier to implement.”
the fuss of taking out my phone?”
Starbucks transactions with its apps
And onto the next
are slower when there’s an issue
In reality, the efforts to innovate face
with the scanning of a QR code, but
a high acceptance threshold. Critics
the loyalty proposition keeps the
of the status quo love to complain
consumers paying that way.
about the weaknesses of the current
4
payment system, but it still works,
Cooperation
Grover notes. “The existing market
Generally, innovation doesn’t
is well-served.”
go far when it doesn’t include
the existing partners of the card
For innovators and investors,
networks, processors, banks and
that’s something to ponder.
merchants. For Apple Pay, Gilbert
transaction time, but for transactions
characterizes the level of cooperation
of $50 or less, many merchants such
among the parties as “unprecedented.”
as pharmacies and grocery stores
So Apple Pay does follow the rule
often don’t require a signature.
of inclusion. “Most importantly, it
About the Author
Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997.
His work at the American Banker included writing about credit and debit cards, merchant processing, and
bank stocks. He later freelanced for the Banker and industry publications such as Banking Strategies,
Bank Director, Community Banker, and U.S. Banker. He also writes about investing, insurance and health
care, and is based in Los Angeles.
www.tsys.com
24
Cross-Border Payments
Due For Disruption
Crypto-currency technology
could usher in a new era
for foreign exchange
by > c h a rl es k e e na n
While use of crypto-currencies still
might be outside the mainstream, the
technology behind them could rattle
the fee-laden world of foreign exchange
trading, resulting in inexpensive
international payments in real time.
Banks are already starting to use the crypto-technology behind the
scenes for cross-border transactions. San Francisco-based Ripple
Labs Inc., which has developed a crypto-currency protocol that
banks can integrate into their systems, has signed up a few banks.
Fidor Bank, based in Germany, has begun offering customers the
ability to make international payments using a crypto-currency
protocol. Two American community banks, CBW Bank of Weir, Kan.,
and Cross River Bank, of Teaneck, N.J., have integrated the Ripple
protocol and are still in the testing phase. And Ripple has more
banks in the pipeline.
These early adopters see a chance to offer customers a better deal.
International payments often feature high commissions and several
days for clearing. Most foreign transactions must now go through
a handful of large correspondent banks, which limits the field of
market makers, who compete in buying and selling currencies.
25
n>genuity
Spring 2015
www.tsys.com
26
This keeps the spread and fee for the
transactions higher than they could
otherwise be, reaching as much as 500
basis points (5 percent). The transactions
can also take several days to clear, adding
to the cost of capital required to carry
the risk during that time.
Market inefficiencies create
opportunities
The expense and slow pace make the
market a prime target for disruption.
There is plenty for the taking: Trading
in foreign exchange markets averaged
$5.3 trillion in April 2013, according
to a triennial study by the Bank of
International Settlements. That’s the
equivalent of $53 billion for every 100
basis points of spread every day.
“If people want money to move faster
between two locations across the
globe, there has to be a solution
better than what it is today,” says
Suresh Ramamurthi, chairman and
chief technology officer of CBW Bank,
which has a focus on providing payments
as opposed to lending. “Ripple can be
one of those solutions.”
The potential for disruption is high.
“Today, you don’t have options to
transfer money across borders quickly
and cheaply,” says Eric Piscini, a
principal at Deloitte Consulting in
Atlanta. “There is a need for real-time
and cheaper service. It’s coming, and
it’s going to happen.”
27
n>genuity
Spring 2015
Distributed ledgers mean
more competition
The promise lies in the technology
behind the crypto-currencies, not the
currencies themselves. For foreign
exchange and real-time settlement, the
crucial components of crypto-currency
technology are the public databases also
known as “distributed ledgers.” These
are also referred to as public ledgers,
or the block chain. Distributed ledgers
are decentralized, rather than using
one network.
Ripple’s network, for example, is a shared
public database, much like Bitcoin’s.
The database has a ledger, which tracks
accounts and balances. Since the database is distributed, it sits on thousands of
servers around the world, with computers mutually agreeing to changes to the
ledger made by transactions, in a process
called “consensus.” This consensus is
reached in seconds, meaning that transactions are instantly verified, offering
strong security. This allows fast clearing
and settlement.
“The distributed technology creates a
structural change to allow all those funds
to compete for those retail streams,”
says Chris Larsen, cofounder and
chief executive officer of Ripple Labs.
Larsen estimates the distributed ledger
configuration could lower international
payments expenses down to the cost of
holding capital — in the range of 30 to
50 basis points. Banks can experiment
Most
foreign transactions must now go through a
handful of large correspondent banks, which limits the field of
market makers, who compete in buying and selling currencies.
with how they want to price the service
to make some profit, he notes.
Sowing seeds in Europe
Other vendors also see the opportunity.
Epiphyte Corp., a software provider based
in London, has been testing with banks
a distributed ledger that integrates with
SWIFT, a messaging system used by
banks worldwide in foreign exchange. It
also is compatible with Bitcoin, Ripple
and Stellar protocols. The vendor says it
is working with several banks in Europe,
plus a few in Asia and Australia.
By integrating with Epiphyte, banks
would get access to a distributed ledger.
“Banks are able to perform transactions
between themselves over multiple
different distributed ledgers without
ever touching a crypto-currency, and to
do so in real time and with substantially
reduced capital requirements,” says
Edan Yago, chief executive officer
of Epiphyte.
Other third parties have jumped
on board. Ripple announced a deal
in December with Earthport, an
international payments firm based in
the United Kingdom, which has HSBC,
Bank of America Corp., American Express
Co. and BB&T as clients and clears
transactions for financial institutions
in more than 60 countries.
Getting regulators on board
Market makers
For U.S. institutions, the key will be
convincing regulators of the reliability of
distributed ledgers, and educating more
bankers on the topic, experts say. While
CBW, for example, expects to go live in
2015, there’s work to be done. “There will
be a lot of scrutiny before it goes live,”
Ramamurthi says.
Essentially what these distributed ledger
services do is help expand the pool of
market makers for foreign exchange.
Systems such as Ripple allow for a big
expansion of the network of market
makers. With Ripple, the market
makers include financial institutions,
but also individuals.
It’s Ramamurthi and other bankers
that might just clear the path. To be
sure, for an international payments
system whose backbone was formed
near the end of World War II at the
Bretton Woods conference, things
won’t change overnight.
These parties provide liquidity by holding
funds in several currencies, and compete against each other. Because of the
increased competition, the bid-ask spread
is much lower than that found in using
the correspondent bank system. Ripple
now has hundreds of market makers
around the world that help provide
liquidity for global payments.
But there’s too much savings potential
for the technology to be ignored,
making 2015 a promising year for
adoption, Larsen says. “The banks are
seeing how this can really help them
and be more efficient. It is inevitable.”
About the Author
Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997. His work
at the American Banker included writing about credit and debit cards, merchant processing, and bank stocks. He later
freelanced for the Banker and industry publications such as Banking Strategies, Bank Director, Community Banker, and
U.S. Banker. He also writes about investing, insurance and health care, and is based in Los Angeles.
www.tsys.com
28
Follow the Money: Why Big Opportunities
in Payments Come in Small Packages
Small business merchants might be the
meal ticket for POS providers
by > charles k e e na n
Large enterprise customers might be
the cash cow for some point-of-sale
software providers, but as Square has
shown, much is to be had from small
business customers. It’s here where many
venture capitalists are putting money
down on the potential next big thing.
The move to cloud computing and software-as-a-service
(SaaS) models has fueled a replacement cycle in technology,
as small businesses take advantage of increasing simplicity
of website interfaces, as they mothball older POS systems
or try credit and debit card acceptance for the first time.
In the words of Jim McKelvey, cofounder of Square who
spoke at Card Forum last year: “Follow the money.” While
newer acquirers and software companies might have a hard
time dislodging larger, so-called “enterprise clients,” the
market of smaller merchants shows plenty of promise.
Big opportunities in small packages
While estimates vary, by one tally there are about 7.6
million small-business merchants, defined as those with
$5 million or less in annual processing volume, according
to Adil Consulting, based in Omaha, Neb. The group of
merchants contains 4.4 million “micro” players, with
“There are tons of opportunities in the small business
space,” says Dan Rosen, a partner at Commerce Ventures
Management, a VC firm based in San Francisco. “There’s a
huge replacement cycle underway.”
29
n>genuity
Spring 2015
annual processing volume of up to $50,000. About
1.5 million “small” merchants make up the next level, with
volume between $50,000 and $150,000 per year. There
are about 1.1 million “medium” merchants, with volume
of $150,000 and $500,000, and 500,000 “premium”
merchants, with volume between $500,000 and
$5 million.
The attention SMBs deserve
The success of Square and others has brought attention
to a market that has been historically overpriced and
underserved, kicking off a price war and a new wave of
access to the payment rails for more merchants, says
Matt Harris, a managing director at Bain Capital Ventures in
New York. “Square really inaugurated a whole new chapter
of innovation for the small merchant.”
But for providers, especially startups, sustaining a business
model of serving small business isn’t a sure thing. The
micro-merchants offer the least amount of revenue,
given smaller ticket sizes and less volume. But going
for larger merchants means offering more customer
service and fuller solutions that will drive up expenses.
www.tsys.com
30
“Can you distribute the product, board the
merchant and manage the risk within a
cost model that allows you to garner more
clients?” asks Marc Abbey, a managing
partner at First Annapolis Consulting, based
in Annapolis, Md. “That is a challenge.”
n>genuity journal recently spoke with a
few VCs to see what they are looking for in
potential investments. The sweet spot is likely
above the micro-merchant level, where there
is still scalability and better revenues. Here is
a short list of investment prerequisites:
1
Integration. In the move to new plat-
forms, merchants want more than just
payments. “They have a distinctive set
of practices that comprise the way they run
their business,” Harris says. “They need software ideally integrated with payments and
their customer database to run their business.” PaySimple, for example, uses a simple
interface to help customers streamline billing,
manage customers and accept payments.
“Merchants don’t want to deal with separate
payment functions,” adds Amir Goldman, a
managing director at Susquehanna Growth
Equity, a Bala Cynwyd, Pa.-based VC firm
that has a stake in PaySimple. “They want
to have their core software integrated
with payments.”
2
Specialization. When it comes to
differentiation, VCs are looking for
specialists who focus on so-called
“verticals,” or specific industries like hair
salons, bars and e-commerce concerns.
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n>genuity
Spring 2015
When it comes to differentiation, VCs are looking for specialists who
focus on so-called “verticals,” or specific industries
like hair salons, bars, and e-commerce concerns.
The software should be specific to their
industry and configurable so merchants
can adapt it to their particular needs,
he says.
Fishbowl serves restaurants, and WebPT
focuses on physical therapists’ practices.
Others take on many industries. Booker,
a company backed by Bain, divides its
markets into major categories like
“wellness and beauty,” “hospitality”
and “lifestyle and entertainment.”
“Few if any small business owners
actually view themselves as small business owners,” Harris says. “They view
themselves as florists, restaurateurs or
spa owners. So there is going to be an
ever-finer set of distinctions on vertical
lines in the small business marketplace.”
3
Customer Service. Vendors
also need good customer
service when dealing with small
businesses. ShopKeep POS, backed in
part by Atlanta-based TTV Capital, touts
24/7 customer service with an 800-tollfree number — a key differentiator
from Square. ShopKeep co-CEO Jason
Richelson founded the company back in
2008 when he was frustrated by the lack
of customer service available for his POS
at the wine store he owned at the time.
While Richelson handled technical
problems on his own, when he went on
vacation, his staff would be relegated
to calling a customer service number of
the POS provider, which charged $150
an hour. For $49 a month per register,
ShopKeep offers 24/7 customer service
via phone, email and chat. “It’s a huge
differentiator,” he says.
Onboarding is also key, given that
customer churn for providers can be 25
percent or more, Goldman notes. “If you
want really good, sticky adoption from
the small-medium business customer, you
need to have a strong customer service
function that actually follows up with
them after they sign up with you.”
4
Distribution. VCs are also
looking for distribution capability in providers. While the best
products generally win, it’s not as true of
an axiom among smaller merchants, who
don’t have the time to comparison shop
for tablet point-of-sale vendors, Rosen
adds. Direct acquisition of customers
through a website has its limits. “There
are only so many small merchant
owners who are searching for table
points of sale on Google every day,”
he says. “They don’t have the time
to do that.”
Instead, startups need another outlet.
They can team up with companies
that have broad access to the market,
including accounting software companies,
email list managers and payment
processors. ShopKeep, for example, has
paired up with TSYS, PaySimple has
tapped Vantiv, and Swipely has gone after
smaller independent sales organizations
and POS resellers.
“In the small merchant universe,
distribution matters much more,”
Rosen says. “It’s about access to those
customers, and influence over them.”
About the Author
Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997. His work
at the American Banker included writing about credit and debit cards, merchant processing, and bank stocks. He later
freelanced for the Banker and industry publications such as Banking Strategies, Bank Director, Community Banker,
and U.S. Banker. He also writes about investing, insurance and health care, and is based in Los Angeles.
www.tsys.com
32
When Switching Cards Has Never Been
Easier, Finding Opportunity in Loyalty
Reevaluating long-term and short-term
strategies for retaining customers
by > samuel murra n t
It’s no secret that payment card loyalty programs are highly
effective customer acquisition tools.
In fact, they are so effective that customer retention
Furthermore, some regions — like the U.K. with its
and loyalty are increasingly being taken for granted.
Current Account Switch Service — are actively altering
As a result, there is an imminent danger that true
market dynamics through regulations to make switch-
“loyalty” to issuer card brands may actually be on
ing providers easier for consumers. Issuers can no
its way out.
longer rely on inertia to retain their customers, who
are looking for financial products with strong long-term
On its face, this is not good news. But could it actually
appeal in order to stay with their current provider.
present an opportunity for reinvention?
The value of instant gratification
Switching: never been easier
Loyalty features such as cashback and reward points
According to last year’s Datamonitor Financial’s
are some of the most effective ways to attract new
Financial Services Consumer Insight (FSCI) Survey,
customers. Datamonitor Financial’s 2013 FSCI Survey
17.9 percent of all credit card holders globally are
indicates that 43.9 percent of consumers considering
considering switching cards within the next year.
switching credit card providers are likely to be swayed
This means that there is a significant opportunity to
by loyalty or reward points, and 42.1 percent are likely
acquire customers from rivals with attractive offers —
to be swayed by cashback offers. Furthermore, issuers
but it also means that there is a substantial customer
are seemingly finding it more cost-effective to offer
attrition rate for any given credit card issuer.
larger rewards for a limited time period to attract
new customers, as opposed to consistently rewarding
Switching providers has never been easier. Consumers
can use popular price-comparison and money-saving
websites to find a better deal elsewhere.
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n>genuity
Spring 2015
long-term customers.
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34
However, there will come a point when competing in introductory
loyalty offers becomes unsustainable, which is when
having a loyal customer base will be most important.
For a bank, rewarding longstanding customers as a
Most traditional loyalty schemes do indeed incorporate a
means of keeping them on board means spending more
long-term dimension, such as offering high-value rewards
money on treading water in the market, which is a less
for customers who rack up very high numbers of loyalty
attractive proposition than growing the customer base
points. In reality, however, many consumers will never
through introductory offers. However, there will come
reach these levels and may prefer smaller, short-term
a point when competing in introductory loyalty offers
rewards instead. Instant gratification is a key selling
becomes unsustainable, which is when having a loyal
point for consumers in today’s connected market,
customer base will be most important.
and loyalty schemes need to adapt to these changing
consumer desires.
Issuers must offer high-quality service and good longterm rewards to keep consumers from looking elsewhere.
Leveraging loyalty through innovation
If issuers cannot viably add more pull factors to their
Loyalty can also be cultivated through non-financial
cards in the form of introductory offers, then those that
means, such as engaging with consumers via online
have the fewest push factors driving consumers away
or social media channels, offering rapid resolution
will have the advantage.
of problems, and providing extensive customer support.
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n>genuity
Spring 2015
Instant gratification is a key selling point for consumers
in today’s connected market, and loyalty schemes need
to adapt to these changing consumer desires.
In the U.K., Barclays’ “Digital Eagles” program, which
Some banks are already experimenting with longer-term
offers customers educational assistance in using the
strategies — RBS and its subsidiary NatWest in the
Internet, shows how banks can build strong relationships
U.K. are prime examples. These banks have pulled out
with consumers outside of traditional financial rewards
of the highly competitive introductory balance transfer
or cashback offerings.
and interest rate space to offer a range of cards that
require annual fees but feature much lower interest rates
New techniques that leverage data analytics, such as
than the market average. It remains to be seen whether
card-linked loyalty schemes, can also provide a solution,
this strategy will prove effective, but it certainly may
as they reward consumers with increasingly relevant
appeal to those customers who use revolving credit
offers the longer they use the scheme. In the card-linked
on a regular basis.
model, consumers are presented with merchant partners’
offers, which can be loaded onto payment cards for
Customer acquisition will always be an important part
automatic redemption at the point of sale.
of any loyalty program, and for the foreseeable future
it will remain an integral part of the credit card market.
The relevancy of these offers is informed by consumer
The current shape of the market seems to demand
purchasing data, meaning the longer the consumer is
robust customer acquisition efforts, but banks cannot
part of the scheme, the more closely matched the offers
rely on acquisition strategies and inertia in their
will be to the consumer’s preferences. The problem here
retention strategies. This would lead to a market in
is that if the offers are not sufficiently relevant to begin
which consumers freely switch providers as soon as
with, consumers may ignore them entirely, invalidating
an introductory loyalty offer expires — a market in
the whole model.
which there is no loyalty at all to issuers.
About the Author
Sam is an Analyst in the Consumer Payments team at Datamonitor Financial. He has worked on Consumer Payments
content since moving into the Consumer Payments analyst team in early 2013. His focus includes online payments and
m-commerce, payment card loyalty, prepaid cards, and the U.S. payments market. His main interests in payments lie in
evaluating new payment products from a consumer perspective.
www.tsys.com
36
Why Nonbank Online Lenders
Are Gaining Critical Mass
Use of analytics is quickly giving
new entrants footholds in
underserved markets
by > c harles keenan
Dealstruck, a relative newcomer to online
lending, had made a few hundred loans in
its first year to small business customers,
generally approving credit ranging from
$100,000 to $150,000. The process at
first took about three to six weeks.
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n>genuity
Spring 2015
But as its pace of lending picks up,
Dealstruck continues to accumulate data
it now can analyze for correlations, thus
speeding up its decisions. In late January
it had a few hundred transactions worth
of data and payment patterns to work
with. That information helped it cut
down the time needed to make a
loan decision to just 14 days. It all comes
down to the data, says Ethan Sentura,
cofounder and chief executive officer of
the company, based in Carlsbad, Calif.
“The most valuable thing you have is
history,” he says. “Every day we get
better, because we have another day
of data and payment performance
and transactions.”
Dealstruck represents the new wave
of alternative lenders tapping into big
data to underwrite loans using sophisticated analytics to help predict borrower
behavior. These new players can make
loans faster, with low default rates and
pricing that better reflects the risk.
“We are moving into an era where data
is going to increasingly become an asset
and source of competitive advantage,”
says Hamid Biglari, a managing partner
at TGG Group, a New York-based
consulting firm. “But it only becomes
that if you have the tools to extract
insight from that data. Otherwise it is
just sitting there and you are not getting
any value from it.”
While the concept of nonbanks using
analytics is nothing new — remember
that Capital One Corp. did it for credit
cards as a monoline in the 1990s —
there are signs that these new lending
players are gaining critical mass as
they target underserved markets of
consumers and small businesses. For
one, so-called peer-to-peer lenders
such as Lending Club and Prosper have
experienced wild growth recently.
Lending Club facilitated $1.17 billion
in loans in the third quarter, up from
$567 million for the same period a year
earlier. Meanwhile, On Deck Capital Inc.,
which lends to small businesses, had
loan originations that grew to $788
www.tsys.com
38
treasure trove
By and large, banks are sitting on a
of loan data from their own customers, but they haven’t
mastered the ability to fully exploit it, Biglari notes.
million, up 171 percent for the nine
months ending last Sept. 30 (compared
with the same period a year earlier)
according to a filing with the Securities
and Exchange Commission.
These players are also increasingly gaining legitimacy with investors. Lending
Club and On Deck had initial public
offerings last December. Meanwhile,
institutional investors are now lining
up to fund the lending. Kabbage Inc.,
which also caters to small businesses,
last year obtained a BBB rating on the
loans it sells to investors in the form
of securitized bonds good enough to
qualify as investment grade — allowing
insurance companies and pension
funds to invest.
Off and running
By and large, banks are sitting on a
treasure trove of loan data from their
own customers, but they haven’t
mastered the ability to fully exploit it,
Biglari notes. Meanwhile, the newer
online upstarts have smaller caches
of customer data, but they possess
the wherewithal to analyze and search
for countless correlations.
of competitors will figure out how to
break into this industry with new ways
of creating value.”
The online lenders, who have ex-bankers
in house, certainly have shown that
they know what they’re doing in terms
of underwriting. While some lenders
to small business can charge annual
percentage rates that can top 50
percent, others are targeting the
mid-prime market.
Biz2Credit lends to small businesses,
with annual percentage rates averaging
around 15 to 16 percent — its default rate
is 70 basis points. That’s better than
the rate of 76 basis points for bank
commercial and industrial loans — a
safer asset class — in the third quarter,
according to the Federal Reserve.
So who wins?
Analytics at work
Where banks are falling behind is in
terms of raw data used and how it is
collected. The average bank might have
20 to 50 data points to make a credit
decision to lend to a small business,
says Rohit Arora, cofounder and chief
executive officer of New York-based
Biz2Credit. Yet Biz2Credit uses about
500 data points as a start.
“It is a bit of a race,” Biglari says. “The
danger for banks is one of complacency.
The old spread-lending paradigm is
ripe for disruption. These new types
Information from a borrower’s accounting software programs, bank statements,
tax returns and payroll records is fed
into its model to score a borrower.
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n>genuity
Spring 2015
Biz2Credit also inputs external data from
sources such as LexisNexis and Dun &
Bradstreet. When Biz2Credit runs correlations, the data points used can run into
the thousands. “Any place they have a
touch point as a business owner, we are
pulling all of that data and putting it in
one place.” Arora says.
Online providers are also at an
advantage because of the automation
built in. All too often, consumers and
small businesses must fill out a paper
application at the bank for a loan.
“The data collection doesn’t start at
the digital level,” Arora says. “So there
is no way you can search through that
data and do your correlation.”
The emergence of more
than one niche
As the industry gains momentum,
specialized providers are emerging. The
Credit Junction, based in Arlington, Va.,
started lending early this year, focusing
on industrial and manufacturing industries. Loans are typically $500,000 to $1
million, collateralized by assets such as
inventory and receivables, at rates from
9 to 19 percent.
“By being industry-focused, we create
a knowledge base of that data,” says
Michael Finkelstein, chief executive
officer. “It creates an internal understanding of companies.”
The online lenders, who have ex-bankers in house,
certainly have shown that they know what
they’re doing in terms of underwriting.
Fortunately, banks have plenty of
opportunity to embrace big data. TGG
Group sees the opportunity in providing
the architecture banks need, and they
help them sift through big data to find
the causation among all the correlations.
Biz2Credit has had discussions with
banks to license its platform.
Banks, which have moved to make
mobile a central part of their offerings,
now must do the same with loan
applications. “First they have to
create a very good digital experience,”
Arora says.
About the Author
Charles Keenan has written
about payments since joining the
American Banker as a staff reporter
in 1997. His work at the American
Banker included writing about
credit and debit cards, merchant
processing and bank stocks. He
later freelanced for the Banker
and industry publications such as
Banking Strategies, Bank Director,
Community Banker, and U.S. Banker.
He also writes about investing,
insurance and health care, and is
based in Los Angeles.
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40
pay ment profiles
60 Seconds With George Wallner
A payments legend — and still an industry innovator —
shares some thoughts on mobile, user experience and
phasing out the magstripe he made commonplace
To start on a somewhat personal level, you are an iconic pioneer in
payments via your card-swipe point-of-sale innovations. So what
drove you to plunge into the mobile arena so many years later?
I saw mobile payments embracing a flawed approach. Successful technology
transitions require continuity, and by that I mean that legacy modes must be
supported when new technologies are introduced. Backwards compatibility is
important. If you don’t provide users with continuity, you put adoption at risk.
The reality of the point of sale (POS) is that it changes slowly and the merchants
upgrade according to their own schedules. To me it was obvious that near-field
communication (NFC) terminals would not be universal for many years, which
could seriously hamper consumer adoption of mobile payments. I felt that
compatibility with the existing POS was an important requirement that was
being missed somehow.
What would you say to those who insist that consumers would rather
just pull their card out of their wallet instead of using an alternative
payment method — like a phone?
I would say they are right — today. It took the banks years to get people to use
ATMs and not line up in front of tellers. There are, however, early adopters.
There is a generation that already feels exactly the opposite. To them the
card is an old-fashioned thing.
More importantly, mobile payments will be adding benefits, improved convenience
and new functions that will gradually convert more and more consumers. Remember,
there were consumers who said they’d never switch from radio to TV.
You’re also an engineer. Can you comment a bit on the obvious
importance of making technology user-friendly?
User-friendly? The better term may be “hassle-free.” Meeting that goal for
consumers should be an engineer’s priority — not inventing something new
just because it is new. So, as an engineer, I felt that it was more useful to solve
an existing problem. It’s doing more with less.
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n>genuity
Spring 2015
The consumer wants their payment function to work
everywhere. They don’t care about the technology that
enables it. If you want adoption, you must make it easy.
able to support it. So the big issue coming up is not whether
magstripe cards are obsolete (which they are) but whether
cards in general are obsolete?
For mobile payments ubiquity is everything: Consumers
must have at least 80 percent confidence that they can use
their phone to pay before adopting it as their primary payment mode. When will NFC on its own be at 80 percent?
So, what do you feel is the future fate of those
point-of-sale swipe machines that you were so
prominent in making ubiquitous?
Thoughts on the EMV/Chip Card liability shift?
About time, indeed — and perhaps too late. The static
magnetic stripe card for financial transactions (without a
PIN) is obsolete. However, it is cheap and widely accepted,
and that is why it has persisted for so long.
We need to get away from static card data — i.e., the
magnetic stripe. Chip provides excellent security, and the
liability shift is just one way to incent merchants to make
the upgrade. But the industry needs to go beyond just
solving an old security problem.
Further, tokenization is a more advanced and flexible
security system, and traditional chip cards may not be
As it turns out, while the magstripe (for financial
transactions) is becoming obsolete, LoopPay’s magnetic
transmission technology repurposes the readers as
high-performance contactless receivers for secure
tokenized card data. The readers will live on beyond
the card for which they were designed.
The technology is super-simple: The magstripe transaction
was always a “contactless” transaction — the stripe never
really touched anything — our technology just extended its
range. That immediately enabled all the magstripe readers
in existence to be used as contactless receivers…receivers
that can support secure tokenized card data today without
merchants having to invest in new equipment.
Talk about getting good value for your investment.
About the Author
George Wallner is co-founder and CTO of LoopPay and a payment industry pioneer and innovator. He has been part of
the payment industry for more than three decades, and was the founder and CEO of Hypercom. Mr. Wallner launched the
first modern magnetic stripe point-of-sale (POS) terminals, as well as the POS network equipment that still support the
electronic payment industry today. With LoopPay, he has taken on his first operating role since Hypercom to help make
the company a leader in mobile commerce.
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a v i ew from was h i ngto n
A View From Washington
Policymakers at Work: Payments regulations
& legislative news from Capitol Hill
by > scott talbot t
The new Congress has begun, and the biggest change
is that they have wasted no time focusing on issues
facing the payments industry. Before we cover those
issues, let me remind you that participating in politics
by communicating with policymakers and attending
conferences — like Transact 15 in San Francisco —
are crucial to ensure that your voice is heard.
Operation Choke Point
Operation Choke Point (OCP), through which law
enforcement and federal regulators are putting
pressure on banks and processors to stop serving
certain legal businesses, is disfavored by the current
administration. The payments industry has pushed
back hard against OCP, and our efforts are beginning
to work.
In late January, the FDIC sent a letter to all banks
urging them to continue to serve the targeted
legal businesses. The letter represents a reversal
by the FDIC, but even with this progress, we must
remain vigilant.
Prepaid cards
The Consumer Financial Protection Bureau (CFPB) has
released a proposed rulemaking for general purpose
reloadable prepaid cards. The proposal weighs in at
more than 800 pages and proposes new disclosures,
restrictions on overdrafts and other limitations.
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n>genuity
Spring 2015
The proposal expresses the CFPB’s interest in
the regulation of mobile, peer-to-peer and digital
currencies. Industry participants are filing comment
letters, expressing concern about the proposal’s
negative effect on the prepaid card industry.
Cybersecurity
The Sony breach triggered a political response in
Washington. Currently, there are 43 different state
laws governing what a company must do to notify
customers in the event of a breach. The President
announced his support for creating a uniform national
standard to supersede the existing state laws.
Next, the President has introduced a proposal to
allow the industry to share with the government information about cyberthreats. This piece of legislation
will allow payments companies to receive and share
the latest intelligence on cyberthreats, also alerting
other companies. This measure is, of course, also
supported by the payments industry.
Cuba
In January, the President announced policy changes
to strengthen diplomatic relations between the U.S.
and Cuba. Part of the order will allow Cuban merchants
to accept credit and debit cards. The payments industry
supports such a move and is working with the U.S.
Treasury Department, Commerce Department and
State Department to implement the change.
Regulators and bitcoin
Bitcoin is one of the hottest sensations in the
payments space. Federal and state regulators are
scrutinizing it, and New York has already issued a
proposed regulation of its use. Lobbying efforts are
underway to educate law enforcement, as well as
federal and state regulators, about crypto-currency
and how it operates.
State issues
States are getting more involved in setting payments
policy. The state legislatures in Nebraska and Colorado
have introduced bills to prevent the application of
interchange to sales tax.
With almost 10,000 different sales-tax jurisdictions
in the U.S., these measures would be exceedingly difficult to implement. Given the rapid pace of change
in the payments industry, 2015 will hold plenty of
opportunities to get involved with federal and state
policymakers to help shape the future of our industry.
About the Author
Scott Talbott, J.D., C.P.A., is SVP of Government Affairs at the Electronic Transactions Association. He is an experienced
policy advocate and communicator with two decades of experience in Washington. Talbott has represented the largest
financial services firms in the country before Congress and federal regulators, most notably during the fiscal crisis. He is
also an expert on communication, appearing regularly on national and international media. He has been called the voice
of the financial services industry and one of the most recognizable faces in the industry.
www.tsys.com
44
p e r spectives in pay m en ts
A Crisis of Culture
Identifying the symptoms of
organizational dysfunction
by > tamara s n y de r
Years ago, I took a job at a communications firm. It was my first
experience working in an agency after several years in an in-house role.
While the content of my job was essentially the same, there were
startling differences between the two environments. One allowed jeans,
telecommuting and alcohol at company functions, and the other didn’t
allow…anything.
Behind the doors
The biggest difference, however, was the doors.
At my old company, you never, ever shut your office
door unless you were doing one of two things: 1) firing
someone or 2) planning a massive restructuring.
The sound of creaking hinges was enough to cause
palpitations in everyone within a 50-foot radius.
It was a completely different story at my new employer.
There, it was considered inappropriate to discuss
sensitive client matters or talk loudly in an open
environment. As such, people were constantly ducking
into conference rooms or private offices for closed-door
conversations. I’ve long since gotten used to the closed
doors, but during my first few weeks on the job I was
convinced the entire company was going under.
What is “normal?”
Such is the case with organizational culture. What is
taboo at one company may be status quo at another.
While the differences may be startling to outsiders, there
is no “best” culture — there is only one that either does
or does not help a company deliver its brand promise.
When culture stymies those efforts, however, the effects
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n>genuity
Spring 2015
can be far-reaching: mergers fail, employee engagement
drops, turnover increases, innovation dies and market
share diminishes. These can all be symptoms of a
pervasive issue, though it may take years to manifest.
Sometimes, however, there’s a dramatic unmasking of
dysfunction: a crisis erupts, the company is scrutinized
and systemic cultural failings rise to the surface with
dizzying speed. Throughout history — from GM’s ignition
switch recall this year to the disintegration of the
Challenger space shuttle nearly three decades ago —
dysfunctional cultures tend to exhibit a variety of similar
characteristics, regardless of the organization’s size,
industry or legacy:
> Management’s words do not match their actions. A
“do as I say, not as I do” mentality obliterates trust and
reinforces fear, since employees cannot discern what is
truly considered right or wrong from their superiors.
> Ethical concerns are ignored or punishment is
directed back onto the whistleblower. In extreme
scenarios, employees may stop reporting concerns
altogether, due to fear of retaliation or the perception
that unethical behavior is actually acceptable; after all,
it’s still continuing.
> The company operates by a set of shadow values versus
the official ones posted on the wall. When concepts such
as integrity or teamwork become meaningless abstractions
— or worse yet, invite eye-rolling and snickering — look out.
>W
hat is achieved is far more important than how it is
achieved. When the bottom line is the only metric that
matters, there is little incentive beyond a person’s own
sense of integrity to produce results in an ethical manner.
This can be especially hazardous when rallying people
around a do-or-die goal or milestone. A company in the
throes of “deal fever” may plow through due diligence to
close the transaction and miss potentially catastrophic
issues. Similarly, NASA was so consumed with launching
Challenger that it forged ahead despite mounting concerns
that could — and should — have delayed liftoff.
> No one talks about problems after they happen. Every
company screws up occasionally. The most successful ones
admit it and learn from their missteps, while secretive
cultures may very well have something to hide. According
to the 2014 Edelman Trust Barometer, the most effective
actions CEOs can take to build trust in their companies
and themselves are to communicate transparently and to
tell the truth — no matter how complex or unpopular it is.
As former IBM CEO Lou Gerstner put it, “in the aftermath
of a crisis, the first step is to clear the air. This includes
acknowledging the mistakes, taking responsibility and
outlining changes that address the original problem.”
> People leave and are unwilling to say why. An unexplained
mass exodus of talent that cannot be attributed to
quantifiable market dynamics — such as increased
competition for talent or below-market compensation —
could be a sign that culture is driving people away. This
is especially true if employees give vague reasons for
leaving (e.g., “I found a better fit somewhere else.”)
or no explanation at all.
Honest self-reflection
If these characteristics are sounding uncomfortably
familiar, it’s time for some organizational soul-searching.
Ask yourself the following questions to evaluate your
company’s cultural health:
> If you asked people to name your organization’s true
values, how closely would they align with the official
ones posted on the wall?
> If an employee had an ethical concern, what would
they likely do?
> Do employees have an outlet for reporting issues, and
are they aware of it?
> Are employees who raise concerns applauded for speaking
up or ridiculed for tattling on others?
> Do leaders hold senior positions because of their behavior
or in spite of it?
> What incentives are there for doing the right thing, even
when no one is looking?
> Are expectations for behavior as clearly defined as
financial targets?
> Are leaders held accountable for the same expectations
for behavior as rank-and-file employees?
> Do you fully understand the reasons why people choose
to leave — or stay with — the company?
Ultimately, the fact that imperfect human beings run
companies means that companies run imperfectly. Mistakes
happen. So does unsavory behavior.
Reinforcing a culture of transparency, integrity and honesty
is one of the best ways to guard against ethical missteps,
weather the storm when transgressions occur, and emerge
smarter and stronger for the days ahead.
About the Author
Tamara Snyder is a senior vice president with Edelman, the world’s largest public relations firm. As deputy of Edelman’s
Chicago-based Employee Engagement team, Tamara helps organizations build connections with employees to deliver
business results. She works with clients to design and execute programs addressing a variety of business challenges,
including strategic internal communications planning, leadership effectiveness, employee ambassador activation,
organizational transformation, communications infrastructure design and measurement.
www.tsys.com
46
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