Trends & Tactics

 

All Signs Point to Credit Cards’ Recovery

 

After getting KO’d in the recession, credit card usage is back on its feet. While card issuers are more cautious than they were a few years ago, consumers who have credit cards are using them more frequently, and they are spending more on each purchase.

 

A good indicator of credit’s recovery comes from the monthly SpendTrend report by First Data Corp., the nation’s largest merchant processor. The report compares same-store dollar and transaction volumes on credit, debit and electronic benefits transfer (EBT) cards at merchants on Atlanta-based First Data platforms for at least a year.

 

In April, credit card charge volume grew 7.4% over April 2010’s levels (chart), and transactions grew 4.6%. Higher dollar versus transaction growth indicates a rise in the average ticket. First Data doesn’t release the raw numbers behind the changes.

 

Credit still isn’t matching the growth in debit cards, which are now America’s favorite payment vehicle, according to the 2010 Federal Reserve Payments Study (“It’s Official: Debit Cards Have Dethroned Checks,” January). In April, signature debit dollar volume grew 9.9% year over year and transactions 9.5%. Comparable PIN-debit increases were 7.2% and 4.8%, respectively, First Data reported.

 

But credit’s fortunes are looking a lot brighter than they did in 2009 and early 2010, when same-store dollar volumes fell for 14 straight months. “It was an incredibly tough period,” says Susan Fahy, vice president, global information and analytics solutions at First Data.

 

While growth has been uneven at times, credit hasn’t had a negative month in either dollar or transaction growth since February 2010. Factors driving credit’s recent growth include higher gasoline prices, not surprisingly, and, after massive cutbacks, a resumption in credit card mailings. “Issuers … are sending out more offers whereas they had held back for a while,” says Fahy.

 

Credit and charge card issuer American Express reported that U.S. card-billed business jumped 15% to $124.1 billion in the first quarter from $108 billion a year earlier. New York City-based AmEx said U.S. airline volume grew 19% on a 12% increase in transactions and a 7% increase in the average airline charge.

 

Visa Inc. reported U.S. credit card payment volume of $199 billion in its second fiscal 2011 quarter ended March 31, up 9.1% from the year-earlier quarter, while credit transactions increased 7.8% to 2.28 billion. At MasterCard Inc., credit and charge card purchases totaled $115 billion in the first quarter, up 4.9%, on 1.37 billion transactions, up 2.8%.

 

 

 

What Does Wal-Mart Know That Others Don’t?

 

Wal-Mart Stores Inc. is gung-ho for chip-and-PIN. The retailing giant has now enabled all of its U.S. stores with terminals to accept chip cards on the so-called EMV chip-and-PIN standard and is “working on rolling out the software” for the payments, Jamie Henry, Wal-Mart’s senior director of payments services, told the audience at the Smart Card Alliance annual conference in Chicago last month.

 

If Wal-Mart had its way, mag-stripe cards would disappear immediately, to be replaced with cards running chip and PIN. “We want to eliminate the fraud-prone mag stripe,” Henry said. “It has served its purpose.”

 

He said the chain is encouraged by recent announcements by JPMorgan Chase & Co. and Wells Fargo & Co. that the banking giants will issue EMV cards to customers who travel overseas, where EMV is prevalent, but noted some impatience with such limited issuance. “We want to offer the most secure environment for people to pay us,” he told the audience. “We believe it needs to move beyond international travelers.”

 

But are other merchants just as enthusiastic about chip? Maybe not. Speaking at the same conference, Erik Vlugt, vice president for product marketing at VeriFone Systems Inc., said few retail clients are showing interest in following in Wal-Mart’s footsteps. Some 70% to 80% of terminal shipments into retail stores are not EMV-capable, he estimated. “We’re still shipping a lot of terminals without smart card readers,” he told the conference.

 

Cost is the main barrier. “Large merchants whose names you would recognize are choosing not to install [readers] because of the [incremental] price,” he said.

 

Nor are banks showing much readiness to pile on the EMV bandwagon, despite the technology’s vaunted security. EMV is a technical standard that allows chips embedded in cards, rather than magnetic stripes, to control transactions.

 

Indeed, a chief reason to move from mag stripe to EMV is that the latter is harder for criminals to counterfeit. But senior strategists within banking organizations aren’t moved by fraud considerations, said Andrew Dresner, a partner at consultants Mercer Oliver Wyman. “Fraud is one of the last things you can get them to talk about,” he told the audience. “Their eyes glaze over.”

 

The problem is exacerbated by the Durbin Amendment’s caps on debit card interchange, he added. The Federal Reserve, charged with implementing Durbin, has proposed a 12-cent top price for debit transactions. “Why should [banks] spend $1 or $2 [on each EMV card] if they only get 12 cents back?” asked Dresner. “If you’re a bank, what’s the value of the investment?”

 

While the language of Durbin allows for interchange relief in return for fraud-control expenses, the language is vague and the Fed has not yet proposed a rule defining how much more interchange issuers could receive. In any case, “fraud losses on an aggregate basis are simply not enough to fund the change” to EMV, Dresner maintained.

 

But that doesn’t mean eyes are glazing over at all financial institutions. Unlike Wells and Chase, Raleigh, N.C.-based State Employees Credit Union is in the process of replacing all of its debit cards with EMV cards. SECU is one of the largest credit unions in the country, with 1.6 million members and 236 branches.

 

Leanne Phelps, senior vice president for card services at SECU, told the conference the credit union started with overseas travelers this spring but will have all of its 990,000 debit cards replaced by the end of the year. “It was a simple decision,” she said. “If we’re going to do it, we’re going to do it all the way.”

 

Like Chase, SECU is starting with chip cards that require a signature rather than a PIN, an authentication routine permitted under the EMV standard (Wells says it will support both PIN and signature, but prefers the latter). But by early next year, it hopes to have the capability to support PINs, Phelps says.

 

That might gladden Wal-Mart’s corporate heart. Calling signatures “worthless,” Henry told the smart card crowd: “It’s chip-and-PIN or nothing. Don’t waste our time [with signatures].”

 

Phelps sees urgency in combating fraud, which she says was a prime reason that SECU moved on EMV technology. The credit union lost $1 million to counterfeit fraud last year, and she told Digital Transactions it blocked about another $500,000 in attempted fraud. “Fraud is a huge issue with SECU,” she told the audience. “Everything we lose is our members’ money. And it keeps growing.

 

 

 

Micropayments—Yet Again

 

Are you ready for Micropayments 3.0—or maybe it’s 4.0 or 5.0? Frankly, it’s hard to say, since there have been so many versions over the years, nearly all of which came to grief on the rocks of tiny transaction values and vapor-like profits.

 

But now, say the latest entrants, things are different (heard that before?). Three things are certainly different this time around: widespread adoption of smart phones, the rising popularity of online gaming, and the equally explosive growth of social networks.

 

Visa Inc. saw it that way earlier this year when it shelled out $190 million in cash for PlaySpan Inc., a Santa Clara, Calif.-based processor of digital-goods transactions. Mix PlaySpan with Visa’s online risk-management technology, picked up in its earlier acquisition of CyberSource Corp., and gamers’ penchant for buying sub-$1 swords and shields for their characters’ latest battles, and you could have a recipe for success in processing transactions under $5.

 

The latest thrust in this market comes from Live Gamer Inc. and Skrill Holdings Ltd., which last month announced an integrated platform that lets game publishers collect small sums from users around the world without chargeback or foreign-exchange risk.

 

The integration represents the debut of London-based Skrill, which is the new brand name for the 10-year-old, U.K.-based online-payments processor Moneybookers, in the increasingly crowded U.S. market for online-games transactions.

 

The market for digital goods worldwide and in the U.S. is growing fast. Skrill has added half of its 17 million users in the past year, says Julian Artope, vice president of marketing for the company. “We’ve seen a huge boost in the past year in the segment of virtual goods,” he says. “It’s a huge growth segment for us.”

 

In the integration with New York City-based Live Gamer, which markets e-commerce services including payments and analytics to game publishers, Skrill will bring its coverage of more than 100 payment options across more than 200 countries and territories. Options include credit, debit, online bank transfers, Facebook Credits, and prepaid accounts.

 

While online-games transactions are quite small, the introduction of a micropayments capability means ongoing revenue for the game developer that goes beyond a one-and-done $60 disk sale, Artope argues. “You can pump out a game and then monetize on the fly,” he says. “There’s a constant stream of cash for things you can sell [to the user].”

 

Average revenue per paying user at Live Gamer exceeds $30 per month, according to the company. Live Gamer serves 90 million users in 23 countries, and counts Electronic Arts and Namco Network among its clients.

 

Because transactions are under $10, indeed 99 cents or less in many cases, publishers can struggle to make money after transaction fees and other costs, including the cost of fraud. Skrill’s micropayments fee is 4.9% plus a nickel per transaction, but it offers what it calls chargeback protection for 5.9% plus 9 cents. With this protection, Skrill assumes all liability for any chargebacks, Artope says.

 

For publishers marketing internationally, Skrill also offers instant settlement in the publisher’s digital wallet. This allows the publisher to avoid the foreign-exchange risk involved in transferring deposits from a foreign to a domestic bank account. “We’re effectively hedging the FX risk for the publisher,” says Artope.

 

To Calvin Young, the online-games market is just too crowded. What he’s after is the market created by publishers looking for ways to monetize their content. Google Inc., for example, has developed a micropayments engine to help publishers decrease their dependence on advertising revenue by collecting fees to read articles online.

 

Young, a former Google engineer, has paid attention. He left the search giant to co-found Minno Inc., a Palo Alto, Calif.-based startup looking to leverage social networks like Facebook, which were nonexistent or under-developed during the last, mostly ill-fated wave of micropayments startups in the mid-2000s. Says Young: “We think what we have going for us is largely a matter of timing.”

 

Minno, which started its beta phase late in March, has four merchants live and is “in the works” with a couple dozen more, Young says. The company will not disclose how many users it has. It’s offering free processing during its beta, but will likely levy merchant fees around 10% per transaction, Young says.

 

It got a shot in the arm earlier this year when The New York Times, whose content had been free online, re-launched its site with a paywall. Minno, which started offering The Times’s content at a nickel per article, got a stern cease-and-desist letter from the newspaper but earned enough publicity from the stunt to stir up interest with potential merchant clients.

 

The “experiment,” as Young calls it, also established that “a lot of users are ready and willing to pay a nickel to read an article.” Minno did stop—and sent the Times a check for $33.85 to cover all of the transactions it processed.

 

For now, users must have a Facebook account to use Minno. Through “Facebook Connect,” users of the network can enable the service by giving it permission to access their stored Facebook details, easing account set-up and eliminating the need to remember or use passwords.

 

“We’ve reduced the signup process down to a few clicks,” says Young. The Facebook link also allows Minno to better control fraud risk, Young says, since the social network can calculate a probability of whether the person behind the account is real or not.

 

Users fund Minno with a credit card, which the company charges in $5 top-off increments whenever it’s depleted. These increments allow Minno to absorb card interchange, which otherwise would leave little or nothing for content sellers at very small transaction tickets.

 

The need for a card may bar gamers, many of whom are younger consumers, from using Minno, but Young says these users aren’t the company’s target audience. “If they don’t have a credit card, it’ll be pretty tough for them to buy anything online any way,” he says. Calling the online-games market “congested,” Young says Minno’s two target markets are journalism and Web apps.

 

Minno’s timing may be fortunate, especially with the rise of social networks, but much will depend on whether the startup can sign up a wide enough variety of content providers, says Rene M. Pelegero, president and managing director of Retail Payments Global Consulting Group LLC, Woodinville, Wash. “I keep going back to what is the content,” he says. “They need to sign up enough content providers to make it attractive to users to tie up five bucks.”

 

 

 

Will Durbin Be the Death of Contactless?

 

Could a little-noted provision in the Durbin Amendment strangle the nascent U.S. contactless-payments market in its crib? It’s a very real possibility, says a pair of researchers, and the consequences could deal a blow to the prospects for mobile payments that depend on a promising technology called near-field communication (NFC).

 

“I see this as having a chilling effect on NFC,” says Andy Schmidt, research director for global payments at Needham, Mass.-based researcher TowerGroup. “It could short-circuit the value proposition behind millions of dollars of investment [in NFC].”

 

While the payments industry’s attention has been riveted on Durbin’s much-vaunted debit card interchange caps and transaction-routing restrictions, the law also tells networks they must allow merchants to set transaction minimums for credit cards, so long as the minimums don’t exceed $10. The law restricts merchants from discriminating among card issuers or networks in setting their minimums.

 

Card networks for years have banned such minimums, fearing they discourage card usage. But some merchants, especially Mom-and-Pop stores, have set minimums just the same to protect their margins from interchange costs on small tickets.

 

The provision for minimum transactions, one of the few in the Durbin Amendment to address credit cards explicitly, would effectively narrow the window for contactless tran­sactions from the current $0-to-$25 range to $10-to-$25. Network rules generally require signatures for transactions above $25, rendering the tap-and-pay throughput of contactless less useful at that point.

 

That means that if enough merchants take advantage of the provision, they could effectively shut out much of the contactless market. Indeed, Brian Riley, senior research director in the retail banking and cards practice at TowerGroup, notes the average contactless ticket is $8.42. Durbin “has the ability to take the wind out of the sails” of contactless payments, he says.

 

Schmidt concedes the law gives merchants the freedom to refuse credit card transactions under a set minimum, but doesn’t compel them to. Still, “as merchants get pushed [on interchange costs], there is the potential to see these types of refusals happen on a more frequent basis,” he says. “You have a fractured payments landscape, when we were pushing for a more cohesive one.”

 

Though a number of major banks have issued contactless cards, which use radio waves to transmit card data to readers at the point of sale, consumer adoption has proven to be “lackluster,” says Schmidt, weakening the case for merchants to install readers (chart).

 

The minimums permitted under Durbin only worsen that case, Schmidt and Riley contend, and hence worsen the case for NFC, which permits mobile POS payments but depends on the same readers. This comes just as banks and telecom companies are showing signs of gearing up NFC trials. Last month, a carrier-led consortium called Isis said it will commence a pilot in Salt Lake City next year, with more cities planned.

 

While the Durbin Amendment, which is part of the Dodd-Frank Act signed into law last summer, hands rule-making authority to the Federal Reserve, the Fed apparently will not formulate rules concerning transaction minimums. In the proposed rules it released in December, the banking regulator called the Durbin language on the subject “self executing.”

 

 

 

Isis: Scaling Back Or Ramping Up?

 

It was named after the ancient Egyptian goddess of motherhood, magic, and fertility, but the Isis mobile-payments joint venture ran out of magic last month, at least as far as building its own merchant network is concerned.

 

Instead, the consortium of three major telecommunications companies is turning its full attention to developing a mobile wallet. The move means that existing payment card networks, not upstarts, will command the dominant positions as mobile payments move into the payments mainstream in the next few years.

 

Isis’s change in plans—coming fewer than six months after its splashy debut in November—immediately triggered questions about whether owners AT&T Inc., Verizon Wireless, and T-Mobile USA were retreating, as most of the press interpreted the move.

 

A statement an AT&T executive gave to the Reuters news service, in which he said the Durbin Amendment contributed to Isis’s change of plans, seemed to support that theory. The amendment, part of 2010’s Dodd-Frank financial-reform law, will impose severe debit card interchange cuts and give merchants more transaction-routing options.

 

“As transaction fees were limited and things were changed, it kind of changed the business model,” said John Stankey, AT&T’s head of business solutions.

 

But Isis, while confirming a May 4 report in The Wall Street Journal that it would not develop its own network, still insists that it’s going full steam ahead.

 

“Isis is in no way scaling back on any of our plans; we are in fact accelerating,” Jaymee Johnson, head of marketing at New York City-based Isis, tells Digital Transactions. He says the reason Isis no longer is building a network is, “frankly, because we don’t have to.”

 

“We’re getting a positive response and we’re driving the ability to work with the existing payment networks and issuers to effect the widespread adoption,” he says. “It wasn’t because we’re scaling back.”

 

Isis is based on near-field communication (NFC), a form of contactless technology that replaces debit and credit cards with mobile phones that can make a payment when tapped on or near a terminal that exchanges data with the phone’s NFC chip. Initial plans called for transactions to be routed over the Discover Financial Services network, with Barclaycard’s U.S. unit as the first issuer of Isis accounts.

 

Johnson says that based on payments-industry interest, Isis is using an open model as it develops its smart-phone mobile wallet. Isis is working with players that, in addition to the major general-purpose card networks, include merchant acquirers for signing merchants. Isis has indicated it is open to working with tech firms such as Google Inc. and Apple Inc.

 

Besides holding data about a consumer’s credit and debit cards, the wallet could contain information about loyalty programs and enable merchants to send coupons and messages to the consumer’s smart phone while she is in the store, according to Johnson.

 

Isis so far has announced just one merchant acceptor, the Salt Lake City-based Utah Transit Authority. An announcement about another big merchant could come as soon as this month.

 

“This is another example of how hard it is for new intermediaries—handset makers, carriers, Google, etc.—to insert themselves into the payment process,” says Richard K. Crone, chief executive of San Carlos, Calif.-based Crone Consulting LLC, via e-mail.

 

Visa Inc. declined to comment. A MasterCard Inc. spokesperson says by e-mail only that “mobile is a priority area at MasterCard. We are in discussions with all players in the mobile-payments ecosystem.”

 

A Discover spokesperson downplayed the Isis decision, noting in an e-mailed statement that Isis “had already indicated that it was making its wallet available to all merchants, banks, networks, and carriers. Our role will continue to be in the processing of mobile payments that run over the Discover network. Isis remains a key component of our mobile strategy.”

 

Payments consultant Todd Ablowitz, president of Centennial, Colo.-based Double Diamond Group, says Isis might attract merchants with electronic coupons that build sales.

 

“If they’re trying to value-add with coupons, at least they can make the argument that they’re not adding to retailer costs,” says Ablowitz, who earlier noted that merchants weren’t too keen about Isis’s initial pricing plans.

 

Isis’s carrier-owners still control a valuable piece of real estate on mobile phones, the subscriber identity module (SIM) card. While technology is available that lets SIM cards and NFC chipsets communicate, some mobile carriers prefer to use the SIM card as the so-called secure element that could house virtual payment cards and other media.

 

“SIM is the wireless carriers’ sacred ground and walled garden that they completely control,” says Crone. “The wireless carriers will use the SIM card to assure their financial participation in any NFC payment scheme, with or without their own payment network.”

 

While its strategy remains somewhat mysterious, Isis clearly is in hiring mode. Its Web site in mid-May listed about 35 open positions in product development, technology, marketing and sales, and finance.