Trends & Tactics

Virtual Currencies: Bust-Out Ahead?

Witness the recent travails of the euro if you want proof of how hard it is for any new currency, even a physical currency backed by multiple governments, to attain and retain widespread usage and acceptance. The obstacles blocking the new breed of electronic currencies from general acceptance are even more formidable.

Not that any of the virtual currencies have openly declared that they want to capture widespread usage like the dollar. But some, including Facebook Credits from the giant social network Facebook, have made moves in that direction.

A January Webinar about virtual currencies sponsored by NACHA, governing body of the automated clearing house association, raised the fascinating question of whether virtual currencies could make the transition into the wider world. The answer: not yet, although Facebook Credits could do it if anyone can, according to panelist George Warfel, consulting director of Global Payment Solutions at bank processor Fiserv Inc.

Facebook now claims about 800 million users, a good number of whom use the Facebook Credits virtual currency to play games, send virtual gifts, or make other transactions through Facebook.

For more than a year, however, Facebook Credits have been moving into the wider world. American Express Co. uses them as rewards points, and they’re sold or to some degree usable online at retailers Walmart, Target, and Best Buy. Customers of Time-Warner can buy or rent movies using Facebook Credits, Warfel said.

“Facebook Credits may, and I emphasize may, be the only use case to demonstrate that an artificial digital currency can escape the world within which it was born and become generally usable,” he said.

One drag on Facebook Credits’ greater acceptance is the 30% cut Facebook takes on its transactions.

While Facebook Credits may be the most famous virtual currency, it is far from alone. Others include Blizzard Entertainment Inc.’s World of Warcraft Gold, Linden Lab’s Linden dollars for use within Linden’s Second Life 3-D virtual world, and Bitcoin, the only major virtual currency today created for general use and not tethered to a social network or online game.

Javelin Strategy & Research estimates that 79% of social-network users have never used a virtual currency. Still, the currencies are gaining acceptance. U.S. revenues from virtual-goods sales will hit $2.4 billion this year, up 41% from an estimated $1.7 billion in 2011.

While most sales are for goods within online games, Javelin’s research shows that 17% of virtual-currency users use the electronic money to buy physical items or services, 16% use virtual currency to buy digital entertainment downloads such as movies, music, or TV-show rentals, and another 13% use them to buy vouchers that could be redeemed for physical goods or services.

“We’re seeing this extension again beyond the virtual world into new applications,” said panelist Beth Robertson, director of payments research at Pleasanton, Calif.-based Javelin.

Still, according to Warfel at Brookfield, Wis.-based Fiserv, no virtual currency has yet met the three criteria that any currency needs for general usage: widespread social acceptance, a central authority to compel usage, and interchangeability at agreed-upon exchange rates.

Bitcoin, which Warfel called “the electronic equivalent of bullion,” arguably has met two of the criteria in that it has a central authority, albeit private, and a controlled exchange rate. But it has very few users outside of the United Kingdom, he says. (Bitcoin also has attracted Congressional attention for its alleged use in illicit drug sales.)

Warfel and Robertson, however, both predicted that virtual currencies would continue to increase their real-world utility, but also will come under greater regulatory scrutiny as they move outside their original confines.

“The real world has seen hundreds of currencies, real currencies, come and go,” said Warfel. “The one [virtual] player that in our view has the possibility of being a big enough market to change this would be Facebook, but we haven’t seen that happen yet.”

Facebook recently changed a policy that required application developers to offer Facebook Credits when they reward consumers who take an advertiser’s offers through a virtual currency. Instead, developers can now offer other virtual currencies.

 

Acquirers And Merchants Pay Homage to PCI

Pity poor PCI. The 7-year-old Payment Card Industry data-security standard (PCI) has not won many admirers among either merchants, who regard it as unduly burdensome and expensive, or the acquirers that serve them.

But now those attitudes may be changing. The card-security rules are proving their effectiveness in preventing data breaches among small merchants, according to a survey of payments-industry acquirers released last month.

To begin with, low compliance seems to line up with a higher probability of breaches. Cosponsored by ControlScan Inc., an Alpharetta, Ga.-based vendor of PCI-compliance solutions, and the Merchant Acquirers’ Committee, a trade group, the survey found that, among acquirers who reported 10% or fewer of their small merchants comply with PCI, 100% said at least one of their merchants had sustained a breach in the preceding year.

At the other end of the spectrum, however, only 17% of those acquirers with a 61% or better compliance rate reported at least one merchant with a breach. “Overall, [acquirers] feel their merchants see the value [of PCI] and acquirers see it reducing risk,” says Heather Foster, vice president of ControlScan.

But if merchants and acquirers are increasingly recognizing value in PCI, overall compliance among small merchants remains low. A separate survey of so-called Level 4 merchants sponsored last fall by ControlScan and Merchant Warehouse, a Boston-based independent sales organization, found just 53% were even aware of PCI. Of those, 57% had validated compliance, up from 47% in 2010 (“Don’t Know Much About PCI,” Trends & Tactics, December 2011).

For the acquirer survey, which was conducted in October and drew responses from 146 banks, processors, and ISOs, ControlScan and MAC asked questions related specifically to Level 4 merchants those acquirers serve. According to Visa Inc.’s definition, a Level 4 merchant is one that processes fewer than 20,000 e-commerce Visa transactions annually or up to 1 million brick-and-mortar Visa transactions a year.

“Respondents have favorable views of PCI compliance programs,” says the survey report. Some 57% said their merchants see value in their PCI programs, while 70% said the programs cut risk. Not surprisingly, acquirers with high compliance rates reported the highest perceived value among their merchants. Nearly all (94%) of responding acquirers said they have a PCI program for Level 4 merchants.

Still, the survey found acquirers overall were doing little to educate small merchants about PCI beyond statement inserts. This isn’t enough, according to to both Foster and Susan Matt, chief executive of ThoughtKey Inc., an Atlanta-based payments consulting firm and MAC member. “It requires more than a couple touch points,” says Foster. Acquirers should include PCI education in all presentations to merchants, both in person and online, Foster and Matt say.

Matt is also critical of acquirers that focus almost exclusively on newly boarded merchants, rather than rolling out PCI programs comprehensively to their portfolios. Some 18% of respondents start program rollouts with new merchants, according to the survey. This number has come down in recent years, Matt says, but remains significant. “I’m very surprised people are focusing only on their new merchants,” she says.

The survey also found that acquirers have established PCI as a source of revenue, with fees to participate in programs and for non-compliance. Some 88% charge so-called compliance fees, with the levies ranging between $50 and $100 a year. Among those charging fees for non-compliance, three-quarters report charges in the $11 to $25 range per month.

Matt says more acquirers are likely to start charging for non-compliance, but says they will shorten the period they assess the fees and then levy another penalty at the end of that period if the merchant still doesn’t comply.

That change will result from fear of legal liability, Matt predicts, since courts could interpret “non-compliance fee” to mean acquirers are also culpable in cases where non-compliant merchants are breached.

 

Visa Gets out of Acquiring—Again

The pending sale by Visa Inc. of CyberSource Corp.’s U.S. merchant portfolio to Global Payments Inc. resolves a somewhat prickly issue for Visa with its merchant-acquiring customers and heightens Global’s currently low profile in electronic commerce.

Global divulged the sale last month in its earnings report for its second quarter of fiscal 2012 ended Nov. 30, 2011. The portfolio has just over 9,000 e-commerce merchants. Atlanta-based Global didn’t disclose a separate purchase price, but said it was paying $45 million for the CyberSource file and two international portfolios. Global expects to close the CyberSource acquisition by the end of its third quarter.

The sale gets Visa out of the uncomfortable position it found itself in after its $2 billion acquisition of Mountain View, Calif.-based CyberSource in 2010. CyberSource’s main businesses were the Authorize.Net gateway for online merchants, various fraud-control and management services for them, and merchant-acquiring portfolios in the U.S. and abroad.

That last business essentially made Visa a direct competitor of its U.S. acquirer customers. One researcher told Digital Transactions News at the time that the deal would “freak out the merchant-acquiring community.”

Visa, however, downplayed fears that it would compete with U.S. acquirers. Chief executive Joseph Saunders said plans called for the acquiring operation to switch to a referral model in which Visa partner acquirers would take ownership of the accounts.

How far that plan progressed is unclear. Visa had no comment on the sale other than to issue a statement saying, “This agreement enables CyberSource to focus on its core business of providing comprehensive payment-management services to merchants.” The network last exited the acquiring business in 2005 when it sold its 50% stake in what was then called Vital Processing Services to partner Total System Services Inc.

Global Payments, meanwhile, is gaining an established portfolio in the fast-growing e-commerce niche dominated by Chase Paymentech, First Data Corp., and a handful of other acquirers.

“This gets us to a really good toehold in the market that we’ve been smaller than we would like to be and allows us to build very substantially off that market,” Global Payments president Jeffrey S. Sloan said during Global’s second-quarter conference call with stock analysts, according to the Seeking Alpha transcript service.

CyberSource essentially will function as one of Global’s independent sales organizations that generate transactions for the processor. In fact, Global already handles an undisclosed amount of volume from CyberSource merchants, according to Sloan. He didn’t give details, but said in response to a question that, “We’ve had a relationship with CyberSource historically.”

Chairman and chief executive Paul R. Garcia said CyberSource’s technology is an important factor in attracting e-commerce merchants. “[The acquisition] puts us in a position to continue to work with CyberSource to win new business. Now their technology is a key to a lot of those wins,” he said. Garcia added that Global Payments has various options for processing CyberSource’s volume, but he indicated new volume could be put on Global’s new G2 platform.

Acquiring industry researcher Adil Moussa, senior analyst at Boston-based Aite Group LLC, isn’t surprised by the CyberSource sale.

“I honestly thought that Visa was never going to keep those merchants,” he says. “It just makes sense for them [to sell]; they’re not in the business of acquiring.”

Moussa qualifies that opinion, however, by adding that Visa might have a different view about direct acquiring if the portfolios of some of its biggest acquirers somehow came up for sale.

Both Visa and rival MasterCard Inc., as publicly held companies, are increasingly interested in growing revenues by offering more services that traditionally have been offered by third-party processors or banks in their roles as card issuers, he notes.

As examples, Moussa cites the long menus of services available to prepaid card and debit issuers through Visa’s Debit Processing Service, and the networks’ expanding data-analysis services. “They have already started doing it on the issuing side,” he says.

The international portfolios that Global is buying include 6,000-plus merchants from Russia’s Alfa-Bank and HSBC Bank’s portfolio of nearly 4,000 merchants in Malta.

 

A Door Opens to Online Betting

For years, backers of domestic online casinos have been stymied by laws like the 50-year-old Wire Act and the more recent Unlawful Internet Gambling Enforcement Act, which bans banks and processors from processing transactions for online gaming houses.

But now all that may be changing, thanks to cash-hungry states looking for new revenue in online sales of lottery tickets.

Just two days before Christmas, the U.S. Justice Department released an opinion that appears to put the federal government’s imprimatur on intrastate online betting. Technically, Justice’s 13-page memorandum gives states the authority to sell lottery tickets online within their borders. But experts have interpreted the document as a green light for intrastate online poker and other wagering games as well.

That’s a potential boon for online casinos and the states, which are likely to forge agreements with other states to allow individuals to use the Web to buy tickets or place bets across state lines, experts say. That’s much like what states have done in creating multistate lotteries involving point-of-sale ticket sales.

The DoJ actually completed its opinion in September but held off for three months in releasing it, possibly fearing political repercussions. The document came in response to requests for a ruling from New York and Illinois. The states are looking to set up online lottery sales but were fearful of running afoul of the Wire Act of 1961, which is widely interpreted to ban electronic forms of betting. The DoJ memo, however, reads the Wire Act narrowly to apply only to online sports betting.

“President Barack Obama’s administration has just declared, perhaps unintentionally, that almost every form of intrastate Internet gambling is legal under federal law, and so may be games played interstate and even internationally … I believe this will be a major incentive for the other states looking at legalizing intrastate poker and other games,” says I. Nelson Rose in his blog, gamblingandthelaw.com. Rose is a professor of law at Whittier Law School, Costa Mesa, Calif., and a nationally recognized expert on online gambling law.

That still leaves the UIGEA, however. Authorities have been relying on that law, which took effect in 2007, to attack online gambling. The law, which was seen by its backers as a way to enforce longstanding prohibitions on Web-based gambling, as used as recently as Dec. 5 to convict an individual in a federal court in Boston. The conviction was the first secured under the UIGEA.

Also, in a sensational raid in April, the Federal Bureau of Investigation shut down three leading online-poker sites and charged 11 persons with UIGEA violations.

But the UIGEA isn’t likely to stand in the way of the DoJ’s apparent permission to set up online gambling sites, says Rose. “The UIGEA is an enforcement law,” he says in an e-mail message to Digital Transactions. “It requires that there be an examination of other federal or state laws to see if the gambling is illegal. It does require that the payment processor obtain a ‘reasoned legal opinion’ that the gambling is legal.”

So, with the DoJ declaring the Wire Act is limited to sports betting, states that legalize instrastate gambling could clear the way for online poker and other games of chance, despite the UIGEA. Nevada and the District of Columbia have already done so, and Iowa is likely to be next, says Rose, as recession-racked states seek out ways to open new spigots of revenue.

It may not end there. Efforts have also emerged in Congress to defang the UIGEA by declaring online gambling legal while having federal authorities regulate and tax it.