Trends & Tactics

For Retailers, An Unsettling Settlement

Retailers and their trade groups opposed to a $5.7 billion settlement of a class-action antitrust case challenging credit card interchange are not going gentle into that good night now that U.S. District Judge John Gleeson has approved the controversial deal.

Defendants in the 8-year-old litigation, which was heard in the federal court in Brooklyn, N.Y., include Visa Inc., MasterCard Inc., and a handful of major banks.

“This decision will be appealed,” says Deborah White, executive vice president and general counsel of the Retail Industry Leaders Association, an Arlington, Va.-based group representing many big-box retailers. “Already, notices of appeal have been filed with the Second U.S. Circuit Court of Appeals.”

White says RILA wants the appellate court “to tell the district court that it didn’t do the analysis properly. Because the proposed settlement does violate merchant due-process rights, the lower court should not have approved it, and rather should have come up with a settlement that was more fair to everyone.”

The National Retail Federation also blasted the settlement.

“[Gleeson’s] decision … violates established law and common sense,” Mallory Duncan, senior vice president and general counsel at the Washington, D.C.-based NRF, said in a statement.

Numerous retail trade groups, as well as some 7,800 retail companies that opted out of the settlement since it was reached in July 2012, objected primarily to the agreement’s provision that, in return for receiving relief, merchants must forfeit the right to sue the defendants in the future over the same issues.

“The settlement permanently ties the hands of thousands of businesses who wanted nothing to do with this misguided case,” Duncan said.

The Minneapolis-based Merchant Advisory Group, which represents big-box merchants on payments issues, also said Gleeson’s order will not appease retailers.

\”Merchants will continue to seek relief in the courts, through legislation, with regulators charged with enforcing existing laws addressing unfair competition and by creating alternate payment schemes to compete directly with the card networks,” the association said in a statement.

With his Dec. 13 imprimatur, Judge Gleeson brought apparent—but only apparent—finality to a case whose settlement involves payouts to merchants of about $5.7 billion in combined damages and reduced interchange. The case consolidated a number of class-action lawsuits brought by merchants and merchant groups starting in 2005. Gleeson held a so-called fairness hearing in September to let both sides in the case argue for and against the settlement.

“This settlement is in the best interest of all involved parties and that has been proven today with the court’s final approval,” said a statement from the Electronic Payments Coalition, a Washington, D.C.-based lobbying group representing the major card networks.

Some merchants expressed support for the settlement.

“I’m ecstatic,” says Mitch Goldstone, president and chief executive of ScanMyPhotos.com, Irvine, Calif., and one of the first plaintiffs in the case. “This is great news for merchants and great news for the networks.”

Some have also argued that the relief itself is insufficient to compensate merchants for years of what they see as interchange overpayments to card-issuing banks for credit card acceptance.

The original deal called for defendants to shell out $6.05 billion in damages along with another $1.2 billion in interchange reductions over an eight-month period, which began July 29. Those amounts have since been reduced because of the opt-outs.

Other terms of the settlement include an agreement by the card networks to relax certain rules, including those that prohibit merchants from surcharging for credit card transactions.

—Kevin Woodward and John Stewart

 

Settlement Highlights

Visa, MasterCard and banks to pay $5.7 billion in damages and provide temporary credit card interchange relief to merchants.

Networks to loosen some acceptance rules, notably their bans on credit card surcharges.

Merchants waive the right to sue the networks over the same issues.

7,800 merchants opted out of the settlement; some plan to appeal final settlement order, others filed separate actions against the networks in 2013.

 

Digital Gift Cards Take Wing

Only a few years old, digital gift cards soared in popularity as U.S. consumers headed into the heart of the 2013 holiday-shopping season.

Total loads on the products were expected to reach $1.3 billion for November and December, a nearly four-fold increase from the same two-month stretch in 2012, according to a forecast from Maynard, Mass.-based Mercator Advisory Service, which follows the prepaid market.

As in prior years, the online-shopping frenzy unleashed on Cyber Monday, the Monday following Thanksgiving, touched off what is likely to be the season’s biggest buying splurge for digital cards. In part, this is because of a late Thanksgiving last year.

It was “Cyber Month because of the condensed holiday season” between Cyber Monday and Christmas, says Tom Niedbalski, senior vice president of business and client development for Transaction Wireless, a San Diego company that produces plastic and virtual gift cards for retail clients. “More and more people [were expected to be] shopping online.”

Other companies looking to take advantage of digital cards’ popularity include PayPal Inc., which early last month announced its Digital Gifts Store, an e-commerce page that allows users to buy digital gift cards issued by merchants that accept PayPal. Users can buy the cards from the store by entering their PayPal credentials. The first merchant in the store? Apple Inc.’s iTunes Store.

Transaction Wireless doesn’t release figures, but Niedbalski says the company saw “triple-digit increases” in digital-card sales last Cyber Monday compared to Cyber Monday in 2012. This is largely owing to promotions merchants were running, including offers of as much as $1 in cash for every $5 loaded on a gift card.

Applebee’s, a restaurant chain and a Transaction Wireless client, offered a $10 digital bonus card for every $50 digital card purchased, for example. Another client, California Pizza Kitchen, offered a $20 digital bonus card when customers bought a $100 digital or plastic gift card.

Niedbalski estimates that digital cards now account for about 60% of gift cards sold by clients in the business-to-consumer market. “Everyone wants to get into digital because of the cost savings and the sex appeal,” he says. “Once they go digital, plastic becomes a minority.”

Digital gift cards can be purchased online, personalized, and sent via email to recipients, who can redeem them by scanning quick-response (QR) codes or by printing them out. They are convenient for consumers who don’t want to bother with postage and waiting times for fulfillment, and they are generally less costly to fulfill for businesses.

They are especially useful for last-minute shoppers who run out of time before Christmas. “That week before Christmas, virtual gift cards become extremely popular,” Niedbalski says.

Now observers are reporting that digital cards, while still associated with the holiday season, are becoming less seasonal. A few years ago, “virtual cards were the new thing, the province of techies, then they started to get adopted by everybody,” says Ben Jackson, a senior analyst at Mercator. Jackson credits the success of the Starbucks gift card for making the product more of a year-round affair.

Experts are also noticing that many more consumers are buying the cards for themselves, or at any rate having them sent to themselves. Niedbalski says this could be the result of the cash offers and other promotions, which buyers want to pocket for themselves. “Customers are viewing [virtual gift cards] as a Groupon, buying them and sending them to themselves,” he says.

During times when merchants aren’t running promotions, about 20% of digital card orders are fulfilled to the buyer, according to Transaction Wireless’s records. But during promotional periods the cards are bought by and sent to the same person in as many as 70% of all orders, Niedbalski says. The buyer may be pocketing the card or re-gifting it, he says. Or “he could re-gift the card but keep the [promotional] bonus for himself,” he adds.

For the closed-loop gift card market overall, Mercator forecasts total loads will amount to $42.1 billion for November and December, up modestly from $40.5 billion in 2012. Some 1 billion plastic and digital cards will be sold in this two-month span, Mercator says.

—John Stewart

 

Transactors

Can This Man Breathe New Life Into NFC?

Ever since Google Inc. stunned the payments business early last November with its mobile operating-system update that skirts the secure element for near-field communication (“A Candy-Coated Pep Pill for NFC,” Trends & Tactics, December 2013), all eyes have been on a tiny startup in Austin, Texas, called SimplyTapp Inc.

The 2-year-old company, with six full-time employees, has kept busy answering questions about its technology, which forms the basis for Google’s NFC workaround, and talking to investors. A few weeks after Google dropped its bombshell, SimplyTapp announced a Series A funding round from LightSpeed Venture Partners, though the parties have kept mum about the amount.

Right now, SimplyTapp’s chief target market is card issuers, especially financial institutions, says Doug Yeager, founder and chief executive. Since the Nov. 1 Google announcement, “there’s been a lot of calls regarding primarily issuers and how they can use this technology,” he says.

Yeager envisions banks integrating SimplyTapp’s cloud-based payments tools into their existing mobile-banking systems to allow customers to make wave-and-go payments while redeeming and collecting rewards at merchant locations. “Seventy percent of mobile phones have a mobile-banking app,” he says. “It’s used a lot, up to 15 times a month. That’s a lot of eyeballs.”

SimplyTapp’s not-so-secret sauce is a technology called host card emulation. HCE, for short, enables NFC transactions on mobile devices that may or may not have a secure element, a chip embedded in the phone that stores users’ payment credentials. The technology lets point-of-sale readers recognize the mobile phone as if it were a contactless card but refers to a remote server, not the secure element, for the card credentials.

The significance of HCE is that it frees NFC from dependence on the secure element, which has largely been controlled by mobile carriers. Banks, merchants, and wallet developers must pay fees for access to that chip. Yeager is counting on HCE to scare up interest among issuers and kickstart NFC, which has been stuck in neutral for years.

“There has been a lot of investment from the Android community in putting NFC capability into handsets, but with very low usage,” he notes. “The telcos made it impractical for issuers, and that’s maybe a big reason NFC hasn’t been used.”

Now, with HCE officially built into Google’s Android 4.4, also known as KitKat, that could start to change. “My guess is there’s a ton of pressure from financial institutions on HCE,” says Yeager. SimplyTapp will ultimately cash in by charging issuers transaction fees or personalization fees, or both, Yeager says, when HCE “gets integrated into a live environment.”

Most observers expect the NFC-based Google Wallet, for example, to soon adopt HCE as a means of breaking an impasse with the major mobile carriers that has hampered the product almost from its launch in 2011. The carriers want to control user credentials on the phone’s SIM card as the secure element and levy fees for access. Google sees things otherwise.

But SimplyTapp faces some obstacles. Unlike the chip-based secure element model for NFC, HCE has not been certified as secure by the card networks. Also, while growing, the installed base of contactless readers in retail outlets is still a minuscule fraction of all U.S. retail outlets. It stands at 430,000, up from 280,000 in 2012, according to Boston-based researcher Aite Group LLC.

And cloud-based NFC may put off some merchants worried about Internet outages. “You have connectivity issues that have to be overcome,” says Rick Oglesby, a senior analyst at Aite.

Still, SimplyTapp’s gambit simplifies what was a complicated business for NFC. “The card-emulation model just requires so many people to be involved,” says Oglesby, referring to NFC relying on a chip-based secure element. “It’s just a very messy business environment.”

And Yeager argues the payments business has no alternative but to work with NFC. “Bluetooth isn’t there yet, bar codes are isolated to a closed loop,” he argues. “For open-loop payments, the only alternative is NFC.”

—John Stewart