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It’s been a
long-lasting affair, and
it’s getting more intense.
Volume Seventeen, Number Nine • DigitalTransactions.net • September 2020
ALSO IN THIS ISSUE:
PayPal’s QR Code Quest
Insecurity Online
Open Banking’s Friends
Real Time’s Reality Check
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SEPTEMBER 2020 • VOLUME 17, NUMBER 9
Why Wall Street Loves Payments 24
Shift4 Payments dazzled the payments industry and Wall Street with its June initial public
offering. What do recent processor IPOs say about the prospects for payments companies?
THE GIMLET EYE Wall Street And the Payments Biz 4
TRENDS & TACTICS 6
PayPal Plots a New Senator Durbin Rides Again Not Just Volume, But the FedNow Sticks to Its Plan
POS Course Merchants are complaining Right Kind of Volume Last year, the Fed said it
about PIN-debit routing. would debut its real-time
QR codes were once seen Newly public Shift4 wants
The author of the Durbin network in 2023 or 2024.
as exotica. Now PayPal is to move more volume
Amendment wants answers One coronavirus later, it still
bringing them to major U.S. from its gateway business
from Visa and Mastercard. says 2023 or 2024.
chains, starting with CVS. to its more lucrative
end-to-end platform.
Plus, Security Notes argues that digital cash could be the key to a renewal of capitalism;
and Payments 3.0 considers how long the payments industry will have to live with the effects of Covid-19.
ACQUIRING 15 NETWORKS 32
Is This the New Online Normal? Fast Thinking for Faster Payments
As merchants, consumers, and For financial institutions of all
payments providers wrestle with sizes, real-time transfers are likely
the Covid-19 pandemic, one thing to be a competitive necessity. But
is certain: Online fraudsters are as small banks must work out how to
relentless—and opportunistic—as ever. balance operational headaches with
potential advantages.
STRATEGIES 20 ENDPOINT 38
Open Banking And Its Friends Why Signatures Won’t Go Away
Big moves by Visa and Mastercard The networks stopped requiring
have thrust data aggregators into signatures on receipts two years ago.
the spotlight just as the focus of Something else is keeping them alive.
payments is expanding and the
aggregation model is modernizing. Cover Illustration: Jason Smith, 123RF.com
Digital Transactions (USPS 024-247) is published monthly by Boland Hill Media LLC, 800 Roosevelt Road, Building B, Suite 212, Glen Ellyn, IL, 60137. Periodicals Postage
Paid at Glen Ellyn, IL, and at additional mailing offices. POSTMASTER: Send address changes to Digital Transactions, P.O. Box 493, Northbrook, IL 60065-3553.
2 DIGITAL TRANSACTIONS | SEPTEMBER 2020 CONTENTS
SEPTEMBER 2020 • VOL. 17, NO. 9
WALL STREET AND PUBLISHER Robert A. Jenisch
THE PAYMENTS BIZ EDITOR-IN-CHIEF John Stewart
SENIOR EDITOR, DIGITAL
Kevin Woodward
CORRESPONDENTS
AS WE LOOK AT THE NUMBERS at precisely 3:15 p.m. Eastern Time on Jim Daly, Peter Lucas
Aug. 17, most of the payments and payments-related stocks we track are up ART DIRECTOR/PRODUCTION EDITOR
for the day. Indeed, out of a basket of some 17 stocks, only four are down— Jason Smith
and there’s still part of the afternoon left. Some, like Adyen, Apple, eBay, EDITORIAL ADVISORY BOARD
Green Dot, Mastercard, PayPal, Shift4, and Square, are at, over, or very near, Eula L. Adams
John Elliott
their highs for a year in which a pandemic has ravaged most businesses.
Alex W. “Pete” Hart
Jim Daly’s cover story, starting on page 24, explains this shouldn’t come Former Chief Executive Officer,
as a surprise. “The publicly traded payments companies have done better Mastercard International
than the broader market for years,” he says. Indeed, as he points out, one William F. Keenan
President, De Novo Corp.
hundred dollars invested early in 2011 in a basket of more than 25 payments
Dr. Gideon Samid
stocks tracked by The Strawhecker Group would have been worth $670 by the Chief Technology Officer,
first quarter this year, a 22% compounded average annual return. The same AGS Encryptions Ltd.
investment in the S&P 500, by contrast, would have yielded $234. DIRECTOR OF ADVERTISING
The love affair on Wall Street shows no signs of abating. In fact, the infat- Robert A. Jenisch, 877-658-0418
bob@digitaltransactions.net
uation only grows more intense. Jim points to the example of one of the
ADVERTISING SALES REPRESENTATIVES
most recent IPOs, that of Shift4 Payments Inc. Priced by its underwriters Robert Mitchell, 877-658-0418, x7
in the low $20s, the processor’s stock debuted in early June as if shot out of bmitchell@digitaltransactions.net
a cannon and closed the first day at $33.54. By mid-August, the shares were Rob Akert, 877-658-0418, x6
rakert@digitaltransactions.net
brushing against $50. Two factors explain its success so far: investors appre-
ciate its growing share of the vital restaurant business, and the big processor Digital Transactions, Digital Transactions News,
and DigitalTransactions.net are publications of
mergers last year made Shift4 and other players more visible to prospective Boland Hill Media LLC, 800 Roosevelt Road,
Suite B212, Glen Ellyn, IL 60137
clients by reducing the ranks of competitors.
John Stewart, Managing Director
Clearly, Covid-19 isn’t damping demand for payments stocks. Another Robert A. Jenisch, Managing Director
example is Green Dot, which got its start in prepaid products and now flexes For advertising information, call
a highly successful strategy centered on a bank it acquired in 2010. Dan 877-658-0418. To subscribe or
give us a change of address, go to
Henry, who took over as CEO early this year, made it plain from day one that www.digitaltransactions.net and click on
“Subscriber Care” or call 847-559-7599.
the bank is key to Green Dot’s future. The market agrees. The stock opened
The views expressed in this publication are
the year at $23.30 and by mid-August had climbed to the mid-$50s. not necessarily those of the editors or of the
members of the Editorial Advisory Board.
We are not in the business of recommending stocks, nor do we intend The publisher makes reasonable efforts to
to get into that game. The shares of any of the companies mentioned in ensure the timeliness and accuracy of its
content, but is not engaged in any way in
this column could plunge tomorrow and stay in the basement for months. offering professional services related to
financial, legal, accounting, tax, or other
Our point is only to say that, to the extent the collective wisdom of stock matters. Readers should seek professional
markets matters, the payments business appears to be on a solid footing counsel regarding such matters. All content
herein is copyright © 2020 Boland Hill Media
despite the buffeting of pandemics, economic shocks, and the inevitable LLC. No part may be reproduced without the
express written permission of the publisher.
regulatory interventions. Subscription prices: $59/year for subscribers
in the United States; $69/year for Canadian
John Stewart, Editor | john@digitaltransactions.net subscribers. All other subscribers, $119/year,
payable in U.S. currency.
4 DIGITAL TRANSACTIONS | SEPTEMBER 2020
ONLY ONE OF THESE BIRDS CAN
GIVE YOU THE LATEST NEWS
IMPACTING THE PAYMENTS MARKET
Today and every day follow
DIGITAL TRANSACTIONS
@DTPAYMENTNEWS on Twitter
trends & tactics
PAYPAL PLOTS A NEW POS COURSE
PayPal Holdings Inc. has made big The move comes as the months- of QR codes for payment, Schul-
plays for the physical point of sale old coronavirus pandemic has man said. The effort includes talks
before, but late in July the San Jose, left hordes of consumers wary of with payment networks and termi-
Calif.-based company unveiled touching payment cards or key- nal providers “to distribute our QR
what could be its biggest strategy pads. Such widespread caution has codes,” he added. “It’s not just about
yet to capture transactions at the opened an opportunity for rapid touchless payment, it’s rewards,
cash register. development of a QR strategy as offers, messaging. We think the
Top executives said an arrange- part of the PayPal wallet, Schulman economics over the medium term
ment under way with CVS Pharmacy said. “QR codes are a key strategic are quite positive for us.”
to run PayPal and Venmo transac- priority for us,” he told the ana- The thrust for QR code capa-
tions on Quick Response (QR) codes lysts. “It’s critical for driving daily bility follows an initiative PayPal
will roll out to all 8,000 CVS stores use. We will make the investments launched in May to bring the tech-
by the end of the year. Already, Pay- we have to.” nology to small-scale sellers as part
Pal has deployed QR codes for pay- Besides CVS, PayPal is working of its mobile app. The company at
ments in some 28 countries, chief with more than 100 “enterprise” the time attributed the move to con-
executive Dan Schulman told equity merchants in the U.S. and European sumer and business fears of infec-
analysts on a conference call. markets to introduce acceptance tion in the midst of the pandemic.
SELLERS STOCK UP ON PAYPAL (Merchant volume in billions)
2016 $300
2017 $393
2018 $512
2019 $649
Source: PayPal
6 DIGITAL TRANSACTIONS | SEPTEMBER 2020 TRENDS & TACTICS
QR codes have proven quite pop-
ular in markets like China, where
pandemic that is wrecking many
world economies. Indeed, by the SENATOR DURBIN
RIDES AGAIN
the big mobile-payments services end of June it had enjoyed what it
Alipay and WeChat Pay depend on called the “strongest” quarter in its
them. In these deployments, as well 22-year history.
as in the PayPal program for small Active accounts reached 346 U.S. Sen. Richard Durbin and a Ver-
merchants, sellers display the code million, up 21% year-over-year, mont Congressman said this sum-
for buyers to scan with their smart including 26 million merchant mer they want the Federal Reserve
phone. The scan triggers the trans- accounts. This total also includes to look into what they say are efforts
action and movement of funds to 21.3 million net new active by debit card issuers “aided by the
the seller’s account. accounts, up fully 137%. Pay- dominant card networks” to pre-
But the codes haven’t gained a ment volume totaled $222 billion, vent PIN-debit networks from get-
foothold in the U.S. beyond efforts exceeding the year-ago number by ting a bigger share of booming card-
to equip popular American chains 30% on a foreign-exchange-neutral not-present payment volumes.
to serve Chinese tourists. Other basis, and topping $200 billion for “The Federal Reserve should
major companies, though, may be the first time in the company’s his- consider appropriate enforcement
seeing potential. Apple Inc. report- tory. Revenue reached $5.26 billion, action and policy responses to cor-
edly was testing QR codes for Apple a 25% year-over-year increase on rect any such anticompetitive incen-
Pay earlier this month, for example. an FX-neutral basis. tives and regulatory violations,” says
PayPal has not discussed how it Venmo, PayPal’s popular peer- a July 24 letter to Federal Reserve
will price QR code transactions for to-peer payments service, ended Board Chairman Jerome Powell
big chains like CVS. It hasn’t been the quarter with more than signed by Durbin, D-Ill., and U.S. Rep.
so reticent when it comes to small 60 million active accounts. Its vol- Peter Welch, a Democrat who has
sellers. In its May announcement, ume totaled $37 billion, up 52% monitored payment card acceptance
the company said these merchants as users turned to the product to issues for at least a dozen years.
would pay 1.9% plus a dime per trans- move money to each other in the Although he has been quiet in
action after the expiration at the end face of the pandemic. recent years, Durbin is well-remem-
of July of an introductory free period. –John Stewart bered in the payments business as
For the first 14 years of its exis-
tence, PayPal stuck with its online-
only payments service. But in 2012
the company began to enlist phys-
ical merchants as it hoped to tap
into the much larger market for
REIMAGINE THE ART OF USAEPAY.COM
866-740-2496
point-of-sale transactions.
At the time, PayPal was still part
TRANSACTION RETAIL E-COMMERCE MOBILE
of eBay Inc. But eBay spun off Pay-
Pal to public ownership in 2015. That
same year, PayPal said it planned a
renewed POS thrust with near-field
communication technology in its
digital wallet. Unlike QR codes, NFC
links to point-of-sale readers with
very short-range radio waves.
Now, as it embarks on its latest
POS gambit, PayPal is register-
ing impressive results despite a
TRENDS & TACTICS 7
the sponsor of the so-called Durbin extra chore for consumers and a tech- reviewing the letter; a Visa spokes-
Amendment to 2010’s sweeping nical hurdle for payments providers. person could not be reached.
Dodd-Frank Act. The amendment But issuers have an economic The letter raises some of the same
famously regulated the interchange incentive to route transactions to issues the Federal Trade Commission
big debit card issuers could receive. networks with higher interchange began investigating earlier this year.
But it did more than that. To rates, and Durbin’s letter says if An FTC spokesperson declined to
preserve network competition in a they don’t provide bank identifica- comment on the status of that probe,
market dominated by Visa Inc. and tion numbers for PINless debit, the in which the agency has asked for doc-
Mastercard Inc., the measure also merchant may not have more than uments from Visa and Mastercard.
required issuers to make at least one routing option. “I believe there is merit to the
two unaffiliated debit networks Citing estimates from research letter,” Anand Goel, chief executive
available to merchants for transac- and consulting firm CMSPi, the let- of Optimized Payments, an Atlanta-
tion routing. The Fed’s Regulation ter says U.S. merchants could save based company that helps clients
II, which took effect in 2011, imple- at least $2 billion a year in fees if reduce their payment-processing
ments the amendment’s provisions. PINless debit functionality “were costs, says in email.
Now comes Durbin’s letter, which made fully available” by having But he adds: “I also believe the
argues “intervention may become more transactions routed over the smaller PIN-debit networks have
necessary again” because of “what PIN-debit networks instead of the been slow to implement PINless
appears to be the anticompeti- Visa and Mastercard networks. capabilities. Visa and Mastercard
tive practice of major debit issu- “Because the volume of online are happy with the status quo, and
ers refusing to enable PINless debit ‘card-not-present’ transactions has neither has added [e-commerce] or
functionality on their cards.” increased dramatically during the PINless capabilities to their Inter-
PIN-debit networks, which typi- Covid-19 pandemic, the need to link and Maestro [debit] networks,
cally have lower interchange rates address obstacles to PINless debit respectively, because they know
than Visa and Mastercard, have in competition has grown more urgent,” those debit transactions will be
some cases developed PINless options the letter says. routed through their ‘credit’ rails. So
in recent years to attract transaction A Fed spokesperson declined to the inaction by Visa and Mastercard
volume, particularly in e-commerce comment on the letter. A Mastercard of not implementing PINless has
payments when entering a PIN is an spokesperson said the company is allowed them to reap larger profits.”
Goel says a good solution “would
be for the Fed to force all issuers to
support PINless capabilities. This
MONTHLY MERCHANT METRIC would foster a competitive market-
Total Gross Processing Revenue, in Percent place in all channels as the Durbin
Amendment had intended.”
Sum of total discount, total transaction fee revenue, and total other fee revenue divided by total volume In a statement, NACS, the Alex-
Q2 2019 2.422% andria, Va.-based trade association
Q3 2019 2.433% of convenience stores, said “the law
Q4 2019 2.435% says that there should be a competi-
tive market choice of payment net-
Q1 2020 2.436%
work on every debit transaction.
Q2 2020 2.347%
Unfortunately, Visa, Mastercard, and
Note: This is sourced from The Strawhecker Group’s merchant data their largest banks have consistently
warehouse of over 3 million merchants in the U.S. market. The ability
to understand this data is important as small and medium-size tried to undercut competition. We
businesses (SMBs) and the payments providers that serve them are key drivers of the economy. appreciate Senator Durbin and Con-
All data are for SMB merchants defined as merchants with less than $5 million in annual card volume. gressman Welch’s tireless work.”
Source: The Strawhecker Group © Copyright 2020. The Strawhecker Group. All Rights Reserved. All information as available.
—Jim Daly
8 DIGITAL TRANSACTIONS | SEPTEMBER 2020 TRENDS & TACTICSNOT JUST VOLUME, BUT THE RIGHT KIND OF VOLUME
Shift4 Payments Inc. chose an inter-
esting time to go public. Its initial END-TO-END TAKES A HIT AT SHIFT4
public offering hit Wall Street in (Payments volume in billions)
June in the teeth of a raging coro-
navirus pandemic. Last month, $5.9 $6.1 $6.2
that move required the Allentown, $5.5
Pa.-based processor to lay bare the
plague’s impact on its business as it
conducted its first earnings call. $4.2
Stay-at-home orders and busi-
ness shutdowns, with tentative Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020
Source: Shift4
reopenings, clipped the company’s
full-service, lucrative end-to-end that simply use Shift4 as a gateway moved clients to online order-
payment volume in the June quarter to other processors. ing. That ratio has since declined
23% year-over-year to $4.2 billion. Typical gateway merchants fall to 80%/20%, Lauber said, though
Things started looking up in into sectors Shift4 has historically the company’s introduction of QR
June and July, however, with total served, including restaurant brands, codes for contactless payments
payment volumes in July coming hotels and resorts, casinos, and golf is helping to buoy the card-not-
in as the second-highest number courses. These are merchants with present business.
in the company’s 21-year history, complex payment needs. “We love “When it comes to payments,
chief strategy officer Taylor Lauber food trucks, but serving food trucks implementing a QR code solution
told equity analysts on the call. And is not what makes Shift4 special,” said is challenging,” Lauber said. Mer-
the pipeline is filling up. chief executive Jared Isaacman, who chants appreciated the fact “we
“Our boarding of new merchants as a teenager founded the company were able to push it out,” he added.
never really slowed during the in his parents’ basement. He noted Another burgeoning market,
quarter,” Lauber said. Wall Street that conversions of gateway clients executives added, is sports stadi-
got the message. Shift4 began trad- can be done in 24 hours or less. “All ums. The company got a big start in
ing publicly June 5 and finished its the connections are already there,” that category last month when the
first day at more than $33 per share. he said. “It can be very, very simple.” Las Vegas Raiders National Football
By mid-August, that price was flirt- With the emphasis on converting League franchise named Shift4 its
ing with $50. gateway to end-to-end business, official credit card processing com-
The end-to-end processing por- the company projects its volume pany. “Sports and entertainment is
tion of Shift4’s business accounts in that sector will not only recover becoming an important market for
for a relatively small part of total but grow to between $6.2 billion us,” Isaacman noted.
payments volume, with the gate- and $6.5 billion in the third quar- For the quarter, Shift4 logged
way operation providing about ter, and to between $6.5 billion and gross revenue, less network fees,
89%, executives said. But they made $6.9 billion in the fourth. of $67.4 million, down 10% year-
it clear they’re set on a strategy to In the face of the exigencies over-year. Gross profit came to
expand that number quickly. That’s forced on payments markets by $32.3 million, down 26%. The adjusted
because the company can make as the pandemic, Shift4 found its net loss totaled $14.4 million, com-
much as eight times more gross card-not-present volume shifting pared to $4.4 million in the same
profit from the full-service end-to- from 15% of total volume in Febru- quarter in 2019.
end business than from merchants ary to 40% in April as the company —John Stewart
TRENDS & TACTICS DIGITAL TRANSACTIONS | SEPTEMBER 2020 9FEDNOW STICKS TO ITS PLAN
While the Covid-19 pandemic has
raised the issue of speeding stim-
‘We are
ulus payments and other relief to committed to
consumers and businesses, the Fed- interoperability
eral Reserve system is staying with to ensure nation-
its planned 2023 or 2024 launch date
for its FedNow real-time payment
wide reach.
service, officials said last month in We can’t do it
an update that came almost exactly on our own.’
one year after the central bank —LAEL BRAINARD, GOVERNOR,
announced the service. FEDERAL RESERVE
“We look to be on track for
2023 or 2024 but I expect over the functionality. As for international interoperability, allowing links to
coming year we will be able to get a payments, “we need to laser-focus other faster-payments services
little more precise about when we’ll on getting the service to function using the ISO 20022 electronic data
be able to deliver the service,” said domestically,” she added. interchange standard. “We are com-
Kansas City Fed president Esther At the same time, tokenization mitted to interoperability to ensure
George, who spoke during a Web “likely won’t be available in the early nationwide reach,” Brainard said.
presentation that included Fed implementation but we are looking at “We can’t do it on our own.”
governor Lael Brainard and Ken- it for later,” Montgomery said. Tokeni- While the launch may be three
neth Montgomery, the Boston Fed zation replaces live account data with or four years off, financial institu-
executive who has been heading up random strings of characters that can tions should be drawing up plans
the FedNow effort for the past year. be decoded by participating institu- now for how they can “serve their
FedNow, which represents the tions in an effort to thwart data theft. customers,” George said.
central bank’s entry into a busi- Still, while the service may not “Given how fundamentally dif-
ness that has been served so far come online soon enough to help ferent this product is going to be,
by private-sector players such as distribute federal relief funds, it’s not too early to start thinking
The Clearing House Payments Co., Brainard stressed the importance about it now,” she added. “What will
is “designing a pilot program as we of real-time delivery in such emer- it mean for accounting, operations,
speak,” Montgomery said. The goal gencies as an alternative to checks staffing? It will involve hard work
is to recruit participants later this and debit cards through the mail. to ensure this platform serves the
year for pilots that could launch “The pandemic is taking a tre- country for many years to come.”
early in 2021, he added. mendous toll on households across One factor in that planning pro-
But when what the Fed is now the country,” she said. “Instant pay- cess that may be hard to pin down
calling FedNow Instant Payments ments would allow households to for some time is cost. “We don’t
launches, it will not include cross- get instant access to funds rather have a number right now,” George
border payments or a so-called alias than waiting for a check to clear.” said. “We’re still settling on the
capability that would enable, for From the start, she said, the new tech strategy, which will determine
example, peer-to-peer payments service will support fraud tools with the cost.” Still, she added, pricing
to phone or bank-account num- parameters set by banks; a liquidity will be based on a “mature volume
bers, George said. Aliases will come management tool to enable banks estimate” and the Fed’s mandate to
“at a later phase,” she noted, as the to ensure they have sufficient funds recover its costs.
Fed concentrates on launching core to support instant settlement; and —John Stewart
10 DIGITAL TRANSACTIONS | SEPTEMBER 2020 TRENDS & TACTICSEVERYTHING YOU NEED
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www.gcfinc.com • 888.GCF.NEWSMOST OF US WILL OPT TO PAY prying eyes, not because they are a higher price at Amazon, which illegal, but because they expose the already holds our financial and pri- payer to ill-wishers. vate data, rather than pay less and gideon@bitmint.com Digital cash in its basic form is expose our data to a merchant with an extremely cost-effective solution unknown security practices. The for this, as BitMint has proven in its net result is that the megastores with frequent replacement of field-test cases. This is because when keep getting bigger, and newcom- personal financial data. Concep- someone pays with digital cash, only ers are stifled, however innovative, tually, it amounts to “painting the cash itself needs to be inspected, superior, and better-serviced their data with short-lived colors.” A not the payer and not the payee. The products may be. computer technique attaches to authentication apparatus shrinks I hear from various craftsmen account numbers, PINs, and pass- dramatically, and so does the service that the coronavirus kept them at words some extra data not visible fee. Digital cash can be spent with- home. They opened an online store, to the user. This data is stealthily out an Internet connection, using but have no way to impress on their mounted, and stealthily refreshed, hard wallets (U.S. Patent 10/754,326). prospective customers that it would as often as desired. It is short-lived. The parties pay a fraction of a per- be safe to surrender their personal Hence, a thief will be able to abuse centage point in operational fees. financial information to such a his spoils only for a short time Now, once you tether money (see my hack-easy home-bound merchant. before the “colors” are refreshed book, “Tethered Money”), the cost This is a fundamental socio- (see U.S. Patent 10/395,053). rises, but so does the service. economic dilemma. Capitalism is Think of it. Today a Social Secu- Imagine the whole world as an powerful if it invigorates the bot- rity Number represents a lasting accessible market. You could buy an tom tier, not when it broadens the value for a fraudster. But with this independent movie directly from the gap between rich and poor. coloring technology, the same data overseas producer. You could buy a Technology can help in two con- will be unusable a week later. The drawing or a statue you like directly ceptual modes: making hacking Social Security Number will not from a poor artist far away. The unprofitable and using digital cash. change. The invisible add-on data buyer is not dependent on the secu- A fence surrounding confiden- will simply expire. rity practices used by the unknown tial data is only as good and as This new “data-coloring” tech- seller. In turn, you could get sensi- smart as its designers. Naturally, nology can also prevent phishing tive advice from an expert who gets some hackers are smarter than the because your email client will be paid without knowing who paid him. fence builders, and hacking contin- able to silently and cryptographi- No doubt, solid, non-speculative, ues. Now, suppose that the hacked cally examine the identity of the quantum-safe, nationally recog- data is short-lived. Its utility will sender, and alert you against phish- nized digital money is promising to diminish quickly to a degree that it ing attempts (U.S. Patent 10/733,374). catapult much-maligned capital- won’t be worth the effort to steal it. Beyond security, privacy con- ism to new heights. History tells us A new technology does just siderations motivate consumers that bottom-up capitalism works. that, and without burdening to use cash, especially for transac- It is when monopolies emerge that the customer and the merchant tions they would rather shield from the social benefit ebbs. 12 DIGITAL TRANSACTIONS | SEPTEMBER 2020 TRENDS & TACTICS
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hole for cable management and can be used with other accessories such as
cash drawers and barcode scanners for user convenience.
Learn more: 1.800.456.6868 | sales@gamberjohnson.comCOVID-19 HAS CHANGED shop- balances fell by $76 billion in the ping and payments behavior, and a second quarter, according to the big question facing the industry is: Federal Reserve Bank of New York. How long will those changes last? bjackson@ipa.org As we all emerge from our Most conversations about the pan- Covid-19 shells and return to work- demic start with, “When things get places, that will be another inflec- back to normal.” But all signs point to pre-Covid levels, and using options tion point for behaviors as environ- a new normal rather than a return to a like curbside pickup long after the ments change again, Berman says. pre-pandemic state. While that might pandemic ends, said Leon Buck, Of course, pandemic behaviors be a disturbing thought, it could lead the NRF’s vice president of gov- may have their own aftershocks. In to improved relationships with cus- ernment relations, banking, and May of 2020, the Federal Reserve tomers and new payments products. financial services. surveyed 2,767 people who had Big shifts in daily lives can provide “Retailers understand their cus- completed its 2019 Diary of Con- an opportunity to make big changes. tomers—everybody wants faster, sumer Payment Choice to ask how Kristen Berman, the cofounder of safer, and easier [shopping expe- things had changed. Although 63% Irrational Labs, a behavioral eco- riences], and they are going to of consumers said they had not nomics nonprofit, explains that peo- accommodate it,” Buck said. made an in-person payment since ple change their habits when their Berman, who is also a cofounder March, the average amount of cash environment changes. The pandemic of the Common Cents Lab, a Duke that respondents were storing had has forced changes—working from University initiative focused on nearly doubled from $275 to $534. It home, for example—so the stage has financial well-being for low-to- may be that we will see a spike in been set for changed habits because middle-income Americans, said cash use when people begin making peoples’ routines have been broken. now is a good time for payments in-person payments again, as they “When people are able to break companies to consider new ideas. will have a lot of cash to use. out of their normal environments, People’s lives are disrupted, so they Payments providers, retailers, then they can change their habits,” are in a mindset open to change. and financial institutions have Berman says. One area in particular that may be opportunities to help shape their Evidence of such changes can be ripe for change is financial health. customers’ behavior. As I have seen in research from the National “While it seems like the worst pointed out in earlier Payments Retail Federation that found that time to be pitching people financial- 3.0 columns, many of the problems 58% of retailers said they can accept health interventions—whether it that have arisen from the pan- a contactless card payment in 2020, be paying down your credit card or demic are chronic issues that have up from 40% last year. It also found changing banks to avoid fees—this been made acute. that 69% of retailers said that con- actually may be a very nice time to do The uncertainty has given us an tactless payments had increased it, because now more than ever peo- opportunity to make course correc- since January. ple realize that their financial strug- tions that can lead to a profitable Retailers expect that customers gles could hit them,” Berman said. future for everyone. But we’ll need will continue using contactless This trend may already be to rise to the challenge and begin payments, shopping online above showing up in the data. Credit card thinking long term. 14 DIGITAL TRANSACTIONS | SEPTEMBER 2020 TRENDS & TACTICS
As merchants, IF LITTLE ELSE, this year has more will consumers shop online
proven that forecasts are grounded and how much more fraud will
consumers, and only in the moment they are made. this shopping spree generate. It’s
payments providers No one could have foreseen in 2019
the impact of the Covid-19 virus on
already known that as e-commerce
volume increases so does fraud. At
wrestle with the the U.S. economy and how it would least one fraud-prevention vendor
alter e-commerce and online fraud. noted major spikes in attacks in
Covid-19 pandemic, Here’s the impact so far. The the first half of 2020.
one thing is certain: most recent quarterly data from Certainly, online-fraud issues
the U.S. Census Bureau for the sec- have intensified in 2020, affected
Online fraudsters ond quarter finds that e-commerce like so much else by the Covid-19
are as relentless— sales accounted for 16.1% of
all retail sales, or more than
pandemic. As many states shut-
tered nonessential businesses and
and opportunistic— $211.5 billion. That is much higher consumers shifted much of their
than the 10.8% share in 2019’s sec- spending to online stores, so, too,
as ever. ond quarter, when online sales did criminals increase their mis-
totale $146.4 billion. deeds. Matters such as account
The big questions about takeovers and a better understand-
BY KEVIN WOODWARD e-commerce in 2020 are how much ing of chargebacks surged to the
forefront of merchant concerns, if
they already weren’t there.
Long a major issue for merchants
and payments providers, account
takeovers further cemented their
position as the pandemic settled in
place. “It’s the number-one fraud
trend we see,” says Jeff Wixted,
vice president of marketing and
client solutions at Accertify Inc., an
online-fraud specialist owned by
American Express Co. “It’s due to
data breaches.”
The problem worsened as habit-
ual online shoppers increased their
spending and consumers who for-
merly didn’t shop online much
increased their e-commerce activity.
Wixted says some Accertify clients
ACQUIRING DIGITAL TRANSACTIONS | SEPTEMBER 2020 15E-COMMERCE FRAUD ATTEMPTS
(Average monthly fraud attempts per U.S. e-commerce retailer, late February through late April)
Prevented Successful
Total attempts: 277
2019 156 121
Total growth:
Growth: -24.4% Growth: 86.8% 24.2%
2020 118 226
Total attempts: 344
Source: LexisNexis Risk Solutions 2020 True Cost of Fraud Study/E-Commerce/Retail Report
are experiencing Black Friday or Program,” Conroy adds. The PPP rings to do well with account-
Cyber Monday sales volumes, refer- program is a small-business funding takeover attempts.” Phishing scams
ring to two peak holiday shopping program from the U.S. government. gull online users into giving up key
days online. A huge new segment of digital credentials like user names and
newbies who may be more suscep- passwords.
DIGITAL NEWBIES tible to social-engineering scams
could succumb to account-takeover
For some frontline personnel,
rising fraud is already a problem.
Some suggest that account-takeover attacks, Conroy says. At the same “Financial institutions definitely
attacks will grow more numerous, time, a lot of financial institutions are contending with more account
especially as the fourth-quarter have relaxed some of their veloc- takeovers,” says Charlotte Ritonya,
holiday season arrives. “We will see ity rules and dollar limitations on vice president of security and
an intensification,” says Julie Con- services like person-to-person pay- fraud, card services, at Brookfield,
roy, research director for Boston- ments and remote deposit capture Wis.-based Fiserv Inc.
based Aite Group’s fraud and anti- because they want to ensure as few “As we shore up the point of sale
money-laundering practice. customers as possible are inconve- with contactless [payments] and
“We haven’t seen a big spike yet nienced, she says. EMV, we start to shore up authen-
because the fraudsters have been Already, she says, “We have seen tication,” Ritonya adds. “Account
focused on defrauding unemploy- an uptick in phishing. All of the takeover is not a new event; we’re
ment and the Payroll Protection ingredients are there for the crime just seeing more and more of it.”
As other observers note, the cheap
price of consumer data—information
‘As we shore up the point of sale with for the average stolen account sells
for $15.43, according to antifraud spe-
contactless [payments] and EMV, cialist Digital Shadows Ltd.—makes
account takeover more widely avail-
we start to shore up authentication.’ able, says Christopher Mascaro,
Fiserv vice president of fraud data
—CHARLOTTE RITONYA, VICE PRESIDENT OF SECURITY
AND FRAUD, CARD SERVICES, FISERV INC. and financial crime insights.
16 DIGITAL TRANSACTIONS | SEPTEMBER 2020 ACQUIRINGRelationships are paramount at First American.
Our holistic and personable approach gives your
ISO the attention it deserves and the security you
need to succeed today, and tomorrow. Read our
story, “Straight Talk for ISOs Continues” at
digitaltransactions.net.
www.first-american.net
Copyright © 2020 First American Payment Systems, L.P. All rights reserved. First American Payment Systems, L.P. is a registered ISO of Fifth Third Bank, National Association,
Cincinnati, OH and of Wells Fargo Bank, N.A., Concord, CA.BIDING THEIR TIME
Immediately after the Covid-19 Account takeovers
lockdowns went into effect this are ‘the number-one
spring, fraudsters sprang into
action. According to data collected
for its third-quarter Fraud & Abuse
fraud trend we see.’
—JEFF WIXTED, VICE PRESIDENT OF MARKETING
Report, San Francisco-based Arkose AND CLIENT SOLUTION, ACCERTIFY INC.
Labs said attack rates on logins
increased 28% in the second quar-
ter. Along with that was a 30% lower
first time, those individuals can be
at higher risk for account-takeover
‘RIDICULOUS VOLUMES’
attack rate on account registrations fraud, says Kimberly Sutherland, Chargebacks also have proven
and a whopping 47% decrease in the vice president for fraud and iden- problematic during the pandemic.
attack rate on payments. tity-management strategy at Lexis- As online shopping volume has
Cloud configurations and the Nexis Risk Solutions, an Atlanta- increased, so too have chargebacks.
notion of software-as-a-service, based risk and data-services pro- “Most of the banks I interviewed
which has contributed positively to vider. “Less-experienced online have seen between a two- and three-
ever-increasing decentralization of users are always going to be at fold increase in non-fraud disputes
computing capabilities, also have higher risk,” Sutherland cautions. in the early months of the pan-
been put to use by criminals. Some criminals, however, are demic,” Aite’s Conroy says. This was
“A couple of years ago, to do biding their time by creating sleeper compounded by the fact that many
account takeovers, fraudsters would accounts. In this scheme, Wixted banks had offshore call centers that
need teams of people to help,” says, the criminal creates an account lacked the infrastructure to adapt
Wixted says. But today, through and doesn’t necessarily do anything to a work-from-home environment.
cloud computing, someone could malicious with it initially. “They cre- While some issuers have regained
do it all themselves, he says. They ate them now and let them marinate control of that, dispute volumes
can efficiently rent the software for for six to nine months,” he says. increased as summer travel plans
a period of time and then shut it These accounts can be spotted were altered to reflect localized
down, Wixted adds. because, as is the case with accounts Covid-19 resurgence. “The other leg
The account-takeover problem for loyalty or rewards programs, of the stool is that fraudsters rec-
is compounded by constant data consumers generally don’t create an ognize that call centers are seeing
breaches leaching usernames and account and then let it sit unused, ridiculous volumes,” she says.
passwords, poor password practices, he says. There’s usually some driver In the past 12 months, 17% of
and technology advances, Wixted to use the account, such as snagging consumers initiated a payment dis-
says, adding: “These make it even points when booking a trip. Many pute, says John Buzzard, lead ana-
more impactful when it does happen.” technology providers can determine lyst for fraud and security at Pleas-
Because there are now more con- an approximate identity on online anton, Calif.-based Javelin Strategy
sumers going online to shop for the accounts, such as email addresses. & Research. “It’s likely this number
is going to increase as a result of
Covid fallout,” Buzzard says.
Cheap prices for illicit “Anecdotally,” he adds, “we are
hearing from some major proces-
data make fraud all sors that they are seeing an increase
in friendly fraud chargebacks in
the more prevalent.
—CHRISTOPHER MASCARO, VICE PRESIDENT OF
the past two months as consumers
have increasingly had buyer’s
FRAUD DATA AND FINANCIAL CRIME INSIGHTS, FISERV remorse and continuing financial
18 DIGITAL TRANSACTIONS | SEPTEMBER 2020 ACQUIRINGuncertainty. This has been differ- One concern centers on whether from a fraud perspective, but from
ent than initial disputes centered online shopping will continue to an economic standpoint, there may
around undelivered goods—think outpace prior quarterly sales. In be more opportunistic fraud,” says
travel—that occurred when lock- 2019, fourth quarter e-commerce Fiserv’s Ritonya. “There may be
downs first went into effect.” sales accounted for 11.3% of all U.S. ways we start to see increases in
The travel-and-hospitality indus- retail sales, according to the Census disputes that are not valid.”
try saw a lot more disputes that Bureau, up slightly from 11.2% in In addition to holiday shopping,
Wixted says were not necessar- the third quarter. the fourth quarter also signals a
ily related to fraud, but could have “I don’t know if we’ll see high lot of personal-care purchases. “If
emanated from a customer-service e-commerce volumes month-over- the current trajectory for [card-
issue. A consumer calling to cancel a month,” says Sutherland. “Will it not-present] payments contin-
flight might have been frustrated by stay at a rate that is higher than ues, we will see a stronger usage
hold times, gave up, and chose to file 2019? One thing that definitely develop around the holidays as
a dispute, he says. came out of the pandemic is a level health needs shift into consumer
of uncertainty as it related to the staples and personal-care items,”
MENACING ASPECT economy and as to whether a state
remains open or closed. Because of
Buzzard says.
He adds: “Scarcity will drive
The other menacing aspect of the the uncertainty, many consumers demand and the demand, we antic-
pandemic is that online shopping are hesitant to make big purchase ipate, will mostly likely send more
already is at elevated levels as the decisions.” than a few consumers to fraudu-
fourth-quarter holiday shopping Criminals, too, may be antici- lent Web sites where they will be
season looms. pating the fourth quarter. “Not just victimized in some way.”
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• Compliant with PCI and PA-DSS Data Security Standards are the property of their respective holders.Big moves by Visa LIKE MOST BUSINESSES, the pay- just because businesses are—
ments world has been upended by tentatively—reopening and con-
and Mastercard the coronavirus pandemic and its sumers are shopping again.
have thrust data impact on buyers and sellers alike.
But just before the virus struck in the
The number of fintech startups
that need these links to make their
aggregators into the United States, Visa Inc. announced apps work smoothly is growing at a
it had clinched a deal to shell out much faster rate. There were 8,775 of
spotlight just as the $5.3 billion for Plaid Inc., an 8-year- them in North America in February,
old financial-data aggregator with up 52% from the same time in 2019,
focus of payments is links to 11,000 financial institutions. according to data-collection service
expanding and the Those connections are the vital Statista. By contrast, that number
links that let apps like Venmo grew only 2% from 2018 to 2019.
aggregation model (peer-to-peer payments), Chime “The number of financial apps
(online banking), and Betterment consumers are using is growing
is modernizing. (digital investing) reach financial pretty significantly. The number
institutions and serve users. of payment apps is growing pretty
It’s called open banking, and quickly. And that’s going to con-
it’s an increasingly essential busi- tinue,” says Ben Isaacson, a former
BY JOHN STEWART ness, not just for Plaid and not Mastercard Inc. executive who is
now senior vice president for prod-
uct strategy at The Clearing House
Payments Co. in New York City.
The same faster expansion is
happening overseas. The Statista
numbers show a one-year doubling
of fintech startups in the Europe,
Middle East and Africa region and
a 91% jump in the Asia-Pacific area.
Not only are there more apps,
but the apps themselves are adding
users hand over fist. PayPal Hold-
ings Inc.’s Venmo service recently
reported 52 million users, up fully
30% in one year (chart, page 21).
Square Inc.’s Cash App, meanwhile,
has hit 30 million users, which
means it added 6 million just since
the start of the year.
20 DIGITAL TRANSACTIONS | SEPTEMBER 2020 STRATEGIESIn concert with this app growth,
aggregators like Plaid are book- TOP 10 FINTECHS
ing more and more business. The (Ranked by user count in millions) ANNUAL
company serviced more than USERS GROWTH RATE
200 million linked accounts last
Credit Karma 100 18%
year, up more than 55% from 2018
and 20 times greater than the num-
ber in 2015 (chart, page 22). Venmo 52 30%
No wonder, then, that the card
networks are paying attention—and Coinbase 30 36%
opening their wallets. Mastercard
agreed in June to lay out $825 million Cash App1 30 N.A.
in a deal for Finicity Corp., a 21-year-
old company whose clients include Mint 20 26%
Brex Inc., a fast-growing startup
offering services such as business
credit cards and cash management.
NuBank 15 150%
“They have very strong connec-
tivity into the banking infrastruc- Toss 13 N/A
ture, so we felt they were the right
partner for us,” says Craig Vosburg, Clearscore 10 N/A
president for North America at
Mastercard. Etoro 10 N/A
‘A BIG DEAL’ Revolut 8 167%
Payments providers and other
N/A=not available 1. Formerly Square Cash Source: Visa presentation January 2020,
financial services have long relied citing the companies; Digital Transactions updates where available
on data aggregators, but the busi-
ness—and its technology—are banks that hold their mutual cus- But the nature of that “connec-
undergoing fundamental changes. tomers’ accounts, he adds, “We are tive tissue” is changing. Aggrega-
Using prearranged links, aggre- the underlying connective tissue.” tors historically relied on a tech-
gators access app users’ financial These links to financial insti- nique called screen scraping, in
accounts on their behalf to perform tutions can support a variety of which the aggregator deploys the
services ranging from identity purposes. “Account verification, app user’s valid credentials to
and balance verification to funds for example, is one of a variety of access his accounts at financial
movement. The process makes for opportunities, and something Pay- institutions. These days, the busi-
a faster, smoother transaction for Pal and Venmo have been apply- ness is moving toward applica-
consumer and fintech alike. ing for quite some time,” says Katja tion programming interfaces to
“Fintechs are an important sec- Lehr, director of global payment achieve the same ends with safer
tor in our economy,” says Stu- products at PayPal Holdings Inc. connections.
art Rubinstein, chief executive of “Another example where PayPal APIs are “the new normal,” says
Akoya LLC, an aggregator spun off and Venmo are leveraging open- Brian Costello, vice president of
in February by Fidelity Investments banking data is in our risk deci- data strategy at one of the early
and now owned equally by Fidel- sioning, making sure our custom- players in aggregation, Envestnet
ity, The Clearing House, and 11 TCH ers can use the payment method of Yodlee, Redwood City, Calif. “It’s
banks. Between the fintechs and their choice.” a big deal.”
STRATEGIES DIGITAL TRANSACTIONS | SEPTEMBER 2020 21‘A BLUNT INSTRUMENT’ PLAID’S HOT GROWTH
(Linked accounts in millions)
The change includes an API stan-
dard for data sharing under devel-
opment by the Financial Data
Exchange, a Reston, Va.-based
trade group embracing fintechs,
aggregators, and financial institu- 30
tions. The standard aims at what 10 72 129 200+
the group calls “data minimization.”
2015 2016 2017 2018 2019
“Screen scraping is going to grab Source: Plaid, as cited in January 2020 Visa presentation
all the data and then sort through
it. It’s a blunt instrument,” says That standardization undergirds acquisitions, the card networks
Tom Carpenter, director of pub- what Mastercard sees as a way for- have “access to some of the best
lic affairs and marketing for the ward in payments not necessarily data on what people do. That’s very
group, which operates under the based on plastic. “Not every open- powerful,” says Eric Grover, princi-
auspices of the 21-year old Finan- banking use case will involve a pay- pal at Intrepid Ventures, a Minden,
cial Services Information Sharing ment or movement of money, but Nev.-based consultancy.
and Analysis Center (FS-ISAC). there’s a reasonable subset that do,” Perhaps the biggest factor, though,
By contrast, Carpenter says, the says Vosburg. “Our strategy is very lies in efforts to move the United
standard restricts data gathering much founded on payments beyond States to a nationwide real-time pay-
to only the information required to credit and debit cards.” ments network connecting nearly all
satisfy a specific request. He cites services like Mastercard the country’s financial institutions.
But more changes are in the off- Send, the network’s real-time transfer The Federal Reserve plans to have its
ing, some experts say, now that Visa product, and the company’s efforts to real-time gross settlement system,
and Mastercard are laying out big develop a blockchain for payments, as FedNow, up and running by 2024 at
sums to jump into open banking. examples of that strategy. “All these the latest, for example.
The move toward developing a stan- things can come to bear in an open- That could put pressure on tradi-
dard for data exchange played a role banking environment where there tional card-payment networks, some
in stoking Mastercard’s interest. “We are needs to move funds,” he adds. observers say, if FedNow ultimately
don’t see [screen scraping] as a great bumps up against such fast-pay-
way for this business to be built,” says
Vosburg. Visa did not respond to a
‘VERY POWERFUL’ ment services as Mastercard Send
and Visa Direct. But a trend toward
request for comment for this story. Some observers also see the card real-time payments could also put
networks’ open-banking acquisi- a premium on managing access by
tions as a way to build pipelines fintech apps to account data as those
for additional transaction volume apps ramp up to compete for trans-
in businesses such as bill payment actions that are irrevocable.
and peer-to-peer transfers. As unemployment lingers in
“This is why Visa paid $5.3 billion the wake of Covid-19, a key to that
for Plaid,” says Patricia Hewitt, prin- action will lie in controlling risk,
cipal at PG Research & Advisory Ser- and that’s where the networks’
vices in Savannah, Ga. “It gives Visa stake in open banking could hand
ownership of all those connections.” them an advantage. “The real-time
Others see value just in the data risk is that the money must be
Vosburg: “Our strategy is very much
founded on payments beyond credit the aggregators can spin off, even there and the user must be who he
and debit cards.” if it’s anonymized. With these says he is,” says Hewitt.
22 DIGITAL TRANSACTIONS | SEPTEMBER 2020 STRATEGIESShift4 Payments dazzled the payments industry and Wall Street with its June initial public offering. What do recent processor IPOs say about the prospects for payments companies? BY JIM DALY
No investment in the stock market is a sure winner, but payments investments often prove to be better than others. On June 4, underwriters for merchant acquirer “Wall Street loves payments,” says consultant Shift4 Payments Inc. priced the company’s ini- Eric Grover, principal of Minden, Nev.-based tial public offering at $23 per share, above their Intrepid Ventures. “Payments remain, nation- $19-to-$21 target just days before. The next ally and globally, healthy [for] secular growth day, Shift4’s shares opened on the New York long term.” Stock Exchange at $33.10—an instant 44% gain. Recently, Allentown, Pa.-based Shift4’s shares have been trading in the $50 range. Not bad, considering that Shift4, which claims about 200,000 merchants generating more than $200 billion in annualized payment ‘INVESTOR APPETITE’ volume, gets more than half its volume from the hospitality industry. After all, its IPO came during the midst of the Covid-19 pandemic, Shift4 and Bill.com have joined a club of about which forced the closure of many restaurants 40 publicly traded payments companies that, in and sent hotel reservations plummeting. addition to the four U.S.-based global card net- Palo Alto, Calif.-based business-to-business works, includes merchant acquirers, online and payments provider Bill.com Holdings Inc. last specialty processors, PayPal, and all manner of year had expected to get $16 to $18 per share tech suppliers. from its planned IPO, then upped the target IPOs let a company’s funders cash out on to $19 to $21. But with underwriters sensing their investments and potentially enable the strong investor demand, the company priced firm to pay down debt, make acquisitions, and its Dec. 13 IPO of 9.82 million shares at $22 per fund product development. But not every IPO is share. The next morning, trading in Bill.com’s a home run. Striking out is a clear possibility, new stock opened at $37.25 on the New York and sometimes the offering is simply the finan- Stock Exchange, 69% above the IPO price. It’s cial equivalent of a single or double. been mostly upward since then. In mid-August, The small acquirer Net Element Inc. had the stock was trading in the $93 range. an IPO in 2012 but in May announced that it WHY WALL STREET LOVES PAYMENTS DIGITAL TRANSACTIONS | SEPTEMBER 2020 25
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