Bay Area Payment Solutions

Bay Area Payment Solutions
Bay Area Payment Solutions

Sunday, 7 February 2016

Unpopular E-Pay Security Improves Usability, but Merchants Remain Wary

U.S. merchants are still reluctant to embrace 3D Secure technology to protect card-not-present transactions, even though it has vastly improved from the initial tedious version that irritated consumers more than a decade ago.

Even more improvements are expected in a 3D Secure 2.0 specification from the EMVCo standards body this year. If merchants and issuers like what they see, the amount of 3D Secure-enabled transactions globally is likely to continue a trend in which 18% of all e-commerce transactions moved along 3D Secure rails in 2015, up from only 6% in 2013, according to new research from Aite Group.

Still, many merchants can't get the friction-laden process of the first version of 3D Secure out of their minds and don't know about the improvements, said Julie Conroy, research director and fraud expert with

Boston-based Aite Group. For the most part, U.S. merchants equate 3D Secure, a technology introduced by the card brands to fight online fraud, to lost sales more so than as a fraud protection, said Conroy, who authored Aite's update on 3D Secure released this week.

Aite Group interviewed 31 executives from global merchants, issuers, payment networks and processors, and 3D vendors in November and December of 2015 in compiling findings.

A negative view from merchants is understandable, considering when 3D Secure made its debut in 1999 it relied on static passwords and other authentication steps for every transaction, in addition to popup boxes that seemed to appear randomly and confused consumers who never had much training with the technology.

Developers have smoothed out a lot of that friction, mostly through establishing risk-based authentication and getting rid of pop-up boxes, Conroy said.

"It is not asking for a password every time, thus phasing out the passwords so the consumer is doing something they can actually input and get right, like a one-time password, rather than a static password you can forget," Conroy added.

In addition, the new 3D Secure does not require card enrollment, a facet that fraudsters took advantage of in the past simply by enrolling stolen cards and assuring that any transactions using those cards would be authorized, Conroy said. In its latest versions, 3D Secure lives up to its name "as really pretty solid and secure," Conroy added.

Aite issued a similar report nearly three years ago, touting 3D Secure's improvements, but the message remains relatively muted in the U.S.The report did not cite specific adoption numbers in the U.S., but use of 3D Secure is far more common in European and Asian countries that have experienced the spike in card-not-present fraud that U.S. merchants are expecting to see soon in the aftermath of the 2015 EMV liability shift and the first post-holiday transaction statements.Australia, with less than a 3% adoption rate, should see an increase in the coming year as regulators mandate use of 3D Secure for e-commerce transactions, Conroy said.

CardinalCommerce is the only security vendor currently enabling merchants in the U.S. to use 3D Secure, Conroy said.

And there are signals that U.S. merchants are warming up to 3D Secure as a method to thwart card-not-present fraud. CardinalCommerce says four of the five largest transacting merchants in the U.S. are using 3D Secure for some portion of their volume, or plan to start this quarter, Conroy said. "That's a sea change from two years ago."

In turn, some merchants globally remain cautious about sending transaction volume into markets where consumers are not educated about 3D Secure for fear of losing sales, the report said. One merchant had 3D Secure enabled in the U.S., but decided to turn it off because of a social media backlash over the user experience.

The use of 3D Secure will be gradual in the U.S. as merchants measure the fraud risks versus the attrition rate as they test the technology, Conroy said.

"The U.S. will continue to be slow to embrace 3D Secure because we have a population of consumers not tolerant to friction," Conroy added. As the newest version of 3D Secure becomes available, the card brands are likely to put more effort behind an education campaign for use of the fraud protection, Conroy said.

Plus, e-commerce merchants have much to gain if card-not-present fraud skyrockets because use of 3D Secure represents their version of the EMV liability shift. A merchant with 3D Secure passes the fraud liability back to the issuers.

In the meantime, some merchants have figured out how to create a win-win scenario for themselves when sending 3D Secure transactions to an issuer.

In using the BIN lookup tables supplied by CardinalCommerce, a merchant can determine whether an issuer supports 3D Secure and in what fashion, Conroy said.

"Based on whether it is password or risk-based support, the merchant can decide on whether to send transactions to that issuer or not," she added.

But some are sending transactions to issuers they know do not support 3D Secure on their side, thus shifting the fraud liability to the issuer and also not risking any consumer friction on the transaction, Conroy said.

"One merchant said by sending 20% of its U.S. card-not-present volume to issuers that can't support 3D Secure, they have saved a few million dollars a year," Conroy added.

Merchants will continue to have concerns about transaction latency, fearing some may take as long as 10 seconds, as well as fees associated with using 3D Secure as the technology advances, the report said.

The technology is called SafeKey for American Express, 3D Secure for China UnionPay, ProtectBuy for Discover, J/Secure for JCB International, SecureCode for MasterCard and Verified by Visa for Visa.

Merchants operate the technology through a plug-in, while issuers enable the software through an Access Control Server to communicate with the consumer and provide a risk-based analysis and stepped-up authentication on the card credentials.


Tuesday, 18 November 2014

Clients Clamor For Cash Advances

The power of an email blast offering merchant cash advances came as a shock to Kevin Frisch owner of Banquest Payment Systems, a Lakewood, N.J.-based ISO. He was immediately inundated with more calls and email messages than he could handle.

 “The response was overwhelming. We were blown away,” says Frisch, CEO of Banquest.
With fewer banks lending to small merchants these days, alternative business lending is more in demand than ever. It’s even attracting investments from Wall Street hedge funds and venture capitalists.

All this translates to a welcome money-making opportunity for ISOs struggling to find additional revenue streams as merchant acquiring becomes more competitive.

“Alternative lending is skyrocketing, and I think you’re going to see more and more of it in the coming years,” said Darrin Ginsberg, founder and CEO of Super G Funding LLC, a Newport Beach, Calif.-based lending company.

Of the ISOs and agents interviewed for this article, most consider merchant cash advances a highly profitable product and a valuable retention tool. Some ISOs have even started taking a hybrid approach to their business, focusing on lending as well as merchant acquiring.

But cash advances can become a costly proposition for ISOs and merchants alike. ISOs can earn more by putting up some or all of the money needed to fund advances, but they should have a lot of cash on hand to pull it off. For merchants, cash advances have come under scrutiny for having high interest rates and short repayment periods, making it difficult for some businesses to pay off the debt.

“It’s expensive money for the merchants,” said Michael Steinberg, who works in Miami Beach, Fla., as an independent liaison between merchant cash advance companies and ISOs.

In spite of the risks, ISOs point to several advantages of selling merchant cash advance. Frisch says the income Banquest takes in from a cash advance far exceeds what the ISO can make on any merchant account. “It’s beyond comparison,” he said.

Because setting up a cash advance requires asking merchants some questions about how their business works, Banquest has forged a much stronger bond with its cash advance clients than it would through a merchant account alone.

“They will never call you to discuss their rates. They’re yours,” Frisch says.

Small-Business Lending Void

Based on his day-to-day interactions with ISOs and merchant cash advance companies, Steinberg says the cash advance business is strong right now because banks are not lending money to small businesses.

Without cash advances helping small merchants, Steinberg believes a substantial number of them would stagnate or go out of business.

“I know that in the long run, I have helped way more businesses than I have hurt,” he said.

Jeremy Abel, regional sales director for U.S. Merchant Systems in Fremont, Calif., said he has seen cash advance rescue a struggling business. One of his agent’s clients, a stereo equipment business, was in danger of closing its doors after a steep decline in business just before one of its busiest times of the year. The business had moved to a new building, but its customers didn’t know and started to think the store had closed.

Abel helped the agent set up the business with a cash advance to help market the new store. “The amount we got him was good enough to keep him in business,” Abel said.

ISOs Cite Pros, Cons Of Advances

Cash advances can help ISOs boost revenues, but some acquirers have mixed feelings about them.
Independent agent Michael Noel of Glastonbury, Conn., has been in the payments business for 25 years, but he is a relative newcomer to selling merchant cash advance. He resisted for a long time because he felt like it took advantage of merchants. But his clients begged for it, and he started losing customers to competitors because he didn’t offer it.

So this past year, Noel took the leap into the cash advance world, and he admits that there’s a lot of money to be made. “It doesn’t hurt my feelings when I get a check for $1,700 for doing this,” said Noel.
Getting involved was a challenging decision for Noel nonetheless, and he remains conflicted. “It seems like the money is too easy,” he said.

But Noel insists the most compelling reason for providing cash advances, beyond the money, has been account retention. “I felt I needed to get involved,” he said.

Cash advances are a last resort for Ferne Glemby, president and owner of CardPlus Payment Systems LLC in Westwood N.J.

“I’ve had good experiences, and I’ve had very bad experiences,” she said.

Tuesday, 11 November 2014

Opportunity Knocks In Vending

Acquirers are encouraging vending-machine operators to add card and mobile electronic-payment acceptance, which could represent a whole new category of transactions.

The ISOs, processors and gateway providers patient enough to handle the relationship-building process, willing to invest in the education necessary to understand the vending market and ready to devise the right tactics could reap financial rewards, insiders say.

There are challenges, however, as vending-machine operators are not like other retailers. Unlike retail POS terminals, for example, vending machines tend to move around a lot—up to 10 times each during their operational existence—thus requiring constant attention. Wireless and other connectivity issues and getting to know an assortment of new market players also pose potential complications, observers say.

Indeed, ISOs venturing into vending face considerable upfront and continuous work building and retaining relationships, said Stacey Finley Tappin, senior vice president of North America sales and marketing communications at Scottsdale, Ariz.-based Apriva, whose tokenized Apriva Vend product provides ePayments gateway services for vending operators. “It takes a lot of investment up front if an ISO wants to get into this,” she says. “It’s not an easy market; it’s complicated.”

Just as ISOs should build a knowledge of vending, vending operators should learn more about the payments industry. ISOs thus can serve not just as ePayment service providers, but also as advisors, much as they were when many traditional merchants still were accepting primarily cash and checks and knew little about card acceptance, not to mention interchange and discount rates.

The vending market essentially represents a new frontier for ePayments, as the vast majority of machines accept only cash, thus providing considerable opportunity for ISOs. In 2013, revenue from vending totaled $19.69 billion, according to the National Automated Merchandising Association (NAMA), citing annual research data from Automatic Merchandiser magazine. However, only 10% of the 4.85 million vending machines last year had cashless readers. That’s not many statistically but still a significant increase from the 4% that did only two years earlier.

To one observer, such growth in cashless-payment acceptance, including cards and contactless mobile transactions, represents progress. “The main thing is we really have moved that thing forward quite a bit,” Mike Kasavana, NAMA endowed professor at Michigan State University, told ISO&Agent. “But on the opportunity side, there’s still lots of machines that are not accepting electronic payments that should be.”
ISOs could find willing customers, as ePayment acceptance can generate potential growth in vending machine sales volume, according to NAMA, citing 2013-14 data from USA Technologies Inc.’s Cashless Knowledge Base. During a recent 12-month period after installing cashless vending, the company found total monthly vending transactions increased by 22.8%, with no decline in cash-sales volume.

“It’s not cannibalizing cash but actually represents new business because so many people don’t carry cash today,” Kasavana says. “It’s a lot easier to make sales with ePayments than with limited currency or coin.”
USA Technologies, whose chief competitors include San Francisco-based Cantaloupe Systems and Crane Payment Innovations of Malvern, Pa., represents an ISO that has succeeded in targeting the vending market. Though it considers itself a “payment services provider,” the company, which also is based in Malvern, primarily sells payment-processing services for Atlanta-based Elavon, Mike Lawlor, USA Technologies’ senior vice president for sales and business development, said in an ISO&Agent interview. Conversely, various ISOs are out selling USA Technologies’ products to vending machine, laundry and kiosk operators, including wireless services and card-acceptance hardware that connects back to the company for processing and reconciliation into the operators’ accounts.

“There is money to be made for them,” Lawlor said in reference to ISOs. “We’re just at the tip of the iceberg with these new market opportunities.”

As of June 30, USA Technologies’ ePort service connected to 266,000 machines, handling some 170 million transactions totaling $300 million during the fiscal year. Some 86% of the company’s connections come from traditional vending customers, Dave DeMedio, USA Technologies chief financial officer, noted during a recent fiscal fourth quarter earnings call with analysts.

Pricing plays an important role when targeting the vending market. Because many vending operators are not familiar with ePayment acceptance, they want pricing to be simple, industry insiders agreed.

USA Technologies, for example, charges a flat percentage rate, which equates to about 5.5% to 6% on an average $1.50 transaction. The rate varies by market, and it goes down as the debit or credit card transaction amount rises, Lawlor says, noting USA Technologies provides an aggregated processing service across customers’ multiple payment-acceptance locations, similar to the concept San Francisco-based Square Inc. has adopted.

The company expects its license and transaction-fee revenue to grow to $44 million to $47 million in the current fiscal year, which would represent 24% to 31% year-over-year growth, DeMedio said on the earnings call.