By Brandes Elitch
CrossCheck Inc.
The year 2020 marks the beginning of the eleventh year I have written a monthly column on payments for The Green Sheet. As you probably know from prior published articles, CrossCheck is located in Sonoma County, Calif., or as we call it: Wine Country.
I often find parallels between the wine industry and payments. Today is no exception. At this juncture I'd say they're both ripe for disruption. A Dec. 27, 2019, article by Katie Jones in Visual Capitalist discusses disruption in the wine industry in some detail. One of her main points is that the international wine market is being transformed by (no surprise) " technological innovation" and changes in consumer behavior.
People between the ages of 18 and 27 prefer spirits, or beer, to wine. If you're a winemaker, how do you connect to this age group? One suggestion is new packaging with such attributes as smaller serving sizes, portability and sustainability. Did you know that canned wine is now a $70 million industry, and is projected to make up 10 percent of wine sales in five years?
In addition, industry observers are projecting that glass bottles will be replaced by edible bottles and compostable glass. QR codes can replace paper labels, which is probably not a good idea, because most consumers make their purchasing decisions by the label. Consumer tastes and preferences will determine success in the marketplace, but right now it seems that millennials are interested in craft beer, craft spirits, and alcohol-free, cannabis-infused beverages. Consumers want something new, and wine brands are responding with augmented reality and enhanced marketing strategies.
In winemaking, labor, energy, and water usage are critical. However, new technology is changing this. For example, in the vineyard, new technologies monitor water usage, mechanize picking and sorting, and improve chilling and filtration. Sorters in the winery can take images of grapes as they pass in front of a camera, software determines what to accept or reject, and air particles push rejected particles out of the stream – at up to five tons per hour.
This describes only a fraction of the dramatic efficiencies new technologies have brought to the wine industry, and new technologies are under continuous development.
Now for payments, an industry that is also ripe for disruption. In particular, I'm going to explore three developments in payments that did not seem to get much mention last year. First up is the almost total failure of gas stations to adhere to that sector's initial EMV implementation deadline, which Visa slated for October 2017.
There are approximately 123,000 gas stations in the United States and about 1 million fuel pumps. Currently, it is estimated that only about one quarter of those pumps have been converted to EMV. The industry cost for compliance is projected to be in the range of $6 billion.
A tangled web of disparate elements related to payment processing all need certification for EMV implementation at the pump. This includes the payment servers, the difference between indoor and outdoor payment terminals, the fuel dispensers themselves, and an on-site back-office system. And when you have to demolish existing concrete pads to lay new electrical wires, there needs to be an environmental review by local authorities.
The new deadline, three years after the original one, is October of this year. My hunch is total industry compliance will not be achieved by then, but we will see. This will be a big problem for gas station owners, because there has been an outbreak of skimming fraud, for which merchants will be liable starting in October if they have not completed their EMV conversion. Incidentally, the margin for this business is about 1 percent of sales, so coming up with the funds for the conversion is a challenge.
Meanwhile, pundits are focusing on being able to use Alexa to pay for your fuel without having to get out of the car. As far as I know, you still have to step outside of the car to put the nozzle in the fuel filler to pump the fuel.
The second item I believe is not receiving enough attention is the avalanche of chargebacks and returns that ecommerce and card-not-present merchants are facing. This has been fostered in no small part by the regulations and policies of the card brands, which have changed consumer behavior. At this point, after just a few years, returns seem to be a necessary part of ecommerce, and I am not sure there is a solution.
UPS said on Jan. 2, 2020, that it expected to process 1.9 million returns that day. This is a 26 percent increase over last year, and the seventh straight year of setting a new record. The UPS study, called Pulse of the Online Shopper, found that consumers make purchases with returns in mind, and the returns experience determines if they will use that merchant again. Another study, by the National Retail Federation, showed that 55 percent of online consumers plan to return or exchange an unwanted gift within a month of receiving it.
There may be no solution for this phenomenon, but there are solutions for the related chargebacks that are occurring. LexisNexis found that a merchant loses $3.13 for every dollar in production value to chargebacks. Many of these are due to what is euphemistically known as friendly fraud. The card brand rules are stacked in favor of the consumer, and the merchant is always on the defensive.
Merchants lose the sale – and the merchandise. They incur the shipping cost. They have to manually review the chargeback if they want to dispute it, and they may have to pay chargeback fees to the acquirer. This is a disaster for affected merchants. Chargebacks 911 estimates that friendly fraud will cost merchants upward of $25 billion a year, and fraud costs the average merchant about 1.47 percent of their total revenue. For some merchants, this is unsustainable.
Finally, you have read a good deal about mobile payments, but probably not a lot about why smartphone users are not using mobile wallets. A survey by Mercator Advisory Payments Insights showed that nearly 40 percent of smartphone users see no benefit in using a mobile wallet. They see no reason to change what they are doing now: inserting a chip card.
Beyond that, consumers have very real concerns about security issues associated with using a mobile wallet. It will take a lot to convince them otherwise, because security, not ease of use, trumps everything else in the consumer's mind.
As we enter a new year, payment professionals, like our counterparts in the wine industry, would do well to focus on consumer behavior and what is important to consumers. Technology for the sake of technology is not going to succeed. Sometimes this is harder to figure out than the next technological breakthrough. 
Brandes Elitch, director of partner acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A certified cash manager and accredited ACH professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at brandese@cross-check.com.
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