By Patti Murphy
ProScribes Inc.
As we close the books on 2013, it's safe to say we've enjoyed another dynamic year in the payments sphere. Optimism has reigned at industry tradeshows; established players and newcomers, alike, have been innovating; and payment pros have been exploring developments they find compelling. Among those, mobile payment options, prepaid products and bitcoin have received significant attention.
Bitcoin, one of the most unusual payment trends in recent memory, is still playing out. It has taken the lead among an emerging group of virtual currencies (that is, software code) that bypass the regulated financial system.
Some experts see it as a modern-day Ponzi scheme. Former Federal Reserve Board Chairman Alan Greenspan, in an interview with the Bloomberg news service in November 2013, said the rapid rise in the value of bitcoins (900 percent in about three months) is nothing more than a "bubble,"and that bitcoins have no "intrinsic value."
Shortly after, on Dec. 6, the People's Bank of China banned banks in that country from handling bitcoin transactions, and said it was looking into a regulatory scheme for virtual currencies.
But there remain plenty of bitcoin champions. Bank of America Corp. Analyst David Woo, in an early December interview on CNBC, said bitcoin has "clear potential for growth." Woo, who heads BofA's global rates and currencies research, also predicted bitcoins could achieve a market capitalization of $15 billion.
Meanwhile, the first ATM to dispense cash for bitcoins was installed in a coffee shop in Vancouver. B.C., Canada in October 2013. Operators of the ATM reported that in the first week alone, the machine handled 348 transactions. And in early December, it was widely reported that a Lamborghini dealership in California accepted 91.4 bitcoins for a $103,000 automobile.
The creators of bitcoins insist the virtual currency is inflation proof, since only a limited number can be created. But there has been plenty of price volatility. In the summer of 2013, the cost of a single bitcoin was less than $100; by Dec. 4, the price, at over $1,147, rivaled that of an ounce of gold. Following the Bank of China's decision, bitcoins fell to under $800.
While bitcoins drew plenty of buzz in 2013, the one big payment trend that seemed primed for takeoff this year – mobile payments – didn't make significant progress. In January 2013, Forrester Research Inc. predicted a 48 percent compounded annual growth in U.S. mobile payments through 2017, when the consultancy expects a total of $90 billion in mobile payments driven largely by in-store transactions.
Yet despite a flurry of activity this year – including the long-awaited launch of Isis, a mobile wallet backed by the three leading mobile companies and adopted by card issuers American Express Co. and JPMorgan Chase & Co – mobile payments have been slow to make converts out of U.S. shoppers. According to the research firm Berg Insight, Americans used smartphones to make $500 million in purchases in 2012, and most of those sales were rung up at Starbucks Coffee Co. Starbucks claims 3 million mobile payments a week from consumers using a smartphone app developed by Square Inc.
So what's holding back mobile payments? Some experts point to a fixation on creating virtual replacements for the traditional wallets consumers generally carry around with them. "Consumers just don't think that way," industry consultant Paul Martaus stated in "The competitive, diversified mobile wallet landscape," The Green Sheet, Nov. 25, 2013, issue 13:11:02.
Michael Misasi, Senior Analyst at Mercator Advisory Group, said merchants need mobile solutions that do more than mimic credit and debit cards. They're more interested in solutions that incorporate rewards – iron-clad security, too, he said.
Security is also an issue. In 2013, the British firm Consult Hyperion Ltd. asked over 1,000 U.S. consumers who they trusted most to provide mobile wallets. Twenty percent said banks, and 10 percent said Google Inc. But the largest share – 64 percent – said they didn't trust anyone. These consumers said they had no plans to use smartphones in lieu of traditional payment form factors, like plastic cards and cash.
Another problem: the proverbial "chicken and egg" dilemma in which consumers represent the chicken and merchants the egg. "Consumers won't demand a payment technology [like mobility] unless it's accepted by their favorite retailers. Retailers won't invest in a payment technology unless consumers demand it," said April Schmaltz, Vice President of Marketing at TMG Financial Services, which handles card-issuing for thousands of credit unions and community banks.
"I see an evolution of mobile where it becomes more of a marketing engine than a vehicle for payments," said Pradeep Moudgal, Director of Emerging Technologies at Mercator.
Even if retailers were ready to make the technology investments necessary to accept mobile payments, there's no clear-cut winner among supporting technologies. Near field communication (NFC) underlies numerous contactless payment schemes involving smartphones, but newer schemes rely on quick response codes that most merchants can read using existing POS equipment. One big problem with NFC: Apple Inc. has declined to add the technology to its popular iPhone line of mobile devices.
As a consequence of this state of flux in technology, several new mobile solutions have emerged. One, called Loop, was created by serial entrepreneurs George Wallner and Will Graylin. Graylin founded two successful early players in the mobile field, ROAM Data Inc. (which he sold to Ingenico) and Way Systems Inc. (sold to VeriFone Inc.). Wallner founded and ran POS terminal manufacturer Hypercom Inc., which was acquired by VeriFone in 2011.
Despite the lagging interest in accepting mobile payments, many retailers are looking to smart mobile devices to support more traditional POS routines, such as inventory management and card acceptance. Mercator said emerging businesses are helping to drive this trend.
"Entrepreneurs have begun to identify more and more areas where tablet-based computers' easy user interface and vast computing power can be used for solutions that are more effective than traditional technology in use today," the consultancy wrote in a report titled Tablets at Checkout: A True Disruptor. "Payment acceptance at the point of sale is among the largest of those segments."
Some acquirers and ISOs say customer interest in tablet solutions is growing, but so are the number of solutions and thus, merchant confusion. "We're just in the early days of harnessing the power available through tablet solutions for merchants," said Bob Baldwin, Vice Chairman of Heartland Payment Systems Inc. Payments will be only one component; other must-haves include marketing, customer service and sophisticated rewards programs.
Perhaps the best news to come out of 2013 was that the economy, following four years of negative and sluggish growth, began showing signs of recovery. Visa Inc. reported processing 58 billion credit, debit and prepaid card transactions in the 12 months ending September 30, 2013 (the company's fiscal year), representing a 10.3 percent increase over the previous 12 months. In the first six months of 2013, MasterCard Worldwide processed 3 billion card payments totaling $268 billion. MasterCard also reported that in 2012, it saw a $7.7 billion shift in consumer spending from MasterCard-branded debit to MasterCard credit cards, reversing a four-year trend that shifted $141 billion in spending from credit to debit card products. The National Retail Federation predicted holiday sales in December 2013 will top $602 billion, 3.9 percent over 2012. Retail sales were up nearly 24 percent on Thanksgiving Day, according to MasterCard. In-store traffic over the holiday weekend was up 27 percent over 2012, the NRF said.
In its U.S. Economic Indicator's Report for the second quarter of 2013, the Electronic Tranactions Association said the merchant acquiring sector is faring well. Using a metric developed in cooperation with The Strawhecker Group and known as the Gross Value Profit Index, the ETA report suggested the value of merchant portfolios has grown at a 16 percent compound annual rate since the fourth quarter of 2010.
At least some of the increase in transactions is being driven by consumer adoption of prepaid debit cards. First Annapolis Consulting expects prepaid programs to generate $4.6 billion in revenues this year, up from $3.8 billion in 2012.
Just about every company with an interest in payments is looking for ways to cash in on prepaid debit, especially the open-loop (network branded) reloadable variety. The most prominent of these perhaps is leading acquirer Total System Services Inc., which recently acquired NetSpend Inc., a major provider of reloadable prepaid cards through online and brick-and-mortar stores. At the time of the acquisition, TSYS said it anticipated that over the next four years, the market for prepaid debit will grow more than 20 percent a year. The unbanked and underbanked – an estimated 70 million U.S. adults who either don't have bank accounts or have limited interaction with banks – are major users of prepaid debit. As a result, some prepaid cards have many of the markings of bank accounts.
One example is Bluebird, a reloadable prepaid debit card issued by American Express Co. in partnership with Wal-Mart Stores Inc. It features a check-writing functionality and Federal Deposit Insurance Corp. insurance for funds loaded onto the cards. Last year U.S. consumers loaded a total of $194.5 billion onto open-loop prepaid cards, according to Mercator.
Prepaid cards are not just for the unbanked and underbanked, however. A Mercator survey of several thousand U.S. adult consumers in the summer of 2013 found 53 percent had purchased some type of prepaid card in the previous 12 months. The firm said its research also suggested consumers are buying more prepaid cards for their own uses, although the majority continue to be purchased for gifting.
Not to be left out, banks are embracing prepaid cards and adding functionality like mobile phone apps for cashing checks and having the funds deposited to prepaid cards. One reason banks issue reloadable prepaid cards is that they are not subject to the interchange rate caps imposed by the Federal Reserve in accordance with the Durbin Amendment to the 2010 Dodd-Frank Act.
Those rates – paid by merchants to acquirers and capped at 21 cents, with a small markup allowed to cover fraud losses – have been successfully challenged in federal court, but not by banks. Judge Richard J. Leon of the U.S. District Court for the District of Columbia was firm in his July 31, 2013, rebuke of the Fed's rate-capping methodology, insisting that the Fed "completely misunderstood the Durbin Amendment's statutory directive."
He ordered the Fed to lower allowable interchange on debit card payments even further and to provide merchants with greater flexibility in choosing transaction processing networks. That decision is now on hold pending the outcome of an appeal by the Fed.
The Global Economics Group Inc., an international economic consulting firm, reported in October 2013 that its research suggests consumers are the biggest losers when it comes to capping debit card interchange, and that consumers will lose even more if the Fed is forced to further lower the cap. "The present discounted value of the loss to consumers is between $22 and $25 billion based on our findings," said Dr. David S. Evans, the consultancy's chairman.
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