The Broken Link - Digital Transactions

VOLUME FIVE, NUMBER TWO • DIGITAL TRANSACTIONS.NET • FEBRUARY 2008
The Broken Link
How a radically new species of debit card
severs the crucial tie between banks
and demand deposit accounts.
ALSO IN THIS ISSUE:
• The Specter of Interchange Regs
• Selling Back Office Conversion
• ATMs That Dispense Gift Cards
• Arming Consumers to Fight Fraud

You
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UBC1106_01152008

D I G I T A L T R A N S A C T I O N S . N E T
CONTENTS
February 2008 ■ Volume 5, Number 2
The development of decoupled
debit and its ripple effects could
represent a sea change in the
card landscape. The situation
has similarities with that of the
1980s when a few big banks
first began marketing plastic to
consumers who had no deposit
accounts with them. page 24
24 Debit’s Decisive
Moment
Many observers hail so-called
decoupled debit cards as the
latest innovation in payments.
While that’s hardly reassuring to
banks, all industry participants
are quickly trying to size up the
unknown risks and possibly rich
rewards.
6 The Gimlet Eye
How the Merchants’
Courthouse Capers
Have Paid off
8 Trends & Tactics
Will the U.S. Meddle in
Interchange? A Higher
Profile for Image Sharing;
Mocapay: Mobile
Payments for Everyone
Plus, Security Notes argues that
shame could be a useful tool
to fight hackers, and the Web
Transaction Performance Indexes
spotlight winners and losers
among the leading credit card
and online-banking sites.
14 Acquiring
The ACH Comes to the
Cash Register
It’s taken some time, but retailers
of all sizes increasingly are
embracing electronic check
alternatives. The reasons: new
technology and a push from
processors.
19 Components
ATMs: Not Dead, Not Done
More versatility can mean
extended life for the ATM, says
an executive with a firm that
enables ATMs for prepaid card
dispensing and sees potential
for distributing a wide range of
other media.
32 E-Commerce
The Big Risk in Instant
Account Verification
Non-account-holding banks
are starting to ask consumers
for their passwords and other
log-on credentials to make sure
they own the accounts they’re
using to make payments. At a
time of massive data breaches,
this is a dangerous practice that
should stop now.
35 Security
Why Issuers Hesitate To
Enlist Cardholders in the
War on Fraud
With data breaches exposing
more and more card accounts,
credit and debit card issuers
should be doing much more
to involve cardholders in fraud
detection, some experts say. But
would the fraud cardholders
spot justify the cost of the tools
issuers gave them?
39 Endpoint
Behind the
Experimentation in
Gift Card Pricing
Single-purpose gift cards are
now central to merchant
acquirers’ offerings to small
merchants, but acquirers vary
widely in their gift card pricing
strategies, say Marc Abbey and
Paul Grill.
Cover illustration:
Silense/istockphoto.com
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POSTMASTER: Send address changes to Digital Transactions, P.O. Box 3553, Northbrook, IL 60065-3553.

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THE GIMLET EYE
FEBRUARY
2008 • VOL. 5, NO. 2
How the Merchants’
Courthouse Capers
Have Paid off
Forty billion dollars.
That’s how much Digital Transactions estimates merchants in this country
paid bank card issuers in 2007 for the privilege of accepting their products
in payment for goods and services. Nor is the rate of increase in this cost a
minor matter. We estimate that tab is up 16% from 2006.
It’s called interchange, and it’s the primary component of all the costs merchants
pay to accept cards. Unlike the other components, it flows straight to issuers, and
increasingly it’s helping to pay for all the rewards banks like to lavish on their cardholders
these days. The more rewards cards, the higher interchange climbs.
The great question is, what should merchants do about it? So far, their tendency
has been to complain to regulators and Congressmen and haul the bank card networks,
which set interchange, into court. The regulatory gambit hasn’t fared well
here, but in Europe merchants scored a victory in December when the European
Commission ruled MasterCard’s interchange setup is anti-competitive. See our
story—and more about how we calculated our interchange estimate—on page 8.
As for the courts, a federal judge in Brooklyn is now presiding over a class action
that consolidates about 50 separate suits brought by merchants and merchant associations
against the card networks and some banks.
We’ve gone on record more than once opposing these moves. They are clumsy,
expensive campaigns to fix a problem merchants would be better off addressing by
adopting and encouraging any of the many alternative forms of payment that have
cropped up recently precisely to address the problem of rising acceptance costs.
But we have to credit the merchants’ legal maneuvering for one signal achievement
that may indeed have a long-term impact on interchange. The heavy hand of
potential legal liability has done much to force both MasterCard and Visa to shed
their historical bank ownership and governance in favor of public ownership. As
early as next month, Visa will float its shares publicly for the first time, following
the example set by rival MasterCard in 2006. These IPOs are events fraught with
significance, but it cannot escape the attention of most merchants that one result
will be that the card networks may no longer be dominated by entities that collect
interchange, and thus benefit directly from discouraging any innovation that threatens
that income stream.
On the contrary, the new owners will have every incentive to foster new products,
and no perverse incentives to quash them. That can only be advantageous to
merchants in their quest to control acceptance costs. And, unintended though it
may be, it’s a direct benefit of their legal onslaught.
John Stewart, Editor-in-Chief
john@digitaltransactions.net
PUBLISHER
Robert A. Jenisch
EDITOR-IN-CHIEF
John Stewart
Senior Editor
Jim Daly
Correspondents
Jane Adler
Lauri Giesen
Karen Epper Hoffman
Peter Lucas
Linda Punch
Art Director/Production Editor
Jason Smith
Editorial Advisory Board
Eula L. Adams
Member of the Board of Directors,
NetBank and Solidus Networks
John Elliott
Alex W. “Pete” Hart
Former Chief Executive Officer, MasterCard
International
William F. Keenan
President, De Novo Corp.
Dr. Gideon Samid
Chief Technology Officer, AGS Encryptions Ltd.
Director of Advertising
Robert A. Jenisch, 877-658-0418
bob@digitaltransactions.net
Advertising Sales Representative
Cathy Woods, 602-863-2212
cathy.woods@mediawestintl.com
Digital Transactions, Digital Transactions News,
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6 • digitaltransactions • February 2008

TRENDS & TACTICS
TRENDS & TACTICS
Will the U.S. Meddle in Interchange?
Regulatory fever over interchange is
rising in Europe, and the U.S. may not
be immune.
The latest challenge came late
last year, when the European Commission
ruled that MasterCard
Worldwide’s interchange-fee structure
is illegal in that region. The ruling
will affect relatively few transactions
in Europe but could encourage
regulators—including those in the
U.S.—to act.
“On balance, the EC decision
is negative,” Eric Grover, principal
at Intrepid Ventures, a Menlo Park,
Calif.-based consulting firm and a former
executive at Visa International,
said in an e-mail message to this
magazine’s sister publication, Digital
Transactions News.The decision “will
spur regulators in other jurisdictions
to intervene and treat card payment
networks like public utilities.”
The stakes potentially involve
billions of dollars. U.S. issuers of
Visa- and MasterCard-branded credit
and debit cards collectively garnered
nearly $40 billion in interchange last
year, Digital Transactions estimates
(chart). If U.S. regulators followed
the example set by Australia’s central
bank several years ago and cut
8 • digitaltransactions • February 2008
interchange by about 40%, the hit
would be nearly $16 billion.
Not even interchange’s most
vehement retailer opponents expect
that will happen. Still, the EC’s interchange
policies could embolden those
in Congress or the federal bankregulatory
agencies to take another
The Rising Interchange Tab
($ figures in billions)
look at this most controversial aspect
of payment card pricing.
Interchange is a per-transaction
fee set by Visa and MasterCard and
paid by merchant-acquiring banks
to card-issuing banks. The fee typically
is expressed as a percentage of
the transaction plus a fixed amount,
usually 5 or 10 cents. In practice,
merchants end up paying the fee as
acquirers pass it on as part of their
discount-fee pricing.
Challengers say interchange smells
of pricing possible only in an oligopoly.
But MasterCard says that market
forces set interchange rates. Asserting
that regulators should not intervene,
MasterCard has said it will appeal the
EC’s ruling at the European Court of
First Instance in Luxembourg.
In the Dec. 19 ruling, the EC
stopped short of striking down the concept
of interchange itself. Instead, it said
the rates on cross-border MasterCard
and Maestro transactions are anticompetitive
and gave MasterCard six
2005 2006 2007
U.S. Bank Card Purchase Volume $1,700 $1,909 $2,159
Estimated Blended Interchange Rate 1.75% 1.80% 1.85%
Revenue $29.75 $34.36 $39.94
Source: First Annapolis, Digital Transactions
months to propose a new interchange
structure compliant with the Commission’s
competition law. In January, European
Union competition commissioner
Neelie Kroes said MasterCard faces a
fine if it doesn’t comply with the ruling.
About 40% of bank cards in the European
Union are MasterCard-branded.
MasterCard has a good chance of
swaying the appeals court in its favor
since its appeal “will be argued and
decided on narrow legal grounds,”
notes Grover.
U.S. merchant groups have already
mounted legal and public-relations

challenges to interchange. Last year,
more than 50 merchant lawsuits challenging
bank card interchange were
consolidated into a massive class-action
case in U.S. District Court in Brooklyn.
Interchange hearings were held in the
U.S. House of Representatives last
year and in the Senate in 2006.
Observers say the likelihood that
the Federal Reserve would intervene
in the interchange is small despite
developments elsewhere in the world.
Grover notes that the central bank has
said that the fees are outside its jurisdiction
and that such pricing should
be left to market forces.
Still, he says, the EC decision could
embolden members of Congress who
have been examining the issue, even
though no regulatory legislation has
arisen so far despite Congress’s change
in control from Republican to Democratic
hands after the 2006 elections.
“Two years ago, I would have rated the
chance of Congress passing legislation
curbing interchange as close to zero,”
Grover observes. “While still unlikely,
the chances are higher today.”
Any intervention would meet
strong banking-industry resistance.
“Honestly, I think the [bank] lobby is
way too powerful,” says Adil Moussa,
a payments analyst at Boston-based
research firm Aite Group LLC. “It’s
very unlikely that Congress is going
to cap interchange.”
Meanwhile, Visa Europe will have
to change its pricing practices as well
once the EU publishes its full guidance
on what form of interchange it
will find acceptable, Grover says. At
the same time, he says, the decision
against MasterCard is likely to prove
only a “small negative” for Visa as it
prepares its initial public offering.
Linthicum, Md.-based First
Annapolis Consulting Inc. provided
U.S. interchange estimates for 2005
and 2006 based on Visa/MasterCard
purchase volumes and blended interchange
rates of 1.75% in 2005 and
1.8% in 2006. Digital Transactions
estimated 2007 interchange revenues
based on a projected 13% increase in
purchase volume and a 1.85% blended
rate mostly due to new card-network
pricing that makes more cards eligible
for higher rewards-card interchange.
A Higher Profile for
Image Sharing
These days, the trafficking of electronic
check images among banks is
on a tear. Lost in all the talk about
image exchange, though, is the fact
that there is an alternative: image
sharing. And, though it’s been quiet
the last few years, sharing is starting
to get attention again from bankers.
“The power of image sharing
is starting to be recognized,” says
Diane Scott, chief sales, marketing,
and product officer for Viewpointe
Archive Services LLC. “We’ll see the
market move in ’08.”
With image sharing, banks deposit
their check images in a massive storehouse,
to be retrieved as needed for
clearing and settlement. Collecting
banks send only check data to paying
banks. Those are much skinnier files
than the big payloads required for
images. Partly for this reason, sharing
proponents argue it’s cheaper and
more efficient than image exchange.
The sharing concept got a big
lift last month when Milwaukeebased
Fiserv Inc. agreed to make
its proprietary image archive part of
Viewpointe’s enormous archive, the
largest in the world at 112.7 billion
checks. That will add 8.5 billion
images to Viewpointe’s collection.
But, more important, the move brings
1,600 Fiserv client institutions, most
of them paying banks, within range
of Viewpointe’s other 11 archive customers,
which include some of the
country’s largest collecting banks.
That’s no small thing. Since it’s
based on an archive, image sharing
doesn’t require paying banks to be
equipped to receive and clear images.
That means there’s no need to print
expensive substitute checks for banks
that can’t handle images. The more
paying banks can be brought into the
archive to trade with banks of first
deposit, the better.
“Viewpointe’s hand is strengthened
by being able to get thousands
of endpoint banks [into the archive]
where historically you had to ship
images via the Fed at higher prices,”
notes Bob Meara, a senior analyst at
Boston-based researcher Celent LLC.
The difficulty of getting images
into the hands of small community
banks is known in the business as
the “last-mile problem.” Steve Ward,
executive vice president of the financial
institutions group for Fiserv,
thinks the deal with Viewpointe helps
solve it. “The overall driver [to participate
in Viewpointe’s archive] is further
enhancing the electronification of
the check business,” he says.
Still, nobody can quantify just
how much more efficient image sharing
really is. Scott says Viewpointe
is still trying to quantify the cost
advantage. “Net net, it works out to
be not that much less” than image
exchange, says Susan Long, who runs
SVPCO’s Image Payments Network
as a senior vice president at The
Clearing House Payments Co. LLC,
New York, though she’s relying on
data that’s several years old.
February 2008 • digitaltransactions • 9

TRENDS & TACTICS
TRENDS & TACTICS
Viewpointe’s Upward Vector
(number and value of images shared and exchanged)
244 million
$320 billion
Long is skeptical about the real
momentum behind image sharing,
Fiserv deal or not, particularly as
compared with the progress of image
exchange. That’s understandable, since
she runs the largest image-exchange
network in the country. “Somebody
asked me, ‘Is image exchange going to
go away now,’” she says. “Absolutely
not.” SVPCO processed 340.9 million
items in December, up nearly threefold
from December 2006. Nationwide,
banks trafficked 1.03 billion images in
November, a 142% leap from November
2006, according to the latest statistics
from the Dallas-based Electronic
Check Clearing House Organization,
whose rules govern image exchange.
By contrast, image-share volume
is hard to measure. Viewpointe says
it processed 244 million images in
December, up 77% in a year (chart),
but it can’t break out image-share from
image-exchange activity. Viewpointe
is owned by Bank of America Corp.,
U.S. Bancorp, IBM Corp., JPMorgan
Chase & Co., SunTrust Banks Inc.,
and Wells Fargo Co. It serves not only
its five owner banks but also 14 other
financial institutions and processors,
offering both an image-sharing and
image-exchange product.
A stumbling block for image sharing
is banks’ long-held reluctance to
give up their proprietary archives.
Scott argues banks are more willing
to consider pooling their images these
138.2 million
• No. of items
• Value
$136 billion
December 2007 December 2006
days, given that the archive function
itself is a commodity business dealing
with a form of payment in which volume
is steadily falling. But Long isn’t
so sure. “Our banks are saying, ‘We
want to do image exchange—we’ve
already built our archives, and it provides
us with a point of differentiation,’”
she says.
In the end, the proof will be in the
statistical pudding. But neither model
of check electronification is likely to
bury the other. Notes analyst Meara:
“I think they’re going to co-exist for
the foreseeable future.”
Transactors
Mocapay: Mobile
Payments for Everyone
Source: Company reports
While mobile-payments services like
PayPal Inc.’s PayPal Mobile concentrate
on paying e-merchants, and
banks and wireless carriers work out
ways to use handsets to pay merchants
at the cashier, a startup in Boulder,
Colo., is getting set to do both.
Two-year-old Mocapay Inc.,
which has been handling transactions
for about 200 merchants in the Boulder
and Cincinnati areas, plans to
launch a national rollout of its service
this spring. And, while its clients are
all brick-and-mortar merchants right
now, it will likely start processing
transactions for Web sites in April,
says Lance Gentry, the company’s
chief marketing officer.
Called Feed until last year, the
company changed its name to Mocapay
as a sort of short code for “mobile
cash payment.” In January, it was
feverishly completing work on its processing
platform in an effort to support
an expansion in transaction capacity.
Its system is handling 50 to 100 transactions
a day currently, but Gentry
declines to make volume projections
with the rollout looming. “We have no
idea,” he says. “It could be gargantuan
if we do it right and really get some
national retailers behind this.”
It may be getting much of the
mobile-payments puzzle right already.
What distinguishes Mocapay is that
“they’re first to market with a deviceindependent,
carrier-independent, and,
most important, bank-independent
service,” that enables both physicalworld
and e-commerce payments,
says Richard Crone, who follows
mobile banking and payments for his
firm, Crone Consulting LLC.
Mocapay’s service operates via
short-message-service (SMS) transmissions,
and can be used on most
mobile carriers in the U.S. Consumers
use it by texting a PIN to Mocapay’s
short code. The processor returns a
message with the user’s account balance
and a one-time-use transaction
code. The consumer gives the code
to the cashier to complete the transaction
(or types it into a field on the
merchant’s checkout page).
At enrollment, consumers set up
a prepaid account, which they fund
with automated clearing house transfers
from their checking accounts.
Merchants enable their point-of-sale
terminals or systems with Mocapay’s
application programming interface
(API) when they sign up to accept
the service. The company has already
integrated its API with systems from
10 • digitaltransactions • February 2008

TRENDS & TACTICS
TRENDS & TACTICS
Aloha and Micros. For each Mocapay
transaction, merchants pay a flat
19 cents, well below credit and debit
card acceptance costs, with funds settlement
nightly. There’s also a fee of
$10 per month per terminal.
Mocapay is targeting primarily
grocery chains and mall merchants,
Gentry says, believing these retailers
to be the best fit with the company’s
target customer, whose age falls
between 14 and 30. “They spend a lot
of time at the mall,” he says.
Last year, the fledgling company
made its first foray outside of the Denver
area by arranging to have its service
added by Cincinnati Bell to a handset
program it has with the University of
Cincinnati that puts cell phones in student
hands with certain campus numbers
preloaded. About 30 merchants
on and around the campus now accept
Mocapay, with Kroger Co. expected to
add two stores to the service.
With the bank card and wireless
networks squabbling over how
to deploy near-field communication
(NFC), merchant setup may be
Mocapay’s chief competitive advantage.
That’s because its system doesn’t
depend on NFC, the short-range technology
that allows brick-and-mortar
payments from handsets but requires
merchants to install contactless readers.
“[Mocapay] has provided a solution
that allows merchants to start
accepting payments instantly without
any new hardware,” says Crone.
Mocapay also plans to beef up
security. Though it says its text messages
go through four levels of authentication,
a downloadable application
is in the works that could be used
instead of texting and would offer
more layers of security. DT
Credit Card And E-Banking Web Transaction Indexes
Following are the Keynote Credit Card Web Transaction Performance
Index and the Keynote E-Banking Web Transaction Performance Index.
The Keynote Credit Card Web Transaction Performance Index measures
the performance and availability of going to a selected credit
card site and logging in to conduct the appropriate intended actions
and checking or signing out. All measurements are taken from the
10 largest U.S. metropolitan areas (Boston, Chicago, Dallas, Detroit,
Houston, Los Angeles, New York, Philadelphia, San Francisco, and
Washington, D.C.) on high-speed links attached to key points on the
largest U.S. Internet Service Protocol (ISP) backbones.
The Keynote E-Banking Web Transaction Performance Index shows
the total execution time and success rate for logging into an account
and checking the account balance on selected Internet banking sites.
The sites included in the index were selected based on publicly
Credit Card Web Transaction Performance Index
Week starting January 7, 2007
Rank By Speed (seconds)
Response Rank w/o Rank w/o Rank w/o
Rank Target Time (sec) 12/31 12/24 12/17
1 Diners Club 3.74 1 1 1
2 US Bank 4.83 2 2 2
3 Chase 5.78 3 3 3
4 National City 8.29 4 5 4
5 Wells Fargo 8.88 5 4 5
6 Providian 9.32 6 6 6
Credit Card Index 9.79
7 Citibank 10.25 8 7 7
8 Capital One 10.26 7 8 8
9 American Express 11.09 9 9 9
10 HSBC 14.71 10 10 10
11 Discover Card 17.53 11 DNR DNR
12 Bank of America 17.87 12 11 11
available market-share information published in The Wall Street
Journal and other reliable industry sources.
Data for these indexes, supplied each week by Keynote Systems
Inc., San Mateo, Calif., reflect performance for the most recent week
available before the production deadline for this issue, as well as
rankings for the three previous weeks. Sites from these lists may
be removed from weekly published results due to insufficient data
points for a particular week. For other weeks the site was removed,
its ranking will be indicated as “DNR”—did not rank. For more
information on the methodology behind the indexes, visit www.
keynote.com. For more complete statistics for the weeks indicated,
go to www.digitaltransactions.net, click on “Web Transaction
Performance Indexes,” and click on the hyperlink for the week you’re
interested in at the bottom of the page.
Rank By Success Rate (percentage)
Success Outage Rank w/o Rank w/o Rank w/o
Rank Target Rate (%) Hours 12/31 12/24 12/17
1 Diners Club 100 0 8 1 1
1 National City 100 0 2 1 2
1 Wells Fargo 100 0 3 3 4
4 US Bank 99.73 0 1 3 3
5 Citibank 99.6 0 7 5 6
6 Chase 99.08 0 5 6 8
7 Bank of America 98.61 0 10 10 9
8 Discover Card 98.52 1 12 DNR DNR
Credit Card Index 98.48 0
9 Providian 97.78 2 6 8 5
10 Capital One 97.73 0 3 8 11
11 American Express 95.76 6 11 6 10
12 HSBC 94.91 5 9 11 7
E-Banking Transaction Performance Index
Week starting January 7, 2007
Rank By Speed (seconds)
Response Rank w/o Rank w/o Rank w/o
Rank Target Time (sec) 12/31 12/24 12/17
1 Etrade 3.24 1 1 1
2 WAMU 3.26 2 2 2
3 US Bank 4.78 3 3 3
4 Chase 5.47 4 4 4
5 Wachovia 6.76 5 5 5
eBanking Index 7.59
6 PNC 8.41 6 6 7
7 National City 8.65 7 8 8
8 Wells Fargo 9.24 8 7 6
9 Bank of America 12.66 9 9 9
10 CitiBank 17.77 DNR DNR DNR
Rank By Success Rate (percentage)
Success Outage Rank w/o Rank w/o Rank w/o
Rank Target Rate (%) Hours 12/31 12/24 12/17
1 Etrade 100 0 1 6 1
1 Wells Fargo 100 0 5 1 9
3 WAMU 99.87 0 6 1 8
4 National City 99.6 0 4 1 1
5 US Bank 99.47 1 2 1 4
6 Chase 99.34 0 3 7 7
7 PNC 99.19 1 8 5 4
8 Bank of America 99.06 0 7 8 3
eBanking Index 99.05 0
9 Wachovia 98.53 1 9 9 6
10 CitiBank 95.37 2 DNR DNR DNR
12 • digitaltransactions • February 2008

Security Notes
A ‘Mark of Cain’ Could Deter Data Thieves
Gideon Samid • Gideon@agsencryptions.com
Cain’s punishment for his
offense against his Biblical
brother Abel was
to be forever recognized as the
criminal he was. Maybe the Bible
can teach some modern employers
and crime fighters a lesson.
Rather than the enduring ignominy
they deserve, today’s hackers enjoy enduring obscurity.
Once exposed for data violations, the hacker is simply
discharged. His tale is hushed up and goes no further. But he
does—straight to the bank across the street, where he flaunts
his brilliant résumé while making no mention of his recent
escapade. Since the hackers who actually steal data or modify
records are so lightly dealt with, it’s hard to prosecute
them, even if someone wished to. Victims—who need the
image of security more than security itself—opt to cover up
an event that would expose their lax security. They reach a
pact with their data rapist, and pretend that all is well.
One could argue it’s their own business. But when China
was exposed as hiding the “private fact” that so many people
died of SARS, the world community was outraged, and the
Chinese eventually apologized without arguing that it was a
private affair. Hackers, and the thievery of data they propagate,
present the same sort of predicament as communicable
diseases. For that reason alone, hiding data violations and
covering up for data violators should be a criminal offense.
But even more could be done about the problem. The
FBI should organize a data-crime center, much like the initiatives
they organize to fight child pornography and pedophiles.
If neighbors have the right to know that a convicted
child rapist lives among them, data dealers should have the
right to be aware that the person who logged onto their site is
a convicted hacker. Convicted identity thieves should have
their mug shots posted and their crimes exposed on the same
Internet they so deftly use for their villainous purposes.
But how could we be sure to identify a convicted data
offender in any interaction? He could be forced to surf the
Internet with an e-mail address that instantly exposes his
past in an unmistakeable way. Offenders could do anything
online, but their address would say something like
John.Doe@fraudlist.gov. That would put anyone on alert.
Exposure and permanent tagging as a punishment is very
cost-effective. The criminals would work and roam free, but
their shame would stain them wherever they go.
It might just be a real deterrent. A kid realizing that,
if he fools around with his father’s bank data, he may
have to use such an e-mail address for the next, say, 10
years, would hesitate before going forward with his prank.
Hackers who count on their employers’ eagerness to hush
things up would face mandatory exposure, by law. The
shame stain would identify hackers no matter which state
they relocate to. And, if successful with this, the U.S. could
initiate a global database for international fraudsters, seriously
limiting their playground.
Today, Web sites and literature glorify the ace hacker
who penetrates walls built by legions of security experts.
Only a few are prosecuted, and even fewer suffer lasting
consequences. Is it any wonder that, instead of writing a
more efficient peer-to-peer protocol, the talented hacker
writes some code for pilferage-and-prowl? What’s needed
is a mark of Cain. When the headlines of the hacker’s
exploits fade, this shame stain will be there, day in and
day out. Every time he shops for a book, buys an airline
ticket, asks for information, the domain name of his e-mail
address will alert the public.
Violators of this tagging system should be treated
harshly. If a convicted hacker uses a normal address instead
of the one assigned to him, he should go to jail. Convicted
hackers should have to go the extra mile to get a job, especially
one with intensive data access. Yes, the tales of the
first wave of shame-stain criminals will be real sob stories,
but society might just be spared the pain of thousands of
would-be hackers who were deterred.
Data crimes are proven through the records; they don’t
rely on witnesses. Ever-improving data-mining programs
can flush out old data crimes nobody discovered. Imagine
the fear in the hearts of hackers who realize a hacking
offense they successfully accomplished, with no one the
wiser, will in due course be exposed and haunt them for
years, forcing them to write to their growing children: Here
is Your_Dad@fraudlist.gov.
February 2008 • digitaltransactions • 13

ACQUIRING
February 2008 digitaltransactions
The ACH Comes
to the Cash Register
Linda Punch
It’s taken some time, but retailers of all sizes increasingly are
embracing electronic check alternatives. The reasons: new technology
and a push from processors.
What a difference a few
months can make.
In early 2007, electronic
check conversion appeared to
be stuck at the starting gate. Despite
the launch in March of back-office
conversion (BOC), the most recent
version of electronic check acceptance,
many retailers beyond a dedicated
few seemed hesitant to adopt
BOC or any other electronic check
conversion option from the automated
clearing house.
But all that changed in the last six
months of 2007, according to some
merchant acquirers, terminal vendors
and industry observers. Merchants not
only are more aware of e-checks, an
increasing number—including major
retail chains such as Hy-Vee Inc. and
Meijer Inc.—are adopting some form
of electronic checks. And based on
what commentators said at October’s
annual meeting of the Association
for Financial Professionals in Boston,
Target Corp., The Home Depot Inc.
and Kohl’s Corp. are taking serious
looks at BOC.
“There are more merchants looking
at [check electronification] and moving
into that realm,” says Paul Rupple,
director of marketing for Digital Check
Corp., a Northfield, Ill.-based provider
of check-scanning equipment. “It’s still
the larger ones at this point although
it’s starting to migrate down to the
smaller ones as well.”
MagTek Inc., a maker of card readers
for ATMs and point-of-sale devices,
is seeing demand for devices that read
the MICR and the check, says John
Arato, vice president and business unit
manager. “There’s certainly a move
toward back office conversion and even
remote deposit,” Arato says. “There
are so many more companies out
there, as well as banks, selling remote
deposit services to large volume checkaccepting
merchants and retailers.”
This long-anticipated merchant
awakening comes at a time when some
in the industry feared e-checks at the
point of sale might never take off, in
part because check volume is declining.
Until recently, even the launch of
BOC, which addressed many of the
objections merchants voiced about
earlier forms of e-checks, appeared to
have no effect.
“If you’d asked me [a few] months
ago, I would have said these are all too
little, too late,” says Robert Meara,
senior analyst in Boston-based Celent
LLC’s banking group. “Retailers are
not going to invest money in a small
and declining percentage of their POS
mix when there are much bigger fish
to fry—[payment card] interchange
rates and that kind of stuff. But I was
proven solidly wrong.”
As check volume declines, the
per-unit cost of processing the paper
increases, says Tom Kettell, strategic
business manager, emerging markets,
for payment-processing hardware manufacturer
Epson America Inc. “Retailers
and their corporate offices are looking
for more economic ways to process
those checks and that has been the catalyst
for e-checks,” he says.
Making POP Work
Processing checks still represents a
substantial cost for merchants, particularly
large retailers, Meara says,
adding “while the pain is less acute
than it was, it’s still millions of dollars
in potential savings.” As a result, electronic
check conversion is “passing
muster in terms of internal businesscase
hurdles at quite a few dozen of
the top 100 retailers,” he says.
Hence, Celent predicts e-check
volumes are about to take off (chart,
page 16). This growing interest in
electronic check conversion also can
be traced to innovations in e-check
technology that address merchant
concerns. For example, apart from
Wal-Mart Stores Inc. and some others,
most large, multilane retailers
have been reluctant to adopt point
of purchase (POP), an older form
of e-check conversion, because it
14 • digitaltransactions • February 2008

typically required retailers to equip
every lane with a check scanner. In
addition, merchants using POP are
required to get explicit customer
authorization for the transaction and
to return the voided check.
But the BOC rules give retailers
more flexibility in how they handle
imaging of the check, says Amy
Gutierrez, vice president of strategic
market development at Nova
Information Services, the merchantacquiring
unit of Minneapolis-based
U.S. Bancorp. BOC enables merchants
that accept checks at the point
of sale to convert them into electronic
debits by scanning them in
their back office for submission to
the ACH network. Herndon, Va.-
based NACHA, which governs the
ACH, views BOC as a supplement
to POP.
The BOC rules have “really
opened the doors for a lot of the
larger retailers, especially in a multilane
environment, to make a POP
solution work,” Gutierrez says.
“We’re seeing more and more market
demand from the retailer community,
especially the very large multilane
retailers that are national.”
Acquirers now offer solutions that
eliminate the need for purchasing new
equipment for check conversion at the
point of sale. Nova, for example, has
built its e-check conversion products
on the backbone of its credit card processing
system.
“Our network infrastructure
is supporting debit and credit card
processing,” Gutierrez says. “And the
point-of-sale terminals that we certify
now take electronic check transactions.
Basically, we offer a full
payment solution for a merchant or
business to be able to take all of their
non-cash payments directly through
Nova network.”
In its Electronic Check Service
package, Nova converts the transaction
at the point of sale. Merchants
can upload images on their own time
from the back office. “The retailer can
keep the check in their cash drawer
and later image that check,” she says.
Nova’s e-check solution also
doesn’t involve special training of
cashiers. “We do all the point-of-sale
upgrades so the product goes electronic
but as far as the cashier is concerned,
it operates the same way as it
always did,” Gutierrez says.
The processor offers several
imaging options: Merchants can buy
scanning equipment for their back
offices or send the checks to Nova
for scanning. Nova sells both POP
and BOC solutions, and processing
of non-ACH check transactions
under the Check Clearing Act for the
21st Century, or Check 21. But the
“essence of our delivery is to take the
check at the earliest point of entry,
when it comes in at the point of sale
and goes through the cash register
and convert it at that point of time
similar to how we handle a credit
card transaction,” Gutierrez says.
Nova has more then 10,000 merchants—ranging
from the small momand-pop
locations to some of the largest
national, multilane retailers—using its
e-check services, Gutierrez says.
Linking to QuickBooks
TeleCheck Services Inc., a First Data
Corp. subsidiary, as part of its Electronic
Check Acceptance service also
offers a POP solution that doesn’t
require installation of imaging scanners
at the point of sale. “If a merchant has a
high-quality MICR [magnetic ink character
recognition] reader at the point of
sale but not an imaging device, we are
still able to accept those transactions
for ECA,” says Mark Wallin, general
manager. That’s because TeleCheck
has offered POP for more than five
years, primarily to regional merchants,
and has amassed a large database of
customer information, including name,
address, and other information typically
found on a check.
“That is a big part of the value
proposition that has helped gain
momentum among the national merchant
base,” Wallin says.
About 60% of retailers already
capture check code lines by scanning
the check’s MICR line as part of the
verification and guarantee process,
and would require no further hardware
investment to do electronic check
conversion, Celent’s Meara says.
The implementation of BOC also
gives retailers unhappy with POP
another option for electronic check
conversion. That was the case with
West Des Moines, Iowa-based supermarket
chain Hy-Vee Inc., which
Recent E-Check Growth Trends
3Q07 2Q07 Change 3Q06
Year-to-Year
Change
ARC 654,490,952 652,401,945 0.32% 547,087,729 19.63%
BOC* 840,743 248,919 237.76% 0 na
POP 123,311,764 127,747,644 -3.47% 80,485,522 53.21%
TEL 84,152,223 81,676,597 3.03% 74,302,402 13.26%
WEB 433,028,085 415,983,882 4.10% 341,990,975 26.62%
Total ACH Transactions** 3,447,300,859 3,461,728,624 -0.42% 3,085,730,166 11.72%
*BOC rules took effect March 16, 2007. **Includes electronic payroll deposits.
Source: NACHA
February 2008 • digitaltransactions • 15

ecently adopted NCR Corp.’s solution
for remote deposit capture with backoffice
conversion.
For Hy-Vee, NCR’s e-check product
addressed problems it encountered
in an earlier test of POP, says Kevin
Reed, assistant vice president and
controller. Hy-Vee, one of the nation’s
top 20 grocers with 224 stores, processes
2 million checks a month.
Hy-Vee tested conversion at the
point of purchase and “we were not
happy with the results,” Reed says.
“It was too slow and too expensive.
It slowed down our front end and we
didn’t like that. The model we had was
more expensive than depositing paper.”
Using Dayton, Ohio-based NCR’s
ImageMark-Commercial Passport technology,
Hy-Vee’s second attempt at electronic
check conversion is proving more
successful. “It didn’t affect our customers
other than they had to be aware of it,”
Reed says. “It didn’t affect our cashiers
so there was no change on the front end.
Of course, it does affect our bookkeeper
in the back office—it takes a little big
longer to scan the checks.”
The only extra investment
Hy-Vee has made in electronic check
Although there is growing interest in electronic check
conversion, retail check conversion will peak in
2010 as check usage at the point of sale continues to
decline, according to a new report from Celent LLC.
More than 50% of checks presented at the retail point
of sale in 2010 will be converted using point of purchase
(POP) or back-office conversion (BOC) methods, while
checks are expected to account for only 4% of point of
sale transactions, the report says.
POP, which has a head-start on BOC, will maintain its
lead as the favored method of check conversion, accounting
for three-quarters of retail e-check volume, Celent says.
That’s due in part to Wal-Mart Stores Inc.’s rollout of POP
to its 3,400 U.S. locations coupled with processor First Data
Corp.’s dominance of the market with a POP-based product
offered through its TeleCheck Services Inc. subsidiary.
Only 4% of surveyed retailers were already using or
piloting BOC, while 6% said they were interested and
evaluating the business case, the report says. Fifteen percent
said they had heard of BOC but had no interest, and
Climbing to the Peak, Then Down
55% said they had never heard of it. Twenty percent of
retailers said they had heard of BOC and were possibly
interested in it.
Of retailers surveyed, 45% said they prefer POP
check conversion while 25% preferred BOC. Thirty percent
said they have no plans to implement either.
Celent also found that two-thirds of retailers use verification
and guarantee services, which capture magnetic
ink character recognition (MICR) data on the check at
the point of sale, and already have the hardware capability
for POP check conversion.
The report—“Back-Office Conversion: Too Little Too
Late?”—is based on interviews conducted between July
and November 2007 with 16 treasury and finance staff
at retailers across multiple segments, eight BOC solution
providers and six large billers using the accountsreceivable
conversion (ARC) e-check code. Celent also
interviewed financial institutions currently offering or
planning to offer BOC as well as administering a Web
survey to more than 300 retail treasury staff.
Recent and Projected e-Check Dynamics
• Checks as % of POS Payments
• % of POS Items Converted
• No. of Retail Checks Converted (millions)
824
1,114
45%
1,112
52%
55%
963
56%
836
60%
728
29%
464
16% 15% 14%
15%
12%
269
148 162 10% 9% 120
168 7% 7% 64
6%
1%
2% 3% 3% 4%
5% 4% 3% 3% 2%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Celent LLC
16 • digitaltransactions • February 2008

conversion is to buy a check scanner
for each of the stores. The roll-out of
the NCR technology began in August
and is expected to be completed in the
second quarter, Reed says.
Hy-Vee is far from alone in its
rejection of POP, says Denis Burgeron,
director of product management
for NCR Payment & Imaging Solutions.
“What almost every retailer
that we’ve talked to is interested in
is not affecting the in-lane experience
at all—treating the customer
like you would today but taking their
payments to a back office within
the retail establishment and imaging
them there,” he says. “They get the
efficiencies of a streamlined process
because it’s all being digitized, but
they’re not impacting the customer
experience at all.”
Wal-Mart, however, has expressed
satisfaction with POP. Mike Cook,
a Wal-Mart executive who spoke
at NACHA’s annual payments
conference last April in Chicago, said
the retailer was nearly done rolling
out POP in all of its 3,400 U.S.
Wal-Mart stores, and added that the
operational hassles for which POP
has been criticized are overblown.
Wal-Mart’s uptake is probably the
biggest reason why the growth in
POP’s quarterly transaction numbers
has been so strong in the past two
years (chart, page 15). Meanwhile,
drug-store chain CVS Caremark
Corp. reportedly is strongly interested
in POP, industry sources say,
though a spokesperson said the company
hasn’t announced any plans for
electronic check acceptance.
Merchants also are finding value
in e-check products that incorporate
other business functions. BankServ,
a San Francisco-based processor that
offers everything from ACH services
and electronic bill payments to
international corporate money transfers,
markets one such solution.
BankServ’s e-check solution can
be integrated with popular accounting
software applications software, such
as Intuit Inc.’s QuickBooks and
PeachTree.
“Almost every other remote
deposit product or desktop deposit
product was designed to solve the
banking issue of taking the deposit
to the bank,” says David F. Kvederis,
president and chief executive. “Our
product is designed to help a business,
particularly a small business,
post their books, post their accounting
system and oh, by the way, it happens
to deposit the check.”
‘Millions, Not Thousands’
The availability of BOC led to a
broad-based revisiting by merchants
large and small of the whole concept
of electronic check acceptance,
Celent’s Meara says. In a recent survey,
Celent found that awareness of
back-office conversion solutions rose
to 45% of surveyed retailers through
August, compared to 75% awareness
of POP after seven years.
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February 2008 • digitaltransactions • 17

In addition, 67% of retail treasury
staff surveyed who were aware
of BOC expressed interest in BOC
compared with 60% for POP. Some
6% are evaluating the business case,
with virtually all doing so comprehensively—evaluating
all e-check
options, Celent found.
“At the end of the day, the merchant
just has to sit down and try
to find out whether it makes sense
to them or not,” says Adil Moussa,
an analyst with Aite Group LLC,
Boston. “That has really been the
challenge so far. If they see the
value, they will do it.”
Indeed, as more merchants learn
of the operational efficiencies to be
gained by converting paper into electronic
transactions, electronic check
services are becoming an easier sell,
TeleCheck’s Wallin says. TeleCheck
in October began offering its Electronic
Check Acceptance service to
Meijer’s large department/grocery
stores in Michigan, Illinois, Indiana,
Kentucky, and Ohio.
Most early adopters of
TeleCheck’s e-check solution were
regional merchants, while larger
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national players sat on the sidelines
to see how electronic check conversion
technology would evolve,
Wallin says.
“Now that there are good solutions
for both BOC and POP, a lot of
merchants are at the place where they
can sit down and do a really full evaluation
and they’re realizing they need
to make a move,” he says. “We’re
starting to almost hit a critical mass
from that standpoint.”
Many merchants are beginning to
realize that electronic check conversion
offers the same advantages as
electronic processing of credit and
debit card transactions, Wallin adds.
“A lot of merchants are looking at
paper checks similar to they way
credit card acceptance was back in the
old knuckle-buster days,” he says.
What’s more, with a number of
major national players changing to
electronic check conversion with good
results, “anybody who just wanted to
watch to see if the solution was going
to be successful now has a resounding
answer to that question,” Wallin says.
TeleCheck has seen “a muchreduced
merchant attrition rate for
those on our electronic check product
as opposed to any merchant on a
paper product,” Wallin adds. “Generally,
once somebody is processing
checks efficiently and effectively
and once they get the operational
costs out of their business related
to handling paper checks, they can’t
imagine ever going back.”
BankServ’s Kvederis also reports
strong interest in electronic check conversion
products. In November 2006,
“a lot of people were kind of talking
about it and saying they were going to
do something, but we hadn’t seen any
material uptake in volume,” he says.
But by November 2007, BankServ
saw “some very strong momentum.
We’ve gone to over 12,000 depositors
from 1,200 depositors a year ago.”
Most of the interest is coming
from businesses such as property
managers and accounting and law
firms, Kvederis says, adding that he
expects other businesses to join the
move to electronic check conversion.
“There is still a large education
process that has to go on to the
business community,” he says. “Most
of them don’t know it is available.
Almost all of them, when they find
out it’s available, want to try it. We’ve
barely scratched the surface on users
on this. There’s going to be millions
of them, not thousands.”
Not all processors have seen a
sharp increase in customers asking for
electronic check conversion, however.
“We’ve seen a slow interest
increase. It has not been people
breaking in the doors to adopt it,” says
Jeff Thorness, president and chief
executive of Allen, Texas-based processor
ACH Direct Inc., which is
piloting BOC solutions with utilities
and governmental agencies.
Yet, Thorness says he expects
demand for e-checks, particularly
BOC, to rise this year. “We’ve got
this early adoption where people are
testing the waters,” he says. “I would
expect the interest levels and adoption
rates to start climbing in 2008.” DT
18 • digitaltransactions • February 2008

COMPONENTS
February 2008 digitaltransactions
ATMs: Not Dead,
Not Done
Thomas E. Honey
More versatility can mean extended life for the ATM, says an executive
with a firm that enables ATMs for prepaid card dispensing and
sees potential for distributing a wide range of other media.
Mark Twain once lectured
that reports of his death
were greatly exaggerated.
A similar view about ATMs may be
true. Since its inception, the ATM has
achieved an institutionalized role as
the premier self-service device for
banking functions and other consumer
services. Consumers’ trust in, comfort
with, and reliance upon the ATM for
its time-and-place convenience value
won’t let it die, but prompt its greater
versatility and extended life.
Automated cash dispensers were
invented in 1967, but soon became
deposit acceptors in the early 1970s
with the introduction of Docutel’s
Total Automated Teller. Being part of
an ATM installation team for my bank
in 1971, I can easily recall bankers’
published doubts about the ATM’s
role and future. In fact, most concerns
focused on cost justification.
The ATM was a major technological
invention for a staid banking
industry at a time of substantial consumer
distrust of computer-related
technology. Intuitive logic by most
banking leaders couldn’t make practical
sense of it. It was seen as a symbol
of modern progress for banks that
could perhaps replace the need for
more human tellers.
A counter-intuitive view held that
the ATM was a time-and-place convenience-value
device for consumers
who valued convenience and anonymity
in conducting their personal banking
business. Changes in consumer
needs, thinking, and behavior ultimately
would determine the innovation’s
success provided it was given
enough time to demonstrate both revenue
and cost benefits to banking. This
was clearly a long-haul proposition that
required a generation of acceptors and
users to enjoy and demand the greater
time-and-place convenience value that
ATMs offered them.
A Stage Two World
By 1986, ATMs were ubiquitous nationally,
banks were charging for their use,
and regional ATM card interchange had
commenced. The so-called less-cash
transaction that often accompanied
paycheck deposits had all but disappeared.
More depositors were comfortable
with direct pay deposit as 24-hour
ATM availability afforded them anytime
access to their funds. By the early
1990s, surcharging of ATM transactions
was permitted and off-premise
ATMs began to flourish—they now
number nearly two-thirds of America’s
400,000 ATMs in use today.
Today’s situation can be viewed
from the standpoint that ATMs have
always been at the mercy of consumer
demand for cash. Though ATMs offer
and conduct a wide range of customer
services and functions, cash withdrawals
constitute nearly 80% of all
ATM transactions, Dove Consulting
reported in 2003.
Cash withdrawals have declined
significantly to levels not seen for
many years. The expanded use of bankissued
debit cards, introduction of prepaid
and gift cards, and expanded cash
back at the point of sale have contributed
substantially to this decline.
Shipments of new ATMs in the
U.S. have also shrunk. Unproductive
off-premise ATMs have begun to
be withdrawn, with the prospect that
many more are headed for the junkyard.
The future viability of ATMs
and of the independent sales organizations
that deploy them is in jeopardy.
Alternatives to the ATM began to
appear about two years ago. The most
heralded has been the multifunctional
kiosk that dispenses cash and gift
cards, cashes checks, makes foreign
remittances, and pays common bills.
Such kiosks are expensive to acquire
and maintain. Consumer acceptance
has been spotty—mainly because of,
in this writer’s opinion, the lack of
consumer-friendly and intuitive navigation
of the device, especially when
compared to the entrenched familiarity
of the ATM.
February 2008 • digitaltransactions • 19

Changing consumer behavior regarding the multifunction kiosk is
another longer-term proposition that may have to go through a few more
intervening stages before consumers are willing to switch from their
comfort with the ATM. Cardtronics Inc.’s decision, therefore, to cease
further deployment of kiosks in 7-Eleven Inc. stores is no surprise. As
one long-time industry colleague has observed, “The kiosk is a Stage
Four solution in a Stage Two world.”
ATMs thus remain at the vanguard of America’s current self-service
surge. This is especially true for younger adults who are more technosavvy
than their parents and grandparents. Nevertheless, multiple generations
are looking to the ATM for extended self-service functionality
that meets their need and demand for time-and-place convenience
value beyond cash access.
ATM manufacturers have responded with newer, more innovative
machines that enhance the deposit process, add bill-payment features,
include more account-transfer options, and expand screen views for
additional promotions and service choices. With newer equipment,
depositors can now get a digital image of deposited checks and currency
(“Pushing the Envelope Aside,” November-December, 2006).
Deposited checks can be cleared more rapidly via the Check 21 option.
While such innovations further connect the consumer with the financial
institution, they hardly add to functional dependency and transaction
volume—especially for off-premise ATMs.
Getting Gift Cards
Increasingly, today’s ATM world needs to connect the consumer with
non-banking businesses and public services for transaction growth
and new revenue streams, and to attract new customers. Among early
attempts in the dispensing arena have been the dispensation of postage
stamps, targeted coupons for U.S. convenience-store customers,
e-ticketing of airline and railroad fares, dispensing of transit passes, and
topping up of mobile phones in some parts of the world. Uncertain consumer
need and acceptance of these applications in the U.S. are likely to
keep demand and volume low.
The union of ATMs and prepaid cards could prove to be a marriage
of convenience in this challenging environment. Dispensing of non-cash
media from ATMs may hold some real promise for incremental ATM
transaction growth—especially for prepaid gift cards, tickets to events
and venues, and other forms of value representations.
Tranax Technologies Inc. recently announced the dispensing of a prepaid
card from a $3,000 sidecar add-on to its ATM. And, in September,
Better ATM Services announced a program for licensing its patent and
patented card technology to ATM and prepaid card industry participants,
enabling prepaid card dispensing from an ATM’s cash tray, as with currency.
Thus, a marriage of convenience is created for both industries.
ATMs are the most secure, trusted, cost-effective, and convenient
device for unattended banking and commerce. According to an ATM
Industry Association study, more than 75% of adults ages 18 and older
regard the ATM as an essential part of their daily lives compared with
56% for e-mail and Internet access. In addition, ATMs are a more costeffective
option for customer-activated transactions, with less than a
fourth of the cost of transactions carried out by human tellers and clerks,
according to a 2004 report by TowerGroup Inc.
February 2008 • digitaltransactions • 21

Prepaid gift cards, meanwhile, need
alternative means of distribution. Sales
of gift cards in 2006 amounted to $80
billion, according to TowerGroup, and
there are more than 660 million openloop
(Visa- and MasterCard-branded)
and closed-loop cards, according to
Mercator Advisory Group Inc.
There are only three methods to
buy gift cards today:
Over-the-counter purchase at
the desired merchant;
Via the J-hook card malls at
mass merchandisers and convenience
stores;
Over the Internet.
All three are relatively inconvenient
for the purchaser and a hassle
for the seller in terms of activation,
stocking of cards, dealing with growing
security and activation issues, and
the labor cost involved.
ATMs offer a more convenient,
secure, and economical gift card distribution
option for both businesses
and consumers. As has been repeatedly
demonstrated for more than 35
years, consumers prefer the time-andplace
convenience-value proposition
in the dispensing of value media.
Imagine the scene during recent
holiday seasons, with people trying
to buy gift cards for family, friends,
and co-workers at retailers and other
merchants with J-hook card malls:
Crowds of people sorting through
racks of cards, long lines of people
trying to pay for the cards and to get
them activated, and frustrated checkout
clerks and customers.
Compare this scene to driving or
walking up to an ATM that features
a gift card of the merchant at that
merchant’s location or an ATM that
features the gift cards of various retailers,
inserting your payment card, and
selecting the number of cards you
wish. The consumer has none of the
hassle, but experiences added value
with a premium or coupon attached to
the card for use by the purchaser. No
security or fraud worries as the gift
cards are contained in a locked safe
within the ATM so no one can photograph
the serial or account number and
use the number shortly after the card
has been purchased and activated.
Dispensing Value
Better ATM Services’ card medium is in
the form of a matted, plastic card sheet.
It is slightly more than 3 inches wide
and 6 inches long and about half the
thickness of a normal embossed card.
The card sheet comes
in three panels that are
easily snapped apart.
Each panel can consist
of a card, premium coupon
and/or advertising
and promotion. Prepaid
card processor Comdata
Corp. cites studies that
show about 80% of gift
card purchasers will
choose a gift card that
offers a value premium
to the purchaser over
another that has no premium
offer.
Dispensing possibilities abound.
Though Better ATM’s business model
is an enabling model via its patents and
does not directly compete with either
industry’s participants, the company
has launched five beta ATM sites in restaurants
in the greater Phoenix area to
test real-world acceptance. The ATMs
dispense both cash and the restaurants’
gift cards. All cards have a premium
offer for a free appetizer, desert, or
value premium for food and drink.
National retailers have inquired
about having their prepaid cards distributed
through financial institutionand
ISO-owned ATMs as well as
ATMs in shopping centers dedicated
to distributing gift cards of the mall’s
client tenants to save them the hassle
of selling and activating cards over
the counter—especially during the
holiday season. Packaged-goods firms
have inquired about coupon space and
paying a fee to the ATM distributor.
Others see opportunities for ticketing
for sporting events and concerts.
Honey: ATMs are wellsuited
to deliver products
like prepaid cards.
Card panels can consist of the admission
ticket and prepaid value for
refreshments once inside the venue,
along with a collector’s photo of a
marquee athlete or performer.
Transit-pass applications are obvious,
especially with the opportunity
for providing safety announcements
and advertising—thus enhancing revenue
opportunities.
Another interesting concept was
recently advanced
from overseas in
which certain airlines
will sell a “fast-track”
pass for passengers not
wanting to wait in long
lines to pass through
security. Selling such
passes via the ATM
is viewed both as an
opportunity to reduce
the size of queues at
check-in counters and
to promote shopping
once inside the security
zone.
These are simply a few of the possible
applications for increasing transaction
volume and delivering value to
consumers with time-and-place convenience.
Better ATM Services’ licensed
and certificated participants are free to
create their own offers and pricing, and
operate within current or newly formed
market and operating infrastructures.
The ATM remains the most frequently
used delivery channel for banks
and for fulfilling consumer demand
for cash. Now, delivery of other value
forms is possible in large numbers, not
only for banking, but also for retailers,
packaged-goods manufacturers, sport
and entertainment purveyors, and the
public sector, providing opportunities
for additional revenue and further
expansion of the versatility and popularity
of ATMs. DT
Thomas Honey is chief development
and marketing officer at Better ATM
Services Inc., Mesa, Ariz. Reach him
at tom@betteratmservices.com.
22 • digitaltransactions • February 2008

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Debit’s
Decisive
Moment
Many observers hail so-called decoupled debit cards as the
latest innovation in payments. Industry participants are quickly
trying to size up the unknown risks and possibly rich rewards.
By Jane Adler
As card issuers look for
ways to tap into the
growing popularity of
debit cards, a new product
is poised to shake up
the market: the so-called
decoupled debit card. What’s so
innovative about the card, as its name
suggests, is that it’s not linked to a
demand-deposit account, or DDA.
Traditional debit cards are issued by
the bank where the depositor has a
checking or savings account.
Industry players see big possibilities
with decoupled debit cards and
they’re lining up to carve out a niche.
Several financial institutions, notably
Capital One Financial Corp. and
HSBC USA Inc.’s HSBC Retail Services,
a big third-party private-label
card issuer, are testing PIN-secured
decoupled debit cards already. Capital
One’s card is seen as a true innovation
because it carries the MasterCard Inc.
logo, guaranteeing acceptance wherever
MasterCard is taken—a huge
advantage. Tempo Payments Inc. (formerly
Debitman Card Inc.), which
HSBC uses to process its product, is
marketing its decoupled-debit platform
to other financial institutions.
Other players are in or plan to be
in the game with variants. Discover
Financial Services LLC is actively
looking at allowing its bank partners
to issue decoupled debit cards on the
Discover Network, according to a
company spokesperson. Meanwhile,
PayPal, the payments unit of eBay
24 • digitaltransactions • February 2008

Inc., has announced enhancements
to its debit card, which is linked to
a PayPal account, not a traditional
checking account.
The development of decoupled
debit and its ripple effects could represent
a sea change in the card landscape.
The situation has similarities
with that of the 1980s when a few big
banks, wearing their credit card issuing
hats, first began marketing plastic
to consumers who had no deposit
accounts with them. “The evolution
of the decoupled debit card will be
extremely fun to watch,” notes Robert
Meara, senior analyst at Boston-based
consulting firm Celent LLC.
rewards programs eventually may be
as costly for retailers as credit card
rewards. And recently, NACHA, the
group that governs the automated
clearing house, ruled that decoupled
transactions cannot be aggregated,
a seemingly minor technicality that
nonetheless could delay widespread
implementation of the product.
At the same time, banks worry
that their checking-account customers
might be lured away by decoupled
debit card issuers. And serious
concerns remain about security, risk
management, and potential liability.
“There are a lot of variables that
could easily affect the willingness of
banks to issue this product,” notes
With debit so hot, it’s no wonder
at least some financial institutions
are seeking new ways to tap into the
demand. And it’s really no surprise that
McLean, Va.-based Capital One, one
of the payment industry’s most adept
marketers, is at the forefront of decoupled
debit. The company started out in
1993 as a monoline credit card issuer
spun off from the old Signet Bank and
quickly grew into one of the nation’s
top issuers. It later bought two sizable
regional bank-holding companies.
In 2007, Capital One began testing
two types of decoupled debit cards.
One is a standalone card offered to a
group of its credit card holders. The
other card is cobranded with merchant
partners. Both cards have a daily
Banks are taking note, though
they’re reluctant to talk publicly
about what some bankers view
as a threat to their core consumer
relationships. But lest they be left
behind, large financial institutions
are either exploring the issuance of
their own decoupled debit cards or at
least watching the market very carefully,
industry sources say. Meanwhile,
merchants have some hopes
that decoupled debit might help them
build customer loyalty.
“There are reasons to be excited
about this product,” says Gwenn
Bézard, research director at Aite
Group LLC, a Boston-based consulting
and research firm. “It’s a great
product for many reasons.”
A Sensitive Issue
But despite decoupled debit’s promise,
many questions have yet to be
resolved. At this early stage, it’s difficult
to gauge the extent of consumer
and merchant acceptance. Already,
merchant Web sites are logging comments
about how decoupled-debit
Bruce Cundiff, research director
at Javelin Strategy & Research in
Pleasanton, Calif.
A spokesperson for JPMorgan
Chase & Co., one of the nation’s top
debit and credit card issuers, in an
e-mail expresses many bankers’ feelings
about decoupled debit cards:
“We don’t plan one. We think our
convenience—3,100 branches and
9,100 ATMs—and range of products
make Chase very attractive to
customers.”
Lending impetus to a new type
of debit card is the fact that debit
card usage is growing rapidly. Debit
card transaction volume has surpassed
credit card transactions in the U.S.
A December report by the Federal
Reserve estimates that debit card transactions
(signature- and PIN-based combined)
grew at a 17.5% annualized clip
in the Fed’s 2004-2006 study period
(chart, page 28). And a recent report by
TowerGroup, an editorially independent
research arm of MasterCard Inc.,
predicts debit card charge volume will
grow to nearly $180 billion in 2008, a
$30 billion increase over 2007.
spend limit of $500. For customers,
they work just like traditional payment
cards, but are different under the
hood: For purchase transactions, they
debit cardholders’ existing checking
accounts via the automated clearing
house network.
A Capital One spokesperson
declines to name the merchants, but
industry sources say they include
Richmond, Va.-based Ukrop’s Super
Markets Inc. and Altoona, Pa.-based
convenience-store operator Sheetz
Inc. The spokesperson also declines
to give the number of cards that have
been issued or transaction volumes.
But Capital One is “pleased” with
adoption rates and card usage so far,
the spokesperson states.
Besides their issuer-provided features,
the Capital One decoupled debit
cards represent a breakthrough because
they carry the MasterCard logo, which
gives them utility at about 6 million
U.S. acceptance locations. MasterCard,
sources say, is hoping to use decoupled
debit to challenge Visa Inc., which has
about a 70% share of the signaturebased
U.S. debit card market compared
with just 30% for MasterCard.
February 2008 • digitaltransactions • 25

MasterCard could take the risk of
offending banks because the network
changed from a bank-owned association
to a publicly traded stock company
in May 2006. Still, it’s a sensitive
issue, and in a prepared statement,
MasterCard’s Richard G. Lyons,
global product group executive, is
careful to note that
MasterCard isn’t trying
to disrupt traditional
bank-consumer
relationships.
“We supported
Capital One’s strategy
to introduce
its innovative debit
offering to compete
in an open-market
environment,” he
said. “MasterCard
understands that consumers
value choice
on how to pay for
their purchases and
how to access their
funds. The Capital
One debit product
serves as a companion to, rather
than a replacement of, the core banking
relationship, at the consumer’s
discretion.”
‘Not for Everyone’
HSBC, meanwhile, also is rolling out
a decoupled debit product with merchant
partners. The cards currently
are offered at the grocer Pathmark
Stores Inc. in a select number of locations
in New York. HSBC’s other
merchant partner is CVS Caremark
Corp., which has 6,245 pharmacies in
40 states and the District of Columbia.
The card debuted at 141 Indianapolisarea
CVS pharmacies last October.
Daniel Eckert, head of venture
acquisition and development at HSBC
card and retail services in Prospect
Heights, Ill., won’t say how many
cards HSBC, the nation’s No. 3 thirdparty
private-label card issuer, has
HSBC’s Eckert: “The interest
among potential card sponsors
has grown exponentially.”
issued or provide transaction volume.
“Decoupled debit is only five months
old as an industry. This is still very
much based on a test-and-learn feedback
loop,” he says. Even so, he adds,
“The interest among potential card
sponsors has grown exponentially. We
will have a lot of new [deal] announcements
in the first
quarter of 2008.”
For now, HSBC’s
decoupled debit card
runs on the Tempo
Payment Network,
which has about
200,000 acceptance
locations and uses
the ACH to debit
funds from cardholders’
DDAs. (In
2006, HSBC participated
in an $8.7 million
investment in
Tempo.) Eckert says
that may change for
future card sponsors,
indicating it might
be possible for merchants
to work with Visa, MasterCard,
or American Express Co., though he
provides no details.
For its part, Tempo Payments
shifted its strategy last summer.
After targeting retailers almost
exclusively since its Debitman days
as a low-cost, PIN-based alternative
to the major card brands, San Mateo,
Calif.-based Tempo now appeals to
financial institutions by offering
a payment platform that accesses
demand-deposit accounts. “We are
the only ones outside of Capital One
that has built this kind of platform,”
says Mike Grossman, Tempo’s chief
executive. Grossman adds that some
financial institutions have signed up
for the product, though he refuses to
name them.
“It’s clear that several big financial
institutions will join HSBC and
Capital One,” he says, noting that
some, but not all, banks see decoupled
debit cards as an opportunity.
He adds that highly motivated institutions
could implement a decoupled
debit program through Tempo in as
little as three to four months.
Speculating on which banks might
soon enter the decoupled debit arena,
Aite’s Bézard says, “It’s not a product
for everyone.” He explains that
decoupled debit makes sense for issuers
such as Capital One and HSBC,
neither of which have a lot of depositors.
“Initially, the most interested
(institutions) will be those without
traditional checking-account relationships,”
Bézard notes.
Looking ahead further, Bézard
thinks banks that specialize in cobranded
and private-label credit cards eventually
will embrace decoupled debit.
Prime candidates could be Citigroup
Inc., General Electric Co.’s GE Money
unit, Chase, and Wells Fargo & Co.
A ‘Powerful Package’
More new twists on debit are coming
from PayPal. About six years
ago, PayPal began offering its business
customers a debit card. Chase
issues the MasterCard-branded card.
Unlike the new decoupled debit
cards, the PayPal card draws funds
from the holder’s PayPal account,
not a checking account. From a regulatory
standpoint, the accounts are
considered stored-value accounts,
Bézard says.
PayPal recently began offering a
“plug in,” a type of software application
the user downloads to a Web
browser, that generates a one-time-use
MasterCard debit number to pay for an
online purchase. The plug-in enables
users to use PayPal even at sites that
don’t accept PayPal. Chris George,
senior director of financial products
at PayPal in San Jose, Calif., adds that
consumers have expressed interest in
a physical debit card product, an idea
PayPal is evaluating.
26 • digitaltransactions • February 2008

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Also, last year, PayPal began
offering its debit card holders backup
funding through a traditional bank
account. If the card user isn’t sure the
PayPal account has enough funds to
complete a transaction, the user can
authorize an ACH withdrawal from
his or her bank account. Or, the cardholder
can institute a charge against
a PayPal credit line. PayPal charges
no fee for the transaction. But if the
bank account is used as the backup
funding source when there isn’t
enough money in the DDA, then the
bank typically charges an insufficientfunds
fee, George says. He adds that
customers who sign up for the backup
funding tend to be those who use
their PayPal account as their primary
transaction card.
“They aren’t so worried about
limiting their purchases to the PayPal
balance,” he says.
As with other decoupled debit
cards out so far, rewards are an
important part of the PayPal program.
Card users get 1% cash back
on all signature-debit transactions.
PayPal’s George notes that some
accounts from the program’s early
days are grandfathered in with a
1.5% rebate on purchases.
In general, rewards linked to debit
cards are on the rise (chart, page 30).
Part of that is due to rising interchange
making rewards more affordable for
issuers, according to Bézard. (Credit
cards still offer richer rewards because
issuers can fund them from lucrative
interest revenues.) But competition
may be equally if not more important.
“Consumers’ embrace of debit
cards has forced banks to increasingly
compete on the features of debit
cards, with big banks increasingly
competing with smaller banks,” he
says. “Their embrace of debit cards is
having a ripple effect across the banking
industry, prompting even small
institutions to offer debit rewards as a
defensive measure.”
Debit Goes on a Tear
(transactions in billions)
Total: 15.6
Signature: 10.3
PIN: 5.3
The decoupled debit card could
open new possibilities in the rewards
arena as a way to garner new customers.
Linking rewards and a debit
card without the hassle of changing a
checking account represents a “powerful
package,” according to Celent’s
San Francisco-based senior analyst
Ariana-Michele Moore.
At Capital One, customers earn
rewards everywhere they spend with
the card—boosting its consumer
appeal. They also earn extra rewards
at partner merchants’ locations.
For example, in the Sheetz pilot
program, cardholders earn bonus
points on purchases made at Sheetz
stores, according to a report in the
restaurant-industry magazine QSR.
These bonus rewards are given in
the form of gift cards to make future
purchases at Sheetz stores. Unlike
most debit rewards cards, some of
Cap One’s cards even give rewards
on PIN-based purchases as well as
signature purchases. Cap One also
is testing versions with rewards only
for signature purchases, the company
spokesperson says.
Aite’s Bézard figures Capital
One’s decoupled debit card on average
returns rewards valued at 46 cents
per $100 of purchases, compared
Total: 25.3
Signature: 16.0
PIN: 9.4
2003 2006
Note: Figures may not sum due to rounding.
Source: Federal Reserve
with a 10-cent return from a traditional
debit card. For $100 spent
at a merchant partner’s store, the
debit card holder would receive 80
cents, he says. And because Capital
One collects interchange when the
MasterCard-branded card is used at
other merchants, Capital One can
afford a higher level of rewards,
Bézard says.
Potential Glitches
Before CVS began testing a decoupled
debit card, the company already had a
loyalty program called “ExtraCare.”
Working with HSBC and Tempo Payments,
CVS enhanced that program to
create “ExtraCare Plus,” which is tied
to a decoupled debit card. Customers
make one card swipe to earn points
and complete a purchase. “It increases
convenience and speeds checkout,”
says HSBC’s Eckert.
The upshot of a reward-rich
decoupled debit card will be even
more rewards, according to Steve
Kenneally, vice president at the
Washington, D.C.-based American
Bankers Association. “The more
popular decoupled debit becomes,
the more banks will offer rewards on
their homegrown debit programs,”
he says.
28 • digitaltransactions • February 2008

From the merchant perspective,
decoupled debit could be a winner.
Merchants are always looking
for ways to reduce acceptance costs
and, compared with credit cards,
decoupled debit does that. But Aite’s
Bézard says Capital One’s product
is not being sold to merchants as a
cost-saving vehicle. Instead, he says,
the product is being positioned as
an instrument to create loyalty and
lift sales.
But merchants’ true decoupleddebit
cost picture is far from clear.
Celent’s Moore notes that while
retailers like any product that reduces
card-acceptance costs, she also points
out that merchants may have to spend
time and money training employees
on how to manage the transaction
at the point of sale, especially if the
transaction runs on a proprietary network.
“Employee training could be
a significant cost for large retailers,”
she says. And, she adds, anything
that “jeopardizes the customer experience
is worrisome.”
Also, some merchants are
already wary of how decoupled
debit rewards will evolve. Many feel
they’ve been burned by rising interchange
rates used to support expensive
credit card rewards programs
(“A Rewarding New Proposition for
Interchange,” April 2007). Recent
postings on the merchant Web site
merchantaccountblog.com contend
other issuers will soon follow Capital
One’s lead. The effect will be an
eventual increase in debit card interchange
fees set by MasterCard and
Visa in order to fund issuers’ generous
reward programs. One blog entry
says: “Until consumers stop buying
into reward cards, interchange can’t
go anywhere but up.”
Financial institutions also have
misgivings. “What I hear from large
debit card issuers is a reluctance to
get behind this [product] because it
disrupts the relationship between the
account and the transaction,” says
Javelin’s Cundiff. Besides that disruption,
some banks worry that the
decoupled debit card issuer could
open new DDAs for
cardholders.
Deposit institutions
are concerned
about losing penalty
fees and interchange
income from
their own debit cards
too. Another possible
wrinkle: a bank that
issues its own decoupled
product could
potentially cannibalize
its established
debit accounts.
Account settlement
also is fraught
with potential pitfalls.
NACHA recently
Aggregated debit transactions
do carry some risks, according
to NACHA’s McEntee.
ruled that debit card ACH transactions
can’t be aggregated. The rule
takes effect in May. NACHA in late
2007 began an analysis of transaction
aggregation at the
request of a member
bank, according
to Elliott C.
McEntee, president
and chief executive
at NACHA in Herndon,
Va. The bank
had not experienced
any problems, but
was concerned
about potential
glitches. In particular,
the bank was
worried that aggregated
transactions
could not be identified,
increasing
the possibility of
February 2008 • digitaltransactions • 29

consumer disputes. Also, the bank
said it would have been difficult to
perform risk assessments on aggregated
transactions.
Aggregated transactions would
affect NACHA also, McEntee says.
“We didn’t feel we could analyze the
data because the merchant would not
appear on the transaction,” he says.
Some observers assert the new
ruling was aimed at Capital One, and
could force the company to spend
money to retool some of its processes.
But McEntee denies the rule targets
any particular issuer. The spokesperson
at Capital One says the company
will follow NACHA guidelines.
Tempo Payments does not aggregate
transactions, Grossman says.
Real-Time Balances
Another worry for the bank holding
the checking account is how disputes
will be resolved. Consumers may be
confused about whom
to call when problems
arise. “It’s unclear to
what extent the product
is tricky for customers
to use,” says Aite’s
Bézard.
Both HSBC and
Capital One list their
customer-service telephone
numbers on the
back of their cards. By
regulation, the issuer of
the card is responsible
for dispute resolution.
“In our program,
we have seen very little
consumer confusion,”
says HSBC’s Eckert. “We are the
point of first resolution because we
are the [phone] number on the back
of the card.”
Others think consumers will call
the bank where they have their DDA
if, say, fraud occurs. A customer who
sees money flowing out of his checking
account isn’t likely to call the
30 • digitaltransactions • February 2008
Rewards Come to Debit Cards
(rewards cards’ estimated share of category, in %)
General-
Purpose
Credit Cards Debit Cards
General-
Purpose Credit
Card Purchases
Signature-
Debit
Purchases
2006 55% 13% 81% 20%
2007 61% 16% 84% 23%
2008 66% 19% 88% 26%
2009 72% 22% 91% 29%
2010 78% 25% 94% 31%
debit card issuer, one source says.
And, according to Celent’s Moore,
banks don’t like losing control over
their DDAs and potentially looking
bad to their account holders if something
goes wrong. “It’s all about the
bank’s reputation,” she says.
Settlements are another potential
pitfall. An account may have insufficient
funds, which the card issuer
can’t determine until the transaction is
“In our program, we
have seen very little
consumer confusion...
We are the point
of first resolution
because we are the
[phone] number on
the back of the card.”
settled, usually two days after the purchase.
“There is a settlement risk,” says
HSBC’s Eckert.
At HSBC, transactions are analyzed
at the point of sale based on
proprietary risk algorithms and authorization
data. Capital One approves
or declines transactions based on
the daily spend limit of $500, not
Source: Aite Group
the balance in the checking account,
according to the spokesperson.
Issuers screen applicants prior to
issuing the card, using the same tools
typically employed to evaluate traditional
credit and debit card applications.
“Issuers need to get comfortable
with a new form of risk management,”
notes Tempo’s Grossman.
HSBC’s Eckert won’t say what
percentage of transactions doesn’t
clear. “The way we look at it, if you
don’t get risk right you don’t belong
in this business. We are comfortable
with how our program is running or
we would not be in this business,”
he says.
New technologies may help facilitate
the growth of decoupled debit
cards. Yodlee Inc., a software and
service provider in Redwood City,
Calif., offers systems to provide
near real-time account balances and
related services. Peter Hazlehurst,
senior vice president of product
development, won’t say whether
Yodlee’s software is being used for
decoupled debit accounts yet. But,
he notes, “there are a lot of [institutions]
at the point of launching these
solutions.”
Indeed, if these observers are
right, many financial institutions and
other players are ready to get into
decoupled debit even if not all the
implications are sorted out yet. For
them, the potential returns appear to
outweigh the possible problems. DT

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E-COMMERCE
February 2008 digitaltransactions
The Big Risk in Instant
Account Verification
George F. Thomas
Non-account-holding banks are starting to ask consumers for their
passwords and other log-on credentials to make sure they own the
accounts they’re using to make payments. At a time of massive data
breaches, this is a dangerous practice that should stop now.
As long as online access
has existed, consumers
and employees have been
instructed to protect their user codes
and passwords. The usual advice is:
Don’t write the user code and password
down, make sure that the password
is complex enough so that it
cannot be guessed, don’t use birth
dates, family-member names, pet
names, and so on.
Financial institutions are now taking
the next step by adding additional
levels of log-on protection known as
multifactor authentication.
So why are financial institutions
asking their customers for the
online-banking credentials they use
at another financial institution? It
may sound crazy, but it’s going on
today. One of my financial institutions
recently asked for my log-on
credentials to validate my accounts at
one of my other financial institutions
when I enrolled for an external funds
transfer service. Thankfully, the bank
also provided another secure method
of account verification, though it took
a couple of days.
The big question is: How many
consumers understand the danger of
32 • digitaltransactions • February 2008
giving this information out, especially
when they are not given an alternative
method of authentication?
Without a doubt, validating that a
bank account belongs to a given individual
is a difficult task. There are no
databases in existence
that can give real-time
assurance that the bank
account that individuals
are providing for
online bill payment,
funds transfers, or
online purchases actually
belongs to them.
They could easily provide
a corporate bank
account or an account
of another individual.
But the lack of a
real-time capability should not make
it an acceptable industry practice
to ask consumers for their banking
credentials.
A Resounding ‘No’
A recent press release by Obopay
Inc. and Yodlee Inc. on what they
call “Instant Bank Account Verification”
illustrates that this practice
for account validation is becoming
How many
consumers
understand
the danger
of giving this
information
out?
more widely accepted. Here’s an
excerpt: “Yodlee’s Account Verification
lets Obopay users authenticate
bank account ownership in real time
by entering their online banking user
name and password. Yodlee currently
provides ownership confirmation
for bank accounts at more than 650
financial institutions that carry more
than 80% of American account volume.
This information is confirmed
by Obopay through Yodlee in a matter
of seconds. Once
confirmed, Obopay
users can immediately
begin sending
money between their
Obopay account and
their existing bank
account.”
And it’s not just
Yodlee. Other companies
are offering a
similar service.
Now, some regular
users of such services
may not fret all that much
about it. “For the rightfully paranoid,
Yodlee is probably a target for hackers
trying to get at all those passwords,”
said one consumer, writing
on a money blog recently. “But since
I log in just about every day to keep
track of my many accounts, any sort
of unauthorized withdrawal will be
noticed immediately. And I figure
it’s just as likely that someone will

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hack into my bank’s Web site as
Yodlee’s, so at least this way I can
nip it in the bud.” But the point that
this consumer is missing is that the
passwords for all of his accounts are
now with Yodlee. It is easier to hack
into one database than many.
As all the recent news about data
breaches has shown us, consumer data
is hard to keep safe. And a data breach
involving consumers’ online-banking
credentials would damage the payments
industry immensely.
It’s not difficult to see how such
data can pile up quickly. After all,
when a trusted entity like a financial
institution asks its customers for
their log-on credentials at another
institution, most customers probably
would not think twice about it
because the request is coming from a
trusted party.
But a requesting financial institution
should be able to answer some
questions, such as:
Who has access to the log-in credentials
at the financial institution
or service provider?
How many people can see it?
How is it protected?
How long is it maintained?
Who has the liability?
Who has the reputation risk?
Do you want your customers giving
their log-on information to
other institutions?
The answer to the last answer
should be a resounding “no.” Senior
management in most of these financial
institutions would probably shudder
if they were informed that their
34 • digitaltransactions • February 2008
institution was requesting the log-on
credentials at other financial institutions
as part of their services.
Banks at Risk
The consumer is giving up a lot when
he signs up for this sort of accountverification
service. The following
excerpt comes from the additional
terms agreed to by the consumer for
A data breach involving
consumers’ online-banking
credentials would damage the
payments industry immensely.
the account-verification service with
Yodlee and Obopay:
“By using the Account Verification
Service, you authorize
Obopay and its supplier Yodlee, Inc.
(“Yodlee”) to access third party sites
designated by you, on your behalf,
to retrieve information requested by
you. For all purposes hereof, you
hereby grant Obopay and Yodlee a
limited power of attorney, and you
hereby appoint Obopay and Yodlee
as your true and lawful attorneyin-fact
and agent, with full power
of substitution and re-substitution,
for you and in your name, place
and stead, in any and all capacities,
to access third party internet sites,
servers or documents, retrieve information,
and use your information,
all as described above, with the full
power and authority to do and perform
each and every act and thing
requisite and necessary to be done
in connection with such activities, as
fully to all intents and purposes as
you might or could do in person.”
Even if a similar type of agreement
were in place with the financial
institution, the liability for security
breaches and fraud as a result of misuse
of the log-on credentials should
fall squarely on the shoulders of the
requesting financial institution.
But the reality is that the account
holder’s financial institution—which
is an innocent party in all of this,
especially if it is not aware that its
customer gave out confidential information
at the request of another financial
institution—is also at risk.
Account-holding financial institutions
must continue to educate their
customers. They should inform them
that they should never divulge their
online credentials to third parties, not
even to another financial institution.
Another step they should take is to
advance their multifactor authentication
programs to prevent this practice
from continuing.
Above all, requesting financial
institutions should stop this practice
altogether and instead rely on methods
like challenge-account verification,
which may take a little longer but has
none of the risks of requesting log-on
Instant account verification is not
essential and is surely not worth
the inherent risks.
credentials. Challenge-account verification
usually occurs when random
low-value transfers are sent to the consumer’s
account, after which the consumer
must verify the amounts.
Instant account verification is not
essential and is surely not worth the
inherent risks. DT
George F. Thomas is chief executive
of Radix Consulting, Oakdale,
N.Y. Reach him at gfthomas@
radixconsulting.com.

SECURITY
February 2008 digitaltransactions
Why Issuers Hesitate
To Enlist Cardholders
in the War on Fraud
Lauri Giesen
With data breaches exposing more and more card accounts, credit
and debit card issuers should be doing much more to involve cardholders
in fraud detection, some experts say. But would the fraud
cardholders spot justify the cost of the tools issuers gave them?
There is no doubt that credit and
debit card issuers are doing a
lot to protect their cardholders
from fraud. With the application
of advanced neural networks that
can detect suspect payment patterns
and rigorous enforcement of cardassociation
rules, most issuers are
attacking fraud aggressively. But are
they giving cardholders all the tools
they need to help protect themselves?
That’s where there seems to be
some criticism of card issuers. Most
issuers send statement stuffers or post
Web-site notices informing cardholders
about basic fraud-prevention steps.
And most issuers will call or send
e-mails to customers when they see
questionable transactions or purchase
patterns indicating something might
be amiss. But many experts believe
that is not always enough to get the
cardholder actively involved.
Most issuers don’t allow customers
to prohibit, or at least request to be
notified about, certain types of transactions
they are unlikely to make.
Many issuers also do not aggressively
promote the idea that customers
should regularly check their
online statements to catch problems
early. And while most issuers call or
e-mail customers to report questionable
transactions, none of the top issuers
sends immediate text messages
to customers’ mobile phones, even
though waiting until the cardholder
gets home at the end of the day to
check phone messages or e-mails may
be too late.
These days, with data breaches
compromising tens of millions of
card accounts, issuers should be doing
more to enlist cardholders in accountprotection
efforts, some observers
say. “Issuers can strengthen brands,
loyalty, and return on security investments
by placing some of the responsibility
traditionally handled by backoffice
expertise into the hands of the
customers,” researchers at Pleasanton,
Calif.-based Javelin Strategy &
Research wrote in a mid-2007 report.
Javelin founder James Van Dyke
doesn’t think most card issuers have
done a good job of engaging cardholders
in fraud prevention. “We estimate
more than half of the identificationfraud
crimes start with information
that is in the cardholder’s control, yet
financial institutions have not always
involved these cardholders in fraud
control as well as they could. Financial
institutions seem to want to work
on behalf of their customers rather
than give them the tools so they can
work together,” Van Dyke says.
One reason for this, Van Dyke
says, is that many issuers think cardholders
don’t want to be bothered.
With zero liability required by law
or network policies, issuers often
believe cardholders operate under the
assumption that since they don’t bear
the brunt of the loss, they can hand
over responsibility for loss prevention
to banks. But consumer research
by Javelin contradicts that perception.
It found 60% of consumers say fraud
prevention is a joint responsibility
between cardholder and issuer.
Other experts also dismiss the
notion that consumers are complacent.
“Nobody wants to have their
accounts violated,” says Brian Riley,
senior analyst for bank cards at Needham,
Mass-based TowerGroup Inc.,
an editorially independent unit of
MasterCard Inc. “There is a real feeling
of violation if fraud occurs to your
financial accounts, even if you don’t
bear the financial burden.”
Adds a spokesperson for San Jose,
Calif.-based PayPal, the payments
subsidiary of eBay Inc.: “Our customers
tell us all the time they want to
February 2008 • digitaltransactions • 35

stop fraud. Consumers are really worried
about ID theft. Even if they get
all their money back and don’t have
to pay for any fraudulent activities, it
can be a real pain for consumers to get
everything straightened out.”
Cell Phone Alerts
But with consumer awareness of and
concern about fraud rising, financial
institutions have not always kept pace
by providing cardholders with the
tools they need to do something about
it. In a Javelin study of 25 top card
issuers, only 50% met the research
firm’s criteria for fraud prevention
and only 31% met its criteria for fraud
detection. By contrast, 83% met the
criteria for fraud resolution.
Most of the areas where issuers
fell short involved failure to provide
proper tools to cardholders. Among
the areas where issuers were lax:
Most issuers are not providing
consumers with the ability to specify
limits or prohibit specific types of
account activity (chart).
More than half (56%) still
require consumers to enter full ninedigit
Social Security numbers, a risky
practice, when interacting with customers
by phone, Internet or mail.
Only 8% of issuers automatically
alert customers about new
accounts opened in their names, or
foreign transactions. Few alert customers
to changes in their personal
data, such as address changes.
None of the issuers surveyed
used two-way cell-phone alerts to
provide immediate communications
about questionable transactions.
Notifying customers that there
has been an address change to their
account by itself could go a long way
in fighting fraud, experts say. “More
than two-thirds of account-takeover
cases were attributed to a fraudulent
change of address, yet we estimate
only one-fourth of the big card issuers
routinely notify customers when
their addresses have been changed,”
Van Dyke says.
Cardholders Play Second Fiddle
to Issuers in Fraud Detection
(% of card issuers meeting detection criteria)
Facilitates viewing of credit
card transactions daily
Order and pay for credit
reports/monitoring services
Alerts to mobile devices
(SMS/text messages)
User-set alert for
past-due payment
User-set alert for new account
set up in cardholder’s name
User-set alert for
foreign transaction
User-set alert for
replacement card sent out
User-set alert for addition or
subtraction of registered users
Two-way alerts to mobile
device (IFM)
And while several of the large
issuers do notify customers, it is
typically by phone or e-mail. Text
messages to customers’ cell phones
about suspected problems could help
even more, some experts say. Yet
cell-phone alerts, which have shown
a lot of promise in Europe, have not
yet caught on in the U.S., according
to Red Gillen, senior analyst in
the banking group at Boston-based
Celent LLC.
Gillen recently spoke with representatives
of the United Kingdombased
CPP Group about a program
where banks send a text-message confirmation
to cardholders each time
their credit cards are used. Customers
then can notify their banks immediately
if they see a transaction they did
not authorize.
Gillen believes the program may
have more appeal in Europe because
credit card fraud is higher there than in
the U.S. And while he believes Americans
may not want to be bothered
20%
0%
28%
8%
8%
4%
4%
72%
100%
Note: 25 issuers surveyed. Source: Javelin Strategy & Research
with a text message every time they
make a routine purchase, such a program
could be adapted for the U.S. in
a way that lets cardholders set notification
parameters.
For example, issuers might allow
cardholders to specify an amount for
which they want to be notified—i.e.
every transaction over $50 or $100.
Or they could request to be notified
for all foreign or online transactions.
At the very least, cardholders could
ask to be notified via text messages
when changes to their accounts have
been made, he says.
Text messages are useful for notifying
customers because of their
immediacy. Consumer studies have
shown consumers today keep their
cell phones with them most of the day.
“Text alerts are a great way to reach
people and it is cheaper than calling
them,” Gillen says.
Aside from sending text messages,
issuers simply could allow customers
to specify the types of transactions
36 • digitaltransactions • February 2008

they don’t want approved. Some customers
never shop online, for example.
Others never travel abroad and
could tell the issuer not to approve
any foreign transactions unless notified
by the customer beforehand.
“There are certain types of transactions
that I never make and there
are certain other types of transactions
that my mother never makes. Card
issuers that know that information can
go a long way in stopping fraud.” says
TowerGroup’s Riley.
Issuers Adhere to a ‘Don’t-Tell’ Policy
(% of card issuers offering personal information alerts to
cardholders during or after potentially fraudulent events)
Changes to log-in
password
E-mail address change
Physical address
change
16%
20%
36%
Shutting off Paper
Change in PIN
8%
Still, some experts say taking such
steps is easier said than done. Michael
Urban, senior director for fraud solutions
at Minneapolis-based riskassessment
software firm Fair Isaac
Corp., points out that aside from the
question as to whether prohibiting
certain transactions violates Visa and
MasterCard rules about universal
acceptance, issuers are afraid to automatically
stop transactions out of fear
of angering customers. He notes customers
could ask that foreign transactions
be prohibited unless the issuer is
notified that the cardholder is taking
an overseas trip.
“But with the hundreds of things
you have to do to prepare for a big
trip, how many people are going to
remember to call their credit card
issuer and notify them to approve
transactions?” Urban says. Then,
the issuer faces the risk of an angry
customer who is denied approval
when making a vital purchase far
from home.
Another way of engaging consumers
is to get them to check their online
statements frequently, which lets them
spot questionable transactions earlier
than if they had waited to receive their
monthly paper bills. Beyond that, a
consumer who elects to receive only
online statements takes the inherently
risky paper statement, which can be
stolen, out of the process. Van Dyke
notes that most online-statement users
still receive paper bills. “You have to
Addition or subtraction
of registered users
4%
completely turn off the paper if you
want to cut back on fraud,” he says.
And while studies such as Javelin’s
show most card issuers have a
long way to go to truly engage the
cardholder in fraud prevention, payment
experts say a few issuers and
payments companies stand out for
doing more. One is PayPal, which has
its online “Security Center” accessed
by a link at the top of its home page.
This center provides extensive
information about payment fraud and
offers quizzes and questionnaires for
consumers to take. It also has a link
for consumers to report suspected
cases of phishing, the use of fraudulent
e-mails to entice consumers
into divulging personal and financial
information.
“We want our customers to know
that they are an important part of
fighting fraud,” the PayPal spokesperson
says. She declines to reveal
how many customers have reported
suspected phishing attempts, but
notes the number is growing. And
while she also declines to reveal
whether most of the reported cases
are indeed phishing-related, she adds
“our customers are good at spotting
fake messages.”
In addition to the Web site, PayPal
sends e-mail alerts and calls customers
Source: Javelin Strategy & Research
when it spots unusual transactions.
PayPal doesn’t use text messages yet.
But the company promotes on its Web
site a $5 token dubbed the “PayPal
Security Key,” which can be linked
to the user’s PayPal account. This
device, which can be hooked to a
keychain, generates a new six-digit
security code about every 30 seconds.
PayPal or eBay users enter the displayed
code after entering their other
log-on information.
One card issuer that experts point
to as doing more than most in engaging
consumers is Charlotte, N.C.-based
Bank of America Corp. BofA also
sends e-mail alerts or makes phone
calls reporting suspicious transactions
or irregular activities. Any address
changes, changes in phone numbers
or orders for convenience checks tied
to a credit card account automatically
warrant an alert to the cardholder, a
spokesperson says.
BofA also has its “Shop Safe”
Web site where customers who want
to make an online purchase can get a
one-time security code to use in place
of their credit card number. The customer
then sends that code to the merchant
to make a purchase instead of
transmitting the card number.
Another bank that has worked
to get customers more involved in
February 2008 • digitaltransactions • 37

fraud control is Wachovia Corp., also
based in Charlotte. Wachovia has
its Security Plus online site where
the bank outlines what it is doing to
protect consumers from fraud and
what consumers need to do to protect
themselves. The site has information
about ID theft as well as a means to
report fraud.
Not Ready
With so many good, though not invulnerable,
technologies and prevention
processes out there, why haven’t more
card issuers adopted them? Beyond
the perception that consumers don’t
want to be involved, Celent’s Gillen
believes a business case is lacking for
many of these systems.
“Because banks bear the cost of
the fraud, you have to ask who would
pay for the cost of the technology
involved? Consumers aren’t going to
be willing to pay for this,” Gillen says.
“I have yet to see a business case made
for using many of these systems.”
Even if a case can be made, these
programs still have to compete with
other technology investments that
might have a bigger impact on issuers’
bottom lines. “It may not be so
much that card issuers don’t want to
make the investment as the investment
required may not have as big of
return as competing projects,” says
Fair Isaac’s Urban.
And while greater integration of
mobile devices and fraud prevention
is likely in the future, Gillen questions
whether the technology is ready.
“Mobile banking itself is just getting
some traction,” he says. “This
‘Issuers don’t want to risk
losing interchange revenue
by limiting the number of
transactions that they approve.’
is a nascent technology that is just
being used to look up bank balances
and make quick bill payments. Now
you want to integrate it with the core
systems for credit card processing.
I’m not sure the systems are ready
just yet.”
Apart from the cost and complexity
of implementing these programs,
some issuers will fear they
might anger customers or lose business
by having policies that are too
stringent. “Issuers are particularly
not going to want to implement programs
where customers can limit the
types of transactions they approve,”
Urban says. “There will be the risk
that you will stop good transactions,
and issuers don’t want to
risk losing interchange revenue by
limiting the number of transactions
that they approve. Balancing risk is
important, but you never want to be
so overly aggressive that you limit
interchange revenue.”
Some issuers will always want to
hold the security baton by themselves.
It’s clear that more questions need to
be answered before they’ll even consider
sharing one end of it. DT
ADVERTISER INDEX
ADVERTISER PHONE WEBSITE PAGE
Apriva 480-421-1210 www.apriva.com Page 17
Digital Check 847-466-2285 www.digitalcheck.com Inside Back Cover
Digital Transactions 877-658-0418 www.digitaltransactions.net Pages 18, 31, 33
MagTek 800-788-6835 www.magtek.com Page 5
Metavante 800-822-6758 www.metavante.com Inside Front Cover
Money Movers of America 800-815-4360 www.mmoa.us Page 7
MSI Merchant Services Inc 800-226-5227 www.1800bankcard.com Page 20-21
North American Bancard 888-229-5229 www.gonab.com Back Cover
ProfitStars A Jack Henry Company 877-827-7101 www.profitstars.com Page 11
Southeast Acquirers Association www.southeastacquirers.com Page 27
United Bank Card 800-201-0461 www.unitedbankcard.com Page 1-3
United Cash Solutions 800-698-0026 www.unitedbankcard.com Page 23
USAePay 866-490-0042 www.usaepay.com Page 29
38 • digitaltransactions • February 2008

ENDPOINT
Behind the
Experimentation in
Gift Card Pricing
The presence of
several specialized
gift card processors
plus the acquirers
with in-house
programs indicate
there is overcapacity
specifically in
single-purpose gift
card processing.
Single-purpose gift cards are now central to merchant acquirers’ offerings to small
merchants, but acquirers vary widely in their gift card pricing strategies, say Marc
Abbey and Paul Grill.
The proprietary gift card has been a stunning
success in recent years, and has
increasingly become a ubiquitous product
in the offerings of payment card acquirers
for their merchants. Gift cards were a highlight
in an otherwise mediocre 2006 Christmas shopping
season, with the National Retail Federation
estimating that over $26 billion in closed-loop
gift cards were purchased in that season.
In recent research, First Annapolis examined
gift card pricing policies of acquirers with
respect to small merchants—Visa/MasterCard
sales of $10 million or less—and found that
pricing structures in 2007 had some important
differences from the structures we found
through similar research in 2004.
In the single-purpose gift card market,
Comdata Corp.’s Stored Value Systems and
First Data Corp.’s ValueLink dominate the
national merchant market, which is nearly
fully penetrated in the sense that almost all
major merchants have a program by now. The
regional merchant market is much more fragmented
and much less penetrated.
In 2004 and again in 2007, First Annapolis
studied the overall pricing strategies of acquirers
representing 54% and 62% of industry
volume, respectively. These acquirers
ranged from small non-banks to the largest of
acquirer/processors.
In 2004, only 25% of acquirers reported
offering single-purpose gift cards to small
merchants. By 2007, more than 80% of acquirers
indicated they offered gift cards. Of the acquirers
that offered gift cards in 2007, approximately
two-thirds did so through a reseller arrangement
with some other prepaid card issuer or processor.
A surprising one-third of acquirers provided
gift cards through an in-house capability.
Dissimilar Pricing
Though the broader prepaid market is becoming
more complex with the proliferation of product
types, functionality, and target markets, the
single-purpose gift card requires a fairly simple
form of processing capability at the moment.
One school of thought is that gift card processing
will consolidate aggressively due to the
effects of scale economies over time.
The presence of several specialized gift
card processors plus the acquirers with in-house
programs tend to underscore the argument that
there is overcapacity specifically in singlepurpose
gift card processing.
Earlier in 2007, First Annapolis completed
research measuring the penetration rates of single-purpose
gift cards in the U.S. and Canada
in four merchant categories: retail, mail order/
telephone order, hotels, and restaurants. This
research updated similar research from 2003, and
we found a significant increase in penetration of
gift card programs in these small-merchant categories:
from 2% in 2003 to 28% in 2007. This
penetration rate was up significantly in every
Marc Abbey (top)
is the partner
responsible for the
acquiring practice
and Paul Grill is the
partner responsible
for the emerging
payments practice
at First Annapolis
Consulting Inc.,
Linthicum, Md.
Reach them at
marc.abbey@
firstannapolis.com
and paul.grill@
firstannapolis.com.
February 2008 • digitaltransactions • 39

Merchants Roll Out Private-Label Gift Cards
(% of category merchants offering gift cards)
21%
19%
6%
4%
0% 0%
Retail MO/TO Hotels Restaurants
merchant category we tracked. The
rate increased from 6% to 55% in restaurants
alone.
Interestingly, the penetration rates
differ materially between the U.S.
and Canada. Restaurant penetration
levels are similar in the two markets,
but the other categories show different
patterns, no doubt driven by
different market developments and
competition.
Pricing for large merchants, as
with many transaction-processing
markets, tends to be highly customized
and negotiated, but pricing to
small merchants tends to be driven
more by policy or list prices. For
general Visa/MasterCard transaction
processing, acquirers gravitated to
similar pricing structures and price
points over the last several years.
In contrast, gift card pricing for
small merchants with these acquirers
has a different character as acquirers
often operate with dissimilar billing
elements and dissimilar price
points. The most common pricing
line items were monthly management
fees, set-up fees, per-card fees,
and per-transaction fees.
The price points for monthly fees
have fallen since 2004, and a greater
proportion of acquirers did not use
monthly fees in 2007. The median
range for monthly fees charged to
merchants was $10 to $15, which was
down from $16 to $20 in 2004. More
than 60% of acquirers charged $15 or
less in 2007, but 32% of acquirers did
• 2003 • 2007
17%
55%
Source: First Annapolis Consulting
not use this billing element at all compared
with 22% in 2004.
The use of set-up fees has declined
since 2004, but the price points for
those acquirers that do charge the
fees have increased. In addition, the
use of set-up fees appears to be correlated
with certain sales and marketing
strategies. The median set-up fee
range was $100 to $200 (up from $50
to $100 in 2004), but 32% of acquirers
do not use this fee type, up significantly
from 11% in 2004.
Challenging Model
One of the factors influencing this
phenomenon is an auto-enrollment
strategy at a small number of acquirers
that have packaged gift cards into
their basic offerings. The acquirer
provides a merchant a certain number
of gift cards as part of a bundled
service at the time the acquirer
signs the merchant. These acquirers
charge merchants primarily for gift
card transactions and as the merchants
reorder cards after the initial batch.
In a sense, the gift card becomes
a loss leader, but acquirers pursuing
this strategy report higher retention
levels for merchants with both
acquiring and gift cards. These
acquirers also report a higher effective
penetration of active gift card
merchants using auto-enrollment. In
other words, auto-enrollment results
in a greater proportion of merchants
using a gift card program than other
sales approaches.
This is essentially the difference
between auto-enrollment—
effectively a negative-response
marketing approach—and opt-in,
positive-response sales approaches
either at the time of the initial sale
or thereafter. Acquirers using autoenrollment
tend not to charge set-up
fees for small merchants.
The use of per-card fees is very
similar to 2004 levels. The median fee
per card is unchanged at 25 cents to
$1. One-third of acquirers do not use
this fee type, which is about the same
as in 2004.
By contrast, transaction fees were
somewhat more prevalent in 2007
than in 2004. The median transaction
fee was 21 to 25 cents, the same as
2004. But 74% of acquirers used this
fee in 2007, compared with 67% in
2004. The transaction fee is the billing
element where acquirers reported the
highest degree of negotiation on pricing;
acquirers indicated that approximately
5% of merchants differ from
the pricing policy.
The picture that emerges from this
research is an industry where merchants
are adopting the single-purpose
gift card at a significant rate and
where, in response, acquirers to varying
degrees have made gift cards a central
aspect of their offerings. There is
not a consensus on the revenue model,
however, since acquirers use divergent
pricing structures. There is some evidence
of price competition, at least at
the billing-element level, as certain
fees have fallen in prevalence or their
median price point has fallen, specifically
set-up fees and monthly fees.
These findings are consistent with
the overall industry trend toward gift
cards becoming a more widespread
offering among merchants. The study
also underscores the challenging economic
model associated with the most
basic forms of the prepaid products
and the need for acquirers and other
providers to investigate value-added
prepaid product offerings and distribution
models. DT
40 • digitaltransactions • February 2008

©2007 Digital Check Corp. All rights reserved. TellerScan® is a registered trademark of Digital Check Corp.

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