Sudden Allure - Digital Transactions

2010TheofP2PALSO IN THIS ISSUE:• Check 21’s Radical Next Step• Prime Time for DVD Kiosks?• Understanding Mobile Bill Pay• Killing Chargebacks, Not Orders

Until now, one of the tenets of being an ISO was that your office was entirely independent,responsible for obtaining your own sales leads. UBC is changing the game with a groundbreakingnew leads program *. UBC will be doing all the legwork to deliver hot leads directly toyou. Although other processors may have offered marketing lists, new business lists, newphone number lists and so forth, the UBC program will provide you with hot, pre-set appointmentswith merchants that are specifically interested in our free ECR program. You will also begiven online access to a real-time, interactive leads management system to manage theseappointments. This system has advanced CRM functionality including text and e-mail alerts. Inthe past, it was your responsibility to obtain your leads; this program changes everything.PLUS:Contact your UBC National Sales Manager today for more information.THE ORIGINALFREE TERMINAL PROGRAMThe newest generation of our revolutionaryFree Terminal Program offers the mostdiverse selection of free equipment availablefrom any processor, including theVerifone Vx510, HypercomT4210/T4220, Nurit 8020(wireless), HypercomT7Plus, Nurit 8320 andNurit 2085.FREE ELECTRONIC CASHREGISTER PROGRAMThe industry's first and only fully integratedelectronic cash register program, deliveredfree of charge to merchants. The most popularCasio cash registermodels integrated withcredit card processingtechnology deliver theultimate sales tool toour ISO partners.HARBORTOUCHPOS SYSTEMSHarbortouch offers the lowest pricing in theindustry for the highest quality POS system,providing our ISOpartners with unmatchedcommissions andresiduals, rejuvenatedleasing revenue and thelowest attrition rates inthe industry.UNITED BANK CARD'S $1 MILLION GIVEAWAY! **Every new merchant account signed with UBC, including accounts signed from the leads program, will earn you an opportunity towin one million dollars! With the entries capped at 27,000, each approved merchant account gives you an unprecedented chanceat winning. Compare that to odds of 1 in almost 200,000,000 for some lotteries!* A fee will apply for each lead provided. Please contact your National Sales Manager for details.**Visit www.isoprogram.com for complete contest information.Visit www.isoprogram.com for more detailsUBC1615_12152009UBC1615_12152009For more information, contact:Brian Jones, EVP Sales and Marketing: 800-201-0461 x 136Jonathan Brandon, National Sales Manager East: 800-201-0461 x 145Max Sinovoi, National Sales Manager West: 800-201-0461 x 219Brian Fitzgerald, National Sales Manager Central: 800-201-0461 x 257United Bank Card, Inc. is a registered ISO/MSP of First National Bank of Omaha, 1620 Dodge St., Omaha, NE - Member FDIC

D I G I T A L T R A N S A C T I O N S . N E TCONTENTSFebruary 2010 ■ Volume 7, Number 2Unlike earlier runsat this market in thelate 1990s and early2000s, these newdevelopments can tap agreater readiness amongconsumers and leveragea more advancedand well-entrenchedtechnology environment.page 2424 The Sudden Allureof P2PFor years, many banks foundperson-to-person payments toolow-margin to bother with. Somehad offered products and gottenburned. Now they—and theirvendors—are rushing into themarket. What’s changed?4 The Gimlet EyeGetting in Touchwith Contactless6 Trends & TacticsGuess Where Check 21 IsGoing Next? Encryption: TheBest of an Imperfect Bunch;Amazon’s PayPhrase Makesan Early StatementPlus, Security Notes shows howelectronic payments can berecruited to fight terrorism, andthe Web Transaction PerformanceIndexes spotlight winners andlosers among the leading creditcard and online-banking sites.14 AcquiringVet Those ChecksPaper checks may be in steepdecline at the point of sale thanksto the mainstreaming of electronicpayments, but there are still plentyof opportunities to bundle checkverification and authenticationwith new processing services.19 ComponentsBest Show in Town:DVD KiosksThe booming DVD kiosk marketmay not produce a hugetransaction windfall for paymentprocessors, but it continues toattract ATM companies and otherpayments-industry players.30 M-CommerceUnderstandingMobile Bill PaymentsBill payments via mobile phoneare a promising new source oftransactions. But getting the mostout of this trend requires masteryof several key factors, includingnew business models and theinfluence of regulationsand technology.34 E-CommerceBundling up inInternet PaymentsThe new partnership betweenFirst Data and Yahoo could testwhether payment processorscan reap new business fromWeb portals.36 NetworksWhy Mobile Will Be Partof NACHA’s WEB, for NowMobile payments are expectedto explode, but the rules-settingbody for the ACH isn’t ready yetto create a dedicated transactioncode. Is that a sound approach,or a serious mistake?39 EndpointControlling ChargebacksIs Only the StartThe cost of driving downchargebacks, when this isthe sole objective, can offsetthe losses you save. Better tointegrate chargeback controlswith a smarter use of staff andtechnology, says Jeff Liesendahl.Cover illustration:Design, Jason Smith;Art: istockphoto.comDigital Transactions (USPS 024-247) is published monthly by Boland Hill Media LLC, 109 S. Roselle Road,Suite 204, Schaumburg, IL 60193. Periodicals Postage Paid at Schaumburg, IL, and at additional mailing offices.POSTMASTER: Send address changes to Digital Transactions, P.O. Box 3553, Northbrook, IL 60065-3553.

THE GIMLET EYEGetting in Touchwith ContactlessContactless payments took another hit last fall when Best Buy Co. Inc.turned off acceptance of Visa Inc.’s payWave contactless program at its1,000-plus U.S. stores. Since there were few transactions to speak of anyway, the move was largely symbolic. The big electronics chain was sending a bluntmessage to Visa that it was unhappy with the card network’s refusal to support PINtransactions on its contactless system.PIN debit is less costly to merchants than signature debit, so it’s not hard tounderstand Best Buy’s position. If contactless ever takes off, and ultimately supportsmobile payments, the retailer stands to save potentially millions of dollarsin transaction costs if can accept payWave with PINs. But Visa said no, and soBest Buy pulled the plug, though news of the shut-off didn’t emerge until lastmonth. The chain is still accepting MasterCard Inc. contactless transactions, sinceMasterCard permits PINs in its PayPass program.Now, it’s easy to get wrapped up in some of the questions this news raises.Wouldn’t entering PINs defeat the purpose of contactless technology, which purportsto speed up transactions? Why would Best Buy want to install contactless inthe first place, since the technology is aimed at high-throughput, low-ticket venueswhere transaction speed is of the essence?We don’t know the answers to these questions, since Best Buy isn’t talking. Butno matter. The real issue this little drama illustrates is that contactless has been adead letter with many merchants for some time, and it’s likely to remain so. Yes, tensof thousands of locations now accept the wave-and-pay cards. But those cards alsocome with mag stripes, and a swipe with no signature—permitted now on a greatmany low-value tickets—isn’t any slower than a wave. At the same time, many consumerscarrying the cards aren’t even aware they have contactless capability.Merchants look at that picture and wonder where the case is for contactless.What’s needed to spark contactless deployment, as we’ve argued before, is aninterchange incentive, similar to the one the networks used to jump-start electronicdraft capture back in the 1980s. Indeed, this move would make more sensethan the hardware subsidies the networks have used to entice merchants to installcontactless—and from which they’re starting to back off.Best Buy’s action underscores how crucial the interchange question is. So far,the networks have resisted any idea of an incentive rate, eager as they are to protectissuers’ incomes. But without such an incentive, contactless will continue to drift.Too bad for contactless, but too bad also for mobile payments at the point of sale.John Stewart, Editor-in-Chiefjohn@digitaltransactions.netPUBLISHERRobert A. JenischEDITOR-IN-CHIEFJohn StewartSenior EditorJim DalyCorrespondentsJane AdlerLauri GiesenKaren Epper HoffmanPeter LucasLinda PunchArt Director/Production EditorJason SmithEditorial Advisory BoardEula L. AdamsJohn ElliottAlex W. “Pete” HartFormer Chief Executive Officer,MasterCard InternationalWilliam F. KeenanPresident, De Novo Corp.Dr. Gideon SamidChief Technology Officer,AGS Encryptions Ltd.Director of AdvertisingRobert A. Jenisch, 877-658-0418bob@digitaltransactions.netAdvertising Sales RepresentativesRobert Mitchell, 877-658-0418bmitchell@digitaltransactions.netCathy Woods, 602-863-2212cathy.woods@mediawestintl.comDigital Transactions, Digital Transactions News,and digitaltransactions.net are publications ofBoland Hill Media LLC, 3 Golf Center, Ste. 314,Hoffman Estates, IL 60169John Stewart, Managing DirectorRobert A. Jenisch, Managing DirectorFor advertising information, call 877-658-0418.To subscribe, go to www.digitaltransactions.netand click on “Subscribe” or call 847-559-7599.To give us a change of address, call 847-559-7599.The views expressed in this publication are notnecessarily those of the editors or of the membersof the Editorial Advisory Board. The publishermakes reasonable efforts to ensure the timelinessand accuracy of its content, but is not engaged inany way in offering professional services relatedto financial, legal, accounting, tax, or other matters.Readers should seek professional counsel regardingsuch matters. All content herein is copyright© 2010 Boland Hill Media LLC. No partmay be reproduced without the express writtenpermission of the publisher. Subscription prices:$59/year for subscribers in the United States;$69/year for Canadian subscribers. All other subscribers,$119/year, payable in U.S. currency.4 digitalFebruary 2010

Trends & TacticsTrends & TacticsGuess Where Check 21 Is Going Next?First, there was image exchange, withbanks of first deposit imaging paperchecks and then transmitting theimages electronically to paying banksinstead of shipping the paper by truckor airplane. Then came remote depositcapture, which pushed this truncationdown to the merchant, shaving evenmore cost out of the check system.The next logical step is to push iteven further, all the way to the checkwriter. And that’s just what some expertshave now proposed. “We have tens ofbillions of checks that aren’t in electronicform, at least at the point of origination,”says David Walker, presidentand chief executive of the ElectronicCheck Clearing House Organizationand one of six authors of a paper on thesubject published late last year by theFederal Reserve Bank of Chicago.What Walker and his co-authorswould like to create is somethingcalled an Electronic Payment Order,or EPO. Not only would this newinstrument squeeze even more costout of the 300-year-old check system,it would preserve all that peoplelike about checks while leveragingone of the hottest transaction technologiesto come on the scene inyears—mobile payments.6 digitalFebruary 2010After all, the new payment formwould make use of the rapidly spreadingbase of smart phones like iPhones,BlackBerrys, and the new NexusOne, introduced last month by Internetsearch giant Google Inc. “Today,smart-phone ownership may appear toIt’s Nearly Universalbe limiting [for EPOs], but projectedgrowth of those devices suggests thatwithin two years, smart-phone ownershipmay eclipse Internet access,”notes Bob Meara, a senior analyst atCelent LLC, in an e-mail messagecommenting on the new concept.Here’s how an EPO would work. Ahandset user would use software on hisdevice to fill out and sign a “check” thatwould appear on the device’s screen.The software would then send theencrypted image to the payee via thewireless network. The software couldbe made available through mobilebankingprograms, Meara suggests.The recipient of the payment wouldalso have to have a phone or otherdevice loaded with the EPO softwareIn the more than the five years since Check 21 took effect, imageexchange has become a widely accepted means of processing checks.Some 15,418 financial institutions are now capable of receiving images,or about 97% of all U.S. institutions (the remainder clear and settlesubstitute checks);In October 2009—exactly five years after Check 21 took effect—the dollarvolume of imaged items came to almost $1.5 trillion (if annualized, thiswould total $17.8 trillion in value);Some 93% of the nearly 1.3 billion items flowing through imageexchangenetworks in October were cleared as images (the remainder assubstitute checks).Note: October 2009 dataSource: ECCHOto receive and endorse the instrumentand to send it on to his bank.Security against fake items andother fraud could be bolstered withbiometric access and a system inwhich paying banks would matchincoming EPOs with separate instructionsfor each transaction, the ChicagoFed paper suggests.

Trends & TacticsTrends & Tacticsto work with Walker and ECCHO,but doesn’t see any action by the Fedfor some time. “If users could benefitfrom the speed of the transaction orthe security of the transaction, there’sdefinitely no reason not to explore theidea,” Herr says.But he wonders how fast EPOtransaction volumes could mount,given the potential legal complications.“It becomes extremely complicated tochange the origin of the payment fromthe way it starts out,” he says. These“little nuances,” he argues, could makeit hard for banks and processors tobuild up economies of scale.Still, it’s not as if banks haven’talready seen something like an EPO.Walker points out that a similar form oftransaction, known as a remotely createdcheck, is already flowing throughthe banking system, though withoutlegal definition and with unknownliabilities. These checks are createdwhen merchants receive instructionsfrom customers over the phone or theInternet and then create a check imagefor processing, skipping the paperstage altogether.Walker says ECCHO’s interest inEPOs, apart from improved efficiencies,stems from the need to createa legal framework for such transactions.“It doesn’t make sense forthem to go through the system undefined,”he says.And, as it turns out, this is not thefirst time the organization has gonedown this path. Walker recalls thatECCHO developed rules in the mid-1990s for a “fully electronic check.”But in those pre-Check 21 days, fewbanks were prepared to handle itemsthat had never had paper form, so theeffort never took off.It may be hard for banks to resistthe allure of an all-digital check.Walker cautions that the new ruleswould apply only to transactionsbetween financial institutions thatare ECCHO members. Still, some2,268 depository institutions belongto the organization—not a bad placeto start.Encryption: The Bestof an Imperfect BunchEnd-to-end encryption of cardholderaccount data is an imperfect solutionto U.S. payment card fraud, but it’sthe most practical one out there now,a new report about fraud managementfrom Aite Group LLC concludes.The report estimates that fraud costthe U.S. card industry $8.6 billionin 2008.Processors—notably HeartlandPayment Systems Inc., which reporteda huge data breach in January 2009—along with point-of-sale terminal vendorsand tech companies are rollingout variations of end-to-end encryptionto combat hackers who breakinto computer systems that transmitor hold cardholder data. These criminalsthen steal that data and sell it toother criminals who make fake cardsto commit fraud.There is a compelling case forend-to-end encryption (E2E), whichFraud and Anti-Fraud Technologies($ figures in billions. Effectiveness and friction scales: 1 = very high; 2 = high; 3 = medium; 4 = low; 5 = very low)Type of Fraud% of FraudFraudAmount(2008) EMV ContactlessFraud-Reduction EffectivenessMag-StripeFingerprintingDynamic MagStripeEnd-to-EndEncryptionCard not Present 16.1% $1.39 5 5 5 5 1Counterfeit 16.5% $1.34 1 1 1 1 1Lost/Stolen 15.7% $1.41 1 1 5 5 5First Party 49.9% $4.30 5 5 5 5 5ID Theft 1.2% $0.13 5 5 5 5 4Non-Receipt 0.3% $0.02 5 5 5 5 5Total 100% $8.59% of Fraud Eliminated 30% 30% 16% 15% 29%Fraud Eliminated (annual) $2.6 $2.6 $1.4 $1.3 $2.5Deployment Cost $12.7 $9.9 $7.1 $5.7 $4.0Return on Investment (years) 4.93 3.82 5.17 4.40 1.61Rollout Time (years) 3.0 3.0 3.0 2.0 2.0Issuer/Network Friction 1 1 2 2 3Cardholder/Merchant Friction 2 2 2 3 4Aite Overall Ranking 6 7 9 8 18 digitalFebruary 2010

enders card data unusable to ahacker, according to report authorNick Holland, a senior researcherat Boston-based Aite. “It basicallystamps out counterfeit and card-notpresent[fraud], it attacks them headon,” he says.Overall, Aite rated E2E as themost effective anti-fraud technologyfor the U.S. based on the amountof fraud it would cut, the cost ofimplementing the technology, thetime needed to return the investmentthrough losses avoided, and the “friction,”or resistance to the solutionfrom cardholders, merchants, issuers,or networks.Aite estimates it would cost$4 billion and take two years to implementE2E nationally. The return oninvestment is an estimated 1.6 yearsbased on about $2.5 billion in annualfraud eliminated. While E2E wouldcut only about 29% all fraud, itsadvantages include reduced requirementsfor merchants to meet the PaymentCard Industry data-security2-FactorPhysicalToken2-FactorTextMessageFraud-Reduction EffectivenessOne-TimeVirtualAccountNumberstandard (PCI). Merchants, however,would bear most implementation costsin the form of new terminals.But neither end-to-end encryptionnor any other technology beingwidely discussed today can thwartall fraud, which Aite breaks downinto six categories (chart). In fact,none of them attacks so-called firstpartyfraud, which alone accounts forhalf of all fraud. In such a scheme,a cardholder opens a credit cardaccount and for some time makestimely payments in hopes of getting aline increase. Eventually, he runs upcharges to, or near, the limit or takesout cash advances, all with no intentof repaying the issuer.Third-party fraud involvesthose who steal card data or buysuch information to make counterfeitcards, or make card-not-present(CNP) charges on a live accountwithout the legitimate cardholder’sknowledge.Aite based its estimates on frauddata in published reports, including3D SecureCardVerificationValue (CVV)AddressVerificationService(AVS)2 2 1 1 3 32 2 5 5 5 52 2 5 5 5 55 5 5 5 5 55 5 5 5 5 55 5 5 5 5 536% 36% 17% 17% 9% 10%$3.1 $3.1 $1.5 $1.5 $0.8 $0.9$1.0 $0.4 $0.3 $0.3 $0.1 $0.10.31 0.13 0.23 0.17 0.18 0.161.8 1.3 0.8 0.8 0.5 0.52 4 4 4 5 51 1 2 2 4 53 2 10 11 4 5Source: Aite Groupissuer filings about losses, and interviewswith more than 30 fraud-controlprofessionals globally on all sides ofthe payments industry.The most expensive fix wouldcome from the so-called EMV chipcard, which instead of a magneticstripe puts cardholder data on a highlysecure chip and requires entry ofa PIN. Aite estimates EMV wouldcost $12.7 billion, with payback takingfive years. Popularly known aschip-and-PIN, EMV could cut losses30% by nearly eliminating counterfeitand lost-and-stolen card fraud. EMV,however, does nothing to addresscard-not-present fraud.Another impediment is interchange.Merchants naturally expectlower interchange on PIN than signaturetransactions, but U.S. cardissuers, especially debit card issuers,could be expected to fight to retaintheir lucrative signature-based interchangerevenues. Aite calls this typeof conflict “issuer/network friction.”But the U.S., which is now theonly big industrialized country thathas not switched or does not plan toswitch to EMV, might be forced toadopt chip-and-PIN if hanging on toa mag-stripe system causes fraud tomigrate to America or impedes globalcommerce, Holland notes.So-called two-factor authenticationtechnologies provide the mostfraud reduction at the lowest cost,according to Aite. Examples are physicaltokens that generate one-timetransaction pass codes, or text messageswith one-time codes sent by theissuer to the cardholder. Aite ratedtwo-factor text messages No. 2 inoverall fraud-fighting effectiveness.But the technologies also will generatefriction in the form of cardholderand merchant resistance to any extrastep in the transaction process, thereport says.digital9

Trends & TacticsTrends & TacticsAmazon’s PayPhraseMakes an Early StatementReducing shopping-cart abandonmentis one of the big goals of online retailers.The early going by a Web-sitedesign and hosting company serving25 fashion retailers indicates thatacceptance of Amazon.com Inc.’snew PayPhrase payment methodcould be an antidote for that chronice-commerce ailment.Secaucus, N.J.-based eFashion-Solutions LLC is one of a handfulof launch partners working withAmazon on the initial rollout ofPayPhrase, the newest product onthe Amazon Payments shelf. Pay-Phrase allows an online shopper atan Amazon Payments-accepting merchantto select and store a word orshort phrase, and a PIN, as checkoutcredentials. Those credentials arelinked to the funding source, such asa credit card, that the customer registeredwith Amazon Payments. Afterregistration, all the customer needs todo to buy from a PayPhrase merchantis enter the phrase and PIN on file.EFashion Solutions providese-commerce platforms, including paymentservices through Litle & Co., forDKNY, Baby Phat, Deron, Lily ofFrance, and Playboy, among others.Chief executive Ed Foy Jr. says he gotto know Amazon executives at tradeshows and through other contacts.“Everybody’s interested in the fashionindustry,” he says.Those contacts led to Amazonpicking eFashion Solutions as one ofPayPhrase’s launch partners, whichAmazon announced publicly onOct. 29. Asked about incentives fromCredit Card And E-Banking Web Transaction IndexesFollowing are the Keynote Credit Card Web Transaction PerformanceIndex and the Keynote E-Banking Web Transaction Performance Index.The Keynote Credit Card Web Transaction Performance Index measuresthe performance and availability of going to a selected creditcard site and logging in to conduct the appropriate intended actionsand checking in or signing out. All measurements are taken from the10 largest U.S. metropolitan areas (Boston, Chicago, Dallas, Detroit,Houston, Los Angeles, New York, Philadelphia, San Francisco, andWashington, D.C.) on high-speed links attached to key points on thelargest U.S. Internet Service Protocol (ISP) backbones.The Keynote E-Banking Web Transaction Performance Index showsthe total execution time and success rate for logging into an accountand checking the account balance on selected Internet banking sites.The sites included in the index were selected based on publiclyCredit Card Web Transaction Performance IndexWeek starting January 4, 2010Rank by Speed (seconds)Response Rank week Rank week Rank weekRank TargetTime (sec.) of 12/28 of 12/21 of 12/141 Diners Club 3.97 1 1 12 Wells Fargo 8.45 2 3 23 Chase 9.27 4 4 34 US Bank 9.69 3 2 45 Citibank 11.94 5 5 5Credit Card Index 13.256 American Express 13.25 6 6 67 National City 14.33 7 7 78 Capital One 14.93 8 8 89 Bank of America 16.48 9 9 1010 HSBC 17.23 10 10 911 Discover Card 20.91 11 11 11E-Banking Web Transaction Performance IndexWeek starting January 4, 2010Rank by Speed (seconds)Response Rank week Rank week Rank weekRank TargetTime (sec.) of 12/28 of 12/21 of 12/141 Regions Bank 4.74 1 1 12 Etrade 5.16 DNR 2 23 HSBC 5.85 3 3 34 Wachovia 5.94 2 4 45 PNC 5.99 4 5 56 Wells Fargo 8.05 5 7 67 Sun Trust 8.98 6 8 7eBanking Index 9.068 US Bank 9.14 7 6 89 Chase 9.68 8 9 1010 Citizens Bank 10.27 9 10 911 Capital One 11.48 10 DNR DNR12 National City 13.53 11 11 1113 Bank of America 14.77 12 12 1214 Citibank 17.16 13 13 13available market-share information published in The Wall StreetJournal and other reliable industry sources.Data for these indexes, supplied each week by Keynote SystemsInc., San Mateo, Calif., reflect performance for the most recentweek available before the production deadline for this issue, aswell as rankings for the three previous weeks. Sites from these listsmay be removed from weekly published results due to insufficientdata points for a particular week. For other weeks the site wasremoved, 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 theweeks indicated, go to www.digitaltransactions.net, click on “WebTransaction Performance Indexes,” and click on the hyperlink for theweek you’re interested in at the bottom of the page.Rank by Success Rate (percentage)Success Outage Rank week Rank week Rank weekRank TargetRate (%) Hours of 12/28 of 12/21 of 12/141 Diners Club 100 0 11 5 42 Wells Fargo 99.9 0 5 8 13 Discover Card 99.6 0 8 11 103 US Bank 99.6 0 6 2 65 American Express 99.5 0 1 5 56 Citibank 99.4 0 1 2 27 Chase 99.2 0 4 9 68 National City 99.1 1 1 2 2Credit Card Index 99.1 09 HSBC 98.7 0 9 1 810 Bank of America 97.5 1 6 5 811 Capital One 96.7 3 10 10 11Rank by Success Rate (percentage)Success Outage Rank week Rank week Rank weekRank TargetRate (%) Hours of 12/28 of 12/21 of 12/141 National City 100 0 3 12 52 Wachovia 99.9 0 4 4 12 Wells Fargo 99.9 0 1 4 74 Etrade 99.8 0 DNR 3 45 PNC 99.7 0 4 7 15 Sun Trust 99.7 0 9 1 67 HSBC 99.6 0 1 1 18 Chase 99.5 0 10 9 89 Bank of America 99.4 0 4 6 99 Citibank 99.4 0 8 10 1111 Regions Bank 98.9 0 4 11 10eBanking Index 98.78 012 US Bank 98.1 1 11 8 1213 Citizens Bank 95.3 5 13 13 1314 Capital One 94.4 0 12 DNR DNR10 digitalFebruary 2010

Amazon, Foy says “they motivatedus,” but he won’t provide specifics.The firm, which also accepts theCheckout by Amazon payments serviceas well as the major card brands,began enabling its merchants to takePayPhrase in 2009’s fourth quarter.Back-office implementation proved tobe fairly easy. “We were able to pull itoff without a hitch,” Foy says.Foy can’t give transaction orrelated numbers because of a confidentialityagreement with Amazon,but he says the initial customer acceptanceof PayPhrase was strong. Thepercentage of sales being charged onPayPhrase “has exceeded our expectations,”he says.Notably, PayPhrase reduced shopping-cartabandonment, or failure tocomplete an initiated purchase. Manyfactors can affect abandonment rates,but e-commerce merchants perceive amultistep payment process, especiallyone that takes the shopper away fromthe retailer’s Web site, as a major contributor.At eFashionSolutions’ Pay-Phrase-accepting merchants, abandonmentrates have been reduced in a rangeof the “low to mid double-digits,” Foysays. He adds that, “We’ve seen anincrease in average transaction size.”Seattle-based Amazon, the No. 1online retailer, did not respond to aDigital Transactions request for comment.Amazon, which started out as abookseller but has diversified into avast online marketplace, has steadilyadded computer and payments servicesto offer other online merchantsin recent years.E-commerce merchants servedthrough CardinalCommerce Corp. havetaken a liking to PayPhrase, accordingto chief executive Michael A. KeresmanIII, though he won’t give details.“The pick-up on that is nice,” he says.Mentor, Ohio-based Cardinal-Commerce provides authenticationservices for more than 20 major andalternative payment brands to 60,000merchants, processors, and e-commercegateways. “Amazon is one of thefastest-growing payments brands thatwe’ve ever enabled,” says Keresman.Foy says the older Checkout byAmazon service garners “definitelymore” transactions, but he expectsPayPhrase to gain share as consumerawareness of it increases. Another reasoneFashionSolutions added AmazonPayments, he adds, was the potentialnew business from Amazon’s vastcustomer base. But just how manycustomers use Amazon Payments is aclosely guarded Amazon secret. DTdigital11

Trends & TacticsTrends & TacticsSecurity NotesEnlisting Electronic Payments in the War on TerrorGideon@AGSgo.comAtime may come when the countermeasures to face the potential of daily acts of urbanrobustness and omnipresenceof the electronictermeasure,and the question for us is implementation.terrorism. Disallowing cash transactions is one such counpaymentindustry will be summonedOne sector of concern is the huge unbanked population.by the country to help root The solution here might be to sell prepaid debit cards againstout a wave of urban terrorism. cash and personal identification. The system will then be able toIt is an open secret that the tie the use of each card with its purchaser. The second considerationpolice and the FBI use electronicmay be volume. As the threshold for no-cash transactionspayment records as a mainstay tool to fight crime and terrorism.is set lower, the volume of transactions in the system gets larger.Nearly everyone goes through his or her day purchas-At some point, the industry would have to develop a solutioning merchandise to support his or her lifestyle. This personal with multiple authentication points and with built-in redundancy.information tells volumes about who we are, and where weIncreased transaction volume also means an increasedare—day by day, hour by hour. Recently, the Patriot Act number of disputed payments, requiring a regulatory change togave the government an unprecedented reach into the privacyforce a quick solution, especially for micropayments.of the citizenry, with the argument that we all have to There would be plenty to be concerned about with such apay with privacy to purchase security. This is deemed today system. What is quite worrisome is that the government, forby our representatives in government as a well-balanced sacrificereasons of secrecy, might develop regulations without allow-to the cause of victory over terrorism.ing the industry itself to adequately participate in their formu-The only thing is, the terrorists are fully aware of the lation. This could lead to chaos in, and even paralysis of, agovernment tentacles and their extensive data-mining capability.system that has become increasingly critical to our civil order.They pay with cash, even for large-ticket items. A common mistake is to not properly account for the reac-Recent terrorism manuals have laid out clear instructions to tions of both terrorists and privacy activists. People could makestay under the radar through cash transactions.it a point to exchange equal-value cards to confuse the system.In this cat-and-mouse game, the next step is for the cat Hackers, as well as privacy fanatics, may offer merchants ato take. It may be a really controversial one: mandating that higher cash price for merchandise that the merchant will thenthere be no anonymous transactions over a preset threshold. report lost or stolen. Once popular, this trend could create pressuresThis threshold could be adjusted at will, and would be setfor laundering and similar unintended consequences.at low enough level to ensure that our enemies will have to Another worry: If the no-cash measures help stop wouldbeleave an electronic track record of their behavior.terrorists, they might become a permanent fixture. TheOf course, the price will be exceedingly high, as all our government would surely enjoy the snooping power theminute actions will become an open book for the government.measures offer. And proponents could argue that this no-But in the war on terror, one has to prepare for all cash payment regimen should be used to catch criminals,eventualities. In Israel, just seven or eight years ago, terrorismspot alimony evaders, and so on.ran rampant, with daily explosions on buses, in res-But enforcement is rather straightforward. Merchants’taurants, on boardwalks, and in shopping centers. It was books would have to show the card used for each payment,relentless, nearly paralyzing the entire civil order. Suicide with prosecution following for cash transactions.bombers and their small support teams purchased their bomb The long-range impact of such a move is hard to foretell.ingredients inconspicuously, blended into the crowds, andShould it become a serious option, it should be broadlyblew themselves up along with scores of innocent victims. debated by all stakeholders, taking into account the technologicalSince America is also an open society, it is equally vulnerable.stress, the operational burden, the ethics and privacyAs a result, our planners must prepare suitable implications, the cost, and, of course, the expected benefit.12 digitalFebruary 2010

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ACQUIRINGFebruary 2010 digitaltransactionsVet Those ChecksPeter LucasPaper checks may be in steep decline at the point of sale thanks tothe mainstreaming of electronic payments, but there are still plentyof opportunities to bundle check verification and authentication withnew processing services.It’s no secret that check volume atthe point of sale is on the declinein the United States as more consumersopt to pay with alternatives,especially debit cards. Check authorizationand guarantee, however, arenot going away.Indeed, several merchant categoriesremain hotbeds of activity thataccount for the majority of checkswritten at the point of sale, such assupermarkets, pharmacies, and healthcareproviders. These merchants servicecustomers so accustomed to payingby check that they find the habithard to break, even if the option topay with plastic is offered.Further stoking the need for checkauthorization and guarantee is thatmerchants are finding check acceptanceto be a dicier proposition thanever. As the pool of consumers writingchecks at the point of sale shrinks,the remaining check writers are provingriskier. These higher-risk checkwriters are the ones more apt to trypassing a fraudulent check or a checkwritten on a closed account.“Check guarantee is becoming amore valuable service to merchantsthat still accept paper checks becausethe instances of bad checks comingthrough the system are growing,” saysRobert Meara, a senior analyst forBoston-based Celent LLC.St. Petersburg, Fla.-based Certegy,a unit of processor Fidelity NationalInformation Services Inc. (FIS), saysthat 500 million checks totaling about$10 billion are forged annually.“We’re also seeing about a 20%annual increase in attempted checkfraud,” says Thomas Carlton, vicepresident of strategic business developmentfor Certegy.‘Downstream Costs’Check verification/authentication reducesthe risk of accepting a check byvalidating the bank routing number andaccount number on the check. Checkguarantee, which is more expensive,goes a step further by guaranteeingpayment to the merchant regardless ofthe check’s authenticity or if there areinsufficient funds to back the check.Increased check fraud alone couldbe enough to build a case to purchaseauthentication or guarantee services.But merchants that convert checks toelectronic formats are discovering theytoo can benefit from these services asthe lingering recession is causing aspike in the number of paper andelectronic check transactions rejectedfor non-sufficient funds (NSF).“Check fraud may be increasing,but so too are the number ofcheck transactions returned for nonsufficientfunds,” says Karen Kaukol,vice president of product managementand innovation for Atlanta-based FirstData Corp. “Even if a merchant electronicallyaccepts checks at the pointof sale, that doesn’t reduce the acceptancerisk. The increase in checksreturned for NSF helps strengthen thebusiness case for bundling check verificationand authentication with electroniccheck acceptance.”First Data, which provides checkauthenticationand -verification servicesthrough its TeleCheck unit, addsthat it is seeing double-digit increasesin check fraud.While bundling check authenticationand guarantee with electroniccheck conversion is nothing new forcheck processors serving banks andmerchants, it remains a popular servicepackage with large merchants.“Large merchants that haveinstalled electronic check conversionusually commit to authentication andverification to offset the acceptancerisk,” says Chuck Doherty, vice presidentand product specialist for Brookfield,Wis.-based processor Fiserv Inc.Several national retailers includingAutoZone Inc., The Home DepotInc., Sears Holdings Corp., andWal-Mart Stores Inc. have adopted14 digitalFebruary 2010

TeleCheck’s ECA Warranty electroniccheck conversion application, whichincludes authentication and guaranteeservices. Overall, 400,000 merchants—including13 of the top 20U.S. retailers—use ECA Warranty.“Bundling authentication andguarantee services with electroniccheck conversion removes all thedownstream collection costs for badchecks for retailers, which can be ahuge savings,” says Kaukol.Such services can also provide substantialsavings to mid-sized and smallmerchants with large check volumes.Even merchants with modest checkvolumes could benefit from authenticationand guarantee if they don’t getenough checks to warrant electronicallyconverting them in the store.“It comes down to the dynamicsof the merchant’s business and theirneeds,” says Doherty. “Smaller merchantsthat don’t have much volume willbase the decision to add these serviceson their check volume and perceivedrisk level associated with that volume.”Granted, small merchants with alocal clientele that have a proven trackrecord as check writers and that generatemodest check volumes are lesslikely to see a need for authenticationor guarantee, let alone electronic checkacceptance. In these instances, processorscan sell remote deposit servicesthat include authentication of the routingnumber. Fiserv offers this optionto merchants that fit this profile.“For some merchants, authenticatingthe bank routing number on thecheck is enough of a risk reduction,”adds Doherty.Real-Time VerificationTwo payment categories that representgrowth for check verification and guaranteeare e-commerce and telephoneorders. Both categories are environmentswhere merchants accept paymentwhen the customer is not physicallypresent, which prevents the merchantRecent Consumer Check-Writing Patterns(% of consumers)Actual changes,2005-20080.9%7.4%40.1%31.1%20.5%Expected changes,2008-20112.2%6.1%19.0%52.7%20.0%• Decreased a lot • Decreased Somewhat • About the Same• Increased Somewhat • Increased a LotSource: Federal Reserve Bank of Boston’s Survey of Consumer Payment Choicefrom validating the consumer’s identitywith a photo ID containing their signature,such as a driver’s license.“Online merchants want to add paymentoptions to lower their acceptancecosts, but that don’t increase transactionalrisk,” says Cynthia Knowles,vice president of marketing for Certegy.“Offering them authentication andguarantee with electronic check acceptanceis a way to achieve this goal.”Amazon.com Inc. is the mostprominent e-retailer accepting electronicchecks backed by options ofauthentication and guarantee. Amazonuses the First Data/TeleCheckECA Warranty application.The primary hurdle to selling onlineand phone-order merchants on bun-dling authentication and guarantee withelectronic check acceptance is educationabout the benefits. With ongoingreports of check volume declining,some mid-sized and small merchantsare looking to debit cards first as wayto lower payment-instrument acceptancecosts, according to Knowles. Arecent study by the Federal ReserveBank of Boston showed that 51.6% ofconsumers surveyed said they wrotefewer checks in 2008 than they did2005 (charts).One alternative to traditionalcheck authentication and guaranteeservices is to provide real-time verificationof availability of funds in theconsumer’s demand-deposit account(DDA). Elavon Inc., the Atlantabasedmerchant-acquiring subsidiaryof U.S. Bancorp, offers this servicethrough direct connections to banks.Once availability of funds is verified,Elavon settles the transactionwith the bank, which then appearsas a direct debit on the consumer’smonthly statement.So far, Elavon has connections tosuch large banks as Bank of AmericaCorp., BB&T Corp., and Wachovia(now part of Wells Fargo & Co.),in addition to U.S. Bank. Between15% and 20% of Elavon’s checkvolume goes through the real-timefunds-verification process via directconnections to banks.“Real-time verification of availablefunds is the purest form of checkverification,” says Amy Gutierrez,Elavon senior vice president, strategicproduct and software solutions.To enable its merchants to acceptchecks drawn on accounts held bybanks not enrolled in its DDA verificationprogram, Elavon uses verificationservices from Miami-basedEnCircle.Other newer ways to packagecheck verification and guaranteeinclude tie-ins to loyalty products.First Data’s ConnectPay offers merchantsa payment and loyalty applicationthat they can offer to consumers16 digitalFebruary 2010

through a private-label card linkedto the consumer’s DDA and a loyaltyaccount. When a consumer presentsthe card at a participating merchant’sstore for payment, her DDAis debited and rewards earned onthat purchase are credited to herloyalty account.“Merchants like ConnectPaybecause it’s a cost-effective alternativeto traditional payment and loyaltycards,” says First Data’s Kaukol.‘Standalone Products’Another option for adding value tocheck processing that some companiesare exploring is pairing checkauthentication and guarantee withCheck 21 protocols. Check 21, shortfor the Check Clearing for the 21stCentury Act that went into effect in2004, allows the merchant’s bankto create a substitute check from adigital image of the original, whichfostered image exchange and reducedthe handling of paper checks. Checkimages typically arecreated after the day’spayments have beentallied.First Data is amongthe first to dip its toeinto these waters. Theprocessor’s Pro 21 suiteof TeleCheck productsoffers automated clearinghouse and Check 21settlement services withcheck authenticationand verification. Check21 and the ACH, whichhave different requirementsfor settlement,are essentially differentroutes to the samesettlement endpoint.Checks that meet ACH requirementsare cleared through the ACHKaukol: “The increasein checks returned forNSF helps strengthen thebusiness case for bundlingcheck verification andauthentication with electroniccheck acceptance.”network to lower the transaction cost.Checks that don’t qualify for ACHsettlement are imaged,batched, and sent tothe merchant’s bankfor settlement viaCheck 21 guidelines.Merchants have theoption to add checkauthentication andverification.“The idea is toprovide 100% electronicsettlement whilerouting the transactionthrough the lowestcostsettlement path,”says Kaukol.Still, not all processorsare convincedthat bundling checkauthentication andverification with Check 21 enhancesthe value of Check 21 services.digital17

That’s because check imaging takesplace in the back office after thecheck has moved through the pointof sale, which is where merchantsprefer authentication and verificationto take place.“The challenge is to bundle checkauthentication and verification withCheck 21 in a way that changesthe value proposition at the point ofsale,” says Barry J. Nordstrand, presidentand chief executive of Plymouth,Minn.-based check processor SolutranInc. “Since the merchant wants toflag bad checks at the point of sale, itmay make more sense to sell authenticationand verification as front-end,standalone products.”The same argument can applyto bundling authentication and verificationwith back-office conversion(BOC) scanners. The business case forBOC, a newer ACH code that allowsmerchants or processors working forthem to do check conversion in backoffices, is that merchants only need acouple of scanners to convert checksto electronic images for settlementthrough the ACH.In contrast, the older pointof-purchase(POP) ACH code for electroniccheck conversion at the checkoutcounter generally means that for highvolumeretailers, a scanner is needed inevery lane. BOC conversions are typicallydone after business hours and theimages are batched for settlement.“Authentication and verification isa nice add-on to BOC, but if verificationand authentication takes place atthe end of the day, that creates lag timein spotting bad checks,” says Fiserv’sDoherty. “Merchants want to catchbad checks at the point of sale.”Even with the steady decline ofpaper checks in stores, paymentsexperts predict the tender will hangaround either in paper or electronicform as long as there is enough consumerdemand, especially from a coregroup of habitual check writers. Theweak economy also may be puttingthe brakes on the long-term declinein check writing.“Paying by check is largely ademographic preference, but the recessionappears to be slowing the moveaway from checks, because consumerslook at checks as a way to help budgettheir spending,” says Solutran’s Nordstrand.“The elimination of checksat the point of sale is a long way offand as long as merchants see the needto continue to accept checks, there isgoing to be a need for authenticationand verification to mitigate the risk.”The key to success for processorswill be how creatively they canbundle authentication and verificationservices to add value to, and lower thecost of, accepting checks. DT18 digitalFebruary 2010

COMPONENTSFebruary 2010 digitaltransactionsBest Show in Town:DVD KiosksLinda PunchThe booming DVD kiosk market may not produce a huge transactionwindfall for payment processors, but it continues to attract ATM companiesand other payments-industry players.The DVD-rental kiosk market,which generates millions ofdollars in transactions annually,is continuing to expand, with marketleader Redbox Automated RetailLLC adding about 8,500 kiosks lastyear while ATM maker NCR Corp.ramped up to capture more marketshare this year.In addition, several playersare testing kiosks that offer digitaldownloads of DVDs, which hold thepotential for offering larger quantitiesand a wider range of self-servicedigital content per kiosk to consumers.The pilots are the first steptoward using portable digital storagetechnology to download movies,TV shows, music, books, games,and other electronic content outsidethe home, which translates into moresales per machine.The technology also wouldallow consumers to play content ona wider variety of devices, includingtelevisions, personal computersand laptops, cell phones, and othermobile devices.The new technology is onereason competition in the DVDrentalkiosk market is becoming soheated, with revenues expected toreach $1.3 billion in 2012, up from$485 million in 2008, according toMonterey, Calif.-based Adams MediaResearch (“The DVD Kiosk GoldRush,” June, 2009).Broader SelectionBut perhaps more important for transactionprocessors, kiosks offeringdigital downloads could open theDVD-rental kiosk market to a widervariety of payment types. Currently,the kiosks accept only credit andsignature debit cards because kioskowners need the flexibility to addcharges for each day the customerholds the DVD.Unlike PIN debit, which requiresthe entry of a personal identificationnumber for each transaction,credit and signature debit cards canbe charged additional fees if the customeris late returning the DVD ordoes not return it at all. With digitaldownloads, however, customers onlypay a one-time fee because the mediatypically are programmed to “selfdestruct” after a specified period ofdays or a one-time viewing.There is no physical item such as aDVD to return and no need for recurringbilling. This could open paymentacceptance to PIN debit and otherpayment methods, some analysts say.For now, the physical DVDremains dominant. But the growthin DVD-rental kiosks is unlikely to“spawn a huge growth in transactions,”says James Van Dyke, presidentand founder of Pleasanton, Calif.-based Javelin Strategy & Research.The kiosks are just an interim technologyuntil consumers grow comfortablewith digital downloads, he explains.“These machines probably havea couple of years of shelf life,” VanDyke says.Some industry executives, however,say it will take longer thanthat for digital media to gain a solidfoothold and are making their businessplans accordingly. Nonetheless,they’re also preparing for the comingof digital content.Duluth, Ga.-based NCR, theleading manufacturer in the matureU.S. ATM sector that also makesself-service kiosks for supermarketsand check-in at airports, is pursuingnew growth opportunities with DVDkiosks and related technologies. InNovember, NCR began testing digitaldownloads with Seattle-based MODSystems Inc., a provider of digitalmedia systems for retailers, and Japaneseelectronics giant Toshiba Inc.The test sites are two BlockbusterInc. stores and four of Movie GalleryInc.’s Hollywood Video stores in Portland,Ore., Seattle, and Dallas.While the initial tests are for digital-downloadkiosks only, there aredigital19

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Be PaidEvery Time,All The TimeCustomized Interchange ProgramsUp To80% / 20% SplitsSigning / Conversion Bonuswith Interchange PricingBad Credit Retail BusinessAcceptedExceptional and Responsive ISOSupport Agent Dedicated To YouExclusive BINs & ICAsOASIS - Online Agent SalesInformation System provides youwith superior management toolsDirect Lease / Split FundingApp In - Live MID / TID - 3 Hrs.MSI Same Day DeploymentTop Management Teamplans to eventually combine digital and physical systems in NCR kiosks,says Anthony Bay, chief executive of MOD Systems.“Digital will be an important part of the mix,” Bay says. “[But] theidea that physical media are about to go away, there’s not a lot of precedentfor that. Our view is that it’s a combination, that digital provides avariety of benefits and value to the consumer, particularly the ability toplay it off of different kinds of devices.”The use of digital media will allow NCR kiosks to offer a broader selectionof material, with the potential for an infinite number of titles. Currently,NCR’s DVD-rental kiosks can hold up to 1,000 DVDs.“The advantages of digital are you can have a very large catalog in avery small space,” Bay says. “You’re never out of stock. You don’t have toreturn movies, and because it’s digital vending, you can have movies, youcan have games, you can have rental, you can have sell-through. You cando all kinds of different things that provide more flexibility.”Ready for DownloadsIn NCR’s test of digital downloads, a consumer can select from more than1,000 movie and TV shows stored in a kiosk, downloading the title to asecure digital (SD) memory card, and playing the movie on a home televisionor on other devices.“The idea of loading things onto a portable card that you can play in anetbook, in TV, and eventually in a phone looks so far pretty compelling toconsumers,” Bay says.‘The advantagesof digital areyou can havea very largecatalog in a verysmall space.You’re neverout of stock.’Rentals from the digital downloadswill be tested at various prices,NCR says. Consumers have 30 daysfrom purchase to watch the movie.Once they begin watching the movie,they have 48 hours to finish it beforedigital rights management (DRM)technology automatically locks thecontent to prevent further viewing.The initial deployment willoffer a choice of 1,000 new-releaseand classic movie titles, with thecatalog increasing to more than1,500 titles early this year, an NCRspokesperson says.At least one other company istesting the digital download of moviesand other media. Digiboo LLC, a new digital-media company in LosAngeles, and Movie Gallery in November announced a pilot program toplace up to 100 of Digiboo’s digital-movie kiosks in select HollywoodVideo and Movie Gallery stores nationwide this year.Digiboo uses USB technology for digital downloads, a technology usedon virtually all PCs, laptops, and many other devices. Digiboo’s touchscreenkiosks will allow customers to plug in a portable flash drive anddownload in less than 30 seconds media from a catalog of more than 1,000movies or TV shows. The media then can be played on a variety of devices,including netbooks and other laptops, PCs, mobile devices, and televisions.The pilot will test both rental and sales and explore various pricing scenarios.Customers eventually will have access to books, music, and games.digital21

Dallas-based Blockbuster in Octoberlaunched the Blockbuster OnDemand movie service, which offersdownloads of digital entertainmentfor rent or purchase through select2009 Samsung HDTVs and disc playersand integrated home theater systemsusing Blu-ray disc technology.(Sony Corp. invented Blu-ray, a nextgenerationphysical disc.) Blockbusterhas a similar arrangement with TiVodigital video recorders (DVRs).Movie rentals range from $2.99 to$3.99, while purchases typically rangefrom $7.99 to $19.99. The BlockbusterOn Demand Service provideson-screen search and browsing capabilitiesas well as details, ratings trailersand other information about eachmovie. To access the movies, consumersselect the Internet@TV feature onSamsung TVs or click a color-codedbutton on remotes for Samsung Blurayplayers and home-theater systems.Blockbuster’s On Demand serviceis built on Sonic Solutions’ RoxioCinemaNow video platform.Blockbuster, which is strugglingto offset declining revenue from itscore in-store DVD-rental business,last year partnered with NCR todeploy 10,000 rental kiosks brandedas Blockbuster Express. The kiosksinitially will offer DVD rentals butalso are digital-download ready, theNCR spokesperson says.Network OwnerBut even while digital downloads arebeing tested, DVD-rental kiosk companiescontinue to expand their kiosknetworks.Bellevue, Wash.-based CoinstarInc., parent company of Redbox,announced in December that it hasinstalled more than 22,210 DVD kiosks,exceeding the company’s projectionsfor net installations in 2009. Coinstar,through Redbox and DVDXpress, asmaller company it acquired in 2007,had 13,700 kiosks deployed at theend of 2008. During 2009, Coinstarand Redbox announced rollouts withKroger, Albertson’s, and 7-Elevenstores. Redbox already deployed itskiosks in high-traffic locations, includingselect Wal-Mart, Walgreen’s, andMcDonald’s stores.Each Redbox kiosk holds 630DVDs, representing up to 200 of thenewest movie releases. Consumersuse a touch screen to select movies,and pay by swiping a credit or debitcard. Customers can keep the DVD foras long as they need it for a low nightlyrental fee (typically $1) and return it toany Redbox location nationwide.During the third quarter of 2009,DVD-rental revenue at Coinstartotaled $198 million, up 90% from2008’s third quarter. Same-store saleswere up 26%.Redbox accounted for about 14.6%of movie-rental market share throughthe quarter, chief executive Paul D.Davis told analysts during Coinstar’sthird-quarter earnings call. (Coinstar,which also reportedly is exploringdigital downloads, did not return callsfor comment for this story.)“We foresee the viability of physicalmedia for years to come andbelieve the digital video landscape isstill in a nascent state,” Davis said.“The winning business model has yetto emerge as consumers lack clarity onwhat they can watch, when and wherethey watch it, and at what price.”The general population still preferswatching movies on their TVs, Davissaid, noting that only an estimated17% of U.S. households, approximately20 million, have a device thatallows them to stream or downloadmovies on their televisions.But despite being the marketleader, Redbox faces ongoing challengesin acquiring newly releasedRecent DVD Kiosk DevelopmentsRedboxNCRBlockbusterDigibooGlobal AxcessAdded about 8,500 kiosks in 2009, leads market with22,000+. Fighting some major movie studios in court forquick access to new releases.Deploying 10,000 DVD kiosks with Blockbuster. Testingdigital downloads with MOD Systems. Becoming kiosknetwork operator; bought kiosk deployers TNR Holdingsand DVDPlay in 2009.In addition to deploying NCR-made kiosks, Blockbusterrecently launched the Blockbuster On Demand movieservice.Testing up to 100 digital-download kiosks withMovie Gallery.About one-third of its 4,600 off-premise ATM locationscould get DVD kiosks.Source: Digital Transactions, news reportsmovies from several major moviestudios. Redbox has filed antitrustsuits against Warner Home Videoand Twentieth Century Fox challengingtheir policies of prohibitingRedbox from providing videosto consumers until at least 28 days(Warner) and 30 days (Fox) aftertheir release. Redbox also says thatthe two studios were trying to limitRedbox’s purchases of new-releaseDVDs to as few as three copies atmajor retailers, including Wal-Mart,Best Buy, and Target.NCR, meanwhile, continues tobuild its DVD kiosk-rental network.In December, NCR acquired Campbell,Calif.-based DVDPlay, whichoperates approximately 1,300 kiosksin the U.S. and Canada. The acquisitionexpands NCR’s reach into California,Colorado, and Illinois. Termsof the deal were not disclosed.“Our acquisition of DVDPlayaccelerates NCR’s growth in the DVD-22 digitalFebruary 2010

ental business as we expand our operations,technology leadership, andconsumer experience in key marketswith premium retail partners,” AlexCamara, NCR Entertainment vicepresident and general manager, said ina press release. “... This further investmentwill help us bring our kiosks toeven more consumers in even morelocations around the U.S., especially inmajor markets in California and otherparts of the western U.S.”The DVDPlay acquisition followedon the heels of NCR’s acquisitionin April 2009 of movie-rentalkiosk operator TNR Holdings Corp.At the time, TNR had about 2,100machines, primarily in Albertson’s,Ralph’s, and Kroger supermarkets.“We purchased them so thatinstead of just being the technologyprovider to other businesses, we’dactually be the owner/operator of ourown DVD kiosk network,” the NCRspokesperson says.NCR signed a naming-rightsagreement with Blockbuster forNCR’s DVD-rental kiosks in January2009. It has rolled out BlockbusterExpress kiosks to retailers includingPublix grocery stores, a 1,000-storegrocery chain in the Southeast. It alsohas deployed kiosks to Tedeschi FoodShops, a convenience-store chain inthe Northeast, and Basha grocerystores in Arizona.In addition, in December NCRannounced that it would install BlockbusterExpress DVD-rental kiosks inmore than 200 locations of DuaneReade, the largest drugstore chain inNew York City.The company expects to deploy atotal of 10,000 kiosks by mid-year.unattended retail self-service kioskcompany,” George McQauin, presidentand chief executive, told analystsduring Global Axcess’s thirdquarterearnings callin November. GlobalAxcess did not returncalls for comment forthis story.Jacksonville, Fla.-based Global Axcessbelieves that aboutone-third of its currentATM portfolio ofabout 4,600 machinesin stores and othermerchant locationsis “ideal and opento installing DVDkiosks,” McQuain said.He did not disclosehow many DVD kioskshad been deployed.During the third quarter, the companyspent about $360,000 on kiosksand about $50,000 on DVD inventory.Once the DVD-rental kioskrollout is completed the companyexpects revenue of about $800 perkiosk per month.“The advantages ofdigital are you can havea very large catalog in avery small space,” saysBay of MOD Systems.The ongoing success of Redboxwill likely attract other newcomers tothe DVD-rental kiosk market. “Themarket remains pretty strong for that,”says Sean Alexander,technology analyst forFranklin, Tenn.-basedresearch and consultingfirm IHL Group.Despite NCR’srecent additions to itskiosk locations, however,no company isclose to challengingRedbox’s market dominance.But NCR’spush to add kiosklocations “reveals thatthere is more than justone option out there,”Alexander says. “Redboxdoes have somecompetition.”Indeed, the kiosk competitionseems likely to only get more intensewhile the physical DVD remainsdominant. But the rules of the gamecould change substantially once digitaldownloads become feasible fromhome for a mass audience. DTCompetitionWhile NCR continues to build itsDVD kiosk business, another ATMindustry player has launched a DVDrentalkiosk pilot program. GlobalAxcess Corp. is in the process of“redefining the company from anATM management company into andigital23

THE SUDDENALLUREOF P2PInstead of just using a mobilephone or computer to reachout and call a friend, consumersmay be using computing devices toBy Karen Epper Hoffmanreach out and pay them.That is, at least, what a raft of banks andtheir technology vendors are expecting as theyhave been rushing to partner up to develop and rollout person-to-person (P2P) payment services, whichwould allow consumers to send money to friends, relatives, oreven independent service providers by e-mail or mobile phone.Unlike a wire transfer or other previously availablepayment options, these new alternatives would only requirethe payor to have their payee’s e-mail address or mobilephonenumber. No bank routing number and account numberrequired. That makes these new options much easierand more appealing to privacy-conscious consumers.“Consumers need the ability to move money ... and payindividuals as well as businesses in an environment wherecash and checks are less and less [used],” says Jeff Lewis,an executive vice president for e-payments at FidelityNational Information Services Inc. “Consumers are saying,‘I need the velocity I want.’”In November 2009, the Jacksonville, Fla., banking andpayments vendor, which serves 14,000 financial institutionsworldwide, announced a deal to integrate PayPal Inc.’sglobal P2P payment system into its own online bill-paymentapplications. According to Lewis, FIS has signed threeunnamed U.S. banks and plans to be in pilot this month.A handful of financial institutions, including PNCFinancial Services Group, Mercantile Bank of Michigan,First Hawaiian Bank, and credit unions Patelco andBECU, have already publicly announced their intention tooffer P2P payments within the first few months of 2010.Technology vendors, including CashEdge Inc., ObopayInc., Fiserv Inc., and S1 Corp. have launched P2P servicesin recent months, typically as an extension of the paymentapplications they already offer. S1 and its bank client, MercantileBank of Michigan, are also employing PayPal’sinfrastructure.Natural Next StepThe interest swirling around electronifying P2P paymentsisn’t surprising, given the size, scope, and readiness ofthe market, according to industry observers. Consumersmake roughly 9 billion personal payments eachyear, the majority of which are made with cash andchecks. In a June 2009 survey conducted by Fiserv,70% of 1,022 U.S. consumers said they would beinterested in making such payments electronically.Three out of four of those surveyed saidthat they would prefer a service offered bytheir financial institution.Many banks see these typically smallervaluepersonal payments as simply anextension of what they already offer tocustomers with online bill payment and24 digitalFebruary 2010

For years, many banks found person-to-person paymentstoo low-margin to bother with. Some had offeredproducts and gotten burned. Now they—and theirvendors—are rushing into the market. What’s changed?funds transfers. To them, P2P is the natural next step inboth their online-banking and mobile-banking offerings.“We were already providing customers with the abilityto transfer funds electronically to a third party,” says JayleneTsukayama, vice president and manager for home bankingat First Hawaiian Bank, which in December began offeringa P2P payment service to customers using CashEdge’sPOPmoney application. “POPmoney just expanded themeans by which the customer is notified that they have apayment waiting and leaves it to the recipient to provideinformation on where the funds should be deposited.”Neil Platt, senior vice president and general managerof banking for CashEdge’s U.S. banking division, pointsout that POPmoney, which the company launched in June,builds off of the vendor’s TransferNow, a service used byabout 400 banks. TransferNow allows customers to transfermoney among their own accounts or to other people’saccounts. Consumers used CashEdge applications tomove nearly $50 billion in online fundstransfers in 2008.“Banks like PNC [also launching POPmoney for P2P]and First Hawaiian have been using our products for a longtime ... But you had to know [the payee’s] routing numberand account number,” Platt says. “Now you just need toknow their e-mail address or cell-phone number.”Similarly, Mercantile Bank of Michigan had been acustomer of S1 for online banking before the bank becamethe first to sign on to offer person-to-person paymentsthrough the banking vendor’s new service with PayPal.“We’d been keeping an eye on P2P for a while ... S1had a vision for approaching this [market],” says JohnSchulte, senior vice president and chief information officerat the Grand Rapids, Mich.-based bank. Leveraging thePayPal network, which boasts 78 million accounts worldwide,helped support that vision for getting consumersinterested, Schulte adds.Not to be left out, MasterCard Inc. last May launched itsMoneySend service in the United States. MoneySend hadalready been available in 17 other countries.Although the service initiallydigital25

equired users to retrieve funds using aprepaid MasterCard, the card networkplans to offer issuers the opportunityto provide payments via mobile andPC through a partnership with mobilepaymentsvendor Obopay.MoneySend functions as “anengine for clearing and settlement”for consumers who want to make paymentsto, say, a friend or the babysitter,just as MasterCard’s system providesthe same service for businessesthat accept its cards, says Josh Peirez,group executive of innovative platformsfor MasterCard.Obopay offers banks “an on-ramponto the payments superhighway” thatis MoneySend, according to MichaelE. Diamond, Obopay’s senior vicepresident for business development.While Obopay has conducted mobilepayments trials with Citigroup Inc.,the company has no U.S. bank customersfor its P2P service as yet.The iPhone EffectWhy, after years of shunning the marketas low-margin and uninviting, arebanks and their technology providerssuddenly stumbling over one anotherto roll out P2P products? Bankers,vendors, and industry observers pointto a number of technological andmarket factors that have emerged26 digitalFebruary 2010THE P2POPPORTUNITYFOR BANKSto make this an opportune moment.“I really think the market is at theright place at the right time,” saysBeth Robertson, director for paymentsresearch at Javelin Strategy &Research, Pleasanton, Calif.Unlike earlier runs at this marketin the late 1990s and early2000s—ill-fated efforts such as Citgroup’sc2it and Bank One’s eMoney-Mail—these new developments cantap a greater readiness among consumersand leverage a more advancedand well-entrenched technology environment,according to Robertson.Perhaps the biggest factor has simplybeen consumers’ own increasingTHE GROWTH OF P2P(U.S. households making online transfers, current and projected,in millions and as a percent of all households)3238%3844%4248%4651%2008 2009 2010 2011 2012 2013 20145054%5457%5861%Source: Javelin Strategy & ResearchÑ 81% of surveyed consumers would usea P2P service if offered by their financialinstitution;Ñ 77% would prefer to use a P2Pservice offered by their own financialinstitution rather than an independentonline P2P service (such as PayPal or asimilar service);Ñ 73% feel that a P2P service offeredthrough their bank would be more securethan an independent P2P service;Ñ 69% feel that a P2P service offeredthrough their bank would be moreconvenient than an independent P2P service.Source: CashEdge surveyfamiliarity with making paymentselectronically. In the past severalyears, consumers have become vastlymore apt to make purchases onlineand, even more analogous to P2P, topay bills online.By some researcher estimates,the number of U.S. households payingtheir regular bills online nearlydoubled in the latter half of the lastdecade. Javelin Strategy & Researchestimates that 32 million householdsare already paying bills online, a numberthat will grow to 42 million by2012. “When [P2P] services were initiallyintroduced years ago, there wasa much smaller segment of customerstransacting online,” Robertson says.“Consumer readiness is a big issue.”Many people have become morecomfortable making electronic paymentsto non-businesses specifically,buying items from online garage saleslike eBay or Craigslist. “People havegrown up using systems like Pay-Pal to buy at online auctions,” saysThomas Trebilcock, vice president ofpayments and e-business for PNC.The ever-expanding capabilitiesof mobile phones and consumers’desire to use them for much morethan voice calling has also made ahuge difference. “The iPhone hasbeen a huge driver. It’s driven competition;it’s lifted the whole marketplaceto a new level,” Schulte of

The Smart Card Alliance will hold the 3rd Annual PaymentsSummit on February 23-25, 2010, at the Marriott City CenterHotel in Salt Lake City, UT. This 2.5-day meeting will focus onexciting new trends and projects that are accelerating thewidespread acceptance, usage and application of contactlessand NFC mobile payments technology for transportation andgeneral retail payment applications.The transit and retail markets have many common industrystakeholders including the chip and card manufacturers,terminal manufacturers, payment brands, issuing banks,payments processors, systems integrators and new mobiletechnology suppliers. Having a summit for Alliance Councilsand common stakeholders to meet in joint sessions to discussthe opportunities and obstacles ahead will allow everyonepresent to gain more insight into the commonalities thatconnect these two markets. Also, time is set aside in the agendafor separate breakout sessions focused on topics relevant toeach market and for discussions about emerging developmentsin the transportation, retail payments and evolving mobile andNFC markets.The Summit will include sessions oncurrent U.S. and international transitprograms, contactless paymentsdevelopments and status, NFC/mobilepayments technology developments,prepaid card initiatives, paymentsindustry fraud, EMV implementations,and technologies that addresspayments security.Presentations By:Register and view agenda online at www.smartcardalliance.org.

THE PAYPALQUESTIONWhenit comesto offeringperson-to-personpayment, two campsare emerging among banksand their vendors: those that wantto try to beat PayPal Inc. and those that want to join it.PayPal, a unit of eBay Inc., has long been the leaderin the electronic peer-based payment space. As somebanks and vendors see it, this makes the company awell-positioned partner. For others, this makes PayPal apotent threat to their own business.“Fundamentally, our model is built [on the concept] thatthe bank or the credit union is the site,” says Steve Shaw,director of strategic marketing for electronic banking servicesfor Fiserv Inc., pointing out that in the PayPal P2P model, therecipient must have a PayPal account into which funds aredeposited. “The idea of transferring money out of the bankaccount is so counter-intuitive to what bankers want to do.”Jaylene Tsukayama, vice president and manager for homebanking at First Hawaiian Bank, says that her bank’s decision towork with CashEdge Inc. was predicated on crafting a servicethat is “available to customers through their existing, trusted,and secure relationship with First Hawaiian Bank. Customersdon’t need to establish a new relationship or set up a newaccount with some third-party provider that they don’t know.”Mercantile Bank says of Apple Inc.’spopular smart phone.The iPhone gave rise to a thrivingmarket for smart-phone applicationsthat consumers can download easily,and often for free. Many of these arerelated to financial services. A recentpoll by financial consulting firm MercatusGroup found that the percentageof U.S. consumers age 26 to 34 whohad used their mobile phone to buygoods or services had doubled to 14%in the past year.“People are getting used to conductingmore complex interactionsthrough their mobile device,” saysMark Moore, vice president of strategyand business development forS1. “And now we have the devicesand networks that serve up richmobile content.”Some banks also worry about whatthey stand to lose if they don’t meetcustomers’ demands for new technologyto access accounts and services.Even though his bank is just under$2 billion in assets, Schulte of MercantileBank says it is “important fromour perception that we do this first.”Platt of CashEdge says hethought he would have to “spend alot of time evangelizing why banksshould offer person-to-person payments.”But in talking to banks sincelast spring, he says, “I was surprisedat how many clients [were sold]. Itwas not a matter of if they wanted togo forward, but when.” Platt says hebelieves CashEdge may have POPmoneydeployed to more than 100banks by late 2010.‘Last-Mile Issue’Non-bank P2P processor PayPalhas also played a role in catalyzingbanks’ moves into the market, especiallyas it introduced mobile servicesin recent years.Menekse Gencer, president andchief executive of MPayConnect, amobile payments consultancy, saysthe PayPal juggernaut has “certainlybeen putting more pressure on banksfor some time now” to move moreaggressively into this market. “A lotof people see this as a necessaryevil,” says Gencer, a former executivewith PayPal Mobile. “They ask themselves,‘If we don’t do it, what’s theopportunity cost?’”Indeed, banks are fearing theycould lose the core deposit accountif they don’t offer a P2P product.“It’s not about revenue,” says Trebilcockof PNC. “It’s about retainingthe customer [and] having a deepershare.” Services like P2P payments,he believes, will help hook and keepemerging affluent Generation X and Yconsumers in particular. “The customerswho use this are the customers youwant to retain, the best customers.”While the business case might notbe the primary motivation, at least forsome banks, those drivers do exist.Industry observers say that person-topersonpayments offer banks the opportunityto cut costs, strengthen retention,and potentially generate revenue.For banks, the cost of processinga P2P payment is a small fraction ofprocessing a paper check, which isby comparison becoming even moreexpensive as check volumes decreaseand courier costs and other relatedexpenses increase. Schulte says heexpects a P2P transaction to cost hisbank about 25 cents, compared to the$1 to $2 it would cost them to processa paper check for the same payment.Researcher TowerGroup Inc. estimatesthat U.S. consumers made morethan 3 billion non-cash person-topersonpayments in 2008, the bulk ofwhich were paid via check at an estimatedcost to banks of $255 million.With as many as 25% of the onlinebill payments consumers make, banksor processors still cut physical checks,according to Dan Schatt, senior directorand head of financial innovationsfor PayPal. “No one has been able tosolve that last-mile issue there,” hesays. “As more and more people gravitateto online bill payment, paper justbecomes an enormous problem.”Also, like online bill payment,person-to-person payment is seen as a“sticky” service that makes users less aptto surf their bank accounts elsewhere. Italso could allow bank providers to add28 digitalFebruary 2010

However, Beth Robertson, director for paymentsresearch at Javelin Strategy & Research, contends Pay-Pal has two key advantages: widespread market recognitionand understanding of its service and its name; and itsglobal presence. “This could allow [PayPal] to help transactorsnot only in the U.S. market, but those who want tosend money outside it,” she says.Dan Schatt, senior director and head of financial innovationsfor PayPal, says he understands why banks mayhave some historical reluctance about working with theonline payments giant. But he argues the business, and Pay-Pal’s focus, have changed.“PayPal has grown up and has no interest in becominga financial-services supermarket [or] a bank ... we’re reallysolving problems that banks have,” Schatt says. “PayPal isjust another rail that can be leveraged quite effectively.”John Schulte, senior vice president and chief informationofficer for Mercantile Bank of Michigan, says he waseager to partner with PayPal on person-to-person paymentsbecause of its established network and its experience.“When PayPal came out, they were viewed as a threat,” hesays. “But now it’s just part of the infrastructure.”“There are financial institutions that absolutely seePayPal as the enemy,” says Jeff Lewis, an executive vicepresident for e-payments at Fidelity National InformationServices Inc., which is also working with PayPal. Still,he says, “At the end of the day, banks and PayPal needeach other.”their logo or other branding or marketingmessages, which would go out topayment recipients who may not alreadybe customers of that bank.‘The International Piece’And the service is another importantarrow in the banks’ quiver as the industryis forced by regulatory changes tomove away from its decades-longdependence on overdraft and otherpenalty fees and develop service andproduct packages for which consumersmight willingly pay.Steve Shaw, director of strategicmarketing for electronic banking servicesat Fiserv, says that while somebanks might charge directly for the service,other banks see this as a way tobuild a package of products that wouldgive customers the sense they weregetting more than just a plain-vanillachecking account. Moore of S1 suggeststhat banks may eventually charge somecustomers for the service but offer it freeto customers who have higher balancesor use more of the bank’s products.While Mercantile and PNC have noplans to charge customers, First HawaiianBank will charge senders $1 perpayment. Tsukayama of First Hawaiiansays that, since the P2P service isan enhancement to the bank’s existingexternal transfer capability, whichcharged a $1 fee already, “we opted tojust keep the fee structure status quowhile we introduced this new service.”Even banks that are not chargingoutright for transactions withinthe U.S. may eventually be able tocharge for payments that take placeacross borders. Industry observerssay that offering the opportunity tosend money abroad could attractunbanked consumers who may besending remittances through nonbanks,especially as these capabilitiesmove to the mobile phone—a platformthat is much more entrenchedfor payments in many foreign countries.In this way, banks could gainentry into the unbanked market andthe international remittance businessat the same time.“The international piece is veryinteresting,” says S1’s Moore, addingthat 10% of the U.S. population sendsmoney abroad. “There’s an opportunityfor banks to play more in thosetransactions.”Some point out that P2P couldplay a critical role in sparking organicgrowth for many banks. “All the bigdeals [industry mergers and acquisitions]have been done,” says Obopay’sDiamond. “The question is now,‘How do you get the underbanked tomove over?’ The mobile phone is thelanguage they all speak.”Mobile As the DriverIronically, while mobile is a majordriver, it’s not the initial platform forP2P—yet.While mobile banking has seensteep growth in comparison to otherfinancial technologies, its usage inthe United States is still a tiny fractionof online banking usage. Similarly,while smart phones like theiPhone, Blackberry, and Palm Pre arefast replacing more basic handsets,they’re far from the majority.Forrester Research Inc. says smartphones, those that use a high-leveloperating system, were only used by17% U.S. cell-phone subscribers in2009, up from 11% in 2008. “Sometimes,the mobile phone is not sophisticatedenough,” MasterCard’s Peirezsays. “And the consumer experiencecannot be clunky.”As a result, PNC, First Hawaiian,and Mercantile all have plans to offertheir P2P services online initially.Still, most observers see the mobileplatform as the place that P2P willtruly hit its stride.“Mobile is going to drive this,”says Schulte, pointing up the ubiquityand the immediacy of cellphones. Schulte and his team arealready actively discussing issueslike whether they should develop aspecific interface just for the category-killeriPhone, or see what theuptake is on the recently releasedMotorola Droid.“Everything is moving to thephone,” Schulte adds. “It’s the nextnatural leap in payments.” DTdigital29

M-COMMERCEFebruary 2010 digitaltransactionsUnderstandingMobile Bill PaymentsKathi PlymouthBill payments via mobile phone are a promising new source of transactions.But getting the most out of this trend requires mastery ofseveral key factors, including new business models and the influenceof regulations and technology.In today’s world, mobile phones arebeing used for a wide range of purposes.So why not on-the-go billpayment? This may seem a naturaluse for mobile devices, but to understandwhat will drive bill-paymentactivity to the mobile phone requirespayments professionals to look atthree key factors: the models available,the segments of interest, and theinfluencing forces at work. Let’s havea look at each.With new technology come newmodels. Conventional online bill paymenttends to fall into two camps, thebiller-direct and the online-banking orconsolidator groups. But with the introductionof mobile devices, another setof considerations comes into play.Currently, three mobile bill-paymentmodels exist: SMS (short messageservice), Web browser, and mobilephoneapplication. The SMS or textmethod is the most popular because ofits ease of use and its connection withexisting mobile-phone behavior.Adam Craig, director of productmanagement for biller solutionsat Fiserv Inc., notes, “Text/SMS is[the] primary [application] for billers.”Fiserv recently enhanced itsBiller Direct HV solution, whichallows consumers to receive notificationtext messages on their cellphones. This year, Fiserv will add anoption to pay the bill.“Many utilities have rolled outSMS for outages so it is natural toconsider the method for collections,”Craig notes. He adds that many utilitieshave found that SMS yields ahigher response rate than traditionalcommunication methods such as lettersor even e-mail.‘Pressed for Time’With the smart phones now available,mobile Web browsing has becomemore popular, seemingly yieldinganother option for paying bills. But,while the experience is similar to payingbills on a PC, it is not the same.The limitations of the Web-browsingexperience on a handheld device, suchas diminished look and feel and possiblyeven authentication, lead manyobservers to argue that consumerswould rather confine their browsingto their laptops.While not as commonplace, mobilebill-payment applications are anotheroption. Gen X and Y users, groups usuallyconsidered the most tech savvy,may embrace this option over time.As the phone moves along the continuumfrom communication device topersonal assistant, perhaps mobile billpaymentbehavior will move from textto bill-payment application.Mobile bill-pay often goes hand inhand with bill notification. “Mobile isa chance to engage and communicatewith the customer,” says Joe Salesky,chairman and chief strategy officerat ClairMail Inc. Two-way interactions,such as bill-notification textalerts and bill-payment text replies,are vital for mobile bill payment.Reminders eliminate payee concernsabout missing the first notice,help ensure timely payment, and caneven deliver expedited-paymentsrevenue. Mobile receipts can carrybiller news or cross-sales messages.Beyond its mobile-banking platform,ClairMail supports a two-way interactionmodel not only for collections butalso for normal bill payment.Texting both the bill notificationand the payment reply also makesthe mobile device consumer-friendlyfor a task most consumers don’tenjoy.With all the mobile bill-paymenttools available, who are the users ofthis technology? The mobile phoneappeals to “certain [bill payment]segments such as under- or unbanked,consumers always pressed for time,and Gen Xers,” notes Murali Subbarao,chief executive of Billeo Inc., amajor online bill-payment provider/30 digitalFebruary 2010

What statement is true to youin regards to mobile bill pay?Too much of a riskToo new to tryConvenientWhat I needed allalong from my bank18%14%6%Inc. and the group leader for theNACHA mobile work group, says,“Considering the requirements of theWEB SEC code, the risk isn’t muchdifferent with mobile bill payments asit is with online bill payments.”The NACHA group not only evaluatedthe risks but also the missedopportunity by not capturing andmonitoring these payments. Research,such as that conducted by SWACHA(charts), started to quantify the potentialinterest.While bill-payment transactionsare generally less risky, security concernsstill need to be addressed inthe mobile setting. Regarding mobilepayments in general, consumersnot only have the same concerns asthey have with online technologies(e.g., hackers), but also new concernsstemming from the handset device(e.g., what if it is lost?).“Consumers are concerned andproviders will need to hand-hold themthrough the transactions to justifywhat they are doing is safe,” saysAite’s Holland. Again, SWACHA’slatest research supports these concerns,with 18% of the survey respondentsstating that mobile bill paymentis “too much of a risk.”Many feel that the perceptionsregarding security are just that—perceptions. The environment on the32 digitalFebruary 201071%Note: Respondents could respondto more than one alternative.Source: SWACHA Consumer Survey Insights 2009handset is not that much differentfrom the one on a laptop. In addition,mobile bill-payment enrollment doesnot occur on the phone but via anotherchannel—online, IVR, or in the paperlockbox environment.Some industry providers contendthat tying alerts to payments mayeven make mobile bill payments, andmobile transactions in general, moresecure than other types of payments.And industry players point out thatsome of the outcomes are low risk, forexample, your bill is paid sooner.Financial institutions also needto determine how they will tap intothe mobile bill-payment space. Bankof America Corp. recently touted1.9 million mobile-banking customers.Research from Juniper predictsthat mobile-banking subscribers whouse their phone to conduct banktransactions will exceed 150 millionglobally by 2011.Imagine if those consumers allpaid their bills via their mobile phones.Some of those mobile-banking usersmay not be current online bill-paymenttransactors. VeriSign Inc. recentlyconducted a survey that suggested60% of consumers who currently arenot using online banking would beinterested in using at least one mobilebankingservice.‘Undeniable Momentum’As billers link their mobile customerserviceand collection activities to billpayment, financial institutions need tostrategically address this space. Thisis not only to drive overall adoptionbut to ensure they lock in future billpaymenttransactions.Technological advances will alsohelp to drive mobile bill-paymenttransactions. The percentage of smartphones will not only drive nontraditionalcell-phone use but also applicationuse, such as mobile bill payment.For instance, in the same VeriSignstudy, while 29% of respondentsstated they would be likely to usetheir mobile phone for making andreceiving payments (if available), thepercentage increased to 52% for usersof smart phone/high-end devices.What all this evidence suggests isthat bill payments are definitely goingmobile. “The momentum of mobile‘Consumers are concerned andproviders will need to hand-holdthem through the transactions tojustify what they are doing is safe.’is absolutely undeniable,” says Subbaraoof Billeo. What is in questionis how fast the shift will occur andwhich providers will capitalize on it.One item is for certain: If you area financial institution or a businessthat collects consumer receivables,you need to determine where mobiletransactions, including bill payment,fit into your strategy. DTKathi Plymouth can be reached atkathleenplymouth@aol.com

Revolutionary Times Call for aRevolutionaryMagazineWe go to the players whoare making revolutionarychange happen. Subscribe toDigital Transactions today.Go to www.digitaltransactons.netand hit “Subscribe.”That’s why we created Digital Transactions. The consumer paymentsmarket isn’t what it was five years ago. It’s not even what it was fiveweeks ago. You know that. But how can you be sure you’re really stayingon top of this fast-changing market? Getting the latest and best insightson competitive strategies, the most informed analysis of market movesand trends. From a single publication that understands this market andspeaks to its key players as no othermagazine does?By relying on Digital Transactions.A magazine created specificallyto cover the dizzying changesweeping over the consumerelectronic transaction businessin North America. To covertrends. To explain competitivestrategies. To help busy executivessort out reality from hype, andmake more money.Credit. Debit. ACH. Issuing,acquiring, originating, orreceiving. Name the channel.Name the network. Name theplatform. If it’s a consumerbasedelectronic transaction,we cover it. We talk to theplayers who are makingthe revolutionary changehappen. Every month.Rely on Digital Transactionsto help you profit from afast-changing, increasinglyinterconnectedtransactions market.Make the transactionrevolution workfor you.

E-COMMERCEFebruary 2010 digitaltransactionsBundling up inInternet PaymentsBen JacksonThe new partnership between First Data and Yahoo could test whetherpayment processors can reap new business from Web portals.The Internet has some big tents,so to speak, that house tensof thousands of merchants.Online-auction king eBay Inc. servicesmerchants that sell goods offof eBay, and eBay’s PayPal subsidiaryprovides payments services tothem. Amazon.com Inc. is rampingup its payment services and technologyofferings to many online retailers.And then there is the giant Web portaland search engine Yahoo! Inc.In an effort to expand its reachamong small and medium-sized businesses,leading payment card processorFirst Data Corp. has signed an agreementwith Sunnyvale, Calif.-basedYahoo to offer card processing for smallbusinesses that use the Yahoo MerchantSolutions e-commerce platform, whichincludes Web-hosting products.The plan is to get more merchantsto use First Data’s processing platformin their stores and online, says SouheilBadran, senior vice president and divisionmanager of e-commerce solutionsfor Atlanta-based First Data.Badran says that over the past yearmany merchants that use First Datafor their brick-and-mortar stores haveasked whether First Data can also providethem with a way to process paymentsonline. First Data did not want totry to build a Web-hosting service, andcustomers wanted something that waslow-maintenance. The company thusdecided to partner with Yahoo, whichit has worked with in the past, becauseYahoo already provided an easy way forsmall businesses to set up Web sites.“Yahoo was offering that service,we just never bundled it” together,Badran says.The two companies have a confidentialagreement under which theyshare revenue from their respectiveservices with each other, accordingto Badran. A Yahoo spokespersondeferred to First Data and declined tocomment for this story.Beyond the ‘HoodYahoo offers an e-commerce merchanta starting plan for $39.95 permonth, which includes a domainname, Secure Sockets Layer 128-bitsecurity, and help in setting up theWeb site. Merchants also pay a $50setup fee. First Data is one option, butmerchants can also use PayPal’s WebsitePayments Pro, which Yahoo listsas its preferred provider, or any currentprocessor they have as long as itis compatible with the First Data MerchantServices Nashville platform.Through its own relationships andvarious merchant alliances with banks,First Data currently services morethan 5.3 million merchant locationsrepresenting all kinds of businesses,Badran says. The service with Yahoo isaimed at small businesses that have notexpanded online before now, he says.“This is catered to small andmedium-sized businesses that arelooking to expand beyond their fourblockneighborhood,” he says.Merchants will get a discount forusing both e-commerce and card-presentservices, but they can choose to useFirst Data with Yahoo even if they useanother processor for their point-ofsaleterminals. Badran, however, saysFirst Data will have a foot in the doorwith those merchants that use anotherprocessor for physical transactions andhopes to convert them to First Data forall their processing services. He alsoexpects the First Data’s bank partnersand independent sales organizationswill pitch the bundle to smaller merchantswhen they make sales calls.Merchants using the First Data/Yahoo online service will have theirprimary relationship with Yahoo,which will collect a monthly hostingfee and transaction fees ranging from0.75% to 1.5%, depending on paymentvolume. Those fees are on top ofFirst Data’s (or other processor’s) discountrate. The Starter plan, at 1.5%,is for merchants generating less than$18,000 per month in charge volume.How the total cost compares directlyto other online payment service plansis difficult to ascertain because of theinterplay of various site and other feesthe players charge (chart, page 35).34 digitalFebruary 2010

In addition to responding to customerrequests for online transactionprocessing and gaining an entrée forconverting card-present merchantsfrom other processors, Badran says thatYahoo would be able to use the brickand-mortarportion of the partnershipas a selling point against competitorslike Google Inc.’s Google Checkout,Amazon’s Amazon Payments, andPayPal. First Data already has integratedthose payment services into itsprocessing platform, so merchants canhave one relationship with First Datathrough Yahoo and at the point of sale,and accept alternative payments.“It is an advantage having First Datado the homework and due diligence onbehalf of the merchant,” Badran says.In theory, at least, the partnershipalso could open new prospects for FirstData among merchants already onlinebecause thousands use Yahoo MerchantSolutions as their e-commerce platform.Yahoo would not disclose the number.‘Commoditized’Still, industry observers are not convincedthat this sales advantage willradically change the market for onlinepayments processing.Red Gillen, a senior analyst with theBoston-based consulting firm CelentLLC, says that from a macro perspective,so many companies are onlinealready and online payments are soeasy to integrate, bundling would notbe a selling point for most businesses.“It’s not that hard to put PayPalon your site these days,” Gillen says.“Payments to a large degree arecommoditized.”First Data will need to compete onprice and Yahoo will need to marketthe service well for the bundle to attractmany merchants, Gillen adds. “There’snot a green-field market,” he says.Beth Robertson, director of paymentsresearch at Pleasanton, Calif.-based Javelin Strategy & Research, saysthat there is extreme competition formerchants in online payments processingbecause there are so many serviceHow E-Commerce Payment Plans CompareYahoo/First DataBrick andMortarOption? Monthly Fee Cost Per TransactionYes$39.50 per month($50 setup fee)Additional charges foroff-line servicesPayPal No With some plans, variesGoogleCheckoutAmazon(Selling onAmazon)AmazonCheckoutNoNoneNo $39.99NoNoneproviders. Value-added packages canhelp differentiate Yahoo and First Datafrom the competition, but “it’s not as ifit’s a totally unique package,” she says.The package of online and offlineprocessing, however, will help FirstData in its competition against otherlarge processors, such as Total SystemServices Inc.’s TSYS Acquiring Solutions,Robertson says.“It probably serves to validatethem as a player in that arena andserves to position them better againstthose companies,” she says.Robertson also thinks that the truecompetitive advantage will be foundin pricing rather than bundling.Looking to the future, Robertsonsays that she expects payments innovationsto come from companies likePayPal opening up their platforms toindependent software developers, followingthe model of Apple Inc. enablingthird-party developers to make about100,000 and counting new applicationsfor its iPhone (“PayPal’s Ploy To Rampup Innovation,” December, 2009).“PayPal is the most aggressive inleveraging their payment services,”0.75%, 1.0% or 1.5%Yahoo charge dependingon volume, plusprocessor fee*1.9% to 2.9% plus$0.30, depending onvolume1.9% to 2.9% plus$0.30, depending onvolumeSelling fees vary basedon product (e.g. $1.35for books, $0.80 forDVDs)1.9% to 2.9% plus$0.30, depending onvolume*1.5% is Starter plan for merchants generating up to $18,000 in monthly charge volume. 1.0% isStandard plan for merchants with $18,000 to $68,000 in monthly volume; 0.75% is Professional planfor merchants with $68,000+ in monthly volume. Processor discount rate is added to Yahoo fee.Source: Company Web sitesRobertson says. “Opening up theirplatform to developers may openunique applications for merchants thatthey might not have chosen to developthemselves as merchants.”But Badran says that the appeal ofthe First Data-Yahoo bundle is not inits uniqueness, but rather in its familiarity.Yahoo makes it easy for smalland medium-sized businesses to setup a Web site and First Data makesit easy for them to accept payments,improve their flow of funds, reducefraud and chargeback costs, and provideprotections against identity theftto their customers. All merchants needto do this and start selling online is aWeb connection, he says.“Yahoo, with their experience,really facilitates the process” of buildinga Web site, Badran says.Those merchants that already havea Web site that might be strictly informationalcan now add e-commerce totheir other ways of selling, he says.If it’s a hit, First Data and Yahoocould prove that bricks meetingclicks can prove profitable in paymentprocessing. DTdigital35

NETWORKSFebruary 2010 digitaltransactionsWhy Mobile Will BePart of NACHA’s WEB,for NowLinda PunchMobile payments are expected to explode, but the rules-setting bodyfor the ACH isn’t ready yet to create a dedicated transaction code. Isthat a sound approach, or a serious mistake?After nearly two years of study,NACHA, the rule-setting bodyof the automated clearinghouse, is still grappling with whetherto create a new type of transaction formobile ACH payments.While acknowledging marketresearch that indicates mobile paymentsvolume will explode over thenext few years, NACHA still isn’tconvinced that a new entry codeclassification is needed in the shortterm. Standard entry class codes areNACHA-speak for types of ACHtransactions, for example, WEB forbill payments on billers’ Web sites.Instead, the group is proposinga two-pronged strategy—classifyingmobile payments under the existingWEB code in the short term while continuingto explore whether a new entrycode classification will be needed inthe long term. Some 562.6 milliontransactions were handled under theWEB code in the third quarter of lastyear, up 7.6% from the same period in2008 (figures exclude on-us volume).“While there’s significant mobilevolume projected in the next couple ofyears, we’re not quite there yet,” saysSusan Pandy, NACHA’s senior directorof Internet and e-commerce. “Wedecided to go with the WEB standardentry class code because there reallyis not a lot of support or consensusamong our industry members for anew standard entry class code.”NACHA in May will send outa ballot asking voting members toapprove the dual strategy, with implementationof the WEB standard entryclass code for mobile-initiated ACHtransactions by year-end.‘Short-Term Approach’NACHA began looking at mobilepayments in 2007 with the formationof the Cross-Council Mobile BankingWorking Group. The working groupin September asked for requests forcomments on a proposal, which led tothe strategy that will be presented tovoting members in May.Initially, the NACHA workinggroup considered proposing a newstandard entry class code because theACH has no way of tracking mobilevolume going through the network,Pandy says. “We don’t know unlessyou use some type of indicator andthat indicator would either be theclassification of a new standard entryclass code or some other type of indicatorin the record format.”NACHA also wanted to ensurethat consumers using mobile paymentsreceive complete disclosure beforeauthorizing transactions and that allbanking information is protected at allpoints throughout the transaction.But “we saw the advantages ofthe short-term approach as being consistentwith what other networks aredoing in terms of the card networks anddebit networks,” Pandy says. “Theyweren’t doing anything necessarilydifferent for mobile transactions.”Under the proposal released inSeptember, a WEB entry would bedefined as a debit entry to a consumeraccount based on an authorizationobtained from a consumer via theInternet or a wireless network. TheWEB rules also would apply to individualdebit payments initiated viaa wireless network regardless of theform of the original authorization.For example, if a consumer signeda paper authorization for a mobilepayment service but initiated eachindividual debit via short-messageservice (SMS, the technology behindtext messaging) or though a dedicatedmobile payment application, that paymentwould be a WEB entry, underthe NACHA proposal.The short-term proposal addressessome of the group’s immediate concernsabout mobile payments, includingthe need to standardize howmobile payments are classified. Theabsence of rules for mobile paymentsled to participants applying their owninterpretations of existing rules to36 digitalFebruary 2010

their products and business models,NACHA says.NACHA found that ACH paymentoriginators are using three otherSEC codes besides WEB to initiatepayment on mobile devices, includingPPD, for prearranged paymentand deposit entry, TEL, for telephone-basede-checks, and CIE, forcustomer-initiated entries.“We knew that industry stakeholderswere using WEB and a coupleof other standard entry class codes,”Pandy says. “We wanted to make surethat mobile transactions that weregoing through the ACH were beingproperly authorized. We wanted to beable to provide the appropriate guidelinesto the industry on what standardentry class code should be used.”Rules MoratoriumIn the short term, NACHA wouldapply the WEB standard entry classcode to any mobile transactions goingthrough the ACH and would modifyguidelines in the code to addressmobile payments. “It required us tomake some changes around definitions,”Pandy says. “For example,we had to revise the definition of anInternet-initiated ACH entry to includemobile. We had to go back through therules, not just for the WEB standardentry class code ... It really was combingthrough the entirety of our rulesand making sure we were makingrevisions where necessary to accommodatethe mobile environment.”One factor weighing on the workinggroup’s decision to use the WEBcode for mobile payments in the shortterm is NACHA’s ongoing campaignto streamline its regulations. “We’rein the middle of a moratorium on ourrules because we’re undergoing a rulessimplificationeffort,” Pandy says.That means that the working groupcan’t go out with a ballot with its newrules proposal until May. “This givesus time to at least establish a baselinein our rules, and to do it ratherquickly, and then to take a wait-and-see approach and look at some of thelonger-term issues,” Pandy says.NACHA also is reluctant to initiatea new code without justifying the needbecause “that does create certain costson the industry in terms of programmingand software changes,” she says.After research, the working groupconcluded that the WEB classificationwould address many of the issuessurrounding mobile payments on theACH, Pandy says.“We were really trying to determinewhat’s different from mobilethan from the Internet,” she says. “Isit any different if I am making a purchasethrough my traditional desktopPC browser versus paying a bill viathe browser on my mobile device?We consulted a lot of industry expertsand, in fact, there’s no differencein security on the browser on yourmobile phone versus your laptop ordesktop PC.”The WEB code offers an array ofsecurity features, Pandy says, includingrequirements for using commerciallyreasonable authentication andfraud-detection systems, verification ofrouting/transit numbers, use of secureonline sessions during the transactionprocess, and annual security audits.If the WEB classification isapproved, NACHA will monitor‘There’s no difference in security onthe browser on your mobile phoneversus your laptop or desktop PC.’Nothing beatsreprints fromDid we write about yourecently? Do you want to usethe article for marketing oreducational purposes?It’s easy. With Digital Transactions’ reprint program,you can:• License complete rights to a PDF of the article;• Post it to your Web site;• E-mail it to colleagues or prospects.But that’s not all. When you license the PDF reprintrights from Digital Transactions, you can have anunlimited quantity of commercial-quality reprintsmade. You control the process: choose the printer,pick the time. And you avoid paying publisher’stypical reprint markups!Call Publisher Bob Jenisch at 877-658-0418or e-mail him at bob@digitaltransactions.netmobile volume for a year and gatherinformation on whether there is aneed for a dedicated standard entryclass code in the long term.“One of the other things we wouldlook at is whether or not it’s feasibleto use an indicator in the WEB formatto indicate whether the transaction isa mobile single entry or mobile recurring,”Pandy says. “That’s somethingwe will be evaluating next year in orderto be able to track these transactions.”Other longer-term issues thatmight emerge include person-to-persondigital37

transactions and mobile ACH credits,and what role mobile communicationsmight play in near-field communication(NFC) or proximity payments, as wellas the use of unencrypted SMS in paymentapplications, the storage of bankinginformation on mobile devices, andcompliance with the Payment CardIndustry data-security standard (PCI).Band-Aid Solution?NACHA’s proposal to use the WEBclassification for mobile payments isa prudent approach, Jim Pitts, projectmanager for the Financial ServicesTechnology Consortium mobile paymentsintiative, tells Digital Transactionsin an e-mail.“I believe they’ve taken thisapproach as an interim step that makesgood sense, leaving the door open formodifications as mobile transactionsevolve,” he says. “The lines are blurringsomewhat between WEB, TEL,and mobile. Rather than a ‘ready, fire,aim’ approach, it’s appropriate I thinkto not fix it if it ain’t broke, for now.”Using the existing WEB classificationcode for mobile paymentsalso places a minimal burden onfinancial institutions’ resources, saysAaron McPherson, practice directorfor financial services at Framingham,Mass.-based IDC Financial Insights.“As a research analyst, I’d ratherthey have a separate entry, then itwould be easy to segregate them out,”McPherson says. “But from an expensestandpoint, banks would resist that.They don’t want to have to upgradetheir system to add a new code.”Indeed, financial institutionsrecently completed a multiyear processimplementing IAT, the new NACHAentry code for international ACH transactions,which replaced several legacycodes, says Alex Romeo, vice presidentand product manager at the ElectronicsPayments Network. EPN, operatedby The Clearing House Payments Co.LLC, a New York City-based company,is the only other ACH operator,or switch, besides the Federal Reserve,NACHA’s Short-Term Proposal for Mobile PaymentsExpand the definition of WEB entries to include debit entries authorized and/or initiated via wireless networks;Revise the definition of Unsecured Electronic Network to include wirelessnetworks and provide additional clarification to the industry;Provide a definition of Wireless Network;Apply all provisions of the WEB SEC code to mobile debit entries;Revise the requirements for transmission of ACH information via unsecuredelectronic networks to clarify that voice or keypad inputs over a wireless telephoneto a live operator or VRU would not be subject to the requirement tosecure the connection with a minimum of 128-bit RC4 encryption.and is the only private-sector operator.Financial institutions “spent agreat deal of time, energy, resources,and money getting ready” for IAT,Romeo says, adding “I don’t think onthe heels of that, knowing what weknow right now about mobile, that afull-blown new standard entry classrule was warranted.”EPN supports the proposal touse the WEB classification in theshort term, Romeo says, adding thatNACHA might “be going a bit slow”but would move forward with a newmobile payments code if circumstanceswarrant.And McPherson says that despitepredictions about a boom in mobile payments,“the volume of mobile paymentsgoing over the ACH is still really tiny, soit probably won’t have that much impacton WEB volumes right now. That’ssomething for two or three years out.”But not everyone agrees withNACHA’s conservative approach tomobile payments.“This is potentially just a Band-Aidsolution and essentially it’s treating itas such a small volume that it’s notworth the time,” says Menekse Gencer,chief executive of San Francisco-basedmPayConnect Consulting Services andformerly an executive with PayPalInc.’s PayPal Mobile unit. “The problemis we all know that the volumes aregoing to be going up and, in fact, securityconcerns are quite different fromthose on simply the mobile Internet.”Mobile payments can take a numberof forms, including text payments andSource: NACHAclient-application payments, Gencersays. “It’s important to treat this as aunique payment form,” she says.Without a unique entry code,NACHA won’t be able to compilehistorical data on mobile payments onthe ACH, she adds.“At the end of the day, what youreally want to do is start tracking thisdata from the very start in order tostart understanding any fraud or securityconcerns, how people are using mobilephones, etc.,” Gencer says. “If they don’tdo it this way now, they’re not going tohave the benefit of historical data.”With the expected boom in mobilepayments, some observers say a dedicatedmobile code is inevitable. Inits proposal, NACHA cited two studiesthat predict mobile paymentscould range between $8.6 billionand $124 billion by 2014. And somebelieve the ACH’s share of volumealready may be sizable because oftransactions originated through Pay-Pal Inc. and the rapidly growing software-salessites of smart-phone makers,including Apple Inc.’s App Storefor iPhone and the app site for Black-Berry from Research in Motion Ltd.“I think we’ll know in 2011 if wesee a huge spike in the WEB volume,”NACHA’s Pandy says. “If we see that,then we know there’s something goingon and we may want to look at breakingout the mobile transactions.”But until that time, “This probablyfalls under the ‘crawl-walk-run’ rulebased on what we know at this time,”Romeo says. DT38 digitalFebruary 2010

ENDPOINTControlling ChargebacksIs Only the StartStricter controlsresulted in asubstantial increasein order reviews,which in turncaused orderprocessingdelaysand other negativeconsequences.The cost of driving down chargebacks, when this is the sole objective, can offset thelosses you save. Better to integrate chargeback controls with a smarter use of staffand technology, says Jeff Liesendahl.If you’re accepting payments online, youknow that managing credit card fraud is a partof doing business. So you’ve put various antifraudtools in place to screen out fishy-lookingtransactions, along with several customer-serviceemployees who are responsible for manuallyreviewing these transactions to determine if theyare in fact fraudulent or legitimate.Despite these precautions, you’re probablystill suffering from fraudulent purchaseattempts. Chances are, as your online businesshas grown, so have your chargeback losses, providinga direct hit to your bottom line. And thebad economy has only added to the problem.Perhaps you’ve tried to reduce your chargebacksby purchasing more effective screeningtools and order-validation services, and addedto your fraud-prevention head count so you canreview more suspect orders. You may have succeededin cutting your chargeback rate, but nowyou’ve got fulfillment delays, customer complaintsabout late shipments, and ballooningfraud-prevention costs.Tip of the IcebergDoes all this sound familiar? You’re not alone.It’s a scenario repeated by many e-commercemerchants. If you are attempting to get the costof online fraud under control, reducing chargebacksis a logical place to start. But it’s onlythe tip the iceberg. If you aren’t also looking atyour fraud-related customer-service and staffingcosts—in your call center, shipping department,and customer-satisfaction scores—youare missing out on significant cost savings.Consider the case of Urban Outfitters Inc., apopular lifestyle specialty retailer with a significantonline presence. Recently, the retailer setout to reduce e-commerce fraud losses. It tooka number of steps that began with a study of itsfraud risks and chargeback history. The analysisenabled the retailer to better understand howand when fraudsters were targeting it. It wasable to tighten screening rules and adopt moreaggressive anti-fraud controls.Within a few months, the new proceduresreduced fraud and resulted in a very low averagechargeback rate of less than 1/10th of 1%of sales, significantly lower than the industryaverage of 1.4%. Clearly, Urban Outfitters hadturned the tables on fraudsters.But, as good as that sounds, the stricter controlsalso resulted in a substantial increase in orderreviews, which in turn caused order-processingdelays and negative consequences for customerservice, fulfillment, and other operationalexpenses. The retailer was reviewing one inthree customer orders, which required a largefraud-prevention staff. It also involved a significantvolume of calls to and from customersregarding order verification and order status.To make matters worse, the company was alsoJeff Liesendahl ischief executiveof Accertify Inc.,Schaumburg, Ill.digital39

absorbing the cost of expedited shippingwhen orders were unnecessarilydelayed for manual review. In short,the cost of achieving and maintaininga low chargeback rate was high.When Urban Outfitters soughthelp to find a more cost-efficientapproach, we worked with them toaccomplish several goals:Ñ Reduce the volume of unnecessaryorder reviews by eliminating falsepositives (legitimate orders flagged assuspicious in the automated screeningprocess) through enhanced filteringtechniques.Ñ Integrate order screening andreview platforms with the latest casemanagementtechnology. This speedsorder review and resolution withreduced mistakes.Ñ Leverage automation to thefullest extent possible. This appliesto the use of negative and positivefiles as well as to sorting, ranking,and prioritizing suspect orders tokeep analysts focused on the riskiestorders and orders that need to beshipped quickly.Ñ Adjust fraud controls quicklybased on chargeback trends.Ñ Empower non-technical usersand fraud managers to modify automatedfraud controls as needed.Dual GoalsWith these changes in place, UrbanOutfitters is now getting orders to itswarehouse faster with improved customerservice. The company’s fraudlosses have continued to decline, thistime accompanied by a substantialdecline in operational costs.The number of orders delayed formanual review has fallen by morethan 80%. Fewer delayed orders hasresulted in a 60% decline in the numberof outbound calls for verifyingorders, and a nearly 50% drop incalls from customers inquiring abouttheir orders.Efficiency gains in order reviewsenabled Urban Outfitters to meet itsgoals for shipping orders on time andfor answering customer calls within10 seconds. The labor savings alsoallowed the company to reduce fraudpreventionstaffing by almost 60%.On top of these efficiency gains, theretailer’s already low chargeback ratedeclined by another 66%.It is possible to reduce chargebacksand manual fraud-preventionefforts at the same time.Urban Outfitters’ experienceshows that it is possible to reduceyour chargebacks and the manualeffort involved in online fraud prevention,all at the same time. Makeno mistake: You must achieve both ofthese objectives to truly cut your totalcost of fraud. DTADVERTISER INDEXAllied Wallet 888-255-1137 www.alliedwallet.com Page 3Certegy 866-496-2637 www.fisglobal.com/products/check Page 5Chase Paymentech 888-849-8980 partners.chasepaymentechsales.com Page 15Discover 866-601-7166 www.discovernetwork.com Inside Back CoverDigital Transactions 877-658-0418 www.digitaltransactions.net Pages 33, 37Elavon 678-731-5000 www.elavon.com Page 13FIS 800-822-6758 www.fisglobal.com Inside Front CoverHumboldt Merchant Services 877-635-3570 www.hbms.com Page 23Merchant Services Inc. (MSI) 800-226-5227 www.1800bankcard.com Pages 20-21MoneyGram 800-723-9777 www.moneygram.com Page 11North American Bancard 888-229-5229 www.gonab.com Back CoverPayvision 917-237-0900 www.payvision.com Page 17Southeast Acquirers Annual Educational Seminar www.southeastacquirers.com Page 18Smart Card Alliance Payment Summit 2010 www.smartcardalliance.org Page 27United Bank Card 800-201-0461 www.isoprogram.com Page 1USAePay 866-490-0042 www.usaepay.com Page 740 digitalFebruary 2010

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