After more than 18 months of pandemic, are you on the road to normal? In this, our annual catalog of woes and worries, we shine the spotlight on that road’s biggest potholes.
Well, nobody signed up for this, right? More than a year-and-a-half after what had been a booming economy came to a screeching halt, the ill effects of the Covid pandemic are still asserting themselves in the payments economy: chip shortages, hard-to-find labor, shipping delays, merchant attrition, inflation, online fraud, you name it.
We don’t have any special wisdom on when all this will be resolved and business will return to its pre-Covid state. Much, after all, depends on how soon the virus can be tamed and the overall economy recovers. We wish we could say when that will be.
But we can lay out what we see as the biggest issues payments professionals are now facing, in the hope that by being aware of these issues, professionals can face them squarely and work out solutions sooner. Yes, many of the issues you’ll read about in the following pages were caused or exacerbated by the pandemic. But that doesn’t mean you have to wait for Covid to wither to begin tackling them.
In fact, delay is likely only to make matters worse. And there is cause of optimism. Not only can these problems be solved or reduced, there is reason to believe the payments economy is more resilient than some may believe. There is a great deal of ruin in a nation, as the great 18th-century Scots economist Adam Smith said, meaning it takes a whole lot of bungling at the top to collapse a national economy. Same for payments.
- Debit’s Routing Rumble
The ink was barely dry on the law 10 years ago that required all debit cards to offer merchants at least two unaffiliated networks for processing before trouble started. That law was the Durbin Amendment, and its routing requirement was supposed to help hold down debit-interchange costs for merchants by fostering more competition among networks.
But merchants have complained almost from the start that they’re not getting that network choice. The increasing use of PINless debit, which came with consumers’ adoption of online commerce, along with special technologies like tokens to mask account numbers, have complicated the picture. Merchants say the big global networks have effectively gutted the routing requirement and largely kept debit volume to themselves. The networks argue nothing is standing in the way of network choice.
The dispute has the ear of the Federal Reserve, which is working to revise the rule it wrote 10 years ago to implement the Durbin law. And much has changed in that decade. The so-called single-message networks, so-called because they combine authorization and settlement in one message, say they can handle PINless debit just as adroitly as Mastercard and Visa.
So the routing dispute, instead of having been solved, is as hot at ever (“Debit Card Pricing at Full Boil,” October). Merchants accuse issuers of favoring the two big networks. Issuers argue merchants are oversimplifying a complicated picture. Who’s right? It may take yet more litigation—along with the new Fed rule—to sort it out.
Meanwhile, other regulators are nosing in. Both the Department of Justice and the Federal Trade Commission have probed Visa’s practices. So the Fed may issue a revised routing rule, but it’s far from certain that will be the end of the matter.
- The Dark Side of BNPL Mania
Despite the popularity of buy now, pay later—44% of consumers say they have used BNPL options to purchase an item they needed, according to personal-finance company Credit Karma LLC—delinquencies are becoming a serious problem.
Of the consumers that have used BNPL—which has been heavily promoted to consumers as a way to stretch their buying power during the economic meltdown that occurred as a result of the pandemic—a whopping 34% have missed at least one payment, Credit Karma says.
One culprit behind mounting delinquencies is that consumers who are not used to financing purchases they would otherwise pay for in full at checkout are more inclined to forget to pay their bill when using BNPL.
“[With BNPL] it’s easier than ever to purchase [an item], and finance it, without even thinking about the implications of the purchase,” says Colleen McCreary, consumer financial advocate at Credit Karma. “It’s this disconnect between making a purchase and actually paying for it where consumers can get in trouble … for some it comes down to forgetting to make the payment versus. not actually having the funds to make the payment.”
Surprisingly, 50% of BNPL users surveyed by Credit Karma aren’t using BNPL to purchase big-ticket items, but instead to pay for purchases of $250 or less, on average.
Among the heaviest users of BNPL are Gen Zers and millennials, more than half of whom have used BNPL compared to 42% of Gen Xers and 35% of Baby Boomers, who tend to be more financially stable, McCreary says.
- No Near-Term End to the Chip Shortage
It’s been nearly two years since the shortage of semiconductor chips used in point-of-sale terminals began, and terminal manufacturers are still scrambling to recover. Lead times of 26 to 30 weeks for terminal orders that, pre-Covid, took 12 weeks to fill are not uncommon, payment industry experts say.
While it’s still too early to predict when the shortage will ease, expectations are for capacity constraints to continue well into 2022, experts say.
Not surprisingly, the shortage is raising chip prices, especially on the spot market, as terminal manufacturers routinely have to settle for orders about half the size of what they typically received prior to the shortage, says Andrew Dark, executive chairman for Miura Systems, a United Kingdom-based provider of mobile payment solutions.
Further complicating matters is that finding alternative chip suppliers is not a sure-fire solution. In many case, new suppliers must undergo certification to meet processor and network specifications.
“Even if you find a new chip source, you have to get them certified, which can take 12 to 14 months. That’s not a scalable solution,” Dark says.
The best remedy is to temper customers’ expectations from the outset. “There is nothing worse than telling a customer you can’t meet their order after it’s been placed,” Rob Hayhow, vice president, North America, for Equinox Payments LLC, told Digital Transactions in August as part of the research for the magazine’s September cover story, “Out of the Chips.”
“The entire supply chain is stressed, not just for chips themselves, but the raw materials to make them, and customers need to know that,” Hayhow said.
- The Rising Menace of Ransomware
One of the biggest cybersecurity threats any company faces is a ransomware attack. The attack, while not new, involves criminals infiltrating databases, locking up the information inside the database by encrypting it, and demanding payment that can total millions of dollars in exchange for the decryption key.
Three drivers behind the rise in ransomware attacks are: they are a successful and lucrative business for criminals; criminals can be paid huge sums of money in cryptocurrency without drawing the attention of bank regulators, making their activity more anonymous; and criminals can set the ransom at a price they are confident the victim will pay, such as below the cost of repelling an attack once it occurs.
Flexibility when setting a ransom also reduces the odds of demanding a payout the company cannot afford. In these instances, even if the criminal erases the data, he still walks away empty-handed.
“Hackers used to copy large databases with customer data, then look for wholesale buyers that can be trusted, which is a headache,” says Gideon Samid, chief technology officer for Bitmint, a McLean, Va.-based provider of cybersecurity solutions. “With ransomware, they need no partners, collect no data, and, most important, they can pare down their demand to make it [uneconomical] to recover their data from backups and other pricey, but useless protections.”
Savvy criminal rings are even franchising the opportunity to launch a ransomware attack, because it is a more efficient way to monetize their efforts, cybersecurity experts say.
It is reasons such as these that are making ransomware the crime of choice, says Samid.
- Contending With Chargebacks
Chargebacks—the ability of consumers to claim a refund through the credit card systems—have been a standard feature of the card business for years. But so have fraudulent chargebacks. And now, with e-commerce booming as more and more consumers buy more online, the problem is getting bigger and more complicated (“Many Unhappy Returns,” April).
Part of the issue is that many consumers have resorted to the chargeback system to claim easy refunds once they decide they don’t like the item they’ve ordered. Indeed, some observers say chargeback fraud committed by criminal gangs probably accounts for no more than 10% of all such losses. Most, they say, stems from so-called friendly fraud, where a dissatisfied consumer simply misuses the chargeback system to claim a refund instead of returning the merchandise. Mobile apps have made that sort of thing much easier, allowing consumers to start a chargeback with the touch of a button.
The result is that U.S. card-not-present fraud losses, which stood at $5.6 billion in 2019, are projected to climb to $7.9 billon this year, according to the research firm Aite-Novarica Group.
Merchants are frustrated because consumers are going straight to their banks to initiate chargebacks instead of dealing with the merchant, which would give sellers a chance to work things out. Again, those mobile apps have made this route a faster and smoother one, they say.
The result: Some observers figure that, while the industry might blunt their steady rise, chargebacks are unlikely to return to their pre-Covid volume.
- Finding New Acquiring Markets
This one is that rare pressing issue that suggests its own potential solution—though pursuing that solution requires some grit and ingenuity.
Most acquiring markets, like hospitality and general retail, are pretty crowded with acquiring services. Even specialized niches, such as legal and medical offices, have attracted their own payments specialists. That’s a problem, particularly for newer companies looking for an entry point. But some of the biggest acquirers in the industry are pointing the way into some brand-new markets that are hungry for transaction services. The big drawback? There are two: high risk and potential regulation.
Take online sports betting, which, as of October, was legal in more than two dozen states. Also, consider consumers’ growing acceptance of cryptocurrency as a payment option. Both businesses represent new opportunities for acquirers.
In 2020, the global online-gaming market generated $21.1 billion in revenues, up 21.9% from 2019, according to Statista, a provider of market and consumer data. The increase is largely attributable to the Covid pandemic, which prompted consumers to turn to digital entertainment, including online gaming. As of year-end 2020, there were an estimated 1 billion online gamers worldwide. That figure is projected to reach 1.3 billion in 2025, according to Statista.
In the United States, about 90% of all sports bets were placed through digital channels, according to consulting and research firm Eilers & Krejcik Gaming. That’s a significant amount of volume that didn’t exist a just few years ago.
Another burgeoning market for acquirers is cryptocurrency acceptance at the point of sale. Several processors have added cryptocurrency acceptance for merchants in the past year, including New York-based OLB Group, whose chief executive, Ronny Yakov, believes crypto acceptance is the next logical contactless step for merchants.
Merchants that do not adopt systems to allow customers to transact in a variety of digital currencies may very well be left behind, Yakov says.
These two markets beckon, but payments providers must tread carefully. Reversals—both economic and legal—could happen at any time.
- The End of the Magstripe
Though no other card brands have indicated they have end-of-life plans for the venerable magnetic stripe on payment cards, Mastercard Inc. announced this year it will cease requiring its credit and debit cards to bear the 3/8-inch-wide stripe by 2027 for U.S. issuers, and by 2024 in regions such as Europe. By 2033, the magstripe will be gone from Mastercard credit and debit cards.
Why now, when the magstripe has been in use for decades on payment cards? Globally, 86.1% of card-present transactions are chip-on-chip—the card and the point-of-sale terminal are both chip enabled. Of the seven regions monitored by EMVCo, the organization behind the EMV standard, only Asia, at 81% and the United States, at 72.8%, are below at least 95%.
While issuers will adapt, what’s the impact overall on the payments industry? “The significance of the elimination of the magnetic strip beginning in 2027 is that it is simply the end of a technology’s era,” says Sarah Grotta, director of debit and alternative products advisory service at Mercator Advisory group. “The magnetic stripe [has] been on cards since the 1960s. Card manufacturers will need to alter their operations to skip the magnetic stripe encoding process.”
That leaves merchants. How will they react? The U.S. EMV migration beginning in 2015 converted a lot of merchants to card acceptance, but many lack point-of-sale terminals that can accept chip cards. A potential risk is their reaction. “There are still many small merchants in the U.S. who will now need to swap out their terminal for one that accepts chip cards, or possibly simply stop accepting Mastercard cards if Visa, Discover, American Express, and other networks don’t follow suit and continue to allow cards to use the old technology,” Grotta says.
- Credit Card Interchange
Visa and Mastercard earlier this year postponed changes to their credit card interchange pricing that would have cost merchants some $889 billion. That’s according to estimates by researcher CMSPi, a retail payment consultancy, which took into account interchange increases but also some price breaks the two networks were planning.
The decision to hold off on the changes came as merchants continued to battle the doleful effects of the Covid-19 pandemic. Indeed, both networks were set to raise interchange rates in 2020 before backing off as the pandemic grew worse. Few industry observers believe the networks will postpone these changes yet again, though it’s hard to tell how much they may tweak the rates.
Merchant acquirers pay interchange to issuers and then pass it on to merchants, typically with a markup. The pricing has been a bone of contention with merchants for years, sparking bitter arguments with the networks as well as massive litigation.
Now, some observers figure that if the two global networks follow through on raising rates this time, the move could spur merchants to do more than litigate. One possible move could be widespread adoption of discounts to consumers who pay with cash. Nearly all states have removed legal barriers to cash discounting, and many independent sales organizations now offer technology to ease the process at the point of sale.
- Platform Consolidation
Acquisition after acquisition can create a complicated array of platforms within a payments company. In years past, many sought to streamline the multiplication of platforms with the goal of reducing costs, simplifying the merchant experience, and making it easier to get a clearer picture of all of a company’s transactions.
Today, the task is no easier as consolidation, acquisitions, and mergers proliferate. “A number of large card processors (primarily legacy providers) have multiple platforms, data centers, etc.,” says Jared Drieling, senior director of market intelligence and insights at The Strawhecker Group, in an email message. “Most of these platforms can be considered legacy or dated, at least for some of the large processers.”
“A lot of these platforms came with acquisitions,” Drieling continues. “Thus, with these types of organizations, there is always a need to understand what systems are duplicate or complimentary (some may be underutilized or not utilized at all but still require maintenance), a need to reduce cyber-attacks and data-security events, the need to reduce overall costs, and the need for a single platform to remain flexible with the ever-evolving competitive landscape.”
Platform consolidation, he says, allows companies to deal with these challenges. That’s a key consideration, considering the competition from emerging fintechs. “To make omnichannel a reality for merchants, a processor offering a single platform may offer a more frictionless merchant experience as well as a more efficient means to managing such clients,” says Drieling. “Matter of fact, a lot of the emerging players market a single platform as a key differentiator compared to the legacy card processors.”
- Will Same-Day ACH Hamper RTP?
Same-day ACH in the United States can track its origins to 2010, when the Federal Reserve began processing certain automated clearing house transactions on the same day. Now commonplace, same-day ACH was joined by real-time payments with the 2017 launch of the RTP network from The Clearing House Payments Co. LLC, an ACH operator along with the Fed, which intends to launch its own real-time payments service—FedNow—in coming years.
With both falling under the concept of faster payments, will they compete for the same customers and mirror each other’s products? For now, the answer may be yes. Same-day ACH, given its breadth of availability within banking and payments, may be ahead of real-time payments for the moment, suggests Patricia Hewitt, principal at PG Research and Advisory Services, a Savannah, Ga.-based consultancy. “But ultimately, these are not the same transaction types, presuming their operation remains the same as we understand it today,” Hewitt says.
“ACH is designed from the ground up to offer inexpensive access to funding accounts with enriched data using multiple settlement windows throughout the day,” she adds. “The other, Real Time Payments, is designed to enable money to be moved in real-time or near-real time. So, it will depend on the use cases.”
The Clearing House says its RTP network is accessible to financial institutions that hold 73% of U.S. demand deposit accounts. Same-day ACH transactions totaled 142.8 million in the quarter ended Sept. 30, up 52% from the year prior, says Nacha, the ACH administrator. Some organizations will “have a more natural affinity to ACH and others to RTP.” There’s room for both, Hewitt asserts. The industry fervently hopes she’s right.