Trends & Tactics

Why Is First Data Dissing PayPal POS?

Discover Financial Services has recruited 50 merchant acquirers to bring acceptance of leading online payment system PayPal to more than 2 million physical merchant locations by year’s end. Still holding out, at least as late as late May, was No. 1 merchant processor First Data Corp.

Atlanta-based First Data announced its decision against PayPal in an April 23 client bulletin, but gave little explanation why.

“For a variety of factors and after evaluation of the PayPal product offering, First Data has decided not to implement support for this new card product,” says the bulletin, a copy of which was obtained by this magazine’s sister publication, Digital Transactions News.

First Data will block acceptance of the new Discover-issued cards sent to about 50 million PayPal account holders to enable them to use their accounts when paying at millions of brick-and-mortar merchants that take Discover.

A First Data spokesperson declined to go into detail about the reasons behind the lockout decision.

“We’re continually working with our network partners to evaluate the value of enabling new payment functionality for our merchant and financial-institution customers and their consumers,” the spokesperson said by e-mail. “I can also tell you that we are in active negotiations with Discover and PayPal, but we currently do not have a contract that allows us to process PayPal transactions in physical stores.”

A PayPal spokesperson said by e-mail that, “We are still ne-gotiating with First Data and believe we can come to a mutually beneficial resolution.” He noted that some of acquiring’s biggest names, including Vantiv, WorldPay, Global Payments, First American Payments, Heartland Payment Systems, and TSYS, are offering Discover’s PayPal service.

A spokesperson for Riverwoods, Ill.-based Discover said virtually the same thing.

Discover’s current acquirer partners have already brought PayPal acceptance to some 250,000 U.S. locations. First Data, however, services about half of the country’s 8 million total estimated Visa and MasterCard acceptance locations.

An accord with First Data, which also processes for card issuers, obviously would open up a huge potential merchant market for San Jose, Calif.-based PayPal, a unit of eBay Inc.

PayPal has individual agreements with a number of large retailers such as The Home Depot Inc. for point-of-sale acceptance of its system, but paired up with Discover, via its acquirers, to potentially reach millions of local and regional card-accepting physical merchants.

Striking an agreement with PayPal or deciding to stick with the lockout will be one of the first major tests for Frank Bisignano, First Data’s new chief executive. First Data’s board in late April chose Bisignano, co-chief operating officer of JPMorgan Chase & Co., to succeed Jonathan Judge, who retired early for health reasons.

A senior independent sales organization executive who asked not to be named suggests that First Data may have dual motivations in refusing PayPal, at least for the time being.

“One is to increase their leverage with PayPal and potentially get more money,” the executive says. “And, they may have gotten pressure from their issuing banks because [PayPal] is a competing platform.”

The executive, however, thinks First Data might eventually reverse course. “Pressure from guys like me and merchants could get them to change,” he says.

Even if it signs First Data, PayPal will need to fill another big hole. Wal-Mart Stores Inc., the world’s largest retailer and a First Data merchant-services client, does not plan to take PayPal in its stores. A Wal-Mart spokesperson told Reuters that in the absence of the card, PayPal acceptance at big retailers can involve the account holder entering a phone number and four-digit PIN.

“The added complexity at the point of sale does not justify acceptance of PayPal,” the spokesperson told the news service.

EMV: Chips Down Among Big Retailers?

The Europay-MasterCard-Visa (EMV) chip card standard may be on its way to implementation in the United States, but it isn’t winning fans among some of the nation’s biggest retailers.

Merchants will have to support EMV—including paying for a good deal of it—if the standard is to succeed, and thereby lies the rub. The technology will impose extraordinarily large costs on retailers to attack a relatively low fraud rate, while doing nothing to contain e-commerce fraud, according to a panel of executives with three major merchants appearing at a trade show this spring.

In the case of some merchants, a high rate of PIN acceptance is already controlling fraud, the merchants said. “Our actual fraud rate is so small it’s hardly worth mentioning,” said Gavin Waugh, vice president and assistant treasurer at Wendy’s International Inc. “[EMV] doesn’t move the needle that much. Even if we pay the fraud liability, it’s a whole lot cheaper than putting in [EMV] terminals.” The hamburger chain processes 300,000 card transactions daily, Waugh said.

The merchants, who spoke in San Diego at Payments 2013, a conference sponsored by automated clearing house network regulator NACHA, decried the cost of EMV installations compared to the possible fraud savings.

George Odencrantz, vice president of information technology at Sinclair Oil Corp., said that since 80% of Sinclair’s transactions are PIN-based, EMV will not offer significant additional protection against fraud. Meanwhile, Odencrantz estimated deploying EMV at his company’s gas stations will cost $20,000 per location or $40 million for the company in total. “It’s going to take a staggering amount of money,” Waugh noted.

Some panelists see this investment attacking the wrong problem. Rue A. Jenkins, assistant vice president for treasury at Costco Wholesale Corp., observed he is less concerned about counterfeit card fraud, which EMV addresses, than he is about fraud stemming from increasingly frequent data breaches. “That’s a bigger concern, in my view,” he told the audience. “There’s a huge exposure there” from malware stealing card credentials.

Under plans released by the card networks, U.S. merchants face an October 2015 deadline to have their stores equipped to accept EMV chip cards. Petroleum retailers have an additional two years. On those dates, merchants that aren’t equipped for EMV will have to accept liability for counterfeit card fraud, losses issuers absorb now.

But, as the merchant panel pointed out, EMV tackles only point-of-sale fraud. In other regions of the world where EMV has been adopted, fraudsters have shifted to e-commerce, driving up online fraud losses, which are absorbed almost entirely by merchants.

In the United Kingdom, for example, card-not-present fraud shot up to 62% of all card fraud in 2010 from 30% in 2004, according to statistics presented by processor First Data Corp. during a presentation at a separate spring trade show in Las Vegas. Canada saw online fraud jump from 31% of all card-fraud losses in 2008 to 50% in 2010, according to the presentation, which was given at Cartes America.

“We are very concerned [EMV] solves only a card-present problem,” said Jenkins. “EMV is going to push fraud to areas that aren’t as well protected.” He mentioned ACH and checks as tender types that may also undergo increased attacks from fraudsters.

Even panelists whose businesses are entirely card-present expressed concern about the problem, pointing to the popularity of online shopping. “We’re going to spend an extraordinary amount of money [on EMV] to protect a card-present environment when the world is going to a card-not-present [environment],” said Waugh.

The issue of card-not-present fraud, indeed, could lead Costco to adopt technologies that would allow consumers to use PINs online in place of signature debit, Jenkins told the audience. “We’ve followed [that technology] for several years,” he said. “It’s back on the radar.”

The Weak Spot of M-Commerce

Checkout has always presented problems for online merchants and their payment processors, and some of those issues are transferring over to the new mobile-commerce market.

A recent survey for payments-and-authentication-services provider Jumio Inc. reveals that two-thirds of respondents attempting to make a purchase using a mobile device failed to complete it due to problems with checkout.

Among the reasons cited for the cart abandonment is difficulty entering personal and credit card data and uncertainty about the Web site’s data security. Of the consumers who failed to complete an attempted purchase on their smart phone or tablet computer, 41% said the checkout was too difficult on their device and 23% said their purchase would not go through.

Also, many mobile shoppers are actually browsers who will put an item in a shopping cart to see shipping charges or test an online coupon to make sure it works, and then leave the Web site, according to Mark Barach, chief marketing officer for Palo Alto, Calif.-based Jumio.

“Checkout on a mobile device can be clunky and difficult to complete for many mobile users and there are still a lot of mobile users that put an item in the shopping cart, go to checkout, and then leave because they are not ready to buy,” Barach says.

Barach is optimistic that the sheer force of demand eventually will lead to solutions to the problems. “Shopping-cart abandonment at checkout, however, is not a death blow for m-commerce, because mobile users are hooked on the ability to shop anywhere, any time with their device,” he says.

To support his point, Barach says 68% of respondents have attempted to make a purchase using their mobile device.

The survey, conducted by Harris Interactive in March, interviewed 2,130 consumers online, 1,261 of whom own a smart phone or tablet.

One of the key hurdles is concerns about data security. Fifty-one percent of those who walked away said they abandoned the purchase process because they did not feel comfortable entering their credit card data. More women than men are worried about security.

“Consumers’ concerns about data security are a weakness in the checkout process,” says Barach. “The goal is to get the checkout process to the point where repeat customers can be authenticated by entering a PIN and having their mobile device validated, and then their stored card and personal information is pulled from the cloud and securely downloaded to the merchant.”

The code for Jumio’s Netswipe application, which merchants integrate into their own mobile-shopping apps, allows shoppers to scan both sides of their credit card using the camera in their mobile device.

The scanned image, which is encrypted, captures all the pertinent account information, the card’s hologram, and other distinguishing features, and then validates the authenticity of those features. Once approved, the consumer’s card data are automatically populated in the appropriate data fields on the checkout page.

The technology, which can complete checkout in about five seconds compared to 60 seconds for manual data entry, can increase conversion rates by as much as 20%, Jumio claims.

“Checkout is the weak link in m-commerce and the less friction there is in the process and the more secure the process, the higher the conversion rate,” says Barach.

One Year Later: No Clear Verdict on Durbin

For those who hanker to tar the Durbin Amendment as a disaster or laud it as a roaring success, we have disappointing news.

One full year after complete implementation of the controversial amendment’s debit card regulations, the impact on both merchants and consumers—the law’s putative beneficiaries—remains mixed, according to a study released recently by the Federal Reserve Bank of Kansas City.

Durbin drastically reduced debit interchange income for the country’s largest banks while exempting from its interchange caps financial institutions with less than $10 billion in assets.

But how many retailers and consumers have seen a benefit—and how much—varies widely according to a sometimes bewildering array of factors, says Fumiko Hayashi, a senior economist at the Kansas City Fed and author of the article.

Especially difficult to pin down are answers to whether merchants are passing interchange savings on to consumers and whether network competition is now favoring merchants rather than issuers. “It’s complicated,” says Hayashi. Interchange fees are paid by acquirers to issuing banks and passed on to merchants.

Merchants, for example, benefit from the interchange ceiling to a greater or lesser extent depending on what type of merchant they are, their average ticket size, their transaction volume, and their mix of signature and PIN debit.

Utilities, hotels, and e-commerce merchants have reaped the largest savings from the cap on regulated issuers, Hayashi’s study says, because they were paying the highest rates before the cap, which is the same for all merchants, took effect in October 2011. By contrast, gas stations and groceries have seen the least savings.

Similarly, large merchants that could once command lower rates with high transaction volumes have realized smaller savings than retailers with lower volumes. And those generating high volumes of signature-debit transactions relative to PIN debit are receiving more savings than those with higher PIN traffic, since PIN debit was priced lower than signature debit before the cap, which does not distinguish by authentication method.

Meanwhile, small-ticket merchants like fast-food restaurants have likely seen their interchange costs increase, the study says. That’s because interchange on these transactions was already below the Durbin cap before the cap took effect.

For example, a $5 signature-debit transaction that once cost 12 cents on a MasterCard card now costs 22 cents on cards from regulated issuers, according to the study. Indeed, fully 10 debit networks now levy a higher interchange fee on a $5 transaction for regulated cards than they did before the regulation took effect, the study says. For a $10 transaction, five networks do.

Even the question of network competition for merchant business is a vexed one, Hayashi says. Some experts maintain debit networks are now competing for merchant loyalty now that a Durbin provision requires debit cards to work on at least two unaffiliated networks.

This provision, which became effective a year ago and was intended to hand merchants transaction-routing power, is working as intended, these experts argue, as even smaller issuers exempted by Durbin are feeling the effects of dwindling interchange rates.

But Hayashi says the picture is a little muddy. “Small issuers can’t avoid that effect of competition for merchants,” she says. “But networks still need to compete for issuers, so they have an incentive to keep interchange as high as possible.”

She says Fed surveys showed a drop of 2 cents in average interchange for exempt issuers between the third and fourth quarters of 2011. Since then, she estimates, there has been a “really small change” in the average.

For consumers, the picture doesn’t get any clearer. While Durbin proponents argued consumers would benefit as retailers lowered prices to reflect lower interchange, Hayashi says it’s virtually impossible to determine whether this has been the case. Any number of factors, including operational efficiencies, could account for lower consumer prices.

At the same time, banks can offset this consumer benefit with new or higher fees to compensate for reduced interchange income. These fees may or may not be directly linked to debit card usage.