Trends & Tactics

Trends & Tactics

 

No Apocalypse Now—Or Later—for Debit

As Digital Transactions went to press this month, the ultimate extent and timing of the debit restrictions contained in the Durbin Amendment remained unclear. Final rules had not yet issued from the Federal Reserve, and in mid-March a bill appeared in the U.S. Senate to delay rulemaking. Another delay bill was said to be forthcoming in the House.

But, while the payments industry may not yet know just how much debit card interchange income the Fed is going to shave off its income statements, there are indications the result won’t be quite as apocalyptic as the industry feared. That’s even if the Fed is allowed to go ahead with the severe price compression it envisions in the proposal it released in December.

 “We don’t see debit falling off a cliff,” David Stewart, senior expert at the consulting firm McKinsey & Co., told the audience at a payments conference last month. “Net-net, we think there’ll be a slowdown in debit [growth], but it’s not going to tank.”

He pointed to McKinsey projections showing U.S. debit card transactions growing to 54 billion by 2014, a 7% growth rate from 2009’s 38 billion. That’s half the growth rate recorded between 2006 and 2009 .

McKinsey’s projections are a “base case,” Stewart told Digital Transactions. They assume that, among the various scenarios proposed by the Fed in December, the regulator will end up requiring a 12-cent interchange cap. The projections also assume the Fed will require all regulated cards (those issued by financial institutions with at least $10 billion in assets) to work on at least two unaffiliated PIN networks and two unaffiliated signature networks.

Finally, they assume the rules will take effect without any of the delays proposed in Congress last month. With delays and other possible modifications, the outlook for debit could become a little brighter.

Among the factors supporting the debit business are consumers’ preference for the product, the strength of the underlying checking-account business, and the fact that that debit will still look attractive to banks compared to other electronic payments businesses, according to Stewart.

“The new debit economics [after Durbin] are still going to be better than competing forms of payment, “ he told a room full of bankers attending the Payments Connect expo, held in Phoenix by the Bank Administration Institute.

He compared the income banks could earn on debit cards, even after Durbin takes effect, to that which they earn on automated clearing house and bill-payment transactions. “The ACH, nobody’s earning interchange,” he noted. “On bill pay, nobody’s making money.”

Looking at the business from a wider perspective, Stewart also noted banks are likely to earn more income over the next three years from demand-deposit accounts, including the checking accounts to which debit cards are linked. Indeed, McKinsey forecasts that, between 2009 and 2014, growth in net interest revenue will more than offset the loss of interchange and overdraft-fee income, resulting in a net revenue increase of $1 billion for consumer demand-deposit accounts.

Also, merchants will help prop up debit by steering customers to the payment method to take advantage of the newly reduced rates, McKinsey figures. This tactic, though, will be tricky to pull off, Stewart says, requiring a targeted application of discounts or other incentives rather than a blanket approach.

Steering will work best for merchants with relatively low debit penetration to begin with, and even for them the move will be difficult. For example, a merchant doing 10% of its sales on debit and 90% on credit would have to displace fully 42% of its credit card sales to justify a 1%-off incentive on debit card transactions, according to McKinsey research. “Steering isn’t easy,” Stewart told the conference.

The strongest factor debit cards have going for them, Stewart argued, is that consumers increasingly prefer to use them. “Debit users want to continue to use debit,” he said. “We need to figure out what to do with them.”

One possibility for banks, he said, is that they could become “marketing conduits” for merchants looking to reach consumers with merchant-funded rewards. The transaction data held by banks could prove valuable to merchants, which would pay banks a fee for the information.

Charged by the Durbin Amendment with implementing restrictions on debit card interchange and transaction routing, the Federal Reserve proposed in December to cut debit income for large issuers by more than 70% and place restrictions on routing agreements. The Fed proposed a 12-cent interchange cap on debit transactions, down from a current 44-cent average it found through industry surveys.

The amendment, part of the Dodd-Frank Act signed into law last summer, calls on the Fed to have its rules ready this month for a July effective date. But Congress may be having second thoughts. Last month, Sen. Jon Tester, D-Mont., and a bipartisan group of fellow senators introduced a bill calling for a two-year stay on rulemaking to allow further time to study Durbin’s effects.

Whether that bill is successful or not, though, it appears the debit business is likely to survive largely intact.

 

Facebook May Be Getting Friendlier with Payments

Does Facebook “like” payments? E-payments executives who watch the massive social network’s every move think it does, and last month indications emerged that those executives might have a bit more to worry about.

Digtial Transactions News, this  magazine’s sister publication, revealed in March that Facebook Inc., a 7-year-old company with more than 500 million users worldwide, has established a wholly owned subsidiary called Facebook Payments Inc. Facebook incorporated the entity in Florida on Dec. 10 and was advertising heavily last month for a controller for the unit.

Little is known about the new Facebook subsidiary beyond what is available in public documents. In response to queries sent to Palo Alto, Calif.-based Facebook, Digital Transactions News received this statement: “As is common in many company structures, we have established a subsidiary called Facebook Payments Inc. that helps handle payments to developers related to our Facebook Credits program.”

But one expert who follows alternative payments closely says Facebook’s payments plans go well beyond Facebook Credits, a virtual currency Facebook introduced two years ago. The currency lets users buy digital goods on the social network’s site, with Facebook collecting a 30% fee.

Referring to job ads and other indications he’s seen in the market, George Warfel, consulting director for global payment solutions at Fiserv Inc., says Facebook is likely looking to build a payments system that could ultimately extend to the physical point of sale.

“If you connect the dots, I’m very comfortable that those dots point to the fact that Facebook will have a payments capability that goes beyond Facebook Credits,” he says. Though Fiserv is based near Milwaukee, Warfel watches developments in Silicon Valley from his office in Oakland, Calif.

To be sure, Facebook, has been steadily expanding the reach of its Credits product. Last month, for example, Warner Bros. Digital Distribution began accepting Credits for movie purchases and rentals.The service, considered a test, will deliver content as streaming video without requiring users to leave Warner Bros. Entertainment’s Facebook page.

And early last year, Facebook recruited PayPal Inc. to help it process Credits transactions. PayPal also agreed to process payments for Facebook advertising.

Still, while Facebook may entertain strategies in payments beyond Credits, exactly how it might expand this capability to build its own payments platform—or perhaps even a rival network—remains murky. It also remains unclear how the new payments unit might be connected to these possible plans. “No one knows—maybe [Facebook doesn’t] know—their ultimate model,” says Warfel.

The articles of incorporation for Facebook Payments Inc., available at the Web site for the Florida secretary of state’s office, gives as the entity’s purpose only this statement: “The corporation is organized for the purpose of transacting any or all lawful business.”

The document, however, does give the unit’s three directors, all of whom are listed with Facebook’s Palo Alto business address, 1601 S. California Ave, which is also listed in the document as Facebook Payments’ principal place of business. These three are David Ebersman, Dan Rose, and Ted Ullyot.

Ebersman is chief financial officer at Facebook, while Rose is vice president of partnerships and platform marketing and Ullyot is vice president and general counsel.

The president and chief executive is Prashant Fuloria, according to a “certificate of authority” issued March 1 by the Idaho secretary of state and available at that agency’s site. Listed as chief financial officer and secretary, respectively, are Jas Athwal and Benjamin Duranske. All three of these persons are also listed at the California Ave. address.

Facebook Payments Inc. issued 1,000 shares at its founding, worth a penny each, according to its articles of incorporation.

 

Tablets As Terminals:  The iPad Revolution

Those long lines you saw last month outside Apple stores were people out to get their hands on Apple Inc.’s iPad 2, the latest iteration of the Cupertino, Calif.-based computing giant’s wildly popular tablet computer.

The launch ushered in a thinner, lighter version of a device that debuted a year ago to considerable fanfare both generally and in the payments business. Like its sister product, the iPhone, the iPad won adoption by some merchants looking for ways to accept card payments while on the move.

Some startup developers, such as Square Inc., even introduced payments applications for the iPad first, following up with apps for the iPhone later.

The original iPad has proven to be a huge hit. Apple sold 14.8 million of the tablets through the end of 2010, good for $9.5 billion in revenue. Already, developers have introduced more than 65,000 apps for the iPad.

The device’s immediate success has inspired a raft of competitors. Some 30 similar machines were on the market by year’s end, while 64 different companies have announced 102 competing models, according to PRTM, a consulting firm, as reported by The Wall Street Journal.

Like its predecessor, the new iPad offers potential advantages for merchants and developers looking for ways to display merchandise, offer loyalty incentives, and take payment, says George Peabody, director of the emerging technologies advisory service at Mercator Advisory Group, Maynard, Mass.

“What makes a tablet different from a phone is that screen real estate,” he notes. “That allows you to do more things in a richer way. Tablets are much better for loyalty or merchandising that lead up to a payment.”

The iPad 2, which Apple chief executive Steve Jobs came back from medical leave to showcase at a formal launch in San Francisco, could be even more advantageous for mobile merchants than the original iPad, which went on the market last April.

The new device, which went on sale March 11, is a sleeker machine, thinner indeed than the iPhone. It has also shed weight, dropping from 1.5 to 1.3 pounds. This should make the device easier to hold and tote around, experts say. At the same time, the new iPad carries the same price, starting at $499 for a model without a cellular-network connection. Apple also cut the price on the older version to $399.

Still, the improved device faces competition. Among the new tablets that have come on the market in the original iPad’s wake is the Xoom, from Motorola Mobility Holdings. This machine, whose starting price is $600, features a dual-core chip, something Apple has built into the iPad 2.

And for all its sleekness and lighter weight, the iPad may still fall short for some payments applications, Peabody says. He notes the device may not be rugged enough, for example, for many outdoor environments. Also, it may offer more than many merchants need, particularly if all they really need to do is process card payments.

“With a smart phone you get a price point that’s a lot lower, and you’re using it for everything,” he says. “If it’s about payments, a smart phone will work just fine.”

That means merchants that get an iPad will need to figure out how to exploit its big screen to build up customer interest to the point that a payment will follow, Peabody says. In displaying variations on merchandise, for example, “the tablet can be enormously helpful,” he says.

With its lighter weight and thinner case, the iPad 2 could also prove useful for a technique called line-busting, or allowing customers standing in long checkout lines to pay for their goods by dealing with a clerk carrying a portable device. Peabody even sees tablets ultimately replacing kiosks if they can be “ruggedized.”

Indeed, the sudden popularity of the iPad, and the emergence of rival tablets inspired by the Apple device, has Peabody thinking “less about the iPad’s impact [on payments] and more about the tablet’s impact,” he says.

But while Apple doesn’t have the tablet market to itself any more, it is likely to remain the dominant supplier for some time. It will command a 78% share in 2011, based on a worldwide market of 43.6 million machines, according to researcher eMarketer.

 

What Keeps ATM ISO Execs Up at Night?

Network changes, legislation, and transaction volumes top the list of worries of ATM independent sales organizations, new survey results say.

Kahuna ATM Solutions, a Bloomington, Ill.-based ATM ISO that services smaller ISOs, commissioned the survey, which was done by a marketing and public-relations firm. While the survey garnered 53 responses at most to its questions, not enough to be statistically representative, the results likely reflect the general feelings of industry executives.

Eighty-two percent of respondents cited what the survey termed “network changes and increasing costs” as one of their top three worries. ATM ISOs particularly fear that lower interchange will spread to more networks, which would cut their revenues, according to Bryan Bauer, Kahuna ATM Solutions president. “Operators are having a very difficult time,” he says.

Last year, MasterCard Inc. significantly lowered interchange on ATM withdrawal transactions in its Cirrus ATM network, according to a study by Boston-based Tremont Capital Group Inc. In contrast to point-of-sale debit, where interchange flows from merchant acquirer to card issuer, ATM interchange flows from issuer to ATM owner, or acquirer. Thus, a cut in interchange reduces issuers’ expenses but cuts income to ATM owners.

Some 76% of respondents also cited legislation as one of their top three fears. According to Bauer, the main concern is planned updates to rules implementing the Americans With Disabilities Act, particularly a requirement that all ATMs be speech-enabled.

“If the proposed rules stand, it’s a really heavy burden to our industry,” he says, adding that ATM owners might remove some machines, even machines many disabled people can already use, to avoid the upgrade expense.

ATM ISOs also fret about the network-affiliation provisions of the Durbin Amendment in the Dodd-Frank financial-reform bill that is the subject of pending Federal Reserve Board rules. Those mainly are aimed at giving merchants more transaction-routing freedom, thereby lowering their costs, on POS debit transactions. Still, there could be spillover effects on ATMs, though exactly what are unclear.

“We could be on the receiving end of benefits, or, on the other hand, it could be detrimental,” says Bauer. “It just all depends on how certain things are interpreted and what the final ruling is.”

The survey also found that 45% of respondents cited declining transactions as a top-three fear. That’s been a long-term issue as ATM owners deployed tens of thousands of machines over the past 15 years, driving down per-machine revenues. Despite that, 74% of respondents said they plan to grow their businesses in the next 12 months.