A year in the card industry is like seven years in ordinary life.
    Almost every year is marked by much change in the electronic transaction industry. 2007 is no exception.
    Technology processes and regulatory efforts have characterized the industry and new developments are reflections of the anticipated future in the card industry. The industry should grow as digital technology grows and electronic transactions grow - in volume and quality.
    To grasp an overview of the past year, we organized a roundtable of commentary by professionals in the card industry.
    “The first half of 2007 has seen major interest and investment in the acquiring/processing space by private equity firms and other companies outside of the merchant services realm,” says Diane Mehochko, President of First National Merchant Solutions. “Some of the impetus behind the attention is likely due to MasterCard’s outstanding performance since their IPO last year. MasterCard seems to be proving that payments have potential for earnings and double- digit volume growth that outbalances concerns about regulatory or compliance risk. At First National, we’ve seen outstanding growth in both volume and value of transactions. The continual migration of consumer purchasing behavior away from cash and checks toward prepaid, debit and credit is a primary factor driving our growth.”
    Changing organizational structure is something that many agreed upon. “Mergers and acquisitions driven primarily by the private equity market will change the face of the acquiring/processing field for years to come,” adds George Cohen of Moneris. “These non- strategic buyers have taken control of many of the largest payments organizations in the U.S. Similarly, the traditional payment networks (Visa, MasterCard and Discover) have either become stand-alone public entities or are in the final processes of becoming so.”
    Cohen also emphasizes that these newly created public-for-profit organizations will change their focus as they are forced to maximize profits and increase shareholder wealth. “The direction and fate of both these ‘new’ processors and the networks remains somewhat of a mystery but the impact will have lasting effects on our business,” adds Cohen.
    “We witnessed the beginning of a paradigm shift in the struture of the card brands, and therefore of the acquiring industry, in 2007,” explains Holli Targan, an attorney with Jaffe, Raitt, Heur & Weiss. “Discover is, for the first time, offering industry businesses an acquiring model akin to the Visa/MasterCard structure. This will enable companies to participate more directly in Discover Card acquiring, which will contribute to revenue while also forcing non- bank companies to directly take on risk and liability. Further, Visa and MasterCard going public have longer-range repercussions for the entire industry as those companies are forced to respond to the pressures of the public market.”
    Targan feels that these developments are a trend shift away from the traditional banking organization. “These developments, along with a general maturation of the acquiring industry, contributed to the continuing shift from banks to non-bank companies of the responsibilities and rewards of authorizing and settling credit, debit and stored value card transactions,” she adds.
    Paul Rianda, an attorney based in Irvine, California who specializes in serving the bankcard industry, feels that as the industry matures, profitability is also affected. “I believe there has been a continuation of the maturation of our industry that started a number of years ago,” says Rianda. “It is getting more difficult for all parties to make money given the continuing competitive pressures. People in the industry need to find a niche or compelling business model in order to make above average profits.”

     It’s The Technology

    As digital technology changes, so does technology’s contribution as applied to the electronic transactions industry. Numerous technological advances are helping to shape the road ahead for an industry in demand. Often, technological form follows function. Function is derived from customer needs.
    “Recently, we hosted an event for some of our largest accounts,” says Diane Mehochko. “We asked our clients which of the new technologies would most impact their business’—contactless, biometrics, mobile technology or alternative payment types.”
    According to their findings, mobility is a factor that is of great importance. “Overwhelmingly, our customers told us that mobile technology would be the next technology that would have the biggest impact on their businesses,” Mehochko adds. “Consumers are increasingly interested in purchasing phones with payment capabilities. We see it as a generational trend with younger consumers driving the change. At First National, a significant number of our customers bank on-line and use mobile devices. We’re excited that Visa has launched their new mobile platform and the delivery of enhanced information via SMS and NFC can only increase our customer engagement and loyalty.”
    Most of the industry professionals in our roundtable mentioned contactless technology. Such technology will accompany the mobile aspects of technology as an important development and one that will likely blossom in the years ahead. It will likely expedite transactions and enable the industry to grow.
    Paul Rassori, Vice President of Global Marketing for San Jose, California-based Verifone Corporation, agrees that contactless technology was the significant technology advance over the past year. “I think the viability of contactless payments has pushed up on a global basis.” “In 2007,” says Rassori. “the international regions have stepped up their activity and there are a number of pilots going on in practically every region.”
    “Contactless technology is something to watch closely,” says Greg Cohen. “Not, however, through the acceptance of the contactless card. I believe that contactless devices that accept transactions using near field communication technology are just helping build the infrastructure for payments conducted by a cell phone. The natural evolution of the physical wallet is to move to the cell phone.”
    “This concurs with the customer survey,” Diane Mehochko explained. “Mobile technology will work in unity with existing venues within the Web 2.0 environment.”
    “Once the phone is activated or equipped with a “wallet” that includes payment cards, loyalty cards and other payment vehicles (watch out for PayPal and Google) consumers will need their merchants to accept payment from their phones,” adds Cohen. “These contactless devices are exactly the peripheral and technology that will allow point-of-sale systems to accept payments using the phone-based wallet. We are building the infrastructure for the next big wave of consumer payments.”
    Mobile technology is growing and improving. Apple’s iPhone and the enthusiasm it has generated may be an indicator of where consumer interest is anchored.
    “Mobile payments, while in its infancy in the U.S., is quickly gaining popularity around the globe,” says Kurt Strawhecker of The Strawhecker Group. “Given the iPhone, a new more mobile phone based population of young adults and the downscaling of the average electronic payment purchase, point toward a huge opportunity for mobile payments.”

     Security Challenges

    Whenever technology advances, there’s always new vulnerability for security threats. Security is its own genre of technology. As soon as fraud is detected, security pundits are developing a patch. It’s a discipline that shows no signs of slowing down for the card industry. The past year has been another year where security has been a great concern. As Paul Rassori explains, there are just too many places in the path of a transaction where a security breach may exist.
    Rassori discussed the practice of “skimming,” which gained infamous notoriety in 2007. This is the practice where someone takes your card, swipes it and records your information to exploit it later. In 2007, there were incidents where this was occurring in restaurants. He recalls seeing some data that said that 70% of skimming incidents take place in a restaurant, when the customer gives up their card to a waiter or waitress to pay for the meal.
    Verifone is responding to this security risk by making a portable wireless device to swipe a card at the table and enable the transaction to take place there.
    “Unfortunately in this day and age, fraudsters move quickly and seem to be one step ahead,” says Diane Mehochko. “Criminals are targeting full track data, card verification numbers and PINs. Consumer confidence is impacted by any data compromises, so we take our role very seriously. A combination of increasing data breaches and state disclosure laws have resulted in a sharp rise in reported security compromises for the entire industry.”
    According to Holli Targan, the publicity surrounding cardholder information breaches dictates that the card brands will continue to emphasize the importance of security practices by companies in all links in the payment chain—small merchants, large merchants, VARs, ISO’s, processors and banks. “The industry has done a good job of showing regulators and Congress that it is on top of the problem and is serious about enforcing industry security standards, which may work to stave off government regulation,” she says.
    Security breaches have been an underlying driver for a proactive program of PCI compliance. Though there’s a focus on larger merchants right now, a program to bring all merchants into compliance is coming soon.
    “We are optimistic with the industry-wide coordination seen with the establishment of the PCI Security Standards Council,” says Mehochko. “At First National, we’re working cooperatively with the card associations to ensure that our merchants are educated, informed and knowledgeable about what they can do to protect their businesses. Our focus for the next year will be in bringing our Level 4 merchants up to compliance. Small and mid-size merchants make up the bulk of our portfolio and are a target population group that needs more ‘hand holding’ through the PCI process.”
    Greg Cohen feels that it is about time for PCI compliance, despite not being overly optimistic in the short term. “I believe most of these compliance requirements are a long time coming,” he explains. “However, the process by which the networks are forcing compliance is cumbersome and flawed. I’m not sure it will actually work.”
    Cohen’s concern is with integrated business management or POS systems. “The majority of these systems are still not compliant and the manufacturers and VARs servicing these systems have no ‘real’ motivation to make them so as they have no liability,” he adds. “Some are bringing systems up to compliance standards but the process is moving slowly. However, for many small businesses and business management systems this is a difficult and expensive task. There has to be a better way to get all stakeholders involved and motivated. The current ‘stick’ approach is inherently flawed.”
    Kurt Strawhecker feels that the requirements of compliance are a tall order and one that will take time to adopt and implement. “I don’t think the industry comprehends what may be asked of them and the impact to daily business,” he says. “Once the industry is fully informed and comprehends the impact, the industry will mobilize.”

     The Road Ahead

    Most every industry has its own crystal ball. Depending on where you sit, you’ll have your own view of the future of an industry. As such, the professionals we spoke to have their own take on the road ahead as well.
    Kurt Strawhecker believes that we will see many different things on the road ahead. “Consolidation of the bankcard acquiring business will continue,” he says. “Payments will no longer necessarily come from a Merchant’s Bank or their ISO. Multiple payment gateways will become continually more specialized and important in driving more niche products solutions.”
    Strawhecker also feels that distribution channel evolution is changing the merchant sales process, and growing trends in transaction volume will continue.
    He predicts that [Automated Clearing House] ACH payments will continue to grow as transaction types expand. He also believes that gift and prepaid cards will continue their extraordinary growth. Like others, he feels that mobile payments will be winning new alternative payment methods.
    Consumers are aging and that may have a positive effect on the industry. “We see demographic shifts as posing both opportunities and challenges. Consumer spending over their lifetimes will increase as the baby boomers age and continue to consume well into their sixties,” says Diane Mehochko. “There will be an increasing percentage of diverse Americans that become part of the mainstream consumer society and create new businesses.”
    Mehochko emphasizes that her company’s greatest challenge is their ability to effectively market their products and services. “A one- size fits all mentality appears to be disappearing from all aspect of commerce as our society becomes increasingly diverse in culture, attitudes and behavior,” she says. “The payment solutions we design and implement have to enhance the merchant experience for consumers.”
    Greg Cohen of Moneris feels that credit card acquiring in the U.S. is perceived as a commodity by the merchant community, however, he sees industry players fanning out to new areas internationally. “We will see the largest processors continue to spread their wings and look for growth in the international markets. In the U.S., we will see continued consolidation as scale drives profitability. In addition, new players will enter the payments space offering value bundles that include merchant services with other business solutions (Intuit, Sage and Verizon). Traditional small ISOs will change significantly as they will need to bring a full electronic payments value suite of products to merchants.”
    Holli Targan feels that the card industry will continue to see consolidation of acquiring companies at the top of the pyramid, forming super-ISOs and processors. At the bottom, she feels you’ll see entrepreneurial innovation. “People who have been around the block once or twice, will not be able to pull themselves away from the industry, and will continue to re-circulate to refine and tweek their former business plans,” says Targan. “Meanwhile, savvy business people from other industries will awaken to the acquiring business potential, and enter the space with new twists.”
    “Technology and innovation will drive our business but our distribution channels will continue to be the keys for success,” says Greg Cohen. “The winning players will bring real value to their chosen segments and partners offering a myriad of payment schemes, solution and technologies. It’s not just the credit card business anymore.”

TW thanks all participants in our December feature Roundtable discussion.