Cutting edge analysis on the world of payments from CMSPI
Insights Magazine from CMSPI
Page 1 | November 2021
Cutting-edge analysis on the world of payments from CMSPI
November 2021
Retail Payments Is Broken, But Not Beyond Repair , i
Insights Magazine from CMSPI
Page 2 | November 2021
Editor’s Note
2 Message f rom the Edi tor
16 Wi l l Cryptocurrency be the Cash of the Future? 4 Boost ing Transact ion Product i v i ty - F i x ing a Broken System
20 Global Payments in Br i ef 22 An In-Depth Look at Thi s Quar ter ’ s Top News 28 Join CMSPI ’ s Retai l Payments Townhal l
Alex Ellwood | SVP of Advocacy & Insights aellwood@cmspi.com
You ’ r e go i ng t o a bus i ness mee t i ng bu t on you r way , you r ea l i ze you r wa t ch i s b roken . There are hundreds of gears and screws that can influence your watch’s performance, and when one of those parts isn’t working, your watch no longer runs optimally. Like most watch owners, you probably know that something is wrong with your timepiece, but you don’t have the insights or technical knowledge to understand what’s causing the issue.
Please note: all figures referenced in this document are, unless otherwise sourced, estimates based on aggregated CMSPI data and publicly available sources. Other sources available on request.
Insights Magazine from CMSPI
Page 3 | November 2021
It’s not unlike payments, where a single miscommunication or breakdown in the supply chain can cause major problems with your business’ ability to optimize payments. Suppliers may lack the incentives or resources to communicate effectively with one another, which can result in lower approval rates and/or higher costs. As merchants and suppliers don’t always have the data or insights to diagnose breakdowns in the supply chain, evaluating the issue with your supply chain is as easy as evaluating the issues with your watch. The goal for most payments managers is to improve sales by increasing approval rates while decreasing costs per transaction. At CMSPI, we define transaction productivity very simply as getting the most out of each payment. That involves a combination of low costs and high approvals while maintaining robust fraud and security standards. For merchants struggling to obtain cross- supplier benchmarks, ensuring maximum transaction productivity is challenging. And with more alternative payment solutions available, optimized productivity requires engagement throughout the payments supply chain. In this edition, we provide insights on where transactions become unproductive,
and offer guidance on how to rectify some of these issues that plague the payments industry.
As we explore approaches to payments, cryptocurrency has posed as many opportunities as challenges. Most people are still trying to understand cryptocurrency, and in this month’s edition we cover what it is, how central banks are getting involved and the future of digital currency. In our Global Payments in Brief section, we take a trip around the world and look at everything from U.S. fraud trends and Afterpay’s acquisition by Square to shifting market share among European acquirers. Around the globe and across the supply chain, CMSPI has visibility into the many complexities involved in ensuring transaction productivity for all stakeholders. As one broken cog in a watch can give the wrong time, one miscommunication or breakdown in the payments supply chain can create inefficiencies. These impairments can make transactions unproductive, leading to lower approvals and higher costs. It is therefore imperative that merchants and payment firms work together collaboratively to address these issues which have routinely hampered transaction productivity.
FEATURE ARTICLE
Insights Magazine from CMSPI
Page 4 | November 2021
Boosting Transaction Productivity - Fixing a Broken System
By Toby McFarlane VP of Ecommerce tmcfarlane@cmspi.com
CMSPI estimates that U.S. retailers lost $24.4 billion to falsely declined card transactions in 2020. Those same retailers are also paying more for each payment on average, with the cost of payments acceptance forecast to double from 2009 to 2025 1 . A similar story is playing out in Europe, where last year merchants saw an estimated €23 billion in false declines and the average Merchant Service Charge rose to levels not seen since before interchange regulation took effect in 2015. These developments represent simultaneous blows to retailers’ costs and revenues. The result? Merchants’ payments have become less productive. Why is the card system broken in this way? Read on to learn more.
The landscape is evolving rapidly, and it is critical conversations about improvements and increased efficiency in the system include all stakeholders…Transaction productivity includes sharing enough data throughout the payments chain with appropriate parties to make the best approval and cost decisions possible. Laura Townsend, Merchant Advisory Group
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Page 5 | November 2021
FEATURE ARTICLE
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Page 6 | November 2021
Assessing transaction productivity means looking at the gross profitability of every transaction. That’s more than just minimizing cost. If one payment type is low-cost but is more likely to be declined because of a “false positive” of possible fraud, then it is less productive than a counterpart that has higher fees but attracts a broader customer base and has higher transaction approval rates (shown in Figure 1). Higher approvals don’t have to mean accepting greater fraud risk: CMSPI estimates that one in five online declines are false, and it is those good customers wrongfully turned down who must be approved to increase productivity. What is Transaction Productivity?
“ The impact of fraud can weigh heavily on a business. Businesses are also contending with increased customer demand, changing customer attitudes, and an accelerated digital transformation… The solution: a modernized checkout experience for the customer and a tech-forward, optimized experience for businesses.
Joanna Raitano, Stripe
VISUALIZING TRANSACTION PRODUCTIVITY
Using the abstract visual opposite as an example, we can see that the calculations involved in adopting a payment method can be challenging. While Payment Method 4 is the cheapest, it is still less productive than Methods 1 and 3, which have higher approvals and offer a smoother customer experience that boosts conversion rates. Similarly, Payment Method 2 generates a significant increase in conversion and average basket sizes, but becomes unproductive if customers are more likely to be falsely declined. These assessments differ not just between payment methods but also between suppliers offering the same payment method.
Figure 1. How Productive Are Your Payments?
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Page 7 | November 2021
Threats to Transaction Productivity
In most cases, these issues impact lots of parties in the supply chain, but it’s difficult to resolve because each lacks the data, resources and ability to communicate given that doing so would require sharing information with competitors. In this article, we follow the life-cycle of a single card transaction from checkout to billing, asking which pain points most threaten a merchant’s transaction productivity and how to resolve them.
The various determinants of a transaction’s productivity can be overwhelming for merchants looking to take stock, especially as consumer demand for frictionless checkout increases and suppliers vie for merchants’ attention with a host of seemingly unquantifiable benefits. Many merchants have attempted to mitigate risks at a price – from buying approvals-boosting ancillary products to adding orchestration layers to their payments supply chain. In doing so, however, their costs can rise further and cause overall productivity to decline. We’re trying to say: you should be able to have it all. In CMSPI’s experience, many of the issues merchants and their suppliers experience are inherent in the structure of the payments industry.
“
Before a purchase is made, transaction data can be used to support personalized and measurable marketing programs. During a transaction there are opportunities to manage transaction costs without increasing fraud risk or transaction declines. And finally, after the transaction, payment reporting and analytics can help merchants identify and respond to trends that could impact efficiency and profitability.
Maureen Elworthy, J.P. Morgan
FEATURE ARTICLE
Insights Magazine from CMSPI
Page 8 | November 2021
Checkout
Gateway
A Short Story of a Good Customer and a Card Transaction
Processor
Network
Issuer-Owned Processor
Flow of Funds
Issuer
TOP-LINE Once a consumer clicks “Pay,” most of time, the merchant hands over control of the authorization process to its payments supply chain. The transaction may be falsely declined at multiple points, resulting in a loss of revenues and an increase in marketing/customer acquisition costs. We’ve highlighted just a few examples of challenges to a given transaction’s productivity.
Fraud Screening
Transaction Approved
Insights Magazine from CMSPI
Page 9 | November 2021
Sub-optimal fraud rules at the pre-authorization stage can generate excessive declines if suppliers later in the chain, such as the processor or issuer, are not aware that screening has already taken place.
CHECKOUT
When connecting with a gateway, each processor requires data in a specific format – which can present an array of challenges. In one case, CMSPI found an international merchant was seeing all transactions above a certain value declined in one country – the result of a payment service provider that was unable to support the necessary number of digits for the local currency.
GATEWAY
Transparency is a major issue when it comes to processor declines. Processors don’t have visibility outside of their transaction database, meaning they don’t have visibility over whether they’re being significantly outperformed by their competitors, and merchants typically receive opaque or limited management information. Further, there is no standardization of definitions – some may measure approval rates by volume as opposed to value for example – which leads to a plethora of issues when determining whether performance is strong, or not. The payments industry suffers from a number of conflicts of interest which can lead to communication challenges throughout the supply chain. Issuers with a processing arm, for example, typically lack the incentive to communicate with other issuers due to competitive dynamics within the industry. In one case, a large merchant saw huge losses for six months following a fraud attack when one issuer responded with stricter rules despite the merchant having immediately implemented its own solution. All would have been better off if the processor would have communicated with other parties.
NETWORK
ISSUER
Overly aggressive post-authorization fraud rules can see payments declined that have been deemed non- fraudulent elsewhere in the supply chain.
FRAUD SCREENING
FEATURE ARTICLE
Insights Magazine from CMSPI
Page 10 | November 2021
Checkout
Gateway
A Short Story of a Good Customer and a Card Transaction
Processor
Network
Issuer-Owned Processor
Flow of Funds
Issuer
BOTTOM-LINE After the transaction has been
authorized and settled, the cost per transaction is reported in a monthly invoice or bill. The fees flow to different parties in the supply chain, with cost increases reducing the productivity of the transaction.
Fraud Screening
Transaction Approved
Processor
Network/Issuer
Alternative Payment Method Provider
Insights Magazine from CMSPI
Page 11 | November 2021
While card processing fees differ between merchants, one key threat to transaction productivity comes from ‘premium’ processing services designed to boost approval rates. Merchants willing to pay a premium should take caution:
The premium approval-boosting product is the result of a broken system, not the solution to it. One partner can’t address challenges throughout the supply chain.
PROCESSOR
Figure 2 shows CMSPI analysis of the approval rate performance of different processors for a sample of merchants. Even if a merchant pays for ancillary services, both processor and merchant may be losing out relative to their competitors without cross-processor industry benchmarks.
Figure 2. Approval Rate by Processor
0.30%
Since 2009, the major card networks have announced, introduced or increased over 40 network fees in the United States. Fees are not only increasing in size and number but are also increasing in complexity. Different payment types across different channels with varying authentication methods and charging structures make understanding fee increases a resource-intensive challenge. This pattern of increases to both network fees and unregulated interchange fees is visible globally, particularly following interchange regulation. (Figure 3)
0.25%
0.20%
0.15%
NETWORK/ ISSUER
0.10%
0.05%
0.00%
Figure 3. Network Fees After Regulation
-0.05%
0
15
Years Since Interchange Regulation
US
EUR
AUS
90% 85% 80% 75% 70% 65% 60% 55% 50% 45% 40%
When exploring the adoption of an alternative payment method like buy
now, pay later, the two key considerations for merchants are the trade-off between increased costs and incremental sales, and the difference between increased conversions and increased approvals. While an APM may draw new customers, new revenues are only achieved if the transaction is approved. APMs can vary in approval rate (Figure 4), and therefore increased conversions don’t necessarily translate to increased sales.
APMS
Figure 4. Sample
Dataset - BNPL Approval Rates
May 20
Jun 20
Jul 20
Aug 20
Sep 20
Oct 20
Nov 20
Dec 20
Jan 21
Feb 21
Mar 21
Apr 21
BNPL
All Other Payment Methods
FEATURE ARTICLE
Insights Magazine from CMSPI
Page 12 | November 2021
What Can Merchants Do?
Top-line
To tackle the challenges of transaction productivity, a merchant needs transaction-level analysis, cross-party benchmarking and collaboration with multiple payments partners.
Merchants should be consistently digging into their approval, fraud, and chargeback ratios to understand where problems are coming from and how to make improvements to minimize costs and maximize approvals.
On the opposite page, we’ve outlined the process CMSPI uses to tackle the hurdles involved with improving a transaction’s productivity during the authorization phase.
Laura Townsend, Merchant Advisory Group
Page 13 | November 2021
Step 1
Work with the merchant’s processor, gateway and fraud provider to gather the relevant data.
Step 2
Benchmark approval rates against best-in-class performance based on merchants with a similar transaction profile.
Step 3
Conduct granular analysis of transaction-level data to identify instances of false declines, why they occur and which supplier is responsible.
Step 4
Work directly with the supply chain to address problem areas.
Step 5
Continue to monitor approval rates on an ongoing basis.
By utilizing a data-driven approach, merchants can measurably improve their payment strategy. In CMSPI’s experience, approvals optimization processes can depend on a variety of factors, but it can typically yield huge uplifts in revenues. Most of the time – with some notable exceptions - the entire payments supply chain benefits from identifying and addressing the underlying causes of false declines. Due to challenges around communication, and transparency, merchants and their payments partners often lack the data to address the root of the problem. By leveraging its independence and data insights, CMSPI’s work removes the trade-off between costs and revenue in payments.
FEATURE ARTICLE
Insights Magazine from CMSPI
Page 14 | November 2021
What Can Merchants Do?
Bottom-line
While some factors may be outside of a merchant’s direct control, understanding payment brand rules and interchange qualifications…and how they relate to approval rates and transaction costs…is something more merchants should be aware of and managing.
Maureen Elworthy, J.P. Morgan
The trade-off impl ied by premium add-on solutions is a symptom of a broken payment system. Take Control of Payments Data
A merchant sacrificing low costs for increased approvals might not be improving the productivity of its transactions. To do that, the merchant would need benchmarking data that offers cross-industry and cross-processor insights. With that data, the merchant can hold its partners to account and ensure that its partners’ incentives are aligned with its own. Per-transaction fees are increasing, and processors can prof it on fee changes i f merchants do not routinely audit their invoices. Audit Fees For example, hidden premiums can find their way into pass-through fees, misapplied rates, and keying errors. CMSPI typically finds errors in one out of every two payments invoices. With new network fees scheduled for 2022 in many parts of the world, it’s important that merchants develop their auditing resources to ensure that their costs align with expectations. Given the chal lenges of adopting an alternative payment method, merchants might feel uncertain where to begin when endeavoring to understand i f an alternative method is right for them and, i f so, which is best . Develop a Business Case by Payment Method Merchants must understand features such as the market of operation of any alternative payment method they consider, the impact of the method on their customer and payments mix, and the positioning of the provider among competitors. Without a robust data-driven business case taking into account new customer acquisition, conversion rates, reporting, fraud, security, and many more factors, merchants may be adopting costly alternative methods without seeing an incremental sales increase.
Boost Your Transaction Productivity >>
For the full source list please click here.
Insights Magazine from CMSPI
Page 16 | November 2021
cryptocurrency article Will
Cryptocurrency be the Cash of the Future? We discuss what cryptocurrency is, what it isn’t, central bank digital currencies, and what merchants need to know about the future of digital payments.
By Josh Pynn Strategic Insights Consultant jpynn@cmspi.com
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Page 17 | November 2021
Figure 1. Market Share by Capitalization
WHAT IS CRYPTOCURRENCY?
a market capitalization of over $2 trillion. Cryptocurrencies are polarizing because of their immense volatility. But the core of the crypto experiment is blockchain, a highly secure data technology that is finding increasing uses in everything from financial transactions to tracking the movement of goods through global supply chains.
Cryptocurrency is a digital, software-based financial asset that has attracted the eye of investors, the public and merchants since the inception of Bitcoin in 2009. Since Bitcoin’s creation, more than 4,000 other digital currencies of various forms, capabilities and popularity have been created, leading to
CRYPTOCURRENCY IS:
CRYPTOCURRENCY IS NOT:
Ultimately, cryptocurrency is a collection of 1s and 0s. Fully Digital Legally, it is a financial asset rather than currency. An Asset
Money
It is not backed by any central authority (except for a few rare cases). Independent
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Page 18 | November 2021
Central Bank Digital Currencies
WHAT IS A CBDC?
been implemented. Fundamentally, CBDCs look to take advantage of the unique and inventive blockchain system while tackling the downsides of cryptocurrencies. Over 80% of central banks in the world are currently assessing the viability of a digital currency to supplement or potentially replace traditional paper currency, so there will likely be substantial growth in coming years.
Central bank digital currencies are cryptocurrencies issued by central banks, and have
been directly inspired by Bitcoin and its immense
public demand. CBDCs are not nearly as widespread as other cryptocurrencies and only a few, like China’s digital renminbi/ yuan (known as E-RMB or E-CNY), have gone beyond the discussion stage and actually
CBDCs ARE:
CBDCs ARE NOT:
Because they are backed by a government, they are not as volatile as cryptocurrencies. Stable A potential replacement for paper money, cash reserves could be moved to a digital form. Adaptable CBDCs can be devalued over time with standard monetary policy. Subject to Inflation
Money, At Least Not Yet
Money in an economic sense needs to meet three criteria to be effective: It must be a unit of account, a medium of exchange and a store of value. Because of volatility, lack of widespread availability and still-limited acceptance in the marketplace, both cryptocurrencies and CBDCs currently fail one or more of those criteria. CBDCs have the most potential to become effective forms of money, but there are still many hurdles to overcome before that happens.
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Page 19 | November 2021
WHAT MIGHT THE FUTURE LOOK LIKE?
The idea of digitizing currency worldwide is an attractive one. Government payments such as Social Security or unemployment insurance benefits have been made by digital forms such as direct deposit rather than paper check or cash for many years. The same is true of most employer paychecks, and many consumers pay their bills electronically. The pandemic has accelerated digital payments and the practices are likely to be sustained. In addition, much of monetary policy is currently enacted digitally, with the purchase and sale of government bonds occurring instantly. Meanwhile, digital purchase options such as digital wallets, mobile apps and QR codes are already widespread in the retail market, also accelerated by the pandemic. That is good news for a digital “cash” future because the infrastructure for digital payments will have been developed before acceptance of digital currencies becomes ubiquitous among retailers. In an entirely digital economy, merchants will have to be at the forefront of acceptance and adoption for digital currency to function effectively.
SPEAK TO OUR EXPERTS TO LEARN MORE ABOUT MERCHANT TRENDS IN CRYPTOCURRENCY
Get in Touch >>
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Page 20 | November 2021
Global Payments in Brief
We explore key payments updates from across the globe - your bite-sized guide to what’s happening and where.
By Martha Southall Economist msouthall@cmspi.com
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Page 21 | November 2021
United States
Germany
Sub-Saharan Africa
President Biden signed an executive order endorsing open banking growth in the U.S. (July 2021).
Paysafe acquired Germany’s viafintech, an alternative banking solution and the biggest bank-independent payments structure in the DACH region (August 2021).
As of September, according to a Global System for Mobile Communications report, Sub-Saharan Africa makes up 66% of global mobile money transactions.
Canada
Italy
Commonwealth Bank of Australia launches BNPL solution (Steppay) in August 2021. The solution charges merchants 0.80% per transaction, 10x higher than debit rates. Australia
Apple and Affirm’s PayBright launch a BNPL program in August for Apple device purchases in Canada.
Worldline acquires 80% of Axepta Italy, BNL’s merchant acquiring entity (July 2021).
Mexico
Kazakhstan
China’s Digital Yuan was used in China’s domestic future market for the first time (August 2021). China
Fintech Credijusto, a lender to small businesses, acquired Banco Finterra for $50mn in June.
Kazakhstan’s first digital Islamic bank, Tayyab, launched in July, offering Shariah-compliant finance in the growing Islamic economy.
Argentina
Ukraine
Mastercard banned from on-boarding new domestic customers onto its card network from July 2022. India
Brubank, a digital-based bank, is looking to expand to Colombia and Peru in 2022 after additional fundraising.
Ukraine government introduced a bill allowing cryptocurrency payments a few weeks after the central bank was allowed to issue digital currency (August 2021).
Brazil
United Kingdom
TSYS experienced a nationwide system outage, affecting at least two cashless sporting venues (August 2021). New Zealand
WhatsApp Pay went live after the Central Bank finally cleared operations of the payment service (May 2021).
UK’s Competition and Markets Authority mandates the nine largest banks in the UK to allow variable recurring payments for sweeping transaction by Jan 2022.
El Salvador
Nigeria
President Bukele tweeted favorable economic viewpoints shared from a Bank of America report on Salvadorian Bitcoin (August 2021).
Following Apple Pay’s entry into South Africa earlier this year, Nigerians can now pay with Apple Pay at merchants using Paystack, an African-based fintech that processes payments for businesses.
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Page 22 | November 2021
An In-Depth Look at this Quarter’s Top News
UK BRINGS VARIABLE RECURRING PAYMENTS TO OPEN BANKING
Recurring payments can be made through standing orders, but only for fixed amounts like rent rather than variable amounts.
British authorities have taken a step toward consumers being able to use open banking to move money automatically even when the amount due varies. The United Kingdom’s Competition and Markets Authority has mandated that the CMA9 – the nine largest banks in the U.K. – begin offering variable recurring payments when “sweeping” funds from one account held by a customer to another account held by the same customer. In one potential application, a consumer who uses one account for spending and another for savings could choose to have the spending account automatically replenished if it falls below a certain amount. Third parties like a budgeting app could also be authorized to move funds within certain limits. U.K. consumers have long been able to use direct debit to automatically make variable recurring payments like their electric or credit card bills. But payments under the U.K.’s three-year-old open banking system are predominantly single transactions, with each transaction requiring authentication.
While the move might not appear to affect merchants at first glance, “sweeping” represents just one particular use of variable recurring payments. Another could be the ability to process variable subscription payments – perhaps a monthly Uber or Lyft bill – over open banking rails in a business-to-consumer scenario.
Even though variable recurring payments have only been mandated for sweeping, this is a step in the right direction for the practice more generally and could be a key to expanding more uses for open banking payments. The mandate takes effect in early 2022.
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Page 23 | November 2021
MERCHANTS CONTINUE THE FIGHT AGAINST UNLAWFUL INTERCHANGE FEES
In 2020, the UK Supreme Court upheld a ruling by the Court of Appeal that multi-lateral interchange fees constituted a restriction of competition in the payments industry. The Court’s judgment confirmed European retailers’ opportunity to reclaim historic interchange fees, with the potential resultant pay- out estimated at over €85 billion. In 2021, that pay-out grew considerably, as the Competition Appeal Tribunal held on summary judgment that claimants bringing interchange claims through the English Courts could apply English Law to intra- and inter-regional transactions. To learn more about how these and other regulatory developments can impact your business, please listen here.
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MASTERCARD CREATES NEW UK MARKET DEVELOPMENT FUND FEE
Mastercard has levied a new market development fund fee on merchants in the United Kingdom and Ireland. The new fee represents a transfer of costs away from another Mastercard fee, rather than a cost increase. Nonetheless, as of August there had been over 50 new interchange and network fee changes announced by Visa and Mastercard in Europe just for 2021. Development fund fees, which many experts believe are essentially scheme fees, across Europe account for some of those increases and present a reconciliation challenge for merchants. Market development funds, also known as innovation funds or card payment promotion funds, are typically used by the card networks to pay for projects aimed at increasing spending, awareness and use of payment cards. 1 In Europe, the fees tend to
vary greatly across merchants. Variables such as country of domicile, countries of operation, channels of operation and accepted payment methods represent just some of the factors on which the fees are calculated. Given the complexities involved in calculating the fees, internationally operating European merchants will be increasingly challenged to reconcile the fees as each market of operation will likely have different charging structures. The U.K. is one of Europe’s most developed payments markets, being one of the earliest adopters of contactless payments and a leader in open banking transactions. Given that development funds are normally intended to encourage card use, many think it’s unclear what Mastercard’s goal is in such an already highly developed market.
BLOCKED FROM BUYING PLAID, VISA SEEKS TO ACQUIRE TINK
Visa has announced plans to purchase Swedish data aggregator and open banking solutions provider Tink for €1.8 billion ($2.15 billion), one of the largest acquisitions in Swedish history. Tink provides its application programming interface to over 3,400 European banks and financial institutions and Visa appears to be eyeing expansion into the European open banking environment.
The deal comes in the aftermath of Visa’s $5.3 billion attempt to acquire U.S. data aggregator Plaid, which was abandoned in early 2021 after the U.S. Department of Justice filed an antitrust complaint claiming Visa was trying to quash a “competitive threat.” 2 The Visa-Tink transaction is currently pending and will be subject to regulatory approvals and other closing conditions.
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Page 24 | November 2021
CONSOLIDATION SPREADING, ESPECIALLY AMONG ACQUIRERS
The payments industry has seen an uptick in consolidation in recent years, including mergers, acquisitions, joint ventures and partnerships. While the trend has been true across the payments industry, the activity of card acquirers is of particular interest because it has led to the emergence of suppliers that offer merchants the ability to consolidate their card acceptance arrangements across their entire business regardless of location. The emergence of these players has come through “megamergers” where large acquirers have merged with or acquired one another to rapidly increase their market reach and coverage.
For example, Worldline claims its acquisition of Ingenico has led to the creation of the largest merchant acquirer in continental Europe. Similarly, the Italian acquirer and payments processor Nexi has recently engaged in a wave of M&A activity with its acquisition of Intesa SanPaolo’s merchant acquiring business as well as Nets, which had previously merged with Concardis. Like the Worldline and Ingenico merger, this likely significantly increased Nexi’s reach across Europe. However, as important as these megamergers are, acquirers have also focused on acquisitions in certain periphery countries where their
presence might not be as concrete as it is in major European countries. For example, Nexi recently signed an agreement to acquire 51% of Alpha Bank’s merchant acquiring business in Greece. While M&A activity in the acquiring industry does offer merchants the ability to simplify their acquiring arrangements across large chunks of where they operate, there are also drawbacks to this approach. Merchants can lose access to a certain level of local expertise as well as local payment methods, so an optimal payments strategy involves evaluating both the pros and cons of a consolidated solution.
U.S. MAG SURVEY SEES MORE FRAUD AS RETAIL MOVES ONLINE
Reserve data 3 , merchants see over 50% of their ecommerce fraud losses from credit, signature debit or prepaid cards, further underscoring the importance of the Fed’s response to the issue of low PINless enablement.
According to a recent survey by the Merchant Advisory Group and CMSPI, U.S. merchants are losing an average 0.7% of their annual sales to e-commerce fraud. The finding underscores a trend of fraud increasing as retail shifts online and the risk of bricks-and-mortar merchants exposing
themselves to new fraud threats as they develop online capabilities. According to the survey, more than 60% of ecommerce fraud losses occur through the merchant’s website. With PINless debit transactions accounting for just 4.5% of online payments, according to Federal
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Page 25 | November 2021
MERCHANTS ASK FED TO OK ONLINE DEBIT ROUTING PROPOSAL BUT BANKS PUSH BACK The U.S. Federal Reserve received more than 2,000 written comments from banks, card networks, merchants and others this summer on existing debit regulation clarifying that merchants’ legal right to choose where to route debit card transactions for processing applies the same online as it does in stores. Many comments were reiterated responses from the banking industry opposing the proposal and citing the impact it could have on their revenues. Visa highlighted market challenges with adopting the PINless technology
Senator Richard Durbin, the author of the landmark law, expressed support for the Fed’s proposal, calling on the agency to “make clear” that card issuers “must ensure” that two networks are enabled regardless of where a debit transaction takes place. 5 Most notably, the U.S. Department of Justice and Federal Trade Commission both filed comments in favor of the Fed’s proposal. 6,7 While the Fed has not yet responded to the comments it received, it is important that merchants monitor the Fed’s reaction. CMSPI estimates that fully enabled debit routing choice for online and other card-not-present transactions could achieve between $2 billion and $3 billion in annual savings for merchants. Industries that have large volumes of Ecommerce and digital transactions have the most to gain from a favorable decision from the Fed. While the agency’s timeline is unclear, merchants need to be ready to take advantage of the opportunity if online routing choice finally becomes a reality.
needed to make online routing choice work, saying the Fed’s proposal “could undermine the safety and efficacy of the payments system” and could expand routing choice “in a way that restricts the introduction of new technology.” 4 Merchants and merchant associations said the 2010 Durbin Amendment passed by Congress – which required that debit cards be able to be processed over at least two unaffiliated networks rather than just Visa or Mastercard – was intended to apply to all debit transactions, not just those in stores.
APPROXIMATELY WHAT PERCENTAGE OF YOUR COMPANY’S TOTAL
E-COMMERCE/M-COMMERCE FRAUD LOSSES COME FROM U.S. CUSTOMER ACCOUNTS VERSUS NON-U.S. CUSTOMER ACCOUNTS?
Insights Magazine from CMSPI
Page 26 | November 2021
SQUARE BUYS AFTERPAY, MARKING LARGEST AUSTRALIAN ACQUISITION IN HISTORY
• Goldman Sachs and Apple have formed a partnership to issue Apple Pay Later. • Sweden’s Klarna is considering options for a public offering in the United Kingdom after its most recent venture funding round raised $45.6 billion. • The Commonwealth Bank of Australia has launched StepPay. • PayPal has announced plans to purchase Japanese BNPL firm Paidy for $2.7 billion. That would enable Square’s small-business clients to extend BNPL offerings directly at the point-of-sale and enable consumers direct access to BNPL at some of Afterpay’s global merchant partnerships. The deal is expected to close by the end of March 2022 but is subject to approval from both Square and Afterpay shareholders as well as Australian Treasurer Josh Frydenberg. With the large-scale consolidation, BNPL may prove to become one of the most permanent and valuable payment products. Now competing with other global BNPL players such as Klarna and Affirm, Square plans to integrate Afterpay’s product offerings into both its merchant- oriented Seller and consumer-oriented CashApp systems.
Square Inc. this summer announced plans to acquire global buy now, pay later pioneer Afterpay, offering $29 billion for the Melbourne- based company to set a record as the largest acquisition in Australian history (AU$39 billion). Founded in 2014, Afterpay is one of the world’s premier BNPL firms, serving over 100,000 merchants and 16 million consumers globally. In recent months, BNPL has come to be one of the hottest segments of the payment industry with a wide variety of new engagements, consolidation and products being developed to meet the high demand for the alternative credit solution • In North America, Visa has entered BNPL with the limited merchant roll-out of Visa Installments, primarily in Canada. • Mastercard has begun the roll-out of consumer and small business-oriented BNPL products under the name Mastercard Installments.
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Page 27 | November 2021
INDIA CAPS DIGITAL WALLET MARKET SHARE, ORDERS INTEROPERABILITY
Digital payment methods have been growing in popularity in India recently, largely due to the success of the Unified Payments Interface. The UPI is a system developed by the National Payments Corporation of India and facilitates interbank transactions supporting both peer-to- peer and business-to-consumer transactions. Two major changes in the past year will impact both the UPI market and the market for digital wallets. In November 2020, the NPCI announced a 30% market share cap on any non-bank provider operating on the UPI that took effect this January. Any providers already exceeding the cap – only Bangalore-based payments app PhonePe and
Google Pay as of this summer – have until January 2023 to comply. This May, the Royal Bank of India mandated full interoperability between digital wallets for both consumers and merchants, meaning someone using a Paytm wallet, for example, must be able to send funds to someone with a PhonePe wallet. Similarly, all wallets will have to support acceptance at any merchant location where any UPI wallet is accepted. Wallets must comply by the end of March 2022. Non-bank providers dominate the UPI and limiting the market share of any particular provider should help with competition. But the cap will not apply to digital wallets operated by banks, limiting its effectiveness.
RBA SHAKES UP PAYMENTS REGULATION IN AUSTRALIA
On October 22nd, the Reserve Bank of Australia released its final decision on changes to payments regulation following a period of consultation on a number of areas, including dual network debit cards, least cost routing, interchange caps, and BNPL ‘no-surcharging’ rules. Upon review, while there seems more can be done, the findings demonstrate the RBA’s commitment to recognize and swiftly act upon merchant feedback. With large regulatory changes like this, it’s key that merchants understand the opportunities and implications for their business. Please click to listen to how the RBA’s decision can impact your business.
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Insights Magazine from CMSPI
Page 28 | November 2021
CMSPI’s Retail Payments Townhall
Discuss key payments trends with the backdrop of CMSPI’s data-driven insights.
Insights Magazine from CMSPI
Page 29 | November 2021
You’re invited to join CMSPI’s exclusive, virtual forum, the Retail Payments Townhall, where the world’s leading retailers come together to discuss the key issues in the payments market - brought to life by CMSPI’s data-driven insights. Members meet each month to learn, connect and collaborate on the most pressing payments topics chosen by the group.
Topics discussed include:
Increasing Network Fees
Interchange Fees
Buy Now, Pay Later
PINless Debit and Debit Routing
Regulatory Interventions
Central Bank Digital Currencies
NORTH AMERICA GROUP Last Wednesday of every month 12:00 – 1:00pm EST
EUROPE GROUP First Wednesday of every month 2:00 – 3:00pm BST
Interested in joining other leading merchants and being at the forefront of payments?
Insights Magazine from CMSPI
Page 30 | November 2021
Cutting-edge analysis on the world of payments from CMSPI
November 2021
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At CMSPI, our payments experts provide advisory services and powerful analytics. Our ultimate goal? Supporting a more innovative and productive payments ecosystem. For hundreds of clients across the globe, our insights help improve performance and create positive change.
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