2012 Payments Systems Year-in-Review
The interchange fee and the potential of mobile payments were the dominant payment system issues in 2012. From a landmark antitrust settlement to seemingly daily announcements of a new prepaid or mobile payment product, there was plenty of activity in 2012. However, following opt-outs and objections to the settlement, the rise-and-fall of new products, and the looming prospect of regulatory enforcement and intervention, there is little certainty at year’s end as to how these issues will be resolved.
- Emerging Payment Products.
Gartner, Inc. released an often-cited report that projected worldwide mobile payment transaction values to surpass $171.5 billion in 2012 (a 61.9 percent increase from 2011) and the number of mobile payment users to reach 212.2 million in 2012 (a 50 million user increase over 2011).
A number of different industry stakeholders made significant moves (as well as retreats) in this space in 2012. Some of the more prominent announcements, if you are looking to update your scorecard, include:
- The different offerings from Square were some of the most talked about. In August, Square and Starbucks announced a partnership that involved Square providing traditional merchant processing services to Starbucks, Starbucks investing in Square, and Starbucks accepting payments using the Square Wallet. Square also announced a pricing change in August that would allow small merchants to elect to pay a fixed monthly processing fee of $275 instead of a per swipe fee. Finally, Square announced in December that users of the Square Wallet could send e-gift cards for use at participating merchants.
- VeriFone launched Sail in May to compete with Square for small merchants, but by December VeriFone determined that the venture was unprofitable and it moved to selling Sail through banks and merchant acquirers.
- Isis, a joint venture of wireless communication companies, launched trials of its mobile wallet (an app that stores virtual credit cards and uses NFC at the POS) in two cities in October.
- PayPal announced a deal with Discover that would allow individuals to pay with their PayPal account at the POS at 16 national merchants.
- The Google Wallet underwent several changes during the year. First, it expanded to work with all four major credit card associations instead of just MasterCard. There are also reports that it will issue a plastic credit card companion to the digital wallet, similar to the PayPay-Discover product.
- Merchant Customer Exchange, a joint venture of several large national merchants, announced that it was developing its own mobile payments platform. Although it has not yet released details regarding the platform, it is anticipated that it will operate outside of the credit card associations (allowing merchants to avoid paying the interchange fee). It will also allow the participating merchants to control the in-product advertising to customers.
Although competition has intensified, no product has developed a simple-enough message to appeal to a wide-enough audience and the right incentives to motivate adoption by enough of the payments ecosystem to emerge as a market leader.
- Interchange Fee.
The interchange fee—a fee set by the card associations that is charged by the bank that issued a credit or debit card to the acquiring bank of the merchant who accepted the card—is the largest expense merchants incur in connection with accepting credit or debit cards. The impact and unintended consequences of the Durbin Amendment, which imposed a cap on the interchange fee for debit transactions, began to emerge, including prepaid card growth (prepaid cards are not covered by the Durbin Amendment), savings to some merchants, increased processing costs to others (e.g. fast food restaurants), and little evidence of individual consumer benefit. Preliminary approval of a $6 billion settlement was granted in the antitrust action related to interchange fee setting practices brought by retailers against Visa, MasterCard, and card-issuing banks. Some merchants and retail trade associations have opposed the settlement, in part because they do not believe the settlement protects them from future interchange fee increase. The Second Circuit Court of Appeals denied the request of the objecting merchants to expedite the appellate process following the preliminary approval and has deferred briefing on the appeal until the trial court issues a final order regarding the proposed settlement.
- EMV Shift.
EMV is a specification for interoperability of POS devices and payment cards with embedded chips that are designed to enhance the security of card transactions compared to cards with a magnetic stripe. EMV cards have been used in Europe and other countries for over a decade. In countries where EMV has been implemented, liability for fraudulent transactions shifts from the bank that issued the credit card to the merchant if the merchant does not accept EMV cards.
By the summer of 2012, Visa, MasterCard, Discover, and American Express had all announced an EMV liability shift roadmap for the United States. Using Visa’s implementation roadmap as an example, as of October 1, 2012, Visa’s TIP program eliminates the requirement for eligible merchants to annually validate their compliance with the PCI DSS for any year in which at least 75 percent of the merchant's Visa transactions originate from chip-enabled terminals (although those merchants must still comply with PCI DSS). Payment processors must support merchant acceptance of chip transactions by April 1, 2013. As of October 1, 2015, liability for fraud on contact chip card-present transactions will shift to the merchant acquirer (whom the merchant will likely have to indemnify) from the issuing bank if the merchant has not adopted chip-enabled terminals (fuel-selling merchant have an extra two years).
Some industry experts expect to see the card associations push the April 1, 2013 deadline for processors to adopt EMV chip card technology back by one year. With issuing banks losing revenue as a result of the Durbin Amendment, issuing cards with smart chips might become more attractive as a way to reduce fraud losses. Adoption by merchants is more complicated, because they have to purchase new POS devices. The uncertainty over what mobile payment technology will emerge further complicates this analysis because merchants will not want to incur the expense to upgrade their POS devices for EMV if they will have to change them again to accept mobile payments. The card associations’ plans for card not present transactions using cards with chips are less clear. And if the EMV implementation experience in the US is similar to Europe, the level of card present transaction fraud will drop but the level of card not present transaction fraud will increase (card not present fraud is now 30-40% higher in Europe than the US).
- The Regulators are Watching.
A veritable alphabet soup of governing bodies have the ability to enforce existing regulations that impact mobile payments, including the FTC, CFPB, FCC, FDIC, OOC, FFIEC, Federal Reserve, DOJ, Treasury, and state regulators. These regulators can enforce “old laws” like the Bank Secrecy Act, Anti-Money Laundering Compliance obligations, OFAC, Fair Credit Reporting Act, unfair, deceptive, or abusive acts and practices laws, and Regs. B, D, E, CC, DD, and Z. Even service providers to banks are subject to direct CFPB enforcement under the Dodd-Frank Act. The Federal Reserve Bank of Boston issued a paper in November discussing the security features of different mobile payment options as well as consumer risks and mitigation options. The winter 2012 issue of the FDIC’s Supervisory Insights featured a discussion that “describes the mobile payments marketplace and examines critical issues, including the adequacy of legal protections and disclosures received by consumers.” If you attend a mobile payments or prepaid card industry event, you are likely to encounter regulators seeking to learn more about these new products as they form their enforcement priorities and evaluate the use of their rule-making authority.
The mobile payments industry is not sitting idly by. The Electronic Transactions Association announced in August that it had formed a Mobile Payments Committee, and one of its agenda items was to educate legislators and regulators. Committee members include the four largest wireless carriers, credit card associations, a payment processor, and other mobile payment industry stakeholders (Google, Isis, PayPal, and VeriFone).
- International Mobile Payments.
In January 2012, the European Commission issued a Green Paper “Towards an integrated European market for card, internet, and mobile payments” for the purpose of assessing the “current landscape of card, internet and mobile payments in Europe, identifies the gaps between the current situation and the vision of a fully integrated payments market and the barriers which have created these gaps.” The sentiment behind the analysis was that the lack of a standard payments framework was a barrier to e-commerce growth and that self-regulation was not sufficient. When the Commission releases its report based on the stakeholder contributions it received, it will be interesting to see what influence, if any, it will have on the US market.